Ed. #71: CFPB v. Colony Ridge-Where's the ATR Claim?

here ought to be a law

People often will hear about some kind of consumer exploitation, especially in the housing industry, and say, “there ought to be a law against that”. Regarding housing in particular, the sentiment behind that consumer protection instinct is the idea that consumers are at such information disadvantage, and their desire for housing is so great, that it is easy to be taken advantage of by unscrupulous actors. The CFPB’s recent enforcement action against Colony Ridge in Texas highlights these concerns, but also raises an interesting question that I am struggling to understand.

Real Estate from a Vending Machine?

Prior to the laws arising out of the Dodd Frank Act, consumers had the disclosure and rescission “protection”[1]of the Truth in Lending Act (TILA), RESPA’s good faith estimate disclosures (and RESPA’s Section 8 prohibition on referral fees I so often like to discuss[2]), general state laws regarding unfair and deceptive acts and practices and the “famous” Interstate Land Sales and Full Disclosure Act of 1968 (ILSA). Of course, ILSA is not very well known at all, but back in the 1950’s when, according to Wes Anderson’s recent movie, Asteroid City,[3] you could pretty much buy land in the desert[4]from a vending machine, people told Congress, ‘there ought to be law against that’.[5] So there is a law against that, and the CFPB, hasn’t forgotten about it, as seen in its aggressive enforcement case against Colony Ridge asserting numerous violations of ILSA.

ATR is my favorite Dodd Frank Rule

Before getting into the specifics of the Colony Ridge Complaint, I think it is important to let my readers know that I think the most important and needed law to come out of the Dodd Frank era for the mortgage lending industry was the Ability to Repay Rule under the Truth in Lending Act (ATR).[6]At its core, ATR requires home mortgage lenders to make “… a reasonable and good faith determination at or before consummation that the consumer will have a reasonable ability to repay the loan…”. ATR, and its requirement of borrower affordability, makes sure that mortgage lenders don’t irrationally “race to the bottom” (again) in making consumer home loans destined for failure from the outset.[7]But ATR also protects consumers from their own irrational[8]decisions to buy homes they can’t afford. ATR is not the kind of government intervention in the market a libertarian-leaning person like me would normally support, but that’s why I said I am just “leaning”.[9]Just as many of us could not follow the plan on New Year’s Eve and ended up with a hangover on New Years Day, sometimes the free market doesn’t work as well as it should, and participants need some guardrails like ATR to prevent bad outcomes.

As I noted back in 2020 in just my 4thMusing, this guardrail idea that a lender must underwrite a loan to have a reasonable belief the borrower will pay it back, seems so obvious that it is hard to believe we need a law making it illegal and “predatory” if lenders fail to do it.[10] Yet, In the run up to the 2008 meltdown, mortgage lenders and borrowers chased unaffordable subprime and stated income loans[11]right into the worst housing and financial crisis since the Great Depression of the 1930s. Housing’s hangover from the 2008 meltdown lasted about 7 or 8 years.

The Colony Ridge allegations are really bad

Meanwhile, based on the allegations in the CFPB enforcement action, Colony Ridge and its affiliates were classic unscrupulous land sellers who took unfair advantage of thousands of mostly Spanish speaking consumers seeking homes. In addition to the ILSA issues, CFPB and the US Justice Department assert violations of fair lending and fair housing, language exploitation, predatory lending and other claims. As summarized by CFPB Director, Rohit Chopra, in his press release,

“In 2022, we opened an investigation into the ring of companies selling and financing land lots. What we uncovered was disturbing: baiting buyers on TikTok[12], exploiting language barriers, and targeting borrowers with predatory loans that turned their dreams into nightmares. Our 11-count complaint alleges that Colony Ridge is operating a sophisticated, bait-and-switch land sales scheme taking advantage of thousands of families in Texas. The company lies to buyers seeking land to build a house, falsely telling people that its lots have utility hookups and hiding the land’s history of flooding with raw sewage. Many of these buyers end up losing their investment and the place they hoped to call home.

It wasn’t just land sales, it was predatory lending, too. Like some of the predatory mortgage lending we saw in the run-up to the 2008 financial crisis, Colony Ridge does not ask prospective borrowers for the information it would need to determine if a buyer can afford a loan. Colony Ridge seems to make no effort to assess whether a buyer could actually make the monthly mortgage payments.” [emphasis added]

CFPB and LEP

The issue of exploiting language barriers for people with limited English proficiency (LEP) is an area I have previously discussed in these Musings. Unfortunately, the rule of ‘no good deed goes unpunished’ often prevails in LEP compliance.[13] While fair lending demands lenders to seek out diverse and underserved borrowers (such as communities with LEP), often unfair and deceptive laws (federal and state) deem it illegal to solicit and/or conduct part of a transaction in one language, but put the legal agreements in another. As highlighted by Firstline Compliance President and longtime LEP advocate, Josh Weinberg, while outreach to LEP communities is critical from a marketing perspective[14], the Colony Ridge action reminds lenders that exploiting language barriers at borrower’s expense is just the wrong way to do it. Per Weinberg,

“One of the key elements of this case is the intentional and direct outreach to Spanish speaking consumers through Spanish speaking sales agents, telemarketing, internet, and social media marketing. While outreach to Spanish speaking communities is critical for lenders to remain relevant and take market share, it’s fundamental it be done the right way, centered around ensuring consumers can make informed decisions and know the actual terms, features, costs, and risks associated with their purchase/loan.” [emphasis added]

But where’s the ATR claim?

The language exploitation and bait and switch issues asserted by CFPB against Colony Ridge violate numerous provisions of the ILSA as well as the Fair Housing Act, ECOA, and CFPA (unfair acts and practices). These are all detailed in the CFPB’s Complaint. Yet, despite the press release comments by Director Chopra about Colony Ridge failing to assess borrower ability to repay, inexplicably, CFPB chose not to make any allegation in the complaint that Colony Ridge violated ATR.

So why is there no ATR claim in the Colony Ridge case? Director Chopra’s statement clearly articulates a violation of both the text and purpose of the ATR Rule. My only speculation is that with the trouble CFPB has had in the 5th Circuit, that CFPB is trying to avoid asserting a unique law or regulation against Colony Ridge that didn’t predate the CFPB’s existence.[15] Besides, CFPB is more than likely going to defeat the 5th Circuit’s challenge to its funding authorization.

We are now nearly 15 years into having the ATR Rule and there has been almost[16]zero litigation involving ATR. That is, since 2009, it would appear that virtually every lender, even non-QM lenders, only make compliant loans where income is verified, and the lender has a reasonable, good faith belief the loan can be paid back. The unfortunate reality remains, however, that the way the mortgage banking industry is still structured, qualifying a borrower for a loan that can be sold on the secondary market is the only criteria that applies underwriting discipline to mortgage lenders, and ATR applies to all underwriting.[17]

As a result, I view ATR as the cornerstone of all the Dodd Frank regulations[18]. The historically low numbers of delinquency and foreclosures in this low unemployment economy bears out the wisdom of a law that demands lenders look out for borrower affordability. Although I don’t have all of the facts, I am surprised and disappointed in CFPB’s apparent lack of confidence in ATR’s enforceability against Colony Ridge. This procedural decision to leave ATR out of the Colony Ridge Complaint short-shrifts perhaps the most highly effective housing regulation of the Dodd Frank era.

Update on reason for no ATR claim: 01/04/23

Mystery solved. My apologies to the CFPB for questioning the decision to pursue claims under ATR. I was graciously advised by a CFPB official (and loyal reader) that the Colony Ridge development consumer financing only involved raw land, not the financing of dwellings. Although the Director's comments suggested that consumers were sold homes, the ATR Rule only applies to financing "dwellings", so it was apparently unavailable to raise as a violation of ATR against Colony Ridge despite their failure to confirm affordability. Perhaps that's an issue worthy of further ATR rulemaking by CFPB.

[1]I put the word “protection” in air quotes because the premise of TILA is that consumers can protect themselves if they have full information. That is different than the idea behind, “there ought to be a law against…” which reflects a desire for an outright prohibition of something. For example, post Dodd Frank, the LO Compensation Rule under TILA is “a law against” something (paying originators based on loan profitability) but, as I have discussed previously, the LO Comp Rule serves no useful consumer protection goal and actually makes discounting consumer prices very difficult.

[2]Most recently here, but also here, here and here among others.

[3]I didn’t love Asteroid City, but I must admit it had some great moments. It was a little too artsy for me. Then again, maybe it was making fun of artsy theater and movies. In that case, I like it better.

[4]And martinis!!

[5]A former HUD enforcement attorney familiar with the ILSFDA told me that developers were actually selling land in the Arizona desert promising that it was going to become beachfront property. He claimed they apparently had remarkable confidence that global warming’s impact on California beach erosion was going all the way to Arizona.

[6]Also known as QM/ATR. The QM part of that refers to a qualified mortgage safe harbor for borrower income to debt service that most lenders apply to make sure the reasonable belief test is met. Now, there is a pricing test.

[7]ATR protects home mortgage lenders from their own worst impulses.

[8]I am using the word “irrational” here to emphasize that the expectation of rationalactors in the marketplace sometimes is unrealistic for both business and consumers. See generally, the field of behavioral economics.

[9]Libertarianism can have tremendous philosophical appeal, but it can sometimes result in undesirable outcomes and just plain weirdness. To borrow a reference from the Robert Downey Jr. character in the movie Tropic Thunder, I would advise, ‘Never go full libertarian.’ I discussed libertarianism a bit with respect to former FHFA Director Mark Calabria in an earlier Musing, but here’s some more recent proof about libertarian weirdness: https://www.cnn.com/videos/us/2023/12/29/university-wisconsin-la-crosse-joe-gow-fired-explicit-videos-wife-cnc-vpx.cnn. Only in Wisconsin.

[10]The ATR Rule carries all kinds of penalties for violation including life of loan foreclosure defenses, class action and statutory damages and attorney’s fees.

[11]a/k/a “Liar loans”.

[12]I have long suspected use of Tik-Tok as a direct path to ruin.

[13]My “elegant” solution for the mortgage lending world offered in early 2021 was to provide a UDAAP safe harbor relative to LEP issues for all QM loans meeting the pricing standard since they also come with a points and fees test ensuring fair cost to the borrower.

[14]Importantly, Weinberg notes that LEP isn’t just a fair lending compliance issue for lenders, it’s a business issue to make sure you can reach more customers generally.

[15]That doesn’t explain why the CFPB raised claims against Colony Ridge under the CFPA, however. So, clearly, my speculation is incomplete.

[16] This 6thCircuit case involving a borrower and his fourth ex-wife (both realtors, by the way) is the only case I am aware of interpreting the ATR rule.

[17]Mortgage bankers will make any loan that qualifies for sale, but since ATR has assignee liability, most loan purchasers including all GSEs will only buy a loan that qualifies for the QM safe harbor. Even so-called non-QM purchasers are all very careful about still making sure that the loan still meets ATR’s “reasonable and good faith belief” standard by requiring income documentation. So, ATR makes “Liar loans” illegal.

[18]I don’t have such nice things to say about other Dodd Frank era regulations such as the Loan Originator Compensation Rule