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In Favor of the Consumer Financial Protection Agency (CFPA)

posted by John Pottow

Adam's earlier post started the ball rolling on the CFPA discussion, and I wanted to weigh in (favorably) having now waded through the 153 pages of proposed legislation.  I take the case to be made for sheer regulatory consolidation as surely correct: the crazy quilt of overlapping agencies would make even Sir Humphrey cringe.  But the case in favor rests on much more than that, and of shrewd appeal to both typical bailywicks of the left and right.

Let's start with the left.  Simply put, people are getting screwed by current financial products, and that's wrong.  No, it's not as simple as self-indulgent consumers gorging themselves on plasmas.  It's that the "play-by-the-rules" families my co-blogger Elizabeth Warren so often champions (and sometimes romanticizes) find themselves subject to rate adjustments, fees, and charges they have no way of knowing, let alone, pricing, in the current price-shrouded contracting environment.  That's wrong, and government should help stop it.

But what of the right?  The right should begrudge the naked market failure apparent in the financial collapse of 2008.  If consumers are over-extending themselves into credit products -- products that, if transparently priced, would never have enjoyed such demand -- then the collapse of the mortgage market can be seen (at least in part) as a consequence of this household-by-household accretion of systemic risk.  I'm all for markets, as are my staunchy liberterian colleagues, but even they would concede that a market should function on transparency and well disseminated information.

This is where CPFA steps in.  It makes clear it's goal is not to stifle innovation and competition.  It even says in the legislation it does not have the authority to impose a national usury cap (sec. 1022(g)).  It says it's "mandate" is "to promote transparency, simplicity, fairness, accountability, and access in the market for consumer financial products or services" (sec. 1021(a)).  And what's even more encouraging, at least to a scholar of consumer and commercial law, is its realist focus on behavioural economics (e.g., sec. 1024(a)((3)(B): "In allocating its resources to peform the monitoring required . . . the Agency may consier, among other factors . . .  consumers' undestanding of the risks of a type of consumer financial product or service.") [emphasis added].  That seems a pretty open invitation to recognize what many scholars (and of course practitioners on the streets) have been saying for years: if people don't process and understand what's in a deluge of information, all the disclosure in the world is useless.

As I learn and think more about this regulatory agency, I become increasingly supportive.


I believe the term that applies, and the basis that has become lost, trampled with an elephant and buried in the Mariana Trench over the years is "least sophisticated debtor".

That said, Professor, since you have already graciously subjected yourself to the digestion of this proposed legislation, could you point me in the direction of the section that empowers a CFPA with the authority of criminal prosecution? Because I, for one, simply do not want yet another toothless agency pretending to protect the American consumer. I want an agency that doesn't comport to Robin Williams' interpretation of British police before they began carrying firearms, i.e. "Stop! or I'll say "Stop!" again."

I want an agency that has the legal authority and potential to criminally prosecute offenders to the fullest extent of the law. Because, until such time as an agency with that authority comes to fruition, any civil penalties will simply continue to be considered the cost of doing business by corporate financial entities and consumers will continue to be left seeking justice for themselves - when they can find private counsel that understands their case, is competent and willing to prosecute it for them and doesn't require the consumer to sell body parts on the black market in order to raise the necessary retainer fees.

Until I have such an agency that I can go to with at least SOME expectation that they will take the time to actually examine my consumer claims and properly prosecute any infractions of law that may exist, as a consumer I will not feel anything close to any kind of consumer "protection". But that's just me...

Thanks for the comment. The statute does not give the agency criminal prosecution powers, I'm assuming on the theory that they don't want to have to hire criminal law attorneys. But it does provide an explicit power to "refer" matters to the DOJ if it finds evidence of criminal violation. To be sure, that's not the power of prosecution, but it's far from toothless; few corporate lenders will relish a well funded government agency's ability to do all the research and effectively pre-draft an indictment for a DOJ prosecutor. (There's also a federalism angle too, where they're trying to empower State AGs, etc., but that's another thing.)

Great. Then all a consumer has to do is convince an AUSA to prosecute the case on their behalf. Doesn't an agency like the FTC already have the power to "refer" matters to DOJ if it finds evidence of criminal violation?

Any thoughts, Professor, on where a consumer can turn when they approach DOJ and/or Mortgage Fraud Task Forces with hard evidence of things like mail and wire fraud and fraudulent documents in Mortgage Servicing Fraud cases and DOJ refuses to look at the case and handballs it off to another agency? Only reason I ask is because I know consumers to whom this has happened in the very recent past...

From a consumer perspective is securitization an inherently unfair and deceptive practice? The consumer contracts with a regulated financial institution as reflected in all the documentation, the billing generally remains in the institution's name, and the consumer is led to believe nothing has changed when the debt has been assigned to an unregulated third party trust entity.
It seems at the very least a debtor has the right to the identity of his creditors, the identity of the party empowered to modify contractual terms and that those parties ought be regulated as financial institutions.

DD, my first thought re: securitization is no, it isn't unfair to consumers - at least on paper if/when the rules in place are properly followed. That said, given the CURRENT manner in which the game is played, it absolutely is unfair and deceptive for consumers.

The way the game is played at the moment, the only time a borrower needs to be notified of a change in the ownership or administration of their loan is when the SERVICING RIGHTS to the loan are sold/assigned/transferred. That notification comes from Section 6 of RESPA if I remember correctly. Otherwise, if the servicing rights stay with the same entity, a note can be sold literally to infinity and the borrower would never have to be notified. That was part of the beauty of MERS from an industry perspective, I'm sure. Another aspect of MERS that the industry liked was that only the initial recording fee needed to be paid to the registry of deeds in the county of origin of the loan. I can only imagine that county registries and recorders across the country have lost hundreds of millions of dollars in recordation fees because of MERS. OF course, MERS is finally getting roughed up in the court system so it'll be interesting to see what happens with them in the long run.

Additionally, you have the issue of "en blanc" assignments. Assignments simply are not being completed and recorded each and every time ownership of a note is xferred. In fact, I would venture out on a limb, with absolutely nothing to back me up, and say that a fair amount of the time, assignments are only completed and recorded when a purported note holder wants to initiate foreclosure. I know in my own case, my assignment remained unrecorded for more than two years after the supposed sale of the note and was only recorded 5 days before Fairbanks/SPS initiated the foreclosure process against me. In essence, up until that document (actually TWO documents) was recorded I was asking everyone I could why Merrill Lynch was foreclosing on me when Merrill had nothing to do with my loan.

The interesting thing about securitization, at the moment, is that it could very well be the thing that actually SAVES borrowers now. Notes have been sliced and diced so many times at this point that it is becoming increasingly evident that original notes cannot be produced when the purported note holder/foreclosing entity is asked/compelled to produce them. If more borrowers and/or their attorneys begin to understand this, and simply demand that the original note be produced under Article 3 of the Uniform Commercial Code (See "Where's the Note, Who's the Note Holder" by Hon. Samuel Bufford and Hon. Glen Ayers) there is a chance - a CHANCE - that borrowers can get a fair shake against a process that is rigged almost entirely against them.

Of course, I could be completely off base here, too....

Having served as both a Bankruptcy Lawyer and a Mortgage Broker, my biggest concern is that this agency will only stop at mandating "better" disclosures. When I was doing loans, it was not unusual for me to prepare DOZENS of pages of disclosures -- Truth in Lending Statements, Good Faith Estimates of Closing Costs, etc. -- which my clients found absolutely incomprehensible. I spent hours explaining to my clients what they were getting into with respect to payment terms; I heard time and again that no-one had taken the time to do this with them when they obtained prior loans.

And then there's the question of what products are appropriate at all. Who's brilliant idea was negative amortization of mortgage loans? I refused to write any, because they made no sense to me -- make payments on your home for five years, and owe MORE than when you started? Likewise with variable rate mortgages (I wrote perhaps 10% of my portfolio in such loans, but only after LENGTHY explanation to consumers of how and when adjustments might take place). It is "Finance 101" that individuals should not be buying a long-term asset with short-term financing. Does the proposed statute strike at the heart of these crazy practices?

Mike Dillon: I think the statue would preclude private lawsuits by citizens, so it would appear if DOJ decides it's not worth the resources to pursue, you're stuck by that decision (although nothing displaces state private actions of fraud, etc. that I could tell).

Arnie Wuhrman: Yes, I think these products are the exact sorts of ills the statute seeks to bring an end to. Few should mourn the demise of the negative amortization home mortgage.

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