Three months after the idea met its demise in the Senate, Mike Lillis at the Washington Independent noticed that the Senate Judiciary committee has scheduled a hearing to reconsider cramdowns — a proposal to allow bankruptcy judges to modify the terms of mortgages:

Nearly three months after the Senate killed a House-passed proposal allowing homeowners to stave off foreclosure through bankruptcy, some upper-chamber Democrats are wondering if it isn’t time to revisit the issue. Leaders of the Senate Judiciary Committee, not satisfied that mortgage lenders and servicers have done enough to prevent foreclosure voluntarily, have scheduled a cramdown hearing for Thursday.

As I outlined last week, there are a number of plans circulating that would address the ever-increasing number of foreclosures and attempt to boost the sputtering administration plan to encourage mortgage modifications. The problem with the current plan is that lenders would rather wait to write down a loan’s losses or hope that a borrower makes a miraculous turn away from foreclosure, and there’s no stick to incentivize them into pursuing a modification. Cramdown was supposed to be that stick, but then it ran into the Senate.

The administration has recently started pushing lenders to voluntarily up the pace of modifications. It sent a letter to mortgage firms saying that “we believe there is a general need for servicers to devote substantially more resources to this program for it to fully succeed and achieve the objectives we all share.” Financial executives are coming to the White House on July 28 to discuss how the modification program has been implemented, and “the administration plans to grill servicers that have done few modifications or have had many complaints.”

However, all of this prodding is no substitute for a real stick, and Treasury has thus far been reluctant to endorse any other legislative remedies. “We have enough tools,” said Herbert Allison, the Treasury Department’s assistant secretary for financial stability. But Congress seems to be open to at least exploring new legislative efforts.

Cramdown does not have to be the stick that Congress settles on (and given the way that it went down last time, it probably won’t be). Right-to-rent, which would give delinquent borrowers the ability to surrender their property but rent it at market price for a set period of time, is one option. Lenders, reluctant to become landlords, might find this a good reason to modify loans.

Another option is taking away the tax advantage enjoyed by trusts that hold mortgage-backed securities “if the investors refuse to allow modifications.” And then there is mandatory mediation, a very successful program requiring that lenders and borrowers meet and try to work out an agreement before a foreclosure can proceed. In the end, the point is to incentivize modifications, and it’s encouraging to see Congress acknowledging that the current effort is falling short.

Minnesota Attorney General Lori Swanson

The bedrock of America’s legal system is an impartial judiciary; if judges are in the pocket of an industry, then laws regulating that industry simply cease to exist.  This is why the credit card industry absolutely loves a company known as the National Arbitration Forum (NAF), which for years has allowed this industry to effectively write and enforce its own laws against consumers.

The scam works like this:  beginning in the 1980s, the Supreme Court rewrote federal law to endorse a practice known as “forced arbitration.”  Under this practice, companies ranging from nursing homes to cell phone companies to employers can refuse to do business with anyone who doesn’t give up their right to sue or be sued in a regular court presided over by a neutral judge.  Instead, consumers and employees are shunted into a privatized, corporate-run judicial system, which overwhelming favors corporate parties.

No one has taken greater advantage of forced arbitration than the credit card industry–it may now be impossible for consumers to get a credit card in the United States without signing a forced arbitration agreement–and the industry’s most important partner in this shell game has been the NAF.  According to one study, which examined over 20,000 NAF cases between a credit card company and a consumer, the credit card company won an incredible 95% of the time.  In one case, NAF ordered a woman to pay the credit card company MBNA almost $8000 because she had the same name as another woman who owed MBNA money.  Conversely, when a Harvard Law Professor named Elizabeth Bartholet, who used to work part-time as an NAF arbitrator, handed down a single decision against a credit card company she was immediately stripped of her caseload by NAF at the request of the credit card industry.

The credit card industry’s halcyon days as judge, jury and victorious litigant may be numbered, however, thanks to a lawsuit brought against the NAF by Minnesota Attorney General Lori Swanson.  Under a settlement announced yesterday, the NAF will cease accepting any new consumer arbitration cases by the end of this week (NAF’s entire business will now be limited to arbitrating Internet domain disputes).  In other words, the credit card industry will need to find a new train conductor if they want to keep railroading consumers into lawless corporate tribunals.

For their part, NAF complained that they are being forced to shut down because “the Forum lacks the necessary resources to defend against increasing challenges to arbitration on all fronts, including from state Attorneys General and the class action trial bar,” but this simply shows that our court system worked.  Thanks to suits brought by Swanson and others, the cost of NAF’s lawbreaking finally became greater than the cost simply shutting down their corrupt business.

Unfortunately, NAF was vulnerable to this kind of attack because the evidence against it was so overwhelming–not every forced arbitration company has a Harvard Law professor prepared to testify about how they were strongarmed into shafting consumers–so it remains to be seen whether another, equally offensive company will emerge to fill the void (a bill, currently pending in Congress, would end the practice of forced arbitration in consumer and employment contracts altogether).  Even so, the near-total demise of NAF is one of the most important pro-consumer developments in decades; for the first time in years, credit card companies may actually have to follow the law.

On Thursday, the House Financial Services Committee plans to begin marking up legislation that will overhaul the nation’s financial regulations and create a new Consumer Financial Protection Agency (CFPA). It seems like the creation of this agency can’t come soon enough, as the New York Times reported today that many of the same subprime brokers “who dispensed risky mortgages during the real estate bubble have reconstituted themselves into a new industry” focused on selling bogus mortgage modifications.

However, Roll Call reported that Reps. Jeb Hensarling (R-TX) and Ed Royce (R-CA) have both said that they plan to obstruct the financial regulation legislation in committee:

GOP Reps. Ed Royce (Calif.) and Jeb Hensarling (Texas) plan to offer a barrage of amendments and rhetorical broadsides as the Financial Services Committee on Thursday begins marking up a bill to overhaul the rules governing the financial sector and create a powerful new regulator, the Consumer Financial Protection Agency. They stand little chance of defeating the legislation in committee — Democrats hold a double-digit advantage in seats on the Financial Services panel. But the conservative lawmakers will try to scale back the bill’s reach and use the markup as a forum for making their case for free markets and limited government oversight.

These are some of the same tactics that Republicans senators employed during their markup of health care legislation, offering unrelated amendments and an endless supply of free-market rhetoric to slow the process.

Roll Call noted that Hensarling is a protégé of former Sen. Phil “mental recession” Gramm and is “popular with the wealthy financial services industry, which could be a key source of campaign funds if he ever opts to run for the Senate.” In fact, Hensarling has received more than $2 million dollars from the finance, insurance, and real estate industries, which easily doubles the amount he’s received from any other sector. And Royce has done even better, taking in $2.5 million from the finance industry.

As the New York Times editorial board noted today, “banks and their minions in Congress have good reason to fear the proposed new agency.” It seems that Hensarling and Royce are ready to take the first stand against the agency on behalf of those banks.