THE CHANGING WORLD OF CONSUMER CREDIT

By: Jim McMillenPrivate Practice and

Adjunct Professor University of Houston Law School

Our Cast

Government

MarketConsumer

Early History Prior Early 19th Century

State banks primary source of lending until 1816. In 1816 State Savings and Loans start to appear. Prior to 1880’s property ownership was by

homestead and land grants land registration after that date was by “Fee Simple Deeds”, but contained conditional provisions.

Prior to 1900 Consumer Credit was by the Banks, S&L’s, General Stores, Company Stores and Loan Sharks.

Early 1900’s Cooperwaits establishes accounts for customers at it’s stores and other stores follow suit.

The Roaring 20’s

The 1920’s consumer credit and investment was in full swing – They were using the Banks & S&L’S to buy major consumer items, real property and the Automobile. The stores for consumer items and S&L’s for savings and real property. The were investing in the Stock Markets.

Mid 1920’s most states were implementing more protect consumer laws and a mortgage system.

Prior to 1933 real property loans were based on repayment in 3 to 5 years with annual payments.

The Great Depression to 1937The New Deal

Black Tuesday 1929 – The fall of the Stock Market – led to recession

1930 the Market actually improved during the first quarter- then Mid America suffered the Dust Bowl – logging, farming and mining declined – Prices fell and unemployment rose. Consumer pulled their investment from the market and defaulted on loans.

Banks and S&L’s suffered losses and were calling loans – Foreclosures were rampant.

During the Great Depression over 9,000 banks failed and Consumers loss over $140.1 Billion in assets.

The New Deal

Actually two parts 1933 and 1935 Part 1 – 1933

March 4- March 9th FDR shut down the banks until congress passed the National Banking Act – Regulating Banks and Guaranteeing deposits.

The U.S. was taken off the Gold Standard. FHA was created – Government insured loans – 10%

down with 90% finance for 25 years. Home ownership rose from 40% in 1933 to 70% by 1937. The ownership however favored white suburban and farm families.

Securities and Exchange Commission Created. In 1938 The Federal National Mortgage Association (Fannie Mae).

Part 2 -1935 created Social Security, labor Acts and investment programs like TVA and rural electric Co-ops.

1940’s – 1958

State Banks, S&L’s , local investors, and individual stores were the primary source of Consumer Credit.

After WWW II and the baby boom the housing market rose and the standard of living climbed.

1944 – The VA Loan came into existence under the GI Bill of Rights. The zero down home mortgage with the Government Guarantee.

Bank failures declined and contained since they were state regulated.

Most states implemented Small Loan Usury laws to protect consumers from loan sharking.

1955 – Enter Dinner’s club in New York city – the first multiple use credit card in New York City for dining and entertainment.

1958 – 1970’S In September 1958 - Bank of America changed the world- It dropped

60,000 credit cards on the unassuming city of Fresno, California. The world of Consumer Finance changed forever – Consumers no longer had

to discuss loans with their banker they had the power to make the decision on their own- no advise from the banker.

Over the next 12 years, until mass mailing of credit cards was outlawed, the banks blanketed the nation with over 100 million credit cards.

1970 Federal Home Loan Mortgage Association (Freddie Mac)a private corporation was created as a secondary source of mortgages.

1970 in February – HUD packages Mortgage loans for the first time and sold securities in a Ginnie Mae Portfolio – SECURIZATION is born.

Consumer Protection laws were implemented through the 1970’s. 1968 – Fannie Mae was converted to a private corporation to finance the

war. 1977 Congress passed the Congressed passed the Community

Reinvestment Act to insure that government were extended to minority communities, but rarely used until 1997.

1978 – Bankruptcy Reform was passed to make it easier for consumers to obtain relief .

1980’sS&L’s Fail

Market Find New Investments

Savings and Loan Crisis resulting in closing of 747 S&L’s --$160.1 billion with the government paying $121.4 Billion.

1980 – Depository Deregulation & Monetary Control Act – Pre-Emption of State Usury Laws allowed mergers.

1982 – Alternate Mortgage Transaction Parity Act – permitting variable rate interest.

1982 - Gunn – St. Germain Depositor Institutions Act –allowed S&L’s to choose to be state or federal institutions and increased allowed interest on accounts.

Securization takes root. 1985 First Auto Loan Package reaches Market. 1986 First Credit Card package reaches Market.

1986 Tax Reform Act – drops deduction for consumer loans except mortgages on 1st and 2nd homes. This put consumers into home equity loans.

1990’sReversing the New Deal

Utility Deregulation Sub-Prime Goes Mainstream.

1994-1997 –Subprime lenders increased from 70 to 210. Lending from $35 Billion to $125 Billion.

They went public and sold securization on the Market Ameriquest and Countrywide move to the top. Underwriting standards fell due to boiler room operations. Citigroup, Wachovia and HSBC all took over subprime. Payday and auto title lending became mainstream.

1996 Smiley v. Citibank (South Dakotare), N. A., 517 U.S. 735, 740-741, 116 S.Ct. 1730, 135 L.Ed.2d 25 (1996) – Federal Banks can apply usury laws of home state. The death of the state small loan acts --Usury is all but dead.

1997 – Lending increases under Community Redevelopment Act 1999 - Financial Services Modernization Act- the elimination of

Glass-Stegall – Lifted the division between Commercial and Investment banking.

Dot Com Bubble 1995-2000

2000 to Present 2000- Dot Com Bubble burst and leads to mild recession. 911 – September 11, 2001 – Terrorist attack Wall Street drops 681 points and the largest

one week drop in history. 2003-2005 – Subprime Mortgage Securization packages out pace prime lending on

market. 2004-2006 the period of homes sales with using ARMs that are resetting causing the

current Subprime Bubble that has burst. 2005 April – Bankruptcy Reform Act making bankruptcy more difficult for consumer. Consumer Debt skyrocketed between 2000-2007.

In 1999 – Consumer Mortgage Debt was $5.1 Trillion by 2006 it had rose to $11.0 Trillion In 1999 – Consumers had $1.4 trillion in installment and credit card debt by 2006 it had risen to $2.4

trillion. Consumer savings are now negative. $6.6 Trillion are now in subprime mortgages and out pace the prime market. As of November the default percentage of Consumer Installment and credit card debt has risen to

7.5% - the next looming disaster.

2007 – The subprime mortgage bubble burst. September 7, 2008- The U.S. Government took over Fannie Mae and Freddie Mac. The

program basically assist the banks to make more Risky loans. No relief for consumers. September 9, 2008 – First Lawsuit is filed to stop take over based on 4th and 14th

Amendment. Citicorp stops SIVA & SISA loans- 40 year ARMs and Interest only loans. Will continue at least until 2013 which is longer than the Great Depression.

Mortgages Longview

Mortgages Short View

Resets to Higher Rates

Option ARM Resets

Pay Day Option Resets

History of Home Values

Change in Price House Index

U.S. Foreclosure Map

Placing the Blame

Borrower

Servicer

Investment Bank

RatingAgencyOriginat

or

Title Company

Appraiser

Broker

Common Fraud Sceems

Property Flipping

Property is purchased, falsely appraised at a higher value, then quickly sold to a "straw buyer" who lets it go into foreclosure. The schemes typically involve one or more of the following: fraudulent appraisals, doctored loan documents, inflating buyer income. Kickbacks to buyers, investors, property/loan brokers, appraisers, and title company employees are common.

Silent Second

The buyer of a property borrows the down payment from the seller through a nondisclosed second mortgage. The primary lender believes the borrower has invested his own money in the down payment, when in fact, it is borrowed. The second mortgage may not be recorded to further conceal its status.

Nominee Loans/Straw Buyers

The borrower's identity is concealed through the use of a nominee who allows the borrower to use his or her name and credit history to apply for a loan.

Fictious /Stolen Identity

A false or stolen identity may be used on the loan application. The applicant may be involved in an identity theft scheme. The applicant's name, personal identifying information, and credit history are used without the true person's knowledge.

Inflated Appraisals

An appraiser acts in collusion with a borrower and provides a misleading appraisal report to the lender. The report inaccurately states an inflated property value.

Foreclosure rescue scams

The perpetrator identifies homeowners who are at risk of defaulting on loans or whose houses are already in foreclosure. Perpetrators mislead the homeowners into believing that they can save their homes in exchange for a transfer of the deed and up-front fees. The perpetrator profits from these schemes by remortgaging the property or pocketing fees paid by the homeowner.

Equity skimming

Scam artists get title to a home at below market value - often by convincing a distressed home buyer that they can prevent foreclosure - then uses refinancing or home-equity loans to strip out any equity in the property.

Air loans

This is a nonexistent property loan where there is usually no collateral. An example of an air loan would be where a broker invents borrowers and properties, establishes accounts for payments, and maintains custodial accounts for escrows. They may set up an office with a bank of telephones, each one used as the employer, appraiser, credit agency, etc., for verification purposes.

Areas of LitigationDocumentation Critical

CONSUMER LENDER

TILA RESPA (No direct route) HOPEA Deceptive Trade Practices Debt Collection Violations Financial Laws Documentation Fraud Loan Servicing FCRA Texas Constitutional Violations Negligence Misrepresentation

Foreclosure Fraud Misrepresentation Malpractice Negligence Securities Violation Actions against

Corporations Actions against MERS

violations Actions against title

companies