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To serve and protect ... banks?

With mega-banks illegally foreclosing on active duty members, the penalty is jail. But, as always, there's a catch


David Dayen
March 5, 2013 5:30PM (UTC)

Wrapping themselves in the American flag is a popular pastime among our nation's prominent institutions. But is it secretly possible for them to commit crimes against active duty members, and pay no price?

Imagine that you’re serving at a forward operating base in Afghanistan. You’ve been in country nine months, coping with hazardous and punishing conditions, trying to survive and return to your family. Then you get a call from your spouse that they’re about to be evicted from the family home. The sense of anxiety is acute, and so is the feeling of helplessness – you’re thousands of miles away, focused on your mission, and you’re wracked with regret and guilt, unable to protect your family from the tragedy and shame of foreclosure.

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This has happened at least 700 times to service members on missions overseas since the beginning of the foreclosure crisis in 2008. And it’s actually illegal; it violates the Servicemembers Civil Relief Act, a statute that carries criminal penalties. The nation’s biggest banks have admitted to the conduct before Congress and in regulatory filings, and they only recently acknowledged that they illegally foreclosed on 10 times as many service members as they previously claimed. Any serious effort to hold banks accountable for routine abuse of homeowners should include prosecutions of this execrable behavior. But the government rolled out settlements years before the true depth of these violations ever began to come to light.

The SCRA’s text is very clear. It protects service members serving overseas from a variety of legal proceedings, including custody cases, penalties under contracts, tax assessments and more. For the purposes of mortgages, there are two main protections. Lenders cannot charge an active-duty military servicemember more than 6 percent interest on their loans. And they cannot complete the foreclosure process while the service member is on active duty abroad, without obtaining a court order. These aren’t exceedingly complex regulations to figure out. “Lenders can easily determine who among their borrowers is active-duty military,” Rep. Brad Miller, who in 2009 co-authored amendments that strengthened the SCRA statute, tells Salon. “We know that they knew because the borrowers would tell them. They would say, ‘My husband is in Iraq.’ And the lenders obviously paid no attention to what SCRA required of them.”

The penalties for violations of SCRA are similarly clear. Anyone knowingly violating the statute is subject to misdemeanor criminal charges, which according to the text means they “shall be fined as provided in title 18, United States Code, imprisoned for not more than one year, or both.” Misdemeanors of this type may be chicken feed compared to other, more serious criminal violations undertaken by the banks during the financial collapse. But the SCRA violations are the most clearly spelled out, both in terms of the burden of proof and the penalties. Typically only repeat misdemeanor offenders get punished with prison time – but that’s exactly what we have in this case.

Reports first started surfacing about widespread SCRA violations early in 2011, with tales of active-duty service members coming home to foreclosures and getting gouged with usurious interest rates. After this caught the attention of the House Veterans Affairs Committee, mega-banks reacted to this in a way best described as “camo-washing,” similar to the “greenwashing” corporations employ to create an appearance of attentiveness to environmental issues. In a bid to keep criticism from spreading to the wider foreclosure crisis, and to boost their public image in the bargain, Wall Street giants like JPMorgan Chase and Bank of America cut a series of very generous settlements with service members, offering the kinds of compensation and principal reductions they denied to practically all other classes of their borrowers. Banks got to wrap themselves in the flag, show off their civic pride and commitment to veterans, and present themselves as good corporate citizens who own up to their mistakes. Never mind that this only applied to this small sliver of the borrowers they wronged for years.  Hardworking civilians duped into toxic loans and stonewalled in their effort to save their homes are not somehow less deserving than men and women on the front lines.

Now we’re learning that banks hid the full extent of their harm to service members. When mega-banks testified before Congress in 2011, and when they entered into settlements with both the Justice Department and some of the individuals over SCRA violations at that time, they claimed that only a small handful of service members were affected. In the aftermath of a botched foreclosure review process mandated by the Office of the Comptroller of the Currency, which itself ended in a settlement, these banks revealed that the harm spread much wider. JPMorgan Chase initially claimed they illegally foreclosed on 18 active-duty military members; they now say, after reviewing their files, that the number was more like 200. Bank of America, Wells Fargo and Citigroup found similar increases. If you add in the service members charged illegally high interest rates, which even in 2011 JPMorgan Chase put at 6,000, you’re talking about tens of thousands of violations of SCRA.

The new figures come from a total review sample of only about 104,000 loan files, a small fraction of the 4.2 million borrowers in foreclosure in 2009 and 2010. In other words, there’s no reason to believe that the SCRA violations stopped here, and really no reason to take the banks at their word when they release these figures, which inevitably inflate. Despite the aggressive camo-washing and all the P.R. efforts to display a commitment to the U.S. military, the ultimate story here is this: financial giants violated the SCRA on tens of thousands of occasions, low-balled their criminal violations by a factor of 10, lied to Congress about it, and then lied to the Justice Department when signing a settlement based on the original low numbers.

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Again, these are criminal violations that banks like JPMorgan Chase and BofA and Wells and Citi have admitted to, including in open congressional testimony. The banks exhibited such a flagrant disregard for what is a pretty simple statute – just don’t foreclose on an active-duty service member or charge them above 6 percent interest – that it can easily be seen as systematic and willful ignorance. In fact, lending institutions target military families, who are often young and inexperienced in financial matters. “You go into any military town,” former congressman Miller explains, “and the strip leading into town is just filled with financial institutions.” Yet the Justice Department never even bothered to conduct their own investigation into this conduct, taking the banks at their word on the extent of the harm, which turned out to be grossly inadequate.

Before you remark that this is just a series of misdemeanor violations, not worth obsessing over in the grand scheme of fraudulent bank conduct, consider the hell ordinary Americans go through when charged with a misdemeanor – the ones without a Wall Street corner office. They can spend months in prison waiting for their case to be resolved. They are habitually forced to admit to the crimes, even if they didn’t commit them. They are hit with fines too expensive for low-income citizens to pay, often leading to additional legal trouble and even more jail time. They face decreased access to public services, reduced employment prospects, and hindrances that can last a lifetime. And we’re talking about first offenders, not those who committed several thousand counts of the same misdemeanor.

Pursuing criminal penalties for SCRA violations would have shown that the Justice Department took seriously abuses against homeowners. The evidence is by now overwhelming that the whole of the federal government, from the Justice Department to the regulators, was not serious. Rep. Miller maintains that they all, in fact, knew what they were settling. “They turned over the flat rock in a damp place, saw what was hiding underneath, and then put the rock back in place,” he says.“They consciously decided not to continue an investigation because what was revealed was so damning. Mortgage practices were simply filled with abuses.”

As a result, we get the kind of deterrent on these abuses revealed in a report of the Office of Mortgage Settlement Oversight last month (I know, it’s hard to keep all these settlements straight; this is for the $25 billion settlement with state attorneys general over foreclosure practices). In a section in the report detailing complaints from consumers about their mortgage servicer, settlement monitor Joseph Smith sounds an ominous concern on Page 7: “Complaints from consumers who are or were active-duty military appear to be on the rise.” It should not surprise anyone that illegal foreclosure activity against active-duty military could be continuing; banks suffered almost no harm, and in fact a P.R. boost, when they were caught the last time. And for sure, nobody at the banks spent so much as a second inside a prison cell.

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Because of sequestration, the FBI announced that personnel furloughs “will cause certain financial crimes investigations to slow,” and that unchecked fraud “could hurt the integrity of US markets” and “undercut the deterrence that comes from strong enforcement.” I didn’t know FBI director Robert Mueller had such a strong capacity for irony.


David Dayen

David Dayen is a journalist who writes about economics and finance. He is the author of "Chain of Title: How Three Ordinary Americans Uncovered Wall Street’s Great Foreclosure Fraud," winner of the Studs and Ida Terkel Prize, and coauthor of the book "Fat Cat: The Steve Mnuchin Story." He is an investigative fellow with In These Times and contributes to the Intercept, the New Republic and the Los Angeles Times. His work has also appeared in the Nation, the American Prospect, Vice, the Huffington Post and more. He has been a guest on MSNBC, CNN, Bloomberg, Al Jazeera, CNBC, NPR and Pacifica Radio. He lives in Los Angeles.

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