Tag Archives: CFPB

Thank You, Director Cordray

Posted on by
photo by Veronica V

Richard Cordray

Richard Cordray has announced that he will be stepping down as Director of the Consumer Financial Protection Bureau. He has been a lightning rod for critics of the Bureau. Those of us who believe that predatory behavior was endemic in consumer financial services markets like the mortgage market, think that he and the Bureau has done a great job in reducing that behavior. Cordray wrote, in an email to his staff,

Dear Colleagues,

I wanted to share with each of you directly what I have told the senior leadership in the past few days, which is that I expect to step down from my position here before the end of the month.

As I have said many times, but feel just as much today as I ever have, it has been a joy of my life to have the opportunity to serve our country as the first director of the Consumer Bureau by working alongside all of you here. Together we have made a real and lasting difference that has improved people’s lives, notably: $12 billion in relief recovered for nearly 30 million consumers; stronger safeguards against irresponsible mortgage practices that caused the financial crisis and hurt millions of Americans; giving people a voice by handling over 1.3 million complaints that led to problems getting fixed for vast numbers of individuals, and creating new ways to bring financial education to the public so that people can take more control over their economic lives. None of this could have happened without all of us being dedicated to pull together in supporting and protecting people and making every consumer count. I will always be immensely proud of you and what you have done.

At the same time, there is always more work that lies ahead. That would be true at any point, of course, and one thing I have tried to reinforce this year is that the Consumer Bureau is far more than its director. I am confident that you will continue to move forward, nurture this institution we have built together, and maintain its essential value to the American public. And I trust that new leadership will see that value also and work to preserve it – perhaps in different ways than before, but desiring, as I have done, to serve in ways that benefit and strengthen our economy and our country.

My gratitude and appreciation for what you mean to me and to our nation is deep and lasting, and I will be taking the opportunity to make that clear to you in person over the days ahead.

Thank you!

RC

As Cordray hints at, there will be a lot of jockeying over his replacement. Some of the leading names are ideologically opposed to some of the Bureau’s activist approaches to consumer protection. Potential successors, such as Vice President Pence’s Chief Economist Mark Calabria, George Mason Law Professor Todd Zywicki and retiring House Financial Services Committee Chair Jeb Hensarling (R-Tx), would likely severely curtail enforcement activity and pull back the Bureau’s regulatory agenda to give financial services companies more freedom to develop new products and more breathing room if they are accused of predatory behavior. I think this would be wrongheaded, particularly given our experience with the Subprime Boom and Bust in the 2000s.

But I am more worried by potential candidates such as Brian Brooks who was general counsel at OneWest when Secretary Mnuchin was the CEO there. Given OneWest’s treatment of mortgage borrowers, confirming a Director Brooks would be more like putting a fox put in charge of henhouse protection regulation.

Maybe now a commission structure for the Bureau does not look so bad to consumer protection advocates!

Understanding Private Mortgage Insurance (PMI)

Posted on by

photo by David Hilowitz

LendingTree quoted me in Guide to Understanding Private Mortgage Insurance (That’s PMI). It opens,

Part I: Basics of private mortgage insurance (PMI)

What is PMI?

If you’ve ever purchased a home without a large down payment, you may have faced the possibility of paying PMI, or private mortgage insurance. This financial product is a type of loan insurance typically bought by consumers when they purchase a house. However, the premiums paid toward PMI aren’t intended to protect the consumer. Rather, they provide protection for the lender, in case you stop making payments on your home loan.

As the Consumer Financial Protection Bureau (CFPB) notes, PMI is typically arranged by your lender during the home loan process and comes into play when you have a conventional loan and put down less than 20 percent of the property’s purchase price. However, private mortgage insurance is not just associated with home purchases; it can also be required when a consumer refinances his or her home and has less than 20 percent equity in it.

Generally speaking, PMI can be paid in three different ways — as a monthly premium, a one-time upfront premium or a mix of monthly premiums with an upfront fee.

There are also ways to avoid paying PMI altogether, which we’ll address later in this guide.

PMI versus MIP: What’s the difference?

While PMI is private mortgage insurance consumers buy to insure their conventional home loans, the similarly named MIP –  that’s mortgage insurance premium — is mortgage insurance you buy when you take out an FHA home loan.

MIP works kind of like PMI, in that it’s required for FHA (Federal Housing Administration) loans with a down payment of less than 20 percent of the purchase price. With MIP, you pay both an upfront assessment at the time of closing and an annual premium that is calculated every year and paid within your monthly mortgage premiums.

Generally speaking, the upfront component of MIP is equal to 1.75 percent of the base loan amount. The annual MIP premiums, on the other hand, are based on the amount of money you owe each year.

The biggest difference between PMI and MIP is this: PMI can be canceled after a homeowner achieves at least 20 percent equity in his/her property, whereas homeowners paying MIP in conjunction with a FHA loan that originated after June 13, 2013, cannot cancel this coverage until their mortgage is paid in full. You can also get out from under MIP by refinancing your FHA loan into a new, conventional loan. However, you’ll need to leave at least 20 percent equity in your home to avoid having to pay private mortgage insurance on the refi.

Which types of home loans require PMI? MIP?

If you’re thinking of buying a home and wondering if you’ll be on the hook for PMI or MIP, it’s important to understand different scenarios in which these extra charges may apply.

Here are the two main loan situations where you’ll absolutely need to pay mortgage insurance:

  • FHA loans with less than 20 percent down – If you’re taking out a FHA loan to purchase a home, you may only be required to come up with a 3.5 percent down payment. You will, however, be required to pay both upfront and annual mortgage insurance premium (MIP).
  • Conventional loans with less than 20 percent down – If you’re taking out a conventional home loan and have less than 20 percent of the home’s purchase price to put down, you’ll need to pay PMI.

*     *     *

Part V: Frequently asked questions (FAQs)

Before you decide whether to pay PMI – or whether you should try to avoid it – it pays to learn all you can about this insurance product. Consider these frequently asked questions and their answers as you continue your path toward homeownership.

Q. Is PMI tax-deductible?

According to David Reiss, professor of law and academic program director for the Center for Urban Business Entrepreneurship at Brooklyn Law School, PMI may be tax-deductible but it all depends on your situation. “The deduction phases out at higher income levels,” he says.

According to IRS.gov, the deduction for PMI starts phasing out once your adjusted gross income exceeds $100,000 and phases out completely once it exceeds $109,000 (or $54,500 if married filing separately).

Relegating Consumer Protection To The Shadows

Posted on by

The Department of the Treasury released its report on Asset Management and Insurance, which follows on the heels of its report on the capital markets. The latest report calls for replacing the term “shadow banking” with “market based finance.” (63) The term “shadow banking” reflected a belief that there was a less regulated sector of the financial services industry that operated in the shadows of heavily regulated financial services sectors like banking.

While innocent enough as a matter of nomenclature, retiring “shadow banking” reflects the Trump Administration’s desire to reduce regulation across the financial services industry and to put an end to any negative connotations that the term shadow banking carries. The report makes this crystal clear:  “Applying the term “shadow banking” to registered investment companies is particularly inappropriate as the word “shadow” could be interpreted as implying insufficient regulatory oversight, or disclosure.” (63)

Given that the Trump Administration is focused on rolling back many of the provisions of Dodd-Frank, it is worth reviewing the changes that this report advocates. I focus here on how the report seeks to limit the regulatory oversight role of the Consumer Financial Protection Bureau:

Title X of Dodd-Frank expressly excludes the “business of insurance” from the list of financial products and services within the CFPB’s jurisdiction. Dodd-Frank also prohibits the CFPB from exercising enforcement authority over “a person regulated by a State insurance regulator.” A “person” is defined to be “any person that is engaged in the business of insurance and subject to regulation by any State insurance regulator, but only to the extent that such person acts in such capacity.”

There are, however, a limited number of exceptions where the CFPB may exercise its authority over the business of insurance and persons regulated by state insurance regulators:

• If an insurer offers a financial product or service to the extent that the insurer is engaged in the offering or provision of a consumer financial product or service (e.g., debt protection contracts that are administered by insurers on behalf of a bank); To supervise and enforce violations of federal consumer laws (e.g., violations of the Real Estate Settlement Procedures Act that relate to insurers);

• If persons knowingly or recklessly provide substantial assistance in an Unfair, Deceptive, or Abusive Acts and Practices (UDAAP) violation (i.e., if an insurer knowingly or recklessly supports a covered person or service provider in violation of the UDAAP provisions of Dodd-Frank); or

• To request information from a person regulated by a state insurance regulator in connection with the CFPB’s rulemaking, investigative, subpoena, or hearing powers.

Despite the general exclusions, these statutory exceptions create considerable uncertainty concerning what the CFPB can examine or regulate. Insurers are concerned that, if the CFPB interprets the exceptions broadly, it could potentially regulate insurers or the business of insurance in a manner more expansive than the statutory exceptions intend. Such regulatory actions could also be duplicative of actions undertaken by state insurance regulators.

Recommendations

Treasury recommends that Congress clarify the “business of insurance” exception to ensure that the CFPB does not engage in the oversight of activities already monitored by state insurance regulators. (108-09)

This recommendation seeks to further reduce consumer protection in the financial services industry. Republicans have been quite open with this goal, so there is really nothing hypocritical about this recommendation. It is just a bad one. There have been a lot of abusive debt protection contracts like credit life insurance products that are priced way higher than comparable life insurance products. Blocking the CFPB from regulating in this area will be bad news for consumers.

 

Arbitration Rule Hit Job

Posted on by

The department of the Treasury issued a report, Limiting Consumer Choice, Expanding Costly Litigation: An Analysis of the CFPB Arbitration Rule. The report is a hit job on the Consumer Financial Protection Bureau’s new Arbitration Rule. The Arbitration Rule prohibits certain consumer financial product and service providers from barring consumers from participating in class action lawsuits involving those goods or services. It also requires that those providers submit certain records of their arbitrations to the Bureau. Academics (myself included) who study consumer finance generally believe that the Rule benefits consumers.

The Treasury report contains a bunch of weak arguments against the rule. For instance, it argues that “improved disclosures regarding arbitration would serve consumer interests better than its regulatory ban” because such disclosures “would be a lower cost, choice-preserving means to advance consumer protection.”(2) This argument in favor of more and more disclosure as a response to predatory behavior in the consumer financial services market gets trotted out all of the time by opponents of consumer protection. The subprime boom and bust taught us (if we had not learned this before then) that disclosure is not enough. Every homeowner has had the experience of signing document after document without having the faintest idea of what they said. Disclosure is overwhelmed by complexity and consumer finance transactions are quite complex (have you read your credit card disclosures recently?).

Here are the other key arguments in the Treasury report for your consideration:

  • The Rule will impose extraordinary costs—based on the Bureau’s own incomplete estimates.
  • The vast majority of consumer class actions deliver zero relief to the putative members of the class.
  • In the fraction of class actions that generate class-wide relief, few affected consumers demonstrate interest in recovery.
  • The Rule will effect a large wealth transfer to plaintiffs’ attorneys.
  • The Bureau did not adequately assess the share of class actions that are without merit.
  • The Bureau offered no foundation for its assumption that the Rule will improve compliance with federal consumer financial laws. (1-2)

On my first read, I do not find them to be convincing reasons to get rid of the Rule. With time, others will respond to them in greater depth. This document, which references no authors, no internal institutional review process and no consultation with stakeholders, strikes me as nothing more than flimsy cover for a takedown of the Rule.

Evolution of the CFPB?

Posted on by

image by Vector Open Stock

The Mortgage Bankers Association has issued a white paper, CFPB 2.0: Advancing Consumer Protection. The Executive Summary reads, in part,

In its first years, the Bureau’s regulatory expertise was largely consumed by the need to meet deadlines on specific rules required under the Dodd-Frank Act, and its supervision program took time to stand up. In its first years, the Bureau spent relatively little time providing guidance to industry on its expectations.

The combination of aggressive enforcement and the absence of regulatory guidance evolved into a regime of “regulation by enforcement.” Director Richard Cordray has argued that the Bureau’s enforcement regime provides “detailed guidance for compliance officers” and that it “would be ‘compliance malpractice’ for the industry not to take careful bearings from [consent] orders about how to comply with the law.” Unfortunately, the reality is that the Bureau’s enforcement program offers only fragmentary glimpses of how the Bureau interprets the laws and regulations it enforces.

This paper explains why authoritative guidance is still needed. Rather than seeking to provide the equivalent of “detailed guidance” through enforcement, the Bureau should simply provide detailed guidance. Such guidance can be provided in a host of forms, including advisory opinions, bulletins, no-action letters, statements of policy, and answers to frequently asked questions. In contrast to enforcement orders, such guidance can be proactive, efficient, clear and comprehensive, and can allow for stakeholder input and revision when facts and circumstances warrant. (v)

It is hard to argue with the MBA that it is better to regulate by supervision than by enforcement as that allows regulated companies to design policies that meet with their regulatory requirements. As the CFPB matures, I would expect that this would happen naturally. Indeed, the white paper acknowledges the challenges of standing up the CFPB in its first few years of existence that led to the early emphasis on enforcement.

I wonder a bit about the timing of this report. The MBA describes the CFPB as being at a “crossroads.” (19) That crossroads may refer to the Republican control of Congress and the Executive Branch, it may refer to the soon-to-be ending term of Director Cordray, or it may refer to both of those developments. So I wonder if this report is meant to provide some intellectual cover to bigger changes that would reduce the CFPB’s role as America’s consumer protection sheriff. Let’s see where the MBA comes down on those bigger changes once their floated in the coming months. Are they advocating tweaks to the way the CFPB does business or are they looking for some kind of revolution in the regulation of consumer protection?

 

Safeguarding The CFPB’s Arbitration Rule

Posted on by

image by Nick Youngson https://nyphotographic.com/

 

I was one of the many signatories of this letter to Senators Crapo (R-ID) and Brown (D-OH) opposing H.R. Res. 111/S.J. Res. 47, “which would block the Consumer Financial Protection Bureau’s new forced arbitration rule.” the 423 signatories all agree “(1) it is important to protect financial consumers’ opportunity to participate in class proceedings; and (2) it is desirable for the CFPB to collect additional information regarding financial consumer arbitration.” The letter, reads, in part,

Class action lawsuits are an important means of protecting consumers harmed by violations of federal or state law. Class actions enable a court to see that a company’s violations are widespread and to order appropriate relief. The CFPB’s study shows that, over five years, 160 million class members were awarded $2.2 billion in relief – after deducting attorneys’ fees. Class actions are especially important for small dollar claims, because the time, expense and investigation needed for an individual claim typically make no sense either for the consumer or for an attorney. Additionally, class actions provide behavioral relief both for the plaintiffs and the public at large, incentivizing businesses to change their behavior or to refrain from similar practices.

Individual arbitrations are not a realistic substitute for class actions. Compared to the annual average of 32 million consumers receiving $440 million per year in class actions, the CFPB’s study found an average of only 16 consumers per year received relief from affirmative claims and another 23 received relief through counterclaims; in total, those consumers received an average of $180,770 per year. While the average per-person arbitration recovery may be higher than the average class action payment, the types of cases are completely different. The few arbitrations that people pursue tend to be individual disputes involving much larger dollar amounts than the smaller claims in class actions. Most consumers do not pursue individual claims in either court or arbitration for several reasons: they may not know their rights were violated; they may not know how to pursue a claim; the time and expense would outstrip any reward; or they cannot find an attorney willing to take an individual case. Thus, if a class action is not permitted, most consumers will have no chance at having their dispute vindicated at all. Class actions, on the other hand, are an efficient method of resolving claims impacting a large number of people.

The U.S. legal system depends on private enforcement of rights. Whereas some countries invest substantial resources in large government agencies to enforce their laws, the United States relies substantially on private enforcement. The CFPB’s study shows that, in those cases where there was overlap between private and public enforcement, private action preceded government enforcement 71% of the time. Moreover, consumer class actions provide monetary recoveries and reform of financial services and products to many consumers whose injuries are not the focus of public enforcers. American consumers can’t solely depend on government agencies to protect their rights.

Reporting on individual arbitrations will increase transparency, broaden understanding of arbitration, and improve the arbitration process. As scholars, we heartily endorse the information reporting requirements of the rule for individual arbitrations. This reporting will address many questions that have gone largely unanswered, due to the lack of transparency that currently exists in this area of law. For example, the public will now know the rate at which claimants prevail, whether it is important to be represented by an attorney, and whether repeat arbitrators tend to rule more favorably for one side than the other. The reporting will permit academic study, which will prompt a necessary debate on how to strengthen and improve the process.

In conclusion, we strongly support the CFPB rule as an important step in protecting consumers. We believe it is vital that Congress not deprive injured consumers of the right to group together to have their day in court or block important research into the arbitration process.

Holding Servicers Accountable

Posted on by

image by Rizkyharis

I submitted my comment to the Consumer Financial Protection Bureau regarding the 2013 RESPA Servicing Rule Assessment. It reads, substantively, as follows:

The Consumer Financial Protection Bureau issued a Request for Information Regarding 2013 Real Estate Settlement Procedures Act Servicing Rule Assessment. The Bureau

is conducting an assessment of the Mortgage Servicing Rules Under the Real Estate Settlement Procedures Act (Regulation X), as amended prior to January 10, 2014, in accordance with section 1022(d) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Bureau is requesting public comment on its plans for assessing this rule as well as certain recommendations and information that may be useful in conducting the planned assessment. (82 F.R. 21952)

Before the RESPA Servicing Rule was adopted in 2013, homeowners had had to deal with unresponsive servicers who acted in ways that can only be described as arbitrary and capricious or worse.  Numerous judges have used terms such as “Kafka-esque” to describe homeowner’s dealings with servicers.  See, e.g., Sundquist v. Bank of Am., N.A., 566 B.R. 563 (Bankr. E.D. Cal. Mar. 23, 2017).  Others have found that servicers failed to act in “good faith,” even when courts were closely monitoring their actions.  See, e,g., United States Bank v. Sawyer, 95 A.3d 608  (Me. 2014). And yet others have found that servicers made multiple misrepresentations to homeowners.  See, e.g., Federal Natl. Mtge. Assn. v. Singer, 48 Misc. 3d 1211(A), 20 N.Y.S.3d 291 (N.Y. Sup. Ct. July 15, 2015).  The good news is that in those three cases, judges punished the servicers and lenders for their patterns of abuse of the homeowners. Indeed, the Sundquist judge fined Bank of America a whopping $45 million to send it a message about its horrible treatment of borrowers.

But a fairy tale ending for a handful of borrowers who are lucky enough to have a good lawyer with the resources to fully litigate one of these crazy cases is not a solution for the thousands upon thousands of borrowers who had to give up because they did not have the resources, patience, or mental fortitude to take on big lenders and servicers who were happy to drag these matters on for years and years through court proceeding after court proceeding.

The RESPA Servicing Rule goes a long way to help all of those other homeowners who find themselves caught up in trials imposed by their servicers that it would take a Franz Kafka to adequately describe.  The Rule has addressed intentional and unintentional abuses in the use of force-placed insurance and other servicer actions.

The RESPA Servicing Rule Assessment should evaluate whether the Rule is sufficiently evaluating servicers’ compliance with the Rule and implementing remediation plans for those which fail to comply with the vast majority of loans in their portfolios.  Servicers should not be evaluated just on substantive outcomes but also on their processes.  Are avoidable foreclosures avoided?  Are homeowners treated with basic good faith when it comes to interactions with servicers relating to defaults, loss mitigation and transfers of servicing rights?  The Assessment should evaluate whether the Rule adequately measures such things.  One measure the Bureau could look at would be court cases involving servicers and homeowners.  While perhaps difficult to do, the Bureau should attempt to measure the Rule’s impact on court filings alleging servicer abuses.

The occasional win in court won’t save the vast majority of homeowners from abusive lending practices.  The RESPA Servicing Rule, properly applied and evaluated, could.