Ed. #27: Gut now? The CFPB's foreclosure moratorium
April 8, 2021|CFPB, Consumer Behavior, Disclosures, Mortgage Industry, Regulation by Enforcement, RESPA, UDAAP, Virus Response
The Prime Directive
I heard a speech over 15 years ago by former Treasury official and ABA executive, Wayne Abernathy, in which he said that the Prime Directive for any regulator should be “do no harm”. Abernathy was making a Star Trek reference by calling it the “Prime Directive”, but that really sounds more like it came from the Hippocratic Oath[1]. Anyway, I thought that was good advice and I like Star Trek references, so it stuck with me.
Regulation by gut
I have written many times about CFPB regulation by enforcement[2]. Now it seems CFPB, the self-proclaimed, “data driven agency”, is making the jump to warp speed[3] on my concerns with its proposed COVID-19 RESPA Regulation X servicing amendments (the “Proposal”). The Proposal includes a foreclosure moratorium so weak in statutory authority that the agency uses a touchless Vulcan mind meld to establish US mortgage borrower cognitive disfunction arising from pandemic related stress[4]. I’m going to call this one “regulation by gut instinct”[5], and it is a terrible regulatory precedent if it holds.
CFPB’s proposed blanket foreclosure moratorium
Specifically, my issue with the Proposal is that it would make it illegal to commence a foreclosure on a borrower for any reason before year end (the “Moratorium”). The Proposal simultaneously requires a 120-day prohibition on foreclosure notice or filing for all borrowers exiting their forbearance period (the “Grace Period”). The Grace Period (along with many other provisions of the Proposal) seems supportable in light of CFPB’s RESPA[6]and CFPA[7]authority, but why is the Moratorium needed on top of the Grace Period? Note that the Moratorium is not limited to borrowers with a “COVID related hardship”.[8]Oddly, CFPB’s Proposal suggests that all delinquent borrowers[9]are somehow cognitively impaired due to pandemic related stress and are incapable of assessing (at least not before the end of the year) the very information CFPB requires borrowers to receive from servicers. In other words, it seems CFPB is saying borrowers in trouble are making bad choices if they don’t accept one of the alternatives to foreclosure offered[10]. Considering the CFPB is just asking for comment on a lot of this, however, I’m probably being too critical and alarmist. There’s lots of well-intentioned discussion in the Proposal about the housing gap and consumer distress, comprehension and behavior due to the impact of COVID-19. Still, I’m troubled by consumer relief going way beyond COVID impacts and assertions of regulatory authority beyond what is permitted by statute.
It’s both!
I have found that individually commenting on proposed regulations as just one concerned citizen[11], can often be a fruitless exercise. Unlike Star Fleet’s “no-win scenario” Kobayashi Moru training exercise that Captain Kirk outwits, however, it’s not hopeless. Still, like Kirk, I have a problem with no-win scenarios to begin with,[12]and so I’m "boldly going where no one has gone before" and shaking up the commenting rules a bit. Yes, this edition is doing double duty as both a Musings and a comment on the Proposal all in one: it’s a floor wax and a dessert topping. I might be totally out over my own skis this idea, but, unlike CFPB, my words have no force of law behind them, so I don’t need any statutory or Constitutional authority[13]to speak my mind.[14]
I hope my friends at the CFPB (some of whom are subscribers to the Musings) appreciate my snarky sense of humor coupled with serious thoughts as well as the challenges of writing for two audiences. CFPB may not agree with my comments, but I hope they can at least enjoy the process of reading these Musings more than the usual comment letter and recognize that this comment’s voluminous footnotes are a mere tip of the hat to the 184 footnotes in the Proposal. Meanwhile, I am also really hoping I don’t lose subscribers over the more floor-waxy parts of this edition.
Is CFPB talking about cognitive dissonance?
When I was law school, I recoiled at some professors[15]and other adherents of the critical legal studies movement (known as the Crits) who claimed that disagreement with their anti-establishment philosophies was due to “cognitive dissonance” rather than any valid difference in opinion about how society is (or should be) ordered[16]. Cognitive dissonance is a clinically recognized psychological thing, but when it is applied to the entire country to justify a foreclosure moratorium it doesn’t seem very clinical. Yet, even though CFPB never exactly said borrowers have “cognitive dissonance”, footnote 78 and the rest of the “Authority” section of the Proposal put me straight back to that disturbing law school discussion.
Authority? We don't need no stinkin' authority.
I provided the RESPA and CFPA language CFPB uses for its statutory authority in earlier footnotes.[17]Although the Proposal is driven by COVID forbearance issues, the Moratorium is not limited to borrowers with COVID-19 related hardships. In fact, it doesn’t matter if a borrower is in default due to a COVID hardship or just decided they would rather use their money on other things. So, essentially CFPB’s entire position for its RESPA authority to issue the Moratorium is that the pandemic interferes with all consumers’ ability to obtain and understand the information provided about foreclosure avoidance.[18]Specifically, as noted at the end of that dreaded footnote 78, “Taken together, the available evidence suggests that experiencing heightened stress and anxiety can impair decision-making in financial contexts, and this association may be particularly strong during the COVID-19 pandemic.” CFPB is not offering to identify when those consumer stress levels will be reduced; only a date certain where they suggest servicers may have lower volume to deal with.
If enacted as part of a final rule, there may be legal challenges to the Moratorium because it lacks solid authority to so widely interfere with contract rights and remedies for all home mortgage lenders and borrowers. So, while there’s lots of good consumer protection stuff in the Proposal, prohibiting foreclosures for everyone is probably a bridge too far, and I think CFPB knows it in asking for specific comment on exemptions.[19]
CFPB and RESPA-mania
Is there something about RESPA, in particular, that seems to cause the CFPB to get sloppy in its legal reasoning to achieve its policy objectives?[20] Last October’s RESPA FAQs and withdrawing that hastily written and poorly reasoned 2015 MSA Compliance Memo were a step in right direction. The FAQ’s didn’t exactly acknowledge the CFPB’s upbraiding on RESPA in the PHH case[21], but the agency did seem to accept the court’s interpretations as binding.[22] [23]Of course, RESPA has other functions in addition to prohibiting kickbacks for settlement services and the CFPB has brand new leadership[24](or do they?[25]), so I guess they figure, why not take another run at the limits of administrative law[26]to achieve a policy goal through RESPA? Oh, and apparently, no one actually ever said, "Beam me up, Scotty", but they came close.
[1]Please do not confuse this with the hypocritical oath most politicians apparently must take.
[2] See also www.mortgagemusings.com. Many others have written and spoke on the topic as well.
[3]This is a Star Trek reference, not vaccine related.
[4]Per the Proposal, “the present circumstances may interfere with these borrowers’ ability to obtain and understand important information that the existing rule aims to provide borrowers regarding the foreclosure avoidance options available to them.” If such cognitive disfunction exists, perhaps CFPB should seek to support its authority for the foreclosure moratorium on the basis that foreclosure would be “abusive” under CFPB’s UDAAP authority.
[5] CFPB’s use of gut instinct to regulate is revealed in footnote 78 of the Proposal which begins with, “The Bureau is unaware of research that explicitly investigates the link between COVID-19-related stress and comprehension of information about forbearance and foreclosure”. CFPB should have stopped right there, but goes on to discuss numerous studies about how stress impairs financial decisioning as support for its authority to issue the Proposal and Moratorium. Without data to support the conclusion, CFPB’s assumes that all borrowers in delinquency are incapable of making good financial decisions because of pandemic related stress and thus the Moratorium is needed. That’s regulation by gut.
[6]The Proposal cites its RESPA authority as, “The consumer protection purposes of RESPA include ensuring that servicers respond to borrower requests and complaints in a timely manner and maintain and provide accurate information, helping borrowers prevent avoidable costs and fees, and facilitating review for foreclosure avoidance options. As a result, the Bureau believes that a substantial number of borrowers will not have had a meaningful opportunity to pursue foreclosure avoidance options before exiting their forbearance or the end of current foreclosure moratoria.”
[7] The Proposal cites its CFPA authority to consider consumer understanding as, “Dodd-Frank Act section 1032(c) provides that, in prescribing rules pursuant to Dodd-Frank Act section 1032, the Bureau “shall consider available evidence about consumer awareness, understanding of, and responses to disclosures or communications about the risks, costs, and benefits of consumer financial products or services.”
[8] The Proposal defines “COVID-19- related hardship” to mean a financial hardship due, directly or indirectly, to the COVID-19 emergency as defined in the Coronavirus Economic Stabilization Act, section 4022(a)(1) (15 U.S.C. 9056(a)(1)).The word “indirectly” can do all sorts of mischief here, but I am not taking issue with this definition.
[9]Except, apparently, those borrowers who are serviced by small servicers (i.e., < 5,000 loans). Why those folks are not similarly cognitively impaired is unexplained.
[10] Is the Proposal a harbinger reverting to Elizabeth Warren’s original consumer protection vision premised on paternalistically determined “safe” options instead of consumer choice and disclosure? Is CFPB angling to do away with foreclosure entirely as an unsafe or unconscionable remedy?
[11]Trade association and interest group comment letters tend to carry more weight due to their membership numbers.
[12]Here is an interesting take on the ethics of Kirk’s response to the Kobayashi Moru exercise.
[13]Actually, the First Amendment is my Constitutional authority. See also, my comments about criticizing the government here.
[14]CFPB’s actions such as enforcement, rulemaking and interpretation on the other hand, are subject to judicial review, so they need authority to act and that’s the problem with the Moratorium I describe herein. See e.g.,PHH v. CFPB.
[15]Please don’t read this Crit’s inscrutably dense and inaccessible academic work unless you’re an insomniac, masochist or judging for tenure.
[16]In other words, the Crits! said you’re not just wrong, you’re actually crazy and not thinking right.
[17]See footnote 6 and footnote 7, infra
[18] The Proposal also goes to lengths to say that servicers might be “overwhelmed” with loss mitigation work in the absence of its Moratorium, but the CFPB’s concern for mortgage servicer workloads seems rather odd in that consistent with many public statements about servicer obligations, on April 1 (interesting choice of issue date) CFPB told mortgage servicers, in no uncertain terms, that “unprepared is unacceptable”. I have discounted that basis for authority entirely since CFPB has no statutory obligation to worry about servicer workloads.
[19] Per the Proposal, “The Bureau is also seriously considering, and therefore seeking comment on, exemptions from this proposed restriction that would permit servicers to make the first notice or filing before December 31, 2021, if the servicer (1) has completed a loss mitigation review of the borrower and the borrower is not eligible for any non-foreclosure option or (2) has made certain efforts to contact the borrower and the borrower has not responded to the servicer’s outreach.”
[20] I usually limit my commentary about RESPA to Section 8.
[21]PHH also opened the door for SCOTUS to declare that the CFPA-CFPB’s enabling statute-was unconstitutional unless the CFPB Director served at the pleasure of the President.
[22] There is no ability of a federal agency to ignore or overrule a statutory interpretation decision of a federal court under the Constitution- at least if you still think Marbury vs. Madison, 5 U.S. 137 (1803), is good law.
[23] Meanwhile, the Seila Law decision, also continues to pose enforcement challenges for CFPB in ongoing cases.
[24] A link to Blazing Saddles would be totally inappropriate today. Even Mel Brooks admits he wouldn’t be able to make that movie today.
[25]There seem to be at least a few folks involved in this Proposal who were around in the Cordray era.
[26] Those of you who picked RESPA as the law that might change the Chevron deference standard just saw their odds increase.