Consumer Law & Policy Blog

Fed/OCC Deal with Banks on Robosigning

The federal bank regulators announced today a series of consent orders with major banks, as well as with LPS and MERS, represented as correcting the problems that came to light in last fall's Robosigning scandal.  The OCC orders are available here  and the Federal Reserve orders are here.  The issue of penalties and sanctions remains open and is not addressed in these orders. 

As expected, the federal agency deal does not prescribe principal write-downs or set targets for foreclosure reduction or for improved performance on HAMP contracts.  The OCC release refers to the infamous dual-tracking process, i.e. servicers moving homes toward foreclosure sales at the same time homeowners are trying to make payment and modification arrangements.  Interestingly, the OCC does not call for an end to dual tracking, but instead claims to be improving it.  In fact, the agreement codifies existing practice, calling for a halt in foreclosure only once a modification has been approved, leaving open the possibility that foreclosure sales will occur while mod requests are pending.  More generally, the federal agency deal is all about process, and not so much about results, i.e. ending the foreclosure crisis.

The banks will no doubt try to defuse the more aggressive state attorney general task force investigation on the strength of their deal with the Fed and OCC. 

More commentary soon, after I have a chance to fully digest the deal documents.

Income Inequality

Are consumer-law problems faced by the middle and working classes at bottom just reflections of income inequality? This new article by Joseph Stiglitz in the May 2011 issue of Vanity Fair suggests that the concerns faced by American consumers can't be dealt with by providing better truth-in-lending disclosures. Here's an excerpt:

It’s no use pretending that what has obviously happened has not in fact happened. The upper 1 percent of Americans are now taking in nearly a quarter of the nation’s income every year. In terms of wealth rather than income, the top 1 percent control 40 percent. Their lot in life has improved considerably. Twenty-five years ago, the corresponding figures were 12 percent and 33 percent. One response might be to celebrate the ingenuity and drive that brought good fortune to these people, and to contend that a rising tide lifts all boats. That response would be misguided. While the top 1 percent have seen their incomes rise 18 percent over the past decade, those in the middle have actually seen their incomes fall. For men with only high-school degrees, the decline has been precipitous—12 percent in the last quarter-century alone. All the growth in recent decades—and more—has gone to those at the top. In terms of income equality, America lags behind any country in the old, ossified Europe that President George W. Bush used to deride. Among our closest counterparts are Russia with its oligarchs and Iran. While many of the old centers of inequality in Latin America, such as Brazil, have been striving in recent years, rather successfully, to improve the plight of the poor and reduce gaps in income, America has allowed inequality to grow. . . . Some people look at income inequality and shrug their shoulders. So what if this person gains and that person loses? What matters, they argue, is not how the pie is divided but the size of the pie. That argument is fundamentally wrong. An economy in which most citizens are doing worse year after year—an economy like America’s—is not likely to do well over the long haul.

The Hill on How the CFPB Comes Out Under the Budget Deal

by Jeff sovern

Here.  No cut in the budget but audits by the GAO and an outside auditor.  The GAO audit is to look at how much financial institutions spend to comply with government rules affecting financial markets and how those rules affect financial markets among other things.  Here's my favorite quote in the article, from Speaker John Boehner's office:

The agreement subjects the so-called Consumer Financial Protection Bureau (CFPB) created by the job-destroying Dodd-Frank law to yearly audits by both the private sector and the Government Accountability Office.

That "so-called" strikes me as disrespectful.  Just as it would if people called him the so-called Speaker, or referred to the House of Representatives as the so-called elected representatives of the people.  Instead of, you know, of the banks.

Lind Paper on Nuisance Laws and Banks

Kermit J. Lind of Cleveland State has written Can Public Nuisance Law Protect Your Neighborhood from Big Banks? 44 Suffolk University Law Review 89 (2011).  Here's the abstract:

One manifestation of the mortgage crisis of the past decade is the destabilization of housing markets and neighborhoods where mortgage defaults were concentrated. As banks and their mortgage servicers employ business practices that result in banks or their agents controlling or owning vacant dwellings, the noncompliance with housing and other municipal codes by these institutional absentee owners presents neighborhoods and cities with a huge and costly public nuisance problem.

This article explores both the theory of public nuisance law and the experience of applying nuisance law in practice to mitigate the harmful consequences of bank debt collection and REO management. It looks at how and to what extent public nuisance law provides protection for those non-defaulting homeowners whose health, safety and welfare are threatened by the business practices of big banks. It compares litigation that applies public nuisance law in different ways to distinguish viable uses from unsuccessful uses of public nuisance law doctrine. The recent efforts to use public nuisance law against manufacturers and marketers of harmful products like guns and tobacco are distinguished from the application of public nuisance law against owners of real estate maintenance deficiencies are in violation of laws protecting the public health, safety and welfare.

Capuano and Ramsay on the Causes of Suboptimal Financial Behavior

Angelo Capuano and Ian Ramsay, both of Melbourne, have written What Causes Suboptimal Financial Behaviour? An Exploration of Financial Literacy, Social Influences and Behavioural Economics.  Here's the abstract:

This research report is part of a project, funded by the Australian Research Council, which will contribute to a broader understanding of the role of financial literacy and consumer behaviour in Australia. The research report explores the causes of financial behaviour and considers whether suboptimal financial behaviour has causes other than lack of financial literacy. Part A of the research report explains the importance of financial literacy. This part identifies the benefits of financial literacy to consumers, the community, the economy and the financial markets. Part B explains the meaning of financial literacy. This part reviews financial literacy surveys conducted worldwide and refers to academic literature to explain the key competencies and proficiencies of a financially literate consumer. Part C outlines the flaws in the decision making processes of consumers when choosing financial products. Part D identifies social, psychological and cognitive causes of suboptimal and irrational consumer behaviour. It considers social influences on financial behaviour such as wealth, income, social capital as well as psychological biases and heuristics studied in behavioural economics and neuroeconomics. It is shown that suboptimal consumer decisions have many causes, not just financial illiteracy. Part E reviews 23 financial literacy surveys to explain how financial literacy is measured. It also identifies common findings among the surveys. The Appendix to the research report provides a summary of 23 financial literacy surveys from the World Bank and a number of countries including Australia, the UK, US, Italy, the Netherlands, Singapore, Japan, Austria, Ireland and Russia. 

A Pair of Arbitration Articles

Thomas V. Burch of Florida State University has written Regulating Mandatory Arbitration, Utah Law Review.  Here's the abstract:

Over the last twenty-five years, the Supreme Court has relied on party autonomy and the national policy favoring arbitration to expand the Federal Arbitration Act’s scope beyond Congress’s original intent. Choosing these loaded premises has allowed the Court to reach the outcomes it desires while denying that it is making any political or moral judgments in its decisions – a type of bureaucratic formalism. One controversial outcome of the Court’s formalism, overall, has been the increased prevalence of mandatory arbitration. Although it reduces judicial caseloads and lowers companies’ dispute-resolution costs, it also restricts or eliminates individual rights and reduces public regulation of the companies that require it. The Court has supported the spread of mandatory arbitration despite these negative effects.

Because of the Court’s support, the parties being subjected to mandatory arbitration began asking lower courts for relief through the unconscionability doctrine in the early 1990s. And because the unconscionability doctrine could not provide the wide-scale relief they wanted, they also turned to Congress, convincing its members to introduce 139 anti-arbitration bills since 1995 – the majority of which proposed eliminating mandatory arbitration. A review of these efforts, including an original survey of these bills, reveals that these parties have been disregarding mandatory arbitration’s public benefits in favor of a rights-oriented, liberal approach that rejects regulation as a possible way to improve mandatory arbitration’s overall fairness.

This Article shows that both the Supreme Court’s and the reform advocates’ approaches to mandatory arbitration are flawed. It makes more sense, at least for now, to continue mandatory arbitration’s use while improving its overall fairness through legislative or agency regulation. Regulating mandatory arbitration with the goal of improving its fairness is consistent with pragmatic principles and is superior to the Supreme Court’s formalism and the reform advocates’ liberalism in the current mandatory-arbitration context. Taking this approach will allow us to study mandatory arbitration over time before deciding whether to eliminate it – a fair way to proceed given the importance of the rights at stake and the positive effects that mandatory arbitration can (possibly) have on the public good.

And Hiro N. Aragaki of Fordham Business adds Equal Opportunity for Arbitration, 58 UCLA Law Review.  The abstract follows:

Despite talk of a “federalism revival,” state law is quietly losing ground in the Supreme Court, and the arbitration area has proven to be no exception. As currently interpreted by the lower courts, the Federal Arbitration Act (FAA) is on course to preempt a vast array of state laws that serve important public interests, often with minimal intrusion on the arbitral process. Numerous petitions for certiorari have recently been filed in the wake of these developments. But except in the case of AT&T v. Concepcion (currently pending on the merits), the Supreme Court has denied all of them, leading many to call for Congressional intervention. The bitterly debated “Arbitration Fairness Act of 2009” is just the latest response to this controversy.

This Article offers a new theory for thinking about the extent to which the FAA should preempt state law. It deepens the work I began elsewhere, which is to reinterpret the Court’s FAA preemption jurisprudence as a principle of equal opportunity for arbitration. This enables me to reframe the current phenomenon of overpreemption in terms of a basic misapprehension of that principle rather than, as is traditionally supposed, in terms of the courts’ dogmatic “favoritism” toward arbitration.

I argue that a more sophisticated engagement with that logic will help courts fulfill the FAA’s mandate without inevitably displacing state law just because it happens to invalidate arbitration agreements. Considering controversial examples from the recent past, I conclude with concrete guidance for how my proposed model might be implemented in practice.

 

GAO Report Recommends CFPB Scrutiny of Debt Protection Products

The GAO, fulfilling a mandate in the Credit CARD Act of 2009, has isssued a report to Congress on debt protection products, which will soon be under the supervisory and enforcement authority of the CFPB. The report focuses on debt suspension and debt cancellation contracts sold in connection with credit cards and concludes that “the increased popularity of debt protection products raises the importance of effective regulatory oversight of these products.”

The GAO recommends that the CFPB (1) factor into its oversight of such products, “including its rulemaking and examination processes,” a consideration of the financial benefits and costs to consumers, and (2) direct its consumer financial education efforts toward identifying “ways to improve consumers’ understanding of credit card protection products and their ability to assess whether or not the products represent a good choice for them.” The CFPB agrees with the recommendations and intends to implement them, according to its letter commenting on the report.

In conducting its study, the GAO obtained data from the nation’s nine largest credit card issuers (representing about 85 percent of the general purpose credit card market by volume) and three major insurance companies (representing about 30 percent of the credit insurance market for open-end credit). The GAO’s concerns include the following:

• Federal regulators have generally not addressed the reasonableness of the pricing of debt protection products in their examinations of such products.

• Only a relatively small portion of the fees paid by consumers for debt protection products is returned to them in tangible financial benefit, and such benefits can have modest monetary value, with some issuers even capping the maximum amount of debt that is canceled but charging fees on borrowings above this threshold. 

• The “bundling” of coverage for multiple events that is characteristic of debt protection products can result in consumers purchasing coverage that is not applicable to them, such as unemployment coverage for a self-employed individual who cannot make an unemployment claim.

• Consumers may have difficulty obtaining the full terms and conditions of debt protection products before making a purchase. For example, the report notes that the GAO was told by customer representatives of seven of the nine surveyed issuers that they would not provide the terms and conditions before enrollment.  

ACLU Suit to Bar Florida Foreclosure Rocket Docket

Yesterday the ACLU filed a petition for a writ of prohibition in the Florida Court of Appeal, to enjoin the truncated procedures being used in Lee County to dispatch thousands of judicial foreclosure cases in Fort Myers.  According to the petition, homeowners are routinely denied due process, and the generally applicable rules of procedure have been illegally suspended, in the name of rushing foreclosures to judgment.  In particular, the petition asserts that homeowners who assert defenses and are seeking discovery are having summary judgments entered against them while their motions and discovery requests are still undecided.

The robosigning scandal brought to light the shortcuts and fraud used by mortgage servicers and lawyers in order to circumvent judicial processes designed to protect defendants from wrongful loss of their property.  In many cases, judges have severely rebuked attorneys for abusing the foreclosure process.  It will be fascinating to see how the Florida judiciary responds to the accusation that its own judges are more or less engaging in a form of robosigning.

One interesting note regarding moral hazard and mortgage modifications:  the plaintiff in the ACLU suit alleges, as many others have, that Countrywide/BofA told her to stop paying her mortgage so that she could qualify for a mortgage modification.  Those who claim that mortgage modifications create "moral hazard" and will cause home owners to stop making payments often cite the fact that many Countrywide borrowers stopped making mortgage payments shortly after the 2008 announcement of Countrywide's deal with the Attorneys General to do more modifications.  The surge in Countrywide's delinquencies was, in all likelihood, self-inflicted.  Homeowners who fully intended to continue paying as long as they could were misled by Countrywide's poor customer service training and communication (borrowers did not have to be delinquent to get modifications, but they did have to be experiencing genuine hardship.)

More on Proposals to Gut the CFPB

by Deepak Gupta

As discussed in my previous post, the House Financial Services Committee is holding hearings this morning on GOP proposals to turn the CFPB into a five-member commission and strengthen FSOC veto power, among other things. A staff memo describes the four GOP bills from the sponsors' perspective.

The committee's website now includes the written testimony, including pro-Bureau statements by Adam Levitin of Georgetown Law and Hilary Shelton of the NAACP. The Chamber of Chamber asserts, with a straight face, that it wants to avoid regulatory capture.  If you want an accurate overview of what's really going on here, read Levitin's testimony first.

Bloomberg News reports that Sen. Tim Johnson (D-SD), Chairman of the Senate Banking Committee, has come out strongly against the four GOP proposals under consideration, which suggests the proposals have little hope of making it through the Senate. “This issue was already considered during the thorough Wall Street reform debate we had last year," said Johnson in an email, "and agreement was reached that consumers would be protected best with a director in place at the CFPB.

House Committee Takes Up Legislation to Weaken the CFPB

by Deepak Gupta

The House Financial Services Committee is holding a hearing at 10am tomorrow, April 6, on "Legislative Proposals to Improve [Read: Weaken] the Structure of the CFPB."  The Committee will consider four GOP proposals to weaken the Consumer Financial Protection Bureau's effectiveness in both the short and long term -- even before the agency is officially launched.  Each of the four proposals seeks to relitigate issues that were resolved with the enactment of the Dodd-Frank Act last year:

H.R. 1121: "The Responsible Consumer Financial Protection Regulations Act of 2011." This bill, introduced by Chairman Spencer Bachus, would replace the Director of the CFPB with a five-member Commission.

H.R. 1315: "The Consumer Financial Protection Safety and Soundness Act." This bill, introduced by Rep. Duffy, would beef up the Financial Stability Oversight Council's already unprecedented power to veto regulations issued by the CFPB.  It would change the vote required for the FSOC to set aside CFPB regulations from two-thirds to a simple majority. It would make clear that the FSOC must set aside any regulation that puts the safety and soundness of the banking system at risk. And it would eliminate the time limits established for the FSOC's decision about whether to veto a regulation.

H.R. __ and H.R. ___: Legislation Affecting CFPB's Authorites Prior to the Appointment of a Director. These bills, introduced by Rep. Capito, would (1) remove the prudential regulators' ability to allow the CFPB to participate in examinations of large financial institutions before the designated transfer date and (2) make the date for transferring regulatory authority dependent on whether the CFPB's Director has been confirmed by the Senate.

Tomorrow's hearing will include testimony from representatives of five financial services trade groups -- the American Bankers Association, the Consumer Bankers Association, the Credit Union National Association, the Independent Community Bankers of America and the National Association of Federal Credit Unions - along with input from Jess Sharp, executive director of the U.S. Chamber of Commerce's Center for Capital Markets Competitiveness. As far as I can tell, nobody from the CFPB is slated to appear.

For more, see this article in The Hill. You can watch a live webcast of the hearing here.