CFPB Suit Faces Long Odds, But May Still Have Impact

By Kevin Wack JUN 22, 2012 6:05pm ET

WASHINGTON – Supporters of the Consumer Financial Protection Bureau are dismissing a new lawsuit that seeks to abolish the agency as a political stunt, and even bank industry insiders who would like the case to succeed are privately calling it an uphill battle.

But despite what appear to be long odds, the suit could have an impact on the CFPB’s operations in a more indirect way. The litigation could drag on for years, and the case could force the agency to make public statements that have the effect of curtailing its power, observers said.

“Even if the complaint is not successful, it’s possible that in responding to the complaint, the CFPB will make statements acknowledging certain limitations on what it can do – so that it could have an impact, a real-world impact, even if it does not ultimately prevail,” said Joseph Barloon, a bank industry lawyer at Skadden Arps in Washington.

The case has drawn headlines for its assertion that the CFPB violates the Constitution because the agency lacks sufficient checks and balances on its power, but it also makes two additional attacks on the Dodd-Frank Act.

The plaintiffs allege that the Financial Stability Oversight Council is also unconstitutional. It also argues that the recess appointment of Richard Cordray as the CFPB’s director violates the U.S. Senate’s constitutional power over presidential nominations.

The case was filed Thursday by a Texas community bank, State National Bank of Big Spring, and two national conservative groups – the Competitive Enterprise Institute and the 60 Plus Association, which positions itself as a conservative alternative to the AARP.

The suit sprung from conservative legal circles in Washington. But the involvement of the Texas bank is critical because a bank can make a more plausible argument for how it has been harmed by parts of the 2010 financial reform law – and therefore for why it should be allowed to sue – than the Beltway conservative groups can make.

The lawsuit comes in the wake of a push by congressional Republicans to reel in CFPB by altering the agency’s structure. The GOP last year fought to subject the agency to the congressional appropriations process, to replace its director with a five-member board, and to make it easier for the agency’s decisions to be overruled.

But congressional Republicans lost their leverage for those demands when President Obama used a recess appointment to install Cordray as the CFPB’s chief.

That context led consumer advocates to dismiss the suit Friday as political sour grapes.

“It looks like opponents of the agency have been shopping a lawsuit to raise the same ideological concerns that they raised in Congress,” said Travis Plunkett, legislative director for the Consumer Federation of America. “They’re hostile to the notion, and in most cases hostile to specific proposals, to establish an agency focused on consumer financial protection.”

Deepak Gupta, a Washington appellate lawyer who formerly served as a CFPB attorney, said that the suit merely recasts political arguments against the agency as constitutional arguments.

“I don’t think that these are serious legal theories, and I don’t think a court is likely to see them as serious legal theories,” he said.

Bank industry lawyers took a different view, saying the case raises substantive legal issues and shouldn’t be dismissed out of hand.

“Whether or not they will win, they have an argument,” said Oliver Ireland, a partner at Morrison Foerster.

Another industry lawyer who asked not to be identified said, “These are serious issues. What I suspect is that one court may take up one or two of these issues and dismiss the rest of it.”

“They’ve raised a lot of questions, and you never know what’s going to stick.”

Observers also noted that initial legal judgments, even from experts, can be wrong. In the health-care realm, the argument that the individual mandate is unconstitutional was at first largely dismissed by the legal establishment, and that issue is now seen as a close call at the Supreme Court.

In order to have a chance to make their constitutional arguments, the plaintiffs will first have to establish that they have suffered harm, and therefore have the legal standing, to sue.

In the complaint, the plaintiffs allege that State National Bank of Big Spring has suffered two specific harms related to the CFPB. The bank states that it stopped offering remittance services to its customers as a result of a February 2012 rule issued by the CFPB regarding international remittance transfers.

The bank also alleges that it exited the mortgage business because of regulatory uncertainty stemming from what it calls an open-ended grant of authority to the CFPB.

The Texas bank’s argument for how it has been harmed by the Financial Stability Oversight Council is less direct.

The bank alleges that the Council’s ability to designate certain nonbanks as systemically important will convey to investors that those firms are too big to fail, which will give them a funding advantage in the marketplace over small institutions such as State National Bank of Big Spring.

If the plaintiffs are able to show that they have been harmed by the two new financial regulatory agencies, they would then need to show that the agencies violate the Constitution because the law does not place enough checks on their power.

The complaint makes numerous arguments as to why the authority granted to CFPB and FSOC is too broad.

For example, it alleges that the CFPB has power to regulate and enforce rules against unfair, deceptive and abusive lending practices, but without any clear definition of those terms. It also argues that Congress has no power over the CFPB’s budget, and the judicial branch’s ability to oversee the bureau’s work is limited, among other arguments.

“Those features combine to create something that is both unprecedented and unconstitutional,” said Adam White, a lawyer at the Washington law firm Boyden Gray & Associates, which is representing the plaintiffs. “At some point those add up to something that the Constitution just doesn’t abide.”

The issue of whether the authorities granted to the CFPB are unprecedented has been the subject of political debate ever since the agency was established.

Last July, the Senate Banking Committee held a hearing where the U.S. Chamber of Commerce argued: “The Bureau’s current structure confers on its Director unprecedented unchecked power of extraordinary breadth, far beyond that wielded by any other federal regulator of individuals and businesses.”

At the same hearing, Adam Levitin, a Georgetown University law professor, countered that the CFPB has numerous checks on its power, including three that no other financial regulator are subject to: a cap on its budget, the ability of a supermajority of the Financial Stability Oversight Council to veto its regulations, and an annual audit by the Government Accountability Office.

Levitin dismissed the lawsuit Friday as “right-wing claptrap.”

“This is basically a rehash of after the-fact arguments that Republicans who are sore about having lost the financial regulatory reform debate are now trying to get a second bite at the apple,” he said.

Even some who said the case should be taken seriously were skeptical of the claim that the CFPB has an unconstitutional delegation of authority. “If that’s true, the Fed is unconstitutional,” Ireland said.

White, the plaintiffs’ lawyer, acknowledged that the Fed has considerable autonomy, but added: “All we’re saying is that even the Federal Reserve isn’t as reserved from checks and balances and oversight as the CFPB is.” (White declined to say who was funding the lawsuit.)

He also noted that the Supreme Court has recently ruled that Congress can violate the Constitution by granting too much authority to an agency. In a 2010 decision, the Supreme Court found that members of the Public Company Accounting Oversight Board needed to be made subject to removal by the Securities and Exchange Commission.

But that court-ordered change was relatively minor in comparison to the changes that congressional Republicans have sought to the structure of the CFPB.

The complaint filed Thursday in the U.S. District Court for the District of Columbia does not seek any specific changes to the structure of the CFPB and FSOC. Instead, it asks the court to declare unconstitutional the portions of Dodd-Frank that create the two agencies, and to prevent the agencies from using any of the powers granted to them.

The courts could presumably rule in favor of the plaintiffs and still impose a less severe remedy, however.

Another question remains whether the bank has legal standing to challenge Cordray’s recess appointment. Republicans argue the Senate was not technically in recess, thus preventing Obama from making a legal appointment.

Even if that’s true, it’s unclear whether the bank is affected by it. Most industry lawyers agree the CFPB had the power to oversee banks with or without a Senate-confirmed director. By contrast, however, the agency clearly lacked the authority to supervise nonbanks without a leader in place.

Although Cordray’s appointment gives nonbanks a potential legal challenge, it’s uncertain if banks can also claim the president’s move affected them.

Still, several observers said that issue remains the strongest part of the overall lawsuit.

“They claim Cordray is an invalid recess appointment,” Ireland said. “It looks to me like there’s probably an issue there.”

Low appraisals that don’t reflect rising markets are ruining deals Real estate professionals say appraisals sometimes come in thousands of dollars below the price that home buyers and sellers have agreed upon.

By Kenneth R. Harney June 24, 2012

WASHINGTON – Are some appraisers failing to see the improvements in real estate values underway in local markets that have recently bottomed out and turned positive? When multiple bids push a house price thousands of dollars above what the seller is asking – not unusual in neighborhoods where demand is particularly robust – are appraisers still coming in with values below the agreed-upon price?

Appraiser reluctance to report local appreciation is becoming a significant complication in sales transactions, say a growing number of mortgage loan officers and realty agents. In a new poll of its members, the National Assn. of Realtors found that 33% of their salespeople reported appraisal problems during the month of May. Moe Veissi, president of the association, said poor appraising “in markets that are no longer in decline is the single most important” valuation obstacle to seeing a real recovery.

Even appraisal experts concede that this is a troubling issue. Frank Gregoire, former chairman of the Florida Real Estate Appraisal Board and an appraiser in St. Petersburg, says that many appraisers are reluctant to make the upward adjustments they know to be justified by recent positive appreciation trends because they fear criticism that they are potentially overvaluing the property – exposing lender clients to costly “buy-back” demands by Fannie Mae or Freddie Mac, or future litigation.

One appraiser in his area recently assembled strong supporting data to make an upward adjustment to a valuation based on recent sales activity on comparable houses. When he delivered the report to the appraisal management company that hired him, however, an official of the firm sent it back immediately with instructions to “revisit” the upward adjustment – in other words, get rid of it.

Joseph Petrowsky, owner of Right Trac Financial Group Inc., a Manchester, Conn., mortgage company, says too often valuations in upward-trending markets “aren’t catching up with the new values, let alone a property that was involved in a bidding war.”

He cites a series of recent loan applications where the appraisal was thousands of dollars below the agreed-upon sales price, endangering or blowing the deals. In one case, the buyer offered $312,500 but the appraisal came in at just $280,000, despite readily available evidence that the local market has experienced appreciation in recent months.

“Appraisers are scared to death” to report rising values, Petrowsky said. “I talk to them and they are beside themselves. They feel they have to [deliver] appraisals they know should be higher.”

Much worse, though, is the effect on sellers and buyers. When appraisals comes in much lower than the mutually agreed-upon price, buyers may need to revise their loan requests or renegotiate the purchase price with unhappy sellers.

Dennis Smith, a co-owner of Stratis Financial Corp. in Huntington Beach, says the problem is magnified when the appraiser assigned by the management company travels from 30 or 40 miles away and has no insights into neighborhood appreciation trends that may be relatively recent. He cited an example in which a client saw a bidding war – four offers that pushed the price from the listed $350,000 to $375,000 – but the out-of-town appraiser would not take this into consideration in arriving at the final valuation.

Sara W. Stephens, president of the Appraisal Institute, the largest association in the industry, says it is every appraiser’s professional duty to arrive at valuations that “reflect the market,” including recent changes – whether positive or negative – if they can be verified with authoritative and accurate data.

How can buyers and sellers guard against the see-no-appreciation problem? Tops on the list: Make sure the realty agents on both sides of your transaction have assembled accurate data on comparable sales or pending sales that demonstrate how the market has changed in the last six months or less. Then make sure the appraiser sees the data.

Your purchase or sale doesn’t have to be jeopardized simply because the appraiser doesn’t have – or chooses not to collect – all the relevant recent facts.

Heavy traffic may mean your overpriced home is a ‘pinball’

By Ken Harney 06/15/2012

WASHINGTON — In the real estate brokerage field they’re known as “setups” or “pinball” homes, and this spring’s improving conditions in some markets could be stimulating more of them.

A setup or pinball property is a house listed with an unrealistically high asking price that pulls in lots of visits by agents and shoppers, but no offers. The problem is this: Real estate agents, including even the listing agent, are using the overpriced house as a negative example to sell other, similar homes nearby that carry lower asking prices.

“It’s like a pinball machine,” says Debbie Cook, an agent with Long & Foster Real Estate in Silver Spring, Md. The “setup” is the foil — the house that agents show clients in order to make other more realistically priced listings look better. Maybe the sellers — encouraged by reports of rising sales and low mortgage rates — insisted on the aggressive asking price and wouldn’t list for anything less. Or maybe the sellers’ agent didn’t fully brief them about what the house could command in today’s conditions rather than lose the listing.

Whatever the specifics, pinball houses tend to see heavy “traffic” but go nowhere until the sellers drop the asking price, usually by significant amounts. Before then, however, they may be used without the sellers’ knowledge to market other houses. Since no one seriously expects them to sell at their original asking price, agents are happy to exploit the overpricing to facilitate other sales.

“We’re definitely seeing it,” said Sandy Nichols Acevedo, an agent at Prudential California Realty in Oxnard, Calif. “Some people think they can go higher now because the market seems to be doing better.”

Joe Manausa, owner-broker at Century 21 First Realty in Tallahassee, Fla., who wrote about the phenomenon on Active Rain, a Seattle-based industry blog with more than 220,000 members, offers this hypothetical example: “If two very similar homes are near each other, with one priced at $250,000, and the other at $280,000, the higher-priced home is often shown first. Then the real estate agent says, ‘If you like this home at $280,000, you are going to love the home down the street at $250,000!’ ”

Bill Gillhespy, an agent in Fort Myers Beach, Fla., has a real life example: He currently has a listing on the 14th floor of a luxury condominium project overlooking the Gulf of Mexico. The asking price is $450,000. There’s a unit on the same floor with similar views, similar square footage and layout, but with a more updated décor, that is listed for nearly $150,000 more. When Gillhespy is asked by another agent or a prospective buyer to see his unit, he often says, “Let me first show you a unit just down the hall. It’s one of the nicest in the entire building.” The higher-priced model shows well, but shoppers immediately remark on the $150,000 difference “and they can’t see how it’s justified.”

Perrin Cornell, a broker at Century 21 Exclusively in Wenatchee, Wash., says some sellers in the mid-to-upper price brackets in his area “are exuberant that we’re finally out of it (the recession) now,” and are tempted to disregard agents’ more sobering recommendations on pricing.

What happens to such listings? “Unless we’re using it for a setup,” Cornell said in an interview, “we stop showing it” until the seller agrees to re-price to a sensible number.

But as a matter of principle and ethics, should realty agents accept listings from homeowners who refuse to listen to reason? Manausa is adamant that they should not. “If you list a property at a price you know will not sell,” he says, “you are misleading the seller. Effectively you are saying, ‘I don’t think it will sell, but I’ll put my name on anything hoping to get paid.’ ”

Acevedo agrees agents have a fiduciary duty to educate even the most headstrong owners about sobering market realities, but has a compromise solution: Take the listing but require the seller to sign a contractual agreement requiring an automatic price reduction to a specified level if the house doesn’t sell in the first two to three weeks.

Bottom line here for owners thinking about selling in modestly improving markets: Get as much accurate information as you can about closed sale prices of comparable houses in your immediate area. Talk to multiple realty agents before listing. Sure, you can try pushing a little on price, but if you go overboard, you seriously risk becoming the unwitting setup, the pinball, and the out-of-touch competition everybody else loves to visit.

FICO, by the numbers

By KENNETH R. HARNEY Jun 8, 2012

In a marketplace where lenders are demanding record-high FICO credit scores – Fannie Mae and Freddie Mac are averaging around 760 on approved mortgages this year – are you a little fuzzy about what can push your scores up or down?

Take “inquiries,” which Fair Isaac Corp., the developer of the iconic score methodology dominant in the mortgage field, says are among the most widely misunderstood components of its system. Do multiple inquiries – requests by lenders and others to pull your national credit bureau reports – knock your score down? Do you know whether your lender is entering the correct code to minimize damage to your score when you’re shopping for a mortgage and generating lots of inquiries? If you’re young or otherwise new to the world of credit, could multiple inquiries do enough damage to prevent you from getting approved for a home purchase?

Given the importance of maintaining high scores, FICO senior scientist Frederic Huynh agreed to run through the key rules governing how inquiries affect homebuyers and mortgage applicants in an interview with me and a post on Fair Isaac’s Banking Analytics blog.

Start with the basics: Yes, racking up large numbers of inquiries can lower your score. The FICO models consider them significant because extensive behavioral research has shown that “consumers who are seeking new credit accounts are riskier,” more prone to defaults, according to Huynh. “Statistically people with six or more inquiries on their credit reports can be up to eight times more likely to declare bankruptcy than people with no inquiries on their reports,” he said. So inquiries do matter.

But this doesn’t mean that if you’re shopping for a home loan or refinancing, and six lenders pull your credit reports, that you’re going to be hit with six separate inquiries and have your score lowered. The FICO models, says Huynh, ignore all mortgage-related inquiries during the 30 days immediately preceding the computation of the score. All mortgage inquiries during the 45 days preceding your loan application only count as no more than a single inquiry. The same buffer zones cover shopping for auto loans and student loans – but no other forms of credit.

In any event, says Huynh, a single inquiry usually is not a big deal, knocking less than five points off your score per pop. But experts in the credit-reporting field say that despite FICO’s good intentions, bad things can happen on inquiries. This is especially true for people with “thin” credit files, such as young, first-time homebuyers and others without extensive credit histories. Larry Nelson, owner of KCB Information Services in Pekin, Ill., a credit reporting agency active in the mortgage field, says a recent applicant lost her pre-approved home loan at closing because five new inquiries for an auto loan suddenly appeared on her credit reports. This deflated her FICO score to 610 – a loss of 30 points and put her below the minimum score required for the mortgage.

How could this happen, since auto loans are one of the three protected classes of credit where multiple inquiries within a short time period are OK? According to Nelson, unless loan officers properly code the purpose of the inquiry when they report it to the national credit bureaus – an auto loan in this case – it won’t necessarily be identified in credit files that way. Nelson’s homebuyer had double bad luck: None of the inquiries that should have been covered by the 30-day buffer carried the correct purpose identification. Plus Fannie Mae and Freddie Mac have begun requiring lenders to pull a second set of credit reports immediately before closing to ensure that applicants’ FICO scores haven’t changed significantly. In this case, there was a sudden spike of score-injuring inquiries in the bureaus’ files and the buyer couldn’t close on the loan.

Nelson says glitches like this “are becoming more commonplace” and can hurt unwary consumers. He strongly urges mortgage applicants to avoid all credit-related shopping – for credit cards, furniture, home improvements, you name it – in the weeks before their closing because a string of inquiries can mount up and knock the home purchase off track or delay it.

Of course not all inquiries indicate active credit seeking, says Huynh, even though your files are accessed. For example, if you’re checking on your credit before applying for a mortgage – either through www.annualcreditreport.com, where they are free once a year – or by simply buying them from Equifax, Experian or TransUnion, your FICO score goes untouched.

Investors Cry Foul Over Their Treatment in Mortgage Settlement

By Kevin Wack

JUN 7, 2012 4:44pm ET

WASHINGTON – Mortgage investors, who have been complaining for months about the costs they will bear under the national servicing settlement, presented a list of proposed remedies at a congressional hearing Thursday.

The settlement between 49 state attorneys general, the federal government, and the nation’s five largest servicers requires the servicers to dedicate at least $20 billion to mortgage relief, including principal reductions. It resolves allegations of robo-signing and other servicing abuses.

But the terms allow the servicers – Bank of America Corp. (BAC), JPMorgan Chase & Co. (JPM), Citigroup Inc. (C), Wells Fargo & Co. (WFC) and Ally Financial Inc. – to get partial credit for principal reductions on mortgages owned by bond investors.

“In the AG settlement, the government is allowing banks to use investor funds to pay for their own wrongdoings,” Laurie Goodman, a senior managing director at Amherst Securities, said in written testimony before the House Financial Services subcommittee on capital markets.

The hearing illustrated that in the five years since the foreclosure crisis began, mortgage investors have developed a deep distrust of the servicing industry.

Under the settlement, the five large banks get credit for modifications of investor-owned mortgages that they were already allowed to make under the contractual agreements that define their relationship with the investors.

But the investor groups argued Thursday that there is potential for abuse by the banks. Under one scenario, banks might grant larger modifications in order to get more credit under the settlement when smaller modifications would make more economic sense to the investors who own the loans.

Another scenario raised by the investors involved banks hiding from investors the size of various fees charged to borrowers, including fees for force-placed insurance.

“Shouldn’t investors, who ultimately pay these fees through a lower recovery on their loans, have the right to disclosure about these costs?” Goodman said in her written testimony.

Another gripe from groups representing investors is that they were excluded from the settlement’s negotiations.

“Our clients and the general public are important stakeholders in this settlement,” Vincent Fiorillo, of Doubleline Capital, LP, said in written testimony on behalf of the Association of Mortgage Investors. “Yet we were excluded from the negotiations over its 15-month process.”

The investors’ specific requests included that the settlement be amended to consider investors’ concerns. But they also proposed more targeted solutions.

Among the ideas they proposed were a monetary cap on the amount that specific investors will have to pay; detailed monthly public reporting on the modifications made under the settlement; and that banks be barred from getting credit for write-downs of investor-owned loans in any future settlements with smaller servicers.

The hearing was convened by GOP Rep. Scott Garrett, R-N.J., who last month sponsored legislation to bar the Justice Department from engaging in mortgage settlement talks with additional servicers without giving bond investors a seat at the negotiating table.

Garrett, who chairs the capital markets subcommittee, echoed the investors’ complaints.

“So, in this case, we actually have the administration advocating policies that directly take money from investors that committed no wrongdoing in order to pay, at least partially, for the problems admitted by the banks,” he said at the hearing.

But it was not just Republicans who expressed concern about the settlement. Democratic Rep. Maxine Waters made remarks similar to those of Garrett.

And another witness, Adam Levitin, a Georgetown University law professor who has frequently defended the Obama administration, also criticized the government’s decision to exclude investors from the negotiations.

“Regardless of how one believes that the cost of principal reduction – and thus ultimately responsibility for the housing bubble – should be allocated, if at all, the process of allocating the costs must be done fairly,” he said in written testimony.