Catching the New Loan Sharks- Shark Week


Two years ago, Congress took its first major step in addressing the problems that led to the burst of the housing market bubble in 2008 from which our economy has never fully recovered. The “bubble” was inflated primarily by the proliferation of subprime mortgages, or rather, mortgages sold to individuals who couldn’t afford them. In most cases, such mortgages were offered by banks and lenders who didn’t care to find out whether the loan recipient would be able to make their payments in the long run.

Photo by Jeffrey Turner.

Why would a lender give money if they didn’t know they weren’t going to get back from a loan recipient? After the loan recipient would default on the loan, the lender could sell the foreclosed property purchased by the loan for an overall profit. These sort of predatory lending practices, as they are referred to in Washington, were further propagated by other unethical activities like “loan steering,” in which a loan officer directs their client to a lender who might not be in the client’s best interest (say, for charging a higher interest rate compared to other lenders) in return for a kickback or other incentives from the lender.

With a Democratic majority in Congress and the long, bloody battle over healthcare reform behind them, the Obama Administration’s ambition to prevent another catastrophe came to fruition in 2010 with the passing of the Dodd-Frank Wall Street Reform and Consumer Protection Act (commonly referred to as “Dodd-Frank” for short).

In regards to the housing market, the bill made new rules specifically targeting these kinds of lending practices – outlawing loan steering and requiring banks to assess whether mortgage recipients could actually afford the mortgage product they were seeking. To enforce these measures and write new rules along the way to fill in the blanks left behind by the 2,000-plus page bill, Dodd-Frank created the Consumer Financial Protection Bureau.

To those conscious of the dangers of predatory lending, the bill and the CFPB will help insure a more reliable housing market in the future.

“[Dodd-Frank] is helping to slowly restore confidence after the bubble and the bursting of the bubble,” Kathleen Day of the Center for Responsible Lending tells BTR. “In part because it doesn’t allow loans to have the stupid features and predatory features loans were allowed to have in the subprime mortgage market …”

Though the climate may be improving for consumers thanks to Dodd-Frank, the extent and nature of the CFPB’s jurisdiction has many on the supply side very wary.

In a new lawsuit that calls into question the constitutionality of the CFPB, the State National Bank of Big Spring Texas (one of three plaintiffs in the suit) is claiming specific injuries endured from not being able to anticipate the extent of the regulation the CFPB might put in place. Before the CFPB could stand on its own two feet, the Texas bank withdrew from the mortgage market, citing regulatory uncertainty as their reason for doing so.

Further, their complaint also charges that after the CFPB announced they would be overseeing international monetary remittances – or in layman’s terms, wire transfers abroad from foreign countries – the bank suspended those services as well for the same reason.

According to Sam Kazman, lead attorney for the Competitive Enterprise Institute, another plaintiff in the case, the legislation is still affecting choices available to consumers.

“This wasn’t a big money maker for the bank, but it was a courtesy to customers who sometimes found themselves stranded in Mexico or Europe, having lost their credit cards,” says Kazman. “In a sense, that could be easily just a taste of what’s to come.”

The third plaintiff in the case, the 60 Plus Association, is described in the complaint as a seven million member, nonprofit, nonpartisan seniors advocacy group devoted to “advancing free markets and strengthening limits on government regulation.” They claim they have been injured because Dodd-Frank has and will reduce through the availability of banking, credit, investment, and savings options they can offer their members.

Whether these costs, the loss of potential profit, or the increasingly limited availability of services to consumers constitutes injuries in a court of law will remain to be seen. To be clear, neither the State National Bank of Big Spring nor any of the other plaintiffs are suing the government for damages.  They are claiming their injuries stem from the powers of an agency whose very existence is unconstitutional.

Their argument is threefold. First, the CFPB is not funded by Congress, but by the Federal Reserve, therefore, their activities are not subject to legislative oversight. The only power the President has over the CFPB is the ability to remove its director under specific circumstances. Judicial review, they argue, is also significantly limited. Their complaint argues that this absence of checks and balances between branches of government is inconsistent with those traditions set forth by the constitution.

Secondly, the CFPB has the authority to regulate actions that fall under “unfair, deceptive, and abusive practices” (or UDAAP) without statute that properly defines exactly what those terms mean.

Lastly, the plaintiffs claim that the President appointed the Director of the CFPB, former Ohio attorney Richard Cordray, in an unconstitutional manner. In a widely publicized and controversial gesture, President Obama appointed Cordray after Congressional Republicans blocked his nomination, claiming that he had the power to do so under the recess appointment clause in the Constitution.

The clause allows a President to make such appointments without Congressional approval as long as they are in recess. At the time Cordray was appointed, Congressional Republicans were holding pro forma sessions every three days into the 2011-12 winter holiday season to avoid such appointments. Democrats used the same pro forma sessions to block recess appointments during the Bush administration. Both gestures have a long history of politically motivated use.

According to the implications laid forth in a 1993 Justice Department opinion, Presidents are supposed to wait up to three days between Congressional sessions to exercise their recess appointment powers. Until Obama’s appointment of Cordray and other regulatory positions during that recess, the three-day-rule had not been broken since President Theodore Roosevelt did so in 1903.

Pro forma sessions can be minutes long and carry no obligation to conduct any substantive congressional business, even though the debt ceiling negotiations of a year ago were carried out in such sessions. With that in mind, the Justice Department argued that the President therefore has the power to determine when Congress is in recess based on the substance of those sessions in order to move forward with recess appointments – a move that echoed of Bush-era legal maneuvers to expand executive powers.

Though the terms of recess appointments have been hammered out in nearly countless battles throughout the history of the judicial branch, one crucial measure was missing in this instance that the Constitution makes crystal clear, says Adam White, associate of the firm representing all three plaintiffs, C. Boyden Gray & Associates.

“No other president has made intra-session recess appointments during an adjournment of less than 10 days,” says White. “And the Constitution makes clear that the Senate cannot adjourn for more than three days without the consent of the House — consent that was not given in this case.”

Legal experts, such as Keith Fisher of Ballard Spahr, a firm that runs a blog called CFPB Monitor, have questioned whether the claims of “aggressive regulations” and the injuries described by the plaintiffs in the Big Spring Bank case are relevant in regards to an agency’s constitutionality:

Of course, Kazman argues otherwise, yet says the case is strongest when these issues are listed in tandem. “Each of these situations by itself, I think, would make a case for the CFPB being ruled to be invalid,” says Kazman. “But you put the three together and you have a very new, very powerful, very unique, and very unconstitutional federal agency.”

In the eyes of consumer watchdog groups like the Center for Responsible Lending, the nauseating political obstructions facing the CFPB are just manipulative efforts by the industry to “declaw” the agency by whatever means necessary.

That still doesn’t take away from the fact that the CFPB possesses a unique and unprecedented design. Whether or not the delegating regulatory responsibility to an agency, one neither funded by nor answerable to Congress, is what the founding fathers had in mind will be determined by the courts in the months ahead.