Thursday, January 6, 2011


The Air Force uses visual flight simulators to train its pilots for the actual experience. Virtual reality simulation models are used to help people overcome their fears or uneasiness about certain real-life situations. Fannie Mae is applying this same idea to foreclosure prevention. The GSE has unveiled an interactive multi-media tool called WaysHome that allows homeowners to put themselves in real-life situations they can identify with, make financial choices, and immediately see the outcomes of those actions.

The interactive WaysHome video goes live on Thursday on Fannie Mae’s KnowYourOptions Web site and is free to use.

BofA to Test New Account Structure, Fees

Home Online Resources Bankruptcy Headlines

January 6, 2011

Chapter 11 Sale Offers a New Way of Dealing with Bank Failures

The recent sale of a Washington state bank out of chapter 11 created a new tool that potentially could rescue hundreds of similarly troubled institutions and save the Federal Deposit Insurance Corp. billions of dollars, the Wall Street Journal reported today. An investment vehicle backed by a Goldman Sachs Group Inc. fund and Oaktree Capital Management LP late last month purchased AmericanWest Bank, of Spokane, Wash., out of bankruptcy from its holding company, without the need for regulators to seize the bank and shore up its deposits. The deal could open up options to save other banks teetering on the edge of failure, particularly those whose holding companies are saddled with so-called trust-preferred securities, and make it easier for hungry investors to acquire undercapitalized banks. Read more. (Subscription required.)

Fulton Homes Fights for Confirmation

Bankrupt Fulton Homes Corp. is still battling its secured lender over confirmation of its plan, the Deal Pipeline reported yesterday. Bank of America NA has asked the court to vacate a previous order approving the debtor's disclosure statement, saying that modifications to the plan have made it unconfirmable. Bankruptcy Judge George B. Nielsen Jr. first heard the bank's motion on Nov. 8, but continued it until Nov. 17. At the second hearing, Nielsen scheduled evidentiary hearings on the bank's motion and the debtor's fourth amended plan for yesterday, and Jan. 19. Debtor counsel Craig D. Hansen of Squire, Sanders & Dempsey LLP said the matter was unresolved after yesterday's hearing. Read more.(Subscription required.)

U.S. Trustee Criticizes Trico Marine Proposal

U.S. Trustee Roberta A. DeAngelis joined a chorus of protest over a Trico Marine Services Inc. proposal to hand over valuable operating units to a leading group of lenders in a pact that the company says is vital to its restructuring, Dow Jones Daily Bankruptcy Review reported today. Trico's proposed deal with holders of $400 million worth of high-yield notes has already drawn fire from the unsecured creditors' committee in its chapter 11 case, as well as from second-lien noteholders and bondholder Arrowgrass Capital Partners LLP. Couched as a settlement of intercompany claims, the proposal is in fact the equivalent of a chapter 11 restructuring plan. However, it is designed to avoid the protections of the bankruptcy process, including the need to court creditors for their votes, DeAngelis, said in a court filing.

Loehmann's to Put Bankruptcy Plan to Creditor Vote

Retailer Loehmann's received bankruptcy court approval to put its restructuring plan to a vote of creditors, a key step to ending the department store chain's chapter 11, Reuters reported yesterday. Creditors of the company will have until Feb. 2 to vote on the plan, the company said yesterday. As part of the plan, the company's current owner, Dubai World unit Istithmar, and Whippoorwill Associates Inc will backstop a rights offering that will invest $25 million in the company when it exits chapter 11. A bankruptcy court hearing is scheduled for Feb. 7 to confirm the plan. Read more.

Delta, Bankrupt Mesa Air settle Claims

Delta Air Lines Inc. has agreed to waive most of its claims against Mesa Air Group Inc. to resolve litigation with the regional carrier, which is reorganizing in bankruptcy court, Reuters reported yesterday. In a Tuesday court filing, Mesa said that Delta will retain about $7.3 million of general unsecured claims and waive other claims. The waiver includes claims that Delta said that it had prior to Mesa's chapter 11 filing one year ago, the filing said. Delta had filed claims for at least $67.8 million against Mesa and its Freedom Airlines unit. Read more.

IRS Watchdog Calls for Tax Code Overhaul

The various calls to revamp the nation's highly complex tax code were joined by a significant new voice yesterday - the IRS's own taxpayer advocate, who urged that the system be rewritten for the first time in a generation, the New York Times reported today. Nina E. Olson, the national tax advocate who acts as an ombudsman for the IRS, issued a sweeping criticism of federal tax policy in her annual report to Congress. Olson found that the volume of the tax code had nearly tripled in size during the last decade - to 3.8 million words in February 2010 from 1.4 million in 2001. She estimated that Americans spent 6.1 billion hours preparing their returns each year - the equivalent of 3 million employees working full time. By comparison, the federal payroll has 2.1 million full-time workers. Read more.

Blockbuster Landlords Take Issue with Store Closing Procedures

Several Blockbuster Inc. landlords are objecting to what they call the video retailer's attempt to get a bankruptcy court to approve "unilateral and virtually unrestricted" power to close its stores, regardless of lease terms, Dow Jones Daily Bankruptcy Review reported today. Blockbuster, which said in a Dec. 17 court filing that it planned on closing and rejecting the leases of 72 stores by the end of 2010 plus an additional 110 during the first quarter of 2011, is getting resistance from the owners of the buildings for several reasons. Publix Super Markets Inc., which owns five shopping centers where Blockbuster leases space, said that it does not wholly object to Blockbuster closing its stores, only certain aspects of the procedures Blockbuster is asking a court to approve. "The order allows the debtors to conduct store closing sales at any location and any time," lawyers for Publix say in a filing. "This blanket authority is highly disruptive and burdensome for all landlords who will not know if and when the debtors may decide to conduct a store closing sale at their location." Publix wants Blockbuster to give more advanced notice, and also to limit the advertising Blockbuster can conduct about its store closing sales.

BofA to Test New Account Structure, Fees

Bank of America Corp. told employees yesterday how it intends to restructure the way it charges customers as the bank will soon begin testing fees of roughly $6 a month on its most basic account, the Wall Street Journal reported today. Customers will have no options to waive that monthly fee. Accounts with more features can have monthly fees ranging from $8.95 to $25. They can be waived if customers maintain certain balances, use credit cards, do their banking online, or have a mortgage with the bank. The nation's largest bank by assets said it will divide customers into four categories structured by account activity and number of products, according to an internal memo. The four accounts are "Premium," "Enhanced," "eBanking" and "Essentials."

Wednesday, January 5, 2011

Struggling Borders to Meet with Publishers

Struggling Borders to Meet with Publishers

The book chain Borders entered 2011 on an unsteady note, telling major publishers that it would delay payments owed to them, and stoking fears that it would not be able to recover from declining sales, the New York Times reported yesterday. On Monday, Borders executives said that they would discuss the company's plans with publishers at hastily arranged meetings in New York later this week. As digital books have risen in popularity, brick-and-mortar bookstores have appeared increasingly vulnerable, and many publishing executives believe their numbers will decrease in the coming years. For months, publishers have been especially worried about the health of Borders, which has suffered from losses in revenue for years and reported dismal third-quarter earnings in December. If the bookseller were to go out of business, publishers could lose tens of millions of dollars, miles of shelf space and the selling power of more than 675 retail stores.

Government Sees High Returns on Defaulted Student Loans

After paying the companies that actually collect the loans and other costs, the U.S. Department of Education expects to recover 85 percent of defaulted federal loan dollars based on current value, the Wall Street Journal reported today. According to White House budget figures for fiscal 2011 ending in September, the federal government expects gross recovery of between $1.10 and $1.22 for every dollar of defaulted student loans. An estimated $49.9 billion of Federal Family Education Loan and Federal Direct Lending Program loans are in default, out of a total $713.4 billion outstanding, as of Sept. 30. Those amounts include only principal balances, not interest.

Tuesday, January 4, 2011

Foreclosure Deals to Start with Big Lenders, Iowa Says

The five largest loan servicers, including Bank of America Corp. and JPMorgan Chase & Co., may be the first to settle with the 50 state attorneys general probing foreclosure practices, Iowa Attorney General Tom Miller said yesterday, according to a Bloomberg News report. The other three are Citigroup Inc., Wells Fargo & Co. and Ally Financial Inc., said Miller, the leader of the 50-state investigation. The five have 59 percent of the U.S. market, Miller said, though no settlements have been currently reached. All 50 U.S. states are investigating whether banks and loan servicers used false documents and signatures to justify hundreds of thousands of foreclosures. The probe, announced Oct. 13, came after JPMorgan and Ally Financial's GMAC mortgage unit said they would stop repossessions in 23 states where courts supervise home seizures, and Bank of America, the largest U.S. lender, froze foreclosures nationwide. The probe has since widened to include other mortgage practices, with attorneys general suggesting a potential resolution should include improving the loan modification process, barring foreclosures when people are modifying loans and creating a general fund to compensate homeowners who may have been victims of wrongful foreclosures.

Consumer Bankruptcy Filings Increase 9 Percent in 2010

U.S. consumer bankruptcies increased 9 percent nationwide in 2010 from the previous year, according to ABI relying on data from the National Bankruptcy Research Center (NBKRC).

Report Studies Race Differentials In Modification Efforts

hn Clapp
Vol. 4
Issue 9
January 2011

John Clapp, Monday 03 January 2011 - 00:00:00

Although many researchers have concluded that delinquency and foreclosure rates are disproportionately high among minority borrowers, do racial or ethnic disparities exist in terms of who receives a loan modification? According to a newly published report from researchers at the Federal Reserve Bank of San Francisco, only very narrow differences are discernable, and they may run counter to popular belief.

In a report titled "Who Receives a Mortgage Modification? Race and Income Differentials in Loan Workouts," authors J. Michael Collins, an assistant professor at the University of Wisconsin-Madison's department of consumer science, and Caroline Reid, a manager at the San Francisco Fed's research group, found that black, Hispanic and Asian American borrowers are marginally more likely to receive a modification and that the modifications have slightly larger interest-rate reductions than those for similarly situated white borrowers.

Collins and Reid's study focused on subprime loans originated in 2005 in three primarily nonjudicial foreclosure states: Washington, Oregon and California. The researchers matched loan-level Home Mortgage Disclosure Act data, which contain information on borrower race and ethnicity, with loan information from Corporate Trust Services (CTS) of Wells Fargo, a large trustee covering 94 servicers. Of the borrowers whose loans were at least 60 days delinquent, 11% of black borrowers, 9% of Hispanic borrowers and 6% of Asian American borrowers received a modification. By comparison, 5% of white borrowers' loans were modified.
"This provides preliminary evidence that minorities are no less likely to receive a loan modification than other borrowers," the report says of the figures, which control for delinquency status but not necessarily other variables. Even once the other variables were considered, Collins and Reid found no significant racial or ethnic disparities, adding, "In fact, blacks/African Americans are slightly more likely to receive a loan modification than whites."
The authors add an important caveat to their conclusions: Their research contains data on permanent modifications only, failing to factor in borrowers who applied for modifications but were rejected. "If black or Hispanic borrowers applied for a loan modification at higher rates than white borrowers, and were either denied a permanent modification or were thwarted by the lengthy and confusing application process, racial and ethnic disparities in the loan modification process could still exist," the authors write.

The researchers observed several noteworthy patterns in the way servicers prioritize modifications. For example, borrowers whose original loans were "high cost" are more likely than other borrowers to receive modifications. Meanwhile, servicers' loan modification decisions appear to ignore local economic factors that may contribute to foreclosure rates, leading the authors to comment that "neither the current house price index nor the local unemployment rate has any significant effect on the likelihood of receiving a loan modification." This trend persists despite research that indicates declining home values are strong predictors of default, Collins and Reid explain.

Although minority borrowers are generally at a higher risk of foreclosure than white borrowers prior to modification, the risk level evens out after modification, the researchers add, calling modifications "an effective way of preventing foreclosures for this population." Furthermore, Collins and Reid found that minority borrowers received slightly more generous terms post-modification. Black borrowers - whose interest rates were 11 basis points higher, on average, than white borrowers' rates prior to a loan modification - pay a slightly lower rate than white borrowers following modification. Hispanic and Asian American borrowers also receive slightly deeper rate reductions, the authors write, adding that the differences are not statistically significant.
Collins and Reid say their research should encourage future studies on how and why servicers' modification efforts have avoided the racial disparities that have historically plagued loan origination.

"Are there lessons from the loan modification process that could help us to design more sustainable paths to homeownership going forward?" the authors ask, noting that housing counselors have served an important role as trusted third parties in many modification cases, helping borrowers to understand the process and terms involved.

Collins and Reid further say that while their conclusions appear to reflect positively upon the loan modification process, "the scale of loan modification is still facing well short of impending foreclosures." The authors also caution that servicers' unwillingness to reduce principal balances will limit the effect of loan modification campaigns.

(Please address all comments regarding this article to John Clapp, editor of Servicing Management, at

Monday, January 3, 2011

Fannie Bars Foreclosure Actions in the Name of MERS

In new policy guidelines released this week, Fannie Mae told servicers that they can no longer name MERS as the plaintiff in any foreclosure action, whether judicial or non-judicial, on a mortgage loan owned or securitized by the GSE.

Fannie Mae stated in its new servicing guidelines that when MERS is listed as the mortgagee of record, the servicer must prepare a mortgage assignment transferring the position from MERS back to the servicer, and then bring the foreclosure in its own name.

In the event that the GSE requires the foreclosure be brought in the name of Fannie Mae, the servicer must conduct that transfer assignment as well. In all cases, the assignment from MERS to the servicer or Fannie Mae must be recorded before the foreclosure begins.

“Fannie Mae will not reimburse the servicer for any expense incurred in preparing or recording an assignment of the mortgage loan from MERS to the servicer or to Fannie Mae,” the guidelines read.

Since 2006, Fannie Mae has required servicers to file foreclosure actions in their own name in judicial states where proceedings take place in the courtroom, such as Florida, Illinois, and New York.

Beginning May 1, 2010, Fannie is adding that same stipulation to foreclosure petitions in non-judicial states, such as California, Massachusetts, and Texas, which allow lenders to foreclose without involving the courts.

Bankruptcy Technical Corrections Act

On December 23,2010, President Obama signed the Bankruptcy Technical Corrections Act of 2010. The Act corrects spelling errors and incorrect cross-references enacted into law as part of BAPCPA. The Act makes similar changes to bankruptcy–related crimes in Title 18, as well.

Freddie Mac's Nothaft Predicts Mortgage Rates to Remain Below 5%

Frank Nothaft, chief economist for Freddie Mac, says he expects long-term mortgage interest rates to hold below the 5 percent threshold throughout 2011, as key macroeconomic drivers provide a backdrop that supports a continued, albeit gradual, recovery in the housing and mortgage markets.


Florida; Reno, Nevada; and Boise, Idaho, however,  will see the nation’s greatest depreciation rates in the coming 12 months. Six of the 10 U.S. markets expecting the greatest depreciation are in Florida.

Projected Five Weakest Markets
Reno / Sparks, NV -7.2%
Orlando / Kissimmee, FL -6.5%
Boise City / Nampa, ID -6.4%
Deltona / Daytona Beach / Ormond Beach, FL -6.3%
Port St. Lucie / Fort Pierce, FL -6.3%
It is noteworthy that depreciating forecasts remain much better than those from a year ago with nothing worse than 7 percent depreciation.
Projected Five Strongest Markets

San Diego / Carlsbad / San Marcos, CA +3.5%
Kennewick / Richland / Pasco, WA +3.4%
Pittsburgh, PA +2.7%
Fargo, ND-MN +2.6%
Washington / Arlington / Alexandria, DC-VA-MD-WV +2.5%

Also predicted generally good forecasts in Texas, Louisiana, Arkansas, Oklahoma, South Dakota, North Dakota, and Iowa, with a strengthening trend spreading to parts of the Midwest.

FTC Issues Final Rule to Protect Consumers in Credit Card Debt

Amendments to Telemarketing Sales Rule Prohibiting Debt Relief Companies From Collecting Advance Fees Will Take Effect in October 2010

Starting on October 27, 2010, for-profit companies that sell debt relief services over the telephone may no longer charge a fee before they settle or reduce a customer’s credit card or other unsecured debt.

“At the FTC we strive every day to make sure America’s middle class families get straight deals for their dollars,” Chairman Jon Leibowitz said. “This rule will stop companies who offer consumers false promises of reducing credit card debts by half or more in exchange for large, up-front fees. Too many of these companies pick the last dollar out of consumers’ pockets – and far from leaving them better off, push them deeper into debt, even bankruptcy.”

Three other Telemarketing Sales Rule provisions to take effect on September 27, 2010, will:
require debt relief companies to make specific disclosures to consumers; prohibit them from making misrepresentations; an extend the Telemarketing Sales Rule to cover calls consumers make to these firms in response to debt relief advertising.

The Final Rule covers telemarketers of for-profit debt relief services, including credit counseling, debt settlement, and debt negotiation services. The Final Rule does not cover nonprofit firms, but does cover companies that falsely claim nonprofit status. Over the past decade, the FTC and state enforcers have brought a combined 259 cases to stop deceptive and abusive practices by debt relief providers that have targeted consumers in financial distress.

Advance Fee Ban

The Final Rule contains specific requirements for debt relief providers related to charging an advance fee before providing any services. It specifies that fees for debt relief services may not be collected until:
the debt relief service successfully renegotiates, settles, reduces, or otherwise changes the terms of at least one of the consumer’s debts; there is a written settlement agreement, debt management plan, or other agreement between the consumer and the creditor, and the consumer has agreed to it; and
the consumer has made at least one payment to the creditor as a result of the agreement negotiated by the debt relief provider.

To ensure that debt relief providers do not front-load their fees if a consumer has enrolled multiple debts in one debt relief program, the Final Rule specifies how debt relief providers can collect their fee for each settled debt. First, the provider’s fee for a single debt must be in proportion to the total fee that would be charged if all of the debts had been settled. Alternatively, if the provider bases its fee on the percentage of what the consumer saves as result of using its services, the percentage charged must be the same for each of the consumer’s debts.

Dedicated Account for Fees and Savings

Another new provision of the Final Rule will allow debt relief companies to require that consumers set aside their fees and savings for payment to creditors in a “dedicated account.” However, providers may only require a dedicated account as long as five conditions are met:the dedicated account is maintained at an insured financial institution; the consumer owns the funds (including any interest accrued);
the consumer can withdraw the funds at any time without penalty; the provider does not own or control or have any affiliation with the company administering the account; and the provider does not exchange any referral fees with the company administering the account.

Disclosures and Prohibited Misrepresentations

Under the Final Rule, providers will have to make several disclosures when telemarketing their services to consumers. Before the consumer signs up for any debt relief service, providers must disclose fundamental aspects of their services, including how long it will take for consumers to see results, how much it will cost, the negative consequences that could result from using debt relief services, and key information about dedicated accounts if they choose to require them.

The Final Rule also prohibits misrepresentations about any debt relief service, including success rates and whether the provider is a nonprofit entity. The FTC’s Statement of Basis and Purpose, which accompanies the Final Rule, provides extensive guidance about the evidence providers must have to make advertising claims commonly used in selling debt relief services.

The Rulemaking Process

In August 2009, the FTC published in the Federal Register a notice of proposed rulemaking proposing amendments to the Telemarketing Sales Rule and requesting public comments. Over 300 commenters, representing a wide variety of stakeholders, submitted comments in response. The Commission also held a public forum on the proposed amendments on November 4, 2009. The FTC developed the Final Rule based on the public comments, the record of the public forum and the FTC’s September 2008 Workshop on the debt settlement industry, recent testimony before Congress, and law enforcement actions brought by the Commission and the states.

Information for Businesses

Today, the FTC staff issued a compliance guide to help businesses comply with the new debt relief rules. The compliance guide describes the key changes to the Telemarketing Sales Rule affecting debt relief services, helps businesses determine if they are covered by the new rules, details information that covered entities must disclose to customers, and discusses how fees may now be collected. It can be found at on the agency’s website and is linked to this press release.

The FTC vote approving publication of the Federal Register notice was 4-1, with Commissioner J. Thomas Rosch voting no. The notice will be published in the Federal Register shortly, and is available now on the FTC’s website at The provisions of the Final Rule will take effect on September 27, with the exception of the advance fee ban provision, which will take effect on October 27.

The FTC works for the consumer to prevent fraudulent, deceptive, and unfair business practices and to provide information to help spot, stop, and avoid them. To file a complaint in English or Spanish, click: or call 1-877-382-4357. The FTC enters Internet, telemarketing, identity theft, and other fraud-related complaints into Consumer Sentinel, a secure, online database available to more than 1,800 civil and criminal law enforcement agencies in the U.S. and abroad. For free information on a variety of consumer topics, click

Mitchell J. Katz,
Office of Public Affairs

Alice Hrdy, Allison Brown, or Evan Zullow,
Bureau of Consumer Protection
(FTC File No. R411001)