PROYECCIÓN DE LA DEMANDA

Consumer financial protection existed before the CFPB regime but it was seen as severely “flawed with consumer protection as an “orphan” mission that had no regulatory “home” in any single agency and subordinated to regulatory concerns about [ensuring] bank

profitability. [The regulators were seen as lacking] expertise in consumer financial issues” and with responsibility spread across many Federal and State agencies this “created regulatory arbitrage opportunities.” 75

The call for a “Consumer Product Safety Commission” pre-dates the financial crisis and is in part based on the work of Professor Elizabeth Warren. The CFPB defines its two 76 objectives as “helping consumer markets work” and “empowering consumers to take more control over their economic lives”. It mainly satisfies these objectives by a combination 77 of consumer education and information provision and ensuring that regulated firms provide standard and consistent information to consumers. It also makes regulations and carries out regulated firm assessments.Additionally, the CFPB’s also has enforcement powers but these are limited to banks with more than $10 billion in net assets, or only just over a hundred institutions out of over 16,000 banks. Many of the latter are authorised by the 78 States and not by Federal regulators. Consequently, the CFPB operates as a co-regulator

Supra, note 72, (Barr), 8

74

Adam Levitin, ‘The Consumer Financial Protection Bureau: an introduction’, (2013) 32 Boston University

75

Review of Banking and Financial Law, 321, 329

Elizabeth Warren, ‘Unsafe at any rate’, (Summer 2007), Democracy, Issue No. 5, “If it’s good enough for

76

microwaves, it’s good enough for mortgages. Why we need a Financial Product Safety Commission.” Her analysis paralleled that of earlier consumer product safety campaigners such as Ralph Nader and his criticism of the US car industry and the creation of the Consumer Product Safety Commission in 1972, Ralph Nader, Unsafe at any speed, (Knightsbridge Publishing, Mass, 1965)

CFPB website, ‘Strategic Plan, 2013 - 2017’, (April 2013), http://www.consumerfinance.gov/strategic-plan/,

77

(accessed 24th July 2017) Supra, note 75,(Levitin), 338

with State authorities. Recognising this, their respective roles are governed by a

memorandum of understanding (MoU) between the CFPB and the Conference of State Bank Supervisors. While the issue of CFPB and State regulation of banks is covered by 79 the MoU there is no equivalent arrangement for mortgage intermediaries. This issue is considered later in this chapter.

The regulator has already levied large fines using its enforcement powers in areas outside its mortgage remit. John Coffee has considered the possible role of regulatory 80

enforcement and private litigation in the development of the securities market in the US. 81 There is no equivalent research for mortgage markets. Paradoxically, prior to the

establishment of the CFPB, there appears to have been a false confidence in the US mortgage market. The financial crisis changed this view and it now appears that regulatory action is very relevant and necessary to the mortgage industry where compliance is

“dependent on supervisory enforcement policy and record.” Any “knowing violation can 82 result in a civil penalty of up to $1m per day.” For example, in November 2013 Castle & 83 Cooke Mortgages paid penalties and consumer restitution of over $13 m following CFPB action. The firm had broken CFPB regulations by paying “bonuses to loan officers who

CFPB website, ‘State supervisory coordination framework’, (7th May 2013),

79

http://files.consumerfinance.gov/f/201305_cfpb_state-supervisory-coordination-framework.pdf, (accessed 24th July 2017)

CFPB website, ‘CFPB orders GE Capital to pay $225 million in consumer relief for deceptive and

80

discriminatory credit card practices’, (19th June 2014), https://www.consumerfinance.gov/about-us/ newsroom/cfpb-orders-ge-capital-to-pay-225-million-in-consumer-relief-for-deceptive-and-discriminatory- credit-card-practices/, (accessed 27th June 2017)

John Coffee, ‘Law and the market: the impact of enforcement’,(2007),Columbia Law and Economics

81

Working Paper No. 304. There is some correlation between enforcement and litigation on confidence in the market. Coffee does not go as far as, for example, Rafael La Porta and others, ‘Law and finance’, (1998), 106 Journal of Political Economy, 1113, 1152-1152, “countries whose legal rules originate in the common- law tradition tend to protect investors considerably more than the countries whose laws originate in the civil- law, and especially the French-civil-law, tradition...Law enforcement is strong in common-law countries as well, whereas it is the weakest in the French-civil-law countries.” It may well be that countries with an active legal and regulatory system enjoy higher economic growth. “legal and regulatory systems that give a high priority to creditors .... have better functioning financial intermediaries than countries where the legal system provides much weaker support to creditors.”, Ross Levine, ‘Law, finance, and economic growth’, (1999), Journal of Financial Intermediation 8, 8–35

Vincent Di Lorenzo, ‘Barriers to market discipline: a comparative study of mortgage market reforms’,

82

(2012), 29 Arizona Journal of International and Comparative Law, 517, 552

Discussed in Laureen Galeoto and others, ‘The Consumer Financial Protection Bureau: the new sheriff in

83

placed consumers with mortgage loans that had higher interest rates.” Nevertheless, the 84 CFPB, as a regulatory institution has still to establish its claim to “institutional legitimacy”. It is perceived as lacking both accountability in governance and financial terms since it is run by one man (until recently Richard Cordray) and not by a board and it takes its funding direct from the Federal Reserve not from a Congressional allocation of funds. Some 85 aspects of Congressional concerns are considered in the next section.

The establishment of the CFPB can be seen as evidence of the US catching up with some other countries. It presents a number of conceptual challenges to the US approach to 86 conduct of business financial regulation. US regulation now requires that one party to a contract has to look after the interests of another more weakly positioned contractor reflecting a “proto-fiduciary duty which changes the consumer debtor/creditor

relationship.” There will consequently be two outcomes: an increasingly “paternalistic 87 regulatory mindset ... and [the] reduction/rationing [of] mortgage credit”. This perception 88 may reflect a more “libertarian” and, possibly, financial services’ industry view. It also reflects a view that Federal regulation may inhibiting the aspiration of homeownership, the importance of which was considered earlier in this chapter. Pottow quotes two

Congressmen that the position will be that of the government saying to a potential

homeowner that your access to the “American Dream” is denied since we the government are “smarter than you” and “we have to protect you from yourself”. 89

Congressman Jeb Hensarling, a Texas Republican, has been chairman of the House of Representatives’ Financial Services Committee since 2012. He is critical of the CFPB. For example, he has said that his “number one goal has been more jobs and a healthier economy for all. That means we’ve got to root out the job-choking red tape that hurts our

CFPB website press release, ‘CFPB Takes Action Against Castle & Cooke For Steering Consumers Into

84

Costlier Mortgages’, (7th November 2013), http://www.consumerfinance.gov/newsroom/cfpb-takes-action- against-castle-cooke-for-steering-consumers-into-costlier-mortgages/, (accessed 24th July 2017). For an example of the process see Sandra Hauser, ‘Lessons learned from the first public CFPB enforcement action and bulletin 2012-06’,(2012) 66 Consumer Financial Law Quarterly Report, 395

David Carpenter, ‘The Consumer Financial Protection Bureau: a legal analysis’, (14th January 2014),

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Congressional Research Service

John Pottow, ‘Ability to pay’, (2011), 8 Berkeley Business Law Journal, 175-208, 193

86

Ibid, (Pottow), 205

87

Ibid, (Pottow), 205

88

Ibid, (Pottow), 205, quoting Representatives Neugebauer and Hensarling

economy, stifles competition, and erodes free enterprise...[and] protecting American

consumers by holding Washington accountable. One of those Washington regulators is the CFPB – perhaps the most powerful and least accountable government agency in the history of the republic. The CFPB and its unelected director were given unbridled,

discretionary power over everyday financial products....Not only does this agency have the power to make these products less available and more expensive, it has the power make them completely unavailable.” 90

However, from a social cohesion perspective the lack of an ability-to-repay regulatory regime may result in “reverse redlining” with high-risk mortgages being concentrated in “low-income and minority communities” with a “confluence of public policy wishing to regenerate deprived areas and intermediaries and lenders keen to provide high margin loans.” It has been argued that during a downturn the process may go into reverse and 91 these same areas are likely to be the worst affected. In other words the increase in 92 homeownership is illusionary. 93

However, despite the establishment of the CFPB it is still not clear that the actions taken to date will be sufficient to prevent further problems in the retail mortgage industry. The over- reliance on information disclosure and role of mortgage brokers are considered in the next sections. Nevertheless, it is worth noting that failures in the area of conduct of business happen quickly. It is apparent that underwriting standards in the US fell very quickly over a very short period mainly between 2005 and 2006. Consequently, it is questionable 94

whether supervisors, using data which may be several months old, will be able to identify issues and act quickly enough.

Jeb Hensarling web-site, speech in Athens, Texas on 27th April 2014, https://hensarling.house.gov/media-

90

center/in-the-news/the-monitor-hensarling-fights-for-east-texans, (accessed 14th July 2017)

Eric Belsky and Susan Wachter, ‘The public interest in consumer and mortgage credit markets’, (2010)

91

Research Paper No. 10-05 Institute for Law and Economics, University of Pennsylvania Law School, 14. In 2009 mortgage lending to non-Latino whites fell by 17% while the equivalent fall for Latinos was 63% and African-Americans was 60%, Greg Jones, ‘Mortgage lending: confusing in every language’, (2012) 24 Loyola University of Chicago School of Law, Consumer Law Review, 661

Ibid,15

92

Ibid, 23

93

Chapt 3, n137, (Demyanyk and Van Hemert), 33

In addition, little work has been undertaken on the role of non-deposit taker mortgage lenders. There may be a correlation between the entry of non-deposit takers into the 95 mortgage market and the decline in underwriting standards. Despite having a large share 96 of the subprime market these lenders largely fell outside regulatory supervision since they did not accept deposits. It is possible that “innovative corporate structures and financial instruments” will again be designed to circumvent and to reduce active supervision. 97 Moreover, often it is the regulations themselves that drive lender strategies. For example, banning prepayment penalties may have encouraged borrowers to use their homes as cash-machines by taking equity from their property and increasing the LTV with no cost with the consequence that they were far more vulnerable to a property price downturn making default more likely. Ultimately, borrowers will need to be equipped to look after 98 their own interests and part of the regulatory strategy is to ensure that they are provided with sufficient information in an easy format to enable them to exercise their own best judgement.