Tag Archives: Consumer Financial Protection Bureau

Violations of Law and Consumer Harm

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The Federal Financial Institutions Examination Council (FFIEC) issued a notice and request for comment regarding the Uniform Interagency Consumer Compliance Rating System (CC Rating System). My comment letter reads as follows:

The Federal Financial Institutions Examination Council (FFIEC) issued a notice and request for comment regarding the Uniform Interagency Consumer Compliance Rating System (CC Rating System). The FFIEC is seeking to revise the CC Rating System “to reflect the regulatory, examination (supervisory), technological, and market changes that have occurred in the years since the current rating system was established.”  81 F.R. 26553.  It is a positive development that the federal government is seeking to implement a consistent approach to consumer protection across a broad swath of the financial services industry.  Nonetheless, the proposed CC Ratings System can be refined to further improve consumer protection in the financial services industry.

One of the CC Rating System’s categories is Violations of Law and Consumer Harm.  The request for comment notes that over the last few decades, the financial services industry has become more complex, and the broad array of risks in the market that can cause consumer harm has become increasingly clear.  Violations of various laws – including the Fair Housing Act and other fair lending laws, for example – may cause significant consumer harm that should raise supervisory concerns.  Recognizing this broad array of risks, the proposed revisions directs examiners to consider all violations of consumer laws based on the root cause, severity, duration, and pervasiveness.  This approach emphasizes the importance of various consumer protection laws, and is intended to reflect the broader array of risks and potential harm caused by consumer protection violations.  81 F.R. 26556.

This is all to the good.  Prior to the Subprime Crisis, a big part of the problem was that financial services companies used regulatory arbitrage to avoid scrutiny.  Lots of mortgage lending migrated to nonbanks that did not need to worry about unwanted attention from the regulators that scrutinized banks and other heavily regulated mortgage lenders.  (To be clear, Alan Greenspan and other federal regulators did not do a good job of scrutinizing the banks. But let’s leave that for another day.)  With the CFPB now regulating many nonbanks and with an updated CC Rating System in place, we should expect that regulatory arbitrage will decrease in the face of this coordinated regulatory action.

I would note, however, an ambiguity in the “Violations of Law and Consumer Harm” category, an ambiguity that should be cleared up in favor of additional consumer protections.  The category title, “Violations of Law and Consumer Harm,” implies that there are some types of consumer harm that are distinct from violations of law and that is obviously true. The discussion of the category emphasizes this by stating that it encompasses “the broad range of violations of consumer protection laws and evidence of consumer harm.” 81 F.R. 26556 (emphasis added).  And the text of the guidance itself states this as well, indicating that the category’s assessment factors “evaluate the dimensions of any identified violation or consumer harm.”  81 F.R. 26558 (emphasis added).

But the remainder of the discussion of this category only focuses on violations of law and pays little attention to “the broad array of risks in the market that can cause consumer harm” that are not also violations of law.  81 F.R. 26556.  Indeed, the four assessment factors for this category are all premises on causes of identified “violations of law.”  This is a significant failing for the CC Rating System because of the many types of consumer harm that are not clear violations of law.  As proposed, the “Violations of Law and Consumer Harm” category appears to be as much about protecting the bank from legal liability from lawsuits brought on behalf of consumers as it is about addressing the legitimate interests of the consumers of financial services.

As we sort out the after-effects of the Subprime Crisis, we have seen many situations where there was no clear violation of law but homeowners suffered from outrageous industry practices.  For instance, many borrowers are suffering needlessly at the hands of their mortgage servicers.  Some servicers are under-resourced, intentionally or not, and continue to treat their borrowers with a maddening disregard.  In some cases, this outrageous behavior does not amount to a clear violation of law, but is behavior that reflects most badly on the parties engaged in it.  The CC Rating System should both acknowledge this type of harm and address it to maximize the benefits that can flow from this forthcoming revision to it.

Dems Favor Land Use Reform

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photo by DonkeyHotey

The Democratic Party has released its draft 2016 Policy Platform. Its housing platform follows in its entirety. I find the highlighted clause particularly intriguing and discuss it below.

Where Donald Trump rooted for the housing crisis, Democrats will continue to fight for those families who suffered the loss of their homes. We will help those who are working toward a path of financial stability and will put sustainable home ownership into the reach of more families. Democrats will also combat the affordable housing crisis and skyrocketing rents in many parts of the country that are leading too many families and workers to be pushed out of communities where they work.

We will increase the supply of affordable rental housing by expanding incentives and easing local barriers to building new affordable rental housing developments in areas of economic opportunity. We will substantially increase funding for the National Housing Trust Fund to construct, preserve, and rehabilitate millions of affordable housing rental units. Not only will this help address the affordable housing crisis, it will also create millions of good-paying jobs in the process. Democrats also believe that we should provide more federal resources to the people struggling most with unaffordable housing: low-income families, people with disabilities, veterans, and the elderly.

We will reinvigorate federal housing production programs, increase resources to repair public housing, and increase funding for the housing choice voucher program. And we will fight for sufficient funding to end chronic homelessness.

We must make sure that everyone has a fair shot at homeownership. We will lift up more families and keep the housing market robust and inclusive by defending and strengthening the Fair Housing Act. We will also support first time homebuyers, implement credit score reform to make the credit industry work for borrowers and not just lenders, and prevent predatory lending by defending the Consumer Financial Protection Bureau (CFPB). And we will help underwater homeowners by expanding foreclosure mitigation counseling. (4-5, emphasis added)

Much of the housing platform represents a continuation of Democratic policies, such as increased funding for affordable housing, improved enforcement of the Fair Housing Act and expanded access to counseling for distressed homeowners.

But the highlighted clause seems to represent a new direction for the Democratic Party: an acknowledgement that local land use decisions in areas of economic opportunity (read: the Northeast, the Bay Area and similar dynamic regions) are having a negative impact on low- and moderate-income households who are priced out of the housing markets because demand far outstrips supply.

This is a significant development in federal housing policy, flowing from work done by Edward Glaeser and Joseph Gyourko, among others, who have demonstrated the out-sized effect that the innumerable land use decisions made by local governments have had on the availability of affordable housing regionally and nationally.

There is a lot of ambiguity in the phrase “easing local barriers to building new affordable rental housing developments,” but the federal government has a lot of policy tools available to it to do just that. If Democrats are able to implement this aspect of the party platform, it could have a very positive impact on the prospects of households that are priced out of the regions where all the new jobs are being created.

What Are Mortgage Borrowers Thinking?

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photo by Robert Huffstutter

Freud’s Sofa

The Consumer Financial Protection Bureau (CFPB) and the Federal Housing Finance Agency (FHFA) have released A Profile of 2013 Mortgage Borrowers: Statistics from the National Survey of Mortgage Originations. While sounding dull and perhaps a bit dated, this document is actually an extraordinary overview of the much discussed but rarely seen mortgage borrower. And while the information is from 2013, it provides a good baseline for the post-financial crisis and post-Dodd Frank world we live in.

Historically, it has been difficult for government and academic researchers to get comprehensive data about mortgage borrowers. The impetus for this report was the Housing and Economic Recover Act of 2008 which requires the FHFA to conduct a monthly mortgage market survey. In the long term, this survey will help policymakers respond to the rapid changes that are so common in our dynamic mortgage market.

The National Survey of Mortgage Originations (NMSO) focuses on

mortgage shopping behavior, mortgage closing experiences, and other information that cannot be obtained from any other source, such as expectations regarding house price appreciation, critical household financial events, and life events such as unemployment, large medical expenses, or divorce. In general, borrowers are not asked to provide information about mortgage terms in the questionnaire since these fields are available [from other sources]. (1)

Here are some of the findings that I found interesting, albeit not always surprising:

  • Mortgage shopping behavior differed significantly by borrower characteristics and by whether the consumer was also shopping for a home at the same time as the mortgage. (14)
  • First-time home buyers differed significantly from repeat home buyers in their mortgage search behavior and repeat borrowers differed significantly in their mortgage search behavior depending on whether they were refinancing or purchasing a home. (14)
  • Slightly more than 40 percent of all respondents reported having a difficult time explaining the difference between a prime and a subprime loan. (16)
  • Overall about one- quarter of borrowers reported that they could not explain amortization or the difference between the interest rate and APR on a loan.(18)
  • Roughly one in five borrowers had to delay their closing date. (26)
  • In general, respondents believe that mortgage lenders treat borrowers well. (35)
  • Fifteen percent of respondents expected to have difficulties in making their mortgage payments in the next couple of years. (44)

There are a lot more interesting nuggets about the subjective views of borrowers in the report. I hope that later reports offer more analysis that ties this information into other objective sources of data about borrowers and their mortgages. How well do they know themselves and how good are they at predicting their ability to maintain their mortgages over the long-term?

Consumer Protection’s Holy Grail

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The Round Table experiences a vision of the Holy Grail by Évrard d'Espinques

The Federal Financial Institutions Examination Council (FFIEC) has issued a notice and request for comment regarding the Uniform Interagency Consumer Compliance Rating System (the CC Rating System). The FFIEC’s six members represent the Federal Reserve Board, Federal Deposit Insurance Corporation, National Credit Union Administration, Office of the Comptroller of the Currency, State Liaison Committee and Consumer Financial Protection Bureau. This veritable roundtable of regulators is seeking to revise the CC Rating System “to reflect the regulatory, examination (supervisory), technological, and market changes that have occurred in the years since the current rating system was established.” (81 F.R. 26553)

I know, I know, this is a deeply technical issued and you are wondering why I am writing about it for a somewhat general audience. The answer is that I think this is a good thing for people to know about: the federal government is seeking to implement a consistent approach to consumer protection across a broad swath of the financial services industry.

One of the CC Rating System’s categories is Violations of Law and Consumer Harm. The request for comment notes that over the last few decades, the financial services

industry has become more complex, and the broad array of risks in the market that can cause consumer harm has become increasingly clear. Violations of various laws, including, for example, the Servicemembers Civil Relief Act 5 and Section 5 of the Federal Trade Commission Act, as well as fair lending violations, may potentially cause significant consumer harm and raise serious supervisory concerns. Recognizing this broad array of risks, the proposed guidance directs examiners to consider all violations of consumer laws, based on the root cause, severity, duration, and pervasiveness of the violation. This approach emphasizes the importance of a range of consumer protection laws and is intended to reflect the broader array of risks and the potential harm caused by consumer protection related violations. (81 F.R. 26556)

This is all to the good. A big part of the problem the last time around (pre-Subprime Crisis) was that financial services companies used regulatory arbitrage to avoid scrutiny. Lots of mortgage lending migrated to nonbanks. Nonbanks did not need to worry about unwanted attention from the regulators that scrutinized banks and other heavily regulated mortgage lenders. (To be clear, Alan Greenspan and other regulators did not do a good job of scrutinizing the banks. But let’s leave that for another post.) With the CFPB now regulating nonbanks and with this coordinated approach to consumer protection, we should expect that regulatory arbitrage will decrease.

If successful, this would amount to a regulatory equivalent of finding the Holy Grail.  So, while this is a technical issue, it is something to feel good about.

Comments due July 4th, so get crackin’!

Arbitration and the Common Man

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photo by Eric Koch

Arthur Miller

Arthur Miller, the playwright who brought us Death of A Salesman, wrote an essay titled Tragedy and The Common Man. It opens,

In this age few tragedies are written. It has often been held that the lack is due to a paucity of heroes among us, or else that modern man has had the blood drawn out of his organs of belief by the skepticism of science, and the heroic attack on life cannot feed on an attitude of reserve and circumspection. For one reason or another, we are often held to be below tragedy-or tragedy above us. The inevitable conclusion is, of course, that the tragic mode is archaic, fit only for the very highly placed, the kings or the kingly, and where this admission is not made in so many words it is most often implied.

When I read the financial services industry’s critique of the CFPB’s proposed rule regarding Arbitration Agreements, it sounds like they believe that litigation, like tragedy “is archaic, fit only for the very highly placed, the kings or the kingly . . .”

The U.S. Chamber of Commerce has criticized the CFPB for proposing this rule because it will, according to them,

cause significant harm to the very consumers it is supposed to protect. The regulation will effectively eliminate the ability of consumers to use arbitration to seek redress for allegedly improper late fees, overdraft fees, or other small individualized claims that they cannot otherwise resolve with their financial service companies’ customer service departments. A “solution” in search of a problem, the bureau’s rule would replace arbitration — a consumer friendly system that is fast, convenient, and inexpensive — with America’s broken class action system. That’s great for class action plaintiffs’ attorneys but a bad deal for consumers.

It sounds to me like the Chamber believes that the consumer is below litigation-or litigation is above them and should be reserved for the kingly alone.

The fact remains, however, that the Chamber has pushed for mandatory arbitration because it is good for the large corporations who count themselves among its members.  And, in fact, the proposed rule would not eliminate the “ability of consumers to use arbitration;” rather, it would prohibit financial services corporations from using arbitration agreements “to bar the consumer from filing or participating in a class action . . .” (Proposed Rule at 1)

You can be sure that the financial services industry will be commenting broadly and deeply on this rule. Those who care about consumer protection from a policy perspective should be sure to put in their two cents too.  Comments are due in early August. so get crackin’.

TRID Trials

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compliance definition

The Consumer Financial Protection Bureau issued the TILA-RESPA Integrated Disclosure (TRID) Rule which went into effect more than six months ago. The TRID Rule were designed to enhance consumer protections in the mortgage application process.  The mortgage industry has been very concerned about its ability to comply with the rule and has also highlighted the fact that borrowers now face longer waits to close as a result of the new regulatory regime. Many in the industry are calling for changes to TRID, but they are not yet in the offing. As far as I can tell, the main problems with TRID are just transition issues as the massive mortgage industry has to change in many ways, large and small, to comply with the new regime.

Kroll Bond Rating Agency has issued an RMBS Commentary which expects TRID to have only a limited impact on residential mortgage-backed securities enhancement levels. Kroll seems to be taking a reasonable position regarding the industry’s failure to consistently comply with the TRID Rule.

The commentary provides some useful information to those who follow TRID developments. Kroll believes that it “is possible many TRID-Eligible Loans originated in the near term will contain at least one technical error under TRID. Such violations, even if corrected in good faith, may carry assignee liability.” (1) At the same time, Kroll “believes the potential assignee liability stemming from TRID violations is both limited and quantifiable.” (1) It is worth contrasting this measured assessment with the histrionics that the credit rating industry displayed with the assignee liability provisions of many of the state anti-predatory lending laws that were enacted in the early 2000s.

Kroll does draw a distinction between the many TRID errors that are cropping up during this transition time and those that might occur over and over again without correction. The latter, of course, could be a magnet for class actions. That seems to me like a good outcome, particularly where the lender has been made aware of the violations by third parties.

While the mortgage industry has reasonably requested clarification of some aspects of the TRID Rule, the industry itself should be seeking to modernize and automate its processes to address not only TRID-induced changes but also the industry’s 20th century mindset. The modern mortgage closing is far from a paragon of technological efficiency.