- CFPB releases report of KPMG audit of its operations and budget. In the report, CFPB agrees with KPMG’s findings about control deficiencies and is aiming to fix such deficiencies.
- FHFA releases report on progress of Fannie/Freddie Conservatorships in advancing access to credit and loss mitigation/foreclosure prevention, among other improvements.
- Report from NYC Department of Investigation raises concerns for health and safety of those in homeless shelters.
- Report from the National Low Income Housing Coalition (NLIHC) claims: “Affordable Housing is Nowhere to be Found for Millions.
Tag Archives: Consumer Financial Protection Bureau
CFPB Mortgage Supervision Highlights
The Consumer Financial Protection Bureau issued its Supervisory Highlights for Winter 2015. The highlights include a section on Mortgage Origination and “largely focuses on Supervision’s examination findings and observations from July 2014 to December 2014.” (9)
The headings of this section give a sense of the CFPB’s work in this area:
- Loan originators cannot receive compensation based on a term of a transaction
- Improper use of lender credit absent changed circumstances
- Failing to provide the Good Faith Estimate in a timely manner
- Improperly using advertisements with triggering terms without the required additional disclosures
- Adverse action notice deficiencies and failure to provide the notice in a timely manner
- Deficiencies in compliance management systems
For good or for ill, these are pretty modest examination findings. They certainly don’t reveal the fire-breathing regulator that some had prophesied. I was particularly interested in the last finding:
an effective compliance management system includes board and management oversight, a compliance program, a consumer complaint management program, and a compliance audit program. The board of directors and senior management should, among other things, adopt clear policy statements concerning consumer compliance, establish a compliance function to set policies and procedures, and assign resources to the compliance function commensurate with the size and complexity of the supervised entity’s practices and operations. A compliance program should include policies and procedures, training, and monitoring and corrective action processes. A compliance audit program should assist the board of directors or board committees in determining whether policies and standards adopted by the board are being implemented, and should also identify any significant gaps in board policies and standards. (13)
Compliance management systems are intended to create a culture of compliance within an organization, from top to bottom. The CFPB found that one or more financial institutions had weak compliance management systems that would allow for numerous violations of federal regulations governing mortgage lending. It is important for the CFPB to focus on these compliance issues now, before the mortgage market really froths up and carries mortgage professionals away from appropriate underwriting and servicing.
Arbitration and The Common Mortgage
The Consumer Financial Protection Bureau posted its Arbitration Study. This is a report to Congress that was required by Dodd-Frank. By way of background, the study states that
Companies provide almost all consumer financial products and services subject to the terms of a written contract. Whenever a consumer obtains a consumer financial product such as a credit card, a checking account, or a payday loan, he or she typically receives the company’s standard form, written legal contract.
* * *
As a general rule, the parties to a dispute can agree, after the dispute arises, to submit the dispute for resolution to a forum other than a court — for example, to submit a particular dispute that has arisen to resolution by an arbitrator. (3)
Arbitration provisions typically do not directly apply to residential mortgages because Dodd-Frank “prohibited the use of ‘arbitration or any other nonjudicial procedure’ for resolving disputes arising from residential mortgage loans or extensions of credit under an open-end consumer credit plan secured by the principal dwelling of the consumer. 15 U.S.C. § 1639c.” (Arbitration Study § 5.4, n.34) But they can apply in mortgage-related contracts, such as those for title insurance, mortgage insurance and forced-place flood insurance. (§ 8.3, n.24 & Appendix S, § 8)
The Study thus holds some interest for those of us interested housing finance. The Executive Summary (§ 1.4) provides an overview of the CFPB’s research findings about arbitrations and other proceedings.
My overall impression after having reviewed the report is that consumers do not often raise claims against consumer finance companies in any forum, whether with an arbitrator or with a judge. The Study does not provide any information that would allow one to conclude what the socially optimal level of formalized disputes would be. It would be helpful for the CFPB to try to model that.
Countercyclical Regulation of Housing Finance
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
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.
Friday’s Government Report Roundup
- CRS Report, ‘Community Development Financial Institutions (CDFI): Programs and Policy Issues’, by Sean Lowry. (Need Bloomberg BNA Subscription)
- Consumers’ mortgage shopping experience, by CFPB.
- HUD Subsidized More Than 106,000 Noncompliant Households. (Discussing HUD’s large-scale failure in oversight of requirement that persons living in subsidized housing perform eight hours of community service per month, or enroll in job training).
Realistic Strategies for Consumer Education
The Consumer Financial Protection Bureau has issued its latest Strategic Plan, Budget, and Performance Plan and Report. I was critical of last year’s strategic plan as it related to financial education. I felt that the CFPB was too optimistic about the efficacy of financial education, given the current state of research on this topic.
I was impressed, however, by the CFPB’s approach in this year’s strategic plan:
The CFPB believes that financial education’s primary goal is to help consumers to take the steps necessary to make choices that will improve their financial well-being and help them reach their own life goals. However, prior to the start of the CFPB’s work, very little empirical research had been conducted in the financial education field regarding what variables measure financial health in terms of real-world outcomes for consumers. By defining these variables through data-driven research, the Bureau will be able to define what knowledge and skills are associated with financial health. This research will inform the Bureau’s ongoing efforts to identify, highlight, and spread effective approaches to financial education. (64)
I am pleased that the CFPB appears to be more skeptical about the efficacy of consumer education in this strategic plan and that is reflected in its performance measure:
FY 2013: Identify variables that are likely to be key drivers of financial health
FY 2014: Develop and test metrics (questions) that accurately measure these variables
FY2015: Develop and implement framework for integration into Consumer Education and Engagement Activities; Complete testing financial health metrics
FY2016: Use metrics to establish a baseline of U.S. consumer financial well-being and begin testing hypotheses of identified success factors in consumer financial decision-making (64-65)
This performance measure does not make assumptions about the efficacy of financial education. By treating the topic like a blank slate, it is more likely that the Bureau will be able to avoid dead ends and blind alleys as it attempts to help people to navigate the world of consumer finance.
This is not to say that the Bureau will necessarily be successful. But it does appear that the Bureau is not falling for some of the wishful thinking that some of those in the financial education field have succumbed to.
