A new paper by Franceso D'Acunto and Albert Rossi, both at the University of Maryland's Department of Finance, contends that the Dodd-Frank Act resulted in "a substantial redistribution of credit from middle-class households to wealthy households", as lenders reacted to regulations by reducing credit to middle-class households and increasing it to wealthy households. This conclusion is based on a regression analysis of loan and ZIP-code level HMDA data. The redistribution point is a serious charge to be leveled at the Dodd-Frank Act, and you can bet that this paper is going to be repeatedly cited by Congressional Republicans in their attempts to repeal Dodd-Frank.
Unfortunately, the paper is founded on a pair of mistaken factual claims about the legal landscape that are so staggering that I am puzzled how they could have been made in good faith. Once these mistakes are corrected, it becomes apparent that the paper's analysis cannot actually support its claims because it is testing the wrong thing. The paper is observing changes in the mortgage market that pre-date the implementation of Dodd-Frank. By definition, then, these changes cannot have been caused by Dodd-Frank. What the paper shows (without realizing it) is that there has been a redistribution of credit from middle class households to wealthy ones, but that it wasn't caused by Dodd-Frank. Whoops.
Continue reading "Are Consumer Protection Regulations Harming the Middle Class?" »
I'm not an oenophile. But some folks are, and some of them spend very large amounts of money on wine, even without knowing how it tastes. Not surprisingly, this is a market vulnerable to fraud. One fraud varietal is simply to market swill as high-end wine
. But another is to sell wine before it's even been made--basically forward contracts on wine--collecting the money at time 1 and then never delivering at time 2. It's a simple Harold Hill (The Music Man)
type scam. It can also be rolled over into a Ponzi scheme whereby later customers are funding the purchases of the initial customers. And that seems to be what happened with an outfit called Premier Cru
, which ultimately filed for bankruptcy.
Now here's the catch. Many of the $45 million of undelivered wine orders were charged on credit cards, with the bulk of it being on American Express. (Think mini-Salad Oil Scandal
. Perhaps this is the Vinegar Scandal.) The question, then, is who bears the losses: the cardholders or American Express? A lot of cardholders have been surprised to hear that American Express is saying that the losses are on them. Is that right? As it turns out, it's a trickier question than it might seem. The cardholders' dilemma was covered recently by
the New York Times, with some reference to yours truly. Below is my extended (and updated) analysis of the situation. It might seem obvious, but I'll state for the record that I have no involvement with this matter other than as an outside observer. The bottom line is that I believe that all of the Amex cardholders who never got the wine delivered have a very strong legal claim for the losses to be borne by Amex, but that it probably doesn't matter a lick because they're all going to get shunted off into arbitration, and the CFPB's proposed arbitration rulemaking won't do anything to change the situation.
Continue reading "Premier Cru American Express Billing Disputes and the Deceptive Nature of TILA Section 170" »
It doesn't take a genius to figure out that incentive-based compensation like the type featured in Wells Fargo's current and previous consent orders has the potential to encourage fraud and steering of consumers into inappropriate products in order to make sales numbers. Here's the thing: there's little regulation of retail banking employee compensation. Instead, banks are relied upon to self-regulate, to have the good sense not to have unduly coercive incentive compensation and to have internal controls to catch the problems incentive compensation can create. But when a leading bank like Wells Fargo repeatedly fails to have good sense and to have sufficient internal controls, it suggests that it might be time for more directed regulation that will create clearer lines that facilitate compliance.
The CFPB already regulates the compensation of mortgage originators (loan officers and brokers), limiting compensation based on loan terms to 10% of total compensation. But this regulation applies only to mortgage loans. There's no regulation of retail banking employee compensation generally. And there are some big wholes in the CFPB mortgage loan officer compensation regulation. In particular, the CFPB's regulation does not cover compensation based on the number of loans made or the size of the loans, only on the terms of the loans. That leaves the door open for banks to set up compensation schemes that pressure employees to engage in fraud to meet quotas and get bonuses.
So what can be done going forward?
Continue reading "Is It Time for the CFPB to Regulate Retail Bank Employee Compensation? " »
The Consumer Financial Protection Bureau's consumer complaint database has contained narratives for over a year now. Each month, the CFPB publishes a report that summarizes the complaints received over the previous three months, and that focuses on a specific product and geographic area. (The latest report was published on August 31.) The higher-level summary offered by these reports is interesting and I have referenced them in class on occasion.
The consumer complaint narratives tell as interesting, but often different stories. However, they are harder to sort through systematically. In preparation for a symposium, I recently took a random sample of complaints with narratives published in the year period between May 2015 and April 2016. Having now read thousands of narratives, one trend stood out to me rather quickly -- narratives that talked about the consumer's prior bankruptcy or a relative's bankruptcy. About 5% of the narratives discuss bankruptcy.
Continue reading "CFPB Consumer Complaint Narratives: What They Say About Bankruptcy" »