Maryland's financial regulators have been busy for several years now, sorting through the fallout from the financial crisis and the real estate collapse.
The Office of the Commissioner of Financial Regulation oversees state-chartered banks and is responsible for ensuring that other financial companies — such as mortgage lenders, brokers and debt-collection agencies — operate properly in the state.
Most recently, the office has been pursuing unlicensed debt collectors and ramping up efforts to make sure that licensed collectors have enough documentation when trying to win court judgments. The office also has been seeking action against loan-modification consulting firms that charge illegal upfront fees.
Leading the charge is Commissioner Mark A. Kaufman, who assumed his post a year ago after serving two years as deputy commissioner.
The Baltimore Sun spoke with Kaufman recently about the health of state-chartered banks and consumer complaints about loan-modification companies and debt collectors.
Of the six Maryland banks that failed since 2009, K Bank was a state-chartered institution. How is the health of state-chartered banks?
We regulate roughly 50 state-chartered banks. One in four branches in the state. The average institution has $500 million [in assets]. … All in all … asset quality has stabilized and recovered. Past dues have begun to turn down [and] capital levels have improved. Ninety to 95 percent of our institutions are well-capitalized.
We've had problems [but] they're the exception, not the rule. Through it all, community banks have grown. The banks we regulate, over the last two years, assets are up 3 percent a year.
What issues are you focused on?
On the banking side, I've been aggressive and outspoken about the need to look at the capital-raising process for community banks.
The fact is federal laws and regulations do not make it easy for small banks to raise capital. They're one-size-fits-all rules. The same rules that apply to a $100 billion bank apply to a $100 million bank.
I've spent 15 years as an investment banker, and it's very hard for small companies to raise small amounts of money. The way that markets work is essentially people invest through institutions [that] invest on their behalf. … If you're a $5 billion bank and you go raise $100 million and you cut it into four $25 million pieces, that still meets the deal size minimums [for institutional investors]. If you're one-fifth of that size and conduct the same exercise, and the guy has a $50 million deal minimum, he doesn't return your calls. …
I understand why the restrictions exist. I think they make a fair bit of sense for large institutions. Applying the same rules blindly across all sizes is a problem for those institutions.
On the non-bank side, we've been active about debt collection over the last 18 months through the Maryland Collection Agency Licensing Board.
Speaking of debt collectors, Maryland's Court of Appeals recently approved rules aimed at preventing these companies from winning judgments in District Court without sufficient documentation to prove their cases. Your office has been aggressive about this issue. Why is it important?
Our office has jurisdiction over licensing of debt collectors. What became clear to us is that the litigation side of collections — which traditionally has not been the first place regulators look at — was an enormous and growing part of debt collection.
In particular, when we investigated Midland Funding, which is part of Encore [Capital Group], it was a growing part of the business. It had grown to 50 percent of revenue. In their public presentation to investors, they were trumpeting the growth of litigation collection.
[Midland Funding agreed earlier this year to dismiss more than 10,000 cases in Maryland as part of a federal class action settlement in which the firm admitted no wrongdoing but promised not to refile lawsuits against consumers or sell the accounts.]
We found that filings and affidavits were deficient. That's important because they're not contested. They were filing thousands of lawsuits in the state of Maryland. In the real world, you file a small-claims action against someone who's not responsive to mail. The person never shows up and you get a default judgment. And then your debt is elevated to wage garnishment.
What other sorts of consumer complaints do you receive?
We have payday lending. It's an ongoing battle in this state and every other state. We have an interest rate cap. It's 33 percent at the highest.
And we work hard to enforce it, and it's an ongoing battle.
Your office has had success with recovering fees from loan-modification consulting firms, many of which charge homeowners illegal upfront fees. How much have you recovered?
Through our efforts, we have been able to obtain roughly $200,000 of refunds for consumers over the past three years. While that's helpful, it is not a solution, as we have orders for multiples of that amount that will never be paid, as the provider is defunct.
More importantly, the consumer has wasted months in the process and now likely faces imminent foreclosure. In the end, we urge people that when someone offers to help you modify your loan for a fee, "don't pay, walk away."
How is the state's new mediation law — which allows homeowners to request a meeting with their lender before an auction can occur — working out?
Since the mediation law went into effect in July 2010, the feedback from housing counselors and legal service providers has been positive. The system provides homeowners face-to-face meeting with servicers to negotiate sustainable alternatives to foreclosure.
To date, the most significant obstacle is accessing mediation and ensuring that homeowners know how and when to "opt in." We routinely hear that homeowners are intimidated by the process, confused by documents and unsure of their eligibility.
To address the problem, the governor supported, and the General Assembly recently enacted, revisions to the program. The time for a borrower to opt in was lengthened from 15 to 25 days and can be extended if the parties agree.
At the same time, our office has been charged with crafting regulations to clarify the process. Our new regulations seek to ensure that the documents served on homeowners are drafted in plain language.
You are a member of a multistate mortgage investigation. What issues is the group looking into?
The emergence of the "robo-signing" scandal highlighted the issue raised by so many — that while homeowners were pursuing a loan modification and waiting on the phone, the foreclosure machine was methodically marching forward in the next room.
When this surfaced, one of our key concerns was that defective affidavits could undermine the protections for homeowners. …
Governor [Martin] O'Malley, Attorney General [Douglas F.] Gansler and Congressman [Elijah E.] Cummings called for an immediate halt to foreclosures until the problem could be investigated.
Likewise, Maryland courts adopted enhanced protections to ensure the accuracy of the foreclosure process.
At the same time, Iowa Attorney General Tom Miller convened a task force that included all 50 state attorneys general and 37 state banking commissions to conduct a multistate review at the five largest servicers. …
I serve on the group's executive committee, and Maryland has played a lead role throughout. In addition, we joined our fellow state mortgage regulators in launching on-site examinations of the smaller, non-bank servicers that are under our jurisdiction.
While I cannot comment on details, the investigation and related settlement negotiations are ongoing. It is my goal that any settlement remedy the misconduct, improve the process for homeowners going forward and, where appropriate, provide for monetary damages — all in an effort to bring certainty to this fragile housing market while avoiding preventable foreclosures in the future.