Should the Government or the Market Set Mortgage Down Payments? A New Study

UNC's Center for Community Capital has posted a new analysis of 19.5 million mortgage loans originated between 2000 and 2008 finding that mandatory down payments of 10% would lock out nearly 40% of all creditworthy borrowers while a 20% down payment would exclude 60%. The study finds a significantly higher exclusion rate for African American and Latino borrowers. The authors (Roberto Quercia of UNC, Lei Ding of Wayne State University, & Carolina Reid from the Center for Responsible Lending) do find valuable default-reduction benefits of other forms of strong underwriting as the Dodd-Frank Act already requires (through the "QM" and "QRM" classifications), but signal caution about the significant access costs of government-mandated down payment levels that government regulators may be currently considering.

The CFPB Gets a Director

The CFPB is finally getting a Director, which enables it to exercise its full range of powers. It's good to see this Administration show some backbone. Better late than never, I guess, and Rich Cordray is a great pick.

While this is a step forward, I worry that the CFPB and Director Cordray will feel that they have to walk on eggshells so as not to rile Congressional Republicans and draw continued scrutiny. There's a fine line that the CFPB will have to navigate in terms of what fights to pick--there are some fights it needs to have and some that are better to avoid to live to fight another day, but I'm happy to see this as the new problem for the CFPB.        

OCC Servicing Settlement--Will Homeowners Get Screwed (Again)?

The WSJ reports on the latest development in the implementation of the OCC's mortgage servicing fraud consent orders.  It seems that the banks will have OCC approved "independent" foreclosure review consultants (chosen and paid by the banks) review foreclosure files from 2009-2010 and pay homeowners damages if there are any problems found.  

This proposal really worries me.  It's hard to imagine that the banks will part with any money unless they receive releases--broad releases--from the homeowners.  The homeowners, however, will not typically have legal representation and will lack the ability adequately value their claims against the banks. $100 for a complete release?  Why not?  

The Slips Go to Capitol Hill

Tomorrow, Katie Porter and I will be testifying at a subcommittee hearing for the Senate Committee on Banking, Housing and Urban Affairs. The title of the hearing is "Consumer Protection and Middle Class Wealth Building in an Age of Growing Household Debt." More information on the hearing is available here, which is also the same place the written witness statements and a link to streaming video eventually will appear. Part of the discussion will be the conditions that led Congress to create the Consumer Financial Protection Bureau and how those conditions remain with us.

Consumers, Cast Your Vote

The Consumer Financial Protection Bureau has launched the first project in its "Know Before You Owe" initiative with the release of proposed mortgage disclosures. While the CFPB did its homework in designing these forms, including getting feedback from a wide variety of sources, it is taking field-testing to a new level by asking American consumers to review two proposed forms. Consumers can then vote for the form that they think best conveys the key information needed to understand a home mortgage loan. The choices, named "Azalea" and "Camellia" for the fictional banks on the sample disclosures, are available here. (Simply click to view them as a PDF and then vote for your favorite.)

Warren's Farewell Letter to CFPB Staff

Over at American Banker is the text of Elizabeth Warren's farewell e-mail to the staff of the Consumer Financial Protection Bureau. My favorite line: "An honest market will give companies that provide fair value to their customers a chance to flourish, free from competition with cheaters." The whole thing is worth a read.

Fed to Wells: $7000 for Wrongful Foreclosure

Yesterday the Fed announced a settlement with Wells Fargo of claims that its subprime unit had 1) deliberately steered prime borrowers into higher-cost subprime mortgage refinancings and 2) falsified income documents to put subprime borrowers into unaffordable loans.  The settlement provides for an $85 million fine, plus an elaborate claims-based compensation procedure for victims, who may number 10,000 or more.  Notably, families who lost their home in foreclosure as a consequence of Wells Fargo's illegal steering are to receive $7,000 for the loss of their home.  That should cover some moving costs and a month's rent or so.   As far as I could tell the agreement does not provide for consumers to release claims in exchange for these paltry sums, but advocates would be well advised to review settlement notices with affected consumers carefully.

The Fed announcement touts this wrist-slap settlement as the largest consumer protection enforcement fine in its history.   Ample evidence that consumer protection against financial institutions needs to be transferred to a real enforcement agency at the earliest.

Plain Vanilla? A Retro Flavor

The Obama adminstration's CFPB proposal took a lot of flak (and almost cratered) because of the inclusion of the "plain vanilla" provision (from the work of Profs. Michael Barr, Sendhil Mullainathan, and Eldar Shafir), which would have required financial service providers that offered "alternative" products to also offer borrowers "standard" plain vanilla products. The typical example given was that if a lender offered a payment option ARM, it would also have to offer a 30-year fixed rate mortgage. That seemed to be a radical demand on the market and got a lot of objections. 

How short our financial services regulation memories are, it turns out. I've been poking around in the history of US mortgage regulation for a couple project, and guess what?  We used to require plain vanilla for federal thrifts.  Prior to 1981, if a federal thrift offered an ARM (the terms of which were heavily regulated), it also had to offer the borrower a FRM. Industry didn't love it, but it was hardly their biggest complaint.  This is hardly an argument in favor of plain vanilla, but it definitely makes it look less radical.   

Is Asbestos Defense Anti-Consumer?

The Boston Herald has a piece questioning Elizabeth Warren's consumer bona fides because she worked on a 2008 Supreme court appeal for Traveller's Insurance involving the validity of Traveller's settlements for asbestos liability relating to Johns Manville's bankruptcy in the 1970s. The Supreme Court ruled for Traveller's 7-2.  

The Herald piece portrays Professor Warren's involvement in the Traveller's case quite unfairly. The article quotes an angry asbestos victim as damning all of "those lawyers [who] are trying to keep every penny away from people who are faced with this disease." That angry sentiment, however, has nothing to do with what the Traveller's case was about or Elizabeth Warren's involvement.  

The biggest problem is that the article doesn't really address what the Supreme Court case was about.  Once one understands what the case was about, it simply cannot stand as evidence that Elizabeth Warren is somehow anti-consumer.  The Traveller's case was not about whether asbestos victims deserve compensation.  Nor was it about how much compensation they deserve.  Instead, it was about the finality of a court order approving a bankruptcy plan--a procedural matter of enormous importance to all bankruptcy cases, not just those involving asbestos. 

The Three Consumer Banking Systems

For the past couple of years we've heard a lot about shadow banking versus traditional banking. But this dichotomy treats the traditional banking system as a unitary whole. That's hardly the case for consumer banking. The United States currently has three consumer banking systems. They have somewhat separate regulation and market segments, but they are fundamentally in competition with each other. 

The first system is the too-big-to-fail commercial banks. They are almost all structured as national banks, regulated by the Office of the Comptroller of the Currency. The second system are the community banks and credit unions.  They tend to be regulated by the FDIC and NCUA, but also by the Fed or state banking supervisors.  And the third system are the nonbank finance companies (payday lenders, title lenders, even pawn, etc).

Despite the competition between these sectors, they have cooperated to a surprising degree recently, particularly community banks and credit unions with commercial banks. For example, on both bankrutpcy cramdown and the Durbin Amendment, there were carve-outs for small institutions (<$10B net assets), but the small banks still fought furiously despite being exempted. I'm frankly puzzled why they are willing to carry water for the big boys (do they want to be part of the club?). Maybe someone will explain in the comments. But below the break I'll lay out the case for why the smaller banks should actually be strongly supportive of recent consumer finance regulatory initiatives. 

Google Wallet-Regulatory Implications

Yesterday, Google unveiled its Google Wallet near field communications payment app for Android phones. As far as I can tell, Google Wallet basically stores your payment card information for multiple cards (credit, debit, prepaid) and then lets the phone act as the NFC device instead of a RFID chip in a card. That's not particularly remarkable. What is cool about Google Wallet is that it integrates a loyalty/coupon system (Google Offers) with the payments. I haven't been able to figure out if the loyalty/coupon system integrates locationally-based offers (e.g., GPS in phone says you're 5 blocks from a Home Depot so you get a SMS text message telling you about the proximity and with a link to a digital coupon that has to be used within 2 hours).

Recess Appointments and "Vacancies"

It's amazing the lengths to which Republicans are going to try to prevent the appointment of a CFPB Director.  First, the Senate is have pro forma sessions over the weekend so there won't be a recess.  And now Rep. Spencer Bachus (R-Ala.), the Chairman of the House Financial Services Committee has come out with the patently ridiculous claim that the President's Constitutional recess appointment power can only be used to fill "vacancies" and that the CFPB directorship is not "vacant" because there has never been a Director.  Bachus's evidence for this is the 1998 Federal Vacancies Reform Act.  

There's a little problem with this argument:  a Congressional statute does not determine the scope of the President's Constitutional authority.  The statute is bounded by the Constitution, not the other way around. Indeed, it's hard to believe that a 1998 statute is probative evidence of what the Framers' intended.  Rep. Bachus might do better by starting with a dictionary.  Here are some of the choice definitions I've found:  "unoccupied" (dictionary.com); ": "not occupied by an incumbent, possessor, or officer" (Merriam-Webster). 

Beyond the semantics, however, it would make no sense for the recess appointment power to be limited to positions that had previously been filled. First, there'd be no reason for the Framers to have imposed such a limitation and second, the whole purpose of the recess appointment power is to ensure that the President has the officers necessary to fulfill his duty to take care that the laws are carried out.  If Congress created a new agency and then went into recess before a nominee was confirmed, the President would be unable to execute the laws, which would frustrate the intent of Congress.  Representative Bachus's recess appointment claim just doesn't hold water.  

CFPB Oversight Compared with Other Regulators

A lot of the debate at today's Government Oversight hearing on the CFPB dealt with whether the CFPB was the most accountable or the least accountable federal government agency ever. My position has been that compared with other federal financial regulators, the CFPB is remarkably accountable. But accountability comes in many different ways and forms. I've tried to summarize comparative accountability visually in the chart below. It compares the oversight mechanisms that apply to the CFPB with some other agencies: the Environmental Protection Agency, the FDIC, the Federal Reserve Board, the FTC, the Office of Comptroller of the Currency and Office of Thrift Supervision, the SEC, and the Social Security Administration. 

Now not all forms of oversight are equal. A GAO audit isn't the same as Presidential removal power, for example. Nonetheless, the chart (available as a better quality PDF here) shows that the CFPB is subject to an extensive battery of oversight mechanisms--more than any of the other financial regulators included in the comparison.

At the very least, this chart provides pretty good evidence that claims that the CFPB is the least accountable agency ever just don't hold water, and that it is at least as accountable as the existing bank regulators. 

CFPB Oversight

I testified as a Minority witness today at a House Government Oversight Committee hearing on the CFPB.  It was a rather extraordinary hearing, not for the substance of the hearing, which was just the latest installment in the Elizabeth Warren witchhunt, but for the exchange between Professor Warren and the Subcommittee Chairman, Patrick McHenry, regarding the scheduling of the hearing. It has strange echoes of Joe Wilson's "You Lie!" outburst. 

 

Amazingly, this was only part of the exchange.  If you watch the full exchange on C-SPAN, it starts at about 56:00-58:00 and then starts up again at around 1:02:30 and runs until 1:09:30.  All of this followed a good hour of Professor Warren being asked questions but then being interrupted before she was able to give complete answers.  

Whatever happened with the scheduling of Professor Warren's testimony, let me just say that the Majority committee staff's handling of the scheduling in regards to me was less than exemplary. At some point this morning, the hearing was moved up by 45 minutes and moved to another hearing room. Majority committee staff, which handles the invitations and scheduling, never bothered to notify me of either of these changes. They did, however, send an email to all of the Majority witnesses. I was lucky to get word of the change from non-official channels. But otherwise, I might well have been late to the hearing.

It was probably just coincidence that only a Minority witness wasn't told of the schedule and room changes. Irrespective, this is no way to run a Congressional committee.  

The Servicing Fraud Settlement: the Real Game

Warning: This is a long blog post. But if you follow mortgage servicing, I think you’ll find it worth reading. Despite lots and lots of media coverage of the servicing fraud settlement, nobody seems to understand the real story that's going on. I think that this post will explain a lot.

Let's start by recapping what we know.  Back in March we started hearing media reports of a proposed penalty for servicers in the $20-$30B range.  Then the American Banker published a 27-page term sheet from the AGs for servicing standards. Next, Huffington Post published a 7-page CFPB powerpoint presentation. Then came the draft C&D orders and then in April, the final C&D orders (which eliminated the ridiculous "single point of contact which need not be a single person" and replaced it with "single point of contact as hereinafter defined" and then failed—quite deliberately—to define it anywhere in the document).

Now there’s another round of activity and conflicting reporting. The American Banker reported that there was a new AG term sheet proposed and that principal reductions were off the table. That turns out to be incorrect, as Shahien Nasiripour reported in the Huffington Post. The new AG term sheet that the American Banker referenced deals only with servicing standards. The American Banker assumed that this mean that principal reductions were off the table because they weren’t referenced in the term sheet. In fact they are still very much in play. They’re just in a second, separate term sheet. So now there are two separate term sheets--one covering servicing standard and another covering monetary issues/principal reductions. (Recall that the original AG term sheet did not cover the monetary issues—that was clearly for a separate document.) We are also hearing news reports that the banks are offering to settle for $5B and won’t go above $10B.

So how do we make sense out of all of this?

The short answer is that the fight is not over a piddling $5B or $10B or even $20B. The banks would buy peace in a second for $20B and servicing reform. So what does that tell us? It indicates that the negotiations are over a substantially bigger figure than $20B. And this explains everything about the banks' negotiating strategy including the recent attacks on Elizabeth Warren by the Wall Street Journal's editorial page and by Congressional Republicans on the CFPB.

The Anti-Consumer Agenda

I often find myself annoyed by left-wing (and occassionally right-wing) anti-business screeds that decry corporations, big business, etc.  I don't find anything inherently troubling about corporate form or business size, and I have no problem with profit-motivated actors (individual or corporate), so long as they play fair. Mindless attacks on the business community have the unfortunate effect of undermining perceived validity of more targeted, thoughtful concerns through a guilt-by-association phenomenon. 

But business and consumer interests often diverge. Now, it should hardly be controversial that there is an unequal playing field between businesses and consumers. Generally, businesses know more about their products than consumers and have more bargaining power than consumers. (Yes, there are information assymetries running the opposite way, which is a particularly salient problem for credit and insurance products.) For many businesses, it is important to maintain this assymetry of information and bargaining power, as there's profit in it.

In theory, and I emphasize in theory, competition should eliminate many of the problems these assymetries create for consumers, but there's no such thing as a perfect, complete market, just varying degrees of market imperfection, so competition alone cannot be relied upon to solve everything. What, if anything else, should be done is an open question, but when one looks at a range of seemingly unconnected recent public policy issues, a troubling common theme emerges.

Instead of a laboratory of experiements to help level the b2c playing field, we see a different trend emerging:  a distinct anti-consumer agenda that aims to reduce consumer bargaining power and information.  Consider the common theme that runs through the following issues: 

• AT&T v. Concepcion (waiver of class actions in arbitrations)
• Attempts to bust up public employee unions (and attacks on unions in general, such as the failure of Card Check legislation)
• Citizens United (corporate speech rights)
• Attempts to retain the current corrupt swipe fee system (failure of antitrust)
• Attacks on public health insurance (prohibition on Medicare bargaining over prescription drug prices and the death of the public option)
• Attempts to first kill off and now to maim the Consumer Financial Protection Bureau

American Bankers Association Now Backs Warren

A few years back there was a person who used to write for Credit Slips named Elizabeth Warren. She left the blog, and we had heard she took a government job in Washington, DC. Now, word comes via our friends at the CL&P Blog that the American Bankers Association is backing her candidacy to head the Consumer Financial Protection Bureau.

This is great news, and I hope it breaks the political logjam against her nomination. President Obama could not pick a better person to head the CFPB.

UPDATE (5/3): As noted by commenter JJM, the president of the American Bankers Association is now backtracking on his statement. See here from Jeff Gelles at the Philadelphia Inquirer (which includes a wonderful analysis of a heretofore unknown phenomenon to me: the Kinsley gaffe).

The Elizabeth Warren Witch Hunt Continues

The latest chapter in the Republicans' Elizabeth Warren witchhunt would be farcical, if it didn't have such potentially serious consequences. Congressional Republicans are now demanding that Elizabeth Warren recant her Congressional testimony about her role in the non-existent mortgage servicing settlement.  The problem?  Professor Warren stated that she "advised" the Treasury Secretary on the settlement, whereas Republicans allege that:

according to the CFPB Settlement Presentation, the CFPB did more than provide advice:  it recommended the goals and provided a detailed framework for the structure of the settlement....rather than merely dispensing advice to those involved in negotiating the settlement, the CFPB was actually its primary architect.

In other words, the Republicans are insinuating that Professor Warren misled Congress in her testimony because she said she "advised" when in fact she "recommended." This charge is truly laughable and shows what a desperate witchhunt the Congressional Republicans are conducting as part of their rear-guard action for the banks. This doesn't even pass the straight face test. I half expect their next letter to demand that Elizabeth Warren show up at the House dunking pond to see if she floats or sinks.

Allocating Scarce Dollars: Payment Hierachy

When Americans have fewer dollars, creditors need to position themselves at the top of the pile to get paid each month. This is called payment hierarchy, and traditionally mortgage creditors have been at the top and unsecured creditors, and perhaps ubiquitous credit card creditors, near the bottom. At the Consumer Financial Protection Bureau conference on the anniversary of the CARD Act, I learned that the payment hierarchy has been upended. In 2010, consumers are paying their credit cards ahead of their mortgages. (Click on CFPB conference link above, then click on "Credit Card Profitability" by Credit Suisse and go to slide 7 to see the full data). Two key explanations for this change: 1) people may be more willing to risk losing their home when its value is plummeting and they are not certain they can hang onto it, and 2) credit card companies reduced the amount of credit lines and closed old accounts, making people more concerned about "preserving" their good standing with their credit card company. Another way to think about this is that homes used to be families' piggy banks, tapped when it is time to send a child off to college or do a home renovation. With no equity, Americans need to rely more on the credit card as their safety net. Unemployment rates are high, the economy remains fragile, medical costs are uncertain. In this economy, it seems entirely rational and reasonable to me for families to highly prize access to unsecured credit from cards.

When there are too many unsecured creditors to go around, however, how do consumers chose who gets their scarce dollars? A new research paper, Winning the Battle but Losing the War: The Psychology of Debt Management, uses a series of experiments to explore this question. The authors find that consumers focus on making payments that reduce the number of open accounts, which the researchers call "debt account aversion," rather than solely on paying off the debt with the highest cost interest rate. The latter would ultimately reduce the total cost of credit, an approach that the researchers term "perfectly rational."  In a series of stylized debt games played by students, not even one student consistently repaid in multiple rounds of the game all of their available cash to the open debt account with the highest interest rate. The pattern of debt account aversion--using some cash to pay off small accounts--held across a variety of conditions, although the researchers find some interventions that reduce the practice, such as prominently highlighting the amount of interest accumulated on each debt between rounds. But is debt account aversion really a "mistake"? Should policymakers be discouraging this behavioral trait?

The Wall Street Journal's CFPB Smear Campaign Continues

The Wall Street Journal editorial page has its fourth hit job in two weeks attacking Elizabeth Warren. It's hard to think of the last time the WSJ editorial page assaulted any individual government official for such extended and personalized animus. (Maybe President Clinton or Elliot Spitzer?) And as I've noted before (here and here), the WSJ keeps stretching the facts in these percussive pieces.

The WSJ's attacks are also way out of line with the mainstream media. You might say they're tone-deaf. Here's a litany of recent pieces supporting the CFPB: SFChronicle, Californian, Las Vegas Sun, Philadelphia Inquirer (and again here), Bangor Daily News, Miami Herald. It would seem that everyone except Wall Street understands the need for the CFPB and that Elizabeth Warren is the person for the directorship. 

The WSJ raises three criticisms of Warren and the CFPB: (1) lack of accountability on rulemaking, (2) lack of control over funding, and (3) disingenuousness about the CFPB's role in servicing fraud settlement negotiations. The WSJ's real issue, however, isn't the level of the CFPB's accountability or funding or even its role in the servicing settlement. It's the CFPB's very existence.

Congress ought to put Ms. Warren's unaccountable bureau under Treasury with an annual budget—or, better, put it entirely out of business.

Complaints about accountability or funding are just cover for the banks' WSJ's real agenda--letting the banks go back to business as usual. How well did that work out for the country in 2008? Heckuva job, Brownie!

The WSJ editorial page has never managed to articulate an argument for why there should not be a CFPB, however. I think there's a reason for that--there isn't one that can be made with a straight face. The WSJ's motivation is it is afraid that the CFPB will result in greater fairness, transparency, and efficiency in consumer finance markets--and hence less profit for Wall Street. But even the WSJ knows that's not an argument it can make in public. So instead, the WSJ editorial page harps on accountability and legality. Let's see how well these strawmen stand up to the fire of reason.

A Bisl Kissel or Why the Kissel Kerfuffle Misses the Point

The gloves have really come off between the Wall Street Journal Editorial Page and the CFPB and its defenders. Zach Carter blogged on HuffPo about how the WSJ's attacks on Elizabeth Warren and the CFPB were authored by Mary Kissel, who worked for a few years at Goldman Sachs before joining the WSJ. The implication here was that Kissel is carrying water for Goldman's regulatory agenda because of her past association. (Full disclosure: I was vaguely acquainted with Kissel in college, but the only thing I recall about her was that she played the marimba quite well.) The WSJ spluttered back at this "ad hominem attack," calling it a smear job because it was anonymously sourced. 

Clearly this struck a nerve with the WSJ; I guess their editorial writers aren't used to being called to account. Ultimately, Kissel and her background are at best irrelevant to the story.  It doesn't really matter what motivates Kissel; the WSJ would have found another soldier to carry out the hit. At worst, though the Kissel Kerfuffle is a distraction from the real issue--that the WSJ's editorial page coverage of Elizabeth Warren and the CFPB have been substantively misleading. 

Shakedown or Bailout? The Mortgage Servicing Settlement

How's this for contrasting interpretations:  the AGs' proposed mortgage servicing settlement is being termed both a "shakedown" (WSJ editorial page) and a "bailout." (Jesse Eisinger at ProPublica--ok, he uses the word "gift", but still).  

Wow.  That's some divergence in characterization of an incomplete term sheet.

I think both of these interpretations miss the mark, as neither really gets what a settlement is.  A settlement is a voluntary contract and represents compromises by both sides in order to avoid uncertain litigation outcome.  The WSJ's interpretation is just nuts--the cheerleaders for freedom of contract are complaining about the price of a contract offer.  Addressing Eisinger's bailout charge is more complex.  Details below the break.    

Foreclosure Fraud Settlement: The Empire Strikes Back (or Why Are Republicans So Obsessed with Backdoor Cramdown?)

It's not surprising to see the banks and their supporters on the Hill pushing back on the proposed Foreclosure Fraud settlement term sheet. (See here and here and here).  There seem to be three major lines coming out of the banks:

 (1) It's "backdoor cramdown," and the agencies shouldn't be pursuing a policy rejected by Congress.  

Thus, House Republicans wrote to Treasury Secretary Geithner that "The settlement agreement not only legislates new standards and practices for the servicing industry, it also resuscitates programs and policies [namely bankruptcy cramdown] that have not worked or that Congress has explicitly rejected."  These House Republicans want to know:  "What specific legal authority grants federal and state regulators and agencies the power to require mortgage principal reductions when the House and Senate have voted down such proposals?"  .  Similarly a coterie of bank-friendly pundits chimed in calling this sub rosa cramdown.  

(2) CFPB has no business being involved given that it doesn't have a director.  

This has to be read between the lines as a thinly veiled Elizabeth Warren witch hunt.  At least one commentator was upfront about that in the American Banker.   

(3) The settlement could negatively affect the safety and soundness of the banks.  

Let me address all of these points.  There's a lot of willful confusion about this term sheet and what it is.  

BoA Nonesense

The irony of the CEO of Bank of America kvetching that it would be unfair to responsible homeowners for the bank to give principal reductions to homeowners in default is really too much. Does he recall that he's the CEO of a bank that is only still in business by grace of a federal bailout?

But where is Moynihan getting that he'll be required to help only deadbeats, when he feels morally bound to share the love with current borrowers?  I sure didn't see anything in the AG/CFPB term sheet that requires that.  Instead, it leaves the question of who will live and who will die up to the banks, precisely so they can't bellyache that federal regulation is restricting their ability to do loan mods, as they have about HAMP.  

Here's the relevant language from the term sheet.  As far as I can see, the basic principle for mods is NPV maximization (i.e., investor protection).  Default status surely plays a role in that calculus, but it's the servicer's decision how to account for that: 

• "Servicers employees shall not advise, instruct, or recommend that borrowers go into default in order to qualify for loss mitigation relief."  (p. 17)
• "Servicer shall consider and apply principal reductions in appropriate circumstances for sustainable modifications." (p. 18) 
• There is a particular requirement that servicers evaluate all defaulted loans with an LTV>100% or CLTV>115% for principal mods in a particular manner, but that's not saying only defaulted loans are eligible for principal mods. (p. 18)

My read here is that Moynihan's real complaint is that BoA might have to dish out $4-5B (relative to earnings of $35-40B, it's not so huge, even if it is is the largest bank fine ever by an order of magnitude) and leave the AGs and CFPB with the ability to hammer it for noncompliance.  (And again, I emphasize that the AGs and CFPB do not currently have authority over things like noncompliance with HAMP or PSAs, but would under the term sheet, meaning there would be a real cop on the beat).  

Foreclosure-Gate Settlement--More Thoughts

[Updated 3.8.11]

Some bloggers on the left (e.g. here) and on the fringe right (see here)  are upset with the servicing standard term sheet that got leaked because they think it just prohibits things that are already illegal.  This is an incorrect reading of the term sheet.  Let me give three examples.

Foreclosure-Gate Settlement?

What appears to be part of a Foreclosure-gate settlement has been leaked.  There's a lot in this 27-page document, but here are some initial thoughts.

The Foreclosure Fraud Settlement

The inter-regulator fight over the proper parameters of a foreclosure fraud settlement are really highlighting the changes in the financial regulatory world.  What we're told is that the OCC and Fed are urging a weak settlement, while FDIC, the state AGs, and the Consumer Financial Protection Bureau (CFPB) are pushing for a serious settlement.  

Parts of this line up look quite familiar, but parts are new and exciting.  

Memo to Elizabeth Warren: How to Do Things With Documents

Elizabeth Warren has proposed, as one of her first initiatives, that banks should simplify their standardized credit card contracts with customers to insure that customers understand what they are signing.This proposal has generated lots of enthusiasm among centrists as a modest, relatively non-political initiative, something that hardly anyone could be against, but that holds out the possibility of reducing fraud and confusion in the credit markets by at least ensuring that consumers know what they are getting into.

Welfare Economics and Consumer Credit Paper

I have just posted a working paper on the welfare economics of microcredit and payday lending.  The paper tries to address some of the questions raised by, among others, Jim Hawkins, discussed in previous posts here and here.  Post-crisis consumer credit regulation, it seems to me, will have to proceed from norms other than revealed preferences utilitarianism.  Accepted criteria for judging the success or failure of  future regulation will be an essential first step in elaborating a fact-based regime of consumer credit rules.

The Political Economy of CFPB Funding

Federal Reserve Bank of St. Louis President James Bullard is kvetching about the CFPB's funding mechanism.  It seems that he doesn't like the CFPB having a claim on 12% of the Fed's budget.  That money might get used for effective consumer financial protection or something crazy like that, instead of for bailing out parts of the financial system.  

Bullard argues that “The amount of money allocated in the law is not based on any careful assessment of what the needs of the bureau will be as it attempts to fulfill the mandate of the Congress with regard to consumer protection."  

At least from his quoted comments, it seems that Mr. Bullard simply doesn't understand the rationale behind the CFPB funding mechanism.  

Principles Aren't Always Enough; Rules Are Needed Too.

In my last posting, I discussed the tradeoffs of regulation on the consumer side, and the extent to which disclosure would be sufficient to resolve consumer protection issues.

Here, I pose a simple problem to illustrate why principles based regulation would be inadequate.

New Consumer Regulation: Education and Disclosure Is Not Enough

Elizabeth Warren’s appointment as special advisor to the president was widely hailed as an achievement for consumer advocates. Professor Warren has long been a strong advocate of the middle class and famously compared financial products to flaming toasters.

The creation of a new agency brings new possibilities and new risks for consumer advocates. Most importantly will be the agency’s approach to regulation. In a two-part posting, I will comment on two key aspects of the new agency’s direction. The first revolves around understanding of consumer behavior and the second around firm behavior.

Part 1:

A core component of the CFPB mission is based around the idea that banks provided risky products to consumers that didn’t understand them. There is abundant evidence that consumers didn’t understand the products they bought; however, it’s far from clear that this is a sufficient role for the CFPB. I’ll argue here that in addition to disclosures, education and information, we need explicit regulation of the products as well.

Effectively, this boils down to a simple question: if banks want to offer a risky product (a flaming toaster) to consumers that fully understand its dangers, should the bank be permitted to offer it?

What's Eating Todd Zywicki?

It's no secret that there's no love lost between Todd Zywicki and Elizabeth Warren.   But Todd's latest salvo in this feud is simply filled with inaccuracies.

Todd goes after Elizabeth for (1) her medical bankruptcy research, (2) the Two-Income Trap, and (3) the treatment of strategic defaults in Congressional Oversight Panel reports.  Todd's charges in (1) and (2) are just rewarmings of his past critiques of Elizabeth's work and of Meghan McArdle's botched hatchet job of Elizabeth in the Atlantic for which she was taken to the woodshed by numerous observers (see also here and here, for example).

But what about the Congressional Oversight Panel's treatment of strategic defaults? Here, Todd's claim is demonstrably false.

Housing Agenda for the new Consumer Czar

The White House announced early this morning via a blog post that Elizabeth Warren will be appointed Assistant to the President and adviser to Treasury Secretary Geithner to begin implementation of the Consumer Financial Protection Bureau.  This intriguing move leaves open the question of who the President will nominate as Director.  Dodd-Frank requires Secretary Geithner to announce a transfer date for the CFPB to begin its work, some time between January and July of next year, and authorizes him to serve essentially as acting director of the Bureau until the Senate confirms a permanent Director.   As far as I can tell, there is no time limit for the nomination or confirmation of the permanent Director.  Obama could wait until after the fall elections, for example.

The Bureau's authority to write regulations and enforce laws does not begin until the transfer date next year.  In the meantime, however, the Warren/Geithner acting director team can take action immediately on several urgent issues. 

The War on Bank Profits?

The Wall Street Journal had a peculiar opinion piece today about bank regulation.  I won't pick the low-hanging fruit of its bizarre statements about potential CFPB Director nominees, but I think it's noteworthy for the revealing language it uses.  It says that Washington should "call off the war on bank profits" and allow[] banks to make profits."  

The conceit of the piece is that a subset of businesses have an entitlement to be profitable.  That's deeply inconsistent with a belief in markets.  The fundamental rule of American capitalism is "Go Forth and Profit, but Fairly."  It's one thing to debate what sort of practice is fair or not.  But that's not what the WSJ piece argues.  It argues that legislation like the Credit CARD Act and the Consumer Financial Protection Act are wrong because the restrict banks' profitability.  This is a serious misunderstanding of financial services reform, and if this is how the financial services industry as a whole understands regulatory reform, we've got serious problems as a society.

Fringe Lending and Consumer Welfare

Like Katie Porter, I found Professor Jim Hawkins' paper on fringe lending valuable for challenging some of the premises underlying calls for stricter regulation of fringe lending products like payday loans.  In my view, there are empirically testable criteria for regulation of fringe credit, which I hope to elaborate in a forthcoming paper.  Unfortunately, Professor Hawkins ultimately does not offer either a normative consumer welfare framework for credit regulation, or a truly empirical examination of the welfare impacts of fringe lending.  Instead, he relies on product descriptions that reflect industry marketing more than the experienced reality of working class borrowers who use them, and uses a very limited implicit definition of consumer harm to restrict the possible justifications for market intervention.

The Dodd-Warren Rift: President Obama Can you Hear Me?

With even Dr. Phil coming out in favor of Warren for CFPB head, Chris Dodd very much opposed and waffling about why, and a new rap video about Professor Warren going viral, according to an article in the New York Times, Americans are waiting to see what the President will do. I agree with readers who say this’ll take some courage, but Mr. President,you wouldn't ignore Professor's Warren's record and instead listen to Senator Dodd, would you? That wouldn't make much sense. By the way, I am not friends with Elizabeth Warren (unlike Dr. Phil apparently and many of my co-bloggers) and have never given a dime to any political campaign.  Differences in world view aside, no one can claim this Harvard law professor is not the most qualified. The CFPB is a reality now and going to be staffed, no doubt at very significant expense. If we are going to do this, and I guess we are, why not give credit-crushed consumers (see Aug. 21 New York Times article) good value for their money and appoint someone who will most swiftly and efficiently fulfill the mission (and namesake) of the bureau. In this instance in particular, shouldn't we get our money's worth?  

Colbert: Elizabeth Warren Is No Oprah

Stephen Colbert last night opining that "a huge budget and no constraint on authority" should be reserved only for Oprah Winfrey here, including an interview with Barney Frank on why Warren is the best pick.

A Puzzle

Working my way through the local paper today, I stumbled across a story on consumer credit. Against my usual inclinations, I read on. It tells the story of how banks routinely sell old debts, that is, debts past the statute of limitations, for about 0.2 cents per dollar. For my co-bloggers, this is probably old news.

But the question that occurs to me, is why do we allow such sales? Just as we don't allow markets to sell expired milk, no matter what the discount, it would seem that allowing sales of debts that can only be enforced by trick is unlikely to be socially useful or something that our banking regulators should condone.

Credit Slips & the WSJ's Washington Wire

Mary Pilon of the Wall Street Journal's Washington Wire has a post up about Elizabeth Warren's blogging here at Credit Slips. Long-time readers will undoubtedly remember many of these posts highlighted there. I'll highlight two others. First, there is a post dated September 14, 2008, just after the U.S. government's bailout of Bear Stearns with some prescient comments about what the future would hold:

More bailouts will be needed, and, at some point, even the American taxpayer can't handle it. Bailouts will not put a stop to the underlying problem: we can't find a bottom in the housing market. Until that happens, the value of financial instruments based on those mortgage obligations will keep falling, and the worldwide market will keep sliding toward collapse.

Second, one of my favorite posts from Warren was this one about the distinction between facts and deductive reasoning. We used this great example in the introductory materials to our empirical methods text.

Where's the Beef? Elizabeth Warren Edition

Here's what's striking about all the criticism of Elizabeth Warren: there's no smoking gun. No one has been able to point to anything radical in Elizabeth Warren's extensive body of writing. Where's the beef?

Secrets about Elizabeth Warren Revealed

I have known Elizabeth Warren for ten years, and I know her pretty well. I've been to her home; she's been to mine. She sent me baby gifts; I got her a 60th birthday present. We exchange Christmas cards,  . . . you get the idea.

Now she's a candidate for this big-time appointment as the Director of the New Consumer Financial Protection Bureau. And somehow there are these things about her that must be deep-dark secrets  because it seems like people do not know Elizabeth Warren at all. (As Bob Lawless has written, I think the debate is becoming about a caricature of Prof. Warren, not Prof. Warren the real person.) So here it is . . . Secrets about Elizabeth Warren Revealed.

Two Thoughts on the Warren Nomination for the CFPB

The latest catnip for the 24-hour news cycle seems to be speculation on whether President Obama will nominate Elizabeth Warren to head the new Consumer Financial Protection Bureau. Like Adam, I was resistant to say anything on Credit Slips because I figured few would care or be surprised to learn that she has the unequivocal and strong support of a co-author, collaborator, and friend posting on a site where she used to be a regular blogger. As I have read the media reports, it has struck me that the debate is becoming about the caricature of a person I know rather than the actual person. Along those lines, here are two thoughts.

Elizabeth Warren and the CFPB

Some of our readers might have noticed that we at Credit Slips have remained remarkably silent about the question of who should head the CFPB. Other bloggers on consumer finance issues have not. Shahien Nasiripour and other HuffPo bloggers (here, e.g.) and Simon Johnson (and here) have declared the nomination of Elizabeth Warren to be a progressive litmus test for the administration. Andrew Leonard and Felix Salmon, among others, have particularly interesting discussions about Professor Warren and some of the other potential nominees. The silence has not been for lack of strongly held opinion, but out of a sense that our opinions would be completely discounted because of our various relationships with Professor Warren and inconsistent with the nature of the blog.