Tag Archives: municipality

Running The CFPB out of Town

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photo by Gabriel Villena Fernández

My latest column for The Hill is America’s Consumer Financial Sheriff and The Horse it Rides Are under Fire. It reads,

Notwithstanding its name, the Financial Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs Act, or Financial Choice Act, will be terrible for consumers. It will gut the Consumer Financial Protection Bureau and return us to the Wild West days of the early 2000s where predatory lenders could prey on the elderly and the uneducated, knowing that there was no sheriff in town to stop ‘em.

The subprime boom of the early 2000s has receded in memory the past 15 years, but a recent Supreme Court decision reminds us of what that kind of predatory behavior could look like. In Bank of America Corp. v. Miami this year, the court ruled that a municipality could sue financial institutions for violations of the Fair Housing Act arising from predatory lending.

Miami alleged that the banks’ predatory lending led to a disproportionate increase in foreclosures and vacancies which decreased property tax revenues and increased the demand for municipal services. Miami alleged that those “‘predatory’ practices included, among others, excessively high interest rates, unjustified fees, teaser low-rate loans that overstated refinancing opportunities, large prepayment penalties, and — when default loomed — unjustified refusals to refinance or modify the loans.”

The Dodd-Frank Act was intended to address just those types of abusive practices. Dodd-Frank barred many of them from much of the mortgage market through its qualified mortgage and ability-to-repay rules. More importantly, Dodd-Frank created the Consumer Financial Protection Bureau. The CFPB was designed to be an independent regulator with broad authority to police financial institutions that engaged in all sorts of consumer credit transactions. The CFPB was the new sheriff in town. And like Wyatt Earp, it has been very effective at driving the bad guys out of Dodge.

The Financial Choice Act would bring the abusive practices of the subprime boom back to life. The act would gut the CFPB. Among other things, it would make the Director removable at will, unlike other financial institution regulators. It would take away the CFPB’s supervisory function of large banks, credit unions and other consumer finance institutions. It would take away the CFPB’s power to address unfair, deceptive, and abusive acts and practices. It would restrict the CFPB from monitoring the mortgage market and thereby responding to rapidly developing abusive practices.

The impacts on consumers will be immediate and harmful. The bad guys will know that the sheriff has been undercut by its masters, its guns loaded with blanks. The bad guys will re-enter the credit market with the sorts of products that brought about the subprime crisis: teaser rates that quickly morph into unaffordable payments, high costs and fees packed into credit products, and all sorts of terms that will result in exorbitant and unsustainable credit.

Rep. Jeb Hensarling (R-Texas), chairman of the House Financial Services Committee, is the chief proponent of the Financial Choice Act. Hensarling claims that Dodd-Frank and the CFPB place massive burdens on consumer credit providers. That is not the case. Interest rates remain near all-time lows. Consumer credit markets have many providers. Credit availability has eased up significantly since the financial crisis

One only needs to look at his top donors to see how the Financial Choice Act lines up with the interests of those consumer credit companies that are paying for his re-election campaign. These top donors include people affiliated to Wells Fargo, Bank of America, JPMorgan Chase, Capital One Financial, Discover Financial Services, and the American Bankers Association, among many others.

Dodd-Frank implemented regulations that work very well in the consumer credit markets. It created a regulator, the CFPB, that has been very effective at keeping the bad guys out of those markets. The Financial Choice Act will seriously weaken the CFPB. When vulnerable consumers cry out for help, Hensarling would heave the CFPB over its saddle and let its horse slowly trot it out of town.

Banks v. Cities

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The Supreme Court issued a decision in Bank of America Corp. v. Miami, 581 U.S. __ (2017). The decision was a mixed result for the parties.  On the one hand, the Court ruled that a municipality could sue financial institutions for violations of the Fair Housing Act arising from predatory lending. Miami alleged that the banks’ predatory lending led to a disproportionate increase in foreclosures and vacancies which decreased property tax revenues and increased the demand for municipal services. On the other hand, the Court held that Miami had not shown that the banks’ actions were directly related to injuries asserted by Miami. As a result, the Court remanded the case to the Eleventh Circuit to determine whether that in fact was the case. This case could have big consequences for how lenders and others and other big players in the housing industry develop their business plans.

For the purposes of this post, I want to focus on the banks’ activities of the banks that Miami alleged they engaged in during the early 2000s. It is important to remember the kinds of problems that communities faced before the financial crisis and before the Dodd-Frank Act authorized the creation of the Consumer Financial Protection Bureau. As President Trump and Chairman Hensarling (R-TX) of the House Financial Services Committee continue their assault on consumer protection regulation, we should understand the Wild West environment that preceded our current regulatory environment. Miami’s complaints charge that

the Banks discriminatorily imposed more onerous, and indeed “predatory,” conditions on loans made to minority borrowers than to similarly situated nonminority borrowers. Those “predatory” practices included, among others, excessively high interest rates, unjustified fees, teaser low-rate loans that overstated refinancing opportunities, large prepayment penalties, and—when default loomed—unjustified refusals to refinance or modify the loans. Due to the discriminatory nature of the Banks’ practices, default and foreclosure rates among minority borrowers were higher than among otherwise similar white borrowers and were concentrated in minority neighborhoods. Higher foreclosure rates lowered property values and diminished property-tax revenue. Higher foreclosure rates—especially when accompanied by vacancies—also increased demand for municipal services, such as police, fire, and building and code enforcement services, all needed “to remedy blight and unsafe and dangerous conditions” that the foreclosures and vacancies generate. The complaints describe statistical analyses that trace the City’s financial losses to the Banks’ discriminatory practices. (3-4, citations omitted)

Excessively high interest rates, unjustified fees, teaser interest rates and large prepayment penalties were all hallmarks of the subprime mortgage market in the early 2000s. The Supreme Court has ruled that such activities may arise to violations of the Fair Housing Act when they are targeted at minority communities.

Dodd-Frank has barred many such loan terms from a large swath of the mortgage market through its Qualified Mortgage and Ability-to-Repay rules. Trump and Hensarling want to bring those loan terms back to the mortgage market in the name of lifting regulatory burdens from financial institutions.

What’s worse, the  burden of regulation on the banks or the burden of predatory lending on the borrowers? I’d go with the latter.

Carson and Fair Housing

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photo by Warren K. Leffler

President Johnson signing the Civil Rights Act of 1968 (also known as the Fair Housing Act)

Law360 quoted me in Carson’s HUD Nom Adds To Fair Housing Advocates’ Worries (behind a paywall). It opens,

President-elect Donald Trump’s Monday choice of Ben Carson to lead the U.S. Department of Housing and Urban Development added to fears that the incoming administration would pull back from the aggressive enforcement of fair housing laws that marked President Barack Obama’s term, experts said.

The tapping of Carson to lead HUD despite a lack of any relative experience in the housing sector came after Trump named Steven Mnuchin to lead the U.S. Department of the Treasury amid concerns that the bank for which he served as chairman engaged in rampant foreclosure abuses. Trump has also nominated Sen. Jeff Sessions, R-Ala., to serve as attorney general. Sessions has drawn scrutiny for his own attitudes towards civil rights enforcement.

Coupled with Trump’s own checkered history of run-ins with the U.S. Justice Department over discriminatory housing practices, those appointments signal that enforcement of fair housing laws are likely to be a low priority for the Trump administration when it takes office in January, said Christopher Odinet, a professor at Southern University Law Center.

“I can’t imagine that we’ll see any robust enforcement or even attention paid to fair housing in this next administration,” he said.

Trump said that Carson, who backed the winning candidate after his own unsuccessful run for the presidency, shared in his vision of “revitalizing” inner cities and the families that live in them.

“Ben shares my optimism about the future of our country and is part of ensuring that this is a presidency representing all Americans. He is a tough competitor and never gives up,” Trump said in a statement released through his transition team.

Carson said he was honored to get the nod from the president-elect.

“I feel that I can make a significant contribution particularly by strengthening communities that are most in need. We have much work to do in enhancing every aspect of our nation and ensuring that our nation’s housing needs are met,” he said in the transition team’s statement.

The problem that many are having with this nomination is that Carson has little to no experience with federal housing policy. A renowned neurosurgeon, Carson’s presidential campaign website made no mention of housing, and there is little record of him having spoken about it on the campaign trail. One Carson campaign document called for privatizing Fannie Mae and Freddie Mac, the government-run mortgage backstops that were bailed out in 2008.

The nomination also comes in the weeks after a spokesman for Carson said that the former presidential candidate had no interest in serving in a cabinet post because he lacked the qualifications. That statement has since been walked back but has been cited by Democrats unhappy with the Carson selection.

“Cities coping with crumbling infrastructure and families struggling to afford a roof overhead cannot afford a HUD secretary whose spokesperson said he doesn’t believe he’s up for the job,” said Sen. Sherrod Brown of Ohio, the ranking Democrat on the Senate Banking Committee. “President-elect Trump made big promises to rebuild American infrastructure and revitalize our cities, but this appointment raises real questions about how serious he is about actually getting anything done.”

HUD is a sprawling government agency with a budget around $50 billion and programs that include the Federal Housing Administration, which provides financing for lower-income and first-time homebuyers, funding and administration of public housing programs, disaster relief, and other key housing policies.

It also helps enforce anti-discrimination policies, in particular the Affirmatively Furthering Fair Housing rule that the Obama administration finalized. The rule, which was part of the 1968 Fair Housing Act but had been languishing for decades, requires each municipality that receives federal funding to assess their housing policies to determine whether they sufficiently encourage diversity in their communities.

Carson has not said much publicly about housing policy, but in a 2015 op-ed in the Washington Times compared the rule to failed school busing efforts of the 1970s and at other times called the rule akin to communism.

“These government-engineered attempts to legislate racial equality create consequences that often make matters worse. There are reasonable ways to use housing policy to enhance the opportunities available to lower-income citizens, but based on the history of failed socialist experiments in this country, entrusting the government to get it right can prove downright dangerous,” wrote Carson, who lived in public housing for a time while growing up in Detroit.

That dismissiveness toward the rule has people who are concerned about diversity in U.S. neighborhoods and anti-discrimination efforts on edge, and could put an end to federal efforts to improve those metrics.

“If you’re not affirmatively furthering fair housing, we’re going to be stuck with the same situation we have now or it’s going to get worse over time,” said David Reiss, a professor at Brooklyn Law School and research affiliate at New York University’s Furman Center.