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By: Jim McMillen Private Practice and Adjunct Professor University of Houston Law School.

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Presentation on theme: "By: Jim McMillen Private Practice and Adjunct Professor University of Houston Law School."— Presentation transcript:

1 By: Jim McMillen Private Practice and Adjunct Professor University of Houston Law School

2 Government MarketConsumer

3 State banks primary source of lending until In 1816 State Savings and Loans start to appear. Prior to 1880s 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&Ls, General Stores, Company Stores and Loan Sharks. Early 1900s Cooperwaits establishes accounts for customers at its stores and other stores follow suit.

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

5 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&Ls 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.

6 Actually two parts 1933 and 1935 Part 1 – 1933 March 4- March 9 th 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 The ownership however favored white suburban and farm families. Securities and Exchange Commission Created. In 1938 The Federal National Mortgage Association (Fannie Mae). Part created Social Security, labor Acts and investment programs like TVA and rural electric Co-ops.

7 State Banks, S&Ls, 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 – 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 – Enter Dinners club in New York city – the first multiple use credit card in New York City for dining and entertainment.

8 In September 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 Federal Home Loan Mortgage Association (Freddie Mac)a private corporation was created as a secondary source of mortgages 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 1970s – Fannie Mae was converted to a private corporation to finance the war Congress passed the Congressed passed the Community Reinvestment Act to insure that government were extended to minority communities, but rarely used until – Bankruptcy Reform was passed to make it easier for consumers to obtain relief.

9 Savings and Loan Crisis resulting in closing of 747 S&Ls -- $160.1 billion with the government paying $121.4 Billion – Depository Deregulation & Monetary Control Act – Pre-Emption of State Usury Laws allowed mergers – Alternate Mortgage Transaction Parity Act – permitting variable rate interest Gunn – St. Germain Depositor Institutions Act – allowed S&Ls to choose to be state or federal institutions and increased allowed interest on accounts. Securization takes root First Auto Loan Package reaches Market First Credit Card package reaches Market Tax Reform Act – drops deduction for consumer loans except mortgages on 1 st and 2 nd homes. This put consumers into home equity loans.

10 Utility Deregulation Sub-Prime Goes Mainstream –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 Smiley v. Citibank (South Dakotare), N. A., 517 U.S. 735, , 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. Smiley v. Citibank (South Dakotare), N. A., 517 U.S. 735, , 116 S.Ct. 1730, 135 L.Ed.2d 25 (1996) 1997 – Lending increases under Community Redevelopment Act Financial Services Modernization Act- the elimination of Glass- Stegall – Lifted the division between Commercial and Investment banking. Dot Com Bubble

11 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 – Subprime Mortgage Securization packages out pace prime lending on market the period of homes sales with using ARMs that are resetting causing the current Subprime Bubble that has burst April – Bankruptcy Reform Act making bankruptcy more difficult for consumer. Consumer Debt skyrocketed between 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 – The subprime mortgage bubble burst. September 7, 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 4 th and 14 th 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.









20 BorrowerServicer Investment Bank Rating Agency Originator Title Company AppraiserBroker


22 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.

23 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.

24 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.

25 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.

26 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.

27 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.

28 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.

29 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.

30 CONSUMERLENDER 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

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