Tag Archives: CFPB

Consumer Protection’s Holy Grail

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The Round Table experiences a vision of the Holy Grail by Évrard d'Espinques

The Federal Financial Institutions Examination Council (FFIEC) has issued a notice and request for comment regarding the Uniform Interagency Consumer Compliance Rating System (the CC Rating System). The FFIEC’s six members represent the Federal Reserve Board, Federal Deposit Insurance Corporation, National Credit Union Administration, Office of the Comptroller of the Currency, State Liaison Committee and Consumer Financial Protection Bureau. This veritable roundtable of regulators is seeking to revise the CC Rating System “to reflect the regulatory, examination (supervisory), technological, and market changes that have occurred in the years since the current rating system was established.” (81 F.R. 26553)

I know, I know, this is a deeply technical issued and you are wondering why I am writing about it for a somewhat general audience. The answer is that I think this is a good thing for people to know about: the federal government is seeking to implement a consistent approach to consumer protection across a broad swath of the financial services industry.

One of the CC Rating System’s categories is Violations of Law and Consumer Harm. The request for comment notes that over the last few decades, the financial services

industry has become more complex, and the broad array of risks in the market that can cause consumer harm has become increasingly clear. Violations of various laws, including, for example, the Servicemembers Civil Relief Act 5 and Section 5 of the Federal Trade Commission Act, as well as fair lending violations, may potentially cause significant consumer harm and raise serious supervisory concerns. Recognizing this broad array of risks, the proposed guidance directs examiners to consider all violations of consumer laws, based on the root cause, severity, duration, and pervasiveness of the violation. This approach emphasizes the importance of a range of consumer protection laws and is intended to reflect the broader array of risks and the potential harm caused by consumer protection related violations. (81 F.R. 26556)

This is all to the good. A big part of the problem the last time around (pre-Subprime Crisis) was that financial services companies used regulatory arbitrage to avoid scrutiny. Lots of mortgage lending migrated to nonbanks. Nonbanks did not need to worry about unwanted attention from the regulators that scrutinized banks and other heavily regulated mortgage lenders. (To be clear, Alan Greenspan and other regulators did not do a good job of scrutinizing the banks. But let’s leave that for another post.) With the CFPB now regulating nonbanks and with this coordinated approach to consumer protection, we should expect that regulatory arbitrage will decrease.

If successful, this would amount to a regulatory equivalent of finding the Holy Grail.  So, while this is a technical issue, it is something to feel good about.

Comments due July 4th, so get crackin’!

Arbitration and the Common Man

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photo by Eric Koch

Arthur Miller

Arthur Miller, the playwright who brought us Death of A Salesman, wrote an essay titled Tragedy and The Common Man. It opens,

In this age few tragedies are written. It has often been held that the lack is due to a paucity of heroes among us, or else that modern man has had the blood drawn out of his organs of belief by the skepticism of science, and the heroic attack on life cannot feed on an attitude of reserve and circumspection. For one reason or another, we are often held to be below tragedy-or tragedy above us. The inevitable conclusion is, of course, that the tragic mode is archaic, fit only for the very highly placed, the kings or the kingly, and where this admission is not made in so many words it is most often implied.

When I read the financial services industry’s critique of the CFPB’s proposed rule regarding Arbitration Agreements, it sounds like they believe that litigation, like tragedy “is archaic, fit only for the very highly placed, the kings or the kingly . . .”

The U.S. Chamber of Commerce has criticized the CFPB for proposing this rule because it will, according to them,

cause significant harm to the very consumers it is supposed to protect. The regulation will effectively eliminate the ability of consumers to use arbitration to seek redress for allegedly improper late fees, overdraft fees, or other small individualized claims that they cannot otherwise resolve with their financial service companies’ customer service departments. A “solution” in search of a problem, the bureau’s rule would replace arbitration — a consumer friendly system that is fast, convenient, and inexpensive — with America’s broken class action system. That’s great for class action plaintiffs’ attorneys but a bad deal for consumers.

It sounds to me like the Chamber believes that the consumer is below litigation-or litigation is above them and should be reserved for the kingly alone.

The fact remains, however, that the Chamber has pushed for mandatory arbitration because it is good for the large corporations who count themselves among its members.  And, in fact, the proposed rule would not eliminate the “ability of consumers to use arbitration;” rather, it would prohibit financial services corporations from using arbitration agreements “to bar the consumer from filing or participating in a class action . . .” (Proposed Rule at 1)

You can be sure that the financial services industry will be commenting broadly and deeply on this rule. Those who care about consumer protection from a policy perspective should be sure to put in their two cents too.  Comments are due in early August. so get crackin’.

Nonbank Mortgage Servicers and the Foreclosure Crisis

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photo by kafka4prez

The United States Government Accountability Office has issued a report, Nonbank Mortgage Servicers: Existing Regulatory Oversight Could Be Strengthened. The GAO found that

The share of home mortgages serviced by nonbanks increased from approximately 6.8 percent in 2012 to approximately 24.2 percent in 2015 (as measured by unpaid principal balance). However, banks continued to service the remainder (about 75.8 percent). Some market participants GAO interviewed said nonbank servicers’ growth increased the capacity for servicing delinquent loans, but they also noted challenges. For example, rapid growth of some nonbank servicers did not always coincide with their use of more advanced operating systems or effective internal controls to handle their larger portfolios—an issue identified by the Consumer Financial Protection Bureau (CFPB) and others.

Nonbank servicers are generally subject to oversight by federal and state regulators and monitoring by market participants, such as Fannie Mae and Freddie Mac (the enterprises). In particular, CFPB directly oversees nonbank servicers as part of its responsibility to help ensure compliance with federal laws governing mortgage lending and consumer financial protection. However, CFPB does not have a mechanism to develop a comprehensive list of nonbank servicers and, therefore, does not have a full record of entities under its purview. As a result, CFPB may not be able to comprehensively enforce compliance with consumer financial laws. In addition, the Federal Housing Finance Agency (FHFA) is the safety and soundness regulator of the enterprises. As such, it has indirect oversight of third parties that do business with the enterprises, including nonbanks that service loans on the enterprises’ behalf. However, in contrast to bank regulators, FHFA lacks statutory authority to examine these third parties to identify and address deficiencies that could affect the enterprises. GAO has previously determined that a regulatory system should ensure that similar risks and services are subject to consistent regulation and that a regulator should have sufficient authority to carry out its mission. Without such authority, FHFA may lack a supervisory tool to help it more effectively monitor third parties’ operations and the enterprises’ actions to manage any associated risks.

As with many GAO reports, this one provides a lot of information about a very obscure, but important, subject. In this case, the report provides a good overview of the servicing industry since the financial crisis. The report also highlights the risks to consumers and the financial industry that result from the rapid expansion of the servicing market share of nonbanks.

One of the disturbing aspects of the foreclosure crisis was the sense that the servicing sector couldn’t do a better job of assisting borrowers, even if it wanted to, because it did not have the resources to meet the challenge. Changes implemented since then, driven in large part by the CFPB, may make things better during the next such crisis. But this report does not give one the sense that they will be all that much better. The GAO report rightly calls for further work to be done to ensure that the industry is prepared to meet the challenges that are sure to come its way.

Couples Leave Money on Closing Table

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photo by Dustin Moore

Geng Li, Weifeng Wu and Vincent Yao, three Fed economists, have posted a research note, Do People Leave Money on the Table? Evidence from Joint Mortgage Applications and the Minimum FICO Rule. The authors state that there “is mounting evidence that households make suboptimal savings and investment decisions” and find that

many mortgage borrowers appear to have failed to apply for mortgages that give the lowest interest rates. Specifically, we find that nearly 10 percent of prime borrowers who applied for their loans jointly could have lowered their mortgage interest rate at least one eighth of 1 percentage point if the mortgage was applied for by the applicant with a higher credit score and an income high enough to qualify for the mortgage. Furthermore, among the joint applicants with a lower credit score below 740, for whom mortgage interest rates are most sensitive to credit scores, more than 25 percent could have significantly reduced their borrowing cost by having the individual with a higher credit score apply. This is due to the fact that when lenders price mortgages with joint applications, the interest rates are determined by the lower score of the two–often known as the minimum FICO rule. We estimate that such borrowers could reduce their annual interest payment by between $220 and $1,400. Consistent with the existing literature, we find that couples who appeared to have left money on the table tend to have lower credit scores and be much younger and less financially sophisticated. (1, emphasis added)

This note provides an example of just how complicated the mortgage underwriting process is, particularly for less financially sophisticated borrowers.

One wonders if the CFPB should take a look at this. Should lenders be required to evaluate if joint mortgage applicants would get a better rate if only one of them ended up taking out the mortgage? And when the answer is yes, should lenders be required to share that information with the applicants? I can think of a variety of reasons why that should not be the case (not the least of which is that it could leave just one member of the family holding the bag if things go south), but it might be worth exploring this question more systematically.

Consumer Survey Surveillance

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As I had noted previously, The Consumer Financial Protection Bureau had issued a notice and request for comment on the Financial Well-Being National Survey.  My submitted comments on it are below:

The Consumer Financial Protection Bureau has solicited comment on whether this collection of information is necessary for the proper performance of the functions of the Bureau, including whether the information will have practical utility.  While the Bureau has increased the rigor it has brought to its financial education mission over the last few years, it is unclear what the Financial Well-Being National Survey is meant to measure and it is unclear what it, in fact, will measure.  Specifically, one of the goals of the Survey is to measure the level of financial well-being of American adults, but the survey relies too heavily on the subjective responses of participants to achieve that goal.  We have reason to believe that subjective assessments of financial literacy are suspect.

 Much of the academic literature around financial literacy and financial education is very depressing as it reveals that Americans are not very financially literate at all. Lusardi, Annamaria, Financial Literacy: Do People Know the ABCs of Finance? (November 30, 2014). Global Financial Literacy Excellence Center Working Paper No. 2014-9. Available at https://ssrn.com/abstract=2585246.

Not only is financial literacy in bad shape, but efforts to improve it have not proven to be very effective.  Lauren Willis has provided a sobering, even depressing, overview of what we know about the efficacy of financial education.  Willis, Lauren E., Financial Education: Lessons Not Learned & Lessons Learned (January 31, 2013). Life-Cycle Investing: Financial Education and Consumer Protection 125 (Zvi Bodie et al., eds. 2012); Loyola-LA Legal Studies Paper No. 2013-4. Available at SSRN: https://ssrn.com/abstract=1869313 or https://dx.doi.org/10.2139/ssrn.1869313.

Willis asks, “Does financial education work as hoped?” (125) She answers her own question:  “Empirical evidence does not support the theory. Some (but not all) studies show a positive correlation between financial education and financial knowledge or between financial knowledge and financial outcomes. But no strong empirical evidence validates the theory that financial education leads to household well-being through the pathway of increasing literacy leading to improved behavior.” (125)

Even worse, Willis finds that some people who would have reason to think they are more financially literate because of their participation in financial education initiatives, do even worse than those who did not participate:  “the only statistically significant effect of mandatory personal financial training on soldiers was that they adopted worse household budgeting behaviors after the training than before it.” (126) Some of Willis’ other important conclusions (based on a thorough review of the literature) include

  • “Youth who took a personal finance course in high school do not report better financial behavior several years later than youth who did not take the course.  Adults who attended public schools where they were required to take personal financial courses were found to have no better financial outcomes than adults who were not required to take such courses.” (126, citations omitted)
  • One “reason financial education is unlikely to produce household financial well-being is that consumers’ knowledge, comprehension, skills, and willpower are far too low in comparison with what our society demands.” (128)

Willis’ conclusions about the efficacy of financial education initiatives are bolstered by a meta-analysis of the literature on financial education that was conducted by researchers at the World Bank.  Their abstract reads,

This paper presents a systematic and comprehensive meta-analysis of the literature on financial education interventions.  The analysis focuses on financial education studies designed to strengthen the financial knowledge and behaviors of consumers. The analysis identifies188 papers and articles that present impact results of interventions designed to increase consumers’ financial knowledge (financial literacy) or skills, attitudes, and behaviors (financial capability). These papers are diverse across a number of dimensions, including objectives of the program intervention, expected outcomes, intensity and duration of the intervention, delivery channel used, and type of population targeted. However, there are a few key outcome indicators where a subset of papers are comparable, including those that address savings behavior, defaults on loans, and financial skills, such as record keeping. The results from the meta analysis indicate that financial literacy and capability interventions can have a positive impact in some areas (increasing savings and promoting financial skills such a record keeping) but not in others (credit default).

Miller, Margaret and Reichelstein, Julia and Salas, Christian and Zia, Bilal, Can You Help Someone Become Financially Capable? A Meta-Analysis of the Literature (January 1, 2014). World Bank Policy Research Working Paper No. 6745. Available at https://ssrn.com/abstract=2380391

My first instinct is that there is no harm in conducting the Financial Well-Being National Survey. It asks reasonable questions, such as “How would you assess your overall financial knowledge?” and “How confident are you that the way you are managing money today is getting you to the results you want?” (5) There are also questions that ask concrete questions about the respondents’ financial situation, but they rely on self-reporting.

The key question that remains, then, is will the answers to such questions actually help shape consumer protection policy in a productive way? The Bureau should be sure that the answer to that question is yes before proceeding with the Survey.

I do not suggest that the Bureau jettison this survey, but I do suggest that the Bureau clarify what the Survey is meant to measure and that it ensures that it does measure those things.  To do so, the Survey should be supplemented with studies that attempt to determine how accurate the subjective assessments contained in the Survey are.  For instance, if respondents report that they are confident that they are managing their money effectively, targeted follow-up studies could determine whether that confidence is warranted.  If the respondent reports that his or her home is valued at a certain level (and homeowners are wont to overestimate the value of their homes), follow-up studies can determine whether that valuation was accurate.  Indeed, a well-designed follow-up study could determine the extent to which people overestimate their financial literacy and their financial situation.

It is of great importance that the Bureau gets its financial education initiatives right from the start.  It is worth investing heavily at the outset to ensure that it does.

Testing CFPB’s Constitutionality

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by Junius Brutus Stearns

Law360 quoted me in PHH Case Poised To Test CFPB’s Constitutionality (behind a paywall). It opens,

A battle over the Consumer Financial Protection Bureau’s interpretation of mortgage regulations in assessing a $109 million penalty against a New Jersey-based mortgage firm has morphed into a fight over the authority vested in the bureau’s director that could reshape the consumer finance watchdog, experts say.

The appeal from PHH Corp. to the D.C. Circuit originally centered on CFPB Director Richard Cordray’s decision to dramatically hike a $6 million mortgage insurance kickback penalty issued by an administrative law judge against a company subsidiary, to the final, $109 million figure. But the judges hearing the case warned the bureau to prepare to answer questions at oral arguments Tuesday about language in the Dodd-Frank Act that says the president could remove the CFPB director only for cause, and about how the court should view an administrative agency led by a single director rather than the more typical commission structure.

Those questions have been hanging over the CFPB since its inception in the 2010 law, and if the D.C. Circuit rules against the bureau, that could fundamentally alter the way the bureau operates, said Jonathan Pompan, a partner at Venable LLP.

Cordray “is potentially going to have to address questions that go to the core of his authority, which really hadn’t been at the forefront of the PHH case until now,” he said.

Challenges to the CFPB’s constitutionality are not new. Everything from the bureau’s single-director rather than commission structure to the agency’s funding through the Federal Reserve’s budget rather than the congressional appropriations process have been constant refrains for the CFPB’s opponents.

Those concerns have been addressed through legislation aimed at curtailing the CFPB’s power, and claims challenging the agency’s constitutionality have been an almost pro forma rite of any litigation involving the bureau.

Up until now, however, those complaints and attempts to curb the CFPB have gone nowhere.

So it was a surprise when the D.C. Circuit last Wednesday told the bureau’s attorneys to be prepared to face questions about whether Dodd-Frank’s provision stating that the president can remove the CFPB director only for “inefficiency, neglect of duty, or malfeasance in office” passed constitutional muster.

The panel, made up of three Republican appointees led by U.S. Circuit Judge Brett M. Kavanaugh, is also seeking answers about potential remedies for any problems that that provision brings, including potentially removing it from the statute and allowing the president to remove the CFPB director without any specific cause.

The judges also want to know how any fix to the problem, if they determine there is one, would affect the CFPB director’s authority.

“This is not, by any stretch of the imagination, idle thinking on their part,” said David Reiss, a professor at Brooklyn Law School.

The questions being posed by the D.C. Circuit panel do not pose the same level of threat that the other constitutional challenges the CFPB could potentially face would, but it is certainly a more defining question than what most observers thought the case would be about.

PHH is challenging Cordray’s interpretation of violations under the Real Estate Settlement Procedures Act that allowed him to supersize a $6 million penalty handed down by an administrative law judge, to the $109 million that the CFPB director handed down when PHH appealed.

But the arguments set for Tuesday are expected to go far beyond that issue.

There will be the central question of whether the U.S. Constitution allows Congress to put in restrictions on when the president can fire officials at an administrative agency. The U.S. Supreme Court addressed these issues in the 2010 Free Enterprise Fund v. Public Company Accounting Oversight Board decision, which affirmed a D.C. Circuit ruling that such protections were constitutional.

Judge Kavanaugh cast a dissenting vote in that case, stating that a president should not have to notify Congress as to why the director of an administrative agency is removed.

“If the challenges were going to be taken seriously anywhere, it was probably going to be this panel,” said Brian Simmonds Marshall, policy counsel at Americans for Financial Reform, which seeks tougher banking regulations.

Removing that provision from the statute, should the D.C. Circuit elect to do so, could limit the CFPB’s independence, as well as that of other administrative agencies for which statute requires a reason for the dismissal of officials, he said.

“The CFPB doesn’t have to check with the White House right now before it brings an enforcement action,” Simmonds Marshall said.

Another case that will be heavily scrutinized will be a 1935 Supreme Court decision in Humphrey’s Executor v. U.S., which allowed for restrictions on the removal of Federal Trade Commission commissioners.

The CFPB relied heavily on that case in its filings with the D.C. Circuit, noted Benjamin Saul, a partner at White & Case LLP.

“I’ll be looking for the questions being driven by Judge Kavanaugh and his comments from the bench, particularly on the Humphrey’s case,” Saul said.

Whether the arguments focus mostly on the constitutional questions about the ability to remove the CFPB director or on remedies to fix that could also indicate where the court is headed on these questions, according to Reiss.

“It does sound that they’re searching for remedies that are not earth-shattering remedies,” Reiss said.

Protecting Seniors’ Home Equity

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photo by Ethan Prater

The Consumer Financial Protection Bureau has issued and Advisory and Report for Financial Institutions on Preventing Elder Financial Abuse. The Report defines elder financial exploitation as

the illegal or improper use of an older person’s funds, property or assets. Studies suggest that financial exploitation is the most common form of elder abuse and yet only a small fraction of incidents are reported. Estimates of annual losses range from $2.9 billion to $36.48 billion. Perpetrators who target older consumers include, among others, family members, caregivers, scam artists, financial advisers, home repair contractors, and fiduciaries (such as agents under power of attorney and guardians of property).

Older people are attractive targets because they may have accumulated assets or equity in their homes and usually have a regular source of income such as Social Security or a pension. In 2011, the net worth of households headed by a consumer age 65 and older was approximately $17.2 trillion, and the median net worth was $170,500. These consumers may be especially vulnerable due to isolation, cognitive decline, physical disability, health problems, and/or the recent loss of a partner, family member, or friend.

Cognitive impairment is a key factor in why older adults are targeted and why perpetrators succeed in victimizing them. Even mild cognitive impairment (MCI) can significantly impact the capacity of older people to manage their finances and to judge whether something is a scam or a fraud. Mild cognitive impairment is an intermediate stage between the expected cognitive decline of normal aging and the more serious decline of dementia. Studies indicate that 22 percent of Americans over age 70 have MCI and about one third of Americans age 85 and over have Alzheimer’s disease. (8-9, footnotes omitted)

The CFPB recommends that financial institutions consider

  • training staff to recognize abuse;
  • using fraud detection technologies;
  • offering age-friendly services; and
  • reporting suspicious activities to authorities.

These recommendations are a step in the right direction, although they offer no panacea. As the Report acknowledges, even if financial institutions report suspicious activities to government authorities, there is no guarantee that they will be acted on. But if these recommendations are publicized, they may deter some predators who think that they can act freely within the fog of their victims’ cognitive decline. And a few well-publicized prosecutions of relatives, caregivers and advisors who violate the trust that was placed in them would help to spread the message that ripping off senior citizens is no easy path to riches.