Predatory Structured Finance

Predatory lending is a real, pervasive, and destructive problem as demonstrated by record settlements, jury awards, media exposes, and a large body of empirical scholarship. Currently the national debate over predatory mortgage lending is shifting to the controversial question of who should bear liability for predatory lending practices. In today’s subprime mortgage market, originators and brokers quickly assign home loans through a complex and opaque series of transactions involving as many as a dozen different strategically organized companies. Loans are typically transferred into large pools, and then income from those loans is “structured” to appeal to different types of investors. This process, usually referred to as securitization, can lower the cost of funds for lenders, allowing them to offer better prices. But, it can also capitalize fly-by-night companies that specialize in fraud, deceptive practices, abusive collections, and other predatory behavior. This article makes three intellectual contributions to this national debate: First, it argues that the current notion of predatory lending has been cast too narrowly. Some of the businesses that sponsor securitization of residential mortgage loans are aware of and capable of preventing mortgage predation. Accordingly, the label “predatory structured finance” is suggested as a necessary addendum to the lexicon of predatory lending. Second, this article tracks the evolution of structured finance of home loans, suggesting that as our financial technology has outpaced consumer protection law, it has effectively deregulated much of the consumer mortgage market. Third, this article argues that the reform strategy favored by many legislators and a growing number of scholars—assignee liability law— is only a partial solution. While a necessary component of the law, these rules are by themselves inadequate because they excuse many of the most culpable parties from accountability. An efficient legal response to predatory structured finance must include further development in an emerging trend of common law imputed liability theories

Two Faces: Demystifying the Mortgage Electronic Registration System\u27s Land Title Theory

In the mid-1990s, mortgage bankers created Mortgage Electronic Registration Systems, Inc. (MERS) to escape the costs associated with recording mortgage transfers. To accomplish this, lenders permanently list MERS as the mortgagee of record instead of themselves to avoid the expense of recording any subsequent transfers. MERS’s claim that it is both an agent of the lender and the mortgagee, and the huge gaps left in the public record, give rise to a range of legal issues. This Article addresses whether security agreements naming MERS as a mortgagee meet traditional conveyance requirements and discusses the rights of counties to recover unpaid recording fees. The author explores the challenges facing judges, legislators, county recorders, and investors who must resolve these issues to rebuild confidence in real property recording systems

Will Congress Remove Consumer Credit “Seat Belts”?

The CFPB has faced criticism not because it is out of control, but because it is effective. If the CFPB were bringing crazy cases, hundreds of federal judges appointed by Republican and Democratic presidents would simply dismiss the agency’s complaints. And some of those judges would enjoy doing so. Too many of America’s financiers are betting it will be easier to strangle the watchdog than actually follow the rules or pay up when they make a mistake. And worse, too many politicians, pundits, and astroturf-think-tanks-for-the-wealthy want to score political points by taking down what may be the best recent example of a government actually doing really great work for the public. If cooler heads prevail, then we can hope in the coming years the CFPB’s no-nonsense approach to consumer protection will be as universally accepted as seat belts are today

Taming the Sharks: Towards a Cure for the High Cost Credit Market

Taming the Sharks: Towards a Cure for the High Cost Credit Market chronicles the historic, economic, legal, and political factors breeding America’s feverish high cost debt industry. The ideas presented are novel, progressive, and controversial. Historians have long argued that interest rates provide a sort of economic and political health of nations. If true, the contemporary American market for credit shows troubling signs of distress. While Federal Reserve Board monetary policy has kept commercial and prime consumer interest rates low, the past two decades have seen explosive growth in an industry specializing in high-cost consumer debt. Payday loan outlet chains, automobile title loan companies, rent-to-own furniture stores, pawnshops, and sub-prime and manufactured home mortgage lenders are transforming the personal finance patterns of millions of Americans. Many observers have complained this industry charges excessive prices, uses unfair business practices, and is generally causing more harm for its borrowers than good. Industry insiders retort they are merely responding to a legitimate demand for financial services that, in effect, consumers vote with their feet. Echoing problems of past centuries, today’s consumers face difficulty comparing credit prices, patterns of reckless lending and borrowing, as well as distressing economic externalities. With an idea on the future, Peterson’s book hopes to find ingredients of a compromise to protect working-poor borrowers while simultaneously preserving economic competition.https://ideaexchange.uakron.edu/uapress_publications/1081/thumbnail.jp

“Warning: Predatory Lender”—A Proposal for Candid Predatory Small Loan Ordinances

Over a hundred different local governments around the country have adopted ordinances restricting small, high-cost loans. This trend reflects the solid majority of the American public that opposes the legality of triple-digit interest rate loans and the long historical tradition of treating payday and car-title lending as a serious civil offense or even a crime. Nevertheless, perhaps owing to limits on municipal power, local payday lending law has generated relatively little scholarship or commentary. This paper describes the existing local law governing small, high-cost consumer loans and proposes a more emphatic ordinance that better reflects the policy judgment of many local leaders and a solid majority of the America public. In particular, this paper (1) introduces the historical background of regulation of usurious lending; (2) analyzes the recent growth in local ordinances attempting to control small, high-cost loans; (3) discusses the evidence of market failure in the small, high-cost loan market; (4) proposes a model ordinance requiring that lenders who offer loans in excess of 45% per annum display a cautionary message that reads: “Warning: Predatory Lender,” on their street, storefront, and other on-premises signs; and (5) argues that the well-established municipal authority over signage provides a solid statutory and constitutional basis for such a law. An appendix with a model ordinance suitable for adoption by most local governments follows

Choosing Corporations Over Consumers: The Financial Choice Act of 2017 and the CFPB

The Financial Choice Act of 2017 is appropriately named in at least one sense: its proposed restrictions on the authority of the Consumer Financial Protection Bureau reflect a choice by the House of Representatives to protect financial companies at the expense of consumers. This choice is borne out by the data. As this empirical review of CFPB enforcement cases demonstrates, nearly all of the relief provided to American consumers in CFPB enforcement cases arose where a bank, credit union, or other finance company deceived their customers about a material aspect of their product or service. Between 2012 and 2016, the CFPB’s enforcement efforts generated $10.5 billion in consumer relief –accounting for 93 percent of all compensation—in cases that included a deceptive-practices claim. Had the Choice Act been in effect, the CFPB would have been powerless to stop the deception of American consumers by financial corporations within its jurisdiction. This change alone would have eliminated or seriously weakened the vast majority of CFPB cases. Moreover, the Choice Act’s blanket exemption on law enforcement cases involving payday loans and similar forms of credit would have eliminated at least 24 enforcement cases where the CFPB found payday or vehicle title lenders breaking the law, generating$73 million in consumer relief and $28 million dollars in civil money penalties. Between the Choice Act’s elimination of UDAAP claims and its proposed exemption for payday lenders, had the Act been in effect from 2012 to 2016, many consumers would have lost out on billions of dollars of relief, and even more would have fallen prey to unchecked violations of numerous consumer protection laws. This empirical comparison of the proposed Choice Act’s provisions to the CFPB’s law enforcement track record leaves little doubt that if the bill passes, meaningful consumer law enforcement will grind to a halt within the rebranded Consumer Law Enforcement Agency. Indeed, the Choice Act’s renaming of the CFPB as the Consumer Law Enforcement Agency is ironic and misleading. The Choice Act makes a stark and unapologetic choice favoring corporate wrongdoing and lawlessness over consumers

Preemption, Agency Cost Theory, and Predatory Lending by Banking Agents: Are Federal Regulators Biting off More than They Can Chew

A pitched battle is currently being waged for control of the American banking industry. For over a hundred years, the federal and state governments have maintained a complex, but relatively stable truce in their contest for power. At the beginning of our republic, state governments were the primary charterers and regulators of banks. In the wake of the Civil War, the National Bank Act created parity between federal and state banks, cementing the notion of a dual banking system that endured through the twentieth century. But in the past five years, the federal government has increasingly used its powers under the Supremacy Clause of the U.S. Constitution to grab new authority for federal banking regulators and for federally chartered depository institutions. A series of controversial federal regulations have preempted the application of state consumer protection laws directed at prevention of predatory lending by national banks and thrifts. The preempted state laws address a recent rash of fraudulent, deceptive, and unconscionable lending that is having a corrosive effect on minority communities, senior citizens, and the entire lower middle class. In a related move, federal banking regulators have also recently preempted the application of state law to independent contractors of national banks and thrifts. This essay explains the potentially far reaching impact of federal preemption of state regulation of independent contractors. If these determinations are upheld, thousands of businesses, including insurance agents, mortgage brokers, and automobile dealers, will be placed beyond state oversight - provided that they have agency relationships with a national bank or thrift. Moreover, this essay uses economic agency cost theory to explore the potential for mischief posed by placing bank and thrift agents beyond the reach of state government. In particular, this Article argues that bank and thrift agents, by their nature, have lower incentives to forego predatory lending than the depository institutions themselves. Given the limited resources of federal banking regulators and their primary focus on safety and soundness, the Article concludes that preemption of state regulation of bank and thrift agents is currently inadvisable

Consumer Financial Protection Bureau Law Enforcement: An Empirical Review

In the aftermath of the U.S. financial crisis, Congress created a new federal agency — the Consumer Financial Protection Bureau (CFPB) — with the goal of fashioning a more just and efficient American consumer finance market. The CFPB now serves as the U.S. Government’s primary regulator and civil law enforcement agency governing consumer lending, payment systems, debt collection, and other consumer financial services. In its first four years of enforcing federal consumer protection laws, the CFPB has announced over a hundred different law enforcement cases forcing banks and other financial companies to relinquish over $11 billion in customer refunds, forgiven debts, and financial penalties. Drawing upon pleadings, consent orders, settlement agreements, press releases, and other public documents, this Article presents an empirical analysis of the CFPB’s law enforcement track record. In particular, this paper: (1) provides an introduction to the jurisdiction and powers of the CFPB’s Supervision, Enforcement and Fair Lending Division; (2) classifies all of the CFPB’s publicly announced enforcement matters through 2015; and, (3) presents seven notable findings on the CFPB’s public law enforcement program. An appendix listing the CFPB’s publicly announced enforcement cases through 2015 follows