Tag Archives: Consumer Financial Protection Bureau

Financially Capable Young’uns

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The Consumer Financial Protection Bureau has issued a new model and recommendations, Building Blocks To Help Youth Achieve Financial Capability (link to report at bottom of page). It opens,

To navigate the financial marketplace effectively, adults need financial knowledge and skills, access to resources, and the capacity to apply their money skills and habits to financial decisions. Where and when during childhood and adolescence do people acquire the foundations of financial capability? The Consumer Financial Protection Bureau (CFPB) researched the childhood origins of financial capability and well-being to identify those roots and to find promising practices and strategies to support their development.

This report, “Building blocks to help youth achieve financial capability: A new model and recommendations,” examines “how,” “when,” and “where” youth typically acquire critical attributes, abilities, and opportunities that support the development of adult financial capability and financial well-being. CFPB’s research led to the creation of a developmentally informed, skills-based model. The many organizations and policy leaders working to help the next generation become capable of achieving financial capability can use this new model to shape priorities and strategies. (3, footnotes omitted)

I have been somewhat skeptical of CFPB’s financial literacy initiatives because there is not a lot of evidence about what approaches actually improve financial literacy outcomes. Unfortunately, this report does not reduce my skepticism. While it claims that it is evidence-based, the evidence cited seems scant, as far as I can tell from reviewing the footnotes and appendices.

The report concludes,

Understanding how consumers navigate their financial lives is essential to helping people grow their financial capability over the life cycle. The financial capability developmental model described in this report provides new evidence-based insights and promising strategies for those who are seeking to create and deliver financial education policies and programs.

This research reaffirms that financial capability is not defined solely by one’s command of financial facts but by a broader set of developmental building blocks acquired and honed over time as youth gain experience and encounter new environments. This developmental model points to the importance of policy initiatives and programs that support executive functioning, healthy financial habits and norms, familiarity and comfort with financial facts and concepts, and strong financial research and decision-making skills.

The recommendations provided are intended to suggest actions for a range of entities, including financial education program developers, schools, parents, and policy and community leaders, toward a set of common strategies so that no one practitioner needs to tackle them all.

The CFPB is deeply committed to a vision of an America where everyone has the opportunity to build financial capability. This starts by recognizing that our programs and policies must provide opportunities that help youth acquire all of the building blocks of financial capability: executive function, financial habits and norms, and financial knowledge and decision-making skills. (52)

What the conclusion does not do is identify interventions that actually help people make better financial decisions. I am afraid that this report puts the cart before the horse — we should have a sense of what works before devoting resources to particular courses of action. To be crystal clear, I think teaching financial literacy is great — so long as we know that it works. Until we do, we should not be devoting a lot of resources to the field.

Mortgage Market Forecast

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OnCourseLearning.com’s new financial services blog quoted me in Mortgage Rates Likely to Remain Low for Foreseeable Future. It opens,

In the weeks since the United Kingdom voted to leave the European Union, previously low interest rates have fallen to near historically low levels.

For the week ending Aug. 25, a 30-year fixed rate mortgage averaged 3.43%, just slightly above the record low of 3.31% established in 2012. At the same time a year ago, the average mortgage rate for a 30-year fixed rate mortgage was 3.84%, according to Freddie Mac.

The drop in interest rates appears to be drawing more homeowners into the mortgage market. Freddie Mac now expects 2016 loan originations to reach $2 trillion, the highest level since 2012.

Market Uncertainty

While markets have calmed since the Brexit vote in late June, the Mortgage Bankers Association cautioned in a July 14 Economic and Mortgage Finance commentary that the actual “terms and conditions of the exit will continue to destabilize markets.”

Global economic uncertainty, oil price fluctuations, slow economic growth and the potential for interest rate hikes suggest market instability will likely continue for some time, experts said. As a result, most analysts expect interest rates will remain low, at least in the short term.

“Those who have been betting on increasing interest rates have been wrong for a long time now,” said David Reiss, professor of law at Brooklyn Law School and research director of its Center for Urban Business Entrepreneurship. He believes rates likely will remain low “over the next six to 12 months, partially driven by a further reduction in spreads between Treasury yields and mortgage rates.”

Greg McBride, chief financial analyst for Bankrate.com, a personal finance website, expects “the backdrop of slow global economic growth, low inflation, and negative interest rates elsewhere will keep demand for U.S. bonds high, and mortgage rates [below] 4% in the foreseeable future.”

In July, Freddie Mac predicted the 30-year rate won’t top 3.6% in 2016, or 4% in 2017.

Lending Opportunities

The low-interest rates have created new opportunities for lenders. Refinance bids recently reached their highest level in three years.

“With mortgage rates having been range-bound for so long, this breakout to the low side has opened the door to refinancing for homeowners who had previously refinanced around 4% or even just below,” McBride said. He expects refinancing demand to continue as long as mortgage rates stay close to 3.5%, but predicts rates may need to drop a bit more to prolong the boom.

Meanwhile, rising home prices are creating more equity, and the MBA expects homeowners to want more cash-out refinancing. In its July 14 report, the MBA raised its 2016 refinance origination forecasts by 10% to $760 billion, replacing its pre-Brexit projection of a decrease.

As rates fall, refinancing becomes attractive earlier for those with outsize mortgages. These jumbo loans are those that exceed $417,000 in most of the country, or $625,000 in high-priced markets like New York and San Francisco, according to a July 7 online article in the Wall Street Journal. With these big loans, lower rates can mean substantial savings.

“Borrowers with larger loans stand to gain more by refinancing, and may not need as large of a rate incentive than borrowers with lower loan balances,” according to the July 14 MBA report. Because more affluent borrowers take out these loans, they generally have fewer delinquencies or foreclosures, and lenders can steer big borrowers to a bank’s other accounts and services. They’re also becoming cheaper: Rates on jumbo loans were at record lows in July, according to the MBA.

Reiss thinks lenders have been somewhat “slow to expand in the jumbo market, and may now gain a leg up over their competitors by doing so.”

Potential Risks

Still, lenders face some risks to profitability, including increased regulatory expenses such as the impact of the Consumer Financial Protection Bureau’s new TRID rule. Most of the pain from the TRID regulations, Reiss said, involve “transition costs for implementing the new regulation, and those costs will decrease over time.”

Bringing Debt Collectors to Heel

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TheStreet.com quoted me in Debt Collectors Hounding You With Robo Calls? Here’s What To Do. It reads, in part,

Mike Arman, a retired mortgage broker residing in City of Oak Hill, Fla., owns a nice home, with only $6,000 left on the mortgage. He’s never been late on a payment, and his FICO credit score is 837.

Yet even with that squeaky clean financial record, Arman still went through the ninth circle of Hell with devilish debt collectors.

“The mortgage servicer would call ten days before the payment was even due, then five days, then two days, then every day until the payment arrived and was posted,” he says. “I told them to stop harassing me, and that my statement was sufficient legal notice under the Fair and Accurate Credit and Transaction Act (FACTA). But they said they don’t honor verbal statements, which is a violation of the law. So, I sent them a registered letter, with return receipt, which I got and filed away for safekeeping.”

The next day, though, the mortgage servicer called again. Instead of taking the call, Arman called a local collections attorney, who not only ended the servicer’s robo calls, but also forced the company to fork over $1,000 to Arman for violating his privacy.

“That was the sweetest $1,000 I have ever gotten in my entire life,” says Arman.

 Not every financial consumer’s debt collector story ends on such an upbeat note, although Uncle Sam is working behind the scenes to get robo-calling debt collectors off of Americans’ backs.

The latest example of that is a new Federal Communications Commission rule that closed a loophole that allowed debt collectors to robo call people with impunity.

Here’s how the FCC explains its new ruling against robo calls.

“The Telephone Consumer Protection Act prohibits most non-emergency robo calls to cell phones, but a provision in last year’s budget bill weakened the law by allowing debt collectors to make such calls when the debt is owed to, or even just guaranteed by, the federal government,” the FCC states in a release issued last week. “Under the provision passed by Congress, debt collectors can make harassing robo calls to millions of Americans with education, mortgage, tax and other federally-backed debt.”

“To make matters worse, the provision raised concerns that it could lead to robo calls not only to those who owe debt, but also their family, references, and even to someone who happens to get assigned a phone number that once belonged to another person who owed debt,” the FCC report adds.

Under the new rules, debt collectors can only make three robo calls or texts each month per loan to borrowers – and they can’t contact the borrower’s family or friends. “Plus, debt collectors are required to inform consumers that they have the right to ask that the calls cease and must honor those requests,” the FCC states.

That’s a big step forward for U.S. adults plagued by debt collection agency robo calls. But the FCC ruling is only one tool in a borrower’s arsenal – there are other steps they can take to keep debt collectors at bay.

If you’re looking to take action, legal or otherwise, against debt collectors, build a good, thorough paper trail, says Patrick Hanan, marketing director at ClassAction.org.

“Keep any messages, write down the phone number that’s calling and basically keep track of whatever information you can about who is calling and when,” Hanan advises. “Just because you owe money, that doesn’t mean that debt collectors get to ignore do-not-call requests. They need express written consent to contact you in the first place, and they need to stop if you tell them to.”

Also, if you want to speak to an attorney about it, most offer a free consultation, so there isn’t any risk to find out more about your rights, Hanan says “They’ll tell you right off the bat if they think you have a case or not,” he notes.

*     *      *

Going forward, expect the federal government to clamp down even harder on excessive debt collectors. “The Consumer Financial Protection Board takes complaints about debt collector behavior seriously, and has recently issued a proposal to further limit debt collectors’ ability to contact consumers,” says David Reiss, professor of law at Brooklyn Law School. “In the mean time, one concrete step that consumers can do is send a letter telling the debt collector to cease from contacting them. If a debt collector continues to contact a consumer — other than by suing — it may be violating the Fair Debt Collection Practices Act.”

No Mortgages for New Moms

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Realtor.com quoted me in Mom on Maternity Leave Denied a Mortgage: Could It Happen to You? It opens,

Hopeful home buyers can be denied loans for all kinds of reasons, from a poor credit score to low income. It sucks, but it makes sense: Lenders prefer giving cash to people who can pay them back. (Can you blame them?) Yet, sometimes people are turned away for dumb reasons. Take, for instance, the recent case of a Philadelphia mom who was denied a mortgage because she was on maternity leave. It was even paid maternity leave, with a firm date to return to her job. What’s up with that?

According to the Washington Post, the mom in question (who remains anonymous) had applied for financing with her husband to fund renovations on a house in Philadelphia. But due to her maternity leave, her pay stubs showed she was on “short-term disability,” which prompted the loan’s underwriter to surmise she might not resume working full time—even though her employer was happy to submit a letter indicating the day she’d return to the office.

And this mom is hardly alone: Over the past six years, the Department of Housing and Urban Development has documented over 200 cases alleging maternity-related discrimination against women seeking mortgages. In one case, a lender in Arkansas allegedly told the applicant that she’d have to be back at work before her loan could close!

And this is a shame, because housing discrimination—based on gender, familial status, disability, race, and other factors—has been illegal since the Fair Housing Act of 1968. Yet apparently it still exists even at prominent mortgage companies, as evidenced by the cases against Wells Fargo, Bank of America, PNC Mortgage, and others.

As for why this happens, experts surmise it’s because some lenders have outdated notions of women in the workplace, presuming most will bail or scale back on their jobs once kids enter the picture, permanently reducing the family’s income and eligibility for a loan. But it’s hardly the norm: Census data suggest that more than half of first-time mothers return to work within three months. Another study by the Department of Health and Human Services’ Maternal and Child Health Bureau found that the average maternity leave lasted a mere 10 weeks.

Bottom line: These days, many moms return to the office—yet some mortgage companies have missed that memo. But luckily, some moms are fighting back—like the Philadelphia woman above, who has recently reached a “conciliation agreement” with the lender, Citizens Bank of Pennsylvania. Although the company denied discriminating against her, it also agreed to conduct fair lending training sessions with staff.

And more should follow, Shanna Smith, president and chief executive of the National Fair Housing Alliance, told the Post: “There needs to be much better training for [lenders] about how to deal with interrupted income for loan closings when a woman is pregnant and [on] paid maternity leave.

All of which may have women everywhere wondering: If they hope to buy a home, might maternity leave get in their way? And if so, what should they do? Probably the first step is just knowing that it’s wrong: Maternity leave—paid or unpaid—is not a legitimate reason to refuse a loan.

“It always helps when you know your rights,” says David Reiss, research director at the Center for Urban Business Entrepreneurship at Brooklyn Law School. “If your lender appears to be violating fair lending laws, you may want to raise the issue directly with your banker and ask to speak to the supervisor to ask the bank to clarify its policy. If your lender continues to enforce a discriminatory policy, you can reach out to the relevant regulators, including HUD and the Consumer Financial Protection Bureau.”

The Future of Mortgage Default

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photo by Diane BassfordThe Consumer Financial Protection Bureau has shared its Principles for the Future of Loss Mitigation. It opens,

This document outlines four principles, Accessibility, Affordability, Sustainability, and Transparency, that provide a framework for discussion about the future of loss mitigation as the nation moves beyond the housing and economic crisis that began in 2007. As the U.S. Department of Treasury’s Home Affordable Modification Program (HAMP) is phased out, the Consumer Financial Protection Bureau (CFPB) is considering the lessons learned from HAMP while looking forward to the continuing loss mitigation needs of consumers in a post-HAMP world. These principles build on, but are distinct from, the backdrop of the Bureau’s mortgage servicing rules and its supervisory and enforcement authority. This document does not establish binding legal requirements. These principles are intended to complement ongoing discussions among industry, consumer groups and policymakers on the development of loss mitigation programs that span the full spectrum of both home retention options such as forbearance, repayment plans and modifications, and home disposition options such as short sales and deeds-in-lieu.

The future environment of mortgage default is expected to look very different than it did during the crisis. Underwriting based on the ability to repay rule is already resulting in fewer defaults. Mortgage investors have recognized the value of resolving delinquencies early when defaults do occur. Mortgage servicers have developed systems and processes for working with borrowers in default. The CFPB’s mortgage servicing rules have established clear guardrails for early intervention, dual tracking, and customer communication; however, they do not require loss mitigation options beyond those offered by the investor nor do they define every element of loss mitigation execution.

Yet, even with an improved horizon and regulatory guardrails, there is ample opportunity for consumer harm if loss mitigation programs evolve without incorporating key learnings from the crisis. While there is broad agreement within the industry on the high level principles, determining how they translate into programs is more nuanced. Further development of these principles and their implementation is necessary to prevent less desirable consumer outcomes and to ensure the continuance of appropriate consumer protections.

The CFPB concludes,

The CFPB believes these principles are flexible enough to encompass a range of approaches to loss mitigation, recognizing the legitimate interests of consumers, investors and servicers. One of the lessons of HAMP is that loss mitigation that is good for consumers is usually good for investors, as well. The CFPB therefore seeks to engage all stakeholders in a discussion of the principles for future loss mitigation.

I have no beef with this set of principles as far as it goes, but I am concerned that it does not explicitly include a discussion of the role of state court foreclosures in loss mitigation. As this blog has well documented, homeowners are facing Kafkaesque, outrageous, even hellish, behavior by servicers in state foreclosure actions. Even if the federal government cannot address state law issues directly, these issues should be included as part of the discussion of the problems that homeowners face when their mortgages go into default.

Retiring with a Mortgage

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MassMutual quoted me in Is it OK to Retire with a Mortgage? It opens,

The conventional wisdom is that you should pay off your mortgage before you retire. Yet, about 4.4 million retired homeowners still had a mortgage in 2011, according to an analysis of American Community Survey data by the Consumer Financial Protection Bureau (CFPB). More than half of them spend 30 percent or more of their income on housing and related expenses, a percentage that may be uncomfortably high even for working homeowners.

Not having to put such a large percentage — or any percentage — of your retirement income toward a monthly mortgage payment in retirement will certainly make it easier to meet your other expenses. But is it really so bad to have a mortgage payment during retirement?

“The logic behind the rule of thumb is that your income will go down in retirement, so it would be helpful if your monthly expenses went down significantly as well,” said David Reiss, a law professor who specializes in real estate and consumer financial services at Brooklyn Law School in New York. But if your income from Social Security and a pension (if you have one), and to some extent your assets (the nest egg you plan to draw on for additional retirement income), will be sufficient to make your monthly mortgage payment and meet your other expenses in retirement, there is no real reason that you have to get rid of the mortgage, he said. The key is that keeping your mortgage during retirement should be part of a plan and not a response to a crisis.

More Homeowners are Retiring with a Mortgage

More homeowners retired with a mortgage in 2011 than a decade earlier, according to the CFPB’s analysis of U.S. census data.1 They’re less likely to have their homes paid off because they’re purchasing later in life, making smaller down payments and tapping equity for other purchases.1 In fact, 36.6 percent of homeowners ages 65 to 74 and 21.2 percent homeowners age 75 and older (some of whom may not be retired yet) had mortgages or home equity loans in 2010, according to the Federal Reserve. The median balance was $79,000 for the 65 to 74 age group, and $58,000 for the 75 and up age group.

The CFPB points out two problems with carrying a mortgage during retirement: less accumulated net wealth and the possibility of foreclosure if retirees can’t make their mortgage payments. Foreclosure is harder to recover from when you’re older because you may not be able to return to the workforce to compensate for the loss and because you’re more likely to have health problems or cognitive impairments, the CFPB said.1

Having less accumulated net wealth is a problem, especially if most of your wealth consists of your home equity, which is less liquid than stocks, bonds and cash. Foreclosure is a serious problem if it happens to you, but the odds are slim: even in the aftermath of the housing crisis, in 2011, foreclosure rates were only 2.55 percent for homeowners 65 to 74 and 3.19 percent for homeowners 75 and older.

Some retirement-age homeowners who haven’t paid off their mortgages undoubtedly would rather be debt free but couldn’t afford to retire their home loan sooner. But others might be putting the money that could have gone toward extra mortgage payments to a better use. (footnotes omitted)

Wall Street’s New Toxic Transactions

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Toxic Real Estate

The National Consumer Law Center released a report, Toxic Transactions: How Land Installment Contracts Once Again Threaten Communities of Color. It describes land installment contracts as follows:

Land contracts are marketed as an alternative path to homeownership in credit-starved communities. The homebuyers entering into these transactions are disproportionately . . . people of color and living on limited income. Many are from immigrant communities.

These land contracts are built to fail, as sellers make more money by finding a way to cancel the contract so as to churn many successive would-be homeowners through the property. Since sellers have an incentive to churn the properties, their interests are exactly opposite to those of the buyers. This is a significant difference from the mainstream home purchase market, where generally the buyer and the seller both have the incentive to see the transaction succeed.

Reliable data about the prevalence of land contract sales is not readily available. According to the U.S. Census, 3.5 million people were buying a home through a land contract in 2009, the last year for which such data is available. But this number likely understates the prevalence of land contracts, as many contract buyers do not understand the nature of their transaction sufficiently to report it.

Evidence suggests that land contracts are making a resurgence in the wake of the foreclosure crisis. An investigative report by the Star Tribune found that land contract sales in the Twin Cities had increased 50% from 2007 to 2013. Recent reports from The New York Times and Bloomberg reveal growing interest from private equity-backed investors in using land contracts to turn a profit on the glut of foreclosed homes in blighted cities around the country.

Few states have laws addressing the problems with land installment contracts, and the state laws on the books are generally insufficient to protect consumers. The Consumer Financial Protection Bureau (CFPB) has the mandate to regulate and prevent unfair and deceptive practices in the consumer mortgage marketplace, but has not yet used this authority to address the problems with land installment contracts. (1-2, footnotes omitted)

This report shines light on this disturbing development in the housing market and describes the history of predatory land contracts in communities of color since the 1930s. It also shows how their use was abetted by credit discrimination: communities of color were redlined by mainstream lenders who were following policies set by the Federal Housing Administration and other government agencies.

The report describes how these contracts give the illusion of home ownership:

  • They are structured to fail so that the seller can resell the property to another unsuspecting buyer.
  • They shift the burden of major repairs to the buyer, without exposing the seller to claims that the homes breach the warranty of habitability that a landlord could face from a tenant.
  • They often have purchase prices that are far in excess of comparable properties on the regular home purchase market, a fact that is often masked by the way that land contract payments are structured.
  • The properties often have title problems, like unsatisfied mortgages, that would not have passed muster in a traditional sale of a house.
  • They often are structured to avoid consumer protection statutes that had been enacted in response to previous problems with land contracts.

The report identifies Wall Street firms, like Apollo Global Management, that are funding these businesses. It also proposes a variety of regulatory fixes, not least of which is to have the CFPB take an active role in this shadowy corner of the housing market.

This is all to the good, but I really have to wonder if we are stuck just treating the symptoms of income and wealth inequality. Just as it is hard to imagine how we could regulate ourselves out of the problems faced by tenants that were described in Matthew Desmond’s Evicted, it is hard to imagine that we can easily rid low-income communities of bottom feeders who prey on dreams of homeownership with one scheme or another. It is good, of course, that the National Consumer Law Center is working on this issue, but perhaps we all need to reach for bigger solutions at the same time that we try to stamp out this type of abusive behavior.