Tag Archives: CFPB
The Secret to Financial Well-Being?
The Consumer Financial Protection Bureau has issued a report, Financial Well-Being: The Goal of Financial Education. I have been somewhat critical of the CFPB’s approach to financial literacy education, but I think that this report sets forth a pretty reasonable baseline for future research. It states,
A growing consensus is emerging that the ultimate measure of success for financial literacy efforts should be improvement in individual financial well-being. But financial well-being has never been explicitly defined, nor is there a standard way to measure it. Overall, the literature paints a picture of nuanced, complex interactions between financial knowledge, understanding, and actions taken. However, rigorously identified links between these factors and financial outcomes have yet to be established.
Our project provides a conceptual framework for defining and measuring success in financial education by delivering a proposed definition of financial well-being, and insight into the factors that contribute to it. This framework is grounded in the existing literature, expert opinion, and the experiences and voice of the consumer garnered through in-depth, one-on-one interviews with working-age and older consumers. (4-5)
The CFPB proposes a definition of financial well-being “as a state of being” where people
- Have control over day-to-day, month-to-month finances;
- Have the capacity to absorb a financial shock;
- Are on track to meet your financial goals; and
- Have the financial freedom to make the choices that allow you to enjoy life.
Because individuals value different things, traditional measures such as income or net worth, while important, do not necessarily or fully capture this last aspect of financial well-being. (5)
This all seems reasonable to me in the abstract, although I am not sure how you would measure success across a large group of people given the very different ways that people would respond to the prongs of that definition. I would also note that events beyond the control of a financially literate person (illness, structural unemployment etc.) could devastate that person’s financial well-being, much as upright Job was devastated by the tests he had to endure. Notwithstanding these concerns, I am looking forward to see how the CFPB uses its definition to develop its research agenda and to design its policies.
Monday’s Adjudication Roundup
- S&P agrees to settlement of $58 million for fraudulent ratings on commercial mortgage-backed securities.
- SEC order regarding violations of Section 17(a)(1) of the Securities Act, Section 15E(c)(3) of the Exchange Act, and Exchange Act Rules 17g-2(a)(2)(iii) and 17g-2(a)(6). $6.2 million disgorgement, plus $800,000 prejudgment interest, and $35 million civil money penalty for affirmatively claiming to use one method of rating when it was actually using another method.
- SEC order regarding violations of Section 17(a)(l) of the Securities Act and Exchange Act Rule 17g-2(a)(6). $15 million penalty for publishing “false and misleading article purporting to show that its new credit enhancement levels could withstand Great Depression-era levels of economic stress.”
- SEC order regarding violations of Section 15E(c)(3)(a) of the Exchange Act and Exchange Act Rules 17g-2(a)(2)(iii) and 17g-2(a)(6). $1 million civil money penalty for failure in oversight of residential mortgage-backed securities (RMBS) ratings.
- SEC order regarding a public hearing.
- Following the Consumer Financial Protection Bureau filing a complaint in the District Court for the District of Maryland, JP Morgan and Wells Fargo agreed to pay $37.5 million in penalties for a mortgage-kickback scheme with a title company.
- The Supreme Court heard oral arguments for disparate impact case on January 21st. (Whether disparate impact is a cognizable claim under the Fair Housing Act).
Reiss on New Mortgage Tool
Tech News World quoted me in CFPB Shifts Some Power to Mortgage Shoppers. The story reads in part,
The Consumer Financial Protection Bureau on Tuesday introduced Owning a Home, a set of online tools designed to make it easier for consumers to comparison shop for the best deal in mortgage financing.
With one tool, users can plug in a credit score and ZIP code to get a sense of the current interest rates being offered within a particular area.
There is also a guide that walks consumers through the various loan options on the market, complete with basic definitions of “loan term,” “interest rate type” and “loan type.”
Another guide describes the closing documents in a typical home purchase.
There is also a checklist that offers suggestions for a smooth closing, including advice on mistakes to avoid.
Other tools will be added to facilitate shopping for a mortgage and improving consumer understanding of the mortgage process.
* * *
This offering is not going to automatically assist all potential homebuyers as they approach the mortgage process, though, said Brooklyn Law School professor David Reiss.
“Shopping for a mortgage is one of the most complex financial transactions that people engage in,” he told CRM Buyer. “Providing additional information should help at least some people, but others are overwhelmed by this type of transaction and will continue to rely on word of mouth, advertising and preexisting relationships to find a lender.”
Shady Lenders
Some lenders benefit from dealing with uneducated consumers and are able to charge higher fees and interest rates as a result, Reiss pointed out.
The informed consumer is in a much better position to select products and services that provide the greatest value, Cadden observed.
“Informed consumers are, to put it simply, much better shoppers,” he said. “The challenge has always been how to easily acquire information.”
CFPB’s Mandate
The mortgage shopping assistance is a natural extension of the CFPB’s broader mandate to act as an advocate for consumers in financial matters, Reiss noted.
“It clearly complements the other components of that mission,” he said.
S&P’s Upbeat Outlook on Mortgage Market
S&P posted U.S. RMBS Roundtable: Mortgage Origination And Securitization In The Post-Qualified Mortgage/Ability-To-Repay Market. The roundtable discussion offers views on many aspects of the 2015 mortgage market, but I found this passage to be particularly interesting:
Originators agreed loans that fall outside of the safe harbor by virtue of interest-only (IO) features have been and will continue to be attractive non-QM lending products. These loans have been originated post-crisis, and originators expect to continue lending to high-quality borrowers with substantial equity in their properties. There was general consensus that IO loans should not have been automatically excluded from QM treatment.
However, large bank depository lenders have shown a desire to originate and hold larger balance IO loans on their balance sheets rather than including them in securitizations. One participant from a major depository institution indicated that, given the increasing IO concentration on those institutions’ balance sheets, there may be a desire to securitize these loans upon meeting balance sheet thresholds. (1)
After Dodd-Frank, there was a lot of concern that the Qualified Mortgage and Ability-to-Repay rules would shut down the mortgage markets. It seems pretty clear to me that lenders are figuring out how to navigate both the plain-vanilla world of the Qualified Mortgage and the exotic world of the non-Qualified Mortgage, with its interest-only and other non-prime products. Lenders are still figuring out how far afield they can roam from a plain-vanilla product, but that is to be expected during a major transition such as the one from the pre- to the post-Dodd-Frank world.
Reiss on Payday Lending Regs
CRM Buyer quoted me in CFPB May Rein In Payday Lending. The story opens,
The Consumer Financial Protection Bureau is considering various approaches to reforming the payday loan industry, The Wall Street Journal reported on Sunday.
The bureau is concerned about the short-term, high-rate debt consumers take on, sources said.
States typically have been responsible for regulating payday loan company practices. If the CFPB should take action, it would be the first time federal regulations were applied to this niche in the financial sector.
Consumer advocates have long been calling for some restraints to be imposed on providers of these loans. Interest rates tend to be astronomical, and borrowers frequently are unable to repay the loans within the prescribed time period. What happens more often than not is that they roll their loans into the next pay period, committing to a never-ending series of high-interest, short-term contracts.
The CFPB reportedly is considering approval of a “vanilla” type of short-term loan with underwriting criteria that would establish whether the borrower actually would be able to repay it — an approach similar to the mortgage qualification requirements put in place after the financial crash.
That is not the only model reportedly under consideration, however, and the CFPB might waive such underwriting requirements for borrowers who don’t tap payday advance loans very often, the Journal reported.
Pushback can be expected from the industry, which has been under fire for years. The payday lenders’ argument is straightforward: With so many Americans living from paycheck to paycheck, their services are necessary to meet emergencies.
Defanging the Predator
“There is clearly a demand for payday lending by unbanked consumers who have needs for short-term credit but do not have access to credit cards, home equity loans or other loan products,” said David Reiss, professor of law at Brooklyn Law School.
“At the same time, payday lending repayment terms are often seen as onerous and predatory, with annual interest rates that run in the hundreds of percent and with many customers stuck in a cycle where they roll over their high cost debt from one month to the next, accruing more interest and fees along the way,” he told CRM Buyer.
Given the mission of the Consumer Financial Protection Bureau, Reiss said, it is natural for it to attempt to develop a regulatory structure for the industry that would allow it to function — but not extract predatory profits from its customers.
Catalyzing Savings
The Consumer Financial Protection Bureau has announced a Project Catalyst Pilot to Promote Regular Saving Behavior Among Prepaid Card Users.The pilot involves an American Express product, a prepaid card with a saving feature.
The CFPB’s research study associated with this pilot will explore two major research questions:
1. Can certain strategies encourage or support regular consumer saving behavior?
2. Is saving behavior associated with better outcomes for consumers, particularly for
low-income and underserved consumers?
Within these broad questions, the research goals for this project are to:
> Gain insight into consumer saving behavior and identify practices that promote saving behavior among prepaid card users
> Evaluate the impact of saving on consumer wellbeing among prepaid card users (2)
I have been critical of some of the CFPB’s financial literacy initiatives, but this seems like a good one. What is important about this pilot study is that it is not just evaluating whether consumers respond to the product in the expected way — save more, for instance — but whether it has longer-term and more significant effects. Does it help consumers develop saving habits in other contexts? Do those saving habits lead to better outcomes in housing and consumer credit contexts? These are really important questions. If the pilot study helps to answer them, it will be of great value.
