January 10, 2021|Ability to Repay/QM, CFPB, Consumer Behavior, Disclosures, Fair Lending, Limited English Proficiency, Marketing & Sales, Mortgage Industry, UDAAP
I am excited to share an idea that I think could enable mortgage lenders to facilitate more lending to marginalized communities arising from limited English proficiency (LEP), but I am still reeling from the awful events of last week at the Capitol and will address that topic first.
The Debacle at the Capitol
A mob riot, stoked by the President of the United States with lies[1]of election fraud and efforts to encourage the Vice President to reject his Constitutional duties[2], breached the Capitol and laid siege to what was the orderly and peaceful proceedings of the US government to transfer power. Watching the whole thing unfold on live TV was surreal. Free speech and peaceful protest are perhaps the most fundamental rights we share, but this mob’s violent actions were shameful, sad, and must never happen again. Five people died, including one police officer. How this happened is astonishing.[3] We need a thorough investigation into the security failures as well as sober reflection about how to properly ensure the safety of our government and the rights of peaceful protesters going forward.
The rule of law
Among other despicable acts of vandalism and terror, attempts were made by the mob to remove the US Flag and raise a “Trump” flag over the building instead. No true US patriot would ever raise a flag to an individual over the US legislative house. We are a nation of laws, not men/women. We are far from perfect, but we are not a tyranny or dystopia like China today, Nazi Germany or some fictional Republic of Gilead. US independence from Britain was a fight against tyranny and our greatest moments as a nation have been when we stand up for justice and the rule of law. I remain humble and grateful for all of the men and women who have spoken out or fought and risked their lives here and abroad to uphold those principals. I was truly heartened by our lawmakers’ return to the Capitol after the riot to finish the work of the day and for the vast majority of whom spoke out[4]and reaffirmed our shared tenet of the rule of law.[5]
You can find plenty of my kindred thoughts about this event better articulated, written and discussed in The Dispatch. Now, back to the mortgage business and my idea for LEP.
Liz Warren and complexity
I have written previously about how regulatory complexity is a subsidy to larger market participants. I’m no fan of Elizabeth Warren, but back in 2009, Professor Warren (before she was a Senator or Presidential candidate) was barnstorming the country with her ideas about a new federal consumer agency that sought to change how we do consumer protection using “vanilla” financial products coupled with a new enforcement agency. On the issue of regulatory complexity, however, we agreed,
“Today’s complicated disclosure system favors big lenders that can hire a legion of lawyers to navigate the rules—and spread the costs among millions of customers. Those complex rules fall much harder on a smaller institution that must navigate the same regulatory twists and turns, but with far smaller administrative staffs. Plain vanilla contracts will be particularly beneficial for community banks and credit unions that will be able to divert fewer resources toward regulatory compliance and more toward customer service and innovation.”[6]
Interestingly, in 2009, Warren’s “vanilla” loan referred to the loan terms other than rate and fees,[7]but that discussion quickly morphed into including a fee cap as well. What we got out of the Dodd Frank Act after years of Congressional negotiations, was not really “vanilla” loans, but we did get the CFPB, the Ability to Repay Rule (ATR), the Qualified Mortgage safe harbor (QM) and the Patch[8](and a whole lot more).
The LEP trick box
Perhaps nowhere is the complexity issue in consumer protection more evident than with fair lending and limited English language proficiency (LEP). While federal fair lending obligations demand that lenders be more inclusive, state laws create a trick box for lenders who seek to work with borrowers in their preferred language. This is because state law in connection with LEP issues has historically focused on the vulnerability of LEP borrowers to being misled into receiving loan terms that are too high, unfair or inconsistent with what they expected. These LEP borrowers are unable to understand disclosures in English and must trust their lenders to correctly interpret and disclose terms to be treated fairly. Unfortunately, bait and switch tactics against LEP borrowers is easy because LEP borrowers are, typically, unable to understand what they sign at closing.[9] So, generally speaking, state laws have developed around the assumption that the LEP borrower will be a victim of an unfair, deceptive, practice (UDAAP) by a lender who uses salespeople and materials in a language that differs from the legal documents.
California, for example, declares it to be an unfair/deceptive practice to conduct any part of loan transaction in one language and then other parts in English (or another language). Unfortunately, loan forms are not prepared in all languages and loan documents have not been translated and standardized[10]. This leads most mortgage legal and compliance folks to recommend that lenders not use any foreign language in their outreach and sales process.[11]Set against other state and federal fair lending and disclosure requirements, lenders desiring to offer language assistance or outreach to LEP borrowers face an almost impossible UDAAP standard, posing a huge obstacle to equal homeownership opportunity.
Well, in the words of presidential candidate Warren, “I’ve got a plan for that.”
LEP and an elegant QM solution?
There has been a lot of discussion about what to do about LEP and discussions like that typically lead to calls for more prescriptive regulation (complexity) detailing what lenders should and shouldn’t do. I’d like to propose a different approach, taking advantage of the new definition of QM recently announced by CFPB.
Later this year QM will be determined based exclusively on price (with the same product and income verification limitations and some other exceptions). So, for something like 95% of the first lien mortgage loans made in the US, QM will essentially mean a “vanilla loan” at market rates[12]. Meanwhile, CFPB has the power to identify UDAAP in the financial markets and to issue rules that preempt state law. My suggestion is that the CFPB should preempt state UDAAP laws designed to protect LEP borrowers if those borrowers end up with a QM loan. The premise being that if the LEP borrower got a QM loan they probably didn’t get ripped off, no matter what confusion there might have been.
I believe this idea could facilitate all kinds of new marketing approaches by mortgage lenders who would escape the trick box of fearing UDAAP type claims for foreign language outreach and assistance as long as they make a QM loan. This would not, however, relieve lenders of fair lending or other regulatory obligations (or even UDAAP premised on issues other than LEP). Within the constraints of the QM interest rate (and fees) based safe harbor range discrimination would still be prohibited. Ultimately, the use of another language in the origination process for an LEP borrower would simply not be cause for a UDAAP type claim if the borrower gets a QM loan.
It’s 5 o’clock somewhere.
By the way, I tried something new with my last Musings. I sent the email out in the evening instead of the morning. I figured if I was going to talk about martinis, best to do that in the evening in case anyone gets inspired to mix one up right away. Google Analytics, however, said most of you read it the next morning, so I hope you were not so inspired at that hour.
[1] The President and his lawyers (and other supporters) have had ample opportunity to prove this fraud story in court. Instead, they used Michael Avenatti tactics. There’s a difference between legitimate questions of fraud, which must be investigated, and using unfounded claims of fraud to try fraudulently steal an election.
[2] Thankfully, the Vice-President said “enough”.
[3] This is probably the Tweet of the Year (so far).
[4] Senator Ben Sasse (R-Neb) actually had me standing and cheering his comments.
[5] Josh Hawley and Ted Cruz know the difference between unproven fraud allegations and lies. They should be ashamed of their “we’re just asking questions” charade (and punished at the polls accordingly).
[6] https://baselinescenario.com/2009/07/21/three-myths-about-the-consumer-financial-product-agency/
[7] “By using an off-the-shelf template for a plain vanilla contracts and filling in the blanks for interest rates, penalty rates and a few other key terms, a financial institution can legally satisfy all its federal regulatory requirements—no need to do more” Warren, Ibid.
[8] My apologies for prematurely announcing the retirement of Larry Platt in an edition of the Musings. Phil Schulman informed me that Mr. Platt is not retiring, which is a blessing to the entire mortgage industry. It has been corrected in the Musings.
[9] Despite over 50 years of consumer protection law predicated on disclosure to “protect” consumers, regardless of LEP, almost all consumers still do not even read, let alone understand what they are signing at application and closing. Yet, billions of dollars are spent every year on these disclosures and consumer regulators think that they just need to be able to create better disclosures to solve the underlying problem of consumer harm. This will, no doubt, be a Musings topic for another day.
[10] Technology vendors may be able to help with this by providing services to translate forms (see e.g. talk’uments)
[11]Similar concerns may impact servicing operations, particularly in the loss mitigation arena.
[12]Set aside other QM categories such as the seasoned loan QM.