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Why Servicers Foreclose When They Should Modify and Other Puzzles of Servicer Behavior: Servicer Compensation and Its Consequences

Mortgage servicers are the companies that accept loan payments from borrowers. Servicers are distinct from the lender, the entity that originated the loan, or the current holder or investors, who stand to lose money if the loan fails. Some servicers are affiliated with the originating lender or current loan holder; many are not. Yet, while servicers normally have the power to modify loans, they simply are not making enough loan modifications. Why? One answer is that the structure of servicer compensation generally biases servicers against making widespread loan modifications.

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Complaint for Declaratory and Injunctive Relief, People, et al. v. FDIC, et al., Case No. 20-5860 (N.D. Cal. filed Aug. 20, 2020)

This is a case about federal overreach. States have long used interest-rate caps to protect consumers, business owners, and scrupulous creditors from the harms of predatory lending. The Federal Deposit Insurance Act (“FDIA”) exempts federally insured, state-chartered banks and insured branches of foreign banks (“FDIC Banks”) from these caps.