Tag Archives: consumer complaints

Dodd-Frank Repeal Unappealing for Homeowners

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photo by Gage Skidmore

Congressman Jeb Hensarling

The Hill published my latest column, Why Repealing Dodd-Frank Is Unappealing if You Own a Home. It opens, 

President Trump has made it clear that he wished to dismantle the Dodd-Frank Wall Street Reform and Consumer Protection Act. Just two weeks after his inauguration, he issued an executive order to get the ball rolling by means of agency action, an effort that will be led by the Department of the Treasury. Trump will have lots of allies in Congress as he pursues this agenda. A recent memo by House Financial Services Chairman Jeb Hensarling (R-Texas) to his committee’s leadership team outlines a legislative path that leads to much the same goal.

One of the key components of the Dodd-Frank regulatory regime was the newly-created Consumer Financial Protection Bureau (CFPB). The bureau is responsible for administering a range of consumer protection regulations, some of which predate Dodd-Frank and some of which were mandated by it. Homeowners should sit up and take notice because a lot of protections they can now take for granted will be stripped away if this push is successful.

Many of these regulations protect homeowners as they obtain mortgages for their homes. Others protect homeowners over the life of the mortgages, particularly when they are having trouble keeping up with their mortgage payments because of those common life events that still knock us for a loop when they happen to us: job loss, divorce, medical bills, a death in the family.

Hensarling’s memo makes clear the extent to which he wants to weaken the CFPB. Among many other things, he wants to eliminate the bureau’s consumer education functions, bar it from commencing actions involving unfair, deceptive or abusive acts and practices, end its practice of tracking consumer complaints, and stop if from monitoring and conducting research on the consumer credit market.

Before the financial crisis, homeowners suffered from a range of abusive and predatory behaviors that were prevalent in the mortgage industry for years and years. Lenders would lend without regard to a borrower’s ability to repay a loan, so long as there was sufficient equity in the home to make the lender whole after a foreclosure. Dodd-Frank’s ability-to-repay rule keeps lenders from doing that now. Lenders would make loans that had large balloon payments at the end of the term, forcing unsophisticated borrowers to refinance with all of the fees and costs that that entails. The lenders would look at those refinancing costs as another profit center. Dodd-Frank’s qualified mortgage rule banned those abusive balloon payments for the most part.

While Hensarling claims that Dodd-Frank “clogs the arteries of capitalism,” he seems to forget that unfettered capitalism nearly gave us a fatal heart attack just 10 years ago, when the subprime mortgage crisis led us to the brink of a second Great Depression. He seems to forget that predatory mortgage lending is not only bad for the individuals affected by it, but also for the housing market and economy in general. Housing prices did not just fall for those with unsustainable mortgages—they fell for all of us.

The push to get rid of the CFPB is not being driven by the consumer finance industry. The industry has learned to live with the bureau. It has come to see that there are some benefits that accrue from primarily dealing with one regulator, in place of the patchwork of regulators that was the norm before Dodd-Frank. Rather, the push is being driven by an unfettered free market ideology that is out of step with the workings of the modern economy.

Getting rid of the CFPB will be bad for homeowners. They will no longer be able to assume that a mortgage they receive is one that has payments they can make month-in and month-out. They will need to treat lenders as predators because predatory lending will certainly return to the mortgage market. Caveat emptor.

Why Have a Complaint Window?

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Angela Littwin of the the University of Texas School of Law has posted Why Process Complaints? Then and Now to SSRN. The abstract reads,

The creation of the Consumer Financial Protection Bureau (CFPB) established the first comprehensive federal forum for processing consumer complaints about financial products and services. The CFPB not only handles consumers complaints; it also publishes a database that includes most complaints and their initial resolutions. For a symposium honoring the scholarship of Professor William C. Whitford, I analyze the CFPB’s complaint system and database using a framework he developed to explore the reasons why government agencies process consumer complaints and whether these reasons justify the resources that complaint processing entails. Whitford and his co-author proposed three “obvious” reasons to process consumer complaints: to settle consumer disputes; to inform the agency’s regulatory activities; and to generate good will for the agency among constituencies such as consumers, government actors, and the companies the CFPB regulates.

I find that the CFPB has mixed success in providing an alternative dispute resolution forum for consumers. I am, however, missing key information for this evaluation. The CFPB Consumer Complaint Database contains the financial institutions’ responses to consumer complaints but there is almost no information available about any follow up actions the CFPB takes. The CFPB is particularly strong on the regulatory function. It makes significant use of complaint data in its regulatory roles and evinces a commitment to ensuring that companies are handling complaints well. Last comes good will. With respect to public good will, I was unable to find much evidence one way or the other. As for good will among government actors, the CFPB appropriately appears not to apply different treatment to complaints referred by government entities or officials. Finally, the CFPB’s complaint data reveal an intriguing possibility that the process may provide some legitimization of financial institutions’ complaint resolutions. But given that consumer financial companies are pushing for the CFPB’s elimination, working to generate good will among financial institutions in this way may be entirely reasonable on the CFPB’s part. This is especially true because the CFPB has made important complaints decisions – such as publishing the database without redacting company names – despite financial companies’ vociferous objections.

I was interested by the “argument regarding bureaucratic companies . . . that a complaint process can find and resolve violations of the bureaucracy’s own rules.” (944) But Littwin also notes that the key issue is the “ineffectiveness in handling the harder cases, such as those raising issues of fact or law.” (Id.) We are still a long way off from figuring out the optimal system for addressing consumer complaints, but this article helps to frame the issue nicely.

Friday’s Government Reports

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  • Consumer Financial Protection Bureau (“CFPB”) announces access to the consumer complaint database where users can read consumer narratives and download complaint data as desired.  The CFPB describes it as an enhanced public-facing consumer complaint database, which includes for the first time over 7,700 consumer accounts of problems they are facing with financial services providers – including mortgages, bank accounts, credit cards, debt collection, etc.
  • U.S. Department of Housing and Urban Development’s (HUD) Semi-Annual Report to Congress (SAR) for the period ending March 31, 2015 – In which it details how: $1.2 billion in funds put to better use; more than $1.7 billion in questioned costs; and more than $457 million in collections through 38 audit reports were reported. HUD also reported more than $38 million in recoveries.
  • HUD’s Policy Development and Research Division (PD&R) publishes reports every quarter profiling 12-15 housing markets, the latest batch includes, amoung others: Denver-Aurora-Lakewood, Colorado; Savannah, Georgia; and Spokane, Washington.

 

CFPB Mortgage Supervision Highlights

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The Consumer Financial Protection Bureau issued its Supervisory Highlights for Winter 2015. The highlights include a section on Mortgage Origination and “largely focuses on Supervision’s examination findings and observations from July 2014 to December 2014.” (9)

The headings of this section give a sense of the CFPB’s work in this area:

  • Loan originators cannot receive compensation based on a term of a transaction
  • Improper use of lender credit absent changed circumstances
  • Failing to provide the Good Faith Estimate in a timely manner
  • Improperly using advertisements with triggering terms without the required additional disclosures
  • Adverse action notice deficiencies and failure to provide the notice in a timely manner
  • Deficiencies in compliance management systems

For good or for ill, these are pretty modest examination findings. They certainly don’t reveal the fire-breathing regulator that some had prophesied. I was particularly interested in the last finding:

an effective compliance management system includes board and management oversight, a compliance program, a consumer complaint management program, and a compliance audit program. The board of directors and senior management should, among other things, adopt clear policy statements concerning consumer compliance, establish a compliance function to set policies and procedures, and assign resources to the compliance function commensurate with the size and complexity of the supervised entity’s practices and operations. A compliance program should include policies and procedures, training, and monitoring and corrective action processes. A compliance audit program should assist the board of directors or board committees in determining whether policies and standards adopted by the board are being implemented, and should also identify any significant gaps in board policies and standards. (13)

Compliance management systems are intended to create a culture of compliance within an organization, from top to bottom. The CFPB found that one or more financial institutions had weak compliance management systems that would allow for numerous violations of federal regulations governing mortgage lending. It is important for the CFPB to focus on these compliance issues now, before the mortgage market really froths up and carries mortgage professionals away from appropriate underwriting and servicing.

Reiss on Cramming

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E-Commerce Times quoted me in Feds Pounce on Sprint for Phone Bill Cramming. It opens,

The United States government is delivering a one-two punch to Sprint over the practice of cramming — allowing third parties to place unauthorized charges on customers’ bills.

The Consumer Finance Protection Bureau on Thursday filed a civil suit against Sprint over the issue.

Meanwhile, the Federal Communications Commission reportedly is planning to hit Sprint with a US$105 million fine.

Coordination between the government agencies “is not atypical,” said David Reiss, professor of law at the Brooklyn Law School.

“Frequently federal government agencies coordinate their actions for better results,” he told the E-Commerce Times.

It’s possible that the FCC was negotiating with Sprint prior to the CFPB taking action, suggested Robert Jaworsky, a partner at ReedSmith.

“I doubt the FCC will take any action while this lawsuit is pending,” he told the E-Commerce Times.

The CFPB’s Allegations

Sprint charged wireless customers for unauthorized third-party services from 2004 through 2013, costing them millions of dollars each year, by creating a billing and payment system that provided third parties with unfettered access to its customers’ accounts, according to the CFPB complaint.

Sprint automatically enrolled customers in this billing system without their knowledge or consent, and many customers were unaware of the unauthorized charges, the bureau maintains.

Sprint continued to operate its system despite numerous red flags, including high refund rates, along with complaints from customers, law enforcement agencies and consumer groups, the CFPB claims. The carrier retained 40 percent of the gross revenue collected for the third-party charges, totaling “hundreds of millions of dollars.”

Sprint took advantage of its customers, treated them unfairly in various ways, mishandled or ignored complaints about the unauthorized charges, and didn’t track them, said CFPB director Robert Cordray.

Sprint refused to provide refunds to some customers, instead telling them how to block future third-party charges, he added — and sometimes it referred victims back to the scammers themselves.

Fightin’ Words on Consumer Complaints

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Deloitte has issued a report, CFPB’s Consumer Complaint Database: Analysis Reveals Valuable Insights, that provides valuable — but superficial insights — into the CFPB’s massive database of consumer complaints.

Deloitte’s main insights are

  • Troubled mortgages are behind the majority of the complaints – a growing trend
  • Customer misunderstanding may create more complaints than financial institution error
  • Affluent, established neighborhoods were more likely sources of complaints
  • Complaint resolution times have improved (2)

As to the second insight — customer misunderstanding may create more complaints than financial institution error — Deloitte notes that

Financial institutions have a number of options for resolving consumer complaints. They can close a complaint in favor of the consumer by offering monetary or non-monetary relief, or they can close the complaint not in favor of the consumer, perhaps providing only an explanation. The percentage of complaints closed in favor of consumers declined during the analysis period, falling from 30.9 percent in June 2012 to 18.0 percent in April 2013,6 a trend that was reflected in the monthly complaint [resolutions] for all products. (4)

The report continues, “In spite of fewer complaints closed with relief, consumers have been disputing fewer resolutions. In aggregate, the percentage of resolutions that were disputed fell from a peak of 27.9 percent in January 2012 to 18.6 percent in January 2013.” (5) Deloitte finds that “the data suggests that many complaints may be the result of customer misunderstanding or frustration rather than actual mistakes or operational errors by financial institutions.” (5)

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This conclusion seems like a big leap from the data that Deloitte has presented. I can imagine many alternative explanations for the decrease in disputes other than customer misunderstanding. For instance,

  • the consumer does not see a reasonable likelihood of a favorable resolution and abandons the complaint
  • the financial institution can point to a written policy that supports its position even if the consumer complaint had a valid basis, given the actions of the institution’s employees in a particular case
  • in the case of a mortgage complaint, the consumer is moving toward a favorable or unfavorable resolution of the issue with the financial institution on another track (e.g., HAMP, judicial foreclosure)

To be clear, I am not saying that customer misunderstanding plays an insignificant role in customer complaints.  Nor am I saying that the reasons I propose are the real reasons that that complaints do not proceed further. I am only saying that Deloitte has not presented sufficient evidence to support its claim that “customer misunderstanding may create more complaints than financial institution error.” Given that these are fightin’ words in the context of consumer protection, I would think that Deloitte would choose its words more carefully.