Consumer Law & Policy Blog

Marsha Courchane Paper on Explaining the Pricing of Home Mortgage Loans to Minority Borrowers

Marsha Courchane's paper The Pricing of Home Mortgage Loans to Minority Borrowers: How Much of the APR Differential Can We Explain? can be found in 29 Journal of Real Estate Research No. 4 (2007).  Here's the abstract:

The public releases of the 2004 and 2005 HMDA data have engendered a lively debate over the pricing of mortgage credit and its implications regarding the treatment of minority mortgage borrowers. This research uses aggregated proprietary data provided by lenders and an endogenous switching regression model to estimate the probability of taking out a subprime mortgage, and annual percentage rate (APR) conditional on getting either a subprime or prime mortgage. The findings reveal that up to 90% of the African American APR gap, and 85% of the Hispanic APR gap, is attributable to observable differences in underwriting, costing, and market factors that appropriately explain mortgage pricing differentials. Although any potential discrimination is problematic and should be addressed, the analysis suggests that little of the aggregate differences in APRs paid by minority and non-minority borrowers are appropriately attributed to differential treatment.

McCoy Paper on HMDA's Legislative History

Patricia A. McCoy, who has been an important scholar on predatory lending, has authored The Home Mortgage Disclosure Act: A Synopsis and Recent Legislative History, 29 Journal of Real Estate Research No. 4 (2007).  Here's the abstract:

This article describes the provisions of the federal Home Mortgage Disclosure Act (HMDA), tracing its legal evolution since 1989, when Congress expanded HMDA to require reporting of home mortgage lending by ethnicity and race. HMDA requires most lenders to report the demographic makeup and geographic distribution of home mortgages to the federal government. The 1989 amendments and later developments transformed HMDA from a law exclusively concerned with geographic disinvestment to one concerned with lending disparities by ethnicity and race. In the process, HMDA evolved from an obscure reporting statute to a flashpoint for debates over lending discrimination and subprime lending.

Credit Card Marketing to College Students

Check out this article in today's Washington Post entitled "Majoring in Plastic -- With Easy Access to Credit Cards, Students Pick Up the Debt Habit Early." We blogged last year on U.S. PIRG's counteroffensive to the credit card companies intense marketing efforts on college campuses.

Product Recall Information for March 2008

The Consumer Product Safety Commission's product safety recalls for March 2008 are available here.  The National Highway Traffic Safety Administration's auto defect recalls for March 2008 are available here.

Senate bill and moral hazard

by Alan White

The Senate today passed its version of a housing crisis bill, stripped of most provisions that could help homeowners facing foreclosure. The provision that would have permitted bankruptcy judges to modify interest rates and reduce mortgage balances to the current value of a home was removed last week. Apart from some additional authority for state housing finance agencies to use tax-exempt financing to offer refinancing loans, no provisions remain to facilitate either refinancing or modification of mortgages to stem the tide of foreclosures. The only help for homeowners comes in the form of $100 million for counselors.

Builders and lenders, on the other hand, would get billions. A tax credit for buyers of foreclosed homes, as well as aid for states and cities to buy foreclosed homes, would prop up the prices of REO (real estate owned, the growing inventory of homes owned by mortgage servicers.) The chief motivation for mortgage servicers to work out loan modifications with homeowners is that the alternative, foreclosure, now results in huge losses. Fitch Ratings currently estimates loss severities for subprime mortgages at 50% to 60%, i.e. foreclosed homes will sell for less than half of the mortgage debt owed on them. While the need to deal with the increasing inventory of foreclosed homes is real, subsidizing their purchase is a dubious strategy. It reduces the pain felt by servicers who go ahead with foreclosures, and tilts the balance (albeit minimally) in favor of foreclosure and away from workouts.

The least appealing and most expensive feature of the Senate package is $25 billion in tax subsidies for home builders, who admittedly are going through hard times, but who are hardly more deserving than the millions of homeowners looking in vain toward Washington for help. Perhaps the greatest moral hazard of all is created by Senate campaign funding.

Fed's Mortgage Regulations

By Alan White

Greetings from ORD! Yes, I'm on American, trying to get to Dallas. TV cameras are everywhere, and I have a bit of time on my hands. HT to the Trib for the photo of our rebooking line.

The comment period for the Fed's proposed regulation on unfair and deceptive practices in the mortgage market closed on Tuesday. So far 1,062 comments are logged, and there are more coming (including mine.) Congress is unlikely to move mortgage reform legislation in this election year, particularly legislation that the President would sign. The Fed's new rules, due to be finalized some time this year, will be the first serious effort to impose some order in the lately deregulated mortgage market. How much of the problem will they solve?

Mystery Shopping Test on RALs; IRS Comments

A new report analyzes the results of a mystery shopping test relating to Refund Anticipation Loans (RALs),  entitled "Tax Preparers Take a Bite out of Refunds:  Mystery Shopper Test Exposes Refund Anticipation Loan Abuses in Durham and Philadelphia."  The mystery shopper testing was conducted by Community Reinvestment Association of North Carolina (CRA-NC) in Durham and by Community Legal Services of Philadelphia (CLS) and the Philadelphia Campaign for Working Families.   NCLC analyzed test results for the report.  The report is found here and summarized below.

NCLC, Consumer Federation of America and other consumer groups also submitted their comments to the IRS in response to its proposal to prohibit tax preparers from sharing return information to make RALs.  Those comments are available here.

For more information, contact
Chi Chi Wu, NCLC, 617-542-8010
Jean Ann Fox, CFA, 928-772-0674
Robin Robinowitz, Philadelphia Campaign for Working Families/CLS, 267-973-1064 
Peter Skillern, CRA-NC, 919-667-1557, x 22

The mystery shopper tests portray an industry that imposes high costs on vulnerable low-income filers and fails to provide high quality tax preparation.  Preparers in Philadelphia and Durham, NC, failed to tell taxpayers about free filing options, and some failed to disclose that RALs are loans.  Preparers made serious errors on some testers' returns, which would have resulted in inflated refunds, and failed to correctly handle education credits or investment income.  Many preparers did not give clear price information about RALs, other products, and tax preparation fees, leaving testers confused and unable to comparison shop. Several preparers made serious errors that significantly affected tax liability, causing two testers to file amended returns to fix errors.  One tester withdrew after a preparer advised him to essentially engage in tax fraud. Several of these preparers, including a gift shop and a small loan company, charged multiple ancillary fees, including one preparer who charged $324 in such fees. 

Advocates from NCLC and Consumer Federation of America (CFA) sent the mystery shopper report to the IRS as part of their submission to the agency's rulemaking on RALs.  The IRS is considering issuing a proposal to prohibit tax preparers from sharing tax return information to sell RALs, RACs, and other products. 

The consumer comments provide extensive documentation that RALs do indeed exploit low-income taxpayers, promote tax fraud, and expose confidential tax returns to prying eyes.  RALs carry high costs and risks, and drain hundreds of millions from the Earned Income Tax Credit (EITC), a special tax benefit to working poor families.  RALs cost between $32 to $130 in loan fees, plus the ancillary fees, and can translate into high Annual Percentage Rates (APRs) of 50% to 500%.  RALs drained $900 million from the refunds of American taxpayers in 2006, plus $90 million in other fees.  Nearly two-thirds of RAL borrowers are EITC recipients, despite the fact that only 17% of taxpayers get the EITC.  (More information on the financial impact of RALs on taxpayers is available here.

RALs also promote the existence of fringe tax preparers, who are attracted by the financial incentives for RALs and/or taxpayers' ability to use loan proceeds to buy merchandise.  A review of IRS authorized e-file providers from five states found hundreds of fringe preparers, including payday lenders, pawn shops, rent-to-own stores, auto title lenders, used car dealers, travel agents, beauty salons, furniture stores, grocery stores, jewelry stores, liquor stores, and a "therapy" office.

    Consumer advocates also noted the privacy risks posed by RALs and other financial products sold at tax time.  Tax preparers share confidential return information with RAL banks by getting the taxpayer to sign a consent form, which is easily slipped into the stack of documents that taxpayers are told to sign.

Elizabeth Schiltz Paper on the Supreme Court's Watters Decision

Elizabeth Rose Schiltz's paper Damming Watters: Channeling the Power of Federal Preemption of State Consumer Banking Laws, 35 Florida State University Law Review, is available at  http://ssrn.com/abstract=1028886.  Here's the abstract:

In Watters v. Wachovia, 127 S. Ct. 1559 (2007), the Supreme Court reversed two presumptions about federal preemption of state law that historically have guided the delicate balance between state and federal authority over consumer protection in banking services - the presumption that issues involving consumer protection are quintessentially matters of state rather than federal prerogative and the presumption that national banks are subject to nondiscriminatory laws of the states where they are located, except where federal law expressly preempts such law.

This article analyzes the dramatic impact of Watters' reversal on two different areas - consumer protection in banking services and the continued vitality of the uniquely American dual banking system. The first part of the article traces the evolution of consumer protection law in the banking industry through three stages. The first was the gradual expansion of the preemptive effect of a particular federal usury statute for national banks through a combination of action by federal banking agencies and case law. The second stage was the assertion by federal banking regulators of a broad theoretical framework for federal preemption of state banking law based not on any particular federal statute, but rather on a theory of congressional intent to permit national banks to provide consistent banking services nationwide. The third stage was the validation of that broad conflict preemption theory by the Supreme Court in Watters. The article demonstrates how the reversal of the historic presumption has recently played itself out in the preemption of state laws governing bank-issued gift cards, culminating in the first citation of Watters in SPGGC, LLC v. Ayotte, 488 F.3d 525 (2nd Cir. 2007).

While challenging the proposition reflected in most recent scholarship in this area that federalization of consumer protection law necessarily entails deregulation, in this article I nevertheless conclude that Watters will have a significant adverse effect on the continued vitality of the dual banking system. Arguments for preserving the "dual banking system" arise out of our nation's fundamentally federalist sensibilities. From that perspective, a recent shift in the tenor of arguments for the preserving the dual banking system from the benefits of competition (states as laboratories of reform) to arguments based on the principle of subsidiarity (states as more responsive units of government where democratic ideals are more fully realized) can be observed. I argue that the subsidiarity arguments are likely to be more persuasive in convincing Congress to intervene to address the imbalance between the state and national banking system exacerbated by the Watters decision. I conclude by proposing that Congress partially reverse Watters by validating a recent proposal by the primary federal regulator of state banks to extend preemption authority to state banks, thus preserving to states the authority to offer a meaningful alternative to the national banking system on the level of consumer protection.

Times Articles on Mortgage Crisis and Preemption of Drug Product Liability Suits

Consumer law issues have frequently appeared on the front pages of the Times in recent weeks, and today's edition has two such articles.  In "Drug Makers Near Old Goal: A New Legal Shield," the Times reports on the Supreme Court case to be argued next term in which drug manufacturers argue that once the FDA has approved a drug, state product liability claims involving the drug are preempted.  Some excerpts:

For years, Johnson & Johnson obscured evidence that its popular Ortho Evra birth control patch delivered much more estrogen than standard birth control pills, potentially increasing the risk of blood clots and strokes, according to internal company documents.

But because the Food and Drug Administration approved the patch, the company is arguing in court that it cannot be sued by women who claim that they were injured by the product — even though its old label inaccurately described the amount of estrogen it released.

* * *

Documents and e-mail messages from Johnson & Johnson, made public as part of the lawsuits against the company, show that even before the drug agency approved the product in 2001, the company’s own researchers found that the patch delivered far more estrogen each day than low-dose pills. When it reported the results publicly, the company reduced the numbers by 40 percent.

The F.D.A. did not warn the public of the potential risks until November 2005 — six years after the company’s own study showed the high estrogen releases. * * *

A series of independent assessments have concluded that the agency is poorly organized, scientifically deficient and short of money. In February, its commissioner, Andrew C. von Eschenbach, acknowledged that the agency faces a crisis and may not be “adequate to regulate the food and drugs of the 21st century.”

The entire article is worth reading, though it may make you swear off prescription drugs. 

The other front-page article today, "The Tricky Task of Offering Aid to Homeowners," discusses the congressional goal of helping homeowners facing foreclosure without bailing out speculators or irresponsible lenders, all while minimizing the impact on the treasury.  The piece explains the Democratic plan, as well as other proposals.  A sidebar tracks through an example of how the Democratic proposal would work.

Some of the most interesting reporting on the mortgage crisis appears in the Business section.  Gretchen Morgenson has a column, "A Road Not Taken by Lenders" about how lenders failed to verify borrowers' incomes with the IRS, even though at least 90% of the borrowers gave lenders permission to do so.  The IRS charges $20 per form and takes a day or less to supply the information, but lenders said doing so was too costly or time-consuming.  An excerpt:

Can investors stuck with losses on these loans sue to recover their investments based on this due-diligence failure? After all, mortgage originators made representations and warranties to investors that the quality of these loans was good when it clearly was not. And they made these representations knowing that they had not bothered to conduct quick and easy borrower-income checks.

“Investors hoping to put back the loans for deficient underwriting under reps and warranties would end up going back to the originators,” said Josh Rosner, an analyst at Graham Fisher & Company and an authority on mortgage-backed securities. “Given that many of these lenders are out of business, ultimately this could come back to the bank or investment bank.”

“The general view is this should not be talked about out loud,” Mr. Rosner added.

Wall Street will certainly battle forcefully against such lawsuits, if investors bring them. But its role as one of the great enablers in this mortgage debacle is something that even Wall Street can’t deny.

And here is a graphic that shows for various regions the percentage of mortgages that are subprime and the percentage of subprime mortgages that are in foreclosure.

The New Century saga

The WSJ Law Blog recently reported the release of the Bankruptcy Court Examiner's Report on New Century Mortgage, the subprime lender that once led the market and is now in Chapter 11. The post includes a link to download the 500-page report itself, which contains a wealth of data about the subprime industry and the rise and fall of New Century, and is replete with details of NC's lending practices and evolving corporate culture. Anyone writing a book on the subprime crisis will want to read this primary source material.