Banking New York Winter 2011 by The Warren Group

THE INDUSTRY MAGAZINE FOR FINANCIAL EXECUTIVES & PROFESSIONALS • WINTER 2011 • VOLUME 16

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NEW

ATTORNEY GENERAL AND GOVERNOR ARE HITTING THE

F O R E C LO S U R E

W A R P AT H

Incoming NY Attorney General Eric Schneiderman

INSIDE: • 06 Foreclosure Wars

• 10 Cyber Friends and Enemies

• 12 Unwieldy Vendor Management

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THE INDUSTRY MAGAZINE FOR FINANCIAL EXECUTIVES & PROFESSIONALS • WINTER 2011 • VOLUME 16

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As former Attorney General Andrew Cuomo steps into the governor’s office, newcomer Eric Schneider vows to work with him and others to turn up the regulatory heat on New York’s banking industry. AP Photo/Mary Attaffer

Features

NEW

ATTORNEY GENERAL AND GOVERNOR ARE HITTING THE

F O R E C LO S U R E

W A R P AT H

Incoming NY Attorney General Eric Schneiderman

INSIDE: • 06 Foreclosure Wars

• 10 Cyber Friends and Enemies

• 12 Unwieldy Vendor Management

AP Photo/Frank Franklin II

Volume 16 Winter 2011 Timothy M. Warren Chairman Timothy M. Warren Jr. CEO & Publisher David B. Lovins President Jeffrey E. Lewis Controller Dir. of Operations Vincent Michael Valvo Group Publisher & Editor in Chief George Chateauneuf Publishing Group Sales Manager

Cover Feature

New Challenges, Unresolved Questions Superintendent’s Spotlight

The CFPB Can’t Go it Alone

current affairs

Foreclosure Wars, Part 2:

The Borrowers Strike Back

Guarding the Gate

Cyber Friends? Cyber Enemies?

Could be the Same

Feature

Third Party Management:

Vendor Management Gets Bigger,

Harder and More Labor-Intensive

Sarah Cunningham Director of Events Emily Torres Advertising, Marketing & Events Coordinator Cara Inocencio Advertising Account Manager Richard Ofsthun Advertising Account Manager Christina P. O’Neill Custom Publications Editor Cassidy Norton Murphy Associate Editor John Bottini Creative Director Scott Ellison Senior Graphic Designer Ellie Aliabadi Graphic Designer

©2011 The Warren Group Inc. All rights reserved. The Warren Group is a trademark of The Warren Group Inc. No part of this publication may be reproduced in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without written permission from the publisher. Advertising, editorial and production inquiries should be directed to: The Warren Group, 280 Summer Street, Boston, MA 02210. Call 800-356-8805.

superintendent’s spotlight

By Richard Neiman

The CFPB Can’t Go it Alone The Dodd-Frank legislation has made consumer protection a top priority of the reform agenda. This is appropriate and long overdue; tragically, it has taken a financial crisis for some to realize that consumer protection is at the root of a safe and sound financial system. The creation of the new Consumer Financial Protection Bureau (CFPB) is a centerpiece of the legislation in this area that holds great promise, but also creates new regulatory relationships that have yet to be worked out. The CFPB will have its hands full in addressing a wide range of actors in today’s diverse financial services marketplace. The key to success for the CFPB is to effectively partner with other regulators at all levels of government, what I refer to as “cooperative federalism.”

tate regulators overlap jurisdiction with the CFPB on multiple levels. The clearest distinction is between banks and nonbanks. For smaller banks, those with assets below $10 billion, the Federal Reserve or the FDIC will remain the federal counterpart. The CFPB will participate in exams on a sampling basis. From an operational perspective, the addition of the CFPB as the secondary federal counterpart for smaller banks, although important, represents the smallest change in the state-federal dynamic. However, for larger banks with assets over $10 billion, the CFPB will be a new federal partner for the states in conducting consumer compliance exams. For those larger banks that are state-chartered, the CFPB is required to “pursue arrangements and agreements with state regulators on joint and coordinated examinations.” There is an important difference in oversight for larger banks to mention here. Those with a federal charter will experience a bifurcation in their supervision, with separate agencies responsible for prudential oversight and consumer protection. Those that are state-chartered, which account for over a third of larger banks, will retain a holistic approach on the part of their chartering supervisor. This does not mean that consumer protection takes a back seat to safety and soundness at state agencies. On the contrary, it recognizes the many touch points between these two disciplines that contribute to effective oversight, such as underwriting standards. The financial crisis has clearly demonstrated that a loan that is unfair to borrowers is not prudent bank business. Federal prudential regulators will still need to maintain consumer compliance expertise, however. They will continue to conduct regular exams for smaller banks. And even at larger 4 | Banking New York

national banks, where safety and soundness is being separated from consumer protection, I believe strongly that prudential supervisors cannot turn a blind eye to consumer issues or rely passively on the CFPB. For example, a proper assessment of the strength of an institution’s management, the “M” in the CAMELS rating, which is a core element of a prudential review, cannot ignore consumer issues. In fact, it is my hope that the CFPB’s existence will create healthy competition among regulators in setting a high bar with respect to consumer protection. Regulatory authority over non-banks, however, such as consumer lenders and check cashers, poses different and novel challenges. Unlike with depository institutions, non-banks have typically been supervised exclusively at the state level. Here, the addition of the CFPB as a federal counterpart will be breaking entirely new ground. In fact, the state-CFPB relationship with respect to non-banks could be the true test for a more cooperative federalism. As states, we are committed to making this relationship work for the benefit of consumers. Our hope and expectation is that this coordination will be a two-way street. There are numerous areas where the CFPB and states will need to be flexible and creative – such as mortgage servicing and payday lending – to ensure we really do work together in implementing our common mission. Another area that presents a real opportunity to inaugurate a new era of cooperation lies in the enforcement of consumer protection laws. Dodd-Frank codifies the Supreme Court’s recent decision in Cuomo vs. Clearinghouse, re-affirming the right of state attorneys general to bring actions against national banks under nonpreempted state laws such as UDAP. It also authorizes state attorneys general to bring actions under federal consumer financial protection laws in state or federal court. By doing so, Dodd-Frank recognizes the crucial role states play in consumer protection. However, the success of this shared enforcement model depends on a new degree of state-federal cooperation. The CFPB and the states must work together, as the states and the Federal Trade Commission have long done, to coordinate enforcement where appropriate to achieve the most effective results. All regulators need to remain vigilant. Inappropriate or unsuitable products, that cannot be repaid or drive consumers deeper into debt, are destabilizing to institutions as well as to families. While there is no one optimal regulatory structure, the changes that we are undertaking will succeed only if we truly embrace cooperative federalism at all levels of government. The CFPB can’t go it alone. s Richard Neiman, superintendent of the New York State Banking Department, writes on regulatory issues for Banking New York.

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current affairs

Foreclosure Wars, Part 2: By Robert Brannum

The Borrowers Strike Back

Before the term “robo-signing” was coined, large banks and mortgage lenders were feverishly initiating loan foreclosure proceedings to protect their assets as mortgage values deteriorated.

hen, news stories began to emerge about erroneous foreclosures on the wrong homes, homes that had been purchased outright without mortgages, and the delivery of faulty loan documentation to courts around the country.

Mass Foreclosures a Result of Mass Originations The bumper sticker suggesting one “drive like hell – you’ll get there” comes to mind. The massive number of home loans generated during the boom years of 2005 and 2006 caused overwhelming paperwork and processing issues for loan originators, lenders, and other counterparties involved in securitization and servicing. In many instances, paperwork was incomplete, inaccurate or falsified in order to approve, and then later sell, those mortgages. Of the $4 trillion of mortgages that were securitized, more than four million loans that are estimated to be in foreclosure suffer from the same lack of proper paperwork,

including in many cases a clear delineation of mortgage ownership. Investigative researchers began to document the mass-production of foreclosure by many of the same lenders that perfected the mass-production of loan originations and securitizations. These researchers reported their findings on blogs and message boards, reporting that in order for lenders to initiate high volumes of foreclosures – in many cases, tens of thousands daily – those lenders were submitting incomplete, inaccurate, and, in some situations, fraudulent paperwork to the courts. Mainstream media outlets, including The Washington Post, began to pursue the bloggers’ allegations. Legal investigations began, depositions were taken, and the industry-wide practice of robo-signing was quickly revealed. In a typical situation, a bank officer or representative signs, either physically or digitally, affidavits proclaiming the ability to proceed with foreclosures.

Signers of those affidavits are legally required to attest to the accuracy of the affidavits. But the robo-signing investigation revealed that individuals were affirming thousands of affidavits in a single day, bringing scrutiny of the foreclosure processes of the largest lenders from advocacy groups and state attorneys general.

Foreclosure Processes Suspended The revelation of robo-signing of foreclosure affidavits at Ally Financial, a subsidiary of GMAC, caused it and other large lenders, including Bank of America and JP Morgan Chase, to re-examine their foreclosure preparation processes. In a recent article published by Bloomberg Businessweek, a robo-signer at Nationwide Title Clearing acknowledged his role in authorizing more than 5,000 loans per day for Citigroup and JP Morgan Chase – including many loan affidavits he never saw, but on which his signature was digitally added (digital signatures are not improper, but they carry the expectation that the signer attests to the documents’ accuracy and validity). The robo-signing issues have led to inaccuracies, including issuing foreclosure statements for the wrong homes, to incorrect owners, and in some cases, without properly confirming which lending party – originator, servicer, securitizer or other party – legally owns the loan, and therefore, has authority for issuing the foreclosure process in the first place. Adding to the challenge of loan provenance is the fact that many leading securitization parties, such as New Century Financial and Lehman Brothers, have gone out of business.

Let the Class Actions Begin Not surprisingly, class action litigation has already begun, starting in Florida and Maine, and now including Kentucky, Maryland and New Jersey. Ohio’s attorney general filed a separate lawsuit in November as well. More are expected across the country. continued on page 11 6 | Banking New York

速

Eric Schneiderman speaking at a pre-election rally in New York on Nov. 1. AP Photo/Seth Wenig

Challenges,

Unresolved Questions Greet Mortgage

Industry in 2011

8 | Banking New York

By Scott Van Voorhis

he Empire State’s banking industry may be in for a rocky 2011 as regulators, politicians and judges turn up the heat amid a never-ending flood of mortgages gone bad. With the foreclosure crisis making headlines, New York’s financial institutions face unprecedented pressure as state regulators and lawmakers alike scramble to grab a piece of the spotlight. The challenges range from a new law that gives a boost to homeowners who contest foreclosure proceedings to promises of a wide-ranging probe into alleged mortgage fraud schemes on Wall Street by the state’s incoming attorney general, Eric Schneiderman whose victory puts two activist Democrats eager to mix it up with the financial industry at top power positions in state government, with Attorney General Andrew Cuomo having won a promotion to the governor’s office.

State bank regulators are stepping it up as well, and have just rolled out new rules forcing lenders to respond in a timely fashion to struggling homeowners seeking to modify their mortgages. And in a widely watched Long Island case, a state judge canceled a couple’s six-figure mortgage debt after ruling the lender had made a number of serious errors in the foreclosure process. It is shaping up to be an eventful 2011 for New York’s banking industry, notes Joshua Stein, chair of the education committee for the New York Mortgage Bankers Association. Stein, in agreeing to an interview with Banking New York, made it clear he is speaking personally and not as a representative of the mortgage bankers group. “Certain mortgage lenders and holders are attractive targets for politicians at all levels, and New York is no exception to that,” said Stein, a lawyer and real estate expert based in New York City who works on financing deals involving both multifamily housing and commercial properties. The mounting regulatory challenges facing banks across New York should not come as a total surprise to local lenders. In fact, the Empire State has taken an activist approach to the foreclosure crisis all along. Practical efforts to delay or stop home takings by judges, regulators and lawmakers have been matched by campaigns targeted at the corporate suite by Cuomo. On the micro level, New York is one of a handful of states that mandates negotiations between banks and homeowners before court officials will allow lenders to move ahead with foreclosures. For banks seeking to foreclose on homeowners who have fallen behind in their payments, the mandated conferences have made New York the slowest state in the country to do business in. The average foreclosure case in the state has dragged on for nearly two years. The result has been tens of thousands of potential foreclosures caught in limbo, reducing the rate of bank seizures, though not necessarily producing permanent solutions, such as loan modifications, banks have argued. Overall, New York has had one of the lowest foreclosure rates in the country, though filings did jump 37 percent in August before leveling out in the fall.

Along with such street level battles, Cuomo has been a leading player in a crusade by state attorneys general across the country in a new front in the foreclosure crisis. The aim has been to force the nation’s biggest banks, many of them headquartered in New York, to freeze foreclosures while allegations of robosigning are sorted out.

“There is always that fear that the new sheriff in town will try to change the world. If it’s not thought out properly, it can cause more harm than good.” In the middle of his campaign for governor in October, Cuomo donned his AG hat to ramp up the pressure on the biggest lenders, calling robo-signing a “fraud upon the courts.” Cuomo has demanded more information from Bank of America, JPMorgan Chase, Wells Fargo and GMAC mortgage on the foreclosure process, including details of the different bank’s procedures and verification practices. He also pressed for a moratorium on new foreclosures as the robo-signing allegations are addressed – a command with which banks have mostly complied. Cuomo’s incoming replacement, fellow Democrat Eric Schneiderman, looks every bit as aggressive as his predecessor. A state lawmaker who once held a hearing on the “underprosecution” of mortgage fraud, Schneiderman has called for raising the stakes in the foreclosure battle by going after potential fraud in how faulty mortgages were packaged, securitized and sold on Wall Street. In particular, the incoming AG has vowed to investigate abuses surrounding the sale of mortgage-backed securities on Wall Street, including phony credit ratings and misleading marketing. He contends fraud in high places helped fuel dishonest behavior on the neighborhood level, and vice versa, citing the parallel explosion in “liar loans” and appraisal fraud. Schneiderman has also pledged to ag-

gressively pursue robo-signing allegations, with plans to add “resources to the ongoing national investigations into fraudulent mortgage processing.” And New York’s next top law enforcement official is also pledging to enforce a 2009 law that requires banks and other lenders to pay for the maintenance of foreclosed properties. “Mortgage fraud schemes on Wall Street are devastating working families on Main Street, and they are threatening our economic recovery upstate and downstate,” Schneiderman said in a press statement. “As attorney general, I will do everything in my power to protect homeowners. That means using every tool in the attorney general’s toolbox to hold these criminals accountable and keep middle class New Yorkers from being thrown out of their homes.” “There is always that fear that the new sheriff in town will try to change the world,” noted Ed Mermelstein, a New York real estate lawyer who closely tracks the foreclosure issue. “If it’s not thought out properly, it can cause more harm than good.” Meanwhile, New York banking regulators have also been busy. The New York Banking Department this fall issued a tough new set of rules requiring banks and other lenders to respond in a timely fashion when struggling homeowners seek to modify their mortgages. The new rules went into effect on Oct. 1 and require mortgage servicers to let homeowners know, in writing, that their application has been received and whether more information is needed. The deadline for the first step is 10 days, and the servicer is required to let the homeowner know within a month if it has decided to modify the loan. The push for a swifter response comes after the release of a report this summer that found that 60 percent of homeowners behind two months or more on their mortgages had not been referred to their loan servicer’s loss mitigation department. New York’s top banking regulator, Robert Neiman, has made it clear his department will judge not only responsiveness on part of mortgage servicers to modification requests, but also their willingness to write down loans as well. In fact, he has pledged to go after mortgage servicers that are not cooperative. The new rules go far beyond laying out continued on page 14

Winter 2011 | 9

Guarding the Gate

By John Jaser

Cyber Friends? Cyber Enemies? Could be the Same Who’s on the side of the consumer? It’s getting harder to tell.

he Wall Street Journal recently reported that many popular websites are installing trackers to record our behavior on the Internet. That data has become a complex and lucrative industry for advertisers looking to target their messages. While this has not touched banks, sophisticated web tracking opens the door to significant risks to banks, should criminals gain access to the information collected. Today’s web tracking mechanisms go well beyond “cookies” – the snippets of text used for years to authenticate users and store their site preferences. Cookies have evolved into “beacons,” which track what consumers do on websites. This information is harvested by data aggregation companies, such as Lotame, which compile it into detailed profiles of user behavior across websites from Google to Dictionary.com. The data aggregators combine information about a consumer’s web activity with his shopping interests, income, even medical conditions, dramatically increasing the consumer’s value to a potential advertiser. If the advertiser is looking for people who visited home furnishing sites four times last week and checked their stocks three times today, this is the way to do it. Armed with this knowledge, an advertiser can reach people on the Internet with ads targeted to their desires when they are most receptive. Add the geo-location capabilities of mobile computing, and this becomes a bonanza to any store looking to attract likely customers as they walk by. Welcome to the new age of marketing, already in progress. BlueKai, a company that conducts real-time auctions of consumer data for advertisers, claims to have information on 160 million shoppers across retail, auto, travel and finance categories, who have shown they are ready to buy as a result of online activities such as comparison shopping or using an auto loan calculator. The key to the new web marketing

10 | Banking New York

methods is the beacon files that are downloaded to the user’s computer as part of free software, advertising or other tracking files. In many cases, the websites aren’t even aware that they’re installing the beacons. Some of these beacons secretly re-spawn themselves after users try to delete them. I find a striking similarity between these legitimate trackers and the sneaky tools of cyber thieves. Drive-by viruses – installed when a user merely visits a corrupt site – are commonly used by today’s criminals, and have resulted in spectacular heists. There’s not much difference here. Yet the Internet advertising industry claims that the data collected via beacons and sold to advertisers cannot identify consumers personally. Besides, such tools keep the Internet affordable, they claim. Omar Tawakol, CEO of BlueKai, recently wrote that a survey by MarketingSherpa showed that consumers preferred to receive ads based on their web behaviors over paying directly for web content. Tawakol even proposed that Internet

advertisers should do a better job of informing consumers about the data it collects and shares. “Preference platforms” would enable consumers to decide if they want their behavior to be tracked or risk the horrors of ads that are “totally unrelated to their interests,” he said. While such disclosures and preference tools are helpful, they fall short of addressing the much larger storehouses of consumer data that could easily identify a person, his habits, his medical history, income, loans and more. No one can dispute the value of such data in the hands of advertisers. But in the hands of cyber criminals, this information is even more valuable – and potentially deadly. You can bet the criminals will someday find a way to access this treasure trove of consumer information, and banks will be affected. ▲ John Jaser manages Internet Services and Security for Avon, Conn.-based COCC, Inc., (www.cocc.com), a 44-year-old firm specializing in outsourced information technology and support.

Foreclosure Wars

in foreclosure – although that number is closer to 80,000, according to the Mortgage Bankers Association – and 130,000 additional homeowners have received preforeclosure notices from their lenders this year after falling behind on their payments.

continued from page 6

The class action in Florida, which was filed against GMAC, could easily be a proxy from any other state and directed toward any other large lender accused of robo-signing, charging that the lender was “systematically fabricating evidence in the form of fraudulent affidavits.” The lawsuit in Maine accused the lender of “submitting false representations” regarding its foreclosure activities. The state of New York has also been highly engaged in the robo-signing foreclosure scandal. In mid-October Attorney General Andrew Cuomo, now governor-elect, was vocal in asking all servicers engaging in robo-signing to suspend all foreclosure actions until their procedures complied with state law (see main story, page 8). New York has been hit particularly hard by the economic recession, and tens of thousands of New Yorkers have been impacted by the foreclosure crisis. According to the attorney general’s office, more than 60,000 homes in the state are

The

NY Judge Raises the Ante On Robo-Signings The latest stone to be cast in the foreclosure scandal has also originated in New York. In October, the chief judge of the New York State Court of Appeals, Jonathan Lippman, issued a new rule that requires banks to affirm they have reviewed each foreclosure case for accuracy – under penalty of perjury – and that banks must pay the lawyers’ fees for homeowners who win their cases against those lenders. The rule was created in an effort to motivate lenders to review each foreclosure case as required by law, and to affirm, under penalty of perjury, that they have properly prepared and reviewed the documentation. This new rule is the first of its kind in the US. The New York Bankers Association has come out in support of Lippman’s ruling. In a November statement to the State

Assembly’s Standing Committee on Banks, NYBA President and CEO Michael Smith noted of the new rule, “As a result, New Yorkers facing the foreclosure process are afforded better protections than citizens of virtually any other state in the country.” The rule is a boon to consumer advocates, who would expect their lenders to now pause long enough before starting foreclosure proceedings to ensure the accuracy of their claims. It essentially strikes down the ability for lenders to generate mass foreclosures as was currently being done under the robosigning process. And with legal fees covered by the lender should the homeowner win, one might expect the rule to embolden homeowners to contest more cases. The short-term impact appears clear, as large banks will need to slow their foreclosures to ensure they’re properly reviewing documentation. According to the New York Post, that is very much what has happened: in the few weeks since Lippman put the foreclosure rule in place, almost no new foreclosure cases have been filed. s Robert Brannum is a freelance writer with special expertise in the finance industry.

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Winter 2011 | 11

Feature

Third Party Management: By Brad Putnam

Vendor Management Gets Bigger, Harder and More Labor-Intensive When I was working for a large financial institution back in the late 1990s, vendor management, as a regulatory requirement, was just beginning to become a big deal. Examiners were beginning to push vendor management, even though they really couldn’t identify it or who should be managed.

nstitutions reacted by sending out huge questionnaires, requests for documentation, and demands for SAS70s. Some vendors tried to respond as best they could to the clamor of hundreds of unique client requests. Some simply ignored them. Many vendors had to reevaluate their business model to accommodate the huge costs of a SAS70, and some just plain stopped working with financial institutions. Needless to say, the whole process for all involved was a painful

and convoluted mess. Here we are over 10 years later and things haven’t changed all that much. Sure, the federal regulators have issued some broad guidance and requirements for institutions and their vendors, but they also placed responsibility for vendor management directly on an institution’s senior management and board of directors. Further, vendor management is now “third party management,” greatly broadening the scope of who an institution is required to scrutinize prior to contract

and monitor over the life of the contract. The term “vendor management” now encompasses review and monitoring of any company that provides critical services, any contact with non-public information (NPI), and any contact with internal networks/software. In other words, well beyond an institution’s core processor and internet banking providers. We’re talking employee benefit providers (i.e. payroll, 401k, health/life insurance), business partners (i.e. partner brokerage and insurance companies), security providers, and more. The broadening of this definition has again left institutions scrambling and a whole new slew of vendors and business partners reacting to the onslaught of vendor management requests. All that said, vendor management is the right thing to do and allocating resources to

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do it properly is imperative. The risks are simply too high not to. In today’s business environment, information blasts around the world in the blink of an eye, and we’ve seen evidence that there are thousands of people willing to steal it. Breaches occur daily due to human error, insider theft, social engineering and outright hacking. Millions of people have their personal information for sale on the black market and ID theft continues to rise. If a business partner or vendor loses member or employee information, even if it isn’t used nefariously, those members and employees will hold accountable not who lost it, but the institution itself. By itself, a hit to an institution’s reputation is costly, but not nearly as costly as the hard costs involved after a breach. The Ponemon Institute recently pegged the cost per record lost at $250. It doesn’t take a huge breach to have costs rising to the millions and don’t count on insurance covering it unless the institution has done at least the industry standard due diligence. Oh, and don’t forget about the visit from the examiner who will most certainly be asking questions about the vendor management policy and program. In these tight economic times, finding the internal expertise and money to create a vendor management program is no easy task. However, trying to create a vendor management program after a breach is guaranteed to be a lot more expensive and a lot more painful.

Thankfully, with the increased burden, we are also seeing an increase in solutions to help! From vendor management software, consulting or outsourcing the whole task, many options are available. Whether you manage this process yourself or find a tool to assist, the message is: Do it today! ▲

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Cover Feature continued from page 9

mere timelines. Mortgage servicers must also hire adequate staff to deal with modification requests, while also proving they have written procedures for handling consumer requests. “The rules are an attempt to address widespread complaints about servicer unresponsiveness, lost documents and failures to engage in appropriate loan modifications forColor borrowers whoCMYK have theprofile desire to stay profile: Generic printer Default screen in Composite their homes and ability to make reduced

monthly payments,” Jane Azia, the department’s consumer protection chief, told New York lawmakers at a November hearing. “We believe our rules are the most comprehensive in the country.” Some of the most sweeping foreclosure policy moves in New York have come not from regulators, but from judges and state lawmakers. Suffolk County Supreme Court Justice Jeffrey A. Spinner made headlines last year

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when he cancelled the mortgage of a Long Island couple, wiping out, with the stroke of a pen, six figures in debt. Spinner based his decision on what he declared to be the “shocking and repulsive” acts by the mortgage servicer in dealing with the couple’s efforts to get their loan modified. However, Spinner is not destined to have the last word on the case, as a state appeals court overturned the decision. There was no existing law or statute to back up Spinner’s decision, nor was the servicer given fair warning that such a penalty was being considered, the Appellate Division of the New York Supreme Court ruled. While mortgage modifications are nice, there is no legal requirement that lenders modify loans, Stein contends. If a 100 homeowner has stopped making mortgage payments, the lender has every right to take 95 back the home. 75 “That was a pretty extreme example,” Stein noted. “The judge decided to punish the lender by invalidating the mortgage. That is completely nuts.” 25 For their part, New York lawmakers 5have also hit the foreclosure warpath. The Legislature passed a bill earlier this year 0 enabling homeowners who successfully contest foreclosures to recoup legal fees from their lenders. That has sparked fears that the new law might become a vehicle for lawyers intent on bringing class action suits against various financial institutions. “There is definitely going to be situations where lawyers will take on these cases on some sort of a contingency scenario,” Mermelstein said. “I’m sure there are going to be class action law suits. If there’s a way to make money, I’m sure attorneys will find it.” But Stein contends the problem is not the law, which could help in cases where homeowners were actually wronged, but the way it is likely to be applied in the courts. Judge Spinner’s controversial decision is but one 100 example of the punitive approach that New York courts are taking towards lenders. Stein 95 fears the new law will simply become anoth75 er way to bash banks and mortgage servicers already struggling with a flood of properties in default. 25 “My problem with the courts is that they are being too cavalier with the lenders,” 5Stein said. “The lenders will have to pay the attorney’s fees for the privilege of being 0 screwed.” ▲ Scott Van Voorhis is a freelance writer.

14 | Banking New York

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