Consumer Law

Now that Congress has voted to create the Consumer Financial Protection Bureau, it will be up to the bureau to protect consumers from predatory lenders. The CFPB can be expected to face again the argument that the economic crisis was not a failure of consumer protection. With all the existing disclosure laws, how could consumers not have known what they were getting into?

An answer can be found in the confidential training manual of a predatory lender, the First Alliance Mortgage Co., attached to an affidavit in a Minnesota case by a former First Alliance loan officer, Greg Walling.

The manual instructs loan officers to point out forcefully, frequently and with the use of specified diagrams that a great deal of the money the borrower pays to the lender is interest and that much of that can be saved by prepaying the mortgage: "Did you realize that by the time you finish paying off this house, you actually agreed to pay off at least three houses?"

Nothing wrong with that. But it turns out to be a distraction from what is really going on.

Mr. Walling's affidavit explains that First Alliance charged high fees, but consumers overlooked that because the presentation "focuses the consumer's attention solely on the idea that the most important part of a mortgage is paying back the loan in a shorter time."

The presentation also undermined the legally mandated disclosures. Those disclosures undoubtedly showed a high APR -- that's how the interest rate is stated on the forms so consumers can comparison shop among different loans.

But before the consumer saw the final disclosures, Mr. Walling had explained that loans have three interest rates and that "the interest rate was what the consumer and I care about [and] the APR is what the federal government cares about ... APR was just an estimate and ... is always higher than the interest rate."

Though First Alliance's predatory practices ultimately brought it to a bad end, some of its practices did not die with it. Others have reported on mortgage originators who misled borrowers, while the complex loan terms often seen in subprime lending-payment option adjustable rate mortgages, hybrid ARMs and the like created their own distractions.

And the claim that disclosures did not cure the problem is, sadly, plausible.

Congress has made an important start down the road to protecting consumers. But now it will be up to the Consumer Financial Protection Bureau to take the next steps by realizing that disclosures are not enough to stop predatory lenders from deceiving consumers.

I've written more about the First Alliance manual and Mr. Walling's affidavit in my forthcoming Ohio State Law Journal article, Preventing Future Economic Crises Through Consumer Protection Law or How the Truth in Lending Act Failed the Subprime Borrowers, at pages 40-43.