Tag Archives: Cordray

Consumer Protection, Going Forward

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photo by Lawrence Jackson

Warren, Obama and Cordray

The New York Times quoted me in Consumer Protection Bureau Chief Braces for a Reckoning. It opens,

Mild-mannered, lawyerly and with a genius for trivia, Richard Cordray is not the sort of guy you picture at the center of Washington’s bitter partisan wars over regulation and consumer safeguards.

But there he is, a 57-year-old Buckeye who friends say prefers his hometown diner to a fancy political reception, testifying in hearing after hearing on Capitol Hill about the agency he leads, the Consumer Financial Protection Bureau. Republicans would like to do away with it — and with him, arguing that the agency should be led by a commission rather than one person.

And with a Republican sweep of Congress and the White House, they may get some or all of what they wish.

Mr. Cordray, a reluctant Washingtonian who has commuted here for six years from Grove City, Ohio, where his wife and twin children live, is the first director of the consumer watchdog agency, which was created in 2010 after Wall Street’s meltdown. By aggressively deploying his small army of workers — he has 1,600 of them — Mr. Cordray has turned the fledgling agency into one of Washington’s most powerful and pugnacious regulators.

The bureau has overhauled mortgage lending rules, reined in abusive debt collectors, prosecuted hundreds of companies and extracted nearly $12 billion from businesses in the form of canceled debts and consumer refunds. In September, it exposed the extent of Wells Fargo’s creation of two million fraudulent customer accounts, igniting a scandal that provoked widespread outrage and toppled the company’s chief executive.

And, according to Mr. Cordray, he and his team have barely scratched the surface of combating consumer abuse.

“We overcame momentous challenges — just building an agency from scratch, let alone one that deals with such a large sector of the economy,” Mr. Cordray said in an interview at his agency’s office here. “I’m satisfied with the progress we have made, but I’m not satisfied in the sense that there’s a lot more progress to be made. There’s still a lot to be done.”

But his future and the agency’s are uncertain. Democrats in Ohio are encouraging Mr. Cordray to run for governor in 2018, which would require him to quit his job in Washington fairly soon, rather than when his term ends in mid-2018. Champions of the agency are imploring him to stay, arguing that if he leaves, the agency is likely to be defanged, its powers to help consumers sapped.

Opponents of the bureau just won a big legal victory: The United States Court of Appeals for the District of Columbia Circuit said last month that the structure of the Consumer Financial Protection Bureau was unconstitutional, and that the president should have the power to fire its director at will.

The agency is challenging the decision — which was made in a lawsuit brought by the mortgage lender PHH Corporation that contests the consumer bureau’s authority to fine it — and that has temporarily stopped the decision from taking effect. But the ruling has kept alive questions about whether too much power is concentrated in Mr. Cordray’s job, and whether the agency should be dismantled or restructured.

Mr. Cordray, who also battled on behalf of consumers in his previous jobs as Ohio’s attorney general and, before that, its treasurer, is praised in some circles as enormously effective, wielding the bureau’s power to restructure some industries and terrify others.

The bureau has “helped save countless people across the country from abusive financial practices,” said Hilary O. Shelton, the N.A.A.C.P.’s senior vice president for advocacy and policy.

Even the regulator’s frequent foes — including Alan S. Kaplinsky, a partner at Ballard Spahr in Philadelphia, who says the agency often overreaches — acknowledge its impact.

“I’ve been practicing law in this area for well over 40 years, and there’s nothing that compares to it,” Mr. Kaplinsky said. “Every company in the consumer financial services market has felt the effects.”

The Consumer Financial Protection Bureau has nearly replaced the Better Business Bureau as the first stop for dissatisfied customers seeking redress. It has handled more than a million complaints, many of which it has helped resolve.

*     *    *

The housing crisis dominated the bureau’s early days. When Congress created the new overseer, it also dictated its first priority: making mortgages safer. The deadline was tight. If the bureau did not introduce new rules within 18 months, a congressionally mandated set of lending guidelines would automatically take effect.

The bureau made it with one day to spare.

It banned some practices that had fueled the crisis, like home loans with low teaser rates or no documentation of the borrower’s income, and steered lenders toward “qualified” loans with a stricter set of safeguards, including checks to ensure that customers could afford to repay what they borrowed.

After much grumbling — and many dire forecasts that the new rules would limit credit and harm consumers — mortgage lenders adjusted. They made nearly 3.7 million loans last year for home purchases, the highest number since 2007, according to government data.

“It seems like the financial services industry has figured out how to adapt to this new regulatory regime,” said David Reiss, a professor at Brooklyn Law School who studied the effects of the bureau’s rule-making. “We’ve moved from the fox-in-the-henhouse market in the early 2000s, where you could get away with nearly anything, to this new model, where someone is looking over your shoulder.”

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?

Testing CFPB’s Constitutionality

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by Junius Brutus Stearns

Law360 quoted me in PHH Case Poised To Test CFPB’s Constitutionality (behind a paywall). It opens,

A battle over the Consumer Financial Protection Bureau’s interpretation of mortgage regulations in assessing a $109 million penalty against a New Jersey-based mortgage firm has morphed into a fight over the authority vested in the bureau’s director that could reshape the consumer finance watchdog, experts say.

The appeal from PHH Corp. to the D.C. Circuit originally centered on CFPB Director Richard Cordray’s decision to dramatically hike a $6 million mortgage insurance kickback penalty issued by an administrative law judge against a company subsidiary, to the final, $109 million figure. But the judges hearing the case warned the bureau to prepare to answer questions at oral arguments Tuesday about language in the Dodd-Frank Act that says the president could remove the CFPB director only for cause, and about how the court should view an administrative agency led by a single director rather than the more typical commission structure.

Those questions have been hanging over the CFPB since its inception in the 2010 law, and if the D.C. Circuit rules against the bureau, that could fundamentally alter the way the bureau operates, said Jonathan Pompan, a partner at Venable LLP.

Cordray “is potentially going to have to address questions that go to the core of his authority, which really hadn’t been at the forefront of the PHH case until now,” he said.

Challenges to the CFPB’s constitutionality are not new. Everything from the bureau’s single-director rather than commission structure to the agency’s funding through the Federal Reserve’s budget rather than the congressional appropriations process have been constant refrains for the CFPB’s opponents.

Those concerns have been addressed through legislation aimed at curtailing the CFPB’s power, and claims challenging the agency’s constitutionality have been an almost pro forma rite of any litigation involving the bureau.

Up until now, however, those complaints and attempts to curb the CFPB have gone nowhere.

So it was a surprise when the D.C. Circuit last Wednesday told the bureau’s attorneys to be prepared to face questions about whether Dodd-Frank’s provision stating that the president can remove the CFPB director only for “inefficiency, neglect of duty, or malfeasance in office” passed constitutional muster.

The panel, made up of three Republican appointees led by U.S. Circuit Judge Brett M. Kavanaugh, is also seeking answers about potential remedies for any problems that that provision brings, including potentially removing it from the statute and allowing the president to remove the CFPB director without any specific cause.

The judges also want to know how any fix to the problem, if they determine there is one, would affect the CFPB director’s authority.

“This is not, by any stretch of the imagination, idle thinking on their part,” said David Reiss, a professor at Brooklyn Law School.

The questions being posed by the D.C. Circuit panel do not pose the same level of threat that the other constitutional challenges the CFPB could potentially face would, but it is certainly a more defining question than what most observers thought the case would be about.

PHH is challenging Cordray’s interpretation of violations under the Real Estate Settlement Procedures Act that allowed him to supersize a $6 million penalty handed down by an administrative law judge, to the $109 million that the CFPB director handed down when PHH appealed.

But the arguments set for Tuesday are expected to go far beyond that issue.

There will be the central question of whether the U.S. Constitution allows Congress to put in restrictions on when the president can fire officials at an administrative agency. The U.S. Supreme Court addressed these issues in the 2010 Free Enterprise Fund v. Public Company Accounting Oversight Board decision, which affirmed a D.C. Circuit ruling that such protections were constitutional.

Judge Kavanaugh cast a dissenting vote in that case, stating that a president should not have to notify Congress as to why the director of an administrative agency is removed.

“If the challenges were going to be taken seriously anywhere, it was probably going to be this panel,” said Brian Simmonds Marshall, policy counsel at Americans for Financial Reform, which seeks tougher banking regulations.

Removing that provision from the statute, should the D.C. Circuit elect to do so, could limit the CFPB’s independence, as well as that of other administrative agencies for which statute requires a reason for the dismissal of officials, he said.

“The CFPB doesn’t have to check with the White House right now before it brings an enforcement action,” Simmonds Marshall said.

Another case that will be heavily scrutinized will be a 1935 Supreme Court decision in Humphrey’s Executor v. U.S., which allowed for restrictions on the removal of Federal Trade Commission commissioners.

The CFPB relied heavily on that case in its filings with the D.C. Circuit, noted Benjamin Saul, a partner at White & Case LLP.

“I’ll be looking for the questions being driven by Judge Kavanaugh and his comments from the bench, particularly on the Humphrey’s case,” Saul said.

Whether the arguments focus mostly on the constitutional questions about the ability to remove the CFPB director or on remedies to fix that could also indicate where the court is headed on these questions, according to Reiss.

“It does sound that they’re searching for remedies that are not earth-shattering remedies,” Reiss said.

eClosings

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conference-room-338563_1280

The Consumer Financial Protection Bureau has issued a report on its eClosing pilot, Leveraging Technology to Empower Mortgage Consumers at Closing. The term “eClosing” refers to technology-enabled loan closings. The CFPB became interested in how eClosings “could facilitate embedding educational materials to closing platforms in addition to early review of closing documents” and conducted a pilot program to evaluate them. (6) The study has methodological limitations (see discussion on page 11), but the CFPB has drawn some interesting conclusions from its study. These include,

  • On average, eClosing borrowers in the pilot had higher scores than paper borrowers on our measured outcomes, including perceived empowerment, understanding (perceived and actual), and efficiency.
  • Consumers who received and reviewed documents before the closing meeting reported feeling more empowered in the closing process, with higher levels of perceived understanding and efficiency. Additionally, these consumers had higher scores on the actual understanding quiz relative to those who did not review documents before the meeting.
  • Most pilot borrowers with access to CFPB educational materials stated that they used these materials and reported that they were useful.
  • eClosing transactions in the pilot exhibited shorter closing meetings and earlier document delivery, which matched higher scores on consumer perceptions of efficiency.
  • First-time homebuyers, low/moderate income borrowers and borrowers with the most years of formal education all had the largest positive gains between paper and eClosing, yet all scored relatively low on our measures of understanding and perceived empowerment. (9-11)

All of this seems good enough, but not great — a bunch of subjective improvements for consumers.  One would have hoped that there would be some objective measures (other than the length of the closing itself) of the benefits for consumers.

This does not mean that the CFPB should stop pushing eClosing technologies. But I do think that consumer protection initiatives should focus more on objective measures of success. Too often financial education initiatives report that consumers feel better without proving that they are, in fact, better off.

CFPB Roundup

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Nomination_of_Richard_Cordray

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!

Reiss on Big Kickback Penalty

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Richard_Cordray

Law360 quoted me in CFPB Ruling Adds New Front In Administrative Law Fight (behind a paywall). The story opens,

Consumer Financial Protection Bureau Director Richard Cordray’s decision last week upholding an administrative ruling against PHH Mortgage Corp. and jacking up the firm’s penalty highlights concerns industry has about the bureau’s appeals process, and it adds to a growing battle over federal agencies’ administrative proceedings.

Cordray’s June 4 decision in the PHH case marked the first time the bureau’s administrative appeals process was put to the test. And the result highlighted both the power that Cordray has as sole adjudicator in such an appeal and his willingness to review a decision independently and go against his enforcement team, at least in part, experts say.

But because PHH has already vowed to appeal the decision, the structure of the CFPB’s appeals process could be put in play, and it could be forced to change — a battle that comes as the U.S. Securities and Exchange Commission is also facing challenges to its administrative proceedings.

The way the CFPB handles administrative appeals “might be one of the issues that the court of appeals might be asked to consider,” said Benjamin Diehl, special counsel at Stroock & Stroock & Lavan LLP.

In the case before Cordray, PHH had been seeking to overturn an administrative law judge’s November 2014 decision that found it had engaged in a mortgage insurance kickback scheme under the Real Estate Settlement Procedures Act, or RESPA.

Cordray agreed with the underlying decision, but he found that Administrative Law Judge Cameron Elliot incorrectly applied the law’s provisions when assessing the penalty PHH should face.

And when Cordray applied those provisions in a way that he found to be correct, PHH’s penalty soared from around $6.4 million to $109 million, according to the ruling.

The reasoning behind Cordray’s decision irked lenders, which say the CFPB director dismissed precedent on mortgage reinsurance, including policies from the U.S. Department of Housing and Urban Development and judicial interpretations of the statute of limitations on RESPA claims.

“If the rules are going to change because an agency can wave a magic wand and change them, that’s disconcerting,” Foley & Lardner LLP partner Jay N. Varon said.

The rise in penalties highlighted both the risk that firms face in an appeal before the CFPB and Cordray’s desire to send a message to companies that he believes violate the law, said David Reiss, a professor at Brooklyn Law School.

“It is unsurprising that Cordray would take a position that is intended to have a significant deterrent effect on those who violate RESPA, and I expect that he wanted to signal as much in this, his first decision in an appeal of an administrative enforcement proceeding,” Reiss said.

Reiss on Cramming

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E-Commerce Times quoted me in Feds Pounce on Sprint for Phone Bill Cramming. It opens,

The United States government is delivering a one-two punch to Sprint over the practice of cramming — allowing third parties to place unauthorized charges on customers’ bills.

The Consumer Finance Protection Bureau on Thursday filed a civil suit against Sprint over the issue.

Meanwhile, the Federal Communications Commission reportedly is planning to hit Sprint with a US$105 million fine.

Coordination between the government agencies “is not atypical,” said David Reiss, professor of law at the Brooklyn Law School.

“Frequently federal government agencies coordinate their actions for better results,” he told the E-Commerce Times.

It’s possible that the FCC was negotiating with Sprint prior to the CFPB taking action, suggested Robert Jaworsky, a partner at ReedSmith.

“I doubt the FCC will take any action while this lawsuit is pending,” he told the E-Commerce Times.

The CFPB’s Allegations

Sprint charged wireless customers for unauthorized third-party services from 2004 through 2013, costing them millions of dollars each year, by creating a billing and payment system that provided third parties with unfettered access to its customers’ accounts, according to the CFPB complaint.

Sprint automatically enrolled customers in this billing system without their knowledge or consent, and many customers were unaware of the unauthorized charges, the bureau maintains.

Sprint continued to operate its system despite numerous red flags, including high refund rates, along with complaints from customers, law enforcement agencies and consumer groups, the CFPB claims. The carrier retained 40 percent of the gross revenue collected for the third-party charges, totaling “hundreds of millions of dollars.”

Sprint took advantage of its customers, treated them unfairly in various ways, mishandled or ignored complaints about the unauthorized charges, and didn’t track them, said CFPB director Robert Cordray.

Sprint refused to provide refunds to some customers, instead telling them how to block future third-party charges, he added — and sometimes it referred victims back to the scammers themselves.