Dave Dayen: Raj Date Retreats to “Sanctity of Contracts” Defense to Excuse CFPB for Suboptimal Servicing Rules

By David Dayen, a lapsed blogger, now a freelance writer based in Los Angeles, CA. Follow him on Twitter @ddayen

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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.

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About David Dayen

David is a contributing writer to Salon.com. He has been writing about politics since 2004. He spent three years writing for the FireDogLake News Desk; he’s also written for The New Republic, The American Prospect, The Guardian (UK), The Huffington Post, The Washington Monthly, Alternet, Democracy Journal and Pacific Standard, as well as multiple well-trafficked progressive blogs and websites. His has been a guest on MSNBC, CNN, Aljazeera, Russia Today, NPR, Pacifica Radio and Air America Radio. He has contributed to two anthology books, one about the Wisconsin labor uprising and another on the fight against the Stop Online Piracy Act in Congress. Prior to writing about politics he worked for two decades as a television producer and editor. You can follow him on Twitter at @ddayen.


  1. ella

    Every first year law studnet should be familiar with contract law and the legal theories of Void and Voidable Contracts. The scantity of contract proponents apparently have never heard of these theories or believe that the theories only apply to them when they want to use them to void their own contacts.

    1. Pepe

      Not even just void/voidable – what about re-negotiation, or other areas of law that modify contracts – bankruptcy, for example.

  2. jake chase

    We won’t really understand whether or not CFPB makes any difference until at least five years have passed beyond the last legal opportunity to compensate anyone illegally victimized during the housing bubble and the crash. This is not a Dodd Frank bug; it’s a feature.

    Another bunch of foozlers gets to drink coffee and shuffle papers while the wealth of the 99% goes up in smoke. In Rome all these guys would have had fiddles.

    Another Liberal Solution, this one the child of Liz Warren, who ought to be getting rich in the Senate even as we read about the fissures already erupting in her creation. LOL.

  3. John

    “Date added, “We can make sure people follow the law because laws were broken.””

    Surely when he said ‘people’ he meant ordinary people or borrowers. After all, didnt Obama tell us that no bankers ever broke any laws?

    1. diptherio

      Actually, what Obama said was “many of the activities of these banks were unethical, but not illegal,” implying that some of the activities may have been both unethical and illegal. Of course, what he wanted us to hear, and what most everybody did, was “nothing illegal happened” (One commentator on Democracy Now! pointed-out this tricky use of language, but that’s about it). Typical lawyerly torturing of language and lying by omission.

      1. Nathanael

        Actually, that sort of use of language is more the ad-man’s art than the lawyer’s art.

  4. LucyLulu

    I’m not a TV fan but, mostly I use it as background noise, but Chris Hayes has the one show I try to actually sit down and watch every weekend. He has good guests (I like Alexis Goldstein!) and does a good job of covering topics without the usual mainstream media spin. Topics like Yves covers here, e.g. ethics of use of drones. I’m always wondering when MSNBC is going to pull his show for not towing the party line sufficiently.

    I too was shocked by Date’s response about investors being grown men. If truth be known, investors have no say in the modification process. It’s been delegated to trustees who in turn have delegated the role to the servicers as the trustees have no stake in the outcome. There must be a certain percentage, a minimum of 25% IIRC, of investors in order to for their voices to be heard. However investors have no means of finding each other. Therefore if investors even want to do loss mitigation on their loans, they don’t have the means to exercise their wishes. Surely Date must know that, as he must know about the claims by trustees that they have no fiduciary duty (per the PSA’s) to the investors.

    We all know how the story ends. Global financial stability must be maintained. “Greedy” investors seeking yield and “deadbeat” homeowners seeking free homes lose out. “TBTF/TBTJ” lenders, unethical perhaps at times, but not criminal enterprises (’cause Obama said so), win. All is right with the world again.

  5. LucyLulu

    Forgot to post……

    Welcome, Dave. Have enjoyed your columns at firedoglake and elsewhere and am glad to see you filling in for Yves (which being chosen is quite the honor). Hope you pull up a chair and stick around a while.

  6. just me

    what she said
    what she said

    Very glad to see you here! Big fan of yours from your firedoglake days. You’re a natural fit here I think. Best wishes and welcome.

  7. just me

    Here’s a transcript of that part of the video:

    HAYES: And to me the CFPB is a great example, right? The CFPB is kind of the best case scenario. I mean, you’re new. It was a new institution brought into being by the bill, right? There’s this palpable sense of esprit de corps among the people that work there. It almost feels like a campaign. And yet at the same time, when you’re looking at the rules – and the CFPB has issued some really good rules and tough rules on mortgage originators, right? The people that make the loans. But the rules on servicers – and the servicers have been some of the biggest villains in this entire drama that has played out. I mean, we just got data the other day from the mortgage settlement that 20 people in this country had their homes foreclosed on and never missed a payment. Okay? Think about that for a second, America. The bank takes your home. You haven’t missed a payment. If you did that to your neighbor, you go to jail for stealing their home, right? You can’t just take people’s property for no reason, right? Twenty times this happened, okay? This is all the servicers. And the servicers’ rules, the CFPB – which, again, I have a lot for admiration for, I know some people that are in there – they look pretty weak. They look like they’re not going to be up to the task of bringing the servicers to heel. And it prompts the question: If the CFPB can’t get good rules in place for the servicers, who have been one of the most toxic aspects of this entire complex, then what hope do we have for the rest of Dodd-Frank?

    DATE: Look, on servicing in particular, let me just point out two things. One, I think the set of rules are pretty strong about exactly the things that are the most important. Number one, look, servicers should be able to tell you where you stand in the process. Servicers had ought to be able to tell you what your options are if you’re in trouble. There are a great many homeowners still in trouble. And third, just operationally, it should not be permitted to be in this business if you’re going to systematically lose people’s paperwork all the time.

    HAYES: Right.

    DATE: And if you can get after those three issues, things look better.

    HAYES: But the thing – wait wait wait – but the thing that doesn’t touch are the incentives of the compensation of the servicer, which is the perverse thing that underlies the whole thing, which is they make more money often off foreclosures because of fees and they lose money when you reduce principal on a loan, and reducing the principal on a loan is often the thing you need to do to keep someone in their home.

    ALEXIS GOLDSTEIN, Occupy Wall Street activist: And what advocates wanted is they wanted an affirmative duty to do loss mitigation, which in plain English means force them to work with the homebuyers –

    HAYES: They have to. They are duty bound.

    GOLDSTEIN: – so that they do principal reduction. Because that’s usually in the best interest of the investor, too, right?

    HAYES: Right.

    GOLDSTEIN: The investor doesn’t want it to just go to foreclosure, and the CFPB did not do that.

    DATE: Investors are grown men and women who know how to look after their own interest. My suggestion for the mortgage industry is that compensation for servicers should be structured in a way that you or any of us would actually look after our own affairs.

    HAYES: Right.

    DATE: They have structured servicer compensation in such a way that it works almost exactly the opposite of what you would want.

    HAYES: Yeah, they’re incentivized to do the wrong thing.

    DATE: And it’s not as though the bureau has the ability, nor do I think you would want this to happen, to sort of set pricing for servicing.

    HAYES: No.

    DATE: People should be able to negotiate their own affairs. What we can make sure is if people follow the law. Because laws were broken, and it’s a great example for how the bank regulators simply were not […] the task.

    I’m fascinated with the MSNBC site video — all the bells and whistles! A not bad transcript that you can use to search and jump to in the video, the ability to make a clip from the video — but you can’t print out the transcript nor do a copy and paste… huh? …and is it invisible to web searching? Needs work.

  8. just me

    And this part has me staring at mental walnut shells:

    DATE: Look, on servicing in particular, let me just point out two things. One, I think the set of rules are pretty strong about exactly the things that are the most important. Number one, look, servicers should be able to tell you where you stand in the process. Servicers had ought to be able to tell you what your options are if you’re in trouble. There are a great many homeowners still in trouble. And third, just operationally, it should not be permitted to be in this business if you’re going to systematically lose people’s paperwork all the time.

    HAYES: Right.

    DATE: And if you can get after those three issues, things look better.

    Like, how many walnut shells are there? Any pea?

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