Insights

The CFPB recently concluded that 47 percent of purchase-money mortgage borrowers do not shop for their mortgage loans before they submit a purchase-money loan application.[1] Many consumers "seriously consider only a single lender or mortgage broker before choosing where to apply." Similarly, in a recent survey conducted by The Pew Charitable Trusts ("Pew"), a comparable percentage of title loan borrowers do not shop for their title loans.[2] Many or most title loan borrowers "do little independent research and do not compare prices or terms among lenders." Title lenders are not generally chosen based on price. They are instead chosen "based on location, advertisements, and recommendations from friends or family." Although the Pew national survey sample was small (313 interviews), the survey indicated that title loan borrowers are evenly divided between homeowners and renters. Approximately two-thirds of the surveyed title loan borrowers were Caucasian and a similar number of surveyed borrowers had annual incomes less than $40,000. One might expect the demographics for title loan borrowers to differ from those for purchase-money residential mortgage borrowers. However, one does not necessarily expect these two groups of borrowers to exhibit similar lack of credit shopping.

Consumers' failure to shop for credit based on pricing terms is perhaps frustrating for consumer advocates and public policy analysts. It suggests a similar consumer shopping approach for fast food, coffee drinks, and loans. The CFPB would prefer that consumers first comparison shop among different lenders, just as they could easily comparison shop for small electronic appliances. The CFPB recently blogged that "[b]uying a home is a big purchase, but it's just that: a purchase. When it comes to spending money on our daily expenses, we have lots of options to help us find the best deal possible. Take, for example, digital gadgets. To get a good deal you can search for sales, find coupon codes, and research whether it's less expensive to buy something from a big box retailer or on the manufacturer's website. We shop to find the best price for laptops or appliances, but a report of recent mortgage borrowers found that almost half of us don't shop around for a mortgage when we buy a home."[3]

However, as the CFPB has conceded, "[s]hopping for a mortgage isn't like shopping for a new toaster."[4] The CFPB has noted two differences between shopping for a toaster and a loan: (1) It may be harder to find mortgage (and other) loan prices online,[5] and (2) the total cost of purchasing a toaster is fixed and will not change after the toaster has been acquired (setting to one side post-purchase costs of maintaining, repairing and potentially replacing the toaster), but with variable rate loans and certain types of open-end credit, the total costs of an extension of credit may change post-closing.[6] These analogies to shopping for loans and small consumer appliances overlook a fundamental difference in consumer eligibility and ability to buy or receive the desired object: Sellers of toasters and other small consumer appliances do not generally need to first rigorously underwrite a prospective buyer's creditworthiness. The average consumer also might not engage in serious online price comparison of a small appliance without first having a pretty good idea of how and when the consumer will pay for that purchase. On the other hand, there is no assurance a consumer will be eligible to enter into and obtain the desired loan - the lowest and best loan prices are only available to creditworthy applicants, and a consumer trying to obtain a loan might correctly believe she does not fall into the "prime" or "near prime" credit category. The consumer might also correctly believe she will not meet the identity verification, "know your customer" and other account-opening requirements of certain financial institutions. So, instead of shopping based on lowest costs for credit, some loan applicants may correctly conclude that it is more productive to shop based on a lender's perceived willingness to make the desired loan. That in turn will tend to steer some loan applicants in the direction of lenders who have recently made loans to friends and family members.

In recent proposed rulemaking, the CFPB suggested that temporarily discontinuing the posting of card issuers' credit card agreements on the CFPB web site for a 12-month period would not significantly affect consumers, because those agreements would remain available on card issuers' web sites and "the Bureau believes that most consumers are not likely to use the [CFPB] repository to identify desirable credit cards, in part because they would not know if they qualified for the cards they identified. The Bureau believes that consumers are more likely to identify a number of cards for which they qualify before comparing the terms and conditions for those cards."[7] Since no public comments were received opposing this proposal, the proposal was adopted effective April 17, 2015 without additional revision.[8]

Privately, consumer advocates and public policy analysts might agree that consumers' failure to shop for credit based on pricing undercuts the fundamental premise of Truth in Lending, RESPA, and other loan application disclosure requirements.[9] However, based on recent amendments to the Truth in Lending Act and Regulations X and Z, including recent proposed amendments, the clock will not be turned back on consumer disclosures. Instead, regulators will continue to propose changes to existing requirements, and consumers will be increasingly encouraged to read and understand their disclosures, shop around for more attractive loan options, improve their credit scores, spend less, and save more (just as nutritionists try to educate consumers about the disadvantages of visiting conveniently located fast food or coffee shops to satisfy hunger pangs).

If we acknowledge that systemic, entrenched, and practical reasons limit many consumers' ability to shop for credit based on credit terms, we also must be prepared for more substantive regulation of credit terms. If, for example, it is clear that no one shops for credit based on the dispute resolution provisions of the offered credit, that could encourage more substantive consumer protection in the dispute resolution arena. Regulators and consumer advocates may also use their "bully pulpits" to try to encourage "best practices" as a way of effecting desired substantive changes to the consumer credit marketplace.[10] If recommended "best practices" are not widely adopted, those same "bully pulpits" could be used to encourage new legislation or rulemaking.

For example, in the title loan area, the recent Pew survey indicated that over 80% of surveyed consumers thought their loan terms and conditions were clear before they took out their loans, 59% thought title loans overall are mostly helpful to consumers, and 58% thought title loans relieve stress and anxiety. Almost half of the surveyed consumers (47%) thought they were either somewhat likely or very likely to take out another title loan in the future. This level of customer satisfaction might suggest that it remains appropriate to let individual states continue to regulate title lending. However, the vast majority of surveyed consumers also indicated a preference for being allowed to repay a small-dollar loan over a longer time period in small amortizing installments - essentially expressing a preference for being able to avoid expensive title loan renewals and refinancings in favor of less costly installment-type repayment options. Public policy may be trending in favor of expanding "ability to repay" analyses to cover more consumer loan types, and away from single-payment secured loans. Substantive regulation of rates, fees, prepayment and refinancing options may also be increasingly implemented as public policy tools.

Recent regulatory consent agreements further suggest a trend towards incorporating commitments and obligations that go beyond what the law presently requires. For example, a February 2015 consent agreement between the U.S. Department of Justice and the State of North Carolina, as plaintiffs, and two used car dealerships as defendants included an agreement to limit the dealerships' maximum "standard" Annual Percentage Rates to not more than 5 percentage points below the applicable state maximum, and to offer certain customers with better credit (such as certain customers paying higher downpayments, or with higher net monthly incomes, or with FICO® scores of 550 or better) Annual Percentage Rates at least 3 percentage points below the "standard" APR.[11] (By requiring this type of risk-based pricing, the settlement agreement could inadvertently make it slightly more difficult for consumers in the defendant dealerships' market area to shop for used car financing based on credit terms.) The Department of Justice also recently entered into a consent agreement with Santander Consumer USA Inc. ("Santander") concerning vehicle repossessions that occurred while consumers were in active military duty, pursuant to which Santander agreed (among other things) to regularly (at least once every 7 days) check the Department of Defense Manpower Data Center electronic database to see if consumers named on vehicle-secured credit contracts originated, acquired and/or serviced by Santander are servicemembers.[12] Other regulators may similarly incorporate innovative "best practices" provisions in their consent agreements, in part to compensate for perceived shortcomings in existing consumer credit requirements, legislative gridlock, and weak market-driven price competition.

Industry self-regulation could continue to be a way to avoid some (but not all) new substantive obligations, although it is difficult to be at the forefront of change, and easier to stay in the middle of the pack within the consumer credit marketplace. The Department of Justice stated that it decided to take action against Santander in connection with vehicle repossessions involving consumers in active military duty because arbitration clauses in the relevant credit contracts precluded affected consumers from obtaining "systematic relief."[13] This suggests that companies using mandatory arbitration provisions might occasionally find themselves in the position of having to choose between class-wide relief negotiated with one or more regulators, or class-wide relief obtained through judicial civil action (after waiving mandatory arbitration contract provisions), unless other appropriate and timely self-initiated class-wide relief is successfully implemented.

Prompt pro-active internal policing and remediation of inadvertent regulatory violations and related consumer complaints might allow a company to avoid significant regulatory or other sanctions. The January 2015 CFPB RESPA consent orders against Wells Fargo Bank, N.A. and JPMorgan Chase Bank, N.A. indicate that an unnamed third party mortgage lender that briefly employed a defendant mortgage loan originator (Todd Cohen) was not made the subject of a similar consent order because "[b]efore the Bureau initiated the investigation underlying this Complaint, Unnamed Financial Institution became aware that Todd Cohen was using unauthorized marketing materials and conducted its own thorough investigation. Following its investigation, Unnamed Financial Institution recognized that Todd Cohen's participation in the scheme may violate RESPA and, in April 2012, terminated Todd Cohen's employment" (approximately 13 or 14 months after Mr. Cohen started working as a mortgage loan originator for the unnamed institution).[14] The CFPB stated in its January 22, 2015 press release that it was not taking enforcement action against the unnamed mortgage lender because "that institution self-identified the problematic practices and terminated the loan officers involved. The institution also cooperated with the CFPB's investigation and self-initiated a remediation plan. Based on the institution's behavior, the CFPB has resolved that investigation without an enforcement action, consistent with the CFPB's Bulletin on Responsible Business Conduct."[15]

As it becomes increasingly evident to regulators, legislators and others that the consumer credit marketplace differs significantly from the marketplace for everyday consumer appliances, clear disclosures, contract transparency, adherence to technical legal requirements, and an internal culture of regulatory compliance and customer-driven service will not suffice to stay below regulators' and policymakers' radar.

Elizabeth C. Yen is a partner in the Connecticut office of Hudson Cook, LLP, headquartered in Maryland. Elizabeth can be reached at 203-776-1911 or by email at eyen@hudco.com.

Endnotes

[1] See "Consumers' mortgage shopping experience" (January 2015), copy available at http://files.consumerfinance.gov/f/201501_cfpb_consumers-mortgage-shopping-experience.pdf

[2] See "Auto Title Loans" (March 2015), copy available at
http://www.pewtrusts.org/~/media/Assets/2015/03/AutoTitleLoansReport.pdf?la=en

[3] See January 13, 2015 CFPB blog post, copy available at
http://www.consumerfinance.gov/blog/2015/01/page/2/

[4] See January 15, 2015 CFPB blog post, copy available at
http://www.consumerfinance.gov/blog/five-reasons-to-check-out-our-owning-a-home-tools-now/

[5] Id.

[6] See, e.g., February 15, 2011 remarks of Elizabeth Warren at Consumer Union's 75th anniversary celebration, copy available at
http://www.consumerfinance.gov/newsroom/remarks-at-consumers-unions-75th-anniversary-celebration/

[7] See 80 Fed. Reg. 10417, 10420 (February 26, 2015).

[8] See 80 Fed. Reg. 21153 (April 17, 2015).

[9] For example, one of the stated principal Congressional purposes behind the Truth in Lending Act was to "assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him and avoid the uninformed use of credit." See 15 USC Section 1601(a). One of the principal Congressional purposes behind RESPA disclosure requirements was "more effective advance disclosure to home buyers and sellers of settlement costs." See 12 USC Section 2601(b)(1).

[10] For example, Regulation Z requires institutions of higher education to make information about certain credit card marketing arrangements with card issuers available to the public, but does not require similar public disclosure of debit card, prepaid card, or other non-credit card marketing arrangements. The CFPB and the National Association of College and University Business Officers encourage disclosure of the terms of such marketing arrangements as a "best practice" to enhance transparency to students and other potential consumers about financial incentives that might be associated with a school's cross-selling or endorsing of certain third party financial products. Interestingly, the CFPB has also noted that subsequent to the Regulation Z amendment requiring disclosure of credit card marketing arrangements with institutions of higher education, the number of such arrangements appears to have steadily diminished, in favor of non-credit card marketing arrangements. See, e.g.,
http://www.consumerfinance.gov/newsroom/cfpb-calls-on-financial-institutions-to-publicly-disclose-campus-financial-agreements/ (from December 2013) and http://www.consumerfinance.gov/newsroom/cfpb-report-finds-continued-decline-in-college-credit-card-agreements/ (from December 2014)
and CFPB College Credit Card Agreements Annual Report to Congress (December 2014), copy available at http://files.consumerfinance.gov/f/201412_cfpb_college-card-agreement-report-2014.pdf

[11] See February 2015 consent degree, United States of America et al. v. Auto Fare, Inc. et al., copy available at http://www.justice.gov/sites/default/files/opa/press-releases/attachments/2015/02/10/auto_fare_proposed_consent_decree.pdf

[12] See Consent Order, United States of America v. Santander Consumer USA Inc., filed February 25, 2015, copy available at http://www.justice.gov/sites/default/files/opa/press-releases/attachments/2015/02/25/santander_consent_order.pdf

[13] See Complaint, United States of America v. Santander Consumer USA Inc., filed February 25, 2015, copy available at http://www.justice.gov/sites/default/files/opa/press-releases/attachments/2015/02/25/santander_complaint.pdf

[14] See CFPB consent order against Wells Fargo Bank, N.A., copy available at
http://files.consumerfinance.gov/f/201501_cfpb_consent-order_wells-fargo-bank-na.pdf and CFPB consent order against JPMorgan Chase Bank, N.A., copy available at http://files.consumerfinance.gov/f/201501_cfpb_consent-order_jp-morgan-chase-bank-na.pdf

[15] See CFPB January 22, 2015 press release, copy available at
http://www.consumerfinance.gov/newsroom/cfpb-takes-action-against-wells-fargo-and-jpmorgan-chase-for-illegal-mortgage-kickbacks/