Tag Archives: consumer protection

Underwriting Sustainable Homeownership

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Mesa-Mesa Journal-Tribune FHA Demonstration Home-1925" by Marine 69-71

I have posted Underwriting Sustainable Homeownership: The Federal Housing Administration and the Low Down Payment Loan to SSRN (and to BePress). It is forthcoming in the Georgia Law Review. The abstract reads,

The United States Federal Housing Administration (“FHA”) has been a versatile tool of government since it was created during the Great Depression. The FHA was created in large part to inject liquidity into a moribund mortgage market. It succeeded wonderfully, with rapid growth during the late 1930s. The federal government repositioned it a number of times over the following decades to achieve a variety of additional social goals. These goals included supporting civilian mobilization during World War II; helping veterans returning from the War; stabilizing urban housing markets during the 1960s; and expanding minority homeownership rates during the 1990s. It achieved success with some of its goals and had a terrible record with others. More recently, the FHA is in the worst financial shape it has ever been in.

Today’s FHA suffers from many of the same unrealistic underwriting assumptions that have done in so many other lenders during the 2000s. It has also been harmed, like other lenders, by a housing market as bad as any seen since the Great Depression. As a result, the federal government recently announced the first bailout of the FHA in its history. At the same time that it has faced these financial challenges, the FHA has also come under attack for the poor execution of some of its policies to expand homeownership. Leading commentators have called for the federal government to stop using the FHA to do anything other than provide liquidity to the low end of the mortgage market. These critics rely on a couple of examples of programs that were clearly failures but they do not address the FHA’s long history of undertaking comparable initiatives. This article takes the long view and demonstrates that the FHA has a history of successfully undertaking new homeownership programs. At the same time, the article identifies flaws in the FHA model that should be addressed in order to prevent them from occurring if the FHA were to undertake similar initiatives in the future.

In order to demonstrate this, the article first sets forth the dominant critique of the FHA. Relying on often overlooked primary sources, it then sets forth a history of the FHA and charts its constantly changing roles in the housing finance sector. In order to give a more detailed picture of the federal government’s role in housing finance, the article also incorporates the scholarly literature regarding (i) the intersection of race and housing policy and (ii) the economics and finance literature regarding the role that down payments play in the appropriate underwriting of mortgages for low- and moderate-income households. The article concludes that the FHA can responsibly address objectives other than the provision of liquidity to the residential mortgage market. It further proposes that FHA homeownership programs for low- and moderate-income families should be required to balance access to credit with households’ ability to make their mortgage payments over the long term. Such a proposal will ensure that the FHA extends credit responsibly to low- and moderate-income households while minimizing the likelihood of future bailouts.

Shaking up the Title Industry

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The United States Court of Appeals for the 9th Circuit issued an opinion in Edwards v. The First American Corporation et al., No. 13-555542 (Aug. 24, 2015) that may shake up how the title insurance industry works. As the court notes,

The national title insurance industry is highly concentrated, with most states dominated by two or three large title insurance companies. See U.S. Gov’t Accountability Office, Title Insurance: Actions Needed to Improve Oversight of the Title Industry and Better Protect Consumers 3 (Apr. 2007). A “factor that raises questions about the existence of price competition is that title agents market to those from whom they get consumer referrals, and not to consumers themselves, creating potential conflicts of interest where the referrals could be made in the best interest of the referrer and not the consumer.” Id. Kickbacks paid by the title insurance companies to those making referrals lead to higher costs of real estate settlement services, which are passed on to consumers without any corresponding benefits. (9)

The Real Estate Settlement Procedures Act (RESPA) is intended to eliminate illegal kickbacks in the real estate industry. In this case, the 9th Circuit has reversed the District Court’s denial of class certification in a case in which home buyers alleged that First American engaged in a scheme of paying title agencies for referring title insurance business to First American in violation of RESPA. The reversal does not get to the merits of the underlying claims, but it does open up a can of worms for title companies.

The title industry is not only highly concentrated but it is also highly profitable. In some jurisdictions like NY its prices are set by regulation at rates that greatly exceed the actuarial risks they face. Regulators like the NYS Department of Financial Services have begun to pay more attention to the title insurance industry. This is a welcome development, given that title insurance is one of the most expensive closing costs a homeowner faces when buying a home or refinancing a mortgage.

Dodd-Frank and Mortgage Reform at Five

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The Department of Treasury has issued a report, Dodd-Frank at Five Years: Reforming Wall Street and Protecting Main Street. The report is clearly a political document, trumpeting the achievements of the Obama Administration. It is interesting nonetheless. It opens,

When President Obama took office in January 2009, the U.S. economy was in crisis. The nation was shedding more than 750,000 jobs per month, and confidence in our financial system had been shaken to its core. The worst financial crisis since the Great Depression exposed a toxic mix of excessive risk-taking, shoddy lending practices, inadequate capital levels, unstable funding, and weaknesses in regulatory oversight. A collapsing financial system choked off credit to consumers seeking to purchase a car, a home, groceries, or to finance an education. Nearly 9 million Americans lost their jobs, and over 5 million lost their homes. Nearly $13 trillion of families’ wealth was destroyed, wiping out almost two decades of gains.

In response to the crisis, the Administration released a proposed set of reforms in June 2009. Congress held numerous hearings and crafted legislation based on the Administration’s proposal, incorporating ideas from both Republicans and Democrats throughout the process. On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law, a historic and comprehensive set of financial reforms, which put in place critical new protections for consumers, investors, and taxpayers. Five years later—as a result of Dodd-Frank and other Wall Street reforms—our financial system is stronger, safer, more resilient, and more supportive of sustainable economic growth. Regulators also have better tools to deal with financial shocks when they occur, to protect Main Street and taxpayers from Wall Street recklessness.

Critics of reform have claimed that Wall Street Reform would deter lending and choke off the recovery. But, today it is clear that the opposite is true. Reform has served as a building block for economic growth, providing Americans with safe places to invest their savings and enabling banks to lend to individuals, businesses, and communities. Only a financial system strong enough to withstand a major financial shock is capable of promoting sustainable economic growth. Five years after the President signed Wall Street Reform into law, nearly all of the major elements of financial reform are in place. Today, our financial system is safer and stronger as a result of these hard-won reforms, and our economy is in a far better position to continue growing and creating jobs. (1)

I was struck by the fact that the report does not address the biggest financial reform failure of the last five years, the lack of reform of the housing finance system.  Fannie and Freddie remain in conservatorship, putting the housing finance system at risk of another crisis.

I was also struck by the following passage:

In the run-up to the financial crisis, abusive lending practices and unclear underwriting standards resulted in risky mortgages which hurt consumers and ultimately threatened financial stability. Wall Street Reform bans many of the abusive practices in mortgage markets that helped cause the crisis, and requires lenders to determine that borrowers can repay their loans. (2)

My recollection from academic conferences over the course of the last six or seven years is that many leading academics denied the link between abusive lending practices and systemic risk. It seemed pretty clear to me, but I was in the minority on that one. I am glad to see that at least the Treasury agrees with me.

The Road to Rent-To-Own

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Rent To Own Sign

TheStreet.com quoted me in Rent-to-Own Homes Can Be a Risky Option for Buyers. It opens,

Instead of shelling out thousands of dollars to rent a home each month, some landlords give their tenants the option to buy the home while they are leasing it — using the rent they’ve paid as a credit toward their mortgage downpayment.

But while rent-to-own options appear like a winning proposition for potential homeowners who have not been able to save up enough money for a down payment or lack a good credit score, these deals can be fraught with many setbacks.

Each state is governed by different laws, and some of them protect homeowners in case they fall behind on payments, said David Reiss, a law professor at Brooklyn Law School. This is a crucial point that needs to be addressed with a lawyer before the contract is signed, because a consumer could end up “losing everything” that he had paid toward the house if he loses his job, Reiss added.

“Rent-to-own transactions can be very complicated and there are fewer consumer protections available, so interested buyers should beware,” he said. “There are a lot of shady operators out there.”

CFPB Roundup

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The Consumer Financial Protection Bureau released its Semi-Annual Report. From a news perspective, it is a snoozer — dog bites man — as it is really just a summary of what the Bureau has done (and already issued press releases about) over the last year. That being said, it is a great compendium of the CFPB’s actions for those who are looking to sketch the forest after six months of peering at the trees. I note a few interesting aspects of the report.

Director Cordray writes that “our supervisory actions resulted in financial institutions providing more than $114 million in redress to over 700,000 consumers.” (2) In this era of billion dollar settlements, this amount seem relatively small. In fact, “$114 million in redress to over 700,000 consumers” comes out to just $163 per affected consumer. I am not sure exactly what that means, but $163 per consumer does not sound as impressive as $114 million. It would be helpful to have had more detail about those supervisory actions. This is not to say that big settlements are a good unto themselves, but it would be helpful to know whether the punishment fit the crime.

I also found the appendices to be particularly interesting, at least for CFPB geeks:

  • Appendix B contains a list of all of the CFPB’s reporting requirements
  • Appendix C lists all of the significant rules, orders and initiatives adopted by the Bureau in the past year
  • Appendix D lists the consent orders the Bureau has entered into with certain regulated entities
  • Appendix E lists significant state attorney general and regulatory actions
  • Appendix F lists CFPB reports from the past year
  • Appendix G lists Congressional testimony given by CFPB officials over the past year
  • Appendix H lists speeches given by Director Cordray and Deputy Director Antonakes over the past year.

All in all, the report is a thorough review of the state of the CFPB. Enjoy!

What Is To Be Done with Mortgage Servicers?

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The Office of the Comptroller of the Currency has found that EverBank; HSBC Bank USA, N.A.; JPMorgan Chase Bank, N.A.; Santander Bank, National Association; U.S. Bank National Association; and Wells Fargo Bank, N.A. have not met all of the requirements of consent orders they had entered into because of deficiencies in how they dealt with foreclosure servicing. The details of these deficiencies are pretty bad.

The OCC recently issued amended consent orders with these banks. The amended orders restrict certain business activities that they conduct. The restrictions include limitations on:

  • acquisition of residential mortgage servicing or residential mortgage servicing rights (does not apply to servicing associated with new originations or refinancings by the banks or contracts for new originations by the banks);
  • new contracts for the bank to perform residential mortgage servicing for other parties;
  • outsourcing or sub-servicing of new residential mortgage servicing activities to other parties;
  • off-shoring new residential mortgage servicing activities; and
  • new appointments of senior officers responsible for residential mortgage servicing or residential mortgage servicing risk management and compliance.

HSBC had the most deficiencies of the six:  it did not make 45 of the 98 changes it had agreed to over the last few years. I was particularly interested in the portion of the consent orders that relate to MERS. The HSBC consent order states:

(1) The Bank shall implement its Revised Action Plan and ensure appropriate controls and oversight of the Bank’s activities with respect to the Mortgage Electronic Registration System (“MERS”) and compliance with MERSCORPS’s membership rules, terms, and conditions (“MERS Requirements”), include, at a minimum:

(a) processes to ensure that all mortgage assignments and endorsements with respect to mortgage loans serviced or owned by the Bank out of MERS’ name are executed only by a certifying officer authorized by MERS and approved by the Bank;

(b) processes to ensure that all other actions that may be taken by MERS certifying officers (with respect to mortgage loans serviced or owned by the Bank) are executed by a certifying officer authorized by MERS and approved by the Bank;

(c) processes to ensure that the Bank maintains up-to-date corporate resolutions from MERS for all Bank employees and third-parties who are certifying officers authorized by MERS, and up-to-date lists of MERS certifying officers;

(d) processes to ensure compliance with all MERS Requirements and with the requirements of the MERS Corporate Resolution Management System (“CRMS”);

(e) processes to ensure the accuracy and reliability of data reported to MERSCORP and MERS, including monthly system-to-system reconciliations for all MERS mandatory reporting fields, and daily capture of all rejects/warnings reports associated with registrations, transfers, and status updates on open-item aging reports. Unresolved items must be maintained on open-item aging reports and tracked until resolution. The Bank shall determine and report whether the foreclosures for loans serviced by the Bank that are currently pending in MERS’ name are accurate and how many are listed in error, and describe how and by when the data on the MERSCORP system will be corrected; and

(f) an appropriate MERS quality assurance workplan, which clearly describes all tests, test frequency, sampling methods, responsible parties, and the expected process for open- item follow-up, and includes an annual independent test of the control structure of the system-to- system reconciliation process, the reject/warning error correction process, and adherence to the Bank’s MERS Plan.

(2) The Bank shall include MERS and MERSCORP in its third-party vendor management process, which shall include a detailed analysis of potential vulnerabilities, including information security, business continuity, and vendor viability assessments.

These should all be easy enough for a financial institution to achieve as they relate to basic corporate practices (e.g., properly certifying officers); basic data management practices (e.g., system-to-system reconciliations); and basic third-party vendor practices (e.g., analyzing potential vulnerabilities of vendors).

It is hard to imagine why these well-funded and well-staffed enterprises are having such a hard time fixing their servicing operations. We often talk about governments as being too poorly run to handle reform of complex operations, but it appears that large banks face the same kinds of problems.

I am not sure what the takeaway is in terms of reform, but it does seem that homeowners need protection from companies that can’t reform themselves while they are under stringent consent orders with their primary regulator for years and years.

Reiss on Lawsky Legacy

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Law360 quoted me in Lawsky’s Aggressive Tactics Provided Model For Regulators (behind a paywall). It reads, in part,

New York Superintendent of Financial Services Benjamin Lawsky’s frequent, aggressive and often creative enforcement actions generated billions of dollars for the state and put his agency at the forefront in financial services regulation, and observers expect a similar approach from Lawsky’s successor when he leaves his post next month.

Confirmed to lead the New York Department of Financial Services in May 2011, few expected the new agency, which combined the state’s banking and insurance regulators, to make much of a mark. But after collecting $3.3 billion in penalties and forcing several traders and top executives out of their positions, Lawsky’s agency has proven to be a powerful enforcer.

“His biggest legacy is simply that he stood up a brand new regulator in one of the global financial centers and made it matter almost immediately,” said Matthew L. Schwartz, a partner at Boies Schiller & Flexner LLP and a former federal prosecutor. Lawsky, who announced his departure from the agency on May 20, established a name for himself and for the Department of Financial Services when he jumped ahead of federal banking regulators and prosecutors in announcing a $340 million settlement with British bank Standard Chartered PLC over its alleged violation of U.S. sanctions against Iran and other countries in August 2012.

That a newly formed state regulatory agency would move ahead with a stiff penalty and threaten to wield the most powerful of weapons — the pulling of Standard Chartered’s license to operate in New York state — reportedly rankled his federal counterparts

*     *      *

“He made clear that consumer protection is integral to the mission of the agency,” Brooklyn Law School professor David Reiss said.

Despite Lawsky’s frequent reminders that he works for New York Gov. Andrew Cuomo — for whom he has also served as chief of staff — and the superintendent’s constant praise for his staff, there is fear among some reformers that the DFS won’t be the same without Lawsky at the helm.

“Lawsky proves that the character of individual regulators can make a crucial difference more than the letter of the law itself,” said Bartlett Naylor of Public Citizen.

“Ideally, he’ll inspire his successor and other regulators that honor awaits the vigilant and opprobrium will fall upon the indolent. More practically, however, the problems of regulatory capture by an enormously influential industry reliant on government favor can prove overwhelming,” Naylor added.

Others are more confident that the agency Lawsky set up will continue its work even after his move to the private sector.

In part, that’s because the penalties the DFS has wracked up have been a boon to New York’s budget.

Cuomo, the state’s former attorney general, has an interest in many of the issues Lawsky acted on, as well.

“I have every reason to expect that Cuomo would want to have a very vigorous enforcer to replace Lawsky,” Reiss said.