Six Days In And All Is Not Well

Six days. One hundred forty four hours (including a weekend). That is precisely how long it took for Treasury Secretary Tim Geithner to complicate President Obama’s plan for development of the Consumer Finance Protection Bureau.

Unless you reside under a rather large rock, you already know that last Friday, September 17, 2010, the President formalized what had become an informal relationship with Elizabeth Warren, appointing her to the post of Special Counsel to the President. The idea being that in that post, Ms. Warren, a Harvard Law School Professor and former member of the Congressional panel that oversaw disbursement of the TARP funds, could avoid a bruising and perhaps unwinnable Senate confirmation battle and act as the defacto interim head of the new Consumer Finance Protection Bureau. Prior to the appointment, it was widely reported that Ms. Warren was not Secretary Geithner’s first choice to lead the agency, and probably not even a close second.

And so, it would seem, it is not only the banking lobby, mortgage brokerage companies, credit card companies and payday lenders that are unhappy about Ms. Warren’s appointment. Yesterday, Secretary Geithner more or less announced that we can add him to those ranks also. In a statement yesterday before the House of Representatives Financial Services Committee, Secretary Geithner said "I think it’s in the best interest of getting this agency up and running to have a confirmed director in place as soon as we can." With that clearly considered quote, Secretary Geithner more or less staked out his position respecting what Ms. Warren’s role should be, which is to say, nothing other than perhaps to assist in choosing a nominee. Once a director is appointed and confirmed, Ms. Warren’s power to influence the direction of the CFPB will be severely diminished if not destroyed entirely.

Whether and how the White House will respond to Secretary Geithner’s statement is unclear. The CFPB technically falls under the umbrella of Treasury, so suggesting that Secretary Geithner should be disinterested or refuse to answer the question is absurd. However, Secretary Geithner works for the President, and the President has made his wishes rather clear.

While all of the foregoing is interesting political intrigue, for our purposes it is important because it evinces a serious fracture in the administration regarding the face and form that the CFPB should take as it gets up and running.

-- Chris Jones is a member in Womble Carlyle's business litigation practice group and a leader of the firm's Consumer Finance Investigation and Enforcement Team. He regularly represents a wide variety of clients in both state and federal venues throughout the United States.

American Home Mortgage Servicing Allegedly Messed With Texas

On August 30, 2010, Texas Attorney General Greg Abbott filed suit against Texas-based American Home Mortgage Servicing, Inc. (“AHMSI”) alleging violation of the Texas Debt Collection Act and the Texas Deceptive Trade Practices Act. In a press release, the Attorney General’s office explained that the lawsuit alleges that AHMSI engaged in “illegal debt collection tactics and improperly mislead[] struggling homeowners.” A copy of the Complaint can be found here.

The Complaint includes a laundry list of allegations regarding violations of the Texas Debt Collections Act, including:

• Repeatedly calling consumers several times on the same day;
• Failing to properly credit consumers for payments made;
• Using false claims that consumers did not make payments in order to justify the imposition of late fees and the establishment of escrow accounts;
• Failing to recognize that consumers' have insurance policies in effect, and then force placing insurance policies unnecessarily;
• Withdrawing funds from consumers checking accounts, but failing to show the withdrawal as a payment on the mortgage;
Failing to timely post consumers' payments;
• Making payment for taxes on consumers' homes when the consumers had already paid the taxes;
• Refusing to accept proper payments from consumers, allegedly because the consumer is in default and the payment is not large enough to cure the alleged default, thereby causing more late charges to be added and false reports made to credit bureaus; and
• Repeatedly sending dunning letters when the loans are not in default.

The AG’s Office also alleges that AHMSI has mislead consumers in a number of ways, including:

• Contrary to the provisions of some of the loan modification programs, American Home insists that consumers bring the loan current prior to becoming eligible, pay a fee to it for the modification, and agree to a release of American Home.
• Contrary to the above described professions of efficiency and compassion, American Home has, on numerous occasions, agreed to receive consumers' modification applications, including financial statements, wage records, tax returns and other documents, by fax or by certified mail, and then has lost or claims not to have received such despite the proofs of receipt held by the consumers. American Home then will require the consumer to resend the modification application, in some cases as many as three or four additional times. Then, in many cases, by the time American Home acknowledges receipt of the application, it claims the information is stale and requires the consumer to resubmit the application and all documents.
• Consumers complain of never speaking to the same representative twice, in spite of American Home's claim that it gets to know consumers through personal attention.
• If the consumer's modification request is at all unusual, the initial representative must send it to the supervisor for approval, contrary to the claim that its Team members are empowered to work out problems directly with the consumer.
• On numerous occasions, American Home offered loan "modifications" that did nothing more than add the amounts claimed to be in default to the principal.
• On numerous occasions, American Home offered loan "modifications" that did not lower the consumers' monthly payment, and in many cases increased it.

The AG’s office alleges that “[t]he cumulative effect of the foregoing acts and practices was to place more homes into foreclosure than there should have been.”

The Complaint seeks heavy penalties against AHMSI. The Complaint request injunctive relief prohibiting AHMSI from engaging in the practices outlined in the Complaint; a civil penalty of up to $100 per violation of the Texas Debt Collection Act; a civil penalty of up to $20,000 per each violation of the Texas Deceptive Trade Practices Act; a civil penalty of up to $250,000 for “committing acts and practices calculated to acquire or deprive money or other property from consumers who were 65 years of age or older”; an order requiring AHMSI to repay “all money or property taken from identifiable Texas consumers by means of unlawful acts or practices”; and costs, interest, and attorneys fees.

According to records from the El Paso County Clerk of Court, AHMSI was served with the lawsuit on September 9, 2010. AHMSI’s answer is due on or before September 29, 2010. It is expected that AHMSI will vigorously dispute the Attorney General’s characterization of its activities.

-- Chris Jones is a member in Womble Carlyle's business litigation practice group and a leader of the firm's Consumer Finance Investigation and Enforcement Team. He regularly represents a wide variety of clients in both state and federal venues throughout the United States.

Elizabeth Warren and the Risks of Skiing Out-of-Bounds

You lift the plastic tape that separates the controlled area of groomed snow from a deep, powdery field of virgin powder and you move beneath it. Your skis disappear beneath you and you are floating. The snow, brushing your knees, or even your thighs, is as light as air. You pick up speed as you turn into the natural bowl created by the steep slopes. And then you feel it. Did the mountain just move? On you go…then the sound. You are high above the tree line. There is nothing here to make such a sound. Reflexively, you glance behind, up the mountain….but it is gone, erased by an opaque white cloud. What you see there is the vanguard tip of the last thing that you will ever see, a 100 mph avalanche. To your surprise, escape is not your first concern, and you have not yet even recognized the severity of your lapse of judgment. Instead the only thing that goes through your mind is whether it is going to hurt. Just before everything goes dark, you decide that it will.

Thus, is the story of countless skiers and more than a few rogue operators in the world of consumer finance. Business is good, right up to the moment that it isn’t. And, from the perspective of many in the industry, things are officially “not fine.” By all accounts, the Consumer Finance Protection Bureau will be a legislative and enforcement avalanche. Things aren’t all bad though. One of Time Magazines “100 Most Influential” people is improving her ranking. Last week, Ms. Warren was appointed to a newly created post of “Assistant to the President & Special Adviser to the Secretary of the Treasury on the Consumer Financial Protection Bureau.” In other words, for now, Ms. Warren is running the show. See White House press release.

Ms. Warren is an Oklahoma native whose lengthy resume reads like a precursor to this appointment. The snapshot: She became a lawyer in 1970, and a Harvard law professor in 1992, after teaching at five separate law schools around the country. With over 100 scholarly articles and two best sellers to her name, countless television appearances on everything from Dr. Phil and The Daily Show to hard news, a long-standing interest and voice in the world of finance as it relates to middle class in America, Ms. Warren’s bona fides are unquestionable. Though her real meteoric rise occurred on November 14, 2008, when she was appointed to chair the Emergency Economic Stabilization Act’s Congressional Oversight Panel, a five person panel charged with overseeing implementation of the much maligned, if necessary, financial bailouts. See http://cop.senate.gov/documents/cop-121008-report.pdf and http://cop.senate.gov/documents/testimony-092409-warren.pdf

Ms. Warren is credited with the idea that was given life in the form of the Consumer Finance Protection Bureau, and she has been a consistent advocate for consumers of financial products. Is Ms. Warren an ideologue? Yes. In fact, this morning on the MSNBC morning news show “Morning Joe,” Ms. Warren commented that the CPFB is really about “fixing broken markets.” She claims that individuals have “no idea” what their credit card contracts are. She is looking to make those “two page agreements” that individuals can compare to other cards and choose the least expensive option. Showing her even truer colors, Ms. Warren also commented that “a lot of people fought this agency. . .I mean, fought it tooth and nail.” She sees her role as being one of talking to the American people and convincing them that it is their agency. She added, “[w]e got this agency through when no one believed that we could do it . . . . Now, we really are in an epic battle. . . .” And, if you haven’t had an opportunity to listen to her, you should.

But here’s the thing, and there is just no getting around it: Corporate and consumer activists and thought leaders alike agree that repeating the past few years would be, well, a bad thing. Ms. Warren’s belief that consumer financial services institutions bear a public responsibility; that consumers may not be sufficiently sophisticated to protect themselves or understand the decisions that they make; and that government oversight should be embraced is clear enough. The real question though is whether, under her direction, the CFPB will earn the fearsome reputation some believe inevitable? The answer is, of course, “yes” and “no.” As is so often the case, it depends upon your perspective.

Ms. Warren is tough and smart and she has a sweeping new consumer friendly policy and law to implement, enforce and, yes, even sell. For the first time, she will have the power to actually implement policy rather than just talk or write about it. Here is the rub though, governing is tough duty. In all that has been written about Ms. Warren, both laudatory and critical, absent is any accusation of intellectual dishonesty. There is nothing to suggest that she is opposed to lending, nor to the earning of profits from lending. That said, from where she stands, debt is never free and such an appearance is dangerous and, as a chair of the TARP I, Congressional Oversight Panel she well understands the dangers of huge and irresponsible industry players. Her goal will be good governance through firm regulatory enforcement. Comply and you will probably be fine. Refuse to comply, or push back too hard against investigators when you have no legitimate defense and you will reap what you sow.

For a long time across America there have been financial services players whose business plans, strategies and tactics took them outside established boundries. It has been known to result in the amazing returns with little or no competition for space, but we all now know that it can also result in the unimaginable force, speed and crushing weight of an avalanche, which can, of course, hurt.

Consumer credit debt is down at the moment, but the first sign of optimism will bring new financial products. Americans’ desire for money has been quieted but not vanquished. It will return, and when it does the incentives to ski out-of-bounds will re-appear. Truth be told, no one really skis out-of-bounds without appreciating the risk, but the risk has been given a name and a face in Elizabeth Warren. As such, it will become more real. Subpoenas will follow, enforcement actions will be the talk of the day. Ms. Warren will have only a few short months to make an impression before the economy begins to improve. Smart skiers will lower the plastic tape and remain in-bounds.

-- Chris Jones is a member in Womble Carlyle's business litigation practice group and a leader of the firm's Consumer Finance Investigation and Enforcement Team. He regularly represents a wide variety of clients in both state and federal venues throughout the United States.

Dodd-Frank Solicits Whistleblowers

Virtually every new federal law which impacts the employment relationship prohibits retaliation, designed to protect those who report, complain about or otherwise express concerns regarding activities which they believe to be illegal, as well as those who cooperate in investigations and other enforcement procedures. The usual form of such protections is the model found in employment discrimination law, language dealing with “participation in” claims and “opposing” violations of the law, with victims of retaliation having the same rights and remedies as those available to those who experience discrimination. A variant of that approach is found in the Sarbanes-Oxley Act of 2002, in which the "whistleblower" protections are expressed in a criminal statute which also carries civil remedies.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L. 111-203, H.R. 4173), signed on July 21, 2010, adopts a quite different approach.

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Boom, Bust & Recrimination: A Consumer Finance, Financial Services Investigation and Enforcement Blog

Mission Statement: The single most obvious common trait amongst all purveyors of consumer finance products is that someone gets money and someone makes money. Identifying, defining, regulating and enforcing principles of fairness in that process is a challenging task rout with competing principles of free-market economics, morality and wildly differing perspectives of “justice.” These concepts are as blurry as the simple truth of debt in our society is clear. American consumers desire more money. And, they want it now and they want but do not demand that it be cheap, so long as it is available. To these subjective tensions and objective desires we have now added newly invigorated government oversight and politics. This will produce interesting times, and we will follow and report upon them without passion or prejudice, but surely with informed opinion.

September 15, 2010

What We Are Not… And What We Are

Starting with what we are not? As important as it is to discuss the substantive and practical changes brought about by the Dodd-Frank Law and its creation of the newest federal regulatory and enforcement bureaucracy, just as important is what you can expect when you subscribe to this blog or even navigate here as an accidental tourist.

First, you will not see advocacy. This is not a place in which policy is being made, though it will be freely debated, criticized and even complimented from time to time. We are not a PAC and our contributors have decidedly different political philosophies. We are practitioners who have noted the dim light of a freight train and vibrating tracks. The light is growing brighter and larger, and whether it is the harbinger of all things good or bad is unknowable. We hope that you will ride along as we seek to follow the path that it takes.

Second, you will not see self-important blogging. Yes, Dodd-Frank is a historic change. For some in the industry it may spell doom. For others, it will be a significant but survivable wave that may eventually be reflected upon as nothing more than an irritating moment in the evolution of free market consumer finance. However, its implementation and enforcement will not be without notable moments and even humor. Mistakes will be made by all involved, us included. We will not overlook or ignore them and, yes, we are not above making a little fun from time to time, including the self-effacing variety.

You will see substantive reporting. We are committed to being current, to focusing on the evolution of the law, regulatory enforcement and information sharing in as efficient and timely a manner as possible. If you see room or manner for improvement along the way, please do not hesitate to share it with us.

We do have opinions. You will see them from time to time. You will not always share them. The fact that you do not share them is not only okay, it is precisely the point. Above all, we will try to be intellectually honest.

Finally, blogging is not "lawyering." It is up to you whether and how you use the information that we post. This is a new landscape and we all will be working to complete it in the months and years to come. The first months will be important ones for the CFPB and the State Attorneys General with whom it will share some power. They will be equally relevant to industry and consumer advocates alike. Everything will be a "first" and nothing will be irrelevant. Tread carefully, as will we. Constant vigilance is the watchword.

-- Chris Jones is a member in Womble Carlyle's business litigation practice group and a leader of the firm's Consumer Finance Investigation and Enforcement Team. He regularly represents a wide variety of clients in both state and federal venues throughout the United States.