Dalrymple column: Consumer Financial Protection Bureau is under (or on) fire
We’ve promised to keep you posted on what’s happening on bank deregulation, the rewriting of the Dodd-Frank Act, and the reorganization of the Consumer Financial Protection Bureau, all of which was promised by the new administration.
Well, as in just about every other venue, the present, somewhat occasional, occupant of the White House hasn’t done much. But the CFPB might have managed to shoot itself in the foot, or worse, long before the change of command, and Dodd-Frank isn’t even in the picture on this one.
Rather, it has to do with an alleged violation by a mortgage company of a law that’s been on the books for 43 years: the Real Estate Settlement Procedures Act, a statute that was created to allow borrowers to shop for mortgages and services relating to home loans, as well as strictly forbidding kickbacks to lenders from real estate practitioners and other third parties.
The circumstances are a bit complex, but we’ll try to simplify it for us non-lawyer types. (Hey, I see you nodding off in the back of the room. Wake up, stay with us — this is kind of fun in a quirky sort of way.)
The case has to do with private mortgage insurance, so a bit of background will be helpful: High ratio home loans — that is loans over, say, 80 percent of value — require mortgage insurance of some kind that pays the lender a certain amount if the borrower defaults on the loan. The Federal Housing Administration (FHA) is a mortgage insurer. FHA loans are around 97 percent of value, and FHA insures the entire loan against default.
If the loan isn’t of the FHA or VA variety, it’s called a conventional loan, and a private, as opposed to government, company insures a portion, instead of all, of the loan, generally around 20 to 25 percent of the loan amount.
The borrower, not the lender, pays for both FHA and private insurance. In the latter instance, the lender, not the borrower, selects the private insurance company, of which there are several. This doesn’t really affect the borrower’s wallet, since the rates charged by these companies are the same. The lender will typically choose the insurer based on its perception of the quality of service provided.
Here’s how the CFPB started down the road that could lead to sweeping reorganization of the bureau, or possibly even its demise.
PHH Corp. isn’t a bank, but a mortgage banker, among the 10 largest in the country. It funds billions in conventional home loans and requires a lot of mortgage insurance on the loans above that 80 percent threshold. It hit on an idea that involved taking part of that risk on itself, and away from the MI companies, i.e. “self-insuring.” PHH said to the insurers, “When your aggregate risk gets above a certain amount, we’ll relieve you of a portion of that risk. For doing this, we’d like you to pay us a portion of the premiums you’re collecting.” Not really a complex concept: PHH gets paid for the risk, and ultimately can book that money if the loans stay current. Sounds like a straightforward business arrangement.
However, when the CFPB looked at the agreement, it alleged that this was a kickback, since the borrowers were paying the freight, and thus a violation of RESPA. The case went before an administrative law judge, who is actually paid by the bureau itself, and not exactly the most even-handed jurist. The judge ruled that PHH should be fined some $6.4 million, which represented the payments it received for its self-insuring activity prior to July 2008.
But Richard Cordray, the bureau’s executive director, decided his tame judge was too lenient. He set the fine at a whopping $109 million, because the agreement with the MI companies is ongoing, and ultimately the revenue to PHH would come to the higher number. This got just about everybody’s attention. To the bureau’s critics, it dramatically demonstrated what’s wrong with the CFPB: that it’s an agency out of control, with no oversight, and answers only to Congress, not to the executive branch, as it constitutionally should.
The case was appealed, going to a Federal Appeals Court, where a three judge panel unanimously agreed that the CFPB was wrong, that due process had not been followed. Two of the three judges even ruled that the structure of the bureau was unconstitutional, and that it should be fixed.
The bureau hasn’t given up; it’s filed its own appeal that is scheduled to be heard by a larger panel of the same Appeals Court, but the blood’s in the water. Last week, the Justice Department has filed a brief asking the Appeals Court to order a restructuring of the CFPB. And the PHH attorneys, somewhat gleefully I suspect, have filed papers pleading, in effect, that the bureau should be done away with altogether.
Which brings to mind the admonition to Spider-Man: “With great power comes great responsibility.” At least, when you take your baseball bat in hand, leave at least one kneecap operational.
And the discerning reader will note that none of this has really much to do with protecting consumers at all, and a lot to do with the exercising of power.
Pat Dalrymple is a western Colorado native and has spent almost 50 years in mortgage lending and banking in the Roaring Fork Valley. He’ll be happy to answer your questions or hear your comments. His e-mail is firstname.lastname@example.org.
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