Usury and Subprime Home Loans

In the bankruptcy practice where I work, I increasingly see clients caught in financial binds caused by usurious home loans.  Oregon has an explicit exception to the Usury statutes limiting interest and fees charged on loans set forth in ORS 84.024 (4).  On the other hand, there are many state and federal statutes including RESPA and HOEPA which have provisions either restricting loan terms or requiring lenders to be explicit when disclosing the costs of a loan. When examining loan documents I sometimes find clear violations of existing laws, but far more often what surfaces is a contract which is legal, but unconscionable.

Usury, once associated with organized crime, has become institutionalized in credit-card lending, subprime home loans, and, increasingly, private student loans.  Home loans and easy credit have driven the economy for the last decade, generating obscene profits for banks and lending institutions.  Congress, meanwhile, adopted a laissez-faire attitude.  If it wasn’t obviously broken, no-one wanted to expend effort to fix it.

Bankruptcy Modification of Home Loans

Bankruptcy allows change of loan terms for loans on many types of real estate.  The reason this power is given to the bankruptcy courts, is that a bank or other lender would only recover the value of the property if it went into foreclosure.  By changing the loan terms to give the lender the same amount of money it would get if it foreclosed, the borrower would get to keep using the property without any loss to the lender.  The technical term for this process is called, believe it or not, “cramdown”.

Congress allows cramdown of the loan balance to the property value in three types of bankruptcy cases.  A cramdown can be ordered in cases under chapters 11, 12 and 13.