Legal/Legislative Update – October 15, 2015

Published on: October 14, 2015

NOW WHAT?

September’s lackluster (to say the least) employment report may have put another crimp in the Federal Reserve’s plan to begin easing its tight grip on interest rates. After the Federal Open Market Committee (FOMC) decided to stand pat again in September, largely because of concerns about the international economic climate, Fed Chairwoman Janet Yellen said a move would likely come before the end of this year – possibly as soon as this month.

work-222768_1920But then the Labor Department reported that employers added only 142,000 jobs in September, falling short of the most conservative predictions. The unemployment rate remained unchanged at 5.1 percent, while the August jobs tally was revised downward to 136,000 from the less than robust173,000 gain reported initially for that month. Analysts generally agreed that the disappointing September employment report vindicated the Fed’s decision to delay a rate move, but it hardly provided the assurance policy-makers seek that the labor market and the economy generally are on solid ground.

“It would be more reassuring if we could see a point where the economy is truly firing on all cylinders for a change,” Diane Sown, chief economist at Mesirow Financial, observed in a client note.

Economic indicators (manufacturing down, GDP growth and consumer spending up), are more confusing than reassuring, however. And Fed policy makers, as a result, are split on whether conditions warrant a rate move or argue against it. They will face that question again when the Federal Open Market Committee meets later this month. Current betting is running heavily against a move – but then, it was running heavily in favor of one in September.

HOUSING “STILL OK”

Skimpy inventories and an uncertain economic outlook conspired to weaken existing home sales in August, but the 5 percent dip was relatively modest, and it came against a July pace that was the highest in more than 8 years.

Sales are running more than 6 percent above the year-ago level, according to the National Association of Realtors (NAR). Among other encouraging signs, the NAR reports, the percentage of first time buyers has been increasing (32 percent in August compared with 28 percent in July). That’s still below the historical average of nearly 40 percent, but inching closer to it. All things considered, “The U.S. housing market is still in good shape,” Jennifer Lee, an economist at BMO Capital Markets, said in a client memo.

Purchases of new homes seem to support that view. The annual sales rate in August reached 552,000 – nearly 22 percent higher than a year ago and the strongest performance in seven years. Home starts, a key indicator of future sales activity, declined in August, but that was compared with a July total that was the highest since 2007. Year-over-year, starts were up by more than 11 percent and permits, another future indicator, increased by 3.5 percent, with gains in both the single-family and multi-family sectors. The decline in starts was “a mere blip on the radar,” Tom Wind, executive vice president at EverBank told CBS News. “The housing market’s underlying fundamentals remain on pace for continued recovery.”

CFPB RULES TARGET MANDATORY ARBITRATION

cfpb-consumer-financial-protection-bureauMandatory arbitration agreements have long been a fixture of the financial services landscape, a standard feature for auto loans, credit cards and checking accounts (but prohibited in mortgage loans under the Dodd-Frank financial reform legislation). Financial institutions insist on arbitration requirements; consumer advocates hate them; and now the Consumer Financial Protection Bureau is poised to shred them.

The CFPB’s target is not mandatory arbitration provisions per se, but the bans on class action suits that usually accompany them. A preliminary “outline of proposals” ─ a precursor to a formal proposal ― the CFPB issued earlier this month, would allow financial services providers to include pre-dispute arbitration requirements under two conditions:

  • The language must specify that the requirement does not apply to class actions unless they are denied or dismissed by a court; and
  • Companies must agree to submit to the CFPB all filings in consumer arbitration disputes and any findings they produce.

Financial industry executives weren’t surprised by the proposal, which the CFPB signaled clearly last spring with the release of a 700-page report to Congress concluding that consumers fare much better in class action litigation than they do in arbitration proceedings.

Referencing that conclusion in the press release announcing the proposal, CFPB Director Richard Cordray said, “Consumers should not be asked to sign away their legal rights when they open a bank account or credit card. Companies are using the arbitration clause as a free pass to sidestep the courts and avoid accountability for wrongdoing. The proposals under consideration would ban arbitration clauses that block group lawsuits so that consumers can take companies to court to seek the relief they deserve.”

If enacted, the CFPB rules would apply prospectively to contracts created after the rules take effect — probably in about two years, industry executives estimate.
Financial industry trade groups are gearing up to oppose the rules, which they contend will trigger a surge in “frivolous” class action litigation, ultimately increasing the cost of credit for consumers.

“The government will argue that in this specific situation there is a special governmental need to regulate these provisions to protect American citizens. The lenders will argue that this violates their right to enter contracts,” according to one industry executive quoted in National Mortgage Professional, who predicts a legal challenge if the arbitration rules are enacted. “I am looking forward to this litigation,” he said.

RENTAL SHIFT ISN’T TEMPORARY

Housing economists have noted with varying degrees of concern the financial constraints that have made it more difficult for first time buyers to enter the market, pushing home ownership rates down while pushing demand for rental housing, and rental costs, up. The prevailing wisdom has held that these pressures are temporary – a hangover from the Great Recession that will ease as an improving economy increases the employment opportunities and confidence that would-be buyers have lacked. But a recent report suggests that the current trends favoring rental housing may not be temporary.

apartment-for-rent-1223901“Over the next 15 years, new renters will outnumber new homeowners, causing a sustained surge of rental housing demand,” the study, sponsored by the Urban Institute, concludes. The reason: More families are concluding that renting a home makes more economic sense for them than buying one.

According to this study (“Headship and Homeownership: What Does the Future Hold?”), the recession didn’t just create a temporary financial setback for millenials entering their prime home buying years; it shook the core assumption that home ownership is always a good investment ─ that a home purchased today will be worth more when it is sold in the future. Having seen millions of homeowners lose their homes to foreclosures and millions more trapped for years in negative equity situations, many young adults are reluctant to pursue an American Dream that, they have learned, can turn into a nightmare.

Against that backdrop, the study estimates that of the 22 million new households that will form over the next 15 years, only 9 million will opt to purchase homes. Home ownership rates, as a result, will continue to decline, falling to 61.3 percent from the 2010 rate of 65.1 percent. That trend isn’t attributable entirely to a shrinking appetite for home ownership; an increasing proportion of new households will be minorities, who have historically had lower incomes, making them more likely to rent than to buy, the study points out.

The bottom line forecast― more renters than buyers — while unsettling for real estate brokers and single-family home builders, is good news for people who own rental housing or plan to purchase or construct it.

“The rapid growth of the renter population will create significant demand for new rental housing construction and encourage shift of owner-¬occupied dwellings to rentals,” the study predicts. “In the next 15 years, many more rental households will form because of the size and ethnic composition of the millennial generation. Rental housing vacancy rates are already low, and rents are rising. Single¬ family homes are shifting to renter occupancy throughout the nation, and this trend is likely to continue.”

WEIRD DISCONNECT

American consumers are notorious bargain-hunters. They will clip coupons endlessly, scrutinize prices on competing brands of green beans intensely, and drive miles out of their way to save a few cents on gas. But when it comes to comparing rates and terms on auto loans or home mortgages ─ not so much.

loan-application-1240982-1279x1705Nearly 80 percent of the consumer responding to a Lending Tree survey described themselves as “bargain hunters” and the same percentage said they would drive further to find a good deal on gas. But only 14 percent said they shop as aggressively ― or at all — for loans of any kind. Only 30 percent said they “always” shop for loan rates, while 18 percent said they never do.

“It’s an interesting phenomenon,” Andrea Woroch, a consumer analyst for Lending Tree, said in a press statement. “Consumers are generally very savvy with their shopping behavior when it comes to day-to-day purchases and material goods. But once it comes to a major financial investment, we don’t see the same rational pattern of behavior and mentality for saving.”

She suggested several explanations for this seemingly incongruous pattern:

  • Consumers may not fully understand “the long-term costs associated with compounding interest and the time-value of money.”
  • They may not know how to go about shopping for loans and/or may not understand the long-term implications of failing to compare loan rates.
  • They may find the process of obtaining a loan complicated and frustrating and so “would rather get through it as quickly as possible.”

“Unfortunately, consumers are becoming accustomed to paying a premium for convenience on a variety products we purchase every day, such as bottled drinks for example,” Woroch noted. But “perceived convenience is a major trap” for consumers, she said. “It can cost them thousands of dollars on a mortgage or an automobile loan.”

IN CASE YOU MISSED THIS

Finding The Consumer Financial Protection Bureau’s (CFPB’s) promise to consider “good faith efforts” to comply with the new mortgage disclosure rules inadequate, the House recently enacted a bipartisan measure mandating a four-month enforcement grace period. President Obama has vowed to veto the measure if the Senate approves it, too.

Student loans aren’t just making it difficult for many Gen-X households to purchase homes; those debts are also making it hard for some families to save the money they will need to send their own kids to college, setting up another generation that will be saddled with student loan debts.

Despite rising home prices, affordability in the first quarter was better than it’s been in the past two years, thanks to rising incomes and a declining unemployment rate.

A newly enacted Delaware law requires companies to disclose clearly and “conspicuously” the personally identifiable information they collect on their websites. The “Delaware Online Privacy and Protection Act” will apply to any company collecting information about Delaware residents – which will cover just about any company operating in multiple states and transacting business on-line.

A (good) sign of the times: Lenders reported only 36,000 foreclosures in August. That is 20 percent below the year-ago level and nearly 70 percent fewer than the 117,357 foreclosures reported in September, 2010, in the depths of the recession.

LEGAL BRIEFS

DODGING A BULLET

Affordable housing developers in Massachusetts dodged a bullet recently, when a state Appeals Court rejected a claim that would have gutted the streamlined permitting process established under Chapter 40 B of the Massachusetts General Laws.

That law, designed to encourage the development of affordable housing, requires developers to obtain a “project eligibility letter” from an appropriate state agency before requesting a consolidated permit from a local zoning board. In this case (Town of Brookline v. Massachusetts Development Finance Agency), Brookline officials argued that 2008 revisions to Chapter 40B, defining more precisely the requirements for granting a project eligibility letter, increased its importance. As a result, the city argued, the letter itself should be subject to judicial review.

The MDFA countered that opening the door to multiple reviews of 40B applications would essentially negate the streamlined permitting process the statute provides. The court sided with the agency.

Rejecting the city’s argument that amendments to the law changed the review framework, the court said its reasoning in a 2007 case (Marion v. Massachusetts Housing Finance Agency), applied to this one. In the earlier case, the court concluded that an “eligibility determination” by the MHFA did not represent “a judicial or quasi-judicial action” warranting judicial review. “We are unpersuaded by the plaintiff’s argument that [subsequent] amendments to [Chapter 40B] vitiate the rationale underlying that case,” the court said.

Equally important, the court noted, judicial review of the eligibility letter is still possible under the consolidated permitting process, obtainable “incident to review of any permit that subsequently may be issued.”

WHERE WEEDS GROW FREE

just-dandy-1488458-460Freedom of speech is a bedrock Constitutional right – defined broadly and defended aggressively. But it is not unlimited. The right to speak freely does not permit crying fire in a crowded theater, nor (in the opinion of a federal appeals court) does it allow the unfettered growth of weeds on private property.

A property owner (Discount Inn) asserted the freedom of expression defense when the City of Chicago fined him repeatedly for violating a city ordinance requiring owners to prevent weeds from growing taller than 10 inches. When a Federal district court dismissed his suit, the plaintiff appealed to the Seventh U.S. Circuit Court of Appeals, which upheld the lower court ruling.
Judge Richard Posner, writing the unanimous opinion for the three-judge panel that heard the case (Discount Inn, Inc. vs. City of Chicago), took advantage of the opportunity to discuss at length the distinctions between weeds and “native plants” (it’s not always easy to tell them apart, Judge Posner acknowledged), and the nature of art as a form of expression entitled to Constitutional protection.

There are some gardens that would be considered works of art, Judge Posner observed, citing as examples the gardens at Sissinghurt Castle and at Giverny. Some gardens in Chicago might also qualify, he said – but the weeds on the plaintiff’s property did not make his list.

“The plaintiff’s claim that the free-speech clause insulates all weeds from public control is ridiculous,” Judge Posner wrote. “It’s not as if the plaintiff invented, planted, nurtured, dyed, clipped, or has otherwise beautified its weeds, or that it exhibits or intends or aspires to exhibit them in museums or flower shows. Its weeds have no expressive dimension. The plaintiff just doesn’t want to be bothered with having to have them clipped.

“Taken to its logical extreme,” Judge Posner continued, “the plaintiff’s defense of the weed would preclude any efforts by local governments to prevent unsightly or dangerous uses of private property. Homeowners would be free to strew garbage on their front lawn, graze sheep there, and broadcast Beethoven’s ‘Fifth Symphony’ 24 hours a day through outdoor loudspeakers – all in the name of the First Amendment.”

While Judge Posner stopped short of saying anything like, “I may not be able to define a weed but I know one when I see one,” he suggested clearly that a weed by any other name is still a weed. And the vegetation growing on Discount Inn’s property consisted of weeds, the court ruled, subject to the Chicago ordinance and not entitled to Constitutional protection.

WORTH QUOTING

“My problem is not with this one man, but with the insidious belief among Washington elites that low income Americans cannot be trusted with freedom, cannot be trusted to make good decisions for themselves, so Washington must do it for them. It is insulting, degrading and an affront to social justice.” ─ Jeb Hensarling (R-TX), chair of the House Financial Services Committee, criticizing the Consumer Financial Protection Bureau.