A Fighting Chance (59 page)

The work of PIRG, NCRC, and other consumer groups in analyzing the CFPB data and expanding the audience for the data is critically important to the success of the agency, and the organizations’ willingness to make constructive criticism about the ways the data could be enhanced are even more important. These organizations are a critical counterbalance to the big banks, helping keep the agency focused on its mission.

“That could happen to anyone”:
When asked to turn down government-funded health care for the sake of ideological consistency, Grimm said: “What am I, not supposed to have health care? It’s practicality. I’m not going to become a burden for the state because I don’t have health care, and God forbid I get into an accident and I can’t afford the operation. That can happen to anyone.” Two weeks later, he voted against the ACA. See, for example, Rachel Maddow, “Michael Grimm’s Health Care Problem,”
msnbc.com
, February 15, 2012.

security clearances they need for promotions and special assignments:
According to Article 134 of the Punitive Articles of the UCMJ, willful nonpayment of debt is considered dishonorable conduct (
http://www.au.af.mil/au/awc/awcgate/law/mcm.pdf
). What’s more, active servicemembers can lose their security clearances if they have significant credit issues, which could result in those members being discharged, taken off assignment, or otherwise ineligible for promotion. According to Lt. Col. James Gregory, debt and late payment has become one of the leading factors in security-clearance terminations because “a person with big debts is more likely to accept money in exchange for revealing secrets.” According to one report, thirty-six thousand active-military members who hold security clearances have sought urgent financial assistance or advice to avoid this scenario. Bill Briggs, “How Big Debt Is Threatening Security Clearances for Thousands of Troops,” NBC News, August 13, 2012. Defense Secretary Leon Panetta said that financial troubles are the number one reason why servicemembers lose their security clearances. Reuters, “Student Loans: Even Military Worries About Rising Debt,”
Christian Science Monitor
, October 21, 2012.

payments and finally had to declare bankruptcy:
In a 2006 study the Department of Defense found that predatory lenders—harnessing a variety of marketing techniques—specifically targeted military personnel who lacked the ability to repay with high-rate, high-fee loans designed to evade state consumer protection laws. The department recommended the following changes be made with respect to servicemembers: (1) lenders should make “unambiguous and uniform price disclosures” to servicemembers and their families; (2) Congress should impose a federal cap on interest rates to prevent lenders from circumventing state restrictions; (3) lenders should be prohibited from making loans to servicemembers and their families “without due regard for the Service member’s ability to repay”; (4) lenders should not require servicemembers to waive important legal protections via contract; and (5) states should enforce their consumer protection laws fairly and consistently, including with respect to non-resident servicemembers stationed within their borders. See “Report on Predatory Lending Practices Directed at Members of the Armed Forces and Their Dependents,” Department of Defense, August 9, 2006, 4–10. The report details the effects of predatory lending on servicemembers and their families, incorporating specific case studies such as the one involving an air force member whose $400 loan turned into a $3,000 obligation. For this impact assessment, see “Report on Predatory Lending,” 37–44.

someone official who would do right by the service member:
On September 30, 2006, Congress passed H.R. 5122, the Military Lending Act, which was designed to protect military families from predatory lending. The act prohibits lenders from charging servicemembers and their families an annual interest rate greater than 36 percent. In addition, it requires lenders to make certain disclosures to clarify key loan terms, prohibits abusive penalties and practices, and bans onerous contractual provisions. While these protections have made noticeable differences, lenders have found many ways to circumvent the law. For example, “Lenders have exploited loopholes in the definitions of covered credit, such as styling a payday or car title loan as open-end credit or setting a loan term slightly longer than the definitions cover, to make high-cost loans to servicemembers.” Furthermore, “Some credit products described as problems for servicemembers in the DoD Report to Congress were not included in DoD’s initial consumer credit definitions, including military installment loans and rent-to-own or other retail installment sales financing. As a result, servicemembers are still exposed to extremely high rates and risky forms of security, inconsistent supervision at the state level, and can still have pay drained by military allotments when borrowing or financing purchases with these creditors.” Jean Ann Fox, “The Military Lending Act Five Years Later,” Consumer Federation of America, May 29, 2012, 10.

targeted for some of the worst mortgages in the housing crash:
The Equal Credit Opportunity Act prohibits discrimination in lending on the basis of race, color, religion, national origin, sex, marital status, age, or receipt of public assistance. Creditors may, however, discriminate on the basis of such factors as income, debts, and other indicators of creditworthiness. For more information on this act, consult the Federal Trade Commission’s summary:
http://www.consumer.ftc.gov/articles/0347-your-equal-credit-opportunity-rights
. The Fair Housing Act prohibits discrimination in housing practices, such as setting different terms on a loan or refusing to provide information about loans, on the basis of race, color, national origin, religion, sex, familial status, or handicap. For more information on this act, see the Department of Housing of Urban Development’s summary:
http://portal.hud.gov/hudportal/HUD?src=/program_offices/fair_housing_equal_opp/FHLaws/yourrights
. Several agencies, including the Consumer Financial Protection Bureau and Department of Justice, have a hand in enforcing these and other important antidiscrimination laws. These laws were created within a context of well-documented lending discrimination against women, minorities, and other groups. John R. Walter, “The Fair Lending Laws and Their Enforcement,”
Federal Reserve Bank of Richmond Economic Quarterly
(Fall 1995): 62–67. For more on CFPB Fair Lending, see
http://www.consumerfinance.gov/fair-lending/
.

Investigation of lending discrimination or the violation of other lending rules typically involves painstaking collection of information from lenders, from debtors, and from other sources. Steve Antonakes, Peggy Twohig, and Patrice Ficklin put together teams of extraordinary people at CFPB to investigate lending activities and act as the frontline cops on the beat. Most of their work will be out of the public view, but their impact will be felt throughout the economy.

pay an additional $25 million fine:
See
http://www.consumerfinance.gov/newsroom/cfpb-capital-one-probe/
.

big banks, too) sold honest, simple mortgages:
During my time at CFPB, I had a chance to visit with community bankers from all fifty states to learn about their business models and get their input on mortgage rules and other policies—thanks in large part to the help of Camden Fine of the Independent Community Bankers of America (ICBA), who generously helped introduce me to his members nationwide and teach me about issues important to smaller institutions. I came to understand that community bankers were particularly interested in the Know Before You Owe project because the previous system of disclosures placed a disproportionate regulatory burden on them. In addition, most community bankers believed they were already following the basic principles of Know Before You Owe, and many viewed transparency and simplicity as core components of their trusted, long-term relationships with the families they serve. See my “Remarks to the Independent Community Bankers of America,” March 22, 2011, at
http://www.consumerfinance.gov/newsroom/remarks-to-the-independent-community-bankers-of-america/
. From early on in the process, community bankers had many positive comments on the CFPB’s mortgage disclosure effort. Ron Haynie of the ICBA made the following remark with respect to the agency’s process: “I think what was probably the most refreshing was just the fact that you had a room of bankers there … folks who use [these disclosures] every single day and have to explain it to customers every single day. And the folks at the CFPB were asking questions—does this work? They want the feedback, and bankers are not a shy bunch.” See Kate Davidson, “New CFPB Mortgage Disclosures Win Praise for Content and Process,”
American Banker
, May 18, 2011. Dillon Shea of the National Association of Federal Credit Unions said the credit unions “appreciate[d] the CFPB’s collaborative approach” and hailed the CFPB’s first prototype forms as “a positive first step in simplifying an increasingly complex mortgage disclosure regime.” See
http://www.nafcu.org/Tertiary.aspx?id=22644
. The ICBA noted the prototypes were “a vast improvement.” See
http://www.icba.org/files/ICBASites/PDFs/cl071311.pdf
. As one community banker put it, “Clearly [Elizabeth Warren] understands our model” of doing business. Andy Kroll,
“
Has Elizabeth Warren Won Over the Banks?,”
Mother Jones
, May 6, 2011.

people to take the form for a test drive:
Each participant in the initial “Know Before You Owe” study signed a privacy notice and consent form. Kleimann Communication Group, Inc., “Know Before You Owe: Evolution of the Integrated TILA-RESPA,” presented to CFPB, July 9, 2012 34.
www.consumerfinance.gov/knowbeforeyouowe/
. The CFPB has never publicly identified individual participants in the study, instead using nonidentifiable information to characterize participant responses in its report. As such, I treat the identity in this example as confidential.

clear information, so he could make a clear choice:
The study protocols and the results and stories are validated beginning on p. 53 in “Know Before You Owe.” Disclosures, by Kleiman Communications Group, July 9, 2012, available at
http://files.consumerfinance.gov/f/201207_cfpb_report_tila-respa-testing.pdf
.

The CFPB employed a user-centered design process to test prototype mortgage disclosure forms, in which the users influenced how the design took shape. The process had several phases, including context setting (information gathering), formative development (rapid prototyping), and iterative usability testing (interviewing and testing prototypes all over the country). During the iterative usability testing phase, the CFPB tested two different thirty-year, fixed-rate loans and two different 2/1 adjustable-rate mortgages using two different designs, both of which contained a summary of key loan and affordability information, closing cost details, and information about insurance, servicing, escrow, and appraisal. Participants in the study were asked to compare the loans and answer a number of questions related to the process, which were coded using grounded theory to identify response trends and participant performance. “Know Before You Owe,” xxiii.

On November 20, 2013, the CFPB finalized the “Know Before You Owe” mortgage disclosure forms, which turned out to be longer than one page. Extensive testing revealed that consumers were better able to understand the revised forms, as they proved more capable of answering questions about a sample loan. In particular, consumers demonstrated understanding of risky loan features, short-term and long-term costs, and monthly payments. In addition, consumers were better able to compare different products and evaluate the difference between an original and final loan offer. The forms will become effective August 1, 2015, following consultation with industry representatives and consumers. See “CFPB Finalizes ‘Know Before You Owe’ Mortgage Forms,” CFPB Newsroom, November 20, 2013.

The stories were genuinely awful:
News of the mortgage foreclosure scandal first emerged in fall 2010. It became clear that many banks were engaged in the practice of “robo-signing,” which occurred when employees signed or forged mortgage foreclosure documents without verifying the information contained in those documents
as they were required to do by law
. In one such case, Jeffrey Stephan of GMAC (now Ally), who was responsible for reviewing foreclosure cases to ensure they were legally justified, testified in July 2010 that he signed off on ten thousand mortgage foreclosure documents per month for five years, which provides some sense of the massive scale of the fraud. Ariana Eunjung Cha, “Ally Financial Legal Issue with Foreclosures May Affect Other Mortgage Companies,”
Washington Post,
September 22, 2010.

Another aspect of this fraud dealt with ownership of mortgages and chain of title. Before a bank can foreclose on a home, it must prove that it owns the property. In their haste to package and repackage and sell and resell loans, banks had often cut corners in their paperwork and ownership could no longer be documented. Some banks offered forged affidavits to “clear” the titles. Since the scandal came to light, courts have intervened to stop foreclosure proceedings in several cases where the banks were unable to prove they owned the underlying mortgages. John Carney, “A Primer on the Foreclosure Crisis,” CNBC, October 11, 2010. One study found that banks failed to prove ownership of the underlying mortgage in 40 percent of foreclosure bankruptcy cases. Katherine M. Porter, “Misbehavior and Mistake in Bankruptcy Mortgage Claims,”
Texas Law Review
87 (2008): 121–82. As people began to examine the mortgage foreclosure process in greater detail and in particular the role of servicers, it became clear that improper foreclosure was not only rampant, but it was also multilayered. For example, “dual tracking” is when a mortgage servicer tells a homeowner she is being considered for a loan modification, while at the same time the servicer is moving forward on foreclosure proceedings. Rick Rothacker, “Senators Criticize ‘Dual-Track’ Foreclosure, Loan Modification Processes,”
Charlotte Observer
, November 17, 2010.