Should the ARM Industry Follow Banks’ Lead in Fighting Back Against Increased Regulation?

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Dave Camp, a Republican Michigan lawmaker who was elected to Congress in 2012, received a great deal of support from banks during the 2012 elections.  However, the chair of the House Ways And Means Committee has recently turned his back on his supporters and proposed a bank tax to be collected from U.S. banks. Rep. Dave Camp’s proposal would increase taxes on banks in such a way that would threaten the bottom line of major equity players, causing his high finance donors to balk at the proposal.   

In a 2010 speech before the Tax Council, Camp stated, "I aim to launch and fight the tax reform battle once again.  And I am well aware that this might ruffle those who have used the tax code to benefit particular industries or activities at the expense of economic efficiency, simplicity, and fairness."  With their feathers truly “ruffled,” Bank of America, Citigroup, Goldman Sachs, J.P. Morgan and other banks have joined forces to lobby against the tax burden that would directly affect the banking industry. 

For example, the Wall Street Journal recently reported that Goldman Sachs refused to attend a fundraiser held in March for the National Republican Congressional Committee due to Rep. Camp’s tax proposal.  After being pressured by banks to publicly denounce the tax plan, 54 Republican lawmakers signed a letter to Rep. Camp expressing their concerns about the tax.   

The concerted effort to join forces and fight increasing taxation and regulation that could harm the industry’s bottom line is something ARM insiders should take notice of.  As can be seen in the case of banks, if the ARM industry makes a concerted effort to protest regulation—including pressuring lawmakers and withholding political contributions—would it see the same success?  The question is: how much will the industry suffer before we begin fighting back? 

Mortgage Lenders Must Assess Borrowers’ Ability to Repay in New CFPB Guidelines

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The Consumer Financial Protection Bureau’s (CFPB) new rules that took effect on January 10, 2014 are getting mixed reviews from industry insiders.  This is particularly true of rules related to a consumer’s ability to repay and the steps loan originators must go through to ensure the numbers are correct.  The rules have been created to curtail risky lending practices that led to the housing market problems in 2008, and are part of the steps required by 2010’s Dodd-Frank Wall Street Reform and Consumer Protection Act.

Industry insiders’ concerns lie in the fact that the rules are further restricting an already heavily-restricted lending environment.  Additionally, the loans that are government backed—primarily those purchased or guaranteed by Fannie Mae and Freddie Mac—remain temporarily unaffected, even if the applicant’s debt-to-income ratio is above the 43% limit created by the new rules. 

The Center for Responsible Lending, a consumer watchdog group, has stated that the CFPB’s approach of increased regulation is a good idea.  However, the group believes that the CFPB should have gone one step further with their rule making, particularly related to allowing the borrower to file a lawsuit against any lender who does not effectively evaluate that borrower’s ability to repay the loan. 

These new rules require lenders to eschew “no documentation” and “low documentation” loans.  The hope is that these new rules will help the American economy avoid the crisis that hit in 2008.  Since that time, approximately 4 million American homeowners have lost their homes to foreclosure. 

Richard Cordray, the Director of the Consumer Financial Protection Bureau, said in a statement: "When consumers sit down at the closing table, they shouldn’t be set up to fail with mortgages they can’t afford.  Our ability-to-repay rule protects borrowers from the kinds of risky lending practices that resulted in so many families losing their homes.  This common-sense rule ensures responsible borrowers get responsible loans."

Local Municipalities Are Finding Creative Ways to Collect on Unpaid Accounts

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Due to decreasing federal monies allocated to cities and towns across the nation, a recent trend in the ARM industry is the acquisition of accounts from a municipality, as collection regulations allow municipalities to outsource their collections accounts.  However, the municipality is still responsible for supervising the collection process to ensure that all rules are followed and that citizens’ rights are protected in the process. 

These collections accounts can originate from multiple sources: overdue library books; court fees that are delinquent; parking tickets that have not been paid; and of course, municipal taxes that are delinquent.  In fact, most municipal accounts are based on collections of the latter category.    

There are creative ways that local municipalities can increase the effectiveness of their collections practices.  For example:

• The town of Norfolk, Virginia has recently begun garnishing residents’ state income tax returns to collect on unpaid parking tickets. 

• New Haven, Connecticut has made use of mobile infrared technology to scan license plates and check the owner’s municipal debts.  During the first six months of this creative approach, the city was able to collect $1 million dollars of money that was owed to it. 

• San Francisco, California decided to focus on corporations with a large number or drivers (for example, UPS) who owed money for parking violations.  In their collections attempts, they billed these companies monthly for infringements and booted the vehicles when the money wasn’t paid.  As a result, the city collected $1.5 million dollars in money that was owed.    

• Augusta County, Virginia hires third-part collections agencies to collect on unpaid library dues.  The result was approximately $100,000 collected—a number which represents more than half of the annual library budget for acquiring new materials. 

• Ohio’s Portage and Cuyahoga Counties use third-party collections agencies to collect on their unpaid accounts, but charge the agency fees to the debtor.  This program has also been highly successful in assisting the counties seeking to balance their operating budgets.  

Can cities use debt collectors to collect on municipal debt?

Could This Mean the End for Small Loan Servicers? Don’t Panic Just Yet!

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There’s no doubt about it: Smaller loan servicers are going to be challenged by the Consumer Financial Protection Bureau’s (CRPB) new rules.  This is particularly true concerning the costs associated with ensuring that all regulations are closely followed and monitored in-house.  In such, many small firms are now looking for strategic alliances with third-party vendors whom they can trust to comply with all of the CFPB’s new rules. 

In particular, residential mortgage servicers will be scrambling to implement new rules related to borrower notifications and interaction, as well as those focusing on key procedures and infrastructure improvements.  While many of the larger servicers have already implemented these changes in expectation of 2014’s regulatory changes, the smaller servicers, on average, are not nearly as well prepared.  This is primarily due to the costs associated with implementing these changes. 

Increased attention to detail in record keeping will require higher costs associated with paperwork and compliance issues for the smaller firms.  While many of the larger banks and mortgage servicers have been selling their servicing rights on loans that underperform to keep expenses down, smaller servicers might not have this option. 

Servicing mortgages is a business that is competitive, just like any other.  Now, with the new CFPB regulatory requirements, small servicers will be feeling the heat of balancing their compliance with turning a profit.  The question that is still on everyone’s mind is this:  will this situation lead to further consolidation in the loan servicing industry?  The answer to that question remains to be seen, although many industry analysts are suggesting that the increased cost of regulatory compliance is likely to cause this exact scenario. 

This doesn’t mean that small servicers should throw in the towel just yet.  It is possible to implement all the changes required by the CFPB and still maintain a profitable business if you’re a small firm servicing loans.  New acquisitions can help manage overall profitability.

How Smaller Firms Are Not Exempt From the CFPB’s New Rules

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While the bulk of the new rules enacted by the Consumer Financial Protection Bureau (CFPB) are aimed at the bigger banks and servicers of consumer loans, small banks will also experience some changes.  The January 10, 2014 deadline for these rules to go into effect has already passed, meaning that all firms (including the small, community banks) must now comply with the new regulations with new procedures or face heavy fines. 

Since the smaller banks and lending firms are often unprepared for this level of in-house scrutiny and regulatory compliance measures, many will look to third-party vendors for solutions to handling the increased workload of ensuring all transactions are compliant.  According to the CFPB’s new rules, these smaller firms will be responsible for the actions of their third-party vendors—including all debt collection practices—making their financial interest in maintaining compliance even more significant. 

Since the CFPB has made it clear that all servicers, whether large or small, are expected to uphold the new regulations or suffer penalty, no firm will be given special consideration unless it services 5,000 or fewer mortgages as of the first of each year.  However, even in this special circumstance, the smaller firm must originate and own the loans.  If it services loans that are originated or owned elsewhere, the exemption does not apply, even if that total number of loans falls beneath the 5,000 cut-off amount. 

There are loss mitigation requirements that are also required of the small servicers.  A notice of foreclosure or filing of foreclosure cannot be processed until the borrower has reached 120 days of delinquency on his or her loan.  Additionally, the foreclosure cannot be continued and the sale cannot be conducted if a borrower is following specific actions stated within the loss mitigation agreement.  

Fewer Lawsuits Mean Better Days Ahead: FDCPA Lawsuits Filed Against Collectors Down 10% in 2013

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If the mutual goal of both consumers and debt collection industry insiders is better communication, there is light at the end of the tunnel for 2013’s heated exchanges between the two sides.  The numbers prove it: 2013 saw 10% fewer cases filed under the Fair Debt Collection Practices Act (FDCPA) by consumers and their attorneys against a debt collector. 

This data, compiled and released by WebRecon LLC, shows a decline in lawsuits that has been happening for two years straight and is showing every sign of continuing this trajectory.  Specifically, 10,320 FDCPA lawsuits were present on federal district courts dockets in 2013, which is a 10.2% decline from 2012’s numbers.  2012’s numbers showed a 6.8% decline from 2011. 

Lawsuits filed by consumers against debt collectors, collections attorneys, and ARM companies saw a rapid rise in 2005 and peaked in 2011, following the brutal economic aftermath of the 2008 world financial crisis.  Fewer lawsuits claiming FDCPA violations means the industry is stabilizing and finding its footing on a path to higher customer satisfaction. 

There are multiple reasons for this but much credit can be given to the willingness of both sides to negotiate best practices in the industry.  Additionally, the recent outspokenness of key players in ARM during the CFPB’s Advance Notice of Proposed Rulemaking (ANPR) shows a willingness on behalf of the debt collection industry to meet consumers halfway. 

Despite the gains being made and the decline of FDCPA lawsuits on federal court dockets, lawsuits alleging ARM violations of the Telephone Consumer Protection Act (TCPA) have risen rapidly in 2013—up almost 70% from 2012’s numbers.  However, as this statute was originally written for telemarketers, there remains open debate concerning the scope and range of this Act as it relates to debt collection industry best practices.