Bankruptcy

It's Easier to Shoot Roadkill than Big Game

By Katie Porter

I'm a little miffed about the recent FTC settlement with Bear Stearns and its subsidiary, EMC Mortgage Corporation. The complaint alleged that EMC engaged in unlawful practices in servicing consumers' home mortgage loans, including violating the Fair Debt Collections Practices Act, the Fair Credit Reporting Act, and the Truth in Lending Act. The FTC brought the complaint pursuant to its enforcement authority to regulate unfair and deceptive practices. A recently announced settlement requires Bear and EMC to pay $28 million to the FTC and enjoins the company from engaging in the alleged illegal practices. Given my concern about poor mortgage servicing, you might expect me to have nothing but praise for the FTC.

But my first reaction to the settlement was that the FTC is shooting roadkill. What do I mean? As Elizabeth Warren wrote back in May, "The Bear is Dead." It's easy to shoot a still target. Notably, the settlement order does not apply to JP Morgan, which purchased Bear Stearns. While EMC continues to function (even touting its "customer service" to borrowers on its webpage), the mortgage industry is reeling and I'm guessing the FTC won't be the only party standing in line with a judgment to collect.  The FTC may have the same concerns; the settlement obligates Bear/EMC to wire transfer the $28 million in cash to the FTC within a few days.

Even assuming that EMC or Bear pays the $28 million, why didn't the FTC take action sooner? Regulators have had deaf ears for years with regard to consumer complaints and allegations of mortgage servicing abuse. While the FTC may have been negotiating with EMC for some time before it filed the complaint and reached settlement, during that period EMC presumably continued its practices, allegedly lying to consumers, some of whom may have lost their homes as a result of EMC's poor recordkeeping. Since EMC services about half a million loans, the injunctive relief prohibiting EMC from initiating any foreclosure action or assessing any fee without making sure its records are accurate, correcting any prohibited practices, and investigating any consumer complaints could protect consumers from wrongful foreclosure or being overcharged.

But the bigger question is what influence, if any, will the settlement have on other servicers?  Will the remaining live targets of investment banks (a number that dwindles each day, it seems) fear that the FTC will reload its rifle and reform their servicing practices accordingly? 

Full post as published by Credit Slips on September 17, 2008 (boomark / email).