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August 10, 2015

Is the CFPB Unconstitutional?

By David Reiss

txbisp14_5_rev1_iwd1 quoted me in Old Court Case Puts Consumer Financial Protection Bureau on Hot Seat. It reads, in part,

here is such a thing as a second act. Even court cases can be resurrected from the dead. Two years after State National Bank of Texas called the Consumer Financial Protection Bureau on the carpet, challenging its constitutionality in a case that was dismissed by a federal court, the D.C. Circuit court breathed new life into the debate when it reopened the case and concluded that State National Bank has legal legs to stand on and can sue, despite the fact that it is not directly supervised by the agency.

Although the D.C. Circuit court didn’t buy all of the bank’s claims, the court didn’t dismiss the bank’s claims that the CFPB should be run by a commission, instead of a single director, nor did it shoot down the bank’s contention that CFPB’s Director, Richard Cordray was improperly appointed during a Congressional recess.

“The proper ruling is that a recess appointment requires the Senate to be in recess. The Senate should determine whether it is in recess by its own rules. So a unilateral decision by the executive branch that the Senate is in recess should be disregarded,” says lawyer David Rubenstein who owns and

“The solicitor general’s office will argue that this is a political question and should not be decided by the courts. If the recess appointment is struck down, then any rules and regulations passed by the CFPB also need to be struck down. Courts generally try to avoid this kind of mess. So you may see some sort of compromise,” he adds.

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Why the case matters

As for this case, scoffs [U.S. PIRG consumer program director] Mierzwinski, “Its proponents climbed a very low bar (standing to sue) to get the case reopened. Most experts on both sides think the odds of them actually winning are very low – achieving their sketchy Constitutional claims on the merits is an extremely high bar.”

The case is significant, says Brooklyn Law School professor David Reiss, “It is opening up a new can of worms for the CFPB and the consumer finance industry. But the court defers on the meat of the matter as it remands the case ‘to the District Court for it to consider the merits of the claim.’”

Reiss contends that cases such as this increase uncertainty for regulated companies, and for their customers. “Until the case is decided and the new regulatory environment becomes clear, we should expect more caution in the development of new consumer finance products and services,” says Reiss.

August 10, 2015 | Permalink | No Comments

Monday’s Adjudication Roundup

By Shea Cunningham

August 10, 2015 | Permalink | No Comments

August 7, 2015

What To Do With MERS?

By David Reiss


Bloomberg BNA quoted me in More Policy Queries As MERS Racks Up Court Wins (behind a paywall). The article further discusses the case I had blogged about earlier this week.  It reads, in part,

Mortgage Electronic Registration Systems, Inc. (MERS), the keeper of a major piece of the U.S. housing market’s infrastructure, has beaten back the latest court challenge to its national tracking system, even as criticism of the company keeps coming (Montgomery County v. MERSCORP, Inc., 2015 BL 247363, 3d Cir., No. 14-cv-04315, 8/3/15). In an Aug. 3 decision, the U.S. Court of Appeals for the Third Circuit reversed a lower court ruling in favor of Nancy J. Becker, the recorder of deeds for Montgomery County, Pa., whose lawsuit claimed MERS illegally sidestepped millions of dollars in recording fees.

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MERS has faced an array of critics, including those who say its tracking system is cloaked in secrecy. MERS disagrees, and provides a web portal for homeowners seeking information.

A host of friend-of-the-court briefs filed in the Third Circuit blasted the company, including one filed in March by law school professors who said the MERS system “has introduced unprecedented opacity and incompleteness to the record of interests in real estate.”

One of those, Brooklyn Law School Professor David Reiss, Aug. 6 raised the question whether MERS, though not a servicer, might be the subject of increased oversight.

“The problems consumers faced during the foreclosure crisis were compounded by MERS,” Reiss told Bloomberg BNA. “Those issues have not been resolved by the MERS litigation, and it would be interesting to see if the Consumer Financial Protection Bureau will seek to regulate MERS as an important player in the servicing industry. It would also be interesting to see whether state regulators will pick the ball in this area by further regulating MERS to increase transparency and procedural fairness for homeowners,” he said.

August 7, 2015 | Permalink | No Comments

Friday’s Government Reports

By Serenna McCloud

  • The Consumer Financial Protection Bureau’s (CFPB)  “Leveraging technology to empower mortgage consumers at closing” found that consumers would benefit from electronic closings. Results indicate that those consumers who completed a closing on an electronic platform had a superior experience with regard to understanding, efficiency, and feeling empowered compared to borrowers who used paper forms.
  • The Federal Housing Finance Agency (FHFA) released its monthly interest rate survey for June 2015.  The average interest rate was up 10 basis points from 3.75 to 3.85% from may to June. Many lenders use this rate to reset the interest rate on some ARMs.

August 7, 2015 | Permalink | No Comments

August 6, 2015


By David Reiss


The Consumer Financial Protection Bureau has issued a report on its eClosing pilot, Leveraging Technology to Empower Mortgage Consumers at Closing. The term “eClosing” refers to technology-enabled loan closings. The CFPB became interested in how eClosings “could facilitate embedding educational materials to closing platforms in addition to early review of closing documents” and conducted a pilot program to evaluate them. (6) The study has methodological limitations (see discussion on page 11), but the CFPB has drawn some interesting conclusions from its study. These include,

  • On average, eClosing borrowers in the pilot had higher scores than paper borrowers on our measured outcomes, including perceived empowerment, understanding (perceived and actual), and efficiency.
  • Consumers who received and reviewed documents before the closing meeting reported feeling more empowered in the closing process, with higher levels of perceived understanding and efficiency. Additionally, these consumers had higher scores on the actual understanding quiz relative to those who did not review documents before the meeting.
  • Most pilot borrowers with access to CFPB educational materials stated that they used these materials and reported that they were useful.
  • eClosing transactions in the pilot exhibited shorter closing meetings and earlier document delivery, which matched higher scores on consumer perceptions of efficiency.
  • First-time homebuyers, low/moderate income borrowers and borrowers with the most years of formal education all had the largest positive gains between paper and eClosing, yet all scored relatively low on our measures of understanding and perceived empowerment. (9-11)

All of this seems good enough, but not great — a bunch of subjective improvements for consumers.  One would have hoped that there would be some objective measures (other than the length of the closing itself) of the benefits for consumers.

This does not mean that the CFPB should stop pushing eClosing technologies. But I do think that consumer protection initiatives should focus more on objective measures of success. Too often financial education initiatives report that consumers feel better without proving that they are, in fact, better off.

August 6, 2015 | Permalink | No Comments

Thursday’s Advocacy & Think Tank Round-Up

By Serenna McCloud

August 6, 2015 | Permalink | No Comments

August 5, 2015

Mortgage Credit Conditions Easing

By David Reiss

Home of Easy Credit

The Urban Institute’s Housing Finance Policy Center has released its July Housing Finance at a Glance. It opens,

Our latest update to HFPC’s Credit Availability Index (HCAI) shows early signs that the overly tight mortgage lending standards of the post-crisis period may finally be starting to ease. This HCAI update shows improvements for both GSE and FHA/VA channels. Between Q3 2013 and Q1 2015, the expected mortgage default rate increased from 1.8 to 2.1 percent (17 percent increase) for GSE originations, and from 9.6 to 10.8 percent (a 13 percent increase) for FHA/VA originations. The expected default rate for portfolio loans and PLS channels has remained largely flat at 2.6 percent over this period.

Long overdue, these improvements are largely a result of efforts to clarify put-back standards and conduct early due diligence. While the FHA has lagged the GSEs in these efforts, it has made some progress. Still, more needs to be done, especially to mitigate uncertain lender litigation risk arising out of FHA’s False Claims Act.

These improvements notwithstanding, there is still significant room to safely expand the credit box. Even if the mortgage market had taken twice the default risk it took in Q1 2015, that level would have still been below the level of default risk of the early 2000s. (3)

This excellent chartbook contains many very interesting graphs. I recommend that you look at the National Housing Affordability Over Time graph in particular. It shows that housing “prices are still very affordable by historical standards, despite increases over the last three years.” (16)

August 5, 2015 | Permalink | No Comments