Consumer Law & Policy Blog

Michael Barr, Jane Dokko, and Benjamin Keys on the Effect of Race on the Likelihood of Troublesome Subprime Loan Terms

Michael S. Barr of Michigan, Jane Dokko of the Fed, and Benjamin J. Keys of Michigan's Economics Department have co-authored "Who Gets Lost in the Subprime Mortgage Fallout? Homeowners in Low- and Moderate-Income Neighborhoods."  Here's the abstract:

With the subprime mortgage crisis going full bore, policy makers face the challenge of resolving the current mess, reforming the mortgage markets going forward, and balancing the risk of "abusive" lending against the rewards of financial deepening and access to credit. To better understand the challenges of homeownership for low- and moderate-income households, this paper makes use of a unique and proprietary dataset of LMI households based on a survey we designed and implemented with the Survey Research Center at the University of Michigan. We establish a profile of the demographic characteristics of homeowners in LMI communities. We then identify relationships between high-cost pricing and demographic characteristics (such as race) in low-income neighborhoods. We find that even within similar low-income neighborhoods, black homeowners are significantly more likely to have prepayment penalties or balloon payments attached to their mortgages than non-black homeowners, even after controlling for age, income, gender, and creditworthiness. We link the attitudes of homeowners and the constraints that they face to their financial decisions. We then suggest key areas for policy reform.

Reverse Redlining Predatory Lending Complaint

The Associated Press, via Law.com, reports here that a Texan has brought a reverse redlining predatory lending suit suit.  According to the article, the plaintiff charges that she was "victimized by a loan with onerous terms because of her skin color. "  Baltimore City in Maryland had previously sued a lender on a similar theory.  The article doesn't indicate the authority for the reverse redlining claim (perhaps section 3605 of the Fair Housing Act?), but notes that the plaintiff is suing under HOEPA and the Texas State Constitution.

Ninth Circuit Severs Non-Preempted Portion of CA Financial Information Privacy Act

by Leah Nicholls

Yesterday, a divided Ninth Circuit panel held that the preempted portions of California's Financial Information Act were severable from those that were not preempted by the federal Fair Credit Reporting Act (FCRA).  The California law sought to protect consumers' nonpublic personal information by requiring financial institutions to conspicuously notify consumers that their information may be shared with affiliates and to provide the opportunity for consumers to direct that the information not be disclosed.  The FCRA explicitly prohibits state restrictions on affiliates sharing information.

Previously, the Ninth Circuit had held that the FCRA preempted the information-sharing restriction in the California law as to information considered to be "consumer report" information under the FCRA.  On remand, the district court found that no portion of the California statute survived preemption, and even if it did, was not severable.  A majority of the Ninth Circuit reversed, noting first that the parties had conceded on appeal that not all the nonpublic personal information covered by the California statute was "consumer report" information as defined by the FCRA.  The court then reasoned that California law would permit severing the application to "consumer report" information from the statute, thereby upholding the application of the statute to non-consumer report nonpublic personal information.  The dissenting judge disagreed only with the majority's severability analysis.

The case is American Bankers Ass'n v. Lockyer, No. 05-17163 (9th Cir. Sept. 4, 2008).

Elizabeth Warren on NPR's "Fresh Air" Discussing the Credit Reporting Industry

Go here to listen to Professor Elizabeth Warren on Terry Gross's "Fresh Air" last Tuesday discussing the error-prone credit reporting industry.

Marsha Courchane Paper on Explaining the Pricing of Home Mortgage Loans to Minority Borrowers

Marsha Courchane's paper The Pricing of Home Mortgage Loans to Minority Borrowers: How Much of the APR Differential Can We Explain? can be found in 29 Journal of Real Estate Research No. 4 (2007).  Here's the abstract:

The public releases of the 2004 and 2005 HMDA data have engendered a lively debate over the pricing of mortgage credit and its implications regarding the treatment of minority mortgage borrowers. This research uses aggregated proprietary data provided by lenders and an endogenous switching regression model to estimate the probability of taking out a subprime mortgage, and annual percentage rate (APR) conditional on getting either a subprime or prime mortgage. The findings reveal that up to 90% of the African American APR gap, and 85% of the Hispanic APR gap, is attributable to observable differences in underwriting, costing, and market factors that appropriately explain mortgage pricing differentials. Although any potential discrimination is problematic and should be addressed, the analysis suggests that little of the aggregate differences in APRs paid by minority and non-minority borrowers are appropriately attributed to differential treatment.

McCoy Paper on HMDA's Legislative History

Patricia A. McCoy, who has been an important scholar on predatory lending, has authored The Home Mortgage Disclosure Act: A Synopsis and Recent Legislative History, 29 Journal of Real Estate Research No. 4 (2007).  Here's the abstract:

This article describes the provisions of the federal Home Mortgage Disclosure Act (HMDA), tracing its legal evolution since 1989, when Congress expanded HMDA to require reporting of home mortgage lending by ethnicity and race. HMDA requires most lenders to report the demographic makeup and geographic distribution of home mortgages to the federal government. The 1989 amendments and later developments transformed HMDA from a law exclusively concerned with geographic disinvestment to one concerned with lending disparities by ethnicity and race. In the process, HMDA evolved from an obscure reporting statute to a flashpoint for debates over lending discrimination and subprime lending.

Engel & McCoy Paper on Improving Sustainability of Minority Homeownership

Two leading writers on predatory lending, Kathleen C. Engel and Patricia McCoy have written a paper titled From Credit Denial to Predatory Lending: The Challenge of Sustaining Minority Homeownership, available at http://ssrn.com/abstract=1011489  Here's the abstract:

Years of discriminatory behavior against minority households have damaged their ability to build wealth. One of the most financially destructive practices endured by minority households is the excessive overpayment to finance a home purchase or access accumulated equity in a home. The market conditions that position blacks, and to a lesser extent, Latino households, to be the principal targets of predatory mortgage lending have their roots in decades of legally sanctioned housing market discrimination. Some minority households lack the financial knowledge or awareness to protect themselves. In other cases, years of discriminatory financial practices have contributed to rendering them ineligible to access low-cost financing. And, finally, vestiges of discrimination continue today with minority consumers convenient targets of unscrupulous lending behavior.

Starting in the early 1990s, federal antipoverty policies placed new emphasis on asset creation for low- and moderate-income people, especially the working poor. While federal policy embraced wealth creation as the new antidote to poverty, it failed to anticipate threats to preserving home equity once it has been created, including rising consumer debt and predatory lending. To date, the federal government has failed to combat predatory lending consistently and effectively. The failure to curb predatory lending has spawned high levels of home loan foreclosures across the U.S. and threatens the largest asset of many minority households, i.e., their homes. This paper proposes policies to improve the sustainability of minority homeownership.

Times Pieces on Telemarketing, the CPSC, and Credit Reports

Recent articles in the Times that bear on consumer law issues include a report in Wednesday's paper, "Papers Show Wachovia Knew of Thefts."  Some excerpts:

Last spring, Wachovia bank was accused in a lawsuit of allowing fraudulent telemarketers to use the bank’s accounts to steal millions of dollars from unsuspecting victims. When asked about the suit, bank executives said they had been unaware of the thefts.

But newly released documents from that lawsuit now show that Wachovia had long known about allegations of fraud and that the bank, in fact, solicited business from companies it knew had been accused of telemarketing crimes.

* * *

“YIKES!!!!” wrote one Wachovia executive in 2005, warning colleagues that an account used by telemarketers had drawn 4,500 complaints in just two months. “DOUBLE YIKES!!!!” she added. “There is more, but nothing more that I want to put into a note.”

However, Wachovia continued processing fraudulent transactions for that account and others, partly because the bank charged fraud artists a large fee every time a victim spotted a bogus transaction and demanded their money back. One company alone paid Wachovia about $1.5 million over 11 months, according to investigators.

“We are making a ton of money from them,” wrote Linda Pera, a Wachovia executive, in 2005 about a company that was later accused by federal prosecutors of helping steal up to $142 million.

Also on Wednesday, the Times editorialized about curing the problems with the Consumer Product Safety Commission in "The Next Step to Safety:"

Right now the commission is paralyzed because it lacks a quorum to adopt safety rules or order recalls. The White House must quickly fill at least one vacancy or Congress must quickly pass a law allowing the commission’s two members to qualify as a quorum.

There is a lot more work to be done. Congress should approve Senate legislation giving the commission the money and the authority it needs. At the very least, this would make it easier for the commission to notify consumers promptly when they have bought a hazardous product. The commission often keeps such data secret while it negotiates — for months or even years — with the manufacturer.

I've been meaning to post links to a couple of interesting articles from January.  First, Bob Tedeschi's column on mortgages, "How to Get a Cheaper Loan," which ran on January 20, described how lenders deal with the fact that the three credit bureaus sometimes report different credit scores for the same consumers:

To account for those differences during the mortgage application process, loan officers review the scores from all three credit bureaus and base their loan offers on the middle number. If a couple — married or not — is jointly applying for a mortgage, the loan officer will choose the middle score of the partner with the lower score.

This was news to me.  Tedeschi also reports:

Bureaus offer more than one type of report — TransUnion has its traditional report and its Vantage report, for instance. A bureau may well come up with different scores for the same borrower because each report weighs various factors like recent payment history in a slightly different way.

Finally, on January 19, the Times ran Janet Morrissey's "Your Money" column, headlined, "What's Behind Those Offers to Raise Credit Scores" about companies that, for a fee, piggy-back the credit records of people with good credit histories onto those with poor credit histories.

The "New Redlining"

The Washington Post reported this weekend on mortgage lenders imposing loan restrictions on entire counties or zip codes considered to be "soft markets."

[via Consumerist]

New York State's Human Rights Division Files Landmark Suits Against Sellers of Tax Refund Anticipation Loans

by Brian Wolfman

The New York State Human Rights Division has just filed first-of-their-kind suits against firms that market tax refund anticipation loans (RALs). The suits claim that the firms' RAL businesses illegally target African-American and hispanic consumers and members of the military. The New York Times suggests that the suits are an effort to end the RAL industry. The complaints in the two cases can be found here and here. Read the press release announcing the suit.

I blogged last year about the annual report of the National Consumer Law Center and Consumer Federation of America on RALs. Yesterday, those groups issued a press release concerning their most recent findings.