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September 9, 2011 – After the housing market collapsed in 2008, many subprime mortgage-backed securities issued by U.S. financial firms became toxic, causing major losses for Fannie Mae and Freddie Mac. Taking action on Friday, Sept. 2, the Federal Housing Finance Agency (FHFA), which oversees Fannie and Freddie, filed a suit against 17 firms for alleged violations of federal securities laws and common law in sales of subprime mortgage-backed securities.
Among the 17 institutions facing these allegations are Bank of America Corporation, Citigroup, Inc., Goldman Sachs & Co. and JP Morgan Chase & Co. The suits indicate that the toxic securities Fannie Mae and Freddie Mac purchased from these entities totaled almost $200 billion in losses, although this number does not represent the amount of compensation the FHFA is seeking. It has not yet announced an amount for its compensation, saying that “actual recoveries will be determined based on filings by the parties, evidence and judicial findings.”
The FHFA argues that these institutions did not accurately present the characteristics of the mortgages backing these securities when they presented them to Fannie Mae and Freddie Mac. It said it “seeks compensatory damages for negligent misrepresentation,” such as misstating the owner occupancy percentage and loan-to-value ratio.
It claims these reports violated the Securities Act of 1933. More broadly, the FHFA filed these complaints it accordance with its authority under the Housing Economic Recovery Act of 2008.
In a statement issued on Sept. 6, the FHFA stated, “Some portion of the losses that Fannie Mae and Freddie Mac incurred on private-label mortgage-backed securities (PLS) are attributable to misrepresentations and other improper actions by the firms and individuals named in these filings.”
In a statement responding to the lawsuit, Bank of America said that it did not portray false characteristics or misleading information to Fannie Mae and Freddie Mac about the securities. Fannie and Freddie, the statement said, “claimed to understand the risks inherent in investing in subprime securities and continued to invest heavily in those securities even after their regulator told them they did not have the risk management capabilities to do so.”
The lawsuits against these institutions were filed in federal and state courts in New York and in the federal court in Connecticut. They follow a similar one against UBS Americas, Inc. on July 27, 2011.
Jason Cox, a staff sergeant from Georgia, is suing Community Loans of America, a lender who offers a service similar to payday loans, for charging far above the allowed annual interest rate on a military loan, according to The Associated Press.
This Fort Benning soldier claims he took out a loan for $3,000 for a trip to pick up his daughter. Within a year, his loan cost him more than $4,000 in interest alone. That amount of interest far exceeds the rates allowed by measures established to protect service members from predatory lending.
But Community Loans of America knew they were sidestepping those measures. “ID TYPE: GA, Military ID” is written directly on Cox’s loan documents.
And despite his military status, Cox’s loan carried an annual interest rate (APR) of 109 percent.
To put that in perspective, according to a Federal Reserve statistical release, the average APR on personal loans in 2011 was less than 12 percent.
After defaulting, the lender repossessed Cox’s car, leaving him without a vehicle and a balance of $4,100—a balance higher than the loan principle itself after more than a year of $375 monthly payments.
The soldier’s lawyer, former Georgia Gov. Roy Barnes, believes more soldiers have been victimized by Community Loans of America, who has over 900 stores in 22 states. As a result, he is pushing to have this suit gain class-action status.
Military personnel have been common targets of predatory lenders because military law prohibits soldiers from defaulting. Consequently, lenders would charge higher interest rates to soldiers since they knew soldiers would avoid default at all costs. In order to cut down on this lending behavior, the Military Lending Act was passed in 2007.
But military advocates are unsure how effective this act has been.
Chris Kukla, a representative from the Center for Responsible Lending, feels the military would be better protected if the laws established for military personnel applied to the entire public.
He explains, “The only way you’re really going to be able to protect [the military] is to have that protection apply across the board,” as reported by the Associated Press.
Owners of Hybrid Honda Civics who took out auto loans for the 2006 model have been rallied together by class action lawyers in a huge lawsuit mounted against Honda Motor Co. They claim the automobile company is guilty of false advertising by promoting a much higher miles-per-gallon for the vehicle than it actually gets.
But one car owner, Heather Peters, decided to take on the auto giant by herself and separated from the class action suit. She approached a small claims court in order to avoid attorney’s fees and to acquire a quick decision.
Then, according to The Associated Press, a Los Angeles Superior Court commissioner announced a decision in Peters’ favor, awarding her $9,867.
“Wow! Fantastic,” responded Peters to an AP reporter. “I am absolutely thrilled. Sometimes big justice comes in small packages. This is a victory for Honda Civic owners everywhere.”
Peters, who took out an auto loan to purchase a car that would get, what she thought, was 50 miles to the gallon, found that the vehicle got no more than 30 miles to the gallon. Claiming the car never lived up to its advertised promise, she sued the manufacturer for $10,000.
Had she stuck with the class action suit, she would have received significantly less.
Honda has proposed a settlement which would give car loan holders $100 to $200 each, and a $1,000 credit towards a new car purchase. And the class action lawyers would receive a total of $8.5 million, Peters told the AP.
A Honda technical expert said that the 50 miles-per-gallon sticker was simply an estimate on the highest amount of mileage the car could get—which, according to the expert, is all that’s required under federal law. He also testified that the car would perform differently depending on how the car was driven. As a result, the company claimed it was innocent and did not deceive anybody.
The ruling for the class-action settlement will be made in March, and those auto loan borrowers who wish to decline the deal must do so by Feb. 11.
Stephanie Watson from Chicago is suing Wells Fargo by alleging that the bank misrepresented requirements for the federal government’s Home Affordable Modification Program (HAMP), which can adjust monthly payments due to financial hardship.
The Chicago Tribune announced that Watson’s lawsuit claims that Wells Fargo willfully told borrowers that they must miss mortgage loan payments in order to qualify for debt modification. Customers, trusting in Wells Fargo, were charged fees and penalties when they missed payments. On top of that the bank reported delinquencies to credit-reporting agencies before refusing to modify existing mortgage loans.
Watson’s troubles first began in 2010, when she applied for the mortgage loan modification program. After speaking to Wells Fargo, she followed their instructions and missed her first payment in November of 2010. She was shocked when she incurred late fees and penalties. The bank told her that if she didn’t get her account current then she would be foreclosed upon. It took a few months for Watson to get her balance back to normal but then she was told she wouldn’t receive modification.
According to the Treasury Department, HAMP requires that applicants be facing “financial hardship and are either delinquent or in danger of falling behind on your mortgage payments.”
Watson’s lawsuit also alleges that Wells Fargo violated its own mortgage loan contract. According to the contract, the bank may hold a partial payment until a borrower pays the loan to bring it current. However, Wells Fargo must pay interest to the borrower on the partial payment unless the bank applies the funds to the home loan on the due date.
The monthly payment on Watson’s mortgage was over $2,300. However, on January 6, 2011, she accidentally made a payment of only $2,000. The bank put that payment into an account which did not apply to any principal, interest or fees of the mortgage loan.
Weeks later on Jan. 27, Watson brought her account current with a payment but Wells Fargo still refused to pay interest on the $2,000 it had been holding.
Wells Fargo, one of the largest banks in the country, says that it is “currently researching this case to better understand the nature of the lawsuit,” according to the Chicago Tribune.
The bank vowed to explore the situation and allegations as stated by spokesman Jim Hines.
“In general, we work hard to keep our customers in their homes when they encounter difficulties. Since January 2009 through the end of August 2012, more than 800,000 of the loans we service were in active trial or completed mortgage loan modifications. We can provide additional context when we have more information about the facts of the filing,” said Hines in a statement for the Chicago Tribune.