REFinBlog

Editor: David Reiss
Brooklyn Law School

October 21, 2015

Wednesday’s Academic Roundup

By Shea Cunningham

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October 21, 2015 | Permalink | No Comments

October 20, 2015

Hypothetically Reforming Fannie and Freddie

By David Reiss

Ben Turner

S&P issued a report, Fannie, Freddie, and the FHLB System: Plus Ca Change . . . The report opens, “Despite reform talk in the years since the U.S. housing crisis, Standard & Poor’s Ratings Services believes the likelihood of extraordinary government support for key U.S. housing government­-related entities (GREs) Fannie Mae, Freddie Mac, and the Federal Home Loan Bank (FHLB) system remains “almost certain” in case of need.” (1) Notwithstanding the fact that S&P expects that this extraordinary support will last well into the next presidential administration, S&P “can envisage three “tail risk” scenarios in which such support could become less likely under certain conditions, but view each of these scenarios as improbable.” (1) The three scenarios, which S&P characterizes as plausible, albeit improbable, are

  • An electoral sweep, with favorable macroeconomic conditions and few competing legislative priorities;
  • Court judgments, pursuant to shareholder lawsuits, forcing the legislators’ hand; or
  • A renewed housing market crisis, with one or more of these GREs viewed as more cause than cure. (4)

In the first scenario, “an election gives one party control of all three legislative actors (the president, House of Representatives, and Senate), precluding the need for bipartisan compromise to enact major reforms to Fannie and Freddie via legislation.” (4)

In the second, Fannie and Freddie shareholders win lawsuits that stem from the “U.S. Treasury’s decision to modify, in 2012, the Preferred Stock Purchase Agreements (PSPAs) governing the terms of its financial support to Fannie and Freddie . . ..” (4)

The final scenario,

is a renewed housing market crisis, on a scale at least similar to that of 2008. Like the other two scenarios, we don’t view this as likely, at least in the coming few years . . . perhaps as a result of the unfortunate confluence of several negative surprises- ­­including, for example, overreaction to Federal Reserve monetary policy normalization, terms­-of­-trade shocks (geopolitical conflicts that cause a rapid and dramatic spike in energy costs, perhaps), fresh financial sector  problems that suddenly tighten the sector’s funding costs, and an abnormally long spell of bad weather. (5)

This seems like a pretty reasonable analysis of the likelihood of reform for Fannie and Freddie. But that should not stop us from bemoaning Congressional inaction on this topic. Obviously, Congress is too ideologically driven to bridge the gap between the left and right, but the likelihood that we are building toward some new kind of crisis increases with time. I can’t improve on S&P’s analysis in this report, but I’m sure unhappy about what it means for the long-term health of our housing finance system.

 

 

 

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October 20, 2015 | Permalink | No Comments

Tuesday’s Regulatory & Legislative Update

By Serenna McCloud

  • The Consumer Financial Protection Bureau (CFPB) has finalized a Rule to expand reporting requirements imposed upon financial institutions under the Home Mortgage Disclosure Act (HMDA). Dodd-Frank included a mandate directing the CFPB to collect metrics to allow, among other things, a better understanding of the mortgage market, quicker identification of trends, and spotting of discriminatory patterns and practices. The CFPB also hopes to use the data to avoid some of the mistakes in the mortgage market which led to the Financial Crisis.  The CFPB also has a site containing resources to help financial institutions comply.
  • CFPB has released the prepared remarks of Director Richard Corday, which he delivered before the Mortgage Bankers Association’s Annual Convention. In discussing the new agency’s work since Dodd-Frank, Corday asserted that the CFPB has worked hard to create a “set of rules that protect prospective homebuyers in a manner that never existed in the past, while supporting responsible lenders against those who led a race to the bottom in underwriting standards.  We now have a system in place that consumers can trust in a way they could not trust in the marketplace a decade ago.”
  • The Terwilliger Foundation hosted a Housing Summit in New Hampshire where Presidential Hopefuls, including, among others: Martin O’Malley, Chris Christie, George Pataki), Mike Huckabee, and Rand Paul.  The Enterprise Community Partners Blog has a great piece which describes the affordable housing policy proposals of the various candidates. 

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October 20, 2015 | Permalink | No Comments

October 19, 2015

Kickbacks in Residential Transactions

By David Reiss

Flazingo Photos

The Consumer Financial Protection Bureau has issued Compliance Bulletin 2015-05, RESPA Compliance and Marketing Servicing Agreements. The Bulletin opens,

The Consumer Financial Protection Bureau (CFPB or the Bureau) issues this compliance bulletin to remind participants in the mortgage industry of the prohibition on kickbacks and referral fees under the Real Estate Settlement Procedures Act (RESPA) (12 U.S.C. 2601, et seq.) and describe the substantial risks posed by entering into marketing services agreements (MSAs). The Bureau has received numerous inquiries and whistleblower tips from industry participants describing the harm that can stem from the use of MSAs, but has not received similar input suggesting the use of those agreements benefits either consumers or industry. Based on the Bureau’s investigative efforts, it appears that many MSAs are designed to evade RESPA’s prohibition on the payment and acceptance of kickbacks and referral fees. This bulletin provides an overview of RESPA’s prohibitions against kickbacks and unearned fees and general information on MSAs, describes examples of market behavior gleaned from CFPB’s enforcement experience in this area, and describes the legal and compliance risks we have observed from such arrangements. (1, footnote omitted)

RESPA had been enacted to curb industry abuses in residential closings. Segments of the industry have been very creative in developing new strategies to avoid RESPA liability, with MSAs a relatively new twist. MSAs are often “framed as payments for advertising or promotional services” but in some cases the providers “fail to provide some or all of the services required under their agreements.” (2,3)

This Bulletin is a shot across the bow of industry participants that are using MSAs, reminding them of the significant penalties that can result from RESPA violations. It seems to me that the Bureau is right to warn industry participants to “consider carefully RESPA’s requirements and restrictions and the adverse consequences that can follow from non-compliance.” (4)

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October 19, 2015 | Permalink | No Comments

Monday’s Adjudication Roundup

By Shea Cunningham

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October 19, 2015 | Permalink | No Comments

October 16, 2015

Enhancing Mortgage Data and Litigation Risk

By David Reiss

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Law360 quoted me in CFPB Data Collection Boost May Bring More Lending Cases (behind a paywall). It reads, in part,

The Consumer Financial Protection Bureau has given lenders more time to prepare for its new mortgage data reporting rule and streamlined some of the information lenders will have to provide to regulators, but worries persist that the new data will be used to bring more fair-lending enforcement actions.

The federal consumer finance watchdog on Thursday released a final version of its update  to the Home Mortgage Disclosure Act — a key tool that regulators for decades have used to determine which populations were receiving home loans and which were being shut out — that more than doubles the amount of information that lenders will have to provide about the mortgages they issue.

That alone will make for a major technical overhaul of lenders’ operations, an overhaul that is likely to be expensive both in purchasing and developing new technology but also in the number of hours lenders will have to spend to get up to speed. But a second concern revolves around the vast new amount of information that the CFPB will have, and how it could use that information to review lenders’ compliance with fair-lending laws, said Donald C. Lampe, a partner with Morrison & Foerster LLP.

“I don’t think the full cost has yet been established, and I think what you’re seeing here are that there are concerns that this level of granular data can be misinterpreted,” he said. “There’s enough information here from a practical standpoint to re-underwrite the loan.”

*     *      *

“My position is that collecting more data about the mortgage market is a very good thing for consumers,” said David Reiss, a professor at Brooklyn Law School. “The more data [lenders] provide, the more likely it is that academics or the feds could find patterns of discriminatory lending.”

The added litigation risks do not come solely from the CFPB. The HMDA data is released publicly each year, meaning that activist groups, state regulators and plaintiffs attorneys will be able to comb through the vastly more comprehensive information, said Warren Traiger, counsel at BuckleySandler LLP.

“This is public data, so in addition to bank examiners and the [U.S. Department of Justice utilizing the data, there’s nothing preventing state attorneys general from using it as well,” he said.

And when state regulators, private plaintiffs or other parties come along with new complaints, the expanded data set will allow them to make far more specific discrimination claims than the current HMDA data makes possible.

“There will be a number of additional fields that will be out there that will allow regulators and the public to make more specific allegations regarding discrimination in mortgage lending than the current HMDA data allows,” Traiger said.

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October 16, 2015 | Permalink | No Comments

Friday’s Government Reports

By Serenna McCloud

  • The Federal Reserve Bank of Philadelphia has released a Discussion paper Gentrification and Residential Mobility in Philadelphia the study uses consumer credit data to study the economic effects of gentrification on existing lower income residents.   The study finds the following:  “[R]esidents in gentrifying neighborhoods have slightly higher mobility rates than those in nongentrifying neighborhoods, but they do not have a higher risk of moving to a lower-income neighborhood. Moreover, gentrification is associated with some positive changes in the financial health of residents as measured by individuals’ credit scores. However, when more vulnerable residents (low-score, longer-term residents, or residents without mortgages) move from gentrifying neighborhoods, they are more likely to move to lower-income neighborhoods and neighborhoods with lower values on quality-of-life indicators. The results reveal the nuances of mobility in gentrifying neighborhoods and demonstrate how the positive and negative consequences of gentrification are unevenly distributed.”

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October 16, 2015 | Permalink | No Comments