Tag Archives: consumer protection

Court Decides that Lower Court Was Correct in Granting Summary Judgment in Favor of Bank of America and ReconTrust on FDCPA Claims

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The court in deciding Brown v. Bank of Am., N.A. (In re Brown), 2013 Bankr. (B.A.P. 9th Cir., 2013) affirmed the lower court’s holding.

The plaintiff in this case alleged alleged that BAC and ReconTrust violated the CPA by promulgating, recording, and relying on documents they should have known were false, in particular: the MERS’ assignment, the successor trustee appointment, and the notice of default. Plaintiffs also alleged that ReconTrust’s issuance and use of the notice of default violated the FDCPA and that ReconTrust’s attempts to dispossess the debtor of her property constituted malicious prosecution.

As to the claim for wrongful foreclosure, the plaintiffs alleged that the defendants violated the Washington Deed of Trust Act when they designated MERS as a beneficiary in the trust deed and MERS subsequently executed the MERS Assignment.

The plaintiffs contended that BAC’s authority to execute the successor trustee appointment and ReconTrust’s authority to execute the Notice of Default derived solely from the invalid MERS Assignment, invalidating both documents. They alleged that these transactions constituted a deception and, therefore, invalid transactions under the Trust Deed Act.

ReconTrust, Bank of America, N.A., as successor by merger to BAC, and MERS jointly brought a motion to dismiss the SAC pursuant to Civil Rule 12(b)(6). The defendants argued that the plaintiffs failed to adequately plead the identified claims and, in addition, that the plaintiffs should be collaterally estopped from contending that BofA could not initiate foreclosure proceedings, based on the order entered by the bankruptcy court on the uncontested relief from stay motion.

Reiss on New Residential Real Estate Exchange

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NationSwell quoted me in Can’t Afford a Down Payment? Let Investors Help You Buy Your Home. It reads in part,

Enter PRIMARQ, the world’s first residential real-estate equity exchange — a soon-to-launch venture of San Francisco entrepreneur Steve Cinelli. Can’t afford a down payment? Let investors put together the capital you can’t, without relinquishing all your clout as a homeowner. By letting “co-owners” buy shares in your home, you’re able to put down a bigger down payment, which means you end up carrying less debt and can get a loan free of mortgage insurance, which is commonly tacked on for down payments of less than 20 percent. “I think the market is overly dependent on mortgage-debt financing,” Cinelli says. “The application of debt has gone way too far.”

Investors can bet on housing without having to deal with the actual house. They’ll get their money back (plus profits if there are any), under one of several circumstances: when you sell your home, when you decide to buy back your shares, or when the investor sells his shares back to the PRIMARQ exchange itself, which offers a “liquidity guaranteed” 90 percent of their value. So, if an investor puts up $10,000, and then wants to cash out for any reason before you sell your home, they’ll walk away with no less than $9,000 (unless the home price drops) — and it doesn’t affect you either way.

Not all homebuyers and not all houses can qualify for PRIMARQ funding. If there’s a mortgage involved, the buyer has to meet strict credit-score criteria, and the home has to have a certain expected price appreciation — meaning it’s got to be a decent property in a good location. That doesn’t necessarily rule out homes in lower-income neighborhoods, but it does stand to reason that unless those neighborhoods are deemed “up-and-coming,” the homes there might not qualify for PRIMARQ.

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To be sure, the PRIMARQ model involves risks for both investors and homeowners — not the least of which is a gaming of the system by nefarious investors, says David Reiss, a professor of law at Brooklyn Law School in New York who researches and writes about the American housing-finance sector. While Reiss calls PRIMARQ a “supercool idea” for all the aforementioned reasons, he could imagine various ways for unsophisticated homeowners to get fleeced without proper consumer protection regulations (the program has not yet been reviewed by a government regulatory agency). Unscrupulous investors could demand fees or increased equity in exchange for agreeing to help fund a second mortgage, for example. By participating in PRIMARQ as a homeowner, “you are not the master of your own destiny,” Reiss says.

Subprime Mortgage Conundrums

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Joseph Singer has posted Foreclosure and the Failures of Formality, or Subprime Mortgage Conundrums and How to Fix Them (also on SSRN). Singer writes,

One of the striking features of the subprime era is that banks acted without adequate regard for state property law. They were intent on serving the national and international financial markets with new and more profitable products, and they treated state property law as an obstacle to get around rather than a foundation on which to build. Rather than sell mortgages to families that could afford them, they hoodwinked the vulnerable by picking their pockets. Rather than honestly disclose the high risks associated with subprime loans, they paid rating agencies to give them AAA ratings, inducing investors to take risks they neither were prepared for nor understood. The banks made huge amounts of money marketing mortgages to people who could not afford to pay them back while offloading the risks of such deals onto hapless third parties. And rather than observe longstanding laws and customs designed to clarify property titles, banks evaded requirements of publicity and formality that traditionally governed real estate transactions. In short, the banks misled both borrowers and investors while undermining property titles. This was both a clever and a profitable way to engage in  business, but it was neither honorable nor responsible. (501, footnotes omitted)

Brad Borden and I have made a similar point in our debate with Joshua Stein, but Singer’s article plays it out in far greater depth. The article is a property prof’s cri de coeur over the near death of real property law principles during the early 2000s subprime boom, but it is also a very thorough inquest. The article concludes with a review of tools that are available to respond to failures in the mortgage market. All in all, it provides a nice overview of what led to the crisis as well as potential policy tools that are available to prevent future ones.

 

Balancing Consumer Protection and Access to Credit

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S&P posted U.S. RMBS Roundtable: Originators, Aggregators, and Counsel Discuss New Qualified Mortgage Rules. In summarizing the roundtable, S&P notes that

The ability-to-repay rule, ostensibly to prevent defaults and another housing crisis, is still very much open to interpretation. To that end, Standard & Poor’s Ratings Services recently held a private roundtable with several market participants. The confidential discussion offered the attendees an opportunity to share their views and interpretations of these rules, offer opinions on how to operate efficiently within the scope of the rules, and highlight perceived conflicts the rules still present.

In our view, the discussion identified some common themes, notably:

    • Most originators will focus on QM-Safe Harbor loans to avoid liability and achieve the best execution.
    • Many originators will also find attractive opportunities to originate non-QM loans.
    • Non-agency originations of QM or non-QM loans will continue to focus on super-prime borrowers as lenders find that the best defense is to limit the potential for default.
    • The documentation standards used by originators will be the key to compliance with the rule. (2)

There are a lot of interesting tidbits in this document, including speculation about the role of technology in the brave new world of mortgage lending.  The summary ended on a guardedly optimistic note:

While the rule leaves significant room for interpretation, originators generally felt that the final rule to be implemented in January 2014 is better than expected. They expressed hope that regulators will be vigilant in pursuing violations that are reasonable. Originators still see challenges for originations of non-QM loans, but they don’t believe they are insurmountable, and many expect that non-QM loans will be represented in origination volume throughout 2014. The challenges that remain are the market’s pricing of QM safe harbor, rebuttable presumption, and non-QM loans; required credit enhancement levels; the effects of risk retention rules, which have yet to be finalized; and the ultimate costs associated with the assignee liability provisions in the rule. (7)

If these industry participants are right, it will look like regulators did a pretty good job of balancing consumer protection and access to credit. Let’s hope!

Fightin’ Words on Consumer Complaints

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Deloitte has issued a report, CFPB’s Consumer Complaint Database: Analysis Reveals Valuable Insights, that provides valuable — but superficial insights — into the CFPB’s massive database of consumer complaints.

Deloitte’s main insights are

  • Troubled mortgages are behind the majority of the complaints – a growing trend
  • Customer misunderstanding may create more complaints than financial institution error
  • Affluent, established neighborhoods were more likely sources of complaints
  • Complaint resolution times have improved (2)

As to the second insight — customer misunderstanding may create more complaints than financial institution error — Deloitte notes that

Financial institutions have a number of options for resolving consumer complaints. They can close a complaint in favor of the consumer by offering monetary or non-monetary relief, or they can close the complaint not in favor of the consumer, perhaps providing only an explanation. The percentage of complaints closed in favor of consumers declined during the analysis period, falling from 30.9 percent in June 2012 to 18.0 percent in April 2013,6 a trend that was reflected in the monthly complaint [resolutions] for all products. (4)

The report continues, “In spite of fewer complaints closed with relief, consumers have been disputing fewer resolutions. In aggregate, the percentage of resolutions that were disputed fell from a peak of 27.9 percent in January 2012 to 18.6 percent in January 2013.” (5) Deloitte finds that “the data suggests that many complaints may be the result of customer misunderstanding or frustration rather than actual mistakes or operational errors by financial institutions.” (5)

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This conclusion seems like a big leap from the data that Deloitte has presented. I can imagine many alternative explanations for the decrease in disputes other than customer misunderstanding. For instance,

  • the consumer does not see a reasonable likelihood of a favorable resolution and abandons the complaint
  • the financial institution can point to a written policy that supports its position even if the consumer complaint had a valid basis, given the actions of the institution’s employees in a particular case
  • in the case of a mortgage complaint, the consumer is moving toward a favorable or unfavorable resolution of the issue with the financial institution on another track (e.g., HAMP, judicial foreclosure)

To be clear, I am not saying that customer misunderstanding plays an insignificant role in customer complaints.  Nor am I saying that the reasons I propose are the real reasons that that complaints do not proceed further. I am only saying that Deloitte has not presented sufficient evidence to support its claim that “customer misunderstanding may create more complaints than financial institution error.” Given that these are fightin’ words in the context of consumer protection, I would think that Deloitte would choose its words more carefully.

 

 

On Fairy Tales for the Subprime Era

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Practicum has posted my short article, The Emperor’s New Loans: A Cautionary Tale from the Subprime Era, today. It begins

A body of folk tales from the subprime mortgage era is now being written. Some are in PowerPoint. Some are in video format. Some appear in the guise of a non-fiction account.  After all, isn’t The Big Short just Jack the Giant Slayer—with the little guys not only ending up with the gold, but also with the big guys dead on the ground? And some stories, like the one below, are just plain old fairy tales.

You might ask why a complex financial crisis needs such folk tales. And I would tell you that they are necessary because they help us to identify the essence of the crisis. They can also make the significance of the crisis clear to non-experts. And they can help shape government responses to the last crisis in order to avert potential future crises. Luckily, noted storyteller Philip Pullman offers us some guidance on finding the essence of a story.

The rest of the article can be found here.

The Financial (Mis)Education of Lauren Willis

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Lauren Willis has posted Financial Education:  Lessons Not Learned and Lessons Learned.  This is a sobering, even depressing, overview of what we know about the efficacy of financial education.  This is an extremely important topic because the CFPB has identified financial education as a core part of its mission in its Strategic Plan (see Outcome 2.2).

Willis asks, “Does financial education work as hoped?” (125) She answers her own question:  “Empirical evidence does not support the theory. Some (but not all) studies show a positive correlation between financial education and financial knowledge or between financial knowledge and financial outcomes. But no strong empirical evidence validates the theory that financial education leads to household well-being through the pathway of increasing literacy leading to improved behavior.” (125)

Some of her her other important conclusions (based on a thorough review of the literature) include

  • “the only statistically significant effect of mandatory personal financial training on soldiers was that they adopted worse household budgeting behaviors after the training than before it.” (126)
  • “Youth who took a personal finance course in high school do not report better financial behavior several years later than youth who did not take the course.  Adults who attended public schools where they were required to take personal financial courses were found to have no better financial outcomes than adults who were not required to take such courses.” (126, citations omitted)
  • One “reason financial education is unlikely to produce household financial well-being is that consumers’ knowledge, comprehension, skills, and willpower are far too low in comparison with what our society demands.” (128)

Willis’ conclusions should caution against assuming that financial education is a proven method to reduce the impact of predatory practices in the consumer finance sector.  The CFPB has shown a willingness to test the efficacy of its approaches.  Hopefully it will do so with its financial education initiiatives too.