Ed. #33: CFPB Induced Anxiety

July 5, 2021|CFPB, Fair Lending, Regulation by Enforcement

Mel Brooks’ and High Anxiety

When my dad turned 80 a few years ago I took him to see Mel Brooks over a fun weekend together. Brooks was turning 90 and doing a live show in Las Vegas. It was more a storytelling event than standup comedy (Brooks was interviewed by his son-in-law and sat through most of it), but my dad loved the old jokes, movie references[1]and stories about Sid Caesar, Carl Reiner other great comedic actors and writers of that era. Brooks admitted that a lot of his movies’ satire in stereotyping and making fun of virtually every ethnic and racial group wouldn’t fly today[2], but at his age, at least no one is “cancelling” him. Brooks’ 1977 movie High Anxiety probably would not be made today either in how it characterized mental illness, but this intrepid mortgage industry blogger is willing to take a little risk to teach and entertain every now and then.

Credit where due

First, however, I’ve been complaining so much about the CFPB lately, that it’s only fair I also highlight when I think CFPB got something right. A few weeks ago, these Musings discussed concerns with the CFPB’s proposed COVID-19 servicing rule (also submitted as a comment letter). Last week, the CFPB’s final COVID-19 Emergency Servicing Rule (the “COVID-19 Servicing Rule”) came out. In it, the CFPB backed away from its proposed blanket foreclosure ban until the end of year. CFPB recognized that such a moratorium would be a bad idea because borrowers who know that there will be no consequences for failing to pay (or even respond to outreach) are less likely to seek the help they need. Kudos to the CFPB for responding well to that industry concern. Now back to our regularly scheduled programming:

CFPB wants us all in Conservatorship

Many dedicated Musings readers will remember my concerns about the proposed COVID-19 Servicing rule’s supposed national psychobabble diagnosis in footnote 78. This was the footnote that sought to justify Servicing Rule on the premise that “everyone isn’t thinking straight”[3]due to COVID-19 anxiety. As I have noted previously, there are some very good reasons for providing borrower assistance due to COVID-19’s adverse impacts, but when a federal agency uses the rationale that “you have anxiety and so aren’t thinking straight” to justify their legal authority, they better have some pretty good data to support that. CFPB has no such data[4]. There are other issues with the COVID-19 Servicing Rule, but attorney Larry Platt does a a much better job of explaining all of that than I can in this blog,

CFPB is causing my anxiety

Remember all that stuff in earlier Musings about how I hate kale? Well, while true (both that I hate kale and that it is awful), that discussion was not really about my hatred for kale. It was to illustrate the right to be wrong. Unfortunately, footnote 78 shows the CFPB doesn’t subscribe to that right. I want the right to make my own financial (and other) decisions and the thought of a (largely unaccountable) government agency making them for me is what causes me to have severe anxiety. If I want to pay off my forbearance arrearage all at once, go gamble in a Las Vegas casino or invest in Gamestop, Dogecoin or whatever Elon Musk tweets next, I should have that right.

Nevertheless, CFPB repeated footnote 78 (as footnote 78 again) in the final COVID-19 Servicing Rule, signaling that CFPB still thinks that, beyond making sure you get complete and accurate disclosures, you need them to think for you too.[5]In more incendiary words, CFPB thinks you have COVID-19 induced dementia and that gives them the legal authority to put you in a conservatorship on your financial affairs. How this concept will be applied in the future by CFPB remains to be seen[6], but at least Britney Spears had 3 psychologists sign off on her conservatorship[7]. Don’t call Britney’s legal team (or Fannie/Freddie’s) for any help either since it seems that once in conservatorship, there is no exit.[8] Apparently, only Elon Musk’s late night tweets can save you[9].

Anxiety over Regulation by Enforcement

CFPB regulation by enforcement is back…, with a vengeance. Last week’s Summer 2021-CFPB Supervisory Highlights evidenced more than just a throwback to the old Richard Cordray “compliance malpractice” comment about reading Consent Orders for regulatory guidance[10]. The CFPB’s announcement about the Supervisory Highlights sent Xanax prescriptions flying off the shelf for mortgage attorneys and compliance professionals[11]. The agency clearly learned nothing about the importance of Constitutional due process from the PHH case it lost a few years back. The CFPB said,

The Bureau’s examiners observed discouragement of people in minority neighborhoods from applying for credit by, among other things, locating offices in almost exclusively majority-white neighborhoods, only using pictures of white people in direct mail marketing campaigns, and publishing loan officer headshots of almost exclusively white people. Examiners noted these practices lowered the number of applications from minority neighborhoods relative to other comparable lenders.

As demonstrated by our complaint against Townstone Financial, Inc., the CFPB will continue to combat redlining in all its forms in the 21st century.”

Vague and Unworkable Standards

Redlining is the practice of excluding certain neighborhoods from loan eligibility based on the racial makeup of the neighborhood. Redlining is a form of illegal discrimination under ECOA and other fair lending laws. CFPB, however, is conflating the definition of “discourage” with failing to encourage[12]to arrive at the violations cited in the recent Supervisory Highlights. While encouraging more minority applications is an excellent idea[13], it’s simply not illegal under current law or regulation to fail to encourage and also unclear that the “failures to act” noted amounted to discouragement.

Compliance Anxiety

Nothing gives compliance folks more anxiety than having to manage compliance against vague and unmeasurable standards. Aside from being nowhere mentioned in ECOA, Fair Housing Act, official interpretations or even case law, to illustrate how this kind of regulation by enforcement is anxiety inducing for compliance pro's as well as unconstitutionally arbitrary, vague and ultimately unworkable, let’s take these examiner-identified “redlining” problems one at a time.

1. Locating offices in almost exclusively majority-white neighborhoods. How is office location a form of communication that discourages applications? What standards for locating offices must a lender apply to not discourage applications and remain compliant? What role does internet accessibility and remote work opportunities play in office location compliance? What is the applicable peer group by which to measure a lender’s relative success in not discouraging applications by office location?

2. Marketing materials with pictures of white people. How does model appearance in pictures discourage applications? Is there a compliant demographic mix of models to use in marketing materials to avoid noncompliance or does it depend on the lender peer group (and how is that determined)? How does one even know a model’s actual racial/ethnic makeup? Can you darken the skin of models artificially to arrive at the right color mix? Would the selection of models based on skin color or ethnic appearance violate other non-discrimination laws?

3. Publishing white loan originator headshots. The CFPB criticized a mortgage lender for having open house flyers with pictures of white loan originators. Was this just another way of saying there weren’t enough minority loan originators hired? Surely the answer was not to put a minority person’s picture instead of the actual loan originator’s headshot.

CFPB and Fair Fights Revisited

The Townstone case is still pending, but, unfortunately, the CFPB’s reference to that case in the Supervisory Highlights actually reveals the only true “lesson” the unrepentant agency gained from the PHH case about its due process obligations: i.e., choose your defendant(s) wisely. That is, just as it did with David Eghbali in the RESPA context, it seems clear that when CFPB wants to change regulatory interpretation through enforcement, rather than follow the Administrative Procedures Act or pick on a big bank or lender with the resources to fight back, CFPB figured out it is much easier to pick on a small player with limited resources to defend themselves. The agency set up by Elizabeth Warren to “fight the big banks”, doesn’t really want a fair fight when it knows it is pushing the envelope.[14]

Meanwhile the CFPB is laser focused on racial equity, but will any of this envelope pushing actually move the needle on the racial housing gap?

[1] This is one of my favorite Mel Brooks scenes ever (from History of the World-Part 1).

[2] He specifically cited Blazing Saddles….” And Methodists!”

[3] My paraphrase, not the CFPB’s actual words.

[4] Footnote 78 begins, “The Bureau is unaware of research that explicitly investigates the link between COVID-19-related stress and comprehension of information about forbearance and foreclosure.” Then it goes on to highlight studies showing that stress can cause bad financial decisions and that stress is high during the COVID-19 pandemic. That’s a lot of unscientific extrapolation by a financial regulator to conclude you are mentally impaired when making decisions about repaying your mortgage loan.

[5]What makes the CFPB regulators immune from the same kind of bad decision-making during periods of high stress?

[6] For example, if people are not allowed the “right to be wrong” about financial decisions, on what basis can the CFPB permit casino gambling to occur anywhere?

[7]Fannie and Freddie didn’t get a psychologist either, but they were already regulated companies with federal charters (who went bankrupt), not human beings having their ability to make choices questioned by an agency with no psychological training or respect for the freedom enhancing right to be wrong.

[8]Remember that JP Sartre reference from Musings #30?

[9] Musk is extremely powerful in moving markets and society. CFPB ought to investigate his influence on decision-making by consumers. See e.g.., Gamestop and Dogecoin. After the recent SCOTUS decision about the FHFA Director being removeable by the President at will, Fannie and Freddie investors may want to see what Musk can do for them.

[10]Two can play the repeating footnote game. Here’s my footnote #3 from Musings #13:

In 2016 Cordray told a financial trade association that it would be “compliance malpractice” not to follow the “guidance” of the CFPB’s Consent Orders. In my view that was an inappropriate scare tactic admonishment by the top consumer financial regulator to the compliance community. The PHH decision concluded that if you had followed the RESPA “guidance” in the CFPB’s enforcement action against PHH, you would have actually misinterpreted RESPA just as Mr. Cordray and CFPB had. Sure, consent orders can tell you what the CFPB’s enforcement priorities are and how they might be interpreting something, but there is no constitutional, legal or malpractice basis to take a consent order’s “guidance” as an official interpretation of the law. See again my 2016 article here.

[11]Many such prescriptions needed refills after the Juneteenth fiasco. We are still waiting for guidance from the CFPB on that one.

[12] Don’t discourage does not mean encourage. As I noted in these prior Musings, if ECOA’s drafters and regulatory interpreters want ECOA to say that, then change the law/regulation.

[13]Some states (e.g., Massachusetts) have CRA like obligations on licensed lenders other than banks seeking to impose affirmative obligations.

[14]Yes, I am calling out the agency for being “chicken”, but that’s a bit disingenuous of me. Either way they force changes because the uncertainty while the case is pending will push progress towards their goals. Still, that’s not the way the government is supposed to act and it is a complexity subsidy to large companies over small.