72 posts categorized "Consumer Financial Protection Bureau"

New Data and Thoughts on Payday and Other Alternative Lending

posted by Pamela Foohey

The Consumer Financial Protection Bureau's new study (published 3/25/14) regarding payday loans has received substantial press coverage over the past couple days. The study focuses on repeat customers and finds that 80% of payday loans effectively are rolled over--that is, another loan is taken out within 14 days of repayment of the prior loan. (Some states have legislated cooling-off periods for payday loans; in those states, loans cannot be rolled over, but customers are free to come back a few days later.) The study further finds that the loaned amount goes up as loans are rolled over and that nearly 50% of all loans are in a sequence at least 10 loans long. This means that payday loans generally are not used by customers as short-term "stopgap" loans to keep them out of a cycle of debt. Rather, customers are in debt effectively for months, as Credit Slips contributor Nathalie Martin's research previously has suggested.

The study's release coincided with yesterday's Senate Committee on Banking, Housing and Urban Affairs, Subcommittee on Financial Institutions and Consumer Protection's hearing titled, "Are Alternative Financial Products Serving Consumers?" -- at which Nathalie testified. The hearing raises larger questions about the federal government's role in regulating the landscape of alternative lending. This includes payday loans and, as Nathalie noted in her testimony, similar short-term loans that are designed in part to bypass state laws regulating "traditional" payday loans.

Continue reading "New Data and Thoughts on Payday and Other Alternative Lending" »

Some Reflections on the "Big Club Behind the Door"

posted by Susan Block-Lieb

Autonomous administrative agencies are anathema to certain sorts of lawmakers, e.g., those who think that we are always better off with less regulation.  Recent legislation – H.R. 3193 – passed the House last week looking to make the Bureau of Consumer Financial Protection more accountable.  Yesterday I posted a quick blog on this bill on Credit Slips, but want to explore the issue a little more deeply today from the perspective of positive political theory (“PPT”).

Continue reading "Some Reflections on the "Big Club Behind the Door"" »

Off with their heads!

posted by Susan Block-Lieb

Hey, Everyone!  Great to be back on CreditSlips.  

Adam blogged earlier on the politics of consumer financial protection regulation (here); I'm writing to add a quick "hear, hear!" Just a few days ago, the House passed H.R. 3193, which in its own words would "amend the Consumer Financial Protection Act of 2010 to strengthening the review authority of the Financial Stability Oversight Council of regulations issued by the Bureau of Consumer Financial Protection" but really it looks to gut the CFPB -- I mean -- make it more accountable to Congress. This bill is an example of legislation with no hope of legislating, enacted not to resolve some policy impasse but rather to irritate and possibly count as newsworthy somewhere (here, here, and here).

Argh. I've written elsewhere that the claim that the CFPB lacks accountability is a red herring (here and here). But I don't feel the need to revisit these arguments. Oh, wait; I just did.

Debt Collection Complaints and Regulation: Last Chance to Comment on ANPR

posted by Dalié Jiménez

Today is your last chance to comment on the CFPB's Advanced Notice of Proposed Rulemaking on Regulation F, regarding debt collection.  I had the pleasure of working with Pat McCoy on a joint comment to the ANPR.  Our comment addresses documentation and information requirements for collectors, chain of title issues, and debt repositories.

After reading two reports released yesterday I'm even more convinced that these are among the most critical issues.  The FTC announced their top 2013 complaints (debt collection still the top industry complained about) and US PIRG released a report on the more than 11,000 complaints the CFPB received on debt collection over a six month period.  The PIRG report in particular highlights just how important the integrity of the information and documentation passed from collector to collector is (and how badly this is working right now).  Most consumers were complaining that the debt was not theirs (25%), they were not given enough information to verify the debt (13%), or that the debt had already been paid (11%).  

This is exactly the underlying issue that we address in our ANPR comment: something is very wrong when a debt buyer only gets a spreadsheet with some information about the debt, gets no documents in connection with the debt, signs a contract where the seller doesn't stand behind the information sold (and sometimes specifically says amounts or interest may be wrong), and then attempts to collect on that debt. I've argued that this violates the FDCPA.  In our comment we try to propose some ways to fix this problem going forward.

I urge Credit Slips readers to send in your comments before the 11:59pm deadline.

CapitalOne Contract Not Just Creepy But Illegal?

posted by Dalié Jiménez

Shutterstock_144867838CapOne's taken a lot of flack today over its apparent desire to check what's in your wallet by visiting you at home and at work.  The LA Times story got even bigger when it made it to Twitter and  great (and lots of bad, see previous sentence) puns started rolling in.

The company answer seems to be that language from a security agreement for snowmobiles got "mixed in" with the credit card language (and no one over there is reading their 6-page contracts). They are now "considering creating two separate agreements given this language doesn’t apply to our general cardholder base."  

I wonder if that means that they'll also revisit the part of the credit card agreements that takes a security interest in anything you buy from Best Buy, Big Lots, Jordan's Furniture, Neiman Marcus/Bergdorf Goodman, or Saks?  (I should note, your clothes are only in danger if you have a Saks "retail" card; if your card is a Platinum or World card not only is your interest rate likely lower but it seems your stuff is also safe).

Continue reading "CapitalOne Contract Not Just Creepy But Illegal?" »

Debt Collection Industry Poised for Changes

posted by Dalié Jiménez

Like Pamela, I’m very delighted to join Credit Slips. As Bob mentioned in his kind introduction, I spent a year as a policy fellow at the Consumer Financial Protection Bureau. One of the most things I got to work on while I was there were the rules defining "large market participants" in the debt collection and credit reporting markets. After issuing final rules, the CFPB began to supervise these non-bank entities; marking the first time any federal regulator had the authority to do so. 

Recently, the Bureau published an Advanced Notice of Proposed Rulemaking on debt collection (comments are due by February 28). The ANPR marks the first time that a regulator will interpret the Fair Debt Collection Practices Act, a statute that has barely changed since its enactment in 1977. What's more, because of its UDAAP authority; the CFPB will be able to write rules defining unfair, deceptive, and abusive practices that apply to both collectors and creditors. I've written elsewhere about how the systemic problems in the collections ecosystem begin at the creditor, so this is exciting news. What might be surprising though is that the collections industry seems to share in this excitement.

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How Risky Is It to Make a Non-QM Mortgage? And Is QM Going to Hold Back Access to Credit?

posted by Adam Levitin

        One of the huge questions hanging over the mortgage market today is what will happen to access to credit for credit impaired or non-traditional borrowers. There is a real concern that the Dodd-Frank Act’s mortgage reforms will reduce the availability of mortgage credit because lenders’ fear liability for making mortgage loans that fail to qualify as “Qualified Mortgages” (QM) and are thus potentially subject to an Ability-to-Repay (ATR) defense. I've blogged on aspect of QM before (herehere, herehereherehere, here, and here). Based on a preliminary analysis, I think this concern is overblown, and in this very long post I attempt to work through the potential liability for lenders that make non-Qualified Mortgages. (I note that all of this is my tentative readings of the statute; we really don’t know how courts will interpret it, and others may see better readings than I do now.) 

        Still, my back-of-the-envelope calculation suggests that it is quite low in terms of loss given default and could probably be priced in at around 18 basis points in additional cost for a portfolio with weighted average maturities (actual) of five years.  Even with rounding up, that's 25 basis points to recover additional credit losses, which is not a big impact on credit availability. I invite those who would calculate this differently to weigh in in the comments—it’s quite possible that there are factors I have overlooked here, as this is a really preliminary analysis.

        Ultimately, I don't think ATR liability really matters in terms of availability of credit. What matters is the lack of liquidity--meaning a secondary market--in non-QM loans, as lenders aren't going to want a lot of illiquid loans on their books, and that is a function of the GSEs' credit box, not CFPB regulation.

        Because this post is REALLY long (the Mother of All QM Posts), here’s where it goes (yes, I feel like I'm doing one of those unwieldy 100+ page UFTA decisions, so I'm going to have a table of contents!):

Continue reading "How Risky Is It to Make a Non-QM Mortgage? And Is QM Going to Hold Back Access to Credit? " »

CFPB What Have You Done for Me Lately? The Cash America Case, For One Thing

posted by Nathalie Martin

The CFPB just settled an enormous enforcement action against payday lender Cash America. Under the settlement, Cash America will pay $5 million in penalties and $14 million in refunds to overcharged customers. The CFPB found that Cash America or its affiliates robo-signed documents in debt collection lawsuits, made loans to military servicemen in violation of the federal Military Lending Act, and even destroyed documents during discovery. 

My student Andrew Anders is writing a paper about the other enforcement actions the CFPB has been bringing. As most of you know, the Dodd-Frank Act gives the CFPB various enforcement powers including the authority to engage in administrative enforcement actions (typically followed by a consent order) and to bring civil litigation proceedings. The CFPB is required to report all public enforcement actions to which it is a party, which is where Andy got his data, all from 2012.

During the time period of January 1, 2012 through December 31, 2012, the CFPB was involved in nine public enforcement actions. Of these actions, five were administrative actions and four were

Continue reading "CFPB What Have You Done for Me Lately? The Cash America Case, For One Thing " »

Another Myth of Consumer Law?

posted by Lauren Willis

As the CFPB gears up to regulate arbitration clauses, a timely article by Omri Ben-Shahar has been posted on ssrn. Part of Ben-Shahar’s “Myths of Consumer Law” project (see here, here, and here ), The Myth of Access-to-Justice in Consumer Law  contains some provocative insights, but key blind spots lead the piece to unwarranted conclusions.

The conclusions are that pre-dispute arbitration and class action waiver clauses in consumer contracts benefit weak consumers. To get there, Ben-Shahar first notes that consumers are not a homogeneous group and access to justice in the courts is far from evenly distributed. Because elites are more likely to sue and are likely to collect higher damages (one of the many reasons they are more likely to sue), giving all consumers the right to sue is, in effect, a regressive cross-subsidy from poorer consumers to those elites.

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Who is Mel Watt?

posted by Jean Braucher

On May 1, President Obama nominated Rep. Mel Watt (D-N.C.) to be the director of the Federal Housing Finance Agency, the conservator for the mortgage giants Fannie Mae and Freddie Mac.

These two entities together currently back a large majority of new mortgages and hold or guarantee about half of all U.S. mortgages. Like other entities immersed in the mortgage market, Fannie and Freddie suffered great losses in the mortgage meltdown and were taken over by the federal government at the end of the Bush administration in September 2008.

Watt could be a key figure in the late stages of the mortgage crisis and in redefining the role of Fannie Mae and Freddie Mac going forward.  So who is this eleven-term congressman and what does he care about most?

Probably the most important points to stress are these:  He rose from humble beginnings through the meritocracy and is a Yale-educated lawyer who likes to immerse himself in the facts.  He is broadly respected at home in Charlotte, N.C., and represents a safe district where he has biracial support.  He carefully listens to the financial services industry, a major player in his community, and one that has supported his campaigns.  Most important of all, he has made working for the economic well-being of African Americans his life’s work, whether as a lawyer in private practice representing minority businesses or as a lawmaker seeking to shore up consumer protection, particularly to strengthen the legal basis for challenging predatory lending, often used against racial minorities and other vulnerable populations.

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A Final Pet Peeve: The Right to Consumer Financial Industry Data

posted by Lauren Willis

Thank you to the Credit Slips team for allowing me to use their soapbox for the last few weeks.  I leave you with a final pet peeve: Why does the government have to rely on commercially-collected financial industry data sets or voluntary surveys of financial firms to discover the effects of policies the government has put in place? This is just embarrassing. The U.S. government has so little power over the financial industry – an industry that only exists by virtue of the full faith and credit, payments systems, FDIC insurance, etc. provided by the U.S. government – that it cannot demand data from banks and financial firms, but instead must ask politely for voluntary survey answers or search the data market and pay for information like a commoner? 

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National Consumer Protection Week and Disclosure 3.0

posted by Jean Braucher

It’s National Consumer Protection Week (NCPW)!   Federal, state, local, and nonprofit consumer protection agencies and organizations are making extra efforts to promote consumer awareness

First I have to get out of my system thoughts of Tom Lehrer’s song, National Brotherhood Week:

                Step up and shake the hand/Of someone you can’t stand . . .

                It’s only for a week so have no fear/Be grateful that it doesn’t last all year.

But to get back on message, of particular interest to Credit Slips readers is this part of the mission of consumer protection described on the NCPW website:

    "Financial Fraud Scams: American consumers owe a whopping $11.31 trillion dollars in debt and are behind on paying about $1.01 trillion of that amount. Mortgages, student loans, and credit cards account for a large portion of that debt. Consumers are often haunted with huge monthly payments, and fraudsters take advantage of that with debt relief scams, tax scams, and other financial fraud scams. Scams target individuals who are in financial distress, but they fail to fulfill their promises, and typically leave consumers worse off than when they started."

Let me say that Lauren Willis has done a great job on this site recently taking us, patiently and painstakingly, through the many problems with the idea that disclosure can be refined into a digital juggernaut to protect consumers. See here  and here and here.

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Disclosure 2.0: Disclosure in the Lab

posted by Lauren Willis

If, as I suggested in my last post, making the consumer smarter is hopeless, at least for those of us whose prenatal and early childhood environments can no longer be altered, what about disclosure?  Could point-of-sale disclosure equip consumers to make good financial decisions? 

Simple disclosures appear effective in directly aiding consumer decisionmaking in some domains, the A, B, and C restaurant hygiene grades being the classic example.  But because financial products have many varying features that consumers need to understand to make good decisions, financial product disclosures are inevitably much more complex.  As a recent article by Omri Ben-Shahar and Carl Schneider details, generally speaking, consumers do not read, or if they do read they do not understand, or if they do understand they do not use correctly, the information presented in complex product disclosures.

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Which Consumer Financial Education Programs Are Most Effective?: Assuming a Fact Not in Evidence

posted by Lauren Willis

Thank you to the Credit Slips team for inviting me to guest blog.  First I must warn the reader that I am not a real blogger (I’m a bit of a Luddite - I don’t even have a smartphone).  But I’m going to join the 21st Century for a bit here.  Over the next couple of weeks I’ll be sharing my thoughts and some recent research pertinent to modes of consumer financial protection, from financial literacy education to policy defaults to product regulation.  As some of you already know, I have been critical of all of these.  But here I will also suggest some underexplored alternative routes to achieve the same ends of consumer financial well-being that have eluded us in the past.

I'll start today with financial education.  The CFPB would like your comments on “effective financial education approaches that create opportunities for consumers to improve their financial decision making capabilities.”  I thought I had blown up this myth already.  And others keep proving me right.  If you were at this past year’s Boulder Summer Conference on Consumer Financial Decision Making you know that a soon-to-be released exhaustive meta-analysis of past studies demonstrates that financial education does not produce better financial outcomes, and another study using a much larger dataset and a more robust set of controls than past work finds that financial literacy does not lead to improved financial outcomes. 

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Challenge to CFPB Authority

posted by Bob Lawless
In the wake of the D.C. Circuit's decision striking down recess appoints, Carter Dougherty at Bloomberg reports what may be the first example of a defendant raising the CFPB's lack of authority as a defense in an enforcement proceeding. Stay tuned.

The Bubble According to Todd

posted by Adam Levitin

Todd Zywicki has a long blog post criticizing the CFPB's Qualified Mortgage (QM) rule and using it as a jumping-off point for a call to transform the CFPB's leadership from a single Director to a commission.  Zywicki's primary criticism of the QM rule is that it fails to address what he believes was the root cause of the mortgage default crisis:  strategic borrower behavior, which he believes needs to be addressed through down payment requirements and real liability for mortgage deficiency judgments, so that there is borrower skin-in-the-game.  As Zywicki sees it, the housing bubble and its collapse as the result of ruthlessly strategic borrowers playing lenders.  In other words, the bubble was a safety-and-soundness problem, not a consumer protection problem.  The lenders were just helpless dopes, fooled by coldly rational borrowers.

The blame the borrowers move we see here is the same one Zywicki pulled during the bankrutpcy reform debates leading up to BAPCPA, and again it is made without an empirical basis.

Continue reading "The Bubble According to Todd" »

NLRB and CFPB: Recess Appointments

posted by Adam Levitin

The DC Circuit's decision in Noel Canning v. NLRB invalidated an National Labor Relations Board ruling on the grounds that three of the NLRB's five members were not validly appointed, so the NLRB lacked the necessary quorum to act.  The DC Circuit's held on two separate grounds that the NLRB members were not validly appointed.  All of the NLRB members in question were appointed as so-called "recess" appointments by the President, meaning that they were appointed without the advice and consent of the Senate.  First, the DC Circuit held that these appointments were invalid because they were appointed under the Recess Appointments power at a time when the Senate was not in recess.  And second, the DC Circuit held that the appointments were invalid because the Recess Appointments power only applies to vacancies that arise during a recess, not vacancies that are continuing during a recess, and the vacancies in question arose before the (non-)recess. The ruling is based on the DC Circuit's close textual reading of the Recess Appointments clause of the Constitution (in particular, the use of the term "the Recess" instead of "a Recess"), but is also butressed by policy arguments.

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Recess at the CFPB?

posted by Bob Lawless

As has been widely reported , the D.C. Circuit today ruled unconstitutional the president's power to make recess appointments. This is a good thing. The ruling draws into question not only draws into question the National Labor Relations Board's power but also draws into question the regulatory powers of the Consumer Financial Protection Bureau because its current directors, Richard Cordray, was a recess appointment. This is a bad thing -- a very bad thing.http://static.typepad.com/.shared:v20130109.02-0-g7da7b3c:typepad:en_us/tiny_mce/3.3.9.4/plugins/pagebreak/img/trans.gif

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Usury Laws Are Dead. Long Live the New Usury Law. The CFPB's Ability to Repay Mortgage Rule

posted by Adam Levitin

[Updated 1.14.13] The CFPB has come out with its long awaited qualified mortgage (QM) rulemaking under Title XIV of the Dodd-Frank Act.  The QM rulemaking is by far the most important CFPB action to date and will play a crucial role in determining the shape of the US housing finance market going forward. The QM rulemaking also represents a return in a new guise of the traditional form of consumer credit regulation—usury—and a move away from the 20th century’s very mixed experiment with disclosure.

Continue reading "Usury Laws Are Dead. Long Live the New Usury Law. The CFPB's Ability to Repay Mortgage Rule" »

CFPB's Anti-Abuse Authority: A Promising Development in Substantive Consumer Protection

posted by Jean Braucher

The Consumer Financial Protection Bureau is doing something promising with its anti-abuse authority under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.  It is going after credit industry exploitation of consumers, particularly when business models involve using confusing terms that disclosure cannot adequately address.  See my paper on this topic. So I was not surprised to see George Will attacking this development.   We can't have smart, effective consumer protection, no matter how popular it might be.

In a column published in many newspapers this week,Will wrote: “The CFPB's mission is to prevent practices it is empowered to ‘declare’ are ‘unfair, deceptive, or abusive.’ Law is supposed to give people due notice of what is proscribed or prescribed, and developed law does so concerning ‘unfair’ and ‘deceptive’ practices. Not so, ‘abusive.’”

The flaws in Will's critique are legion. First, the CFPB has given lots of notice of what it is doing, in a detailed examination handbook.

Continue reading "CFPB's Anti-Abuse Authority: A Promising Development in Substantive Consumer Protection" »

Bankruptcy and Politics: Junior Senator from Massachusetts Edition

posted by John Pottow

Politics is not my strong suit -- this, ironically, from the faculty sponsor of both the Democratic and Republican student associations at Michigan Law.  (No, I am not confused; I was asked presumably because each group wanted a political independent, and I don't like to play favorites.)  So I have what may be a naive but is nonetheless a genuine question regarding Senator-Elect Warren's upcoming trip to Washington: does this increase the likelihood of substantive amendment of the bankruptcy laws in the next few years?

I'm not talking about full-throated repeal of BAPCPA or anything like that (although maybe I should?), but does having a bankruptcy expert as one senator matter?  Is it a salience focus for committees?  E.g., is it more likley we'll see home mortgage policy addressed through amendments to Chapter 13?  Does it somehow beef up the CFPB knowing they have a "champion" in the Senate?  Does it mean the venue fights will roar back to life?

I'd be curious if those more in the know have thoughts (with apologies in advance if this is dumb/trite).

MyConsumerTips.info

posted by Amy Schmitz
I have been working for a few years in developing and creating a consumer outreach website at MyConsumerTips.info.  The site is purely non-profit and has no sponsors or advertisers. It aims to simply provide consumers with “consumer tips” that change each day, independent summaries regarding debt-related and other consumer rights, quizzes and polls regarding such issues, and other consumer protection resources. It is user-friendly and interactive. This is part of my larger “Consumer Empowerment”service and experiential learning projects, and outreach endeavors.

Unfortunately, it is tough to gain traction for such non-profit sites without paying for promotions through Google or others. Also, there so many sites that purport to provide consumer resources that individuals suffer information overload and are not sure what to trust.

Hopefully, MyConsumerTips.info will deservedly gain trust, do some good and expand in ways that benefit consumers!  Check it out.

Reverse Mortgages -- The Next Big Problem Area?

posted by Bob Lawless

In October 2011, I testified to the U.S. Senate Banking Committee's Subcommittee on Financial Institutions and Consumer Protection. In a nation of short memories, the hearing took place amid claims that we did not need new consumer financial regulation. Existing institutions could adequately take care of things. Thus, among other things, the hearing focused on what specific tasks the Consumer Financial Protection Bureau (CFPB) could undertake.

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Arbitration Agreements

posted by Adam Levitin

Brian Wolfman has an interesting post about e-Bay's new arbitration agreement with a class action opt-out.  Curiously, e-Bay's arbitration agreement isn't mandatory, but it is opt-out with a limited opt-out period.  Brian's take is that this opt-out is consumer choice window-dressing:  while there is formally a consumer choice involved, functionally it is meaningless. I agree. 

First, consumers aren't likely to pay attention to the opt-out notice in the first place in this age of information overload.  (That's one reason why I don't like the mandatory annual Gramm-Leach-Bliley Act privacy notice--it contributes to information overload by telling me nothing--basically there are no privacy rights--and lulling me into thinking that all fine-print disclosures by my bank don't matter.)  Second, even if they do pay attention, consumers are unlikely to place much value ex-ante on the right to sue in court or to proceed as part of a class; certainly not enough to bother opting out.  

The problem, it seems to me, with arbitration or class action waiver or forum selection clauses in contracts, even if explicit opt-out provisions are available, is that there's an inherent imbalance between businesses and consumers in the way valuations of the provision are going to work: businesses value arbitration clauses in the aggregate, while consumers value them based on individual transactions. For contract provisions with small value this means that businesses are more likely to value them than consumers, which therefore warps the nature of any sort of bargain. The business is bargaining in aggregate;the consumer is bargaining based on an individal valuation.

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Levitin on the Board

posted by Bob Lawless
Congratulations to Credit Slips's Adam Levitin who was just named to the Consumer Advisory Board for the Consumer Financial Protection Bureau.

Credit Card Data

posted by Katie Porter

The CFPB released a beta version of its complaint database on June 19th. Right now, one can only search credit card complaints, which the CFPB began taking on the first birthday of its creation, July 21, 2011. My takeaway is that this is major step forward for the disclosure of complaint data but that the "beta" in the website is well-deserved. You can see some neat graphics and and best of all you can download the raw data. One problem is that this is SO apparently cutting-edge and sophisticated that I couldn't figure out how to use many of the features after a half-hour of poking around (and while some may disagree, I think it's safe to say I have more technology and statistical skills than the vast majority of U.S. consumers). Below was my effort to use the "embed" graphic feature that is touted as allowing one to "publish this dataset on the internet at large."

https://data.consumerfinance.gov/dataset/Complaints-by-issue/c2vc-5i9b/widget_preview?width=760&height=646&customization_id=

And yes, I know the graphic does not appear and the hyperlink does not work. If you cut and paste it into a window (old school), it does appear.

Storage Wars and the Credit Practices Rule

posted by Bob Lawless

A few times I have caught Storage Wars, a television show on A&E. When storage units customers do not pay their fees, the contents are auctioned off by the storage unit company. The show follows professional treasure hunters who bid at these auctions. The catch is that the treasure hunters are purchasing the unit without full knowledge of the unit's contents. With all the drama of finding out what was behind door number three on Let's Make a Deal, viewers get to watch these treasure hunters paw through the storage unit's contents and try to profit by finding items of real value. Every now and then, an item of tremendous value might be uncovered. A few days ago, I started wondering how this was legal.

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CFPB to Share Information with Attorneys General

posted by Nathalie Martin

Carter Dougherty of Bloomberg reports this morning that  the Consumer Financial Protection Bureau is entering into an  information-sharing agreement with state attorneys general, that will help states enforce consumer protection laws. The agreement will “establish a general framework to share data on consumer financial protection issues,” according to an advance copy of a speech Cordray will give to the National Association of State Attorneys General later today in Washington. Cordray will also collaborate with state AGs offices on a “national strategic plan” to address abuses in various areas, but debt collection, an area regulated on both state and federal levels,  was specifically mentioned.  I can think of a couple of other areas where such collaboration would also be useful, but this is a good start.  

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

posted by Melissa Jacoby

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

posted by Adam Levitin

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)?

posted by Adam Levitin

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?  

Continue reading "OCC Servicing Settlement--Will Homeowners Get Screwed (Again)?" »

The Slips Go to Capitol Hill

posted by Bob Lawless

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

posted by Katie Porter

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.)

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Warren's Farewell Letter to CFPB Staff

posted by Bob Lawless

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

posted by Alan White

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

posted by Adam Levitin

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?

posted by Adam Levitin

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. 

Continue reading "Is Asbestos Defense Anti-Consumer?" »

The Three Consumer Banking Systems

posted by Adam Levitin

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. 

Continue reading "The Three Consumer Banking Systems" »

Google Wallet-Regulatory Implications

posted by Adam Levitin

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).

Continue reading "Google Wallet-Regulatory Implications" »

Recess Appointments and "Vacancies"

posted by Adam Levitin

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.  

Continue reading "Recess Appointments and "Vacancies"" »

CFPB Oversight Compared with Other Regulators

posted by Adam Levitin
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. 
Oversight Comparison
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. 

Continue reading "CFPB Oversight Compared with Other Regulators" »

CFPB Oversight

posted by Adam Levitin

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

posted by Adam Levitin

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.

Continue reading "The Servicing Fraud Settlement: the Real Game" »

The Anti-Consumer Agenda

posted by Adam Levitin

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

Continue reading "The Anti-Consumer Agenda" »

American Bankers Association Now Backs Warren

posted by Bob Lawless

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

posted by Adam Levitin

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.

Continue reading "The Elizabeth Warren Witch Hunt Continues" »

Allocating Scarce Dollars: Payment Hierachy

posted by Katie Porter

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?

Continue reading "Allocating Scarce Dollars: Payment Hierachy" »

The Wall Street Journal's CFPB Smear Campaign Continues

posted by Adam Levitin

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.

Continue reading "The Wall Street Journal's CFPB Smear Campaign Continues" »

A Bisl Kissel or Why the Kissel Kerfuffle Misses the Point

posted by Adam Levitin

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. 

Continue reading "A Bisl Kissel or Why the Kissel Kerfuffle Misses the Point" »

Shakedown or Bailout? The Mortgage Servicing Settlement

posted by Adam Levitin

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.    

Continue reading "Shakedown or Bailout? The Mortgage Servicing Settlement" »

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