FDIC's Loss-Share Agreement Scam is killing America

Noelle Nikpour of the Sun Sentinel wrote in November 2011 of issues involving "Loss-Share" agreements with banks buying the assets of failed banks.  

In essence the Loss-Share agreements insure the loans acquired by the purchasing bank, but require prudent business judgment in the treatment of the loan.  In other words, if the loan were in the bank's own portfolio, it must treat the insured loan in the same manner.  Many banks write a portion of a loan down so as to keep a performing loan, to prevent taking back a burdensome and costly property, and to otherwise cut losses to a minimum.  That is prudent business.  Why take back property that you have to maintain, pay taxes on and try to sell or lease?  You don't if the buyer can pay on better terms.  You change rates, extend amortization schedules, waive interest, or even hold some principal in abeyance to keep the borrower on the property as they are in the best positions to be hands on and run the property.

Not with Share-Loss agreements.  The bank just takes the loan, goes through the motions and collects its money from the FDIC.  What is disturbing is that some banks have used TARP funds to purchase the assets of troubled banks for the sole purpose of collecting on the FDIC money.  This is the equivalent of insurance fraud.   

As Noelle wrote:

The FDIC uses loss-share agreements to encourage lenders to buy the loan portfolios of failed banks. The loans are sold at discounts of up to 65 percent and deals are "sweetened" with loss protection guarantees of up to 95 percent (including legal fees). "Losses," however, are not based on the discounted price paid for the loans, but on their original value.

For instance, let's say the FDIC transfers a $350,000 home loan to Bank A at a 30 percent discount ($245,000) with a 90 percent loss-share guarantee. Bank A then sells the home at foreclosure for $150,000. According to the FDIC, Bank-A's "loss" is $200,000 ($350,000 minus $150,000) and a check for $180,000 is cut to cover 90 percent of the "loss."

With sale proceeds of $150,000 and loss reimbursement of $180,000, Bank A just made $85,000 by foreclosing on an American family with taxpayers paying the expenses and much of the profit.

If a lender can make $85,000 by foreclosing without regard to costs, there remains little incentive to deal with the uncertainty and negotiating pains of a short sale and zero incentive to modify loans. In other words, the exploitation of loss-share turns traditional collection practices upside-down.

Loss-share agreements do strive to prevent exploitive tactics as lenders are permitted only to incur expenses with the same degree of care that would be exercised in the absence of FDIC protection. The unscrupulous lender, however, exploits the lack of contractual oversight and pursues foreclosure even when costs and risk would dictate the pursuit of a short sale or loan modification.

This abuse is harming families and depressing real-estate markets as conventional sellers are forced to compete with an artificially high foreclosure rate, which results in artificially low sales prices. Unless these practices are exposed and the unintended consequences of loss-share are addressed, the problem is going to get worse.

Between 1991 and 1993 the FDIC entered into 16 loss-share agreements. By 2009, the number jumped to 94. Today, 269 loss-share agreements guarantee losses of $160 billion. Many banks have been paid hundreds of millions, and some have received more than $1 billion from the FDIC.

With payouts expected to exceed $21 billion by 2014 and an FDIC insurance fund balance of negative $20 billion, one wonders where money will come from.  Perhaps the FDIC will crack down on exploitive lenders or maybe they will simply draw on their$500 billion line of credit from the U.S. Treasury, also known as the U.S. taxpayer.

You can follow Noelle on Twitter at @noellenikpour, and communicate with her at letters@sun-sentinel.com.

TILA Violation Statute of Limitations clarified to three years

In the 9th Circuit Court of Appeals case of McOmie-Gray v. Bank of America Home Loans, the Court settled the issue of how long a consumer borrower has to rescind a loan based on a TILA violation.  

Plaintiff sought rescission of her loan secured by a trust deed with the Bank for alleged violations of disclosure requirements under the federal Truth in Lending Act (TILA).  The trial court granted Bank's motion to dismiss saying that the claim was brought more than three years after the violation occurred.  The applicable statute of limitations falls under 5 U.S.C. 1635(f).  Borrower's agruement was that because she gave the Bank timely notice of rescission, she was not required to bring suit within the three-year period, and the district court erred in dismissing the case. The 9th Circuit Court of Appeals held that, under the court's precedent and Supreme Court precedent, the time limit established by section 1635(f) was applicable, which is a three-year statute of repose (limitation), requiring dismissal of a claim for rescission brought more than three years after the consummation of the loan secured by the first trust deed, regardless of when the borrower sent notice of rescission. Accordingly, the court affirmed the judgment of the district court.

The importance of the decision is to bring finality to TILA violations.  Once the loan is three years old, TILA is no longer a viable claim. 

Hot Coffee documentary discussing Tort Reform

Director of Hot Coffee takes down Colbert

3rd. Circuit Court of Appeals erodes ERISA plan's right to full reimbursement

The 3rd. Circuit Court of Appeals, has entered a decision under principals of fairness and equity that erodes an ERISA plans right to full reimbursement.  US Airways, Inc. v. McCutchen (3rd. circuit 2011).

This case stemed from a tragic car accident in which James McCutchen was grievously injured and survived only after emergency surgery. He spent several months in physical therapy and ultimately underwent a complete hip replacement. Post accident, McCutchen, who had a history of back surgeries and associated chronic pain, became unable to effectively treat his pain with medication. The accident rendered him functionally disabled. McCutchen's Health Benefit Plan (the "Plan"), administered and self-financed by US Airways, paid medical expenses in the amount of $66,866 on his behalf.

After the accident, McCutchen, through his attorneys filed an action against the driver of the car that caused the accident. Because she had limited insurance coverage, and because three other people were seriously injured or killed, McCutchen settled with the other driver for only $10,000. However, with his lawyers' assistance, he and his wife received another $100,000 in underinsured motorist coverage for a total third-party recovery of $110,000. After paying a 40% contingency attorneys' fee and expenses, his net recovery was less than $66,000. US Airways demanded reimbursement for the entire $66,866 that it had paid for McCutchen's medical bills. Soon after, McCutchen's attorneys placed $41,500 in a trust account, reasoning that any lien found to be valid would have to be reduced by a proportional amount of legal costs. 

US Airways, in its capacity as administrator of the ERISA benefits plan, filed suit in the District Court under § 502(a)(3) of ERISA, seeking "equitable relief" in the form of a constructive trust or an equitable lien on the $41,500 held in trust and the remaining $25,366 personally from McCutchen. The Summary Plan Description describing the US Airways benefits plan covering McCutchen contained the following paragraph, entitled "Subrogation and Right of Reimbursement":

The purpose of the Plan is to provide coverage for qualified expenses that are not covered by a third party. If the Plan pays benefits for any claim you incur as the result of negligence, willful misconduct, or other actions of a third party, the Plan will be subrogated to all your rights of recovery. You will be required to reimburse the Plan for amounts paid for claims out of any monies recovered from a third party, including, but not limited to, your own insurance company as the result of judgment, settlement, or otherwise. In addition you will be required to assist the administrator of the Plan in enforcing these rights and may not negotiate any agreements with a third party that would undermine the subrogation rights of the Plan.

Under the Plan Description, a beneficiary is required to reimburse the Plan for any amounts it has paid out of any monies the beneficiary recovers from a third party. US Airways claimed that this language permited it to recoup the $66,866 it provided for McCutchen's medical care out of the $110,000 total that he recovered regardless of his legal costs. 

McCutchen argued that it was unfair and inequitable to reimburse US Airways in full when he had not been fully compensated for his injuries, including pain and suffering. He also argued that US was not out  time or money in pursuing the third party.  To permit US full recovery would be unjustly enrich it. In other words, the ERISA plan was "reaching  into its beneficiary's pocket, putting him in a worse position than if he had not pursued a third-party recovery at all."

The trial court rejected McCutchen's arguments and granted summary judgment to US Airways. The Court required McCutchen to sign over the $41,500 held in trust and to pay $25,366 from his own funds. 

^{ERISA DISCUSSED}

The Court stated:  "Congress designed ERISA to protect employee pensions and benefits by providing pension insurance, enumerating certain specific characteristics of pension and benefit plans, and setting forth fiduciary duties for the managers of both pension and nonpension plans. Varity Corp. v. Howe, 516 U.S. 489, 496 (1996). The Supreme Court has repeatedly observed that "ERISA is a comprehensive and reticulated statute, the product of a decade of congressional study of the Nation's private employee benefit system." Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204, 209 (2002) (quoting Mertens v. Hewitt Assocs., 508 U.S. 248, 251 (1993)) (internal quotation marks omitted). Courts have therefore been reluctant to tamper with its carefully crafted and detailed enforcement scheme. Id. Under this scheme, Congress gave plan beneficiaries greater rights than plan fiduciaries to enforce the terms of a benefit plan. A beneficiary has a general right of action "to enforce his rights under the terms of the plan." Knudson, 534 U.S. at 221 (quoting 29 U.S.C. § 1132(a)(1)(B)). By contrast, a fiduciary's right to enforce plan terms is governed by ERISA's § 502(a)(3), which limits the available relief to an injunction or "other appropriate equitable relief." 29 U.S.C. § 1132(a)(3); Knudson, 534 U.S. at 221; Sereboff v. Mid Atlantic Medical Servs., Inc., 547 U.S. 356, 361 (2006). It is under this provision that US Airways seeks to enforce the Plan's subrogation and reimbursement provision against McCutchen.

The Supreme Court has explained that the modifier "appropriate equitable relief" is not superfluous. Mertens, 508 U.S. at 257-58. Rather, "Congress's choice to limit the relief available under § 502(a)(3) to `equitable relief' requires us to recognize the difference between legal and equitable forms of restitution." Knudson, 534 U.S. at 218. Thus, the Supreme Court has "interpreted the term `appropriate equitable relief' in § 502(a)(3) as referring to those categories of relief that, traditionally speaking (i.e., prior to the merger of law and equity) were typically available in equity." Cigna Corp. v. Amara, 131 S. Ct. 1866, 1878 (2011) (quoting Sereboff, 534 U.S. at 361) (internal quotation marks omitted)."

By applying the equitable principle of unjust enrichment, the Court of Appeals stated that the trial court's decision constituted inappropriate and inequitable relief. Because the the judgment exceeded the net amount of McCutchen's third-party recovery, it left him with less than full payment for his emergency medical bills, thus undermining the entire purpose of the Plan. The Court of Appeals also stated that it amounted to a windfall for US Airways, which did not exercise its subrogation rights or contribute to the cost of obtaining the third-party recovery. The Court of Appeals stated that "Equity abhors a windfall. See Prudential Ins. Co. of America v. S.S. American Lancer, 870 F.2d 867, 871 (2d Cir. 1989)."

^{The trial court's decision was vacated and remanded to determine what was "appropriate equitable relief."}

^{I hope this gives you ammunition going forward to help prevent the injustices of of past ERISA inflexability.}

JP Morgan Chase recently had the question of whether it was entitled to foreclosure fees and costs listed on its proofs of claims against three debtors. IN RE JOHNSON, Bankr. Court, ED Arkansas 2011.  In the three cases there was no dispute that the foreclosure fees and costs were owed under the loan documents, which granted JP Morgan "the right to be paid back by me for all of its costs and expenses in enforcing this Note . . . ." The only question in each of the three cases was whether the foreclosure fees and costs were allowed by the controlling law. 

In all three cases, the controlling law was the Arkansas' Statutory Foreclosure Act (i.e., Arkansas' non-judicial foreclosure procedure), and whether JP Morgan was qualified to use Arkansas' non-judicial foreclosure procedure when it initiated the foreclosure proceedings against these Debtors.  The Debtors argued JP was not qualified to use the non-judicial foreclosure process because § 18-50-117 of the Statutory Foreclosure Act requires an entity to be authorized to do business in Arkansas, and that JP was not in compliance with that requirement.  JP stipulated that it was not authorized to do business in Arkansas.

 Among other arguements, JP argued that the authorized to do business portion of the Act was preempted by federal law through the provisions of the National Banking Act.  The Court found that JP Morgan was not qualified to use the Arkansas non-judicial foreclosure process when it initiated the foreclosures against the Debtors. 

Attorney Fees

Both parties asked for attorney fees.  The Court stated that generally under the "American rule," parties to litigation must pay their own attorney fees. However, exceptions to the rule exist, one of which was Ark. Code Ann. § 16-22-308, which states,

In any civil action to recover on an open account, statement of account, account stated, promissory note, negotiable instrument, or contract relating to the purchase or sale of goods, wares, or merchandise, or for labor or services, or breach of contract, unless otherwise provided by law or the contract which is the subject matter of the action, the prevailing party may be allowed a reasonable attorney's fee to be assessed by the court and collected as costs.

The Court found that the action was brought by the Debtors to determine whether they owed the foreclosure fees and costs incurred by JP Morgan in conducting non-judicial foreclosure proceedings on its promissory notes. The Debtors were construed the prevailing party, and the Court awarded the Debtors a reasonable amount for their attorney fees. Counsel for the Debtors were requested to submit separate applications fees.

This case is an example of the pitfalls that can befall a creditor.  In this case, the objection to the creditor's proof of claim was sustained, and the creditor's objection to the plan was denied.  JP Morgan did not get included in the plan and had to pay fees to the Debtors to add further insult to injury.

Changes to Bankruptcy Proof of Claim form and Addendum involving Debtor's principal residence.

The bankruptcy proof of claim form has been amended in several respects. A new section—3b—is added to allow the reporting of a uniform claim identifier. The new identifier consists of  24 characters and is intended to facilitate automated receipt, distribution, and posting of payments made by means of electronic funds transfers by chapter 13 trustees. Creditors are not required to use a uniform claim identifier.

Language is added to section 4 to clarify that the annual interest rate that must be reported for a secured claim is the rate applicable at the time the bankruptcy case was filed. Check boxes for indicating whether the interest rate is fixed or variable are also added.

Section 7 of the form is revised to clarify that writings (such as a promissory note) supporting a claim or evidencing perfection of a security interest must be attached to the proof of claim. If the documents are not available, the filer must provide an explanation for their absence.  The instructions for this section of the form explain that summaries of supporting documents may be attached only in addition to the documents themselves.

Section 8—the date and signature box—is revised to include a declaration that is intended to impress upon the filer the duty of care that must be exercised in filing a proof of claim. The individual who completes the form must sign it. By doing so, he or she declares
under penalty of perjury that the information provided “is true and correct to the best of my knowledge, information and reasonable belief.” That individual must also provide identifying information—name; title; company; and, if not already provided, mailing address, telephone number, and email address—and indicate by checking the appropriate box the basis on which he or she is filing the proof of claim (for example, as creditor or authorized agent for the creditor).


Amendments are made to the instructions that reflect the changes made to the form, and stylistic and formatting changes are made to the form and instructions. Spaces are added for providing email addresses in addition to other contact information in order to facilitate communication with the claimant. The provision of this additional information does not affect any requirements for serving or providing official notice to the claimant.

A sample form may be found at:   New Revised Proof of Claim form

ATTACHMENT INVOLVING DEBTOR'S PRIMARY RESIDENCE

There is also an "Attachment A" to the proof of claim form.  It must be completed and attached to a proof of claim secured by a security interest in a debtor’s principal residence. The form requires an itemization of prepetition interest, fees, expenses, and charges included in the claim amount, as well as a statement of the amount necessary to cure any default as of the petition date. If the mortgage installment payments include an escrow deposit, an escrow account statement must also be attached to the proof of claim.

The form may be found at:    Supplemental form involving Debtor's principal residence

 ATTACHMENT INVOLVING CHAPTER 13 CASES

This form is new and applies in chapter 13 cases. It requires the holder of a claim secured by a security interest in the debtor’s principal residence—or the holder’s agent—to file a notice of all postpetition fees, expenses, and charges within 180 days after they are incurred. The notice must be filed as a supplement to the claim holder’s proof of claim, and it must be served on the debtor, debtor’s counsel, and the trustee. The individual completing the form must sign and date it. By doing so, he or she declares under penalty of perjury that the information provided is true and correct to the best of that individual’s knowledge, information, and reasonable belief. The signature is also a certification that the standards of Rule 9011(b) are satisfied.

The form may be found at:  Chapter 13 supplemental form

Update on Medical Payments and PIP

With the Arkansas Supreme Court's recent decisions that first party medical payments or personal injury protection payments (PIP) are only recoverable after a judicial determination that the insured has been made whole, subrogation is practically dead in Arkansas.  Adjusters for first party carriers are still putting third party carriers on notice of subrogation rights causing problems with settlement.  Don't back down, set them up for a claim by providing both sides with recent decisions on this subject and point out that they are opening themselves up for a lawsuit if they do not withdraw their pre-adjudication claim.  Be mindful that they can still pursue your client so it is best to use some tact and ask them to waive any claim if possible.