CFPB's Proposed Mortgage Disclosure Rules and Criticism of Them

The Dodd-Frank financial reform law directed the Consumer Financial Protection Bureau to propose new disclosures that consumers will receive when they apply for and close on a mortgage loan. Current law demands differing and arguably confusing disclosures under two different laws: the Truth in Lending Act and the Real Estate Settlement Procedures Act. To see why the CFPB thinks its proposal makes sense, read the agency's summary at pages 2 through 8 of its proposed new rules and forms. (The proposal has just been released and public comments are now being taken.)

Law professor Jonathan Macey has written this op-ed, which appeared in last Wednesday's Wall St. Journal, that criticizes the CFPB's proposal. He claims that the new rules will undermine consumers' loan options and says that Habitat for Humanity has criticized the proposal on that ground:

Will they make it easier for consumers to get a loan? The nonprofit Habitat for Humanity is concerned that they will impede its "ability to enable low-income families to become homeowners." Why? Because any lender, including organizations such as Habitat, is at legal risk if they try to help low-income borrowers who lack the ability to repay their loans. (Habitat lends money to people so they can buy the houses they help build. It uses the monthly mortgage payments to help build still more houses.)

He gives two examples of what he sees as limits on consumer choice:

The [new rules] would forbid many borrowers from making smaller payments every month, followed by a single, one-time balloon payment to retire the principal at the end. They also would cap late fees—which means borrowers would be unable to get a lower interest rate on a loan by agreeing to pay a penalty if they don't make their payments on time.

Macey also complains that that the new disclosure forms would make disclosure of the Annual Percentage Rate (APR) less promiment:

Oddly, hidden on the new disclosure forms is the Annual Percentage Rate. For decades the APR was front and center on government-mandated disclosure documents. It is the single number that shows borrowers the cost of borrowing including such factors as the interest rate, certain fees, and the maturity structure of the loan. The CFPB claims its consumer testing showed people didn't understand the APR. Yet if someone is trying to compare two loans—one with a lower interest rate and $15,000 in fees, the other with lower fees but a higher interest rate—it's not possible to determine which loan is cheaper without the APR.

Finally, Macey asserts that the length of the proposed rules is itself a problem, noting that while the proposed mortgage closing form is fives pages, "the agency rules required to implement the new forms weigh in at an astonishing 1,099 pages." So? If the agency's model disclosure forms are clear and useful, they should aid both consumer and lender, regardless of the number of pages the CFPB used to explain itself in the Federal Register. Moreover, "the agency rules" are not 1,099 pages (as presumably professor Macey is aware). The CFPB's proposal -- like many Federal Register rulemaking notices -- contains many pages of explanation, descriptions of the agency's procedures, illustrative examples of how the rules are intended to operate, etc. The actual proposed rules take up far fewer than 1,099 pages.

Beales, Muris, and Pitofsky on the Standard for Advertising Substantiation

 

Howard Beales

 of George Washington Business School,

Timothy J. Muris

 of George Mason, and

Robert Pitofsky

 of Georgetown have written In Defense of the Pfizer Factors. Here is the abstract:

Since the Federal Trade Commission’s 1972 Pfizer decision, advertisers have been required to possess and rely on a “reasonable basis” for product claims. From its inception, the requirement was a flexible one, taking into account the costs and benefits of requiring additional substantiating evidence. In particular, the Commission has considered the relative costs of possible errors in setting the level of evidence, evaluating both the costs of mistakenly allowing false claims and the costs of mistakenly prohibiting truthful claims. In contrast to the FTC, the FDA applies a less flexible standard, often requiring elaborate scientific evidence before even non-drug products can make claims about health and nutrition benefits. In a notable clash between these conflicting approaches, the FTC, joined by the National Cancer Institute, overcame the FDA’s objections to Kellogg’s 1984 claims that diets high in fiber could reduce the risks of cancer. Despite previous bipartisan application of the substantiation doctrine, the current FTC is replacing its flexible standard with stringent evidentiary standards similar to those required for new drugs. This approach threatens to deny consumers the benefits of information that enhances the performance of product markets.

 

Cooley lawsuit dismissed.

The lawsuit brought by former law students against Thomas M. Cooley Law School has been dismissed. While this probably doesn’t come as a surprised to most, the court’s reasoning is interesting, and gives some hope to similar lawsuits in other states. 

The court’s decision was based on The Michigan Consumer Protection Act, as interpreted by the Michigan courts. The district court first held that the Michigan Act does not apply because the purchase was not for personal family or household purposes. “Plaintiffs purchased a legal education in order to make money as lawyers so that they could live a lifestyle that they believed (perhaps naively) would be more pleasing to them. This is a business purpose.” [The court seems to indicate plaintiffs would have a claim if the went to law school “so that they could leisurely read and understand Supreme Court Reports.”] The court then dismissed two other counts “because one representation is literally true and because Plaintiffs unreasonably relied upon the representations that comprise Plaintiffs’ misrepresentation claim.” 

This result is similar to that reached by the court in NY in a suit against New York Law School, and does not bode well for other pending lawsuits. But unlike Michigan, many state consumer protections law, e.g., Texas, are not as limited in scope, do not accept “literal truth” as a defense, and require reliance, not reasonable reliance. It will be interesting to see how future suits in other jurisdictions, turn out.

 

Department of Education and CFPB Issue Joint Report on Student Loan Debt

As explained on the Consumer Financial Protection Bureau's website . . .

The Dodd-Frank Wall Street Reform and Consumer Protection Act requires the
Director of the Consumer Financial Protection Bureau and the Secretary of Education
to submit a Report on private student loans. This Report [issued on July 20, 2012] addresses the following topics, as set forth in the Act:

• The private lenders, their market and their products, as they have evolved and performed over time,
• The consumers of these products, their characteristics, and shopping, usage and repayment behaviors,
• Consumer protections, including recent changes and possible gaps,
• Fair lending compliance information currently available and its implications, and
• Statutory or legislative recommendations to improve consumer protections.

Read the entire report and this LA Times article on the report, which explains the report's critical findings on the private student-loan industry and notes:

With more people steeped in student loan debt and defaults rising, two federal agencies are urging Congress to rein in private lenders that have flooded the market with often risky loans. The growth in loans from banks and other private lenders are exacerbating problems that college graduates — and dropouts — already have in repaying their government loans. Private loans made up about 15% of the $1 trillion in student loans outstanding last year. During the subprime housing boom in the mid-2000s, private lenders loosened their standards amid high demand from investors for loans packaged into securities ... . The lax standards and aggressive marketing led some people to borrow more than necessary to pay for college, the [agencies'] report said. "Too many student loan borrowers are struggling to pay off private student loans that they did not understand and cannot afford," said Richard Cordray, director of the consumer bureau. "We must do our best to leave the next generation in a better place than we are today, rather than buried under a mountain of debt."

Reminder: Consumers generally may not discharge student loan debt in bankrupty, even when the loans are entirely private.

LA Times Interviews CFPB's Richard Cordray on Agency's One-Year Anniversary

Today (Saturday) is the Consumer Financial Protection Bureau's one-year anniversary. Expect a lot of articles marking it. The LA Times scored an interview with CFPB head Richard Cordray that's worth a look.

The CFPB's Impact

The Blog of the Legal Times says in this article that the Consumer Financial Protection Bureau's first year was one "in which it remained a potent political target but also made considerable headway implementing its agenda." The article goes on to discuss the CFPB's agenda and regulatory power with lawyers who represent industries regulated by the CFPB.

More Straight Talk From Michael Bloomberg

We blogged earlier today about NYC mayor Michael Bloomberg's ban on large-sized sugary drinks. This blog centers on consumer law and policy, broadly defined to be sure. But it hasn't extended to gun violence. Nevertheless, I think it's worth passing along what Bloomberg said today, reacting to the Colorado mass shooting:

You know, soothing words are nice, but maybe it's time that the two people who want to be President of the United States stand up and tell us what they are going to do about it, because this is obviously a problem across the country. And everybody always says, 'Isn't it tragic,' and you know, we look for was the guy, as you said, maybe trying to recreate Batman. I mean, there are so many murders with guns every day, it's just got to stop. And instead of the two people - President Obama and Governor Romney - talking in broad things about they want to make the world a better place, okay, tell us how. And this is a real problem. No matter where you stand on the Second Amendment, no matter where you stand on guns, we have a right to hear from both of them concretely, not just in generalities - specifically what are they going to do about guns?

Posner on Bloomberg (and the obesity epidemic)

by Brian Wolfman

We have blogged (for instance, here and here) on New York mayor Michael Bloomberg's decision to ban the sale of sugary drinks larger than 16 ounces at restaurants, movies theaters, food carts, and the like. Bloomberg's policy has garnered support in some circles. But it has also come under severe criticism as a heavy-handed "nanny-state" tactic that likely will be ineffective and could impose additional costs on consumers (that is, instead of buying one 18-ounce drink, consumers may now buy two 12-ounce drinks, which together would cost more in terms of cash and calories). TV comedian and social critic Jon Stewart, for instance, really went after Bloomberg's ban.

Federal judge Richard Posner -- who is no anti-"nanny-state" libertarian, but generally is careful to support only those policies he views as cost effective -- sees potential value in Bloomberg's ban. Writing on his blog, Posner begins by noting that although generally he is "hesitant to recommend governmental intervention in personal choice," "the case for some government intervention in the obesity epidemic ... seems to me compelling." He says he's not interested in saving the obese from themselves, but he is very concerned about the huge costs (mostly medical costs) that obese people impose on society generally. He then turns to his central argument:

"Bloomberg’s proposal is widely criticized, not only on the shallow ground that it interferes with freedom of choice, but on the more substantial ground that it can’t have much effect, since the same sugared drinks can be sold in smaller containers. But this misses two important points. The first is that the only reason for selling a product in different-size containers is that there are consumer preferences for the different container sizes; for it would be cheaper to sell all one’s product in identical containers. This suggests that if the sale of sugared drinks in big containers is forbidden, there will be at least a slight drop in the purchase of those drinks and hence in their consumption; there will not be perfect substitution of smaller containers; and this could be significant because sugared soft drinks are as I said the straightest path to obesity. More important is the symbolic significance of Bloomberg’s proposal (if it is adopted and enforced). It is an attention getter! It tells New Yorkers that obesity is a social problem warranting government intervention, and not just a personal choice."

Posner then goes on to make an interesting -- and, and in my view, accurate -- analogy to the government-driven movement to reduce smoking. Worth reading.

Can Consumers Have Facebook and Privacy Too?

 

Andrew Chin

 and

Anne Klinefelter

, both of North Carolina, have written Differential Privacy as a Response to the Reidentification Threat: The Facebook Advertiser Case Study, 90 North Carolina Law Revi

 

Recent computer science research on the reidentification of individuals from anonymized data has given some observers in the legal community the impression that the utilization of data is incompatible with strong privacy guarantees, leaving few options for balancing privacy and utility in various data-intensive settings. This bleak assessment is incomplete and somewhat misleading, however, because it fails to recognize the promise of technologies that support anonymity under a standard that computer scientists call differential privacy. This standard is met by a database system that behaves similarly whether or not any particular individual is represented in the database, effectively producing anonymity. Although a number of computer scientists agree that these technologies can offer privacy-protecting advantages over traditional approaches such as redaction of personally identifiable information from shared data, the legal community’s critique has focused on the burden that these technologies place on the utility of the data. Empirical evidence, however, suggests that at least one highly successful business, Facebook, has implemented such privacy-preserving technologies in support of anonymity promises while also meeting commercial demands for utility of certain shared data.

This Article uses a reverse-engineering approach to infer that Facebook appears to be using differential privacy-supporting technologies in its interactive query system to report audience reach data to prospective users of its targeted advertising system, without apparent loss of utility. This case study provides an opportunity to consider criteria for identifying contexts where privacy laws might draw benefits from the adoption of a differential privacy standard similar to that apparently met by Facebook’s advertising audience reach database. United States privacy law is a collection of many different sectoral statutes and regulations, torts, and constitutional law, and some areas are more amenable to incorporation of the differential privacy standard than others. This Article highlights some opportunities for recognition of the differential privacy standard as a best practice or a presumption of compliance for privacy, while acknowledging certain limitations on the transferability of the Facebook example.

Medical device approval and an FDA "enemies list"

Both the New York Times [here and here] and the blog Pharmalot [here] have been reporting this week details about the Food and Drug Administration monitoring the emails of employee scientists who expressed concern to Congress that the FDA was forcing employees to approve medical devices that posed unacceptable risks. The monitoring was first reported in a Washington Post story in January, when the employees sued the FDA. According to the NYT, the agency surveilled five of own scientists beginning in 2010, resulting in “80,000 pages of intercepted e-mails and other documents, along with what amounted to an enemies list of 21 ‘actors’ at the agency, in Congress, the news media and academia who were thought to be collaborating to put out confidential information damaging to the reputation of the FDA’s medical device reviews.” The software used by the agency “tracked keystrokes, intercepted personal e-mails, copied documents on personal thumb drives and followed line-by-line messages as they were drafted.” The FDA’s Office of Chief Counsel reportedly approved the surveillance, which was run out of the agency’s “information security section.” As for the scientists' claims about the approved devices, the NYT reports that a “confidential government review in May by the Office of Special Counsel, which deals with the grievances of government workers, found that the scientists’ medical claims were valid enough to warrant a full investigation into what it termed “a substantial and specific danger to public safety.”