Joseph and Neidin Henard thought they had finally fixed the mortgage that was crushing them.
In January, the couple reached a settlement with every company that had a stake in the mortgage on their house in Santa Cruz, California, a deal that would have slashed their monthly payment by almost 40 percent to $3,337. It was the end of a process that started with their defaulting in 2009.
But when they saw the final paperwork for their settlement, they found that Ocwen Financial, the company that collected and processed their mortgage payments, had added an extra clause: they couldn't say or print or post anything negative about Ocwen -- ever.
The Henards' experience wasn't unusual. Mortgage payment collectors at companies including Ocwen, Bank of America (BAC) and PNC Financial Services Group (PNC) are agreeing to ease the terms of borrowers' underwater mortgages, but they are increasingly demanding that homeowners promise not to insult them publicly, consumer lawyers say. In many cases, they are demanding that homeowners' lawyers agree to the same terms. Sometimes, they even require borrowers to agree not to sue them again.
These clauses can hurt borrowers who later have problems with their mortgage collector by preventing them from complaining publicly about their difficulties or suing, lawyers said. If a collector, known as a servicer, makes an error, getting everything fixed can be a nightmare without litigation or public outcry.
A 2013 report by the National Consumer Law Center found that servicers routinely lost borrowers' paperwork, inaccurately input information, failed to send important letters to the correct address -- or sometimes just didn't send them at all.
"If your servicer screws up, you can't say anything about it," said homeowner attorney Danielle Kelley in Tallahassee, Florida. "The homeowner has no defense."
Gag orders and bans on suing are appearing when borrowers use litigation to settle foreclosure and loan modification cases. But they are also popping up when servicers modify loan terms outside of the courts, known as "ordinary loan modifications," according to consumer lawyers.
Bank of America doesn't include non-disparagement clauses and releases of claims in the course of ordinary loan modifications -- just in ones involving negotiated legal settlements, spokesman Rick Simon said. Waivers don't preclude customers from filing suits on post-settlement issues, he said.
PNC's vice president of external communications, Marcey Zwiebel, said "these clauses are part of the consideration we receive for agreeing to settle the case. This helps to ensure that the discussion is not re-opened in public after the case has been settled."
Ocwen declined to comment, citing pending litigation.
Attorneys for lenders and servicers say consumer lawyers are overstating the importance of these clauses. Banks are looking to avoid being sued again for the issues resolved in the settlement, but understand they may be sued if they are responsible for a future wrong, said Martin Bryce, a partner with Ballard Spahr in Philadelphia who specializes in consumer finance and banking.
Bryce acknowledges that the language is ambiguous -- under the waivers, homeowners often give up the right to sue on claims "whether existing now or to come into existence in the future."
The non-disparagement clauses are meant to protect banks from public insults from borrowers, which the lender can often not respond to without violating privacy laws, Bryce said.
Banks and servicers have been facing bad publicity along these lines for years, and while quantifying the impact of this bad-mouthing is difficult, few banks would choose to face it.
On a Facebook page devoted to denigrating Bank of America, one homeowner said, "They are without a doubt the worst organization I have ever dealt with. Keep suing them America! They deserve it!!"
Just Want It To End
Clauses preventing future disparagement and lawsuits first started appearing after the housing crash, but they have grown more widespread in the last six months, said Ira Rheingold, executive director of the National Association of Consumer Advocates in Washington.
In January, the Consumer Financial Protection Bureau, a U.S. government agency, said it examined two servicers who were requiring homeowners to give up their right to sue as part of ordinary loan modifications. The CFPB said the practice was "unfair," and required the two servicers to cease the practice.
The agency also directed the servicers to stop enforcing existing waiver clauses and "to provide notice to the borrowers that it would not enforce these waivers in the future," according to a CFPB Supervisory Highlights bulletin. The agency didn't name the two servicers.
These clauses are likely more popular because mortgage companies are trying to stem their expenses from the housing crisis, which triggered some 5.1 million foreclosures, consumer lawyers said. Having helped create the foreclosure epidemic, banks are now paying the price, spending billions of dollars on fines, penalties, mortgage settlements with borrowers, and other charges associated with working through the glut of bad loans.
Since 2009, Bank of America alone has logged some $50 billion of expenses for settlements of lawsuits and related legal costs, many of them linked to mortgages. Without those charges, its income before taxes would have been about three times higher.
Homeowner attorneys say they advise their clients not to sign non-disparagement agreements. But some of them do so just end the ordeal.
"I try to talk my clients out of agreeing to it, but a lot of times they will agree," said Pamela Simmons, an attorney with the law office of Simmons & Purdy in Soquel, California.
During the past few years, loan servicers have been renegotiating mortgage terms with borrowers who have fallen behind on their payments. Since the housing crash, there have been about 1.3 million loan modifications done under the government's Home Affordable Modification Program, according to the U.S. Department of Treasury. Servicers have done an additional 5.6 million modifications in-house.
Companies like Ocwen say that modifying mortgages is cheaper than foreclosing. Servicers modify mortgages through some combination of changing monthly payments or interest rates, lengthening the terms of loans, and changing the principal owed, either by forgiving some of the loan or by adding on penalties and fees to make it bigger.
The 2012 National Mortgage settlement, which covered Ally Financial Group (ALLY), Bank of America, Citigroup (C), JPMorgan Chase (JPM) and Wells Fargo (WFC) prohibited the use of waivers during the course of offering normal loan modifications-though it did allow for waivers in the event of litigation. Waivers were also forbidden under HAMP modifications.
Attorneys say the experience of the Henards was typical: the gag orders often pop up after borrowers think deal negotiations have been completed.
The Henards balked when they saw the Ocwen clause stating that they were to "not make any derogatory and/or disparaging comments about Ocwen or publish or discuss this Agreement or the settlement and compromise evidenced hereby on the internet or with the media."
"We are worried about them coming back against people in the future," said Dan Mulligan, the Henards' attorney. "It's just a risk you don't want to take." The Henards have about $680,000 outstanding on their mortgage.
Ocwen responded in court documents that the language was "standard boilerplate." The Henards haven't signed the non-disparagement clause. The issue is still being dealt with by the two sides' lawyers.
Consumer lawyers also object to being gagged themselves. Some lawyers challenge the banks to strike the language -- or water it down. Attorneys also sometimes instruct their clients to fire them. That way, the homeowner can agree to the terms while the attorney doesn't have to.
"The banks are attempting to hold our clients hostage with a provision they know we cannot agree to," said University of Notre Dame law professor Judith Fox, who runs a clinic for troubled homeowners and who has also petitioned the Indiana Bar Association over attempts to muzzle attorneys. "It is coercive and unethical."