Consumer Law & Policy Blog

Comptroller of Currency Responds to Claims that CRA Contributed to the Subprime Lending Crisis

In a speech before the Enterprise Annual Network Conference today, Comptroller of the Currency John C. Dugan rejected claims that the Community Reinvestment Act was responsible for the subprime lending crisis:

* * * While not perfect, CRA has made a positive contribution to community  revitalization across the country and has generally encouraged sound community development lending, investment, and service initiatives by regulated banking organizations.

CRA is not the culprit behind the subprime mortgage lending abuses, or the broader credit quality issues in the marketplace. Indeed, the lenders most prominently associated with subprime mortgage lending abuses and high rates of foreclosure are lenders not subject to CRA. A recent study of 2006 Home Mortgage Disclosure Act data showed that banks subject to CRA and their affiliates originated or purchased only six percent of the reported high cost loans made to lower-income borrowers within their CRA assessment areas.

Over the last ten years, CRA has helped spur the doubling of lending by banking institutions to small businesses and farms, to more than $2.6 trillion. During this period, those lenders more than tripled community development lending to $371 billion.

Maybe he read Alan White's post!

Courts Mediate Foreclosures

Local courts around the country are implementing mediation programs in order to reduce foreclosure sales and encourage negotiated workouts.  The Philadelphia program  (photos here) is one of the most ambitious, enlisting the aid of hundreds of counselors and volunteer lawyers and mediators.   Senator Spector presided at an October 24 hearing (link to witness testimony) at which participants described some of their successes, as well as the need for more resources for counselors and legal services and volunteer lawyers.  Programs have also been established in Seminole County Florida (click here for the court's order).  The state court systems of Ohio, Connecticut, and New Jersey have also adopted foreclosure mediation programs. These initiatives are certainly deserving of a modest slice of the federal government's bailout money.

Latest Development in Jones Day Trademark Abuse Case

by Paul Alan Levy

A few weeks ago, I commented on the efforts of mega law firm Jones Day to abuse trademark law to suppress articles it didn’t like on a real estate transactions web site, BlockShopper.com.  Jones Day claims that linking to its web site without permission infringes and dilutes its trademark.  Along with EFF and other public interest groups, we also filed a brief as amici curiae explaining why a case like this should have to meet a higher pleading standard, and why allowing cases like this to proceed threatens the free speech rights of the general public.

Earlier this week, the trial judge denied the motion to dismiss on the ground that the complaint contains the right formula of words to plead likelihood of confusion and dilution, without addressing the broader concerns that we raised.  Paradoxically, the judge declined to accept our amicus brief (which Jones Day had opposed), largely on the ground that, supposedly, it did not say anything that the defendants did not say.

The opinion is worth reading as much for what it doesn’t say as for what it does.  The judge ignores the larger issues and gives no guidance to the parties, not to speak of the rest of the world, about what proofs will suffice to create liability or confer adequate defenses.   Of course, it is always up to a judge how much to say to explain his decisions, but this thirteen-page decision is quite remarkable for how little it says.

So the good news is that the issues we raised remain to be considered in the case (we plan to make further amicus submissions when we conclude that the parties’ argument insufficiently address larger concerns).  The bad news is that the chilling effect remains.  Happily, Blockshopper.com seems to be willing to spend on its own defense, but we must worry about the chilling effect of a decision that says, in effect, anyone who doesn’t like your speech can make you spend similarly to defend an abusive trademark claim, so long as they craft a complaint with general language.

State of Texas Objects to Ameritrade Settlement

by Brian Wolfman

A little while back, Public Citizen Litigation Group objected to the proposed settlement in In re Ameritrade Accountholder Litig., No. 3-07-cv-02852-VRW (N.D. Cal.), on behalf of the named plaintiff who instigated the litigation. The case concerns alleged massive security breaches in Ameritrade's on-line stock trading accounts. View our objections to see why we think the settlement stinks.

I'm writing now to tell you that the State of Texas has objected to the settlement. In 2005, Congress passed and President Bush signed the Class Action Fairness Act (CAFA), one provision of which requires the parties to notify state Attorneys General of class action settlements that affect their citizens and to send the AGs certain case documents. Some class action gurus have been skeptical of that requirement, thinking that it would do no more than increase the size of the AGs' circular files. But it appears that Texas's objection to the Ameritrade settlement may have been prompted by the CAFA notice.

Michael S. Barr et al. on Behaviorally Informed Home Mortgage Regulation

Michael S. Barr of Michigan, Sendhil Mullainathan of Harvard's Economics Department and the National Bureau of Economic Research (NBER), and Eldar Shafir of Princeton have co-authored "Behaviorally Informed Home Mortgage Regulation."  Here's the abstract:

Choosing a mortgage is one of the biggest financial decisions an American consumer will make. Yet it can be a complicated one, especially in today's environment where mortgages vary in dimensions and unique features. This complexity has raised regulatory issues. Should some features be regulated? Should product disclosure be regulated? And most basic of all, is there a rationale for regulation or will the market solve the problem? Current regulation of home mortgages is largely stuck in two competing models of regulation - disclosure and usury or product restrictions - neither of which take adequate account of behavioral psychology or market incentives. This paper seeks to use insights from both psychology and economics to provide a framework for understanding both these models as well as to suggest fundamentally new models. We understand outcomes as an equilibrium interaction between individuals with specific psychologies and firms that respond to those psychologies within specific markets. Regulation must then account for failures in this equilibrium.

Foreclosure and Modification Data

By Alan White

We now have foreclosure and mortgage modification reports coming from five sources on a periodic basis:  the Mortgage Bankers Association National Delinquency Survey (watch for the 3rd quarter report due the first week of December), the FHFA report on Fannie/Freddie mortgages, the State Foreclosure Prevention Working Group, HOPE NOW and the OCC/OTS mortgage metrics from banks and thrifts.  I have compiled the data into a spreadsheet (Download Excel file here) to facilitate comparisons and tracking of trends.  The different sources cover different segments of the mortage market, which explains some of the variance in the numbers. 

Generally, foreclosure starts and foreclosure sales continue to increase each month.  Modifications increased significantly in the first quarter, but leveled off somewhat over the summer, although HOPE NOW reports a big jump in September.  Foreclosures dipped in September, but that is largely due to the California foreclosure delay resulting from new notice requirements (California and Florida account for 40% of all foreclosure starts).  Expect to see a big jump in October and November when California foreclosures resume.  For now, the crisis continues to deepen, and the voluntary modification effort is still failing to contain the crisis.

Paying (but not overpaying) the Servicers

By Alan White

Why are foreclosures continuing, when each foreclosure results in an average loss of $100,000 and frustrated homeowners and counselors are trying to get reasonable loan workouts?  One of the many answers to this complex question is how mortgage servicers get paid (or don’t). 

Tire Pressure Monitors Save Lives

A post today on this blog expressing grave reservations over the proposed bail out of the auto industry referenced the importance of tire pressure monitors in saving fuel. Tire pressure monitors also save lives. And, importantly, Federal Motor Vehicle Safety Standard No.138 now requires tire pressure monitors in all new passenger cars and small trucks and buses. For a discussion of the safety benefits of tire pressure monitors, see the Second Circuit's 2003 decision in Public Citizen v. Mineta, No. 02-4237.

Bail out Detroit? Not without some conditions.

While I did not like the idea of bailing out Wall Street, I really do not like the idea of bailing out Detroit. Yes, the auto industry is a cornerstone of the American economy. Yes, the collapse of GM, Ford, and Chrysler will deal a powerful blow to an already-reeling market. Yes, this will suck.

But if subprime lending got way out of control, at least lenders were selling products people--and Congress--wanted. Detroit has not built cars people want to drive in decades. I am not alone in thinking that Detroit carmakers are prime examples of businesses that are failing because they ought to: they make bad products that nobody wants to buy.

Sure, there are exceptions, but, by and large, American cars are pretty awful. The best GM models barely accomplish average reliability according to Consumer Reports. Many GM models are "well below average in reliability." Chrysler is even worse. Only Ford is getting better; Consumer Reports says that, excluding some trucks, "Ford's reliability is now on par with good Japanese automakers."

Consumers agree. Ford has not made a profit since 2005, which has nothing to do with the present economic meltdown. GM lost $269 million during 2007, and Chrysler lost a whopping $1.6 billion last year.

If this really is a case of "too big to fail," then Congress must impose some strict conditions on the auto industry, including higher fuel economy and emissions standards, limits on large trucks and SUVs, and maybe tire pressure monitors as standard equipment, since properly-inflated tires could save an awful lot of fuel. Maybe some quality control targets, as well. After all, cars that break frequently result in wasted spare parts and extra transportation costs to move all those spare parts around.

In short, Congress will need to do more than just keep the Big Three on life support. It will need to force Detroit to start innovating once again, and return to the novel idea of selling products consumers want.

Credit Cards -- Less Purchasing Power

In response to current market conditions, the credit card companies are greatly reducing credit limits and increasing fees.  Check out this comprehensive article in today's Washington Post.