Banking Law

There is more stupidity around than hydrogen and it has longer shelf life.

---Frank Zappa

Not long ago, a banker told me that one of the many problems with federal intervention in the country's residential mortgage markets was that none of the players at the top of the U.S. government's regulatory and legislative dog piles appear to have actually participated in the origination, sale, purchase, securitization,  workout, or foreclosure of an actual mortgage loan. I reckoned, without giving it much thought, that he had probably made a correct observation.

If I had actually given it any thought, I would have insisted that my banker friend throw university professors and other assorted talking heads into another related pile called "bloviators without portfolio."

?So far, the Treasury Department and Federal Deposit Insurance Corp. have paid almost no attention to the terms of loan mods apart from setting standards for affordability,? said Alan White, a law professor at Valparaiso University who monitors foreclosure trends and loan modification efforts. ?I think some members of Congress at one point expressed concern that homeowners were being required to sign broad releases of claims in loan modifications, but I am not aware of any regulator taking action on the issue.?

The good professor, whose name I've seen in print previously, and who appears to be a "go-to guy" who can always be counted on by a reporter for a quote-worthy sound bite, is shocked -- SHOCKED, I TELL YA! -- that a lender who agrees to modify a loan rather than foreclose on the collateral for the loan, demands that the borrower release the lender from claims, known or unknown, that the borrower might have and that arise out of any act or omission of the lender prior to the date of the loan modification agreement. I'm older than dirt, but my memory isn't as shot as some parts of my anatomy, and I can assert with a reasonable degree of certainty that securing such a release in consideration of waiving past borrower defaults and agreeing to grant a modification of the loan terms acceptable to the borrower is, and has been, standard practice in the lending business for the entire 34 years I have been practicing law, most of those years spent representing financial institutions, FDIC-insured and non-FDIC-uninsured. It also makes perfect sense for the lender to do so. Why grant a modification if the borrower retains the right to assert pre-modification lender liability claims?

But, by all means, let's treat this requirement as something unusual, outrageous, and in need of a legislative remedy.

A commenter to the linked blog post, who links his name to his web site where borrowers are offered loan modification services, has this additional condemnation to make of lenders who modify loans:

The reality is that the banks are collection agents whose goal is to get the borrower to pay as much as they can. They are wolves in sheeps clothing. Borrower beware.

Lenders are wolves in "sheeps" (sic) clothing because they want to recover as much of what the borrower legally promised to pay the lender as the lender is able to recover. How unjust it is that a lender's employees would actually perform their jobs in a manner required by the duties they owe to their employers, and that the management and board of directors of a lender would implement policies aimed at fulfilling their fiduciary duties to the shareholders of the lender! It simply makes your skin crawl.