Tag Archives: CFPB

Good Data Makes Good Mortgages

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The CFPB issued a proposed rule about increasing the quality of information that lenders report about mortgage applications. The press release regarding the proposed rule states that these changes will ease the reporting burden on lenders, and that may very well be true. But the contested part of these rules relate to the type of information to be collected:

  • Improving market information: In the Dodd-Frank Act, Congress directed the Bureau to update HMDA regulations by having lenders report specific new information that could help identify potential discriminatory lending practices and other issues in the marketplace. This new information includes, for example: the property value; term of the loan; total points and fees; the duration of any teaser or introductory interest rates; and the applicant’s or borrower’s age and credit score.
  • Monitoring access to credit: The Bureau is proposing that financial institutions provide more information about underwriting and pricing, such as an applicant’s debt-to-income ratio, the interest rate of the loan, and the total discount points charged for the loan. This information would help regulators determine how the Ability-to-Repay rule is impacting the market, and would also help the Bureau monitor developments in specific markets such as multi-family housing, affordable housing, and manufactured housing. The proposed rule would also require that covered lenders report, with some exceptions, all loans related to dwellings, including reverse mortgages and open-end lines of credit.

Lenders are not going to like this, because this new information may be used against them in a variety of ways — in Fair Housing lawsuits, by the CFPB in enforcement actions, by members of Congress seeking to increase credit access to various constituencies.

I like this because regulators and academic researchers have been hamstrung by limited and stale data on the fast-moving mortgage market. The mortgage market is often driven by the short-term profit-seeking of private actors and by special interests pushing their agendas with the Executive and Legislative Branches.  Good data can inform good decision-making that can ensure that the housing finance system is vibrant and provides sustainable credit for households over the long term.

Comments on the proposed rule are due by October 22, 2014.

 

Financial Literacy Rehash

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The Consumer Financial Protection Bureau released its second Financial Literacy Annual Report. In blogging about last year’s report, I noted that the CFPB assumed that financial education worked more than research had shown it to work. Unfortunately, this report seems to be mostly a rehash (in many cases an extensive word-for-word rehash) of last year’s (pace Senator Walsh). From what I could tell, the only significant new financial education research that the CFPB has undertaken since last year is its “rules of thumb” project.

“Rules of thumb” are a decision-making and education technique that uses practical, easily-implemented guidelines for making decisions. Existing research has found rules of thumb to be a successful technique for improving decision making in many areas, and more successful than comprehensive education in some instances. Thus, rules of thumb could be a cost-effective method to improve consumer decision making. However, little research exists examining the effectiveness of rules of thumb for financial decision making.

Accordingly, in 2014 the Bureau began a research project to study the effectiveness of rules-of-thumb-based approaches aimed at helping consumers decrease their credit card debt. Rules-of-thumb-based education may be particularly appropriate for improving consumer literacy about credit card use, as credit card decisions are repetitive and frequent. We have finished the first phase of the project to understand how to create rules of thumb, when they are most useful, and how they can be implemented to ensure maximum success. The second phase of the project will test a set of rules of thumb aimed at helping consumers decrease their credit card debt. When we release the final results, which are expected in 2015, we expect that this project will increase knowledge of the efficacy of a rules-of-thumb approach to financial education both within the CFPB and among a range of external stakeholders who serve consumers. (72-73, footnote omitted)

This seems like a great project for the CFPB to undertake. But the rest of its efforts to improve its understanding about the efficacy of financial literacy leaves me under, underwhelmed, particularly because the rule-of-thumb project is limited to just one consumer financial product, credit cards.

Armed, Unarmed or Harmed by Knowledge?

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I posted Armed, Unarmed or Harmed by Knowledge? A Comment on the FHA’s Housing Counseling Pilot Program to SSRN (and to BePress). The abstract reads,

The FHA has requested input on its Homeowners Armed with Knowledge (HAWK) for New Homebuyers pilot program. This comment letter argues that housing counseling is not a proven solution to the problem it is meant to solve, excessive defaults by FHA borrowers. HAWK is a traditional housing counseling program but the scholarly literature casts into doubt the efficacy of such programs. It would be better to take time to research which counseling strategies, if any, are proven to be effective. This is true for the FHA but also for other government agencies, such as the Consumer Financial Protection Bureau, that have devoted significant resources to unproven financial counseling programs.

This comment was submitted to the FHA in response to its request for input on its Homeowners Armed with Knowledge (HAWK) for New Homebuyers program.

Regular readers of this blog will be familiar with my take on this topic as the comment is adapted from blog posts that have addressed various financial education topics.

Input on Housing Counseling

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HUD has issued a Notice, Federal Housing Administration (FHA): Homeowners Armed With Knowledge (HAWK) for New Homebuyers (Docket No. FR-5786-N-01).

HAWK is a pilot that will

provide FHA insurance pricing incentives to first-time homebuyers who participate in housing counseling and education that covers how to evaluate housing affordability and mortgage alternatives, to better manage their finances, and to understand the rights and responsibilities of homeownership. The goals of the HAWK for New Homebuyers pilot (HAWK Pilot) are to test and evaluate program designs that meet these objectives:

•To improve the loan performance of participants and reduce claims paid by FHA’s Mutual Mortgage Insurance Fund (MMIF).

• To expand the number of families who improve their budgeting skills and housing decisions through access to HUD-approved housing counseling agency services; and

• To increase access to sustainable home mortgages for homebuyers underserved by the current market. (27896)

I have already noted that HAWK is based upon some pretty sketchy research about the efficacy of housing counseling. The Notice presents additional research (in footnotes 5-8) that supports its goals, but I have to say that it seems cherry picked to me. The notice says, for instance, “some studies show” and “Several major studies have recently noted a correlation . . ..” But the Notice does not seem to contextualize these studies at all. A meta-analysis (see here too) of financial education initiatives is decidedly less optimistic.

It seems that the FHA and the CFPB have gone whole hog on counseling even though the evidence is not there to support such strong support. On the bright side, HAWK is a pilot program and the FHA will evaluate it to see whether it meets its goal of “improving loan performance.” (27903) I am just worried a bit worried though, because the FHA’s materials seem to show an unwarranted bias toward counseling that a review of the relevant literature does not seem to bear out.

The HAWK Notice requests comments by July 14, 2014, so you’d better act fast if you have something to say!

Servicer Safety & Soundness and Consumer Protection

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The FHFA’s Inspector General issued an audit, FHFA Actions to Manage Enterprise Risks from Nonbank Servicers Specializing in Troubled Mortgages. The audit identified two major risks in the current environment:

  • Using short-term financing to buy servicing rights for troubled mortgage loans that may only begin to pay out after long-term work to resolve their difficulties. This practice can jeopardize the companies’ operations and also the Enterprises’ timely payment guarantees and reputation for loans they back; and
  • Assuming responsibilities for servicing large volumes of mortgage loans that may be beyond what their infrastructures can handle. For example, of the 30 largest mortgage servicers, those that were not banks held a 17% share of the mortgage servicing market at the end of 2013, up from 9% at the end of 2012, and 6% at the end of 2011. This rise in nonbank special servicers has been accompanied by consumer complaints, lawsuits, and other regulatory actions as the servicers’ workload outstrips their processing capacity. (1-2)

The audit notes that “nonbank special servicers do not have a prudential safety and soundness regulator at the federal level for their mortgage servicing operations.” (6)

I think the important story here is more about consumer protection than it is about safety and soundness regulation. That is not to say that the Inspector General’s audit ignored consumer protection. Indeed, it it does spend a significant amount of time addressing that topic, noting that other federal regulators such as the CFPB have also zeroed in on the impact that non-bank servicers have on consumers.

But the safety and soundness risks may a bit overblown. A significant number of consumers, on the other hand, continue to be treated poorly, poorly, poorly by servicers.

Reiss on High Loan Fees

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CRM Buyer quoted me in On-Premises Banks Stick It to Walmart Customers. It opens,

Walmart customers who use the banking services provided inside the chain’s stores are among the highest payers of fees — especially overdraft fees — in the U.S., a Wall Street Journal analysis of federal filings concluded.

The five banks with the most Walmart branches ranked among the top 10 U.S. banks in fee income as a percentage of deposits last year, the paper reported, compared to other U.S. banks that earn most of their income through lending.

It is a notable finding, especially given Walmart’s brand: First and foremost, the company has built a reputation for providing low-cost products at significant savings compared to other stores.

Walmart cannot be held completely responsible for the banks’ practices, of course. The financial sector is highly regulated, and no third-party retailer is in a position to set standards or make policies.

However, Walmart told the Journal that it has a thorough process for vetting banks to make sure they are in line with its philosophy.

Financial Reform? What Financial Reform?

Apart from the Walmart branding issue, the report highlights some other concerns. In spite of curbs on financial industry practices in the last few years, it still is possible for providers to levy high fees on consumers in the lowest economic brackets, making it more difficult for them to work their way out of debt. A new government agency, the Consumer Finance Protection Bureau, was established to curtail such activities. Why do they still occur?

The Wall Street Journal leads off its article with the story of a consumer who knowingly overdraws her checking account to pay for a needed car repair. The US$30 fee, which translated into an APR of more than 300 percent, was actually cheaper than a payday loan, the borrower said.

In the bank’s defense, there are certain financial, market, regulatory and business realities that cannot be ignored.

“While I am not going to defend high-cost fees for financial products, I would say that the lenders often have high fixed costs for each transaction that can work out to a higher percentage of the amount borrowed than they would be for larger transactions,” David Reiss, a professor at Brooklyn Law School, told CRM Buyer.

“So, I would say that there is some gouging going on in this market, but also some basic business reality,” he remarked.