June 19, 2024
Brian S. Levy
For a fleeting moment at the beginning of Rohit Chopra’s tenure as CFPB Director, I believed that the new Director’s stated competition-focused consumer protection policy vision might actually be implemented to achieve meaningful consumer protection goals while also fostering a robust lending marketplace. I hoped CFPB under Chopra would be targeted and balanced in its policies and would refrain from the old playbook politics of demonizing the lending industry as bad actors preying on defenseless consumers who end up impoverished instead of enriched through the purchasing power of financing.
There are bad actors in the lending industry to be sure, but a thriving mortgage and consumer lending industry has enabled countless US citizens to own homes, purchase needed or desired items, pay for needed medical care, and otherwise contributed immensely to this country’s relative economic growth, wealth, and standard of living superiority over most of the world.
Advocates or regulators?
Unfortunately, Chopra’s agency appears now to be leaning in harder to the kind of Occupy Wall Street/Elizabeth Warren/Bernie Sanders/all moneylenders are bad mentality that, fueled by the excesses of the subprime era, led to the CFPB’s creation in the Dodd Frank Act. If you read to the CFPB’s rhetoric on policy initiatives (and Chopra's statements in particular), however, it is as if the agency (and the Dodd Frank Act) has done nothing in the last 12+ years to protect consumers from all these awful predatory lenders. CFPB still seems to feel the need to generate populist support and anger for its initiatives as if it was a shoestring budget non-profit consumer advocate organization. This is true despite the many consumer protection accomplishments CFPB has achieved[1]and the massive powers they hold to initiate changes and enforce laws against bad actors.[2]
Praising Chopra no more
To be clear, shortly after he began his CFPB tenure, in my April, 2022 Musing #44, I praised Chopra for not targeting “little guys” and shared his frustration that regulators often focus on easily cowed small participants when larger companies harm more consumers. In that Musing, I also outlined what I then saw as Chopra’s view of consumer protection: that the market operates best to protect consumers when there are robust consumer options. In my next Musing after that, I again cheered Chopra for offering a (backhanded) compliment to the financial services industry in blasting a “Repeat Offender” by contrasting that recidivist’s conduct to the operation of most other institutions the CFPB examines. So (for those of you scoring at home) that was two Musings in a row in 2022 where I complimented Mr. Chopra and his leadership direction for the CFPB.
Two years later through the prism of a Presidential election year, Chopra has lost all his initial goodwill with me in his policy initiatives.[3] This past year or so, he and his agency have gone full shrill Warrenista banking/lending industry critics instead of effective regulatory policymakers seeking to improve consumer outcomes.[4] CFPB’s recent policy efforts remind me of the drunk looking for his lost keys under the street lamp or Captain Renault’s direction in Casablanca to “Round up the usual suspects”.[5] Chopra and his agency policymakers now just seem to exclusively offer ideas for equity signaling and scoring rhetorical and political points instead of crafting meaningful, efficient, economically-grounded market reforms to enhance competition and create better consumer outcomes for all consumers. My examples follow.
Talking (about) points
Despite the worst housing affordability in memory, with respect to mortgage lending now, it seems it's just about politics: not about enhancing competition to improve housing affordability and consumer outcomes.[6]Chopra’s initiative are proving to be merely talking points in the Biden administration’s rudderless and ultimately counterproductive search for equity or to serve as populist catnip like the Administration’s “junk fee” initiative.[7] I discussed the CFPB’s mortgage industry junk fee initiative in a recent Musing, but at the time, I thought it was consistent with Chopra’s views on competition to enhance consumer protection. I’m rethinking that conclusion based on his most recent flurry of junk fee related announcements.
Shortly after I published my “Are you a junk fee?” Musing, CFPB demonstrated remarkable disingenuity by issuing a study insinuating that higher points paid at closing by borrowers in the rising interest rate market of 2022 and 2023 somehow could reflect nefarious lender gouging worthy of investigation.[8]In a period of rising rates, it is entirely normal to see consumers pay points to lower their interest payments over time and Chopra’s agency knows this. So, what was the point of issuing that study?
Junk TRID?
Then, on May 30, 2024 CFPB issued a Request for Information regarding mortgage closing costs about which former CFPB attorney (and TRID lead author) Rich Horn noted, “…, CFPB is looking to create an administrative record to support a future proposed rule that may be based on the argument that certain mortgage closing costs (or the ways in which they are itemized and disclosed) are a UDAAP violation because they are not subject to competition and cannot be readily understood or avoided by consumers.” Horn’s article questioned the CFPB’s studies used in the RFI which, in an incredible about-face, concluded that disclosure of price information does not, in fact, protect consumers but rather, somehow, enables lender price gouging.[9]
I agree with Horn that CFPB ought to do a better job of showing its work if it plans to flip-flop on over 50 years of federal regulatory consumer protection philosophy premised on disclosures in favor of other ideas for consumer protection.[10] Cutting out the “middleman” and lowering costs through technology is one thing, but pass through expenses like appraisals, credit scores, and title insurance do not result in monopoly rents or profiteering by lenders.[11] Meanwhile, at a recent Congressional hearing, Chopra was forced to admit under questioning that not all closing costs are “junk fees”[12]. I guess I wasn’t the only person who misunderstood the CFPB’s junk fee initiative’s intentions.
Name and shame registry
Meanwhile, the Dodd Frank Act gave CFPB the ability to create a registry of non-bank financial service companies. CFPB under Chopra, however, seems to be vastly overreaching with these registry powers[13]to punish, shame and again, demonize, the lending industry. First, as I noted in my Musing in reference to the CFPB’s proposed “contract registry database”, “[c]all this move by CFPB ‘enforcement by regulation’ since the whole point as far as I can tell is to enable CFPB to punish industry with an unnecessarily burdensome and easy to violate compliance regime rather than to gather important information or do any risk assessments needed for regulation.” Again, CFPB knows what provisions in consumer finance agreements it doesn’t like,[14]and it can obtain copies of form agreements just by asking, so the contract registry is just a punitive attempt to create a gotcha regime that will do nothing to advance consumer protection.
More recently, on June 3, 2024, CFPB again demonstrated its love for that registry/enforcement by regulation approach by finalizing another registry idea ostensibly to create a public database identifying “repeat offenders” to consumers and law enforcement. This “bad boy” registry requires any consumer finance company with a regulatory order of any kind (going back to 2017) no matter if relatively minor[15] or if settled with a confidentiality agreement, to register as a “repeat offender”, and provide other information about the company, any individuals involved, and response(s) to those orders. This Final Rule to identify repeat offenders again seems nothing more than a name and shame effort to frame all consumer lenders in a bad light and offers CFPB with more enforcement options for mistakes. Again, this compliance burden is a complexity raising subsidy to large organizations which will not benefit consumers in any meaningful way.[16]
“Weaponizing the credit reporting system”
Finally, this past week offered another example of a CFPB rule proposal (and Directors' comments about it) likely to gin up populist support in an election year, but for which the consumer benefits are dubious: CFPB Proposes to Ban Medical Bills from Credit Reports | Consumer Financial Protection Bureau (consumerfinance.gov).
According to Chopra, “The CFPB is seeking to end the senseless practice of weaponizing the credit reporting system to coerce patients into paying medical bills that they do not owe …. Medical bills on credit reports too often are inaccurate and have little to no predictive value when it comes to repaying other loans …the CFPB expects the proposed rule would lead to the approval of approximately 22,000 additional, safe mortgages every year.”
Is it “weaponizing the credit reporting system” to coerce patients into paying medical bills they do owe? Look, I’m generally ok with demonizing the credit bureaus because there are only 3 of them, their costs have outpaced inflation, and they don’t deserve the right to hold my personal credit data without my permission,[17]but taking medical debts off credit reports doesn’t make those debts no longer enforceable, it just makes it more expensive to collect.
It's true, however, that this rule, if enacted, will make it almost impossible for invalid debts to be collected, but if valid and enforceable medical debts are also not reported it will make virtually all debt-to-income calculations for QM/ATR open to challenge for mortgage lending purposes. Moreover, even if all medical debts could be ignored for loan approval purposes, the downstream effects of this rule on consumers’ ability to obtain medical services could be disastrous. That is because if medical debts become harder to collect, medical service providers will simply require more consumers to pay in advance and financing costs for medical services will become more expensive. So, CFPB might have a short-term win for people with medical debts today, but future medical service consumers may find they are unable to get non-emergency care at all, especially for uninsured items like dental or eye care, unless they can afford to pay in advance.
Pushing one side of the balloon
Director Chopra must know that pushing on one side of the market balloon here will cause another side to pop out with those unwanted downstream effects. Chopra’s recent policy initiatives, however, will only add unnecessary complexity and compliance costs to the mortgage industry which will lead to more industry concentration and higher consumer costs.[18]This is the exact opposite of the kind of consumer protection I thought Mr. Chopra believed in when he first came on board CFPB. Now it seems CFPB is just playing politics when they enable popular (but ineffective) talking points about what the Administration is doing about housing affordability when the real underlying affordability problems; inflation, housing supply, and high interest rates, continue to go unaddressed.
[1] As far as I am concerned, imposing ability to repay requirements on consumer mortgage loans to protect consumers from the awful consequences of foreclosure on their homes was perhaps the most impactful consumer protection law ever: perhaps more important than even the CFPB itself. CFPB should study the impact that QM/ATR has had on foreclosure rates and proudly announce the tremendous positive impact that has had for everyone (except foreclosure attorneys).
[2] Both political parties seem to desperately want to be in the minority these days. Similarly, CFPB wants to be seen as a advocate fighting “The Man”. Here’s a newsflash for the CFPB: You. Are. “The Man”.
[3] I distinguish my criticism of Chopra’s policy making initiatives from his enforcement priorities. On enforcement, with a few exceptions, CFPB has been much better about picking on larger participants alleged to have engaged in bad actions.
[4] I recently highlighted my Hayekian reservations about the abilities and hubris of policymakers to design regulation to achieve optimal outcomes due to “the knowledge problem”.
[5] As I joked to one CFPB staffer at a recent conference, it is like the Cold War Era story about a Russian KGB officer talking another Russian saying, “If you see a Bulgarian on the street, beat him. He’ll know why.” Mortgage lenders are the Bulgarians in that joke.
[6] It gets exhausting to repeat myself, but as I have said many times in these Musings (most recently, here), if Chopra and CFPB really wanted to do something with an immediately tangible positive effect on competition to reduce mortgage costs he would modify the LO Comp Rule to permit originators to reduce their commissions at the point of sale.
[7] According to the NY Times which republished a Blueprint/YouGov poll from late 2023, while only about half of those polled were aware of the Administration’s junk fee elimination initiative, almost 90% supported it. Seriously, who are the 10% of people that like junk fees? They can’t all be mortgage lending professionals, right? P.S. Awareness and support were basically reversed for Biden’s student debt cancellation initiative (about half supported it, but almost everyone was aware of it.)
[8]This is like Tucker Carlson defending throwing all kinds of outrageous accusations against the wall by saying, “I’m just asking questions.”
[9] Rich Horn was the lead author of TRID, so he has every right take it personally when CFPB now suggests the TRID disclosure regime runs contrary to consumer protection goals. I would add that the mortgage industry that spent billions of dollars developing systems and training to implement that detailed compliance regulation might also have a right to be a little miffed at any CFPB about-face on the consumer protection value of TRID.
[10] Such as the untested “bundling” theory that was discussed, but never implemented, over 20 years ago which would also require numerous other regulatory changes to RESPA and TILA to make it work.
[11] Speaking of monopolies, Fannie, Freddie and FHA (a/k/a the federal government) require these third party underwriting requirements if you want a mortgage loan. Mortgage lenders would be more than happy to originate and sell loans without these “junk fees” if permitted by the government buyers and insurers of mortgage loans (even if they misunderstand their repurchase risk in doing so).
[12]Wait until the state and local government folks hear their transfer and property taxes are “junk fees”.
[13] Attorney Rich Andreano had some choice thoughts about the CFPB’s overreach on registries on Ballard Spahr’s Consumer Finance Monitor podcast (listen towards the end of the podcast). In my book, Alan Kaplinsky and the Ballard team produce the best consumer finance legal podcast out there.
[14]Arbitration is at the top of the list.
[15] For example, if you were in the mortgage business in California odds are good you had a consent order involving the notoriously confusing California per deim interest requirements. I’m not sure that anyone who got that wrong should be considered a bad actor "repeat offender".
[16] I predict that a Blutarski grade point average of zero point zero percent of consumers will make any decisions about which lender to use based on review of the CFPB’s repeat offender database.
[17] I know FCRA requires lenders (furnishers) to report to the bureaus, but are these profit-making monopolies really necessary if we can have links to all of our accounts on our cell phones today? CFPB is also working an upcoming Personal Financial Data Rights Rule, but I’m not sure how that will impact how we interact with the credit bureaus or whether their usefulness has been displaced by technology.
[18] I often note how complexity is a subsidy to larger organizations who can afford to pay experts and build systems to deal with that complexity. Accordingly, CFPB induced complexity is also a subsidy to me personally since I am the kind of expert those organizations tend to hire to sort out that complexity. I really should not bite the hand that feeds me.
Brian Levy is an attorney with Katten & Temple, LLP licensed in Illinois and Wisconsin who writes the free Levy’s Mortgage Musings blog available at www.mortgagemusings.com. Mr. Levy can be reached by email at blevy@kattentemple.com. Mr. Levy’s blog is copyrighted and presented by Chrisman Commentary with permission. All rights are reserved.