Borrowers often hit by dubious fees

A foreclosure sign hangs in front of a home for sale.

TEXT OF INTERVIEW

KAI RYSSDAL: Members of the House Financial Services Committee spent their day considering the evils of predatory lending. Chairman Barney Frank has promised mortgage reform by the end of the session later this month. Today, committee members and the rest of us got a glimpse of exactly how hard it can be to avoid foreclosure. University of Iowa professor Katherine Porter's done a study of what happens to homeowners in bankruptcy who're trying to stay in their homes. Professor Porter, good to have you with us.

You did some research into Chapter 13 bankrupcies. What exactly did you find?

PORTER: What I found is that bankrupcy, which we conceive of as a refuge for homeowners in trouble, is actually the locus of significant misbehavior by mortgage companies. Instead of helping people save their homes in bankrupcy, some lenders are actually abusing the bankrupcy process to harm consumers and threaten their chance to save their houses.

RYSSDAL: "Misbehavior" sounds kind of like a law professor word. What does that mean in actual practice?

PORTER: Bankrupcy law has a carefully crafted set of rules to ensure that consumers and companies, their creditors, exchange information. So that only the actual and legal amount of a debt is paid. In more than one half of the loans that I studied the mortgage company didn't follow the rules. They didn't attach the required documentation to show the amount of the debt that was owed and document that that was correct. And in a lot of instances they tacked on fees that are not permissible, or may in fact not be permissible. But there's so little information provided nobody could determine that.

RYSSDAL: What kinds of fees are we talking about?

PORTER: Well, some of the examples that were just really, really, common were things like a $50 fax fee. There's even an e-mail fee. In some instances I saw very large fees, $5,000 or $8,000, the only description given was "other."

RYSSDAL: Is it illegal to charge somebody $50 to send a fax?

PORTER: It's not been ruled illegal in any kind of national consistent basis. I think those charges could quite easily be challenged as being unreasonable or even unconscionnable under existing law.

RYSSDAL: Who's supposed to be keeping an eye on loan servicing companies and loan originators? I mean aren't there regulators who are supposed to do this?

PORTER: This is one of the problems. There's a real regulatory black hole here. In theory the agency in charge of this would be HUD.

RYSSDAL: Housing and Urban Development

PORTER: Housing and Urban Development. Mortgage servicers are actually their number one area of complaint that they receive. But so far HUD has taken the attitude that this is not really an area of major policy for them. And part of the lesson I think of my study is that that needs to change. People don't just lose their houses because they get into bad loans. They lose their houses because they can't get out of bad loans. They can't get the company to take their payments. They can't understand what they're being charged. They can't get a real human on the phone to help them work things out when they do get into trouble.

RYSSDAL: So what are consumers supposed to do? I mean, if you're worried about losing your house, the last thing really you want to do is plow through this big, thick document you get from the bank. What are you supposed to do about it?

PORTER: I think the best advice for consumers is to keep the best records that they can. To document every phone call or letter that they send to their mortgage servicer; and to ask their company for a detailed loan history showing all of the charges that the company is trying to collect from them.

RYSSDAL: Katherine Porter at the Universiy of Iowa School of Law. Professor thanks for your time.

PORTER: Thank you.

About the author

Kai Ryssdal is the host and senior editor of Marketplace, public radio’s program on business and the economy.

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