Tag Archives: CFPB

Assessing RESPA

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image by Yoel Ben-Avraham

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)

This is certainly a pretty obscure initiative, albeit one required by the Dodd-Frank Act. But it is worth determining what is at stake in it. The Request includes some additional background:

Congress established the Bureau in the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).1 In the Dodd-Frank Act, Congress generally consolidated in the Bureau the rulemaking authority for Federal consumer financial laws previously vested in certain other Federal agencies. Congress also provided the Bureau with the authority to, among other things, prescribe rules as may be necessary or appropriate to enable the Bureau to administer and carry out the purposes and objectives of the Federal consumer financial laws and to prevent evasions thereof. Since 2011, the Bureau has issued a number of rules adopted under Federal consumer financial law.

Section 1022(d) of the Dodd-Frank Act requires the Bureau to conduct an assessment of each significant rule or order adopted by the Bureau under Federal consumer financial law. The Bureau must publish a report of the assessment not later than five years after the effective date of such rule or order. The assessment must address, among other relevant factors, the rule’s effectiveness in meeting the purposes and objectives of title X of the Dodd-Frank Act and the specific goals stated by the Bureau. The assessment must reflect available evidence and any data that the Bureau reasonably may collect. Before publishing a report of its assessment, the Bureau must invite public comment on recommendations for modifying, expanding, or eliminating the significant rule or order.

In January 2013, the Bureau issued the ‘‘Mortgage Servicing Rules Under the Real Estate Settlement Procedures Act (Regulation X)’’ (2013 RESPA Servicing Final Rule). The Bureau amended the 2013 RESPA Servicing Final Rule on several occasions before it took effect on January 10, 2014. As discussed further below, the Bureau has determined that the 2013 RESPA Servicing Final Rule and all the amendments related to it that the Bureau made that took effect on January 10, 2014 collectively make up a significant rule for purposes of section 1022(d). The Bureau will conduct an assessment of the 2013 RESPA Servicing Final Rule as so amended, which this document refers to as the ‘‘2013 RESPA Servicing Rule.’’ In this document, the Bureau is requesting public comment on the issues identified below regarding the 2013 RESPA Servicing Rule. (Id., footnotes omitted)

The Bureau will be evaluating servicer activities such as responses to loss mitigation applications and borrower notices of error. It will also be evaluating fees and charges; the exercise of rights by consumers under the rule; and delinquency outcomes.

The Bureau is requesting comment on some technical subjects relating to the assessment plan itself. But if you think you have something to add, you should submit comments by July 10th here.

Banks v. Cities

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The Supreme Court issued a decision in Bank of America Corp. v. Miami, 581 U.S. __ (2017). The decision was a mixed result for the parties.  On the one hand, the Court ruled that a municipality could sue financial institutions for violations of the Fair Housing Act arising from predatory lending. Miami alleged that the banks’ predatory lending led to a disproportionate increase in foreclosures and vacancies which decreased property tax revenues and increased the demand for municipal services. On the other hand, the Court held that Miami had not shown that the banks’ actions were directly related to injuries asserted by Miami. As a result, the Court remanded the case to the Eleventh Circuit to determine whether that in fact was the case. This case could have big consequences for how lenders and others and other big players in the housing industry develop their business plans.

For the purposes of this post, I want to focus on the banks’ activities of the banks that Miami alleged they engaged in during the early 2000s. It is important to remember the kinds of problems that communities faced before the financial crisis and before the Dodd-Frank Act authorized the creation of the Consumer Financial Protection Bureau. As President Trump and Chairman Hensarling (R-TX) of the House Financial Services Committee continue their assault on consumer protection regulation, we should understand the Wild West environment that preceded our current regulatory environment. Miami’s complaints charge that

the Banks discriminatorily imposed more onerous, and indeed “predatory,” conditions on loans made to minority borrowers than to similarly situated nonminority borrowers. Those “predatory” practices included, among others, excessively high interest rates, unjustified fees, teaser low-rate loans that overstated refinancing opportunities, large prepayment penalties, and—when default loomed—unjustified refusals to refinance or modify the loans. Due to the discriminatory nature of the Banks’ practices, default and foreclosure rates among minority borrowers were higher than among otherwise similar white borrowers and were concentrated in minority neighborhoods. Higher foreclosure rates lowered property values and diminished property-tax revenue. Higher foreclosure rates—especially when accompanied by vacancies—also increased demand for municipal services, such as police, fire, and building and code enforcement services, all needed “to remedy blight and unsafe and dangerous conditions” that the foreclosures and vacancies generate. The complaints describe statistical analyses that trace the City’s financial losses to the Banks’ discriminatory practices. (3-4, citations omitted)

Excessively high interest rates, unjustified fees, teaser interest rates and large prepayment penalties were all hallmarks of the subprime mortgage market in the early 2000s. The Supreme Court has ruled that such activities may arise to violations of the Fair Housing Act when they are targeted at minority communities.

Dodd-Frank has barred many such loan terms from a large swath of the mortgage market through its Qualified Mortgage and Ability-to-Repay rules. Trump and Hensarling want to bring those loan terms back to the mortgage market in the name of lifting regulatory burdens from financial institutions.

What’s worse, the  burden of regulation on the banks or the burden of predatory lending on the borrowers? I’d go with the latter.

Running Circles around the CFPB

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Lauren Willis has posted The Consumer Financial Protection Bureau and the Quest for Consumer Comprehension to SSRN.  It addresses an important subject — the cat and mouse game of the regulator and the regulated. The abstract reads,

To ensure that consumers understand financial products’ “costs, benefits, and risks,” the Consumer Financial Protection Bureau has been redesigning mandated disclosures, primarily through iterative lab testing. But no matter how well these disclosures perform in experiments, firms will run circles around the disclosures when studies end and marketing begins. To meet the challenge of the dynamic twenty-first-century consumer financial marketplace, the bureau should require firms to demonstrate that a good proportion of their customers understand key pertinent facts about the financial products they buy. Comprehension rules would induce firms to inform consumers and simplify products, tasks that firms are better equipped than the bureau to perform. (74)

The Bureau has worked hard to tackle financial education in a meaningful way, but Willis is right that this is a Herculean task given the profit incentive that financial institutions have to run circles around consumers and the Bureau itself. Willis explains

the feebleness of mandated disclosures, the inherent flaws in the alternatives the CFPB has been pursuing, the advantages firms have over regulators in ensuring their customers’ comprehension, and the CFPB’s legal authority to require customer confusion audits and enforce comprehension rules. I then elaborate on a few examples of how this form of regulation might operate in practice, including these four key elements:

1. Measuring the quality of a valued outcome (comprehension) rather than of an input that is often pointless (mandated or preapproved disclosure);

2. Assessing actual customer comprehension in the field as conditions change over time, rather than imagining what the “reasonable consumer” would understand or testing consumers in the lab or in single-shot field experiments;

3. Requiring firms to affirmatively and routinely demonstrate customer understanding, rather than relying on the bureau’s limited resources to examine firm performance ad hoc when problems arise ; and

4. Giving firms the flexibility and responsibility to effectively inform their customers about key relevant costs, benefits and risks through whatever means the firms see fit, whether that be education or product simplification, rather than asking regulators to dictate how disclosures and products should be designed. (76) (footnotes omitted)

Hopefully the Bureau will take a serious look at Willis’ critique.  It is important, of course, to get consumer financial literacy right in order to benefit consumers directly. But it is also important for the Bureau to get it right in order to protect its reputation as an effective regulator that brings real value to the consumer finance sector.

Comparison Shopping Savings in Mortgage Market

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Alexei Alexandrov and Sergei Koulayev of the Consumer Financial Protection Bureau have posted a working paper, No Shopping in the U.S. Mortgage Market: Direct and Strategic Effects of Providing Information to SSRN. The paper is the first to answer the question, “How much do consumers lose by not shopping enough for mortgages?” (5) They find that “for the average consumer, the the difference between the actual and the lowest offered rate amounted to an extra $300 per year.” (Id.)

The abstract reads,

We document and analyze price dispersion in the U.S. mortgage market. We find significant price dispersion in posted prices in the retail channel: for example, a consumer with a prime credit score and with a 20% down payment might see a spread in interest rates of 50 basis points, controlling for all relevant consumer/property characteristics, including discount points. We also show, from survey evidence, that close to half of consumers did not shop before taking out a mortgage, and worse, many consumers do not seem to realize that there is price dispersion. Using a proprietary dataset of lenders’ ratesheets, we estimate an equilibrium model of costly search where a share of consumers holds incorrect beliefs regarding price dispersion. Whereas high search costs is one reason behind the lack of search, we show that non-price preferences also play an important role in preventing consumers from searching more; and so an effective policy would target both. In one of our counterfactuals, we show that eliminating non-price preferences results in savings of about $9 billion dollars a year.

In addition to its significant finding on a new topic (one that should have policy implications for the Consumer Financial Protection Bureau), the paper also demonstrates the value of government research on the mortgage markets.

The paper relies on data from the National Survey of Mortgage Originations. The NSMO is a survey designed by the CFPB and the Federal Housing Finance Agency.  It is sent out on a quarterly basis to a nationally representative sample of recent mortgage borrowers. Jeb Hensarling (R-TX), the Chair of the House Financial Services Committee, has introduced legislation to stop the CFPB from conducting research on the mortgage markets. That would be a bad result for consumers.

What is the Debt to Income Ratio?

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OppLoans.com quoted me in What is the Debt to Income Ratio? It opens,

One of the great things about credit is that it lets you make purchases you wouldn’t otherwise be able to afford at one time. But this arrangement only works if you are able to make your monthly payments. That’s why lenders look at something called your debt to income ratio. It’s a number that indicates what kind of debt load you’ll be able to afford. And if you’re looking to borrow, it’s a number you’ll want to know.

Unless your rich eccentric uncle suddenly dies and leave you a giant pile of money, making any large purchase, like a car or a home, is going to mean taking out a loan. Legitimate loans spread the repayment process over time (or a longer term), which makes owning these incredibly expensive items possible for regular folks.

But not all loans are affordable. If the loan’s monthly payments take up too much of your budget, then you’re likely to default. And as much as you, the borrower, do not want that to happen, it’s also something that lenders want to avoid at all costs.

It doesn’t matter how much you want that cute, three-bedroom Victorian or that sweet, two-door muscle car (or even if you’re just looking for a personal loan to consolidate your higher interest credit card debt). If you can’t afford your monthly payments, reputable lenders aren’t going to want to do business with you. (Predatory payday lenders are a different story, they actually want you to be unable to afford your loan. You can read more about that shadiness in our personal loans guide.)

So how do mortgage, car, and personal lenders determine what a person can afford before they lend them? Well, they usually do it by looking at their debt to income ratio.

What is the debt to income ratio?

Basically, it’s the amount of your monthly budget that goes towards paying debts—including rent or mortgage payments.

“Your debt to income ratio is benchmark metric used to measure an individual’s ability to repay debt and manage their monthly payments,” says Brian Woltman, branch manager at Embrace Home Loans (@EmbraceHomeLoan).

“Your ‘DTI’ as it’s commonly referred to is exactly what it sounds like. It’s calculated by dividing your total current recurring monthly debt by your gross monthly income—the amount you make before any taxes are taken out,” says Woltman. “It’s important because it helps a lender to determine the proper amount of money that someone can borrow, and reasonably expect to be paid back, based on the terms agreed upon.”

According to Gerri Detweiler (@gerridetweiler), head of market education for Nav (@navSMB), “Your debt to income ratio provides important information about whether you can afford the payment on your new loan.”

“On some consumer loans, like mortgages or auto loans, your debt to income ratio can make or break your loan application,” says Detweiler. “This ratio typically compares your monthly recurring debt payments, such as credit card minimum payments, student loan payments, mortgage or auto loans to your monthly gross (before tax) income.”

Here’s an example…

Larry has a monthly income of $5,000 and a list of the following monthly debt obligations:

Rent: $1,200

Credit Card: $150

Student Loan: $400

Installment Loan: $250

Total: $2,000

To calculate Larry’s DTI we need to divide his total monthly debt payments by his monthly income:

$2,000 / $5,000 = .40

Larry’s debt to income ratio is 40 percent.

David Reiss (@REFinBlog), is a professor of real estate finance at Brooklyn Law School. He says that the debt to income ratio is an important metric for lenders because “It is one of the three “C’s” of loan underwriting:

Character: Does a person have a history of repaying debts?

Capacity: Does a person have the income to repay debts?

Capital: Does the person have assets that can be used to retire debt if income should prove insufficient?

What is a good debt to income ratio?

“If you listen to Ben Franklin, who subscribed to the saying ‘neither a borrower nor lender be,’ the ideal ratio is 0,” says Reiss. But he adds that only lending to people with no debt whatsoever would put home ownership out of reach for, well, almost everyone. Besides, a person can have some debt on-hand and still be a responsible borrower.

“More realistically, in today’s world,” says Reiss, “we might take guidance from the Consumer Financial Protection Bureau (CFPB) which advises against having a DTI ratio of greater than 43 percent. If it creeps higher than that, you might have trouble paying for other important things like rent, food and clothing.”

“Requirements vary but usually if you can stay below a 33 percent debt-to-income ratio, you’re fine,” says Detweiler. “Some lenders will lend up to a 50 percent debt ratio, but the interest rate may be higher since that represents a higher risk.”

For Larry, the guy in our previous example, a 33 percent DTI would mean keeping his monthly debt obligations to $1650.

Let’s go back to that 43 percent number that Reiss mentioned because it isn’t just an arbitrary number. 43 percent DTI is the highest ratio that borrower can have and still receive a “Qualified Mortgage.”

How Tight Is The Credit Box?

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Laurie Goodman of the Urban Institute’s Housing Finance Policy Center has posted a working paper, Quantifying the Tightness of Mortgage Credit and Assessing Policy Actions. The paper opens,

Mortgage credit has become very tight in the aftermath of the financial crisis. While experts generally agree that it is poor public policy to make loans to borrowers who cannot make their payments, failing to make mortgages to those who can make their payments has an opportunity cost, because historically homeownership has been the best way to build wealth. And, default is not binary: very few borrowers will default under all circumstances, and very few borrowers will never default. The decision where to draw the line—which mortgages to make—comes down to what probability of default we as a society are prepared to tolerate.

This paper first quantifies the tightness of mortgage credit in historical perspective. It then discusses one consequence of tight credit: fewer mortgage loans are being made. Then the paper evaluates the policy actions to loosen the credit box taken by the government-sponsored enterprises (GSEs) and their regulator, the Federal Housing Finance Agency (FHFA), as well as the policy actions taken by the Federal Housing Administration (FHA), arguing that the GSEs have been much more successful than the FHA. The paper concludes with the argument that if we don’t solve mortgage credit availability issues, we will have a much lower percentage of homeowners because a larger share of potential new homebuyers will likely be Hispanic or nonwhite—groups that have had lower incomes, less wealth, and lower credit scores than whites. Because homeownership has traditionally been the best way for households to build wealth, the inability of these new potential homeowners to buy could increase economic inequality between whites and nonwhites. (1)

Goodman has been making the case for some time that the credit box is too tight. I would have liked to see a broader discussion in the paper of policies that could further loosen credit. What, for instance, could the Consumer Financial Protection Bureau do to encourage more lending? Should it be offering more of a safe harbor for lenders who are willing to make non-Qualified Mortgage loans? The private-label mortgage-backed securities sector has remained close to dead since the financial crisis.  Are there ways to bring some life — responsible life — back to that sector? Why aren’t portfolio lenders stepping into that space? What would they need to do so?

When the Qualified Mortgage rule was being hashed out, there was a debate as to whether there should be any non-Qualified Mortgages available to borrowers.  Some argued that every borrower should get a Qualified Mortgage, which has so many consumer protection provisions built into it. I was of the opinion that there should be a market for non-QM although the CFPB would need to monitor that sector closely. I stand by that position. The credit box is too tight and non-QM could help to loosen it up.

United States v. CFPB

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photo by AgnosticPreachersKid

United States Court of Appeals for the District of Columbia Circuit, E. Barrett Prettyman Federal Courthouse

The Trump Administration has filed an amicus brief in PHH Corp. v. CFPB. The case is schedule for an en banc hearing in May. The filing is particularly newsworthy because the Trump Administration is siding with PHH, a mortgage lender, against the CFPB, a federal agency. The Trump Administration summarizes its position as follows:

In 2010, Congress created the Consumer Financial Protection Bureau (CFPB) as part of the Dodd-Frank Act, giving the CFPB authority to enforce U.S. consumer-protection laws that had previously been administered by seven different government agencies, as well as new provisions added by Dodd-Frank itself. See 12 U.S.C. § 5581(b). The CFPB is headed by a single Director who is appointed by the President, with the advice and consent of the Senate, for a term of five years, id. § 5491(b), (c)(1), and who may be removed by the President only for “inefficiency, neglect of duty, or malfeasance in office,” id. § 5491(c)(3).

The panel in this case held that this “for cause” removal provision violates the constitutional separation of powers. Op. 9-10. The panel explained—and neither party disputes—that, as a general matter, the President has “Article II authority to supervise, direct, and remove at will subordinate [principal] officers in the Executive Branch” in order to exercise his vested power and duty to faithfully execute the laws. Op. 4. The panel recognized as well that Humphrey’s Executor v. United States, 295 U.S. 602, 629 (1935), established an exception to that rule, holding that Congress may “forbid [the] removal except for cause” of members of the Federal Trade Commission (FTC)—a holding that has been understood to cover members of other multi-member regulatory commissions that share certain features and functions with the FTC. Op. 4.

The principal constitutional question in this case is whether the exception to the President’s removal authority recognized in Humphrey’s Executor should be extended by this Court beyond multi-member regulatory commissions to an agency headed by a single Director. While we do not agree with all of the reasoning in the panel’s opinion, the United States agrees with the panel’s conclusion that single-headed agencies are meaningfully different from the type of multi-member regulatory commission addressed in Humphrey’s Executor.

The Supreme Court’s analysis in Humphrey’s Executor was premised on the nature of the FTC as a continuing deliberative body, composed of several members with staggered terms to maintain institutional expertise and promote a measure of stability that would not be immediately undermined by political vicissitudes. A single-headed agency, of course, lacks those critical structural attributes that have been thought to justify “independent” status for multi-member regulatory commissions. Moreover, because a single agency head is unchecked by the constraints of group decision-making among members appointed by different Presidents, there is a greater risk that an “independent” agency headed by a single person will engage in extreme departures from the President’s executive policy. And as the panel recognized, while multi-member regulatory commissions sharing the characteristics of the FTC discussed in Humphrey’s Executor have existed for over a century, limitations on the President’s authority to remove a single agency head are a recent development to which the Executive Branch has consistently objected.

We therefore urge the Court to decline to extend the exception recognized in Humphrey’s Executor in this case. (1-2)

This is of course an obscure argument about administrative law jurisprudence, but it also has serious real world consequences. I have previously argued that the panel reached the wrong result in this case and I think that the en banc Court will overturn it.

This amicus brief does not add too much to the reasoning in Judge Kavanaugh’s majority opinion in PHH v. CFPB, although it does flesh out one important argument that it made. The brief provides some support for the position that multi-member commissions are better suited to run independent agencies than single directors. But while it makes the case that single director agencies may not be the best choice for agency design, it does not make the case that it is an unconstitutional one.