Consumer Financial Protection Bureau

Mortgage Closing Costs May Rise Under the New Rules to Prevent Illegal House “Flipping”

By Mark Rutter, J.D. Class of 2015 | Posted on

In August 2012, six federal financial regulatory agencies issued a proposed rule to implement Section 1471 of the Dodd-Frank Act which sets forth appraisal requirements for “higher-risk” mortgage loans.

The intended purpose of the proposed rule is to tighten valuation standards for homes in order to reduce the risk of appraisal fraud, a move meant to reassure creditors, borrowers, and investors alike. Section 1471 was created as part of Congress’ intention to prevent the use of false or inflated appraisals in obtaining mortgages. If the proposed rule is finalized without amendment, lenders seeking to issue high-risk mortgage loans will be “unable to value properties on the basis of broker-price opinions, automated valuations, or drive-by appraisals”. The proposed rule would affect mortgages with annual percentage rates (APRs) at designated levels above the Average Prime Offering Rate (APOR). First-lien loans (such as standard mortgages) with an APR 1.5 percentage points above the APOR would be classified as a higher risk mortgage under the proposed rule, while first-lien jumbo loans with APRs 2.5 percentage points above, and subordinate-lien loans with an APR 3.5 percentage points above the APOR would similarly be considered higher-risk.

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National Mortgage Servicing Reform Proposals are Under Consideration

By James Nguyen, J.D. Class of 2013 | Posted on

As the debate over how to reform the housing finance market takes a back seat to the 2012 General Election, Dodd-Frank’s statutory changes to mortgage servicing will see no delay in its implementation.  On April 10, 2012, the Consumer Financial Protection Bureau released its first set of proposed mortgage servicing rules:

“The proposed rules currently under consideration aim to protect consumers from surprises by directing servicers to provide:

  • Clear monthly mortgage statements that explicitly breakdown principal, interest, fees, escrow, and due dates
  • Warnings before adjusting interest rates on certain adjustable rate mortgages (ARMs) that explain how the new rate was determined, when it will take effect, dates of future adjustments, and a list of alternatives for consumers to consider
  • Options for avoiding expensive “forced-placed” insurance, which is insurance charged to borrowers by servicers when their existing insurance appears to have lapsed
  • Early outreach to struggling borrowers that informs them of potential options to avoid foreclosure

We also want to address the issue of consumers getting the “run-around” when dealing with servicers.  To accomplish this, the Bureau is considering proposals that would require:

  • Payments to be credited to consumer accounts the day payment is received
  • Implementing new policies and procedures so that records are kept up-to-date and accessible
  • Quickly addressing and correcting errors
  • Giving homeowners direct and ongoing access to servicer staff members who have access to the homeowners’ records and can actually help address their issue(s)”

The rules are scheduled to become effective in early 2013 unless the Bureau issues finals rules first.  An outline of the proposals under consideration was also posted on the Bureau’s website.

To learn more about these proposed changes to mortgage servicing as well as other housing reforms arising out of the financial crisis, please register for “The Foreclosure Crisis: Challenges and Solutions to the Mortgage Meltdown,” Friday, April 13, 2012 at the International House on the U.C. Berkeley Campus, and stay tuned as we live-blog the event throughout the day.

Will Concepcion Allow Arbitration Agreements to Squash Consumer Class Actions?

By James Nguyen, J.D. Class of 2013 | Posted on

Not entirely—at least that’s the conclusion according to this article in the most recent ABA Infrastructure issue.The key holding of the Supreme Court decision in AT&T Mobility LLC v. Concepcion–that the Federal Arbitration Act (FAA) preempts any state rule invalidating class-action waivers (such as the Discover Bank v. Super. Ct. rule in California prohibiting non-class arbitration clauses)–significantly bolsters the already superior bargaining power of defendants in class-action suits and undermines the ability ofconsumers to even undertake these suits. (There is already some evidence that banks have increased adoption of arbitration clauses as a result of the decision)

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Dodd-Frank One Year Later: A Lot of Unfinished Business

By James Nguyen, J.D. Class of 2013 | Posted on

The one-year anniversary of the Dodd-Frank Act (DFA) marks an important moment to review and reflect on the transformative changes that have taken place since enactment of the sweeping reforms.  Yet, much of the work to implement those reforms is still underway.A slew of reports and studies were released to recognize the significant milestone, and of which there are a few worth reviewing:

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What’s at Stake in the Ongoing Mortgage Servicing Settlement Negotiations?

By James Nguyen, J.D. Class of 2013 | Posted on

Potentially $135 billion or the political demise of the CFPB.

Ahead of the first face-to-face negotiations between major banks and government agencies over a proposed mortgage servicing settlement, additional information is surfacing over the potential scope and scale of the settlement.  An internal presentation by the CFPB to the 50-state Attorneys Generals estimates that mortgage servicers avoided $20 billion in servicing costs by failing to adequately process loan modifications of troubled homeowners, and suggests that a proposed settlement, in addition to or as an alternative to a regulator-imposed penalty, would focus on mandates for principal reduction and short sales for underwater homeowners.

The CFPB estimates that a regulator-proposed $20 billion penalty would have limited effect on the bank’s capital ratios, suggesting that a penalty that size would not adversely affect bank solvency.   However, depending on the extent of borrower eligibility for principal reductions (i.e., how much principal is forgiven) and the number of mandated loan modifications, these mandates could cost servicers and banks anywhere between $7 billion to $135 billion.  It is unclear whether the major servicer banks could absorb a settlement costing $135 billion, although some have already speculated that the true costs could go beyond these estimates.

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Live Blogging at the Dodd-Frank Symposium: The Uncertain Future of of Bank Regulation Under Dodd-Frank’s “Abusive” Standard

By By Mike Perez, J.D. Candidate Class of 2012 | Posted on

John D. Wright, of Wells Fargo & Company, just finished giving his thoughts about the Dodd-Frank Act’s new “abusive” standard. Section 1031 of the Dodd-Frank Act vests the newly created Bureau of Consumer Financial Protection with the authority to take enforcement action against banks and other covered entities from engaging in unfair, deceptive or abusive practices. Mr. Wright highlighted § 1031(d), which defines the abusive standard, claiming that the standard introduces “radically new concepts regarding the customer’s understanding of banking products, the customer’s suitability for a banking product, and the bank’s duty to act in the interests of the consumer.”

Mr. Wright pointed out that a lack of clarity in the statute’s language and guidance from regulators makes for muddy waters for large banks future interactions with customers. First, the wording of § 1031(d)(2)(A) seems to require banks to determine each customer’s “financial literacy” to a previously unknown degree. Furthermore, banks will require further clarification as to whether the standard the Bureau will apply is that of a reasonable consumer or a particular consumer. Second, § 1031(d)(2)(B) may require that a bank determine whether a particular customer is suitable for a financial product, regardless of whether there was clear and conspicuous disclosure of product terms, even if the customer understands it. Finally, § 1031(d)(2)(C) may create a legal duty to act in their customers best interest, beyond their normal trust or investment advisory settings.

For more, please view Mr. Wright’s paper here.