Consumer Law & Policy Blog

Immergluck on Federal Preemption of State Antipredatory Lending Laws

by Jeff Sovern

I've been reading Dan Immergluck's fine book, Foreclosed: High-Risk Lending, Deregulation, and the Undermining of America's Mortgage Market (2009).  At pages 177-78, he has as good a description of the competition among regulators for lenders as I've seen:

 

[S]ome state regulators have a vested interest in preempting state consumer protection laws.  The ability to preempt state law is perhaps the greatest source of value in the federal thrift and national bank charters. Regulators can gain political power based on the number and size of the banks that fall under their regulatory supervision. In some cases, a regulator's operations are funded by levying fees on the institutions they regulate.  This can encourage an agency to pursue policies that are friendly to banks--especially larger ones. If a regulator does not use its ability to allow banks under its supervision to preempt state consumer protection regulations, the bank may change its charter so that it is regulated by a more lender-friendly agency.  . . . Even if an agency's funding is not directly tied to the banking assets under its supervision, if fewer and fewer institutions fall under its supervisory umbrella, its power and relevance will be called into question.  In the long run, this could jeopardize the agency's very existence.

* * *

In 1974, Arthur Burns, chairman of the Federal Reserve Board, expressed concerns over a "competition in laxity" among the regulators . . . . Since then, there have been repeated concerns that banks "forum shop" to find the most comfortable regulator . . . . Since at least the late 1990s, this "race for the bottom" includes regulators vying to offer banks as much preemption power as they can. Demonstrating the important of preemption to the value of a charter type, a banking attorney was quoted in the American Banker regarding the OCC's preemption actions as asking "Why would you want a national charter but for the preemption authority?" * * *

[After noting that the Office of Thrift Supervision (OTS) moved before the Office of the Comptroller of the Currency (OCC) to preempt state antipredatory lending laws, Immergluck continues:] The OCC was not about to let the thrift charter gain a clear regulatory advantage over the national bank charter. [Immergluck then describes the OCC's preemption efforts]

Perhaps this explains why the federal regulators have been so aggressive in preempting state laws. It's not just a matter of ideology or even generating fees; it's a matter of survival.  Another argument for the CFPA, which of course would not need to preempt state laws to survive.

Bogus Mortgage Assignees

Over at 4closurefraud.org there is an interesting story reporting that mortgage assignments are being filed in many states transferring mortgages to "Bogus Assignee".  Literally.  One of my personal favorites is a transfer of a mortgage from M.E.R.S., which arguably already subverts our title recording systems, to Bogus Assignee.  Property records down the rabbit hole.  This practice, if it is indeed widespread, would certainly throw another monkey wrench in the legal system to foreclose mortgages, while layering another coat of murk over efforts to hold lenders and servicers accountable for their misdeeds.

Posner on Car Title Loans, Predatory Lending, and the Commerce Clause

by Deepak Gupta

Yesterday, Judge Posner issued an opinion that may be of some interest to those following the great debate over predatory lending and behavioral economics. As with many Posner opinions, its significance is of course enhanced by the author's identity. Although it doesn't actually take sides, the opinion devotes an unusual amount of space (for a judicial opinion) to citing and summarizing the leading research on predatory lending, including work by scholars such as Elizabeth Warren and Ronald Mann and consumer advocates such as Jean Ann Fox and Kathleen Keest, as well as their opponents on the right (e.g. Todd Zywicki). The opinion even takes note of the pending legislation to create a Consumer Financial Protection Agency, citing opinions pro and con, again without taking a position. But as we've noted here before, Posner has already taken a position on the legislation in his extrajudicial writings: He doesn't like it, and doesn't feel contrained by his judicial role from saying so.

The case concerns the constitutionality of an Indiana statute regulating car title loans (also known as car title pawns) -- loans with interest rates in the neigborhood of 300%, secured by cash-strapped consumers' vehicle titles, in which a lender advances a fraction of the vehicle's value to the consumer, who forks over a set of car keys to facilitate easy reposession in the event of default.  Indiana strictly regulates such loans through licensing requirements and interest-rate caps. But in neighboring Illinois, thanks to industry influence on state politics, it's a free-for-all. Concerned that Illinois-based lenders were evading the Indiana law by advertising directly to Hoosiers and entering into transactions on Indiana-titled vehicles, Indiana added a "territorial application" provision extending coverage to lenders that advertise to Hoosiers and then enter into transactions with them out of state.

Yesterday's decision strikes down that provision. It acknowledges that there's no economic protectionism or outright discrimination against interstate commerce at work here. Nevertheless, the court relies on a series of decisions forbidding extraterritorial regulation, including the Supreme Court's decision in Healy v. Beer Institute, 491 U.S. 324 (1989). The opinion concedes that Indiana isn't interfering with transactions with residents of another state, as in Healy, but focuses instead on the extraterritorial effect of interference with a commercial activity taking place in another state: "The contract was, in short, made and executed in Illinois, and that is enough to show that the territorial-application provision violates the commerce clause." 

The opinion makes some characteristically Posnerian analogies to illustrate that point, likening the law to an attempt by Indiana to ban its citizens from gambling in Las Vegas. "Of course the loan proceeds were probably spent in Indiana, but the same would be true of the winnings of a Hoosier at a Nevada casino. The consequences of a commercial transaction can be felt anywhere. But that does not permit New York City to forbid New Yorkers to eat in cities in states that do not ban trans fats from their restaurants."

So much for Indiana's attempt to protect its own consumers from one of the worst forms of predatory lending. But I wonder if Indiana can still get at the problem another way. The opinion notes that the loan company notifies the Indiana DMV of the loan as soon as it was made, so that the lender's security interest is protected against subsequent creditors, and that the repossessions occur in Indiana and the cars are auctioned off in Indiana. Surely Indiana would be well within its rights to regulate such conduct--particularly the use of its own DMV to prioritize the security interest--all of which occurs through the machinery of its own state government or within its own borders.

The case is Midwest Title Loans, Inc. v. Mills.  (Disclosure: Public Citizen, along with several other consumer groups, joined an amicus brief in this case authored by the Center for Responsible Lending.)

Preventing Future Economic Crises Through Consumer Protection Law or How the Truth in Lending Act Failed the Subprime Borrowers

A draft of my article Preventing Future Economic Crises Through Consumer Protection Law or How the Truth in Lending Act Failed the Subprime Borrowers, parts of which I spoke about at the AALS, is now available on SSRN.  Here's the abstract:

This paper argues that one cause of the current economic crisis was that the federal Truth in Lending Act failed to provide mortgage borrowers with the tools to determine whether they would be able to meet their loan obligations, and that as a result many borrowers assumed loans on which they would later default. The paper first explores the disclosures for adjustable rate mortgages - which were commonly used for subprime loans - and explains how those disclosures misled borrowers about their monthly payments. Next, the paper reports on a survey of mortgage brokers conducted in July of 2009. The brokers were nearly unanimous in reporting that borrowers never withdrew from a loan after reading the final TILA disclosures at the closing, and never used those disclosures for their stated purpose of comparison shopping for loans. In addition, brokers reported that many borrowers spent a minute or less with the disclosures, despite the fact that mortgage loans are among the largest, longest-term, and most complex obligations most consumers ever assume. It thus appears that many borrowers enter into their mortgages without comprehending the terms and the ramifications of those loans.

The paper suggests several measures to increase the likelihood that borrowers will attend to and understand their loan terms. At present, disclosures are mandated by governmental entities that do not participate in the loan transaction - thereby reducing their control over how the disclosures are presented; provided by lenders who do not have a stake in having consumers understand the disclosures and in some cases have an interest in obscuring them; and received by consumers who may not appreciate their importance and may even have reasons to overlook them. The paper therefore suggests a switch from the current TILA disclosure regime to a comprehension regime under which lenders would be obliged to insure that borrowers understand their loan terms. Alternatively, the paper suggests that lenders should be required to determine what proportion of their borrowers understands their loan terms and disclose those figures in the hope of generating competition among lenders for better comprehension scores. The hope is that either choice would give a party to the loan transaction - the lender - a stake in borrowers understanding their loan terms. Creation of such an incentive might cause lenders to reduce distractions to consumers reading disclosure forms, enlist the aid of lenders in conveying key terms to consumers, increase the intelligibility of loan terms, and lead lenders to abandon loan terms that consumers cannot comprehend.

If such a proposal proves politically unfeasible, the paper also draws on the work of Cass Sunstein and Richard H. Thaler to suggest “nudges” that might enhance the current disclosure regime. Specifically, the paper advocates requiring borrowers to view a video of the pain and risk of default and foreclosure to make those risks more salient and increase the likelihood that consumers attend to disclosures. The paper also suggests that loan applicants be obliged to draft a budget, taking into account any future increases in loan payments, so that they will understand the consequences of their payment obligations. Finally, the paper calls for requiring borrowers to take a “placement exam” to demonstrate their mastery of their loan terms and the budgetary consequences. Those who fail the exam would not be permitted to borrow unless a neutral credit counselor worked with them and certified that they understand their loan terms.

David Reiss on Regulation of Subprime and Predatory Lending

David J. Reiss of Brooklyn has written an entry for the International Encyclopedia of Housing and Home on Regulation of Subprime and Predatory Lending.  Here's the abstract:

This is an entry on the Regulation of Subprime and Predatory Lending for THE INTERNATIONAL ENCYCLOPEDIA OF HOUSING AND HOME (Elsevier Ltd, 2010). This entry provides a brief introduction to the explosive development of the subprime mortgage market. It then enumerates the abusive practices that were found in that market until it was effectively shut down at the outset of the ongoing credit crisis. It then reviews the limited federal and state legislative and regulatory responses to various abusive practices. It concludes that abusive practices will likely resurface once underwriting standards loosen, as they inevitably will.

Article on Some Relationships Between Payday Borrowing and Credit Card Borrowing

Sumit Agarwal of the Federal Reserve Bank, Paige Marta Skiba of Vanderbilt and Jeremy Tobacman of Penn have written Payday Loans and Credit Cards: New Liquidity and Credit Scoring Puzzles?  Here's the abstract:

Using a unique dataset matched at the individual level from two administrative sources, we examine household choices between liabilities and assess the informational content of prime and subprime credit scores in the consumer credit market. First, more specifically, we assess consumers' effectiveness at prioritizing use of their lowest-cost credit option. We find that most borrowers from one payday lender who also have a credit card from a major credit card issuer have substantial credit card liquidity on the days they take out their payday loans. This is costly because payday loans have annualized interest rates of at least several hundred percent, though perhaps partly explained by the fact that borrowers have experienced substantial declines in credit card liquidity in the year leading up to the payday loan. Second, we show that FICO scores and Teletrack scores have independent information and are specialized for the types of lending where they are used. Teletrack scores have eight times the predictive power for payday loan default as FICO scores. We also show that prime lenders should value information about their borrowers' subprime activity. Taking out a payday loan predicts nearly a doubling in the probability of serious credit card delinquency over the next year.

"How to Beat the Bank," a Mini-Documentary on Overdraft Fees

Filmmaker Karney Hatch, annoyed with overdraft charges on his bank statements, took Wells Fargo to small claims court and got the charges reversed. In an interview for Hatch's film, Ralph Nader speculates that if a million consumers did what Hatch did, the banks would fold. Watch the video here.

Kurt Eggert Article on Securitization

Kurt Eggert of Chapman has written The Great Collapse: How Securitization Caused the Subprime Meltdown, 41 Conecticut Law Review.  Here's the abstract:

This Article builds on existing criticism of securitizing subprime loans and argues that one of the primary causes of the subprime meltdown and the resulting economic collapse was the structure of securitization as applied to subprime and other non-prime residential loans, along with the resecuritization of the resulting mortgage-backed securities. Securitization weakened underwriting by discouraging originators from gathering “soft information” about the likelihood of borrower default and instead caused loan originators and other market participants to focus almost exclusively on such “hard information” as FICO scores and loan to value ratios. At each stage of the loan and securitization process, securitization encouraged market participants to push risk to the very edge of what the applicable market standards would tolerate, to make the largest, riskiest loans that could be sold on Wall Street, to bundle them using the fewest credit enhancements rating agencies would permit, and then to repeat the securitization process with many of the lower-rated mortgage-backed securities that resulted. Loan originators could profit by bargaining down the due diligence of other market participants and so reduce their own underwriting standards. Securitization also created a business model for subprime lenders whereby they could “profitably fail.” Thinly capitalized subprime lenders could generate large numbers of loans likely to default, along with substantial profits for the executives who directed them, and then simply exit the market when they predictably lost their access to the securitization pipeline.

Cuomo Case Great News for State Attorneys General

by Christopher Peterson

The Supreme Court has issued an opinion striking down the federal banking regulatory preemption of state fair lending enforcement lawsuits. The Court confronted whether ambiguity in the National Bank Act left the Office of the Comptroller of the Currency free to preempt state fair lending litigation originally brought by former New York Attorney General Eliot Spitzer. In applying the administrative deference standard of Chevron U. S. A. Inc. v. Natural Resources Defense Council, Inc., the Court explained:

[T]he presence of some uncertainty does not expand Chevron deference to cover virtually any interpretation of the National Bank Act. We can discern the outer limits of the term “visitorial powers” even through the clouded lens of history. They do not include, as the Comptroller’s expansive regulation would provide, ordinary enforcement of the law. Evidence from the time of the statute’s enactment, a long line of our own cases, and application of normal principles of construction to the National Bank Act make that clear.

Cuomo v. Clearing House Association, LLC.,  No. 08-453, slip. op. at 3 (U.S. June 29, 2009).

The decision reverses the trend in recent years, discussed here and here, of giving free reign to federal banking regulators to squelch the consumer protection efforts of state attorneys general. While the long-term impact of the decision is yet to be clear, the opinion is likely to embolden some state AGs in litigation against national banks and their subsidiaries over the subprime mortgage debacle.

The Role of Predatory Lending in the Collapse of Detroit

by Laura MacCleery

After listening to a stirring speech by Professor Elizabeth Warren of the Senate Congressional Oversight Committee on the bailout last Saturday at the American Constitution Society convention, I was struck by the many similarities between credit card company practices in moving the profitability of financial products towards the “back end” penalties and fees, and those I uncovered several years ago in the automobile lending context.

The coverage of the auto bailout and the collapse of the domestic auto industry has lacked real understanding of how risk was fed into the auto purchase marketplace. The same full range of predatory practices affecting home mortgages were widely used – and perhaps even to a greater extent – by the automobile industry to sell vehicles. 

In general, Detroit has been inattentive to the serious problem of oil dependency for its profitability model, pushing far larger SUVs and pickups on consumers than was justified by transportation needs. It has also been hostile to safety advances, and managerially backwards. These problems are well known. Less well understood is that, through predatory lending practices, they’ve been taking their customers to the poorhouse with them.

When I was at Public Citizen, we wrote a report in 2003, entitled Rip-Off Nation, detailing many of the fraudulent and misleading aspects of auto purchases. We worked closely with a whistleblower who had been an auto dealership employee and was familiar with many of the tricks and traps then being used to saddle consumers with overpriced auto loans, and published real examples of actual auto lending documents demonstrating the scams. Without the mortgage lending example to illustrate the problem and its potential economic costs, our work to raise the issues largely fell on deaf ears.

Yet the situation has only worsened since, and the number of consumers who are underwater in their loans continues to climb. In December 2008, as The Denver Post reported, both the number of “upside-down” new vehicle purchases and the amount that consumers owe on auto loans have ballooned: