Paper on the Effect of State and Local Anti-Predatory Lending Laws

Raphael W. Bostic of the University of Southern California - School of Policy Planning and Development, Kathleen C. Engel of the Cleveland State University - Cleveland-Marshall College of Law, Patricia A. McCoy of Connecticut, and Anthony Pennington-Cross of the Marquette University - Department of Economics, have co-authored State and Local Anti-Predatory Lending Laws: The Effect of Legal Enforcement Mechanisms, available at http://ssrn.com/abstract=1005423.  Here's the abstract:

Subprime mortgage lending has grown rapidly in recent years and with it, so have concerns about predatory lending. In response to evidence of predatory lending, most states have enacted new laws or expanded existing laws to address abuses in the subprime home loan market. The effect of these statutes is a matter of debate. This paper seeks to improve the understanding of this increasingly important issue and pays particular attention to the role that legal enforcement mechanisms play in this context. Our results are consistent with the view that anti-predatory lending laws influence subprime lending markets and that disaggregating the details of the overall legal framework into its component parts is essential for understanding subprime market dynamics. The restrictions, coverage, and enforcement components all have significant relationships with subprime market outcomes, with the coverage relationship found to be broadly consistent with the reverse lemons hypothesis put forward by Ho and Pennington-Cross (2007). The results also suggest that the newer mini-HOEPA laws have had an impact on the subprime market above and beyond the older preexisting laws, particularly for subprime originations. Broader coverage through these new laws is associated with higher origination likelihoods, while increased restrictions through the mini-HOEPA laws are associated with lower origination propensities.

How the candidates stand on the subprime meltdown

by Sam Glover

Bankrate.com highlights the major-party presidential candidates' stances on the subprime meltdown. Romney, Huckabee, and McCain favor a light touch, perhaps freezing interest rates or offering some aid to borrowers. But they are vague as to what, if anything, they would do. Paul favors a return the gold standard and the abolition of the Federal Reserve.

Democrats Clinton and Obama, by contrast, each have a plan to address the problem and prevent a recurrence.

Clinton's four-point plan is to (1) crack down on unscrupulous mortgage brokers; (2) crack down on mortgage lending abuses; (3) help reduce foreclosures; and (4) expand affordable housing.

Obama's also has four points to his approach, and would (1) combat mortgage fraud and subprime loans; (2) mandate accurate loan disclosure; (3) create a fund to help homeowners avoid foreclosure; and (4) close the bankruptcy loophole for mortgage companies.

So there you have it. The Democrats seem to have given the subprime meltdown more thought than the Republicans, with the possible exception of Ron Paul, whose solution involves a fundamental change to the market.

[Caveat Emptor crosspost]

Becker and Posner on the Suprime Mortgage Meltdown

by Jeff Sovern

The Becker-Posner Blog, written by Law and Economics Guru Richard Posner and the Nobel Prize-winning economist Gary Becker, always offers interesting commentary.  In December they took on the suprime mortgage crisis (you can find their posts here, though you have to scroll down a bit).  The posts are worth reading in full, but here are some excerpts.  Becker offers this assessment about the Fed's proposal to prevent recurrences of the crisis:

Given the low interest rate lending atmosphere of the past few years, it is highly unlikely that borrowers would have turned down the mortgages they received if they had much better information about terms, or that lenders would have been more reluctant to originate or hold these mortgage assets if they had better information about the credit and other circumstances of borrowers. This is why I doubt that the rules proposed * * * by the Federal Reserve to require lenders to get more information about borrowers, and to provide more information to borrowers about the terms of mortgage loans, would have been effective in warding off this crisis, or will be effective in preventing future crises.

I'm not sure what the basis for his assumptions is, but it does make you think.  He also comments:

* * * it is ironic that only a few years ago, banks were being investigated for "redlining"; that is, for avoiding lending to blacks and other residents of poor neighborhoods. The Fair Housing Act of 1968 prohibits discrimination in lending, and The Community Reinvestment Act of 1977 requires banks to use the same lending criteria in all communities, regardless of the living standards of residents. As a result of the present crisis, however, banks and other lenders are being criticized for equal opportunity lenient lending to all, including black residents of depressed neighborhoods.

That isn't precisely how I interpret the CRA, and I would have mentioned ECOA's prohibition on discrimination in lending, and my own understanding of the criticism for lenders is not that they provided equal opportunity lending to all, but that they made some loans on terms unsuited to their borrowers, but perhaps he's seen some criticism that I haven't.  In any event, the perspective is interesting.  Here's an excerpt from Posner's post:

It has been argued that the people who took out subprime mortgages with adjustable interest rates did not understand the risks they were assuming, and that the banks that bought mortgage-backed securities did not understand the risks they were assuming. I am skeptical. Suppose you have a low income, you'd like to own a house, and a mortgage broker offers to arrange a mortgage that will cover 100 percent of the price of the house. What do you have to lose by accepting such a deal? Since you haven't put up any capital, you have no capital to lose if you lose the house because you cannot make your monthly mortgage payments. As for the banks, they rode the bubble for too long; but, to repeat, had they got out too early, they would have left a lot of money on the table.

If there's any evidence floating around that borrowers did understand the risks they were assuming, I'd love to hear it. 

Rent to Own in the News

From time to time, articles appear in the media bemoaning the high cost of rent to own transactions.  Here is another, from yesterday's Times.  This one is a bit unusual in that it contains a suggestion that placing rent-to-own stores in neighborhoods largely poplulated by people of color may violate the ECOA.  Some excerpts from the article about the prices:

* * *  40-inch Bravia [TV], with payments of $47.51 a week. In 117 weeks, the customer would own the set outright, for $5,558. * * *

* * *

* * * They wanted $4,000 for a Sony laptop,” Ms. Navarro said. “I could pay $1,500 honest cash and get it.”

Texas Supreme Court: Threat or Menace?

The Texas Supreme Court, since the turn of the Millennium, never met a defendant it didn’t like. In an opinion delivered on February 1, it once again proved that to be the case, when it reversed and rendered judgment in yet another class action case, DaimlerChrysler Corp. v. Inman.

But wait there’s more: There is a dissent! And the dissent is written by the Chief Judge!! And there are three more justices on the dissent, making this a 5-4 decision!!!

Because the majority decision is allegedly based on standing law, it’s important to understand the basis of the case. The seat belts on plaintiffs’ cars (and trucks — this is Texas, after all) could accidentally come unlatched in an accident. Since none of them was unfortunate enough to have already been hurt when the belts failed in a collision, plaintiffs only asked for economic damages — the cost of replacing defective belts with ones that actually worked.

Telling the plaintiffs, “You’re not dead yet,” the majority held that the possibility of harm was just too darn small, so no standing.

When plaintiffs attempted to point out that this would be a merits decision in any normal court, the majority responded that “standing, and the concrete injury it requires, is quite distinct from the merits of a claim and the injury required to prove it.”

Okay, let me see if I understand this. If I have a meritorious claim and can prove my injury, in Texas I am simply out of luck if five justices decide that I am whining about unimportant things.

The Chief Justice, in dissent, concluded that, “Today, the Court conducts an extraordinary and unworkable reading of both pleading and precedent . . ..  We have never before stretched the doctrine this far. The Court’s opinion reveals a visceral distaste for class actions.”

”Oh, yeah?“ say his five brethren (yup — all men; the lone woman on the court is in dissent). And here’s the rebuttal “We simply think that the rights of ten million vehicle owners and lessees across the United States should not be adjudicated in an action brought by three plaintiffs who cannot show more than the merest possibility of injury to themselves.“ An interesting argument in rebuttal, since it seems to provide support for the position asserted.

Okay, let me see if I understand this. The majority does not have a visceral distaste for class actions — it simply doesn’t believe they should exist at all.

Another point of note came fairly early, when the majority wrote, “In designing seatbelt buckles, the risk of injury from accidental release of easy-to-unlatch buckles must be balanced against the risk of injury from non-use of hard-to-unlatch buckles, for either way, there is risk. The National Highway Traffic Safety Administration is charged with being sure that balance is struck in the right place for vehicles sold throughout the country. The decision is not one for a jury in one state or another to make for the rest of the nation. NHTSA has never required that the Gen-3 buckles be recalled and replaced.”

Absolutely right, your honors! Why in the world should we respect the rules of court or the fundamental tenets of our judicial system, if NHTSA hasn’t done anything?

Thank goodness Texas has a radically activist court willing to leap into the breach to protect someone. Pity it’s a German multinational.

The mortgage mess explained

The good folks at NEDAP in New York have made a wonderful video of one woman's testimony about how an ordinary, well-educated middle class homeowner can find herself facing foreclosure. We need more first-person accounts from foreclosure victims like this one.

Groups to Congress: Make BofA clean up Countrywide

In a February 1 letter, four community development and advocacy groups have called on Congress to hold hearings on the BankofAmerica acquisition of Countrywide, a merger that will make BofA the nation's largest mortgage lender and servicer. The groups want Congress to determine whether BofA will devote adequate resources to foreclosure prevention and loan modifications, given BofA's past record of following acquisitions with layoffs.

The groups also call attention to the fact that after the merger BofA will have more than 10% of all bank deposits nationwide, which could violate federal law. BofA says there is a loophole, and that deposits held by federally-chartered thrifts like Countrywide FSB don't count towards the 10% concentration cap. For banking law geeks, this is a question governed by 12 USC 1842 and the definitions in 12 USC 1841.

Meanwhile a hedge fund wants to block the merger on the grounds that the $8 per share offered by BofA to Countrywide shareholders is too low (?). Countrywide Financial (CFC) has been trading between $6.00 and $7.50 in the last few days.

CPSC Drags Its Feet on Critical Safety Warnings

  A new Public Citizen report, Hazardous Waits: CPSC Lets Crucial Time Pass Before Warning Public About Dangerous Products, takes the Consumer Product Safety Commission to task for failing to compel manufacturers to provide prompt notice of hazardous products and raps the CPSC for dragging its feet on passing those warnings on to the public.  A study of 46 cases since 2002 in which the CPSC fined companies for violating the reporting law — which calls on manufacturers to notify the agency "immediately" after learning of product safety risks — found that companies waited an average of 993 days, or 2.7 years, before informing the CPSC. The CPSC then delayed an average of 209 additional days before warning the public. 

The hazards that were kept from the public are serious. They included coffee makers and vacuum cleaners prone to catching fire, treadmills that spontaneously accelerated to an Olympic miler’s pace, all-terrain vehicles with throttles that became stuck in the “go” position, bicycles with forks that could break under normal use, and infant swings that could cause strangulation and were implicated in six deaths.

Attention homeowners: your lender can help you avoid foreclosure

According to a Freddie Mac study, 57% of homeowners are unaware of the workout options that could help them avoid foreclosure. And this is an improvement, up from 61% in 2005. Will the lender actually work something out? It's worth a try, and lenders do know that allowing a house to go into foreclosure is bad for everyone, lenders included.

[via Consumerist]

Edit: Phuong Cat Lee from Consumer Smarts linked to a number of helpful resources for consumers looking to get help from their lenders.

Lexis Willing to Abandon Unfair Arbitration Clause

by Paul Bland

It’s no secret that Westlaw an Lexis are in a fierce competitive battle for customers and marketshare. In light of this situation, I’ve always been curious that Lexis’s standard contract with law firms contains a long set of provisions that require the arbitration of any disputes between Lexis and its customers.

It’s not enough that Lexis’s contract provides (in a weird irony) that its customers must abandon a number of basic legal rights in order to get access to its legal research service, but it’s also a particularly unfair arbitration clause:

Lexis’s arbitration clause includes a gag order on its customers requiring tem to keep all arbitrations confidential. A number of courts have struck down similar secrecy provisions in consumer arbitration clauses as unconscionable.

Lexis’s arbitration clause requires any customer with a claim against it to arbitrate the claim in the headquarters city of Lexis, which is apparently Dayton, Ohio. What a deal if the customer lives in Seattle or Maine! A number of courts have struck down similar provisions requiring consumers to travel long distances to arbitrate claims.