WASHINGTON — Fannie Mae, Freddie Mac, Merrill Lynch and Lehman Brothers may be dominating the financial headlines, but a little-noticed $28-million settlement earlier this month between the Federal Trade Commission and what's left of Bear Stearns symbolizes the housing boom era products — and practices — that started a lot of the trouble.
Once the fifth-largest investment bank on Wall Street, Bear Stearns was a major funding source for subprime and exotic mortgages — payment-option plans that allowed borrowers to buy expensive houses and run up their debts while making minimal monthly payments, "stated-income" mortgages that required no income or asset verifications, and a variety of other creative concepts. Bears' subsidiary, EMC Mortgage, serviced hundreds of thousands of these mortgages and had a portfolio in excess of 475,000 loans in 2007, according to the FTC.
But the FTC's complaint and settlement Sept. 9 allege that EMC hit mortgage customers with unauthorized fees, misrepresented how much money they owed, harassed homeowners with debt-collection techniques including "property inspections" that were designed to get collectors into houses illegally, and failed to tell national credit reporting bureaus that borrowers were disputing derogatory reports about them from EMC.
Bear Stearns and EMC agreed to pay out $28-million to consumers as part of the settlement and change its loan servicing procedures, but admitted no wrongdoing. JP Morgan Chase & Co., which acquired Bear and EMC as part of a federally assisted bailout May 30, was not named in the settlement and had no comment about its terms.
The types of loans Bear Stearns and EMC made their specialty were the jet fuel of the boom, aimed at consumers who often couldn't afford the houses they wanted and didn't understand the payment changes and principal balance movements associated with the complex mortgage instruments they used.
Borrowers like these depended heavily upon their loan servicers to maintain accurate records and tell them what they owed and when it was due. Yet EMC, according to the FTC, acquired loan portfolios from lenders without performing proper due-diligence checks on the accuracy or completeness of the loan account files.
"Despite indications that loan data obtained from prior loan servicers . . . was likely inaccurate or unverified, EMC nonetheless used that data" to demand principal and interest payments and late fees from customers who didn't actually owe what they were being charged, said the FTC's complaint.
EMC sometimes made late-payment collection calls immediately after acquiring mortgages, according to the FTC, without having backup data to be certain of the facts. In the course of those collection efforts, EMC allegedly violated the Fair Debt Collection Practices Act by contacting homeowners with phone calls for debt amounts they didn't necessarily owe and even resorted to "false representations" to gain access to borrowers' homes — sending out "property inspectors" who were actually debt collectors seeking to confront borrowers.
The FTC alleged that EMC violated the Fair Credit Reporting Act by sending delinquency and default reports to the national credit reporting bureaus without disclosing that borrowers were disputing EMC's charges. Failure to report disputes can have serious negative impacts on consumers' overall credit standings and affect their ability to obtain credit elsewhere.
EMC also allegedly imposed impermissible fees including late-payment and prepayment penalties, and $500 "loan modification" fees among others. They even charged new customers for property inspections when there was no information in loan files suggesting the house needed a physical examination, according to the FTC complaint.
Compounding the problems inherent in the high-risk, highflying mortgage products of the boom years, a key aspect of the Bear Stearns-EMC case is data integrity. Every month millions of homeowners put their trust in companies they don't really know — loan servicers working for the borrowers' original lenders or companies who bought the servicing rights.
If successive servicers do not accurately keep track of borrowers' loan balances, escrows and payment histories — or worse, as alleged by the FTC in this case, pile on improper charges and violate federal credit, truth in lending and debt collection law — consumers can find themselves in deep financial jams.
"People already have enough problems with their mortgages," said Lucy Morris, a lead attorney for the FTC in the Bear Stearns-EMC settlement, "so it's all the more important that servicers take appropriate care in handling consumers' billings and collections."
That's especially true when the consumers involved happen to be saddled with confusing loans they should never have been sold, stuck with houses that have plummeted in value and are sitting on a conveyor belt moving them closer to foreclosure every month.
Ken Harney can be reached at firstname.lastname@example.org.