Author Archives: David Reiss

Levitin Gives Overview of CFPB

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The extraordinarily prolific Adam Levitin has posted The Consumer Financial Protection Bureau:  An Introduction.  He concludes that the

CFPB faces a constant challenge in terms of measuring and then balancing the consumer protection benefits from regulation with the costs of regulation and the potential impact of those costs on the availability and pricing of consumer financial products and services. What remains to be seen, however, is whether the CFPB will back away from more controversial rulemaking and enforcement activity because of the political threat it faces or whether the agency will pursue the policies it believes to be substantively right irrespective of the political situation. In other words, will the agency’s own interests affect guide its behavior? And are those interests best served by compromise and living to fight another day or by taking a principled stand and hoping to rally political support on that basis? The CFPB is a powerful new agency, but it is also one very much aware of its vulnerability.  (35)

The paper was posted just as the Bureau unleashed a series of major rules for the mortgage industry.  Levitin is right that the path that the Bureau will take in the long term is still unclear.  But the early reaction indicates that the Bureau has taken a middle ground that has not unleashed vicious attacks from consumer advocates nor from industry groups.  Indeed, it has garnered measured praise from both camps.  Congressional Republicans do appear, however, to be preparing for a long term fight to dismantle the Bureau (see here for instance).

 

CFPB Issues Rules on High-Cost Mortgages

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The CFPB issued rules for high-cost mortgages (those with high interest rates and/or points and fees).  Importantly, the rules now apply to most mortgages, including purchase money mortgages; refis; home equity loans; and home equity lines of credit.

High-cost loans can no longer have prepayment penalties, balloon payments (except in special circumstances), big late fees and some other miscellaneous fees.

The high-cost mortgage rules have been criticized for not reaching many mortgages as they only kick in (in most cases) when the APR on a first mortgage is more than 6.5 percentage points higher than what people with good credit would pay or if the points and fees are more than five percent of the total loan amount.  The new rule will still cover only a small number of loans, so it is not clear if the new rule will have much impact on the market, as opposed to the new Qualified Mortgage rules.

 

 

CFPB Issues Rule on Loan Originator Compensation

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Distorted mortgage broker incentives were one of the big problems during the Subprime Boom.  Indeed, many lenders have since stopped outsourcing loan originator to mortgage brokers because a lot of the terrible loans they were stuck with had been originated by them.  Homeowners were also frequently burned by mortgage brokers who placed them in inappropriate products.

The CFPB has just issued new rules (summary here) relating to the compensation of mortgage brokers. One of the key elements of the rule is that broker compensation cannot be based on a term of the transaction such as the interest rate.  This is intended to keep brokers from steering borrowers into more expensive mortgages solely to increase their own compensation.  This is a major consumer protection initiative because a large number of homeowners with subprime loans were eligible for prime loans with lower interest rates.  Because brokers had been financially incentivized to place them in subprime loans, that is what they did.

The new rule seeks to prevent the mortgage industry from doing an end run around the rule by attempting to identify proxies for the terms of the transaction.  Time will tell whether the proxies work as intended.

Rental Housing Market Trends — Growing Demand, Unsurprisingly

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The Bipartisan Policy Center has an interesting “infographic.”  I found the demographic information to be of particular note.  The Center says that Baby Boomers, Echo Boomers, Former Homeowners and Recent Immigrants will be driving demand.

CFPB Issues New Rules To Protect Homeowners in Foreclosure

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The CFPB issued new rules today that increase protections for homeowners in foreclosure.  The 2013 Real Estate Settlement Procedures Act (Regulation X) and Truth in Lending Act (Regulation Z) Mortgage Servicing Final Rules.  These rules are a first national standard to replace a hodgepodge of practices that had been in place.  The rules come on the footsteps of the $85 billion settlement last week arising from improper foreclosure practices by the ten banks who are parties to the settlement.  The rules address many of the behaviors that infuriated homeowners over the last few years including

1.  non–transparency as to interest rate adjustments, fees, penalties and other costs;
2.  inability to speak with employees at mortgage servicers;
3.  overly complicated forms and procedures;
4.  glacially slow processing of information; and
5.  capricious review standards.

The CFPB has a fact sheet about the rule.

Federal Involvement in Real Estate — It’s Big!

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SmartGrowth America has issued an interesting report, Federal Involvement in Real Estate:  A Call for Examination, which provides a high level summary of the topic.  While it does not contain any surprises, it is somewhat shocking to see the range of budget and tax expenditures all laid out in one document.  The report states, “While $450 billion was the average amount directly committed to real estate each fiscal year by the federal government, the government’s impact goes even further. This figure does not include the obligations of GSEs Fannie Mae and Freddie Mac, which exceed $5.5 trillion in outstanding loans and loan guarantees.”  (4, footnote omitted)

The report makes the obvious point, “Though many think of the United States as a free market economy, real estate is greatly influenced by government policies.” (6)  While obvious, it bears repeating often and loudly whether one is a free marketeer who would like to reduce the government role in real estate or a proponent of the welfare state who would like to see government resources directed more rationally.

The reports key points include, among others, the fact that federal housing policy favors homeowners over renters, single-family homes over multifamilies, vacation homeowners and upper-income households.  (6-8)

Last point:  Appendix B has an interesting table that compares total single-family and multifamily expenditures from 2007 through 2011.  it comes out to about $606 billion for the former and $227 billion for the latter, nearly a 3-1 ratio.  (17)

Rating Agency Liability The Wide World Over

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Haar has posted a draft of Civil Liability of Credit Rating Agencies – Regulatory All-or-Nothing Approaches between Immunity and Over-Deterrence. This paper helps to fill in a gap in the literature about potential liability of rating agencies across the globe.  Most attention has been given to lawsuits filed in the US, but the recent landmark case in Australia imposing liability on Standard and Poor’s has reminded us that rating agencies may face liability wherever they may rate.

Haar identifies some cases that may also result in rating agency liabilty:  Wochenüberblick, Betriebsberater (BB) 2010, p. 1482 and Bathurst Regional Council v. Local Government Financial Services Pty Ltd (No. 5) [2012] FCA 1200.

She also references a recent French law that expands liability for rating agencies:   Loi n° 2010-1249 du 22 octobre 2010 de régulation bancaire et financière (available here).  This is in addition to the bill expanding liability that is now being considered by the European Parliament.

She also highlights developments, such as a possible new wave of litigation that may follow from the Australian case in countries where similar products were mis-rated, citing P. Durkin and H. Low, IMF talks of new wave of litigation, Australian Financial Review, November 7, 2012, p. 14.

It would be a great public service if someone maintained a list of cases around the globe involving rating agency litigation.  Any takers?