Sunday, October 16, 2011

National Conference of Bankruptcy Judges--10/14/11--The Consumer Financial Protection Bureau

Rajeev Date had the unenviable job of filling a speaking slot originally assigned to Elizabeth Warren to discuss the creation of the Consumer Financial Protection Bureau. He is currently the Special Advisor to the Secretary of the Treasury on the Consumer Protection Bureau. Prior to that, he worked for over a decade in the financial services industry, including stints at Capital One Financial and Deutsche Bank.

Mr. Date described the similarities between his job and that of bankruptcy lawyers pointing out that both deal with people getting wiped out because of something financial and both seek to help consumers.

The Consumer Financial Protection Bureau was a signature part of the Dodd-Frank legislation. He stated that its goal was making consumer financial markets work. Before Dodd-Frank, consumer protection functions were assigned to seven agencies which had other responsibilities as well.

He sketched out some recent history to show the need for the Bureau. He said that consumer debt exploded during the years before the financial crisis. He said that it “covered everything, big ticket, small ticket, secured unsecured. Everything grew and everything grew fast.” From 1999-2007, household debt nearly tripled. He cited college kids with credit cards, home mortgages with teaser rates and people exhausting their savings on high cost debt as emblematic of the period. Mr. Date said that consumers were signing up for “things they didn’t understand.”

Mr. Date noted that the mortgage industry was at the epicenter of the financial crisis. While lenders usually have incentives to ensure borrowers can pay them back, the mortgage industry was different. Because the brokers and banks that originated loans were compensated up front, risk and reward were delinked.

He also said that there was a breakdown in the market. Because originators could shop for the most favorable legal regime, they did so.

Additionally, there were problems with transparency. He defined transparency as both parties understanding the terms of the deal and talking about the same deal. Mr. Date said that transparency was absent during the years leading up to the financial crisis. The fastest growing products were things that were hard to understand. In order to gauge the risk involved in some financial products, it was necessary to have extensive knowledge of how the rate caps worked and interest rate history. He said that “problems of transparency continue today. Borrowers deserve to know what they are signing up for.”

Mr. Date was enthusiastic about the prospect of starting a new agency from the ground up. He quoted Steve Jobs for the proposition that “the only way to great work is to love what you do.” He described his challenge as creating new perspectives, creating a new structure and recruiting new talent.

Although the CFPB is only a few months old and lacks an Executive Director, it has grown to 690 employees, has begun taking consumer complaints, started education programs and has released examination guidelines. Notwithstanding the lack of an Executive Director, the authority to carry out the Bureau’s powers has transferred to the Secretary of the Treasury.

He pointed out that from 2001-2007, the volume of unusual mortgages exploded dramatically. He described one of the worst products offered as a mortgage with a one month teaser rate. He said that while the Bureau is working to clean up new originations, there are already $10 trillion in mortgages out there.

Mr. Date answered several questions related to mortgage servicing. He said that when he was in the financial services business, he would walk the floors of collection operations for automobile lenders and credit card lenders to evaluate whether to purchase the business. He said that they understood that there were some people who wouldn’t pay and planned for it.

On the other hand, income in the mortgage servicing industry is largely fixed regardless of whether the loan performs or does not. When a loan is performing, the cost to service the loan is less than the fees paid. However, when a loan is not performing, the servicer’s costs exceed their revenue. As a result, “the incentives don’t line up” for mortgage servicers to work with borrowers in default.

He also pointed out a disparity in that mortgage servicers can “fire” their borrowers by selling the portfolio to a new servicer, while borrower cannot fire their servicer.

The CFPB has released its manual for mortgage servicer examinations. Mr. Date said that in the past, examinations of mortgage servicers were neglected because these operations did not affect the “safety and soundness” of the financial institution. He said that the servicing manual does two things: it sets standards for consistency and lets servicers know what to expect.

Three different judges asked questions relating to home mortgage modifications. One judge spoke about debtors who submitted everything they were asked to and didn’t hear back for months only to be told their information had been lost. Another judge asked, “What do I do? What do I tell them?”

Mr. Date pointed out that mortgage brokers were good at holding consumers’ hands during the application process. However, no one is holding their hand in the modification process. He pointed out that the CFPB will put consumers in touch with HUD-approved housing counselors. This information is available at

He also said that enforcement was a tool available to the Bureau. He said that the Bureau would choose the right areas for investigation and bring cases when we need to. He said, “There are bad guys. If you don’t know who they are, you may be one yourself.”

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