Cordray Escapes Congressional Lion’s Den

By Kevin Wack

JUL 24, 2012 5:31pm ET

WASHINGTON – For all the hostility that congressional Republicans have directed at the Consumer Financial Protection Bureau, the agency’s director appears to be adept at escaping their wrath.

Richard Cordray faced off Tuesday against the congressional panel most suspicious of his agency, an oversight subcommittee chaired by GOP Rep. Patrick McHenry. While Cordray did not exactly get a hero’s welcome from the panel’s Republicans – one called him “condescending” – the hearing was largely substantive and respectful, with McHenry going out of his way to praise him for his cooperation.

“Your actions serving in this position have been honorable, even if at times I’ve disagreed with the actions you’ve taken,” said McHenry, who chairs the House subcommittee on financial services oversight.

The scene was far more civil than what unfolded in May 2011, when McHenry accused Elizabeth Warren, who was then setting up the consumer bureau, of essentially lying about the agreed-upon terms of her appearance.

McHenry was primarily interested in using the hearing on Tuesday to assess the CFPB’s impact on the availability of credit in the U.S. economy, arguing that overregulation is choking off the supply of loans from financial institutions.

Cordray disputed that point, saying the financial crisis caused the credit crunch, and noting that the CFPB has only finalized one new rule at this point. But he also acknowledged that the regulatory pendulum can swing too far in the wake of a crisis.

“Can people overreact, and can they potentially compound the problem? I think that is always a possibility,” Cordray said. “So we need to be careful about what we are doing.”

McHenry acknowledged that Cordray had a point about the role of the financial crisis, proving the two sides could find more common ground than might have been expected just a few months ago.

Still, there were a few moments when Republicans turned testy.

Rep. Ann Marie Buerkle, R-N.Y., accused Cordray of condescending to the American people by implying that they can’t take care of themselves without the help of the federal government.

“First of all, it’s condescension. But second of all, it’s such 180 degrees from what this country is about,” Buerkle said.

Cordray took umbrage with that characterization, saying that many Americans have been victimized in recent years by abuses in the financial services industry.

“So the idea that everything is working fine if we can just get the federal government out of the way cannot be squared with the facts,” he said.

Rep. Mike Kelly, R-Pa., also got into a heated exchange with Cordray over the impact that CFPB regulations are having on small financial institutions.

To make his point, the GOP congressman held up the nearly 1,100 pages that the consumer agency released in connection with its effort to consolidate existing mortgage disclosure forms. He said that it is ludicrous to think that community banks can go through all of those pages.

“It’s not making it easier. It’s making it more difficult,” Kelly said.

Cordray said many of those pages were included to satisfy demands imposed by Congress and requests from financial institutions. Reading all of them isn’t necessary, he said.

“We’re not asking anybody to go through 1,100 pages,” Cordray said. “Industry often tells us that they want us to be very specific. Specificity means greater length.”

But Kelly wasn’t buying it.

“While we debate, they’re dying,” he said, referring to small banks.

McHenry also questioned Cordray about the bureau’s use of behavioral economics, a field whose findings suggest that consumers will make more prudent choices when they are offered subtle encouragement in that direction.

The North Carolina lawmaker said that he is greatly concerned that regulators, using behavioral economics, will seek to limit the options available to consumers.

In response, Cordray said that the agency is trying to incorporate behavioral economics into its work, in part because private industry is doing the same thing. But Cordray also added, “We have really not been thinking of banning products per se.”

McHenry also pressed Cordray on what he characterized as the lack of detail provided by the agency so far regarding what constitutes an abusive business practice, a sore point with bankers who are looking for clear guidance about what is allowed.

“Do you have an intention to lay this out in rulemaking in a formalized way?” McHenry asked.

Cordray responded: “I think at the moment we have no present intention to launch a rulemaking on that issue.”

Seizing on the same subject, Buerkle warned that if the CFPB won’t define abusive, “how are banks supposed to know what it is?” She said the ambiguity was having a “chilling” effect on lending.

The only point in the hearing when Cordray seemed to be caught off-guard was when McHenry asked him about any contacts he has had with Assistant Attorney General Thomas Perez regarding fair-lending cases.

McHenry explained that he is investigating whether the Justice Department influenced a decision late last year by the City of Saint Paul, Minn., to drop a Supreme Court appeal that might have made it harder for the government to bring fair-lending cases against banks.

Before the appeal was dropped, liberal groups feared that the Supreme Court would strike down the use of a legal theory that allowed such lawsuits based on a statistical analysis of lending patterns if there is not also proof of discriminatory intent.

Cordray replied that he knows Perez, who heads the Justice Department’s Civil Rights Division, and their agencies have been working with each other on certain issues. McHenry requested that the consumer bureau turn over records of contacts between the two agencies.

Eminent Domain, Eminently Suitable for Defaulted Loans

Andrew Kahr

JUL 24, 2012 12:30pm ET

A remarkable result of the housing crash has been the revelation that although local governments retain legal authority over real estate – taxes, title, recordation, foreclosure – 100% of them lack the will or the way to protect constituents from a horrific, slow-motion disaster.

If they won’t use their powers constructively, then reduce complexity by having Washington centralize all this – such as title registry. That might even save money and thin the fog.

But Washington has done little that has been quantitatively effective in reducing the enormous costs and collateral damage associated with forcing out owners and throwing properties on the market.

Now comes a new idea: San Bernardino County, California, is considering acquisition by private investors via eminent domain of home-secured loans, to protect homeownership while delivering the market value of the old loans to their owners.

Many vested interests, starting with large banks and other investors who don’t want to recognize losses, particularly on second lien loans, object vociferously to getting paid off at market. That’s odd if their accounting is honest-but they’re entitled to pursue their perceived self-interest. The people of our political subdivisions are likewise entitled to exercise their legal rights.

What legal rights? According to some commentators, this program is unconstitutional. First we are told eminent domain doesn’t apply because there is no “public purpose.” Ridiculous excuse. Protecting and improving neighborhoods, as with eminent domain for urban renewal, is a well-tested public purpose.

Second we’re told that the program breaches the “sanctity of contracts.” Indeed it does. After prior misreading of the Fifth and Fourteenth Amendments, state legislative enactments have breached the “sanctity of contracts” to serve a public purpose with support from the Supreme Court since 1937 (West Coast Hotel Co. vs. Parrish). Now we again have what that Court referred to as “unparalleled demands for relief.”

I do not argue for the specifics of the San Bernardino plan, but rather for flexible use of eminent domain, which fits specific classes of situations such as: The homeowner can’t pay on his current mortgage loans, but he’s able and willing to pay on a new mortgage loan with value at least as high as the reduced market value of his present loans.

A concrete example: Suppose the customer’s payments under a 30-year government-backed fixed-rate mortgage, plus home equity loan – averaging a 6.5% rate – aren’t affordable. He’s paying only on the home equity. The total market value of the loans is only 50% of the balance.

Maybe he can make the much smaller payments – approximately half as large – under a new mortgage with no reduction in principal, but interest-only payments for 10 years with initial rate of 3.25%. This isn’t a modification. It’s a single new mortgage which should receive the same government backing, since it’s more affordable.

Between the mortgage servicer settlement, legacy Countrywide, investors and various federal interventions, the refinancing of the old mortgages doesn’t get done. So, the borrower, even after being magnanimously accorded the highly-touted advantages of “single point of contact” and “no dual tracking,” is likely to lose his home.

Fix this: Cut the fiddling with securities trustees and owners of seconds. If the holders of the existing loan can give the borrower a better deal than the outside investor proposes, let them do so. Otherwise, the investor gets the loans.

Why does this idea upset almost everyone? First, it requires the current owners of the debt to recognize their losses. Maybe up to now their accountants and regulators have helped or allowed them to avoid this.

Second, the servicers who have been paid to mess with these mortgage problems-ineffectually, but profitably – don’t want the game moved off their turf.

Then, there are the special pleaders who insist that the right solution always requires reducing principal to or below market value of the home. Reduce the principal every year? Every day? Somehow, it’s OK to lose money on your investment or pension account, but never on your home.

Rates have dropped precipitously. Reducing the interest to market – which, under our inherited system, has become virtually a fundamental right of homeowners – is just too complicated without eminent domain because of the multiple consents required. Let’s cut the knot, chop up the obsolete papers, and reduce the overhang of vulnerable mortgages. Next go after the mortgages on unforeclosed, abandoned properties that are not being maintained.

Washington isn’t motivated to do this. Get out of the way and let governments that are closer to the people and have more direct eminent domain power do it.

Andrew Kahr is a principal in Credit Builders LLC, a financial product development company, and was the founding chief executive of First Deposit, later known as Providian.

Has the CFPB Done a Good Job in Its First Year? Poll Results

JUL 20, 2012 6:47pm ET

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Community Banker Suing CFPB Takes Case to Congress

By Kevin Wack

JUL 19, 2012 3:15pm ET

WASHINGTON – The Texas community banker who’s leading the courtroom fight against the Consumer Financial Protection Bureau took his case to Capitol Hill on Thursday, using homespun adages to make the case against excessive regulation.

For the House Republicans who called the hearing, Jim Purcell, chief executive officer of State National Bank of Big Spring, was right out of central casting, speaking with a drawl and emphasizing his small-town roots, though he had a hard time answering certain questions from Democrats.

Purcell urged financial policymakers to show more caution regarding the impact of new regulations, saying they should follow the advice his first-grade teacher gave him regarding railroad tracks: “Stop, look, and listen.”

Rep. Michael Capuano, D-Mass., agreed that policymakers should show caution as they implement financial reform, but argued that they should not be frozen into inactivity.

“We are stopping, looking and listening,” he said. “I totally agree.”

Purcell thrust his $30 million asset bank into the national spotlight last month when he signed onto a lawsuit – spearheaded by conservative lawyers in Washington – that challenges the constitutionality of the consumer agency.

In the suit, State National Bank of Big Spring alleges that it exited the mortgage business because of regulatory uncertainty stemming from the Dodd-Frank Act’s wide grant of authority to the CFPB.

Purcell said Thursday that his bank traditionally offered residential mortgages and kept them on its books, insisting on five-year balloon payments in order to manage its interest rate risk. He testified that new rules on balloon payments helped drive his bank out of the mortgage business, and wondered aloud about where the bank’s customers will now go.

“Our customers have a dilemma: ‘Where do we turn?” he told the House financial oversight subcommittee.

But several of the panel’s Democrats were skeptical of the claims made by Purcell and some of the other witnesses about the size of the impact Dodd-Frank will have on small financial institutions, since much of the law applies only to larger firms.

Rep. Brad Miller, D-N.C., asked Purcell to identify which sections of Dodd-Frank apply to his bank.

In response, Purcell mentioned the creation of the consumer agency before conceding: “I could not tell you at this moment exactly which ones do and which ones don’t.”

Rep. Barney Frank, D-Mass., challenged Purcell regarding the lawsuit’s claim that the CFPB got something close to a blank check from Congress. Frank, one of the 2010 law’s principal authors, argued that the Office of the Comptroller of Currency has similar autonomy.

“Why didn’t you sue to get the comptroller of the currency thrown out?” Frank asked. “Or you just don’t like consumer protection?”

“I’m going to leave that up to the attorneys,” Purcell responded.

Rep. Randy Neugebauer, R-Texas, pushed back at the Democrats’ claim that some community banks are overstating the impact of Dodd-Frank.

Asked whether small financial institutions simply dreamed up the law’s negative consequences, Purcell responded: “Our customers are not dreaming it up, and they’re worried.”

Purcell went on to contrast his bank’s business model with those of large banks. “I don’t understand all there is in Wall Street,” he said at one point. “I don’t understand all the default swaps.”

The hearing, called by Neugebauer, who chairs the financial oversight subcommittee, was the latest in a series that House Republicans have convened to make the case against Dodd-Frank.

It was titled “Who’s In Your Wallet? Dodd-Frank’s Impact on Families, Communities and Small Businesses,” a reference to Capital One’s “What’s In Your Wallet?” marketing campaign.

In light of Wednesday’s enforcement action against Capital One regarding credit-card marketing, Frank joked that “what was in the wallet of many consumers were the hands of Capital One. So references of who’s in whose wallet and for what purpose are very relevant to today’s hearing.”

Green Can Indeed Be Green

By Ken Harney 7/20/2012

WASHINGTON – It has been a controversial question in the home real estate market for years: Is there extra green when you buy green? Do houses with lots of energy-saving and sustainability features sell for more than houses without them? If so, by how much?

Some studies have shown that consumers’ willingness to pay more for Energy Star and other green-rated homes tends to diminish during tough economic times. Others have found that green-certified houses sell for at least a modest premium over similar but less-efficient homes.

But now a new econometric study involving an unusually large sample of 1.6 million homes sold in California between 2007 and early 2012 has documented that, holding all other variables constant, a green certification label on a house adds an average 9 percent to its selling value. Researchers also found something they dubbed the “Prius effect”: Buyers in areas where consumer sentiment in support of environmental conservation is relatively high – as measured by the percentage of hybrid auto registrations in local ZIP codes – are more willing to pay premiums for green-certified houses than buyers in areas where hybrid registrations were lower.

The study found no significant correlations between local utility rates – the varying charges per kilowatt hour of electricity in different areas – and consumers’ willingness to pay premium prices for green-labeled homes. But it did find that in warmer parts of California, especially in the Central Valley compared with neighborhoods closer to the coast, buyers are willing to pay more for the capitalized cost savings on energy that come with a green-rated property.

The research was conducted by professors Matthew E. Kahn of UCLA and Nils Kok of Maastricht University in the Netherlands, currently a visiting scholar at the University of California at Berkeley. Out of the 1.6-million-home-transaction sample, Kahn and Kok identified 4,321 dwellings that sold with Energy Star, LEED or GreenPoint Rated labels. They then ran statistical analyses to determine how much green labeling contributed to the selling price – eliminating all other factors contained in the real estate records, from locational effects, school districts, crime rates, time period of sale, to amenities such as swimming pools and views.

Energy Star is a rating system jointly sponsored by the U.S. Department of Energy and the Environmental Protection Agency that is widely used in new home construction. It rewards designs that sharply reduce operational costs in heating, cooling and water use, and improve indoor air quality. The LEED certification was created by the private nonprofit U.S. Green Building Council and focuses on “sustainable building and development practices.” Though more commonly seen in commercial development, it is also available as a rating for single family homes. The GreenPoint Rated designation was created by a nonprofit group called Build It Green, is similar to LEED, and can be used on newly constructed as well as existing homes.

The 9 percent average price premium from green-rated homes is roughly in line with studies conducted in Europe, where energy-efficiency labeling on houses – new and resale – is far more commonplace. Homes rated “A” under the European Union’s system commanded a 10 percent average premium in one study, while dwellings with poor ratings sold for substantial discounts.

Labeling in the United States is a politically sensitive real estate issue. The National Association of Realtors has lobbied Congress and federal agencies to thwart adoption of any form of mandatory labeling of existing houses, arguing that an abrupt move to adopt such a system could have severely negative effects. A loss of value at resale because of labeling would be disastrous, the Realtors have argued, particularly coming out of a housing downturn in which owners across the country have lost trillions of dollars of equity since 2006.

The National Association of Home Builders, on the other hand, has enthusiastically embraced labeling as a selling advantage for newly constructed homes. Buyers of new homes today are far more likely than purchasers of resale homes to find them rated as energy-efficient and environmentally friendly. But there can be an environmental downside to new homes as well: Many are located in subdivisions on the periphery of metropolitan areas, and require higher fuel expenditures – and create more air pollution – because homeowners have longer commutes to work.

Kahn and Kok make no secret about where they stand on labeling: The more disclosure on the green characteristics of homes makes a lot of sense – and ultimately a lot of savings on energy consumption – for buyers and sellers.