June 22, 2015
Law360 quoted me in New Guidelines For Bad FHA Loans Won’t Boost Lending (behind paywall). It opens,
The federal government on Thursday provided lenders with a streamlined framework for how it determines whether the Federal Housing Administration must be paid for a loan gone bad, but experts say the new framework will have limited effect because it failed to alleviate the threat of a Justice Department lawsuit.
The U.S. Department of Housing and Urban Development provided lenders with what it called a “defect taxonomy” that it will use to determine when a lender will have to indemnify the FHA, which essentially provides insurance for mortgages taken out by first-time and low-income borrowers, for bad loans. The new framework whittled down the number of categories the FHA would review when making its decisions on loans and highlighted how it would measure the severity of those defects.
All of this was done in a bid to increase transparency and boost a sagging home loan sector. However, HUD was careful to state that its new default taxonomy does not have any bearing on potential civil or administrative liability a lender may face for making bad loans.
And because of that, lenders will still be skittish about issuing new mortgages, said Jeffrey Naimon, a partner with BuckleySandler LLP.
“What this expressly doesn’t address is what is likely the single most important thing in housing policy right now, which is how the Department of Justice is going to handle these issues,” he said.
The U.S. housing market has been slow to recover since the 2008 financial crisis due to a combination of economics, regulatory changes and, according to the industry, the threat of litigation over questionable loans from the Justice Department, the FHA and the Federal Housing Finance Agency.
In recent years, the Justice Department has reached settlements reaching into the hundreds of millions of dollars with banks and other lenders over bad loans backed by the government using the False Claims Act and the Financial Institutions Reform, Recovery and Enforcement Act.
The most recent settlement came in February when MetLife Inc. agreed to a $123.5 million deal.
In April, Quicken Loans Inc. filed a preemptive suit alleging that the Justice Department and HUD were pressuring the lender to admit to faulty lending practices that they did not commit. The Justice Department sued Quicken soon after.
Policymakers at the Federal Housing Finance Agency, which serves as the conservator for Fannie Mae and Freddie Mac, and HUD have attempted to ease lenders’ fears that they will force lenders to buy back bad loans or otherwise indemnify the programs.
HUD on Thursday said that its new single-family loan quality assessment methodology — the so-called defect taxonomy — would do just that by slimming down the categories it uses to categorize mortgage defects from 99 to nine and establishing a system for categorizing the severity of those defects.
Among the nine categories that will be included in HUD’s review of loans are measures of borrowers’ income, assets and credit histories as well as loan-to-value ratios and maximum mortgage amounts.
Providing greater insight into FHA’s thinking is intended to make lending easier, Edward Golding, HUD’s principal deputy assistant secretary for housing, said in a statement.
“By enhancing our approach, lenders will have more confidence in how they interact with FHA and, we anticipate, will be more willing to lend to future homeowners who are ready to own,” he said.
However, what the new guidelines do not do is address the potential risk for lenders from the Justice Department.
“This taxonomy is not a comprehensive statement on all compliance monitoring or enforcement efforts by FHA or the federal government and does not establish standards for administrative or civil enforcement action, which are set forth in separate law. Nor does it address FHA’s response to patterns and practice of loan-level defects, or FHA’s plans to address fraud or misrepresentation in connection with any FHA-insured loan,” the FHA’s statement said.
And that could blunt the overall benefits of the new guidelines, said David Reiss, a professor at Brooklyn Law School.
“To the extent it helps people make better decisions, it will help them reduce their exposure. But it is not any kind of bulletproof vest,” he said.
- Two Moody’s Investor Services Inc. entities remain the only defendants in appeal from Illinois Bank following the exit of McGraw-Hill Cos. Inc. and Standard and Poor’s in suit over residential mortgage-backed securities ratings.
- A Second Circuit judge did not revive untimely suit against Bank of America for failing to fully disclose exposure to the secondary mortgage market finding that a “reasonably diligent” plaintiff could have filed suit by 2008 based on the publicly available information.
- BlackRock Inc. and other investors filed a class action in New York state court against U.S. Bank NA for allegedly failing to oversee $743 billion in residential mortgage-backed security trusts. The claims had been dismissed in federal court.
- The National Low Income Housing Coalition (NLIHC) releases report on differences between the National Housing Trust Fund (NHTF) and HOME Investment Partnerships Program. It found that the NHTF is more targeted to low-income renter households than HOME.
- The US Department of the Treasury’s Community Development Financial Institutions Fund (CDFI) evaluated New Markets Tax Credit (NMTC), which “enables economically distressed communities to leverage private investment capital by providing investors with a federal tax credit.”
- The Center for Housing Policy at the National Housing Conference released report, Affordable Housing’s Place in Medicaid Reform: Opportunities Created by the Affordable Care Act and Medicaid Reform.
- The Center for Housing Policy and Children’s HealthWatch released report, The Timing and Duration Effects of Homelessness on Children’s Health.
- The Offices of the Inspector General released report, Coordination of Responsibilities Among the Consumer Financial Protection Bureau and the Prudential Regulators—Limited Scope Review.
- HUD released a report making changes to the Rental Assistance Demonstration (RAD).
- On June 23, at 2pm the Urban Land Institute, John D. and Catherine T. MacArthur Foundation, and Hart Research are hosting a Virtual Conversation entitled: Housing, Communities, & Messaging that Resonates: Results from Three New Polls (RSVP Here).
- Americans’ housing and community preferences in this rapidly changing landscape,
- where and how Millennials want to live,
- overall satisfaction with government’s prioritization of housing affordability, and
- the most persuasive messaging about affordable housing.
- Corelogic’s Equity Report finds that 245,000 properties regained equity in the first quarter of 2015 – over 90% of properties have positive equity and the percentage of “underwater” mortgages decreased by over 19% year-over year.
June 17, 2015
Dodd-Frank tasked the Consumer Financial Protection Bureau with ensuring that “consumers … understand the costs, benefits, and risks associated with” financial products. Despite this ambitious mandate, and despite the Bureau’s self-branding as a “21st century agency,” the Bureau’s pursuit of consumer comprehension has thus far focused on the same twentieth century tool that has already proven ineffective at regulating financial products: required disclosures. No matter how well the Bureau’s “Know Before You Owe” disclosures perform in the lab, or even in field trials, firms will run circles around disclosures when the experiments end, confusing consumers and defying consumers’ expectations. Even without any intent to deceive, firms not only will but must leverage consumer confusion to compete with other firms that do so. While firms are not always responsible for their customers’ confusion, firms take advantage of this confusion to sell products.
If the Bureau wants to ensure that consumers understand the financial transactions in which they engage, then to meet the challenge posed by the velocity of today’s marketplace, the Bureau must induce firms themselves to promote consumer comprehension, either by educating consumers or by simplifying products. To generate this change in firm behavior, the Bureau should require firms to regularly demonstrate, through third-party testing of random samples of their customers, that their customers understand key costs, benefits, and risks of the products they have bought. Rather than attempting to perfect the format of price disclosures, for example, the Bureau should require firms to prove that their customers understand the price at the moment when the customers are deciding whether to take the actions that will trigger it, whether those actions be taking out a mortgage, overdrawing a checking account, or calling customer service to inquire about the balance on a prepaid debit card. Where consumers are confused about benefits rather than costs, such as the benefit of signing up for a credit repair service, buying credit life insurance, or paying off a debt that is beyond limitations, firms should be required to show that their customers understand the actual benefits the firm is offering before the consumer commits to the purchase or action. (1, footnotes omitted)
This paper poses an important challenge to the CFPB — can disclosure regimes be replaced with something better? One hopes that the answer is yes, although Willis’ previous work on financial education makes me somewhat pessimistic.
This new paper does offer some reason for optimism though. Willis argues that comprehension rules may induce firms to simplify products, so such rules may have a positive impact even if the CFPB cannot move the dial on consumer comprehension all that much.