Countrywide Financial and predatory lending in the housing crisis

Countrywide Financial

Consumer Protection and Predatory Lending

The Case Against Countrywide Financial

Consumer Protection and Predatory Lending

The Case Against Countrywide Financial

The most recent U.S. housing boom ended dramatically in 2007, with the near collapse of the economy and the sudden loss of trillions of dollars in home equity and stock values. For years before this sudden recession, some domestic mortgage lenders were setting profit records issuing loans to consumers who would never have previously qualified. In fact, several of the most successful of these lenders were actively engaged in a pattern of predatory lending.

The definition of predatory lending turns on who really benefits in the questioned mortgage transaction. The fact that the homeowner does NOT benefit (but the loan broker does) is what turns a legal mortgage into a predatory lending practice that can and should be acted agains, and barred. Because these shady lenders know this field so well, in many cases only a fine line divides actual fraud from an ethical and legal transaction.

Barred by state and federal consumer protection laws, the practice of predatory lending involves or otherwise impacts a host of stakeholders:

1) Borrowers: wherever low-income borrowers or otherwise financially vulnerable groups enter the market, the potential for unethical mortgage companies (or white collar criminals) to profit from unscrupulous behavior threatens. Predatory lending practices can leave victims homeless and defeated, stripped of self-respect and hope, their credit ruined.

2) Loan initiators: clearly the defrauding party is a stakeholder, often the only one to benefit financially in the end,

3) Secondary mortgage market / investors: usually the fraudulent loan is passed on to a bank or other financial institution to carry as an asset during the period of the loan. When it defaults, they lose.

4) Law enforcement and industry watchdogs: while the actions of these companies may not always be flagrantly illegal, the result can be the same. There are consumer protections against the professionals who are predators -- often seeking their prey from the elderly, the sick, and the poor. Another stakeholder class is the institution charged with seeking recovery and making the parties whole, such as attorneys general and federal agencies.

5) The public ( & the whole economy): where the unfair practices become so systemic that the value of all real estate is impacted, all homeowners and the economy at large become collateral damage. In this instance the nation's unemployment rate rose sharply after these losses, and the stock market lost 50% in one year, as the scale of the harm rippled through the economy.

Now, homeowners and government officials are increasingly taking these institutions to court, either individually or as part of class action lawsuits alleging unfair and predatory practices. While many of these actions are still winding their way through the legal system, some banks have already settled for millions of dollars.

"Borrowers are looking to the legal system for help in keeping their houses," says Gary Klein, a partner in Boston-based Roddy Klein & Ryan, which focuses on consumer law. "There are more cases pending than I've ever seen in my 23-year career."

Ethical analysis

Countrywide Financial Corp. said Friday that it fired a mid-level executive at one of its mortgage units after he encouraged loan officers in a memo to downgrade borrowers' credit ratings in order to steer them into more expensive loans.

"We are fortunate that one of our conscientious employees made us aware of inappropriate conduct by one of our managers," said the company's chief ethics officer, Richard Wentz. He said Countrywide had "no tolerance" for such actions, adding that "we are committed to responsible lending practices." Annette Haddad, Times Staff Writer, Countrywide Fires Manager, Citing Ethics, Los Angeles Times, (November 20, 2004)

Years before the crises broke, Countrywide acknowledged its improper practices, resolving the entire issue with a single firing -- an "ethical" resolution, no? Now it is known that they misrepresented, misled, and worked against their own clients' interests. A partial list of the ethical issues raised by this case includes:

Full disclosure -- has the lender advised the borrower of all the terms and conditions of the loan?

Incomplete, irregular forms -- was the borrower asked to sign paperwork not completely filled out? Unethical lenders will inflate reported income, making changes to W-2 documentation. Changes might be made to the debt to income ratio to mislead the loan processor.

Pre-qualification -- A lender should only secure a mortgage for a client that they are financially suited to. Even though the mortgage broker knows a borrower cannot qualify for the loan, he will make every attempt to push it through

Misrepresentation -- Client is promised a fixed rate loan without pre-payment penalties; at the closing this becomes an adjustable rate mortgage with pre-payment penalty.

Fees -- was there a Good Faith Estimate, listing all fees and charges in advance?

An ethical lender works in a timely manner, and does his best to close the loan quickly.

Timeliness -- did the matter close on time and as indicated?

The ethical issues presented by Countrywide's case are so plentiful that under at least three of the established theories of ethical perspective, Countrywide's conduct falls grievously short.

Under a deontological perspective, Countrywide absolutely failed to "Do unto others as you would have them do unto you." In the 1800's Immanuel Kant argued that the basis of ethics is the obligation, or the duty, to do what is "right," an idealized notion of what a better world ought to be. He defined the ideals that people share about how people ought to behave a "categorical imperative" - a transcendent concept of "rightness of action." No one would want to be taken advantage of the way Countrywide did, and under no circumstances did they themselves believe their actions were "right."

Egoism or self-interest ethics may explain the Countrywide rationale, after all, they were acting to advance own interests, over all else. Although some conduct is "right" when it advances personal interests, Countrywide's motive was actual "greed" because greed includes "excess" -- demanding more than one is entitled to. Egoism assumes that there is no "entitlement," others also have interests, and interests can and should compete. No one is "more deserving" than another. This also is Adam Smith's view of the market: buyers and suppliers with opposing interests (buyers want the lowest price and suppliers want the highest price) seek a transaction, to buy or to sell. Countrywide so skewed the negotiations in their own best interests that Mr. Smith would have been appalled.

Pursuant to the ethics of social group relativism, we assess Countrywide's conduct by understanding what our social group expects of us. While the term "relativism" has been misunderstood to imply that "anything goes," here the term simply means that standards of conduct in business are governed by the expectations of others on our behavior. "We conform." Countrywide obviously did not.

Each of these categories identifies a different kind of standard for making choices, and refers to some interest that is valued or preferred. We may not share the same interest or preference, but this is not an argument for what some call "situational" ethics -- ethical behavior that may, or may not, differ with circumstances.

Questions

What aspects of the situation (actions by any stakeholder) demonstrate ethically sound behavior and which illustrate unethical behavior?

Sadly, until the Attorneys General pursued Countrywide for consumer fraud, securing an $8.68 Billion settlement for defrauded borrowers, no one acted ethically. Not Countrywide, and in some instances, not the homeowners either, where they acquiesced in the lies.

Analyze how the company's corporate culture that may have helped to minimize the unethical behavior or actually contributed to/caused the unethical behavior.

The corporate culture at Countrywide included a "Friends of Angelo" scheme that gave low interest loans to members of congress. The order of the day was profit, from any action, and the profits were divvied up in the billions.

Analyze how the company's corporate governance (overall guidelines, strategic decisions/actions) may have helped to minimize the unethical behavior or actually contributed to/caused the unethical behavior.

Few situations are as saturated in misconduct as the Countrywide debacle. In short, there was no governance whatsoever. Now that Bank of America bought the company, their guidelines and rules will apply as necessary to wholly alter the previous absence of law or ethics. All new personnel are necessary.

Based on the ethical perspectives (theories of ethical thought presented in the course), what are the key factors that should be addressed or considered in resolving the legal/ethical issues identified in this case (as outlined above)?

This entire episode mandates further oversight, and congress is still examining these issues. The primary lesson here is that self-regulation does not work, where so much money can be made. The only resolution was the loss of millions of homes, and breaking of our banks.

Recommend corrective actions for each of the legal/ethical issues outlined above.

Provide supporting rationale for each recommendations or industry examples of the use of your recommendations as "best practices."

Full disclosure -- retrain brokers and edit the paperwork to ensure all facts are revealed. Consider standard DVD that borrower views with lender, raising all issues clearly

Incomplete, irregular forms -- prohibit anyone from processing blank forms, as in banking.

Pre-qualification -- Require online process with advance written loan amount qualification in writing, as with car buyers.

Misrepresentation -- Prohibit alterations in terms at closing, period. Make it escrow company's responsibility.

Fees -- mandate a Good Faith Estimate, listing all fees and charges in advance, like with auto repair.

Timeliness -- Adhere to schedule, or suffer commission penalty. An ethical lender works in a timely manner, and does his best to close the loan quickly.

Recommend approaches or policies that the company can take to help prevent these issues in the future.

1. Require professional licensing of all broker reps, with an exam, like attorneys.

2. Require professional liability insurance for all broker reps.

3. Establish review processes at all lenders to inspect loan origination documents.

4. Pass criminal bans on steering, and securing loan above buyer's creditworthyness.

5. Monitor secondary market to remove profit and kickbacks from subprime market.

Provide supporting rationale for each recommendations or industry examples of the use of your recommendations as "best practices."

1. Licensing is required for barbers, why not mortgage reps? An exam would improve the professional competence of lenders and this exams could include an ethics section, like the bar exam.

2. Insurance would cover victim's of fraud, when they avoid recovery. MDs and Attys have to be insured, same here.

3. Internal reviews would screen improper loan apps rather than just try and process them.

4. Criminal sanctions would get the industry's attention, and deter fraud.

5. Congress is about to regulate that secondary market for the first time, after it nearly brought the economy down.