Tag Archives: Reiss

Reiss on Ocwen Settlement

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Law360 quoted me in New York’s Ocwen Deal Sets Tough Precedent For Regulators (behind a paywall). It reads in part,

New York regulators ordered Ocwen Financial Corp. to pay $150 million in hard cash and barred the company from claiming a tax deduction on the restitution payments in a mortgage servicing settlement that could set a new standard for regulators accused of being soft on the companies they penalize.

The New York Department of Financial Services’ penalty against Ocwen, which also saw the company’s executive chairman lose his job, comes amid criticism that major penalties against Bank of America Corp., JPMorgan Chase & Co. and other banks have been too lax. In a move aimed at addressing concerns over companies’ abilities to game the penalties, New York’s settlement specifically says Ocwen will not be able to use some of the techniques banks have used to lessen the blow of earlier settlements.

“They’ve tried to make a very tight settlement that demonstrates that Ocwen is suffering measurable costs for their behavior,” said David Reiss, a professor at Brooklyn Law School.

The New York Department of Financial Services announced Monday that Ocwen, the country’s fourth-largest mortgage servicer, with some $430 billion in unpaid servicing balances, would pay out $150 million in “hard money” to New York homeowners who were victim to the company’s problematic servicing operations. A third of that $150 million would go directly to people who were foreclosed upon, and the remaining $100 million would go to housing-related projects chosen by the state.

But, unlike in previous mortgage-related settlements, Ocwen will not be able to count what are known as “soft dollar” modifications of mortgages they do not own and other techniques toward its settlement total, the DFS said. Banks and other servicers have been able to count such modifications in their total settlement amounts in previous deals, including the $25 billion national mortgage settlement from 2012.

Critics say such soft-dollar remediation has allowed law enforcement agencies, regulators and banks to inflate the amount of money banks and servicers are said to be paying out while limiting the amount of money they actually pay.

“It seems like a transparent settlement,” Reiss said.

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“A lot of the problems that people have had with these financial settlements are specifically identified,” 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.

Lederman, Rahman & Reiss on CFPB No-Action Policy

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Jeff Lederman, Sabeel Rahman and I submitted a comment on the Consumer Financial Protection Bureau’s proposed policy on No-Action Letters. Basically,

This is a comment on the Consumer Financial Protection Bureau’s (the “Bureau”) proposed Policy on No-Action Letters (the “Policy”).  The Policy is a step in the right direction, but a more robust Policy could better help the Bureau achieve its statutory purposes.

The Bureau recognizes that there are situations in which consumer financial service businesses (“Businesses”) are uncertain as to the applicability of laws and rules related to new financial products (“Products”); how regulatory provisions might be applied to their Products; and what potential enforcement actions could be brought against them by regulatory agencies for noncompliance.  Businesses could therefore benefit from the issuance of a No-Action Letter to reduce that uncertainty.

There is very little scholarly literature on the use of No-Action Letters by administrative agencies.  In the absence of comprehensive studies, it is hard to precisely determine how to allocate agency resources to informal guidance as opposed to other types of regulatory action.  Notwithstanding this, an agency should attempt to determine the optimal amount of its resources that should be devoted to informal guidance as opposed to the alternatives and then refine that initial estimate as experience dictates.

A rapidly changing field like consumer finance can benefit from the availability of quick and informal feedback for Businesses so long as the process is properly designed.  Because the Policy would use a relatively small amount of Bureau resources compared to other types of regulatory action, a well-designed No-Action Letter Policy would be a win-win-win for Businesses, for the Bureau and for consumers.

Reiss on Fair Housing Falsehood

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The Providence (R.I.) Journal quoted me in its Truth-O-Meter column:  Mike Stenhouse: According to HUD, It’s Unfair, Unjust for Wealthy to Live in Exclusive Neighborhoods. The column reads, in part,

For more than three years, the Rhode Island Division of Planning has been working on RhodeMap RI, a long-term economic development plan meant to help guide efforts to improve the state’s economy.

The process, partly financed by a $1.9-million grant from the U.S. Department of Housing and Urban Development (HUD),  didn’t get much notice until a nearly 200-page draft of the plan was released in mid-September, igniting a firestorm of controversy.

Critics of the plan denounced it as a thinly disguised blueprint for social engineering. If it is implemented, they say, local communities will be forced to cede authority to the federal government on issues such as affordable housing and land use, and individual property rights will be under threat.

Supporters, including Governor Chafee and the planners and community leaders who drafted the plan, say it’s a well crafted, comprehensive guide that will help move the state’s economy forward over the decades ahead. They say there’s nothing in the plan that would infringe on individual property rights or local home rule.

The debate grew so heated at one meeting a shouting match broke out, with charges of racism and bigotry hurled. And last week, at a meeting of the Statewide Planning Council, opponents called it unconstitutional, socialist and even treasonous. Nonetheless, the council voted unanimously to adopt it.

Mike Stenhouse, CEO of the Rhode Island Center for Freedom and Prosperity, a conservative research group, has led the opposition. A few weeks ago, he talked about the plan on WPRO-AM’s “The Dan Yorke Show.”

Yorke asked Stenhouse to cite a component of the plan “that highlights what you think is problematic.”

“I’m going to give you my interpretation,” Stenhouse responded. “I don’t have their plan in front of me. What we believe, for instance, take Poppasquash Point in Bristol. According to HUD, it is patently unfair and socially unjust that wealthy people can live in an exclusive neighborhood.”

We wondered whether Stenhouse was right about HUD’s view of wealthy neighborhoods such as Poppasquash Point, one of the state’s priciest enclaves.

When we asked Stenhouse about his statement, he told us he was not directly quoting HUD, but said that his statement was “an accurate interpretation of HUD’s openly stated intent.” He provided links to multiple documents to support his position.

While we don’t view Stenhouse’s statement as a direct quote of HUD policy, we do  believe that listeners who heard Stenhouse’s preface — “according to HUD” — would assume he was summarizing HUD’s policy.

Stenhouse’s backup is comprised primarily of links to a news story and an editorial in Investor’s Business Daily and links to various legal  documents and HUD regulations.

*    *    *

According to David Reiss, a professor of real estate and housing policy at Brooklyn Law School, “HUD does not interpret the FHA [Fair Housing Act] to mean that `wealthy people’ can’t `live in an exclusive neighborhood.’”

“An exclusive neighborhood is an expensive one – the FHA does not ban expensive neighborhoods.” Reiss continued in an email statement. “What it does do is ban exclusionary practices.  Exclusionary practices are those that exclude people based on certain of their characteristics such as their race, sex or religion.  To my knowledge, HUD has never taken the position that merely living in an exclusive – that is, expensive — neighborhood violates the FHA.”

We also asked HUD whether Stenhouse had accurately characterized its rules.

“There are simply no policies, practices, regulations or anything that can validate such hyper hyperbole,” Brian Sullivan, a public affairs officer with HUD, said in an email statement.

Our ruling

Mike Stenhouse said “According to HUD, it is patently unfair and socially unjust that wealthy people can live in an exclusive neighborhood.”

There’s no doubt that HUD has challenged what it considers to be discriminatory practices at the community level, including exclusionary zoning ordinances.

But that’s not nearly the same as objecting to the right of wealthy people to live in expensive neighborhoods.

We rule Stenhouse’s claim False.

Reiss on Shakespearean GSE Litigation

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Fundweb quoted me in Stateside: My Kingdom for a House. It reads in part,

History repeats itself. In 1483, Richard III seized the British crown from his 13-year-old nephew on a trumped up legal sophistry.  One justification was to prevent a return to the chaos of the War of the Roses, considered likely to resume under a child king. (Many historians believe he subsequently murdered those princes in the tower to dispense with future claims.)

Five centuries later, the issue of confiscation returns in the form of US government actions taken to stabilise the financial system during the 2008 credit crisis.  The usurpation argument repeats that the end justifies the means and the rule of law may be subverted in perceived emergencies for the common good. Recent legal cases are challenging that principle, with momentous long- term consequences for the nation.

Specifically, in 2008, Congress enacted the Housing Economic and Recovery Act, which authorised loans to mortgage agencies Fannie Mae and Freddie Mac known as government-sponsored entities. The HERA law placed the GSEs in a conservatorship, giving the US government senior preferred shares in the companies, which paid the government a 10 per cent dividend.

Eventually, the GSEs became immensely profitable again, having now repaid $30bn more to the government than the original loan. In 2012, the conservator passed a third amendment, which transformed the 10 per cent preferred dividend to a sweep of all profits, forever.

Richard Bove, vice-president equity research at Rafferty Capital Markets, responds: ”If the government has the right to override any contract and can appropriate private property for itself, then contracts mean nothing in the US and the government is like Richard III.”

Politics of populism
Ultimately, the government may determine whether the GSEs survive or in what guise or how their profits are distributed.

“Politicians are carrying out what people want them to do.  The public and the media maintain that if the bankers are harming society and the economy, there is no limitation on what the government can do,” says Bove. But beware. Investor confidence further erodes each time the government steps in to act unilaterally in the name of crisis control. The determinant is whether or not the country needs the GSEs to continue to underwrite mortgages and the answer is probably yes. Without them, there will be no one to under-write 30-year mortgages, “the monthly cost of owning a home will go up, prices will go down and it will kill housing in the US,” Bove insists.

Mel Watts, who was appointed this year as a new conservator, may represent a new direction for reshaping the GSEs. His recent speeches suggest he may be planning to merge the two agencies and liberate them from conservatorship status.

David Reiss, professor at Brooklyn Law School, points out another drawback to leaving the GSEs in limbo for six years. Executives, employees and others are now running for the exits, with turnover at the top. The agencies back 60 per cent of residential US mortgages but no longer know who they are. “It’s not healthy for homeowners or taxpayers,” says Reiss.

Investment War of the Roses
A number of hedge fund investors have rebelled, challenging the conservator’s behaviour. Marquee names include Perry Capital, Fairholme Funds and Pershing Square Capital Management. Their claims generally derive from assertions that the conservator illegally expropriated shareholder profits. The plaintiff hedge funds represent a motley crew, some of whom bought the stock after 2009, knowing they were picking up lottery tickets, and others well predating the conservatorship. From the sidelines, smaller investors watched keenly and joined the big boys’ ranks.

“People bought the stock only knowing that Icahn, Berkowitz and Ackmann had positions, so they followed like lemmings,” says Bove. To compound the confusion, most conventional wisdom from commentators lined up on one side. Many were openly remunerated by the shareholders, like New York University’s Richard Epstein.

Reiss adds that, “with no public speakers of equivalent prestige on the other side, it seemed inconceivable the investors might lose, which was a perfect set up for falling hard”.

Indeed they fell, with the recent ruling by Judge Royce Lamberth in the Perry hedge fund case.  The court dismissed the suit with complex arguments but one theme undergirded the judge’s ruling: the government had acted forcefully in a financial emergency, authorised by Congress, which he hesitated to unwind.

Reiss on Avoiding War

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MaintStreet quoted me in How to Avoid War Between Homeowner Associations and Residents. It reads in part,

When Robert Stern moved into the Sedgefield retirement community in Ocean Isle Beach, N.C. four years ago, all he could see was four golf courses, a pool and club house on multiple wooded acres.

“Our home is on the 14th hole of Lion’s Paw golf course where there is beautiful water lining the green,” Stern told MainStreet. “It is common to see egrets, herons, geese, turtles and other wildlife coming in and out of the area.”

But lurking under the beautiful scenery was the Homeowners Association, which Stern discovered when he left for six months to live in his Nevada retirement home. Stern is among the 63 million Americans living in communities across the country under the jurisdiction of an HOA, according to the Community Association Institute.

“Our property was being neglected and is currently a mess and the dysfunctional Sedgefield Committee won’t take responsibility for not having performed contractual compliance inspections,” said Stern.

“An HOA is a double edged sword,” said David Reiss, professor of real estate with the Brooklyn Law School. “HOAs allow residents to have a lot of sway over their environments but they also make decisions that individual residents don’t like. If you don’t agree with the decision, whether it be over a big or small issue, it can grate no matter what the decision is.”

How to Resolve Disputes

Resolving a dispute with an HOA can involve litigation or joining the club.

“When it comes to the tyranny of the board, we have met the enemy and it is us,” Reiss told MainStreet. “A very effective technique to contest a decision with which you disagree is to run for the board.”

Under most HOAs, boards are elected by residents.

“Those who are willing to do the work end up calling the shots,” Reiss said.

Reiss on GSE Privatization

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GlobeSt.com quoted me in Waiting to Say Goodbye to the GSEs. It reads in part,

US HUD Secretary Julian Castro added another “to do” item to the lame duck Congress’ list of things they should get done before they adjourn on Dec. 11: pass the bipartisan Johnson-Crapo Senate bill introduced earlier this year that would wind down the GSEs.

“This could be, I believe, a good victory in the lame duck session or next term of Congress for housing finance reform,” he said in an interview with Bloomberg Television earlier this week. The crux of the plan – doing away with Fannie Mae and Freddie Mac, creating a backstop for these loans and removing tax payer risk – are all supported by the Obama Administration, he said.

“Housing finance reform will continue to be a priority for the Obama Administration,” Castro said.

The multifamily finance industry has been expecting GSE reform for years now; certainly there have been calls for their dismantlement when they were placed in conservatorship in 2008 during the depth of the financial crisis. Many in the industry, in fact, would welcome their sunset, in the expectation that the private sector could fully and more efficiently and more cheaply provide the same level of funding.

That is not the unanimous sentiment though. In fact, opinions about the subject in commercial real estate range, widely, across the board from “it is about time” to “the politics are too strident for it to happen” to “maybe it will happen but it is difficult to believe the GSEs could entirely be replaced by the private sector.”

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David Reiss, a professor of Law and Research Director, Center for Urban Business Entrepreneurship (CUBE) at Brooklyn Law School, has been calling for the privatization of Fannie and Freddie for some time and is dismissive of the “Chicken Little claims” that the sector will collapse if the government reduces its footprint in multifamily and single-family housing finance.

“With a carefully planned transition, it is eminently reasonable to believe that we can put private capital in a first loss position for multifamily housing so long as the government retains a role in subsidizing affordable housing and acting as a lender of last resort when necessary,” he tells GlobeSt.com.