Tag Archives: federal regulators

Violations of Law and Consumer Harm

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The Federal Financial Institutions Examination Council (FFIEC) issued a notice and request for comment regarding the Uniform Interagency Consumer Compliance Rating System (CC Rating System). My comment letter reads as follows:

The Federal Financial Institutions Examination Council (FFIEC) issued a notice and request for comment regarding the Uniform Interagency Consumer Compliance Rating System (CC Rating System). The FFIEC is seeking to revise the CC Rating System “to reflect the regulatory, examination (supervisory), technological, and market changes that have occurred in the years since the current rating system was established.”  81 F.R. 26553.  It is a positive development that the federal government is seeking to implement a consistent approach to consumer protection across a broad swath of the financial services industry.  Nonetheless, the proposed CC Ratings System can be refined to further improve consumer protection in the financial services industry.

One of the CC Rating System’s categories is Violations of Law and Consumer Harm.  The request for comment notes that over the last few decades, the financial services industry has become more complex, and the broad array of risks in the market that can cause consumer harm has become increasingly clear.  Violations of various laws – including the Fair Housing Act and other fair lending laws, for example – may cause significant consumer harm that should raise supervisory concerns.  Recognizing this broad array of risks, the proposed revisions directs examiners to consider all violations of consumer laws based on the root cause, severity, duration, and pervasiveness.  This approach emphasizes the importance of various consumer protection laws, and is intended to reflect the broader array of risks and potential harm caused by consumer protection violations.  81 F.R. 26556.

This is all to the good.  Prior to the Subprime Crisis, a big part of the problem was that financial services companies used regulatory arbitrage to avoid scrutiny.  Lots of mortgage lending migrated to nonbanks that did not need to worry about unwanted attention from the regulators that scrutinized banks and other heavily regulated mortgage lenders.  (To be clear, Alan Greenspan and other federal regulators did not do a good job of scrutinizing the banks. But let’s leave that for another day.)  With the CFPB now regulating many nonbanks and with an updated CC Rating System in place, we should expect that regulatory arbitrage will decrease in the face of this coordinated regulatory action.

I would note, however, an ambiguity in the “Violations of Law and Consumer Harm” category, an ambiguity that should be cleared up in favor of additional consumer protections.  The category title, “Violations of Law and Consumer Harm,” implies that there are some types of consumer harm that are distinct from violations of law and that is obviously true. The discussion of the category emphasizes this by stating that it encompasses “the broad range of violations of consumer protection laws and evidence of consumer harm.” 81 F.R. 26556 (emphasis added).  And the text of the guidance itself states this as well, indicating that the category’s assessment factors “evaluate the dimensions of any identified violation or consumer harm.”  81 F.R. 26558 (emphasis added).

But the remainder of the discussion of this category only focuses on violations of law and pays little attention to “the broad array of risks in the market that can cause consumer harm” that are not also violations of law.  81 F.R. 26556.  Indeed, the four assessment factors for this category are all premises on causes of identified “violations of law.”  This is a significant failing for the CC Rating System because of the many types of consumer harm that are not clear violations of law.  As proposed, the “Violations of Law and Consumer Harm” category appears to be as much about protecting the bank from legal liability from lawsuits brought on behalf of consumers as it is about addressing the legitimate interests of the consumers of financial services.

As we sort out the after-effects of the Subprime Crisis, we have seen many situations where there was no clear violation of law but homeowners suffered from outrageous industry practices.  For instance, many borrowers are suffering needlessly at the hands of their mortgage servicers.  Some servicers are under-resourced, intentionally or not, and continue to treat their borrowers with a maddening disregard.  In some cases, this outrageous behavior does not amount to a clear violation of law, but is behavior that reflects most badly on the parties engaged in it.  The CC Rating System should both acknowledge this type of harm and address it to maximize the benefits that can flow from this forthcoming revision to it.

Nonbank Servicers Pose Risks for Homeowners

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Christy Goldsmith Romero, Special Inspector General for the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP)

SIGTARP Special Inspector General Romero

The Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) has released its Quarterly Report to Congress (April 27, 2016). The Report focuses on how nonbank servicers raise risks for homeowners participating in the Home Affordable Modification Program (HAMP) of the Troubled Asset Relief Program (TARP). (65) The report states that

Mortgage servicers are the single largest factor in determining whether homeowners applying for, or participating in, TARP’s signature foreclosure prevention program HAMP are given a fair shot, and whether the program runs effectively and efficiently. This is because Treasury has contracted with mortgage servicers to play a predominant role in HAMP, by making the day-to-day decisions related to HAMP that have enormous implications for homeowners seeking relief. Mortgage servicers decide whether homeowners are eligible for HAMP, whether homeowners get a trial run in the program, and whether that trial run should result in the servicer permanently modifying the homeowners’ mortgages. Mortgage servicers decide how the mortgage will be modified, such as whether a homeowner will get a lower interest rate, and if so, what rate. Mortgage servicers decide how much the homeowner will have to pay each month. Mortgage servicers also apply payments they receive, and they make decisions on whether a homeowner should be terminated from the program. Because of this outsized role, all mortgage servicers are required to comply with HAMP rules, and federal laws. Following HAMP rules and federal laws is necessary to protect homeowners from harm.

Non-banks who service mortgages have increased their participation in HAMP, and now play a larger role in HAMP than bank servicers, but that was not always the case.

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HAMP and its related programs have become a lucrative business and reliable source of income for non-bank servicers. Treasury pays mortgage servicers for every homeowner who receives a permanent mortgage modification in HAMP. Nonbank mortgage servicers have received $1.1 billion in Federal TARP dollars from Treasury through the HAMP program.

As non-bank servicers increase their role in HAMP, the risk to homeowners has also increased. Non-bank servicers have less federal regulation than banks that service mortgages. Some of the largest non-bank servicers have already been found to have violated laws in their treatment of homeowners, and have been the subject of enforcement actions by the federal or a state government. Some of the largest non-bank servicers also have been found to have violated HAMP’s rules in their treatment of homeowners. This increased risk to homeowners must be met with increased oversight to ensure that homeowners are treated fairly, and that HAMP and its related programs are effective and efficient. (65, notes removed)

Regulators and other government agencies have been taking a hard look at servicers recently (take a look at this and this). It is important for federal regulators to get their oversight of servicers right because they can and do cause mountains of misery for homeowners when things goes wrong.