Consumer Law & Policy Blog

CFPB Report: Nearly Half of Borrowers Do Not Shop for a Mortgage

by Jeff Sovern

As previously reported in The New York Times and CFPB Monitor, a CFPB report based on data in the National Survey of Mortgage Borrowers has found that nearly half of borrowers don't shop for a mortgage. The new report,taken together with my earlier survey of mortgage brokers finding that consumers virtually never back out of mortgages upon learning their actual rates in the final TILA disclosures and don't use thoses disclosures to comparison shop for mortgages, raises concerns about whether consumers are obtaining the best possible deals on mortgages. As Ryan J. Richardson and Richard J. Andreano, Jr. wrote on the CFPB Monitor "the data and their attendant conclusions suggest that the new TILA/RESPA integrated disclosures, set to be implemented in August 2015, may not, by themselves, sufficiently address consumers’ failure to shop the mortgage market."  The Bureau has also created a web tool for checking mortgage rates which may help consumers savvy enough to use it.   The Times article notes about that:

Both NAMB and the Mortgage Bankers Association, another professional group, have been critical of the bureau’s focus on interest rates alone. Mr. Councilman called the rate-checking tool “probably one of the worst things you can do for consumers,” because it might cause borrowers to make a decision without considering factors like closing costs and other fees.

In response to the criticism, the bureau released a statement saying there were plans to expand and improve the online tools to “help orient consumers to the overall mortgage process.” 

I hope the Bureau is able to do that because I fear that if consumers use the tool, mortgage lenders will respond to the extent they can by increasing fees that are not taken into account in the rate checker and so the tool will not enable consumers to discover the true cost of their loan (think of how airlines now charge fees for such things as boarding earlier, checking bags, extra legroom, and in some cases, using the overhead compartments, and so airline passengers shopping only on the basis of ticket price may not realize the full cost of flying with some carriers).  It may be, however, that lenders have only a limited capacity to shift expenses in that way because of regulation of the APR in TILA. It will be interesting to see what additional steps the Bureau takes to protect mortgage borrowers.

Consumer issues in tonight's State of the Union speech

The President highlighted consumer issues several times in his speech tonight.  Here's some of the relevant text:

• On Dodd-Frank and the CFPB: "We believed that sensible regulations could prevent another crisis, shield families from ruin, and encourage fair competition. Today, we have new tools to stop taxpayer-funded bailouts and a new consumer watchdog to protect us from predatory lending and abusive credit card practices."

• On vetoing GOP efforts to roll back Dodd-Frank: "We can’t put the security of families at risk by taking away their health insurance, or unraveling the new rules on Wall Street, or refighting past battles on immigration when we’ve got a system to fix. And if a bill comes to my desk that tries to do any of these things, it will earn my veto."

• On reducing crippling student-loan debt and making community college free: "Forty percent of our college students choose community college. ... Whoever you are, this plan is your chance to graduate ready for the new economy, without a load of debt. ... I want to spread that idea all across America, so that two years of college becomes as free and universal in America as high school is today. And I want to work with this Congress, to make sure Americans already burdened with student loans can reduce their monthly payments, so that student debt doesn’t derail anyone’s dreams."

• On middle class economics: "[A]t every moment of economic change throughout our history, this country has taken bold action to adapt to new circumstances, and to make sure everyone gets a fair shot. We set up worker protections, Social Security, Medicare, and Medicaid to protect ourselves from the harshest adversity. We gave our citizens schools and colleges, infrastructure and the internet — tools they needed to go as far as their effort will take them. That’s what middle-class economics is — the idea that this country does best when everyone gets their fair shot, everyone does their fair share, and everyone plays by the same set of rules."

Amato and Willis op-ed in L.A. Times

Lauren Willis (of Loyola Los Angeles) and Theresa Amato (of the Fair Contracts Project) have a great op-ed in today's Los Angeles Times on what to do about consumer financial illiteracy. "There are dozens of entities devoted to educating you about all things financial," they write, "[b]ut none of it is working very well." Financial literacy education isn't the answer; instead "[t]he financial marketplace must be structured so that ordinary people — people with limited time, math skills, attention and willpower, and an abundance of those wonderful American traits of trust and optimism — can navigate it safely and effectively." This means enforcing existing unfair-and-deceptive-practices laws, banning forced arbitration, and, perhaps most importantly, bringing financial industry incentives "into alignment with the interests of consumers."

Troubling sale of Corinthian Colleges set to close soon

by Maura Dundon (Senior Policy Counsel, Center for Responsible Lending)

The sale of Corinthian Colleges (the for-profit college chain that operates Everest, WyoTech, and Heald) to the student loan debt collector ECMC is poised to close today. The deal has raised serious concerns about the fate of Corinthian students and whether the new entity represents a true reform for student borrowers. [Update: It's being reported that the closing has been postponed through February 2.]

Corinthian has been the subject of numerous accusations of abusive conduct and law enforcement investigations into consumer fraud allegations. With Corinthian suffering severe financial instability, the Department of Education is midwifing the sale to ECMC -- which itself has a record of consumer abuse allegations against it—instead of allowing Corinthian to fail. Despite serious concerns raised by consumer, education, civil rights, and student groups, and by legislators, the Department of Education is set on seeing the deal through.

As part of the deal, which must be approved by the Department of Education and other regulators, Corinthian will be transformed from a for-profit into a non-profit, evading the bulk of regulations that apply to career college programs. This includes the “gainful employment” rule that the Obama administration has worked so hard to put into place.

Among the many troubling aspects of the deal, ECMC plans to perpetuate Corinthian’s use of forced arbitration agreements with students, suppressing their rights to bring their legitimate complaints to court and hindering important information that would otherwise reach regulators. Arbitration agreements are common at for-profit colleges, but they are essentially unheard of in private non-profit and public colleges. The deal would already limit ECMC’s successor liability for Corinthian’s conduct – so the arbitration agreements are clearly intended to reduce ECMC’s liability for its own conduct.

The Department of Education says that ECMC is “committed to giving students a new start and more opportunities for success,” but the insistence on arbitration suggests that ECMC expects to be the subject of a high volume of strong consumer and whistleblower complaints. The fact that ECMC still expects such a consumer litigation risk after it takes over belies ECMC and the Department’s claims that the deal represents a real sea change in conduct towards students.

The fate of Corinthian students’ $500 million dollars in private student loans remains a mystery. The CFPB filed suit against Corinthian this fall for predatory lending practices related to its Genesis private student loan product, but Corinthian sold the loans to a debt buyer for pennies on the dollar on the eve of the CFPB’s complaint filing. During that time period, Corinthian was also under close scrutiny and oversight by the Department of Education – but nobody seems to have taken action to stop the sale. This is a shame. Although borrowers may have some residual FTC Holder Rule claims and defenses against the debt buyer derived from Corinthian’s conduct, the best result would have been for the Department to require that Corinthian forgive the loans as part of the sale to ECMC, or forgiveness pursuant to the CFPB action. Those chances have been lost, since most of the loans are no longer held by Corinthian. Only a small fraction of the loans, those which are still held by Corinthian, will be forgiven under the deal.

By keeping Corinthian on life support, the Department of Education has also effectively blocked students from having their federal student loans discharged. The deal with ECMC would provide some relief for a subset of students, but if Corinthian closed, all current and recent students would have the option to have their loans discharged. But instead, Corinthian remains open and enrolling new students who are incurring new debts pending the sale. Some students certainly may prefer their school to remain open, but one can’t help but wish that this deal let all the indebted students have the option for a fresh start.  ECMC is poised to enter this new endeavor free and clear of liability and with significant insulation against future claims. Why not the students, too?

American Banker Op-Ed on the St. John's Consumer Arbitration Study

Here.

Cleveland Plain Dealer's Sheryl Harris on the St. John's Arbitration Study

Here.  An excerpt:

Right now, the CFPB is finishing up the second phase of its study, which will hone in on consumers' understanding of arbitration clauses. At that point, it will decide whether it needs to act.

If the bureau's findings are anything like those of the law school study, it must. Being stripped of our rights shouldn't be a cost of doing business.

If Republicans Take the Senate, What Happens to the CFPB?

Bloomberg story here, and here is one from InsideArm.com.

Stark et al. on Mortgage Disclosures

Debra Pogrund Stark of John Marshall,Jessica M. Choplin of DePaul University, Mark A. LeBoeuf of DePaul and Andrew G. Pizor of the National Consumer Law Center have written Dodd-Frank 2.0: Creating Interactive Home-Loan Disclosures to Enable Shrewd Consumer Decision-Making, forthcoming in the Loyola Consumer Law Review. Here's the abstract:

Congress and the Consumer Financial Protection Bureau (the “Bureau”) have taken major steps under the Dodd-Frank Wall Street Reform and Consumer Protection Act to begin to meaningfully address the predatory practices that led to the mortgage loan crisis. However, most of the legal reforms enacted to help consumers are more in the nature of a “nudge” than outright prohibition of predatory practices. Consequently, home loan disclosure forms and disclosure rules remain the primary method under federal law to enable borrowers to avoid entering into predatory loans. And while the new home loan disclosure forms created by the Bureau are a vast improvement over the forms used prior to 2010, we argue that the Bureau’s new Loan Estimate form is doomed to fail many consumers due in large part to: (i) pernicious practices that mortgage brokers and lenders commonly engage in when presenting the forms to the borrower (including saying “sign here” rather than “please carefully review this form” causing many consumers not to carefully read or to only skim over the form), (ii) the complicated nature of the home loan decision making process and the high level of financial illiteracy of many consumers (as evidenced in the results from a financial literacy test that we gave experiment participants), and (iii) certain cognitive phenomena we describe that impede rational decision making in this context. We hypothesize that revising the Loan Estimate form to make it “interactive” in the manner we propose will better address the afore-described barriers to consumers’ effective use of the disclosure forms. In addition, we report on two experiments we ran that demonstrate that one major change the Bureau made to the Loan Estimate form (to greatly de-emphasize the “APR”) was a major step backward.  Experiment participants using the Bureau’s new Loan Estimate form were able to identify the lower of two offered home loans at only chance level (44%) compared with 74% who were able to do so with our proposed enhanced APR disclosure. Consequently, we urge the Bureau to revise the Loan Estimate Form before it becomes effective in August 2015 to reflect the enhanced APR disclosure we designed together with certain interactive features we propose.

The Hill: House rebuffs bid to limit congressional review of CFPB

by Jeff Sovern

Here.  To see why it is important to keep the CFPB's budget out of the appropriations process (just as with the other bank regulators), here's an excerpt from one of our posts from 2011 (the more things change, . . . ):

To see why this matters, you have only to read New York Times reporter Gretchen Morgenson's book (written with Joshua Rosner), Reckless Endangerment (2011).  The authors explain, at pages 28-29, that when Congress created the Office of Federal Housing Enterprise Oversight (OFHEO) to regulate Fannie and Freddie in 1992, Fannie lobbied to have OFHEO subject to annual appropriations by Congress.  The authors state:

The overseer would have to beg for money to operate. . . . [That, together with other constraints,] allowed Fannie to shift the power of oversight to congressional subcommittees, run by members who could be easily swayed by the company's lobbying efforts and campaign contributions.  Once his company's oversight was in the hands of Congress, [Fannie chief executive James A.] Johnson knew that he could work behind the scenes to derail any restrictions on the company's activities that OFHEO might suggest.

We all know how that ended.  OFHEO's efforts to regulate Fannie Fannie and its fellow enterprise Freddie failed miserably.  Fannie and Freddie needed a bailout of something like $160 billion, and OFHEO has since been replaced by a new regulator.  So this is really an attempt to enable financial institutions to regulate their regulator, the CFPB, and prevent effective consumer protection.

A Comment on Comments on the CFPB Arbitration Study

by Jeff Sovern

The CFPB Monitor blog has a post titled Industry trade groups urge OMB not to approve CFPB arbitration telephone survey about a filing by the American Bankers Association, the Consumer Bankers Association and the Financial Services Roundtable. They "strongly recommend that OMB not approve the proposal because it will not produce information of practical utility . . . ."  I couldn't disagree more. 

The survey will ask respondents what credit card they have.  From that, the CFPB should be able to determine if the credit card contract includes an arbitration clause, waives the right to a jury trial,  and the right to participate in class actions, among other things, because the Bureau has credit card contracts on file.  The survey asks respondents about all those rights. Accordingly, the Bureau should be able to find out how aware consumers are about their surrender of those rights.

Suppose for the sake of argument that the Bureau finds that significant numbers of consumers don't realize that they have given up those rights.  Wouldn't that raise questions about whether arbitration clauses are abusive within the meaning of 12 U.S.C. section 5531(d), which provides that conduct can be abusive a long as it “takes unreasonable advantage of— (A) a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service . . . "?  The abusive definition establishes public policy that the Bureau should consider in exercising its discretion to ban or regulate arbitration in consumer financial contracts under the Dodd-Frank Act.

I will have a lot more to say about consumer understanding of arbitration clauses later in the summer.