Tag Archives: consumer finance

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.

Countercyclical Regulation of Housing Finance

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Pat McCoy has posted Countercyclical Regulation and Its Challenges to SSRN. The abstract reads,

Following the 2008 financial crisis, countercyclical regulation emerged as one of the most promising breakthroughs in years to halting destructive cycles of booms and busts. This new approach to systemic risk posits that financial regulation should clamp down during economic expansions and ease during economic slumps in order to make financial firms more resilient and to prick asset bubbles before they burst. If countercyclical regulation is to succeed, however, then policymakers must confront the institutional and legal challenges to that success. This Article examines five major challenges to robust countercyclical regulation – data gaps, early response systems, regulatory inertia, industry capture, and arbitrage – and discusses a variety of techniques to defuse those challenges.

Readers of this blog will be particularly interested in the section titled “Sectoral Regulatory Tools.” (34 et seq.) This section gives an overview of countercyclical tools that can be employed in the housing finance sector:  loan-to value limits; debt-to-income limits; and ability-to-repay rules. McCoy ends this section by noting,

The importance of the ability-to-repay rule and the CFPB’s exclusive role in promulgating that rule has another, very different ramification. It is a mistake to ignore the role of market conduct supervisors such as the CFPB in countercyclical regulation. The centrality of consumer financial protection in ensuring sensible loan underwriting standards – particularly for home mortgages – underscores the vital role that market conduct regulators such as the CFPB will play in the federal government’s efforts to prevent future, catastrophic real estate bubbles. (44)

While this seems like an obvious point to me — sensible consumer protection acts as a brake on financial speculation — many, many academics who study financial regulation disagree. If this article gets some of those academics to reconsider their position, it will make a real contribution to the post-crisis financial literature.

Consumer Thoughts on Credit Reports

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The Consumer Financial Protection Bureau has issued a report, Consumer Voices on Credit Reports and Scores. This report builds on other recent work from the CFPB about how much people really understand about consumer finance. The answer — they still have a lot to brush up on. The CFPB conducted a series of focus groups about credit reports and credit scores. The CFPB concluded that

that many consumers are interested in and concerned about credit reports and scores. We found that some of the consumers we talked to expressed confusion about the best way to access credit reports and scores, what makes up credit reports and scores, and how to improve their scores. Some of the consumers we spoke to often do not feel empowered to take action to improve their credit histories, to use their credit reports and scores to negotiate better credit terms, or, ultimately, to use credit reports and scores as a helpful tool in achieving their financial goals.
The diversity of consumer perceptions, attitudes, and behaviors we heard around credit reports and scores suggests that there is much work to do in helping consumers understand and manage this complicated financial topic. Because consumers have a wide range of knowledge about and perceptions of credit reports and scores, there is no single message or approach to encourage consumers to engage more fully with their credit histories.
However, consumer perspectives on credit reports do suggest that many consumers feel that the credit reports are “hard to get, and hard to read.” Efforts by credit reporting agencies to make it easier for consumers to access and interpret their reports could be a useful contribution tohelping consumers navigate their credit histories.
The growing number of financial services companies that provide their customers with regular access to their credit scores on monthly credit card statements or online provides an opportunity to engage consumers around their credit reports. Once consumers see their credit scores, they may be motivated to learn more about their credit histories, check their full credit reports, and take action to improve their credit reports and scores. (19)
I am happy to see that the CFPB is trying to understand where consumers are at in terms of their financial literacy. This should help them to target their financial education efforts realistically. The report notes that the subject of credit reports is a complicated one. The mortgage application process is far, far more complicated so this report gives us a sense of how much work is to be done for consumers to achieve financial well-being.

Lederman, Rahman & Reiss on CFPB No-Action Policy

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Jeff Lederman, Sabeel Rahman and I submitted a comment on the Consumer Financial Protection Bureau’s proposed policy on No-Action Letters. Basically,

This is a comment on the Consumer Financial Protection Bureau’s (the “Bureau”) proposed Policy on No-Action Letters (the “Policy”).  The Policy is a step in the right direction, but a more robust Policy could better help the Bureau achieve its statutory purposes.

The Bureau recognizes that there are situations in which consumer financial service businesses (“Businesses”) are uncertain as to the applicability of laws and rules related to new financial products (“Products”); how regulatory provisions might be applied to their Products; and what potential enforcement actions could be brought against them by regulatory agencies for noncompliance.  Businesses could therefore benefit from the issuance of a No-Action Letter to reduce that uncertainty.

There is very little scholarly literature on the use of No-Action Letters by administrative agencies.  In the absence of comprehensive studies, it is hard to precisely determine how to allocate agency resources to informal guidance as opposed to other types of regulatory action.  Notwithstanding this, an agency should attempt to determine the optimal amount of its resources that should be devoted to informal guidance as opposed to the alternatives and then refine that initial estimate as experience dictates.

A rapidly changing field like consumer finance can benefit from the availability of quick and informal feedback for Businesses so long as the process is properly designed.  Because the Policy would use a relatively small amount of Bureau resources compared to other types of regulatory action, a well-designed No-Action Letter Policy would be a win-win-win for Businesses, for the Bureau and for consumers.

Performance-Based Consumer Law

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Lauren Willis has posted Performance-Based Consumer Law to SSRN. This article

makes the case for recognizing performance-based regulation as a distinct tool in the consumer-law regulatory toolbox and for employing this tool broadly. Performance-based consumer law has the potential to incentivize firms to educate rather than obfuscate, develop simple and intuitive product designs that align with rather than defy consumer expectations, and channel consumers to products that are suitable for the consumers’ circumstances. Moreover, the process of establishing performance standards would sharpen our understanding of our goals for consumer law, and the process of testing for compliance with those standards would produce data about how to meet those goals in a continually evolving marketplace. Even if performance-based regulation does not directly lead to dramatic gains in consumer comprehension or marked declines in unsuitable uses of consumer products, the process of establishing and implementing such regulation promises dividends for improving traditional forms of regulation. (1)
This seems like a pretty radical change from our current approaches to the regulation of consumer financial transactions. Willis argues that disclosure does not work (no argument there) and industry can easily circumvent bright line rules (no argument there). She claims that a suitability regime, like ones that exist in the brokerage industry, offer a superior alternatives.  She writes,
Suitability standards would be closer to traditional substantive regulation, but more flexible. Regulation might define suitable (or unsuitable) uses of types or features of products, or firms might define suitable uses of their products, provided that they did so publicly. Although suitability might be required of every transaction, testing every transaction for suitably would often be prohibitively expensive and ad hoc ex post enforcement would create only limited incentives for firm compliance. Better to set performance benchmarks for what proportion of the firm’s customers must use the products or features suitably (or not unsuitably) and use field-based testing of a sample of the firm’s customers to assess whether the benchmarks are met. Enforcement levers could include, e.g., fines, rewards, licensing consequences, regulator scrutiny, or unfair, deceptive, or abusive conduct liability. (4)
This is certainly intriguing. But just as certainly, one can see the consumer finance industry raising concerns about a lack of clear rules to guide their actions and the after-the-fact evaluations that this approach would subject them to. Willis is too quick to reject such concerns, but they are legitimate ones that would need to be addressed if performance-based consumer law was to be widely adopted. Nonetheless, this is an intriguing paper and its implications should be further explored.