In the early 2000s the subprime lender Household Finance settled the largest consumer fraud settlement in U.S. history. Household Finance paid a whopping $484 million in fines to a joint settlement with a group of attorneys general. One month later Household was acquired by HSBC, the London financial giant, for $16.4 billion, setting off a bidding war on subprime dealers by the highest parts of Wall Street. It’s like they were being rewarded, instead of punished, by the markets for committing consumer fraud. This convinced me of the need for a Consumer Financial Protection Bureau; I see the argument for why the market can regulate itself when it comes to pizza and barbers, but has proven unable to when it comes to mortgage debt.
Right now our consumer mortgage lending markets are a mess. We’ve seen how servicers are messing up modifications and how bad loans were issued knowing that they could be passed off to unsuspecting investors. Right now would not be a good time to gut a crucial piece of consumer protection already in place for deceptive mortgages, especially when the Consumer Financial Protection Agency isn’t up and running yet.
This appears to be happening. Right now the Federal Reserve Board is proposing a new rule to make changes to rescission and disclosure provisions in the Truth in Lending Act. There’s no urgency to do this, especially right now with the mortgage market so weak and suspicion about lenders and servicers so high. The way it is being done is that it looks like it wants to circumvent the new consumer protection agency before it is up and running; given the bad history of mess-ups with the Federal Reserve and consumer protection, wouldn’t it be wise to wait just a little while longer?
At the depths of the worst foreclosure crisis since the Great Depression, the Federal Reserve Board has proposed new rules that make it much harder for homeowners to escape abusive loans, avoid foreclosure or obtain refinancing. The rules could be finalized before the July 21, 2011 transfer of the Board’s authority to the new Consumer Financial Protection Bureau. The rules should be withdrawn and reconsidered by the CFPB in the context of its comprehensive evaluation of mortgage protections.
The changes to rescission and disclosure provisions of the Truth in Lending Act (TILA):
- Create a huge obstacle to escaping an illegal mortgage. Since 1968, TILA has allowed homeowners to demand that a lender release the mortgage lien if the loan violates the law. The homeowner can then refinance or negotiate a loan modification to repay any amount owed. The Fed reverses the statutory rule and requires consumers to obtain a new loan before the first loan is cancelled. Most homeowners cannot qualify for two mortgages, making TILA’s remedy for illegal loans useless to all but the wealthiest homeowners.
- Lower standards for accurate loan information. Lenders would have greater latitude to provide inaccurate information. For example, lenders could understate the monthly payment by $100, more than 10% of the average mortgage payment. Large tolerances are also proposed for the loan amount.
- Favor lenders and reduce consumer protection. Creditors could replace the Fed’s consumer-tested disclosures with their own, untested forms, potentially omitting key disclosures altogether. A myriad of other changes in the 250-page rule rewrite the disclosure regime and further limit consumer protections. The Fed is clear in the proposal that its primary aim is to relieve creditor burden, not further consumer protections.
The proposed rule is not only bad policy; it exceeds the Fed’s authority to change the protections Congress enacted. There is no urgency to the proposed changes or justification to rush them through before the Consumer Financial Protection Bureau takes over for the Fed on July 21, 2011. The Fed should withdraw the proposed rule and allow the CFPB to consider the proposal as part of its comprehensive review of mortgage disclosures and protections.