The Leadership Conference on Civil and Human Rights

Consumer Protection: Addressing the Root Causes of the Recession and the Foreclosure Crisis

By Rob Randhava

As the nation’s housing crisis accelerated throughout 2009, efforts to prevent foreclosures continued to fall short. As the fiscal crisis grew, legislators showed a willingness to embrace stronger measures that could provide Americans with greater protection from predatory lending practices and other abuses in the financial industry.

Despite Ever-Increasing Foreclosures, Little Help for Struggling Homeowners
Throughout most of 2009, the record-setting wave of nationwide mortgage foreclosures that began in 2006 continued to grow. While the bulk of home losses in the previous few years were caused largely by inherently risky loan products, such as mortgages that charged higher monthly payments after several years of deceptively low “teaser” rates, foreclosures in 2009 became increasingly tied to rising unemployment. Although precise estimates vary, most experts predict millions of additional home foreclosures over the next several years.

Faced with this still-growing crisis, the new Congress renewed its efforts to keep borrowers in their homes. The top legislative priority was the Helping Families Save Their Homes Act, designed to let homeowners secure reduction in the size of their loans in bankruptcy court if they could not keep up with their payments. While current law allows virtually any debt to be modified in bankruptcy proceedings, including vacation homes and yachts, residential mortgages have long been excluded. Similar legislation was first proposed in 2007 with the strong backing of The Leadership Conference on Civil and Human Rights and many other civil rights and consumer advocates, while the housing crisis was still in its early stages. But pressure from banking industry lobbyists bolstered a filibuster of the measure, preventing it from coming up for a vote in the Senate. Opponents charged that the bill would lead to higher interest rates on mortgage loans, even though they provided no evidence to back up their assertion.

After the collapse and subsequent bailout of the financial industry in late 2008 weakened the credibility of Wall Street lobbyists among many members of Congress, there was renewed hope that the bankruptcy measure might have a better chance of being enacted this year. In March, the House of Representatives passed a bill on a mostly partisan vote. In the Senate, however, the proposal once again faced tremendous resistance, forcing Sen. Dick Durbin, D. Ill., the legislation’s key sponsor, to undertake negotiations on a bill that might be more acceptable to financial services industry lobbyists.

Shortly after Sen. Durbin’s compromise legislation had been drafted, however, banking industry representatives inexplicably walked away from the bargaining table and again encouraged a filibuster. Once again, the bill was blocked from coming up for a vote in the full Senate, leading a frustrated Sen. Durbin to vent in a radio interview that “the banks – hard to believe in a time when we're facing a banking crisis that many of the banks created – are still the most powerful lobby on Capitol Hill. And they frankly own the place.”

Meanwhile, policymakers looked to other channels to reduce home foreclosures. In February, the Obama administration announced the Home Affordable Modification Program (HAMP), a $75 billion effort to provide financial incentives for lenders to reduce the monthly payments of struggling borrowers. Similarly, Congress passed legislation in May to expand the 2008 HOPE for Homeowners law, which encourages lenders to refinance borrowers into lower-cost loans that would be guaranteed by the government.

These and similar efforts, however, have only helped a fraction of troubled homeowners to date, partly because many loans in recent years were sold by lenders and packaged into highly complicated investment products, making modification or refinancing extremely difficult. Even among borrowers who have been helped, questions remain about whether the modifications are significant enough to prevent default in the long run, or whether they simply delay the inevitable. The Leadership Conference continues to strongly favor the bankruptcy law change because it would allow more substantial write-downs of troubled loans – particularly in cases where loan servicers are unwilling or unable to provide them. But it remains unclear whether the bill can ever overcome Wall Street-backed opposition in the Senate . The good news – perhaps – is that there are some early signs that foreclosure rates may have begun to level off in the past several months. RealtyTrac, a company that monitors foreclosures nationwide, reported in November that activity had slowed for the third consecutive month. Experts warned, however, that the stagnant housing market, high unemployment, and problems with high-risk loans continue to pose a threat – and that defaults are still considerably higher than they were a year ago.

Wall Street Collapse & Bailout Leads to Expansion of Financial Reform Agenda
While the foreclosure crisis continues, policymakers have also continued their efforts to institute broader, more forward-looking reforms of the financial industry with an eye toward eliminating practices that allowed the crisis to occur in the first place.

In May, the House revived a bill that had stalled in the previous Congress, the Mortgage Reform and Anti- Predatory Act. The bill had many provisions that civil rights and consumer protection organizations strongly supported. Among other things, it would prohibit lenders from tricking borrowers into taking higher-rate mortgages when they qualify for cheaper ones, and it would require lenders to ensure that borrowers could afford monthly loan payments.

As in 2007, however, the bill’s enforcement provisions were weakened before it reached the House floor as its sponsors were forced to make compromises to secure enough votes for passage. In particular, language was added to keep borrowers from taking advantage of potentially more favorable state laws. Once again, the compromises did nothing to satisfy financial industry lobbyists. While the bill ultimately passed the House, it did so with little support from stakeholders on either side of the debate, and it faced dim prospects in the Senate.

Efforts to rein in abusive credit card practices, on the other hand, proved to be slightly more successful. In May, with the support of consumer advocates, Congress passed and President Obama signed the “Credit CARD Act,” which outlawed retroactive interest rate increases, double-cycle billing, and a number of other deceptive billing practices designed to extract more money from credit card users. In the wake of the law’s enactment, however, credit card issuers quickly found other ways to extract this money, such as instituting higher interest rates and new fees that were not covered by the law. If there is a lesson to be learned from the experiences with the mortgage lending and credit card bills, it is that Congress is not the most ideal venue for regulating predatory lending practices. It is usually very slow to respond to abuses – if it does so at all – and when it does, the laws that emerge often include major compromises that limit their effectiveness.

It should be good news, then, that policymakers appear to have shifted their approach. Spurred by public outrage over 2008’s massive taxpayer bailout of the financial industry, and by the growing sense that Wall Street has failed to learn from its mistakes, the Obama administration and its allies in Congress have turned to far more sweeping reforms of the financial industry and the infrastructure that is currently charged with regulating it. In June, the administration issued an 88-page blueprint for a dramatic overhaul of the financial regulatory system. Among other things, it called for consolidating some of the existing bank regulators, allowing the government to break up large financial firms that threaten economic stability, and overseeing derivatives and other financial products that had previously escaped any meaningful regulation. Americans for Financial Reform, a coalition of more than 200 advocacy organizations including The Leadership Conference, was formed to build support for the blueprint, and legislation was introduced in both the House and the Senate.

For civil rights and consumer advocates, the most appealing part of the blueprint has been the proposal of a new “Consumer Financial Protection Agency” (CFPA). The CFPA would assume jurisdiction over most consumer protection laws, and because those laws would be the agency’s exclusive focus, it would likely provide much stronger and more nimble oversight than existing agencies. The Leadership Conference and other civil rights organizations were quick to support the CFPA. As is the case with the bankruptcy legislation discussed above, Wall Street has been furiously lobbying its allies in Congress to block the CFPA. The progress of the bill to date, however, has given civil rights and consumer advocates some reason for optimism. It was marked up by several House committees, and despite some troubling changes – including an exemption for loans provided by auto dealers and the exclusion of the Community Reinvestment Act from the new agency’s jurisdiction – the bill emerged in fairly strong form overall. Legislative action on the CFPA and the rest of the financial overhaul blueprint is expected to continue over the next several months.

Rob Randhava is counsel for The Leadership Conference on Civil and Human Rights and The Leadership Conference Education Fund and specializes in immigration and housing/finance issues.