By David Dayen, a lapsed blogger, now a freelance writer based in Los Angeles, CA. Follow him on Twitter @ddayen
Hello, everyone, while Yves is off conferencing, I’m taking over the controls for a couple days.
I want to start with a belated story from the weekend. I’m a fan of Chris Hayes’ show on MSNBC – it’s the only cable news I’ve seen outside of Election Night in the last year or two. He puts on issues that get virtually no attention elsewhere and he’s responsive to his audience. Over the weekend I noticed that he was to have Raj Date on, formerly number 2 at the Consumer Financial Protection Bureau. So I asked Chris on Twitter if he could bring up the CFPB’s servicing rules, which I chronicled at Washington Monthly. To review, the rules kind of nibble around the edges, but do nothing to fix the wrongheaded financial incentives that lead servicers to reap rewards from foreclosures and avoid principal reductions because it would hurt their bottom lines.
As you can see above, Chris did challenge Date on this (the fun starts at around 2:00), and it’s a really illuminating discussion. First of all, Date was completely blindsided that a show on the “liberal network” would dare to criticize a rulemaking from an agency birthed by President Obama. He probably thought he would get to criticize all those other “bad” regulators and shine his badge as the good one. Watch him do an actual double-take at 3:18; it’s worth the admission price.
Having to argue the fact rather than get by on reputation, Date then struggles for an explanation. He briefly explains what the servicing rules do, basically a series of second-order efforts around transparency and disclosure, along with gentle nudges toward ensuring that servicers don’t constantly lose paperwork. “The thing that doesn’t touch are incentives around compensation of the servicer,” Hayes responds. Alexis Goldstein of Occupy Wall Street pipes in at this point, adding that under the rules, servicers have no affirmative duty to do loss mitigation (they just have to make the borrower aware of their various options), and that changing this would be in the best interest of the investors, the underlying owners of the loans, who don’t want to lose more money in foreclosure.
And here’s where Date reveals himself, the part where I laughed out loud: “Investors are grown men and women who know how to look after their best interest,” he says. This is an analogue to the “sanctity of contracts” excuse we heard from Summers and Geithner during the AIG bonus mess. The CFPB has a mission to protect consumers, and if the incentives around mortgage servicing work to the detriment of the borrower they have some responsibility to remedy that (ideally by overhauling the entire broken servicing model, to be honest). This idea that investors have their own contractual rights and don’t need any regulatory help has simply not been borne out over the crisis period. That’s in part because investors in some private label securities are spread all over the world. And it’s also because servicers have simply not delivered information back to the investors on loss mitigation outcomes. The CFPB rules do try to fix that problem, forcing servicers to clarify procedures with the investors before the fact and report back afterwards. But enforcement on that is a bit vague, and ultimately, the discretion continues to lie with the servicers.
The proof that Date knows about the importance of protecting consumers by targeting financial incentives is that this is precisely what CFPB did when it comes to mortgage originators. Armed with a mandate from Dodd-Frank, CFPB banned yield spread premiums, stopping brokers from collecting bonuses by steering customers into higher-cost loans. He could just as easily have said that “The funders of mortgage lenders are grown men and women who know how to look out for their best interest,” and that surely they wouldn’t give bonuses for higher-cost loan products anymore after having witnessed the subprime crash, and anyway who’s to say a regulator should step into a private compensation process?
I don’t want to come down on CFPB too much here. They were tossed into this in the middle of some complicated jurisdictional issues around servicer compensation. There was an “active” process at FHFA and HUD on the issue (I use “active” in scare quotes because it basically died on the vine by the end of 2011). But just the fact that other federal agencies were looking into the compensation problem makes Date look a bit foolish insisting that regulators have no ability to deal with pricing.
Date added, “We can make sure people follow the law because laws were broken.” And here’s where I have to add in some of my reporting that didn’t make the Washington Monthly article. First, CFPB did put in a rule to “prevent” servicers from steering borrowers into higher-cost modifications. But there’s no definition attached to it of what steering would look like; it’s more like stating a general principle. On ending dual track, the rules do include a 120-day period before servicers can put a borrower into foreclosure. But once the borrower gets into foreclosure, “there’s not much protection at all,” Julia Gordon, housing specialist at CAP, told me. There are at least three different deadlines for action at three different dates, which layers more confusion onto an already confusing process.
As an example of the Swiss-cheese style of the post-foreclosure dual track rules, one measure says that, if a borrower applied for a modification 37 days before a foreclosure sale, the servicer cannot seek foreclosure judgment, seek an order of sale or execute the foreclosure sale. This sounds great until you realize that the foreclosure sale isn’t usually scheduled until a few weeks out. There’s no mechanism to determine when “37 days” before a foreclosure sale takes place. And in a non-judicial state, the rule doesn’t stop all of the things that usually occur, like notice of foreclosure or advertising of the pending sale. “This confuses the homeowner, because they’re getting the notices, and it doesn’t slow the foreclosure process while allowing fees to rack up,” Alys Cohen of the National Consumer Law Center told me. These are just a couple small examples.
A few minutes later on the program – it was in a different clip – there’s a discussion about how to deal with regulatory capture, and Deepak Bhargava of the Center for Community Change suggests more “regulation from below,” public action through complaint-driven processes. And this is something CFPB has at least opened up as a possibility. But it irked me to no end to hear Date respond to this with this quote:
I would absolutely agree with that. Fundamentally you can outsource expertise, you delegate authority to regulatory agencies, but you cannot delegate leadership. When you see a problem, get off the sidelines and get into the game and fix it.
This is from the same guy who said, five minutes earlier, “Investors are grown men and women who know how to look after their best interest.” How off-the-sidelines of him. The CFPB’s servicing rules aren’t awful, though they aren’t likely to be too effective. But the way Date tried to hide the ball here only makes me happy that he left the bureau.