Alabama Consumer Lawyer Blog

Consumers and Lawyers Beware of Credit Card Companies Bearing Gifts

2009-02-24T14:42:57Z

Bankruptcy and consumer lawyers in Alabama and elsewhere should be aware of American Express’s attempt to subvert bankruptcy laws with respect to preference payments. American Express has announced a plan to pay some of its card members $300 to pay-off their cards and close their accounts. American Express says its offer is to help consumers “simplify” their finances. However, it is clear; American Express is trying to induce consumers to pay it first.

As many remember, the “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005” was expected to stem losses for credit card companies. But in practice, the bill has actually increased the percentage of credit card debt that is being discharged in bankruptcy. You may have noticed the difference in your mail box. You probably no longer receive three offers for “pre-approved” credit cards in the post each day.

“What AmEx is trying to do is move to the front of the line in terms of getting paid back” by customers who owe debts to multiple lenders, said Micheal Talano, an analyst at Sander O’Neill & Partners. “They clearly grew loans faster than their competitors in the years leading up to this financial crisis.”

American Express is shedding customers as rivals reduce credit lines, raise interest rates and cut back on mail solicitations to brace for future losses. Consumers have fallen farther behind on credit card payments as U.S. unemployment reached 7.6% last month, the highest rate since 1992.

American Express said that charge-offs or loans that it deems uncollectable, rose to 8.29% in January from 7% the month before, while payments that are over 30 days overdue climbed to 5.28% from 4.86%.

I encourage all bankruptcy lawyers to review their clients’ files to ensure that American Express was not paid-off shortly before the client sought your legal services. This will not affect the client’s filing per se but American Express may have to pay some of the money it received back to the bankruptcy court for distribution to other creditors.

One final note, American Express recently received $3.39 billion from the U.S. Treasury to boost its capital. But apparently it had no intention to use that money to increase lending.

The Bankruptcy Option

2009-02-22T17:35:24Z

As an Alabama consumer lawyer I see more and more clients who are “over-extended” and having tough times economically. Deciding whether or not to file bankruptcy is one of the most difficult decisions a person can make. However, bankruptcy no longer carries the stigma it once did. This is especially true during these particularly dire economic times. Many of the country's largest and most prestigious institutions, like Lehman Brothers, have fallen on hard times and sought relief in bankruptcy.

If you’re trying to hold onto a house then you might want to consider filing a petition under Chapter 13. If you want to discharge all your debts and get a fresh start then you may wish to consider filing a petition under Chapter 7.

There are pros and cons to filing bankruptcy. The pros include:

• It can wipe out or “discharge” all or some of your debts;
• It can give you a chance to “catch your breath” by temporarily prohibiting creditors from foreclosing or repossessing your home or car;
• It can temporarily prohibit wage garnishment or disconnection of utilities;
• It will stop harassing creditor phone calls and letters;

The cons include:

• It puts a blemish on your credit report that will remain there for 10 years;
• Can be a source of embarrassment and may be seen by potential employers, insurance companies and such.

Exemptions are laws that exempt, protect or withhold a certain amount of property from creditors. These exemptions are applied in bankruptcy cases. Under Alabama law a person filing bankruptcy is entitled to exempt up to $5,000 in real property (house or mobile home) from creditors. The $5,000 real property exemption is doubled for husband and wife. Therefore, a couple filing bankruptcy in Alabama may exempt $10,000 in home equity from their creditors. If they have more than $10,000 in equity in their home then they will have to file a Chapter 13 and pay some or all of their unsecured creditors.

For example, if Mr. and Mrs. Smith’s home is worth $100,000 and their mortgage has an outstanding balance of $80,000, then they have $20,000 in equity in their home. The first $10,000 in equity is exempt. The remaining $10,000 will have to be paid to their creditors over the course of their bankruptcy. Most bankruptcies have a term of 60 months. Therefore, they will have to pay their creditors $167 per month. And they get to keep their home.

However, nowadays, with the mortgage crisis and the high foreclosure rate, most homeowners are not worried about the amount of their equity. Many, as I have reported numerous times, are upside-down in their mortgages and owe more than the value of their home. Recently, my office has seen a new attitude from some mortgage lenders which are now willing to negotiate new mortgage terms in some cases.

]]> Additionally, the personal property exemption in Alabama is $1,500 per person. Like the real property exemption, it is doubled for a couple. Personal property, like furniture, is valued at the amount one would realize at a garage sale. Therefore, few couples have trouble staying under the $3,000 limit.

Finally, some items like a car that is being financed may be “reaffirmed.” Reaffirmation means that you agree to pay off a particular debt according to the terms of the contract and that the debt will not be discharged in bankruptcy. Reaffirmation is an option; but one that should be utilized sparingly.

For example, many times a car is worth much less than is owed on it and if the lender will not negotiate the car note then it might be better to let the car go and obtain another vehicle at a more sensible price. The lender has an incentive to renegotiate because it will only get the fair market value (or less) for the repossessed car and the balance will be discharged in consumer’s bankruptcy. Smart lenders understand this and will frequently redo the terms of a car note.

Ultimately, you must weigh the advantages and disadvantages of bankruptcy and make a choice. For many people who face real problems that bankruptcy can eliminate, bankruptcy may have a positive effect on their lives. For others with few debts, filing for bankruptcy may be premature when it is possible to negotiate a debt settlement plan with creditors.

The determination of whether to file for bankruptcy or not must be made on a case by case basis, and a lawyer experienced in bankruptcy law can help you assess your options.

Frequently asked Questions for Borrowers about the Homeowner Affordability and Stability Plan

2009-02-20T16:50:08Z

Borrowers Who Are Current on Their Mortgage Are Asking:

1. What help is available for borrowers who stay current on their mortgage payments but have seen their homes decrease in value?

Under the Homeowner Affordability and Stability Plan, eligible borrowers who stay current on their mortgages but have been unable to refinance to lower their interest rates because their homes have decreased in value, may now have the opportunity to refinance into a 30 or 15 year, fixed rate loan. Through the program, Fannie Mae and Freddie Mac will allow the refinancing of mortgage loans that they hold in their portfolios or that they placed in mortgage backed securities.

2. I owe more than my property is worth, do I still qualify to refinance under the Homeowner Affordability and Stability Plan?

Eligible loans will now include those where the new first mortgage (including any refinancing costs) will not exceed 105% of the current market value of the property. For example, if your property is worth $200,000 but you owe $210,000 or less you may qualify. The current value of your property will be determined after you apply to refinance.

3. How do I know if I am eligible?

Complete eligibility details will be announced on March 4th when the program starts. The criteria for eligibility will include having sufficient income to make the new payment and an acceptable mortgage payment history. The program is limited to loans held or securitized by Fannie Mae or Freddie Mac.

4. I have both a first and a second mortgage. Do I still qualify to refinance under the Homeowner Affordability and Stability Plan?

As long as the amount due on the first mortgage is less than 105% of the value of the property, borrowers with more than one mortgage may be eligible to refinance under the Homeowner Affordability and Stability Plan. Your eligibility will depend, in part, on agreement by the lender that has your second mortgage to remain in a second position, and on your ability to meet the new payment terms on the first mortgage.

5. Will refinancing lower my payments?

The objective of the Homeowner Affordability and Stability Plan is to provide creditworthy borrowers who have shown a commitment to paying their mortgage with affordable
payments that are sustainable for the life of the loan. Borrowers whose mortgage interest rates are much higher than the current market rate should see an immediate reduction in their payments. Borrowers who are paying interest only, or who have a low introductory rate that will increase in the future, may not see their current payment go down if they refinance to a fixed rate. These borrowers, however, could save a great deal over the life of the loan. When you submit a loan application, your lender will give you a "Good Faith Estimate" that includes your new interest rate, mortgage payment and the amount that you will pay over the life of the loan. Compare this to your current loan terms. If it is not an improvement, a refinancing may not be right for you.

]]> 6. What are the interest rate and other terms of this refinance offer?

The objective of the Homeowner Affordability and Stability Plan is to provide borrowers with a safe loan program with a fixed, affordable payment. All loans refinanced under the plan will have a 30 or 15 year term with a fixed interest rate. The rate will be based on market rates in effect at the time of the refinance and any associated points and fees quoted by the lender. Interest rates may vary across lenders and over time as market rates adjust. The refinanced loans will have no prepayment penalties or balloon notes.

7. Will refinancing reduce the amount that I owe on my loan?

No. The objective of the Homeowner Affordability and Stability Plan is to help borrowers refinance into safer, more affordable fixed rate loans. Refinancing will not reduce the amount you owe to the first mortgage holder or any other debt you owe. However, by reducing the interest rate, refinancing should save you money by reducing the amount of interest that you repay over the life of the loan.

8. How do I know if my loan is owned or has been securitized by Fannie Mae or Freddie Mac?

To determine if your loan is owned or has been securitized by Fannie Mae or Freddie Mac and is eligible to be refinanced, you should contact your mortgage lender after March 4, 2009.

9. When can I apply?

Mortgage lenders will begin accepting applications after the details of the program are announced on March 4, 2009.

10. What should I do in the meantime?

You should gather the information that you will need to provide to your lender after March 4, when the refinance program becomes available. This includes:
• information about the gross monthly income of all borrowers, including your most recent pay stubs if you receive them or documentation of income you receive from other sources
• your most recent income tax return
• information about any second mortgage on the house
• payments on each of your credit cards if you are carrying balances from month to month, and
• payments on other loans such as student loans and car loans.

Borrowers Who Are at Risk of Foreclosure Are Asking:

1. What help is available for borrowers who are at risk of foreclosure either because they are behind on their mortgage or are struggling to make the payments?

The Homeowner Affordability and Stability Plan offers help to borrowers who are already behind on their mortgage payments or who are struggling to keep their loans current. By providing mortgage lenders with financial incentives to modify existing first mortgages, the Treasury hopes to help as many as 3 to 4 million homeowners avoid foreclosure regardless of who owns or services the mortgage.

2. Do I need to be behind on my mortgage payments to be eligible for a modification?

No. Borrowers who are struggling to stay current on their mortgage payments may be eligible if their income is not sufficient to continue to make their mortgage payments and they are at risk of imminent default. This may be due to several factors, such as a loss of income, a significant increase in expenses, or an interest rate that will reset to an unaffordable level.

3. How do I know if I qualify for a payment reduction under the Homeowner Affordability and Stability Plan?

In general, you may qualify for a mortgage modification if (a) you occupy your house as your primary residence; (b) your monthly mortgage payment is greater than 31% of your monthly gross income; and (c) your loan is not large enough to exceed current Fannie Mae and Freddie Mac loan limits. Final eligibility will be determined by your mortgage lender based on your financial situation and detailed guidelines that will be available on March 4, 2009.

4. I do not live in the house that secures the mortgage I’d like to modify. Is this mortgage eligible for the Homeowner Affordability and Stability Plan?

No. For example, if you own a house that you use as a vacation home or that you rent out to tenants, the mortgage on that house is not eligible. If you used to live in the home but you moved out, the mortgage is not eligible. Only the mortgage on your primary residence is eligible. The mortgage lender will check to see if the dwelling is your primary residence.

5. I have a mortgage on a duplex. I live in one unit and rent the other. Will I still be eligible?

Yes. Mortgages on 2, 3 and 4 unit properties are eligible as long as you live in one unit as your primary residence.

6. I have two mortgages. Will the Homeowner Affordability and Stability Plan reduce the payments on both?

Only the first mortgage is eligible for a modification.

7. I owe more than my house is worth. Will the Homeowner Affordability and Stability Plan reduce what I owe?

The primary objective of the Homeowner Affordability and Stability Plan is to help borrowers avoid foreclosure by modifying troubled loans to achieve a payment the borrower can afford. Lenders are likely to lower payments mainly by reducing loan interest rates. However, the program offers incentives for principal reductions and at your lender’s discretion modifications may include upfront reductions of loan principal.

8. I heard the government was providing a financial incentive to borrowers. Is that true?

Yes. To encourage borrowers who work hard to retain homeownership, the Homeowner Affordability and Stability Plan provides incentive payments as a borrower makes timely payments on the modified loan. The incentive will accrue on a monthly basis and will be applied directly to reduce your mortgage debt. Borrowers who pay on time for five years can have up to $5,000 applied to reduce their debt by the end of that period.

9. How much will a modification cost me?

There is no cost to borrowers for a modification under the Homeowner Affordability and Stability Plan. If you wish to get assistance from a HUD-approved housing counseling agency or are referred to a counselor as a condition of the modification, you will not be charged a fee. Borrowers should beware of any organization that attempts to charge a fee for housing counseling or modification of a delinquent loan, especially if they require a fee in advance.

10. Is my lender required to modify my loan?

No. Mortgage lenders participate in the program on a voluntary basis and loans are evaluated for modification on a case-by-case basis. But the government is offering substantial incentives and it is expected that most major lenders will participate.

11. I'm already working with my lender / housing counselor on a loan workout. Can I still be considered for the Homeowner Affordability and Stability Plan?

Ask your lender or counselor to be considered under the Homeowner Affordability and Stability Plan.

12. How do I apply for a modification under the Homeowner Affordability and Stability Plan?

You may not need to do anything at this time. Most mortgage lenders will evaluate loans in their portfolio to identify borrowers who may meet the eligibility criteria. After March 4 they will send letters to potentially eligible homeowners, a process that may take several weeks. If you think you qualify for a modification and do not receive a letter within several weeks, contact your mortgage servicer or a HUD-approved housing counselor. Please be aware that servicers and counseling agencies are expected to receive an extraordinary number of calls about this program.

13. What should I do in the meantime?

You should gather the information that you will need to provide to your lender on or after March 4, when the modification program becomes available. This includes
• information about the monthly gross income of your household including recent pay stubs if you receive them or documentation of income you receive from other sources
• your most recent income tax return
• information about any second mortgage on the house
• payments on each of your credit cards if you are carrying balances from month to month, and
• payments on other loans such as student loans and car loans.

14. My loan is scheduled for foreclosure soon. What should I do?

Contact your mortgage servicer or credit counselor. Many mortgage lenders have expressed their intention to postpone foreclosure sales on all mortgages that may qualify for the modification in order to allow sufficient time to evaluate the borrower's eligibility. We support this effort.

The foregoing information is reprinted with the permission of the U. S. Treasury Department.

President Obama's Foreclosure Plan

2009-02-20T15:34:24Z

Alabama Consumer Lawyers will soon have another avenue to help embattled homeowners fight and avoid foreclosure. On Wednesday, February 18, 2009, the White House announced President Obama’s “Homeowner Affordability and Stability Plan” earlier this week. The plan presents a comprehensive program designed to help families stay in their homes. The Administration estimates that the plan will assist as many as 9 million homeowners whose homes are now worth less than the amount of their mortgages.

The plan will assist two main groups of homeowners: (1) those whose homes are financed with Fannie Mae or Freddie Mac and who owe up to 105% of the fair market value of their home, and (2) homeowners with other lenders who are at risk. Complete eligibility guidelines will not be issued until March 4, 2009.

The program will help both homeowners who are current on their payments but find that their homes are worth less than their mortgage balance and homeowners in default and behind on their payments.

Many homeowners who are not behind in their payments find that the current mortgage crisis and high foreclosure rate has lowered their home's fair market value and they are "upside-down" in their mortgage. The president's program will assist these people.

The plan changes Fannie Mae and Freddie Mac eligibility guidelines so that as many as 5 million homeowners with loans owned or guaranteed by Fannie Mae or Freddie Mac may refinance their mortgages at lower rates. Under current rules, refinancing is not an option for most homeowners who owe more than 80 percent of the value of their homes.

Removing this restriction “will allow millions of families struck with loans at a higher rate to refinance,” Obama said. “And the estimated cost to taxpayers would be roughly zero; while Fannie and Freddie would receive less money in payments, this would be balanced out by a reduction in defaults and foreclosures.”

An additional 3 million to 4 million homeowners will be able to avoid foreclosure through a new $75 billion mortgage modification program. The Homeowner Stability Initiative will be available to homeowners who are at imminent risk of default, even if they are now current on their payments.

Lenders will be responsible for reducing interest rates on these loans so the monthly payment would be no more than 38 percent of the homeowner’s income. Government funds would match further reductions in interest rates to bring the payment down to 31 percent of income.

“If lenders and homebuyers work together, and the lender agrees to offer rates that the borrower can afford, we’ll make up part of the gap between what the old payments were and what the new payments will be,” Obama said in a speech to be delivered Wednesday in Phoenix.

Mortgage servicers would receive an upfront fee of $1,000 for each loan modification that meets the program’s guidelines and would continue to receive up to $1,000 a year in fees for three years as long as the borrower remains current on the loan.

As an additional incentive to boost the program, mortgage servicers also will receive a $500 bonus if they modify at-risk loans before they fall behind. Mortgage holders will receive a $1,500 bonus to do this.

The administration’s goal is to stabilize the housing market saying “the Homeowner Affordability and Stability Plan will support a recovery in the housing market and ensure that these workers can continue paying off their mortgages.” This is good for everyone. Even homeowners who are not in distress will benefit from fewer foreclosures in their neighborhoods.

Additionally, this is only one part of the Administration plan. The foreclosure relief bill or bankruptcy "cramdown" bill I discussed in my January 27, 2009 posting is working its way through Congress.

Equal Pay For Equal Work: Shame on Goodyear

2009-02-01T03:07:46Z

Opportunity calls out to each of us every day. But, more often than not we fail to hear it. One day in 1998, Lilly Ledbetter of Gadsden, Alabama, heard the clarion call of justice, loud and clear.

For almost twenty years Lilly had been a loyal worker at the Goodyear plant in Gadsden, Alabama. She had risen through the ranks to a supervisory position. She was, in a word, a “company” person.

However, unknown to Lilly until one day in 1998, Goodyear had been treating her with much less loyalty than she had given it. Lilly found out that even though she shared the same pay grade, duties and responsibilities as her male coworkers, she was actually being paid 40% less for the same work.

Such is wrong on many levels. But most importantly to this discussion, it is illegal. A jury found for Lilly and awarded her back pay and damages.

But Goodyear appealed and defended not by professing its innocence but by raising a procedural issue that Lilly should have commenced her suit years earlier when its discriminatory conduct had commenced. Goodyear begged the court to find that its wrongful acts were beyond the statute-of-limitation.

In a sharply divided 5-4 opinion written by Justice Alito, the Supreme Court reversed the jury's verdict and sided with Goodyear. But Lilly Ledbetter’s judicial nightmare ended on Thursday, January 29, 2009, when the President signed the “Lilly Ledbetter Fair Pay Act of 2009.” The act legislatively reverses the Supreme Court decision and clarifies the law so that from this time forward every discriminatory pay check will restart the statute-of-limitation. That seems like common sense to most of us.

“It is fitting that with the very first bill I sign — the Lilly Ledbetter Fair Pay Act — we are upholding one of this nation’s first principles: that we are all created equal and each deserve a chance to pursue our own version of happiness,” the president said.

“Goodyear will never have to pay me what it cheated me out of,” said Mrs. Ledbetter. “In fact, I will never see a cent. But with the president’s signature today I have an even richer reward.”

Now if only Goodyear could be as gracious as Mrs. Ledbetter. Shame on you Goodyear.

Foreclosure relief bill moves forward

2009-01-28T02:50:56Z

Help may be on the way for Alabama consumers facing foreclosure. On Tuesday, January 27, 2009, the House Judiciary Committee voted 21-15 to send a bill designed to help consumers save their homes to the full House.

The bankruptcy reform bill will allow bankruptcy judges to cram-down residential home mortgages. The term "cram-down" in bankruptcy law means the power of a judge to reduce the amount of a mortgage to the value of the property. In the current real estate climate in which many consumers' homes are worth less now than when purchased (and mortgaged), a cram-down is the only thing that makes sense.

Republicans in Congress oppose the Democrats' cram-down mortgage proposal. They disingenuously argue that it will raise interest rates. What they fail to acknowledge is that without a cram-down law, millions of Americans will walk away from their homes leaving the banks to deal with the abandoned property which will still be worth less than the bank loaned the homeowner. The bank's losses are locked in either way.

Understanding that it is better to keep homeowners in their homes, Citigroup, one of the nations largest mortgage lenders, has split with the rest of the mortgage industry and supports the cram-down proposal for all mortgages entered into before the passage of the bill.

I am dismayed that Alabama officials have failed to take any substantive action in response to the foreclosure crisis. The economic and emotional toll that foreclosure is taking on our citizens is enormous. Imagine the emotional scars inflicted on children who lose their homes. We are fortunate that wiser leaders in Washington are now prevailing. Let us hope they act before too many more suffer.

The Right of Rescission: How to cancel a bad mortgage (Part II)

2009-01-26T20:46:09Z

The Truth in Lending Act mandates additional disclosures at closing for ARMs. A list of the required disclosures may be found at 12 C.F.R. § 226.19. In my clients’ case, there were a number of disclosures that were not made. For example, my clients did not receive a copy of the HUD handbook titled “Consumer Handbook on Adjustable Rate Mortgages.” Additionally, my clients were not given a historical example of how interest rate changes could affect their mortgage payments. Most importantly, in my opinion, the lender (and broker) failed to inform my clients that the initial rate of their mortgage was actually higher than the Index rate called for by the adjustable rate note.

In other words, my clients did not receive a “teaser rate” or an interest rate that is lower at the beginning of the loan. Quite the opposite, they received an interest rate that was higher than their rate would have been if it had been set by the Index.

I believe that these failures to disclose, and others too numerous to list, are material failures to disclose and therefore extend the period during which my clients may rescind their loan to three years.

Rescission is a four-step process. First the consumer must give notice that he or she is electing to cancel or rescind their mortgage loan and state the TILA violations they allege to have occurred during the loan process.

Step Two: The lender’s security interest is automatically void and the consumer is relieved of any obligation to pay any finance charges, closing costs or other costs associated with the loan.

Step Three: The Creditor has twenty days from receipt of the notice to return any money and to take actions necessary to reflect the termination of its security interest.

Step Four: Following step-three, the consumer is obligated to tender back to the lender any money given the consumer at the consummation of the loan.

As a practical matter, lenders almost always oppose a consumer’s attempt to rescind a loan. It is at this juncture that the consumer lawyer must be ready to present positive evidence that material disclosures were not made. The better prepared the lawyer, the more likely he will be able to either rescind the loan or extract loan concessions from the lender.

It is important for consumer lawyers to be creative and resourceful during these difficult times. Foreclosures are taking a serious toll on millions of Americans. I will keep you posted on the progress of this rescission action.

The Right of Rescission: How to cancel a bad mortgage (Part I)

2009-01-25T21:56:48Z

The right of rescission is an under utilized and little understood but powerful weapon in the consumer lawyer’s arsenal. Nothing will stop a foreclosure faster than a consumer giving notice of rescission to a mortgage company.

Most lawyers and many consumers are aware of the normal three day "cooling off" period or right to rescind a mortgage. Every consumer receives a notice of the three day right to rescind at the closing of his or her mortgage. But few lawyers know that if the lender (or the lender’s broker) fails to give all the disclosures mandated by the Truth in Lending Act, 15 U.S.C.§ 1635(a), then the right of rescission is extended to three years after the date of the loan.

The power to cancel a mortgage, at the sole option of the consumer, anytime up to three years into a mortgage loan is the “nuclear option” for an embattled consumer. Counsel for mortgage lenders have candidly told me that nothing keeps mortgage lenders up at night more than the prospect of thousands of borrowers attempting to rescind their loans.

I recently filed a rescission action for a couple in Mobile, Alabama. My clients are good people with solid work histories and no prior problems paying their debts but they were victimized by an unscrupulous mortgage broker. The broker convinced them to enter into a high interest Adjustable Rate Mortgage (“ARM”) with the promise that he would refinance them into a fixed rate mortgage in one year. However, he failed to disclose that he was receiving outrageously high fees for brokering the ARM including a “yield spread premium” in the amount of $10,800.

A yield spread premium is a commission paid by the lender to the broker for having obtained a mortgage at an interest rate that is actually higher than the lender would have otherwise offered the loan to that borrower. A lender that pays a yield spread premium of $10,800 has no incentive to refinance a loan a year later at a lower rate.