Consumer Law & Policy Blog

MIchael W. Hudson Quotes Ameriquest Loan Officer: "Every closing that we had really was a bait and switch,"

MIchael W. Hudson interviewed industry insiders for his new book, The Monster: How a Gang of Predatory Lenders and Wall Street Bankers Fleeced America--and Spawned a Global Crisis.  It won't be out until October 26, but you can read a fascinating excerpt here.  The excerpt and subtitle suggest that this book will focus much more on the conduct of the predatory lenders themselves than other accounts of the subprime crisis have.  It sounds like the book will help add to our understanding of why so many people took out loans they couldn't repay.

Elizabeth Warren's Speech to the Bankers

by Deepak Gupta

Last week, Elizabeth Warren went into the lion's den, giving a dinner speech in Washington to the Financial Services Roundtable -- the banking industry's lobbying group. According to one account, she gave a "tough speech to bankers, comparing them to 'snakes' and their lending practices to 'garbage.'"

Or at least that's how the speech was characterized by certain news outlets. But if you go beyond the headlines and actually read the text of the speech, what you'll find is that Warren outlined a pragmatic, principles-based approach to regulation that contrasts sharply with a heavy-handed regime focused on technical disclosure requirements. Drawing inspiration from the SEC's first chairman, banker Joe Kennedy (pictured), Warren explained how smart regulation can create opportunities for good business to thrive. The heart of her speech focused on a proposal put forward by the Financial Services Roundtable itself:

Regulation can take two obvious forms: Regulators can make more pronouncements from on high, identifying suspicious practices in the various markets and banning them. Or regulators can layer on more disclosure requirements. But neither restores customer trust. In one case, it becomes the job of the agency to highlight industry shortcomings and pile on more and more “thou shalt not” rules, and, in the other case, consumers are hit with even more paperwork— and a growing suspicion that the game is rigged against them. . . .

But I’m here tonight to talk about an alternative recommended by the Financial Services Roundtable three and a half years ago: a principles‐based approach.

Instead of creating a regulatory thicket of “thou shalt nots,” and instead of using ever more complex disclosures that drive up costs for lenders and provide little help for consumers, let’s measure our success with simple questions. Your first principle is “Fair treatment for consumers.” I’ll paraphrase your explanation of how to tell if that principle has been met: Can customers understand the product, figure out the costs and risks, and compare products in the marketplace? Regulators should be aiming toward the goals you laid out.

Instead of layering on regulations that don’t fully protect consumers, a better approach would focus on how to give consumers the power to make the right choices for their families—and, at the same time, to ease the regulatory burden for the lenders. Best of all, if we do this right, perhaps together we can reassure families that the people in this room have met their own goal of fair treatment and that they should be treated as trusted friends.

More on Warren's vision for the new agency, below the jump.

Larry Kirsch on the Fremont Case

Larry Kirsch of IMRHE, LLC has written The State Attorney General as Consumer Advocate: A Recent Effort to Tame Unfair Subprime Lending.  Here's the abstract:

In 2008, the Massachusetts Attorney General’s Office obtained a preliminary injunction in state court against Fremont Investment and Loan, a major state-chartered lender active in the subprime mortgage market. The injunction claimed that Fremont’s Adjustable Rate Mortgage loan products and underwriting practices were inherently unfair to borrowers. This article describes the unique and innovative role played by the Attorney General’s Office in enforcing the unfairness arm of a state’s Unfair and Deceptive Acts and Practices statute against abusive financial products and practices. And it suggests that the heretofore underused state UDAP unfairness litigation strategy is available to other states.<

Predatory Lender Tactics

by Jeff Sovern

Yesterday, the Pittsburgh Post-Gazette published my op-ed, Consumer Bureau is Just the First Step, which reports on the tactics one predatory lender used to persuade borrowers to enter into loans that were not in their best interest. Here it is:

Now that Congress has voted to create the Consumer Financial Protection Bureau, it will be up to the bureau to protect consumers from predatory lenders. The CFPB can be expected to face again the argument that the economic crisis was not a failure of consumer protection. With all the existing disclosure laws, how could consumers not have known what they were getting into?

An answer can be found in the confidential training manual of a predatory lender, the First Alliance Mortgage Co., attached to an affidavit in a Minnesota case by a former First Alliance loan officer, Greg Walling.

The manual instructs loan officers to point out forcefully, frequently and with the use of specified diagrams that a great deal of the money the borrower pays to the lender is interest and that much of that can be saved by prepaying the mortgage: "Did you realize that by the time you finish paying off this house, you actually agreed to pay off at least three houses?"

Nothing wrong with that. But it turns out to be a distraction from what is really going on.

Mr. Walling's affidavit explains that First Alliance charged high fees, but consumers overlooked that because the presentation "focuses the consumer's attention solely on the idea that the most important part of a mortgage is paying back the loan in a shorter time."

The presentation also undermined the legally mandated disclosures. Those disclosures undoubtedly showed a high APR -- that's how the interest rate is stated on the forms so consumers can comparison shop among different loans.

But before the consumer saw the final disclosures, Mr. Walling had explained that loans have three interest rates and that "the interest rate was what the consumer and I care about [and] the APR is what the federal government cares about ... APR was just an estimate and ... is always higher than the interest rate."

Though First Alliance's predatory practices ultimately brought it to a bad end, some of its practices did not die with it. Others have reported on mortgage originators who misled borrowers, while the complex loan terms often seen in subprime lending-payment option adjustable rate mortgages, hybrid ARMs and the like created their own distractions.

And the claim that disclosures did not cure the problem is, sadly, plausible.

Congress has made an important start down the road to protecting consumers. But now it will be up to the Consumer Financial Protection Bureau to take the next steps by realizing that disclosures are not enough to stop predatory lenders from deceiving consumers.

I've written more about the First Alliance manual and Mr. Walling's affidavit in my forthcoming Ohio State Law Journal article, Preventing Future Economic Crises Through Consumer Protection Law or How the Truth in Lending Act Failed the Subprime Borrowers, at pages 40-43.

Three Interesting Articles on the OCC, Debt Collection, and the Military Lending Act

by Jeff Sovern

Yesterday the Times published speculations about who will replace John Dugan as head of the Office of the Comptroller of the Currency in its Reuters BreakingViews column.  The OCC will continue to matter even after the CFPB becomes a reality because of its power to declare state laws preempted as to federal institutions. An excerpt:

If President Obama is looking for a candidate already intimately involved in the transformation of the nation’s regulatory architecture, he could go with Daniel K. Tarullo, a Fed governor and an expert on bank regulation. But why would he want the job? Although the Office of the Comptroller of the Currency will pick up the powers of the thrift regulator, oversight of the biggest bank holding companies will be the purview of the Fed. In that respect, the O.C.C. could be a step down for Mr. Tarullo.

That paves the way for more of an up-and-comer, like Richard H. Neiman, New York’s top state bank regulator. Mr. Neiman knows Washington, too. He worked at the O.C.C. earlier in his career and serves on the Congressional oversight panel for the bank bailout. Even better, Mr. Neiman has private sector experience as head of TD Bank USA.

Following up on Deepak's post yesterday on the FTC debt collection report, today's Times included Automated Debt-Collection Lawsuits Engulf Courts about a law firm, Cohen & Slamowitz, of Woodbury, N.Y, that files more than 5,700 lawsuits per lawyer a year.  The article strongly implies that those are collection cases.  What makes it possible is software that merges court documents with information received from debt buyer-clients.  I wonder how that squares with the "meaningful review" requirement courts impose on lawyers under the Fair Debt Collection Practices Act.

Finally, Parade Magazine had a depressing piece this weekend about soldiers who have been scammed, titled  Red, White, and Scammed, which reported on how some lenders have gotten around the Military Lending Act's interest rate limits:

Some lenders abide by the cap but drown their products in fees—in one reported case, $452 of charges were piled on a $1000 loan. Others base their businesses offshore and call their offerings “revolving lines of credit”—both so they can skirt U.S. laws and charge 500% interest. In her Arlington, Va., office, Petraeus typed “ military loans” into Google. “I got about 2.5 million results from that,” she says. “A lot of them are predatory or just outright scams.”

National Consumer Law Center Issues Report on Alternatives to Payday Loans

 Some banks and credit unions offer "alternatives" to payday loans that are sold as better deals for consumers than what is offered by store-front payday lenders. The National Consumer Law Center has just issued a report on the topic -- Stopping the Payday Loan Trap -- Alternatives That Work, Ones That Don't. An NCLC press release says that some "loans offered by banks and credit unions as 'alternatives' to high-cost, short-term payday loans may instead plunge consumers into a costly and nearly inescapable debt cycle – just like payday loans!" The report's principal auth Lauren Saunders explains that “[t]oo many providers of so-called payday loan alternatives hit consumers with some of the same onerous provisions that predatory lenders use to saddle unwary and vulnerable borrowers with loans they can’t afford to repay.” Check it out.

New Studies on the Effect of Federal Preemption of State Lending Laws on the Foreclosure Crisis

by Deepak Gupta

A new study, The Preemption Effect: The Impact of Federal Preemption of State Anti-Predatory Lending Laws on the Foreclosure Crisis (PDF), conducted by UNC-Chapel Hill's Center for Community Capital, concludes that federal action to exempt large national banks from state consumer protection laws led to increased numbers of home foreclosures and risky lending practices. The study analyzes data from 2.5 million mortgages before and after federal preemption in states with and without anti-predatory lending laws, controlling for other factors to isolate the impact of preemption. 

In a companion study, The APL Effect: The Impacts of State Anti-Predatory Lending Laws on Foreclosures, the researchers demonstrate the effectiveness of state laws by studying the quality of loans, from both the loan level and neighborhood level, in states with and without state anti-predatory lending laws. "Our research confirms that state consumer protection laws work, but that when one group of lenders is handed a regulatory free pass, they are going to take advantage of it," says Center for Community Capital Director Roberto G. Quercia. "In this scenario, unfortunately, we see preemption shifting the activities of federally insured banks to riskier activities than they would otherwise have pursued."

The research “proves that that vigorous state consumer protection laws make a positive difference for consumers throughout the country,” said Jim Tierney of Columbia Law School's National State Attorneys General Program, which funded the study. Contrary to the claims of two Comptrollers of the Currency last week, federal preemption of stricter state consumer protection laws has worsened the effects of the housing crisis on homeowners, according to the study.

A summary of both reports is provided below the jump.

Texas Consumer Laws Prevented Banking Crisis

by Richard Alderman

Paul Krugman's editorial in the New York Times today compares the results of the financial crisis in Georgia with Texas, noting that Texas did not face similar problems. He states, "Why didn’t the same thing happen in Texas? The most likely answer, surprisingly, is that Texas had strong consumer-protection regulation. In particular, Texas law made it difficult for homeowners to treat their homes as piggybanks, extracting cash by increasing the size of their mortgages. Georgia lacked any similar protections (and the Bush administration blocked the state’s efforts to restrict subprime lending directly). And Georgia suffered from the difference."

Krugman is correct that throughout the 1990s, Texas law prohibited home equity loans and made it difficult for consumers to get over their heads in what appeared to be low interest rate debt. What he doesn't note, however, is that Texas has since amended its law to permit home equity loans. Although the Texas law does have some consumer protections, I don't think we will fare as well in the next economic crisis.

Bankers Were for Separating Safety and Soundness Regulation from Consumer Protection Before They Were Against It

Here's a quote from Elizabeth Warren's op-ed yesterday in Politico, referring to the 2006 filing from the American Bankers Association:

In 2006, the ABA claimed to act on principle as it railed against an interagency guidance designed to exercise some modest control over subprime mortgages. It criticized the proposal for “combin[ing] safety and soundness guidance with consumer protection guidance, creating confusion that is best addressed by separating them.”

The ABA went on to argue that the “marriage of inconvenience between supervision and consumer protection appears to blur long-established jurisdictional lines.” And then: “ABA recommends that the safety and soundness provisions relating to underwriting and portfolio management be separated from the consumer protection provisions.”

Read that again: The ABA in 2006 said that policymakers should separate safety-and-soundness and consumer protection — exactly the opposite of its position today.

"Did a Lack of Consumer Protection Cause the Financial Crisis?"

Tomorrow at noon, the Cato Institute's Policy Forum will host what promises to be an interesting and lively  debate over that question, featuring Janis Bowdler, National Council of La Raza; Thomas Durkin, Former Economist, Federal Reserve Board; Ed Mierzwinski, U.S. PIRG; and Todd Zywicki, George Mason University School of Law. Moderated by Mark A. Calabria, Director, Financial Regulation Studies, Cato Institute.

Here's Cato's official description, which uses the term "consumer protection" in scare quotes:

There is likely no issue more contentious in the debate over the causes of the recent financial crisis and the appropriate response other than "consumer protection." The question of whether credit was too cheap or too expensive (or predatory) is at the heart of the differing narratives of the crisis. Panelists will examine these opposing narratives and debate the merits and substance of proposed consumer protections in our financial markets, including the creation of a Consumer Finance Product Agency.

If you can't make it over to Cato's Dupont Circle headquarters, you can watch it live online.