postings by Adam Levitin

OLC Legal Opinion and the Missing Legislative History

posted by Adam Levitin

The OLC's Legal Opinion on the CFPB succession is out. It's available here.  Three observations. 

First, the OLC opinion dispenses with the idea that only the FVRA, not the CFPA governs succession. That's an important point in terms of how the issue will likely be argued. The White House isn't bound to argue the OLC's analysis, but this strongly indicates that the White House isn't going to argue that the CFPA doesn't provide for succession.  

Second, the opinion argues that the FVRA exists as an alternative to the CFPA. The basis for this analysis is some of the FVRA's legislative history, prior OLC opinions, and a single circuit court opinion. The problem with the OLC's analysis, however, is that both the part of the legislative history cited, the previous OLC opinions (both about 28 USC 508 and OMB) and the circuit court opinion on the NLRB General Counsel deal with the effect of the FVRA on existing statutes. As I noted in a prior post, the Senate Report on the FVRA is very clear that existing statutes are treated differently than future statutes under the FVRA. For existing statutes, the FVRA is an alternative to the succession mechanism detailed in the statute. The Senate report specifically mentions this for the Attorney General, the OMB, and the NLRB General Counsel positions. Congress was of course able to do this because a later statute can always override an earlier one.  

But for future statutes, the FVRA is either exclusive or does not apply.  As the Senate report notes: 

"[W]here Congress provides that a statutory provision expressly provides that it supersedes the Vacancies Reform Act, the other statute will govern. But statutes enacted in the future purporting to or argued to be construed to govern the temporary filling of offices covered by this statute are not to be effective unless they expressly provide that they are superseding the Vacancies Reform Act." S. Rep. 105-250, 1998 WL 404532 at *15 (emphasis added).  

This would have to be the case because one Congress cannot tie the hands of a future Congress.  At most they can set up a default rule, but Congress if passed a law providing that one statute would always provide an alternative method of appointment no matter what any future Congress wanted to do, a future Congress would not have to repeal such a statute to avoid its application to a new office, only make clear that it did not apply to the new office.  In other words, the different treatment of existing and future statutes makes a lot of sense.  The CFPB is, of course, under a future statute, unlike all of the cases the OLC has addressed in the past.  That would suggest that the OLC's past opinions, on which it heavily relied in this opinion, were of limited value.  Yet strangely the above quoted language received no mention in the OLC opinion. I don't know if the OLC just overlooked it or what, but I think it really undermines the legislative history part of the OLC's argument, as well as the OLC's reliance on its past opinions and on the 9th Circuit opinion regarding the NLRB General Counsel. Instead, what we're left with is the statutory text, and that's ambiguous on its own. Once one plugs in this bit of legislative history, however, then I think it seems that the OLC just got it wrong. 

Third, check out the last paragraph in Part III of the OLC opinion. It really doesn't flow from the prior paragraphs or, for that matter, fit in Part III.  Part III is about whether the CFPB's independent status changes anything. But the final paragraph is about the legislative history of the CFPA's succession provision and whether that indicates that the FVRA applies. That's an issue that more properly relates to the Part I of the opinion, which is also discussing the same provision. This is just a guess, but my sense is that the final paragraph in Part III was a last minute addition to the memo. If so, it means that OLC wrote Part I without having properly dug through the legislative history....

Legal Malarkey from the White House about the CFPB Putsch

posted by Adam Levitin

We now have a CFPB succession crisis with a Director and a Pretender. The White House did a press briefing this morning to put out its case for why Mick Mulvaney is the rightful acting Director of the CFPB. I expected that the White House would argue that the Federal Vacancies Reform Act controls the succession, not the Consumer Financial Protection Act.  Curiously, the White House made a different argument.  The White House's argument is not that the Consumer Financial Protection Act does not provide a succession mechanism. The White House appears to acknowledge that it does.  Instead, the White House contends that the Federal Vacancies Reform Act stands as an alternative to the CFPA, and the choice between which mechanism to use is the President's. This argument appears underresearched and just not well-thought through.  The White House's position fails textually, on the legislative history, and as a matter of logic. 

Continue reading "Legal Malarkey from the White House about the CFPB Putsch" »

The Myriad Irregularities of the Mulvaney "Appointment"

posted by Adam Levitin

I want to emphasize just how irregular and probably illegal the Trump administration's attempt to make OMB Direct Mick Mulvaney the acting Director of the CFPB really is.  

First, there's the problem that it's hard, nay impossible, to read the Federal Vacancies Reform Act and Consumer Financial Protection Act and the relevant legislative history and come away thinking that the FVRA clearly controls.  At most, there's ambiguity; I can't imagine a competent attorney writing a legal opinion that says anything more than that.  

Second, even if one believes that the FVRA governs or even might govern, it does not mandate Mulvaney's appointment as acting Director.  Instead, the default setting under the FVRA is that the CFPB's Deputy Director would become the acting Director. Thus, if one believes there is statutory ambiguity, the prudent position would be to let the CFPB Deputy Director serve as acting Director, and proceed expeditiously to nominate a permanent Director for the Bureau. President Trump could have sent the Senate a nomination for a CFPB Director today. He didn't. Instead, he decided to put in place a cabinet member who already has substantial duties without running a second federal agencies. (Of course, Mulvaney's plan, it seems, is to only run one agency and shut down the other, so maybe it isn't actually double duty.) I'd be quite surprised if the President nominates anyone to be a permanent Director--the plan is to keep Mulvaney in place for as long as possible. That's not a good faith approach to the issue.  

Third, there's a Mulvaney-specific problem. Mulvaney is a cabinet officer who serves at the pleasure of the President.  That role is inconsistent with that of the head of an independent agency who can be removed only for cause.  By wearing two hats, Mulvaney would inherently compromise the CFPB's independence from the White House. And given that the CFPB Director is also an FDIC Director, the problem exists there too.  Serving in the executive branch in an at-will cabinet position and a for-cause independent agency position simultaneously seems unconstitutional, as a separation of powers violation:  when agencies engage in rulemaking, they are exercising the legislative power. That's a power that's forbidden to the executive. And putting that aside, can one really imagine that having the Treasury Secretary also serving simultaneously as the Federal Reserve Chair and SEC Chair would be permissible? Even if the FVRA were to apply, choosing Mulvaney is problematic. 

What we see here, then, is an approach that disregards the rule of law. But that shouldn't come as any surprise in this administration. 

 

Regulatory SPAM

posted by Adam Levitin

The Washington Post has an interesting piece about the huge volume of "SPAM" comments that the FCC received regarding the net neutrality rule. This all seemed very familiar to me:  the CFPB received an enormous number of comments about the payday rule. Many were utter spam comments, but the most problematic would attach random academic articles.  That meant that the Bureau's staff, when analyzing the comments, had to spend time on deliberate wild goose chases. (I'm aware of this because a number of the random articles were my own.) I wasn't sure what to make of the volume of frivolous comments; now I'm wondering if there was a giant spamming of the bureau. Are there legal consequences for such actions? It certainly feels icky, along the lines of inflammatory news stories fed by a foreign government to affect our elections. 

CFPB Directorship Succession: What the Dodd-Frank Act's Legislative History Tells Us

posted by Adam Levitin

With the announcement by CFPB Richard Cordray that he will be leaving the agency by the end of the month, the question arises who will succeed Cordray as Director. Numerous news outlets have run stories that President Trump is planning on naming OMB Director Mick Mulvaney as acting CFPB Director, with the expectation that Mulvaney will delegate his authority to some individual who doesn't have to go through Senate confirmation. There's just one catch: the President lacks the legal authority to appoint Mulvaney, or anyone else, as acting Director of the CFPB.  

Continue reading "CFPB Directorship Succession: What the Dodd-Frank Act's Legislative History Tells Us" »

Greatest Bankruptcy Case Name Ever?

posted by Adam Levitin

This morning I saw a docket for a bankruptcy case captioned In re Kabbalah Taxi, Inc.  Look for the cab with the little red thread around its mirror. If you meditate properly on the Tetragrammaton you will be teleported to your destination, although there are special fees for bridges and tunnels. I suppose the company competes with the Magic School Bus and the Chariot of Fire. Or it might just be a yeshivah bukher with a side job.

Any other great case names out there? Comments are open. 

Toys "Я" US's Curious Bankruptcy Venue

posted by Adam Levitin

Toys "R" Us filed for bankruptcy with impeccable timing--the very morning I was teaching my Financial Restructuring class about the commencement of the bankruptcy process. I decided to take my class through the TRU petition on PACER. Some 19 TRU entities filed in the Eastern District of Virginia, Richmond division. Only one of those 19 entities is a Virginia entity. I don't know the domicile of the other entities, but TRU is headquartered in New Jersey, and I'd be shocked if there wasn't at least one Delaware entity in the family.  

This left me puzzled. It would seem that TRU likely had at least two respected venues for large Chapter 11s:  District of New Jersey, and District of Delaware. Yet TRU chose to file in Virginia, and in Richmond to boot. 

After a few minutes of sleuthing on the LoPucki-UCLA WebBRD, I discovered that TRU's counsel, Kirkland & Ellis seems to have a cottage industry of Chapter 11 filings in Richmond:  5 cases in recent years. Again, this is puzzling. Richmond is hardly a convenient venue for K&E (with a bankruptcy practice based in Chicago and NY), nor is it a convenient venue for really anyone else--all of the financial creditors are likely to be NY-based, while the suppliers are from all over.  Nor is there obviously better law in the 4th Circuit for a retail bankruptcy (as far as I know, and if there is, it doesn't explain why Richmond rather than Alexandria). Are EDVA judges more lenient on fee applications or less likely to push back against overreaching DIP financing agreements? I don't know, but clearly there's something on tap in Richmond that K&E likes.  

Now here's what else I discovered--there are only two bankruptcy judges in Richmond, and K&E seems to keep getting the same one for its cases. I don't know how cases are assigned in EDVA, but it seems that K&E has discovered a sort of one-judge venue, much like Reno, NV. And what lawyer wouldn't want to pick the judge?  

I'm curious for others' thoughts.  I'd like to think that the chances of bankruptcy venue reform have increased with the departure of Joe Biden from the Senate (or Naval Observatory), not that we're likely to see any legislative action in the foreseeable future.  

WARN Act Claims after Spokeo v. Robins

posted by Adam Levitin

I'm musing out loud here, but does the Supreme Court's holding in Spokeo v. Robins—that a suit claiming statutory damages without alleging actual damages lacks Article III standing—impact WARN Act claims in bankruptcy? The WARN Act is a labor law that requires advance notice of certain plant closings--basically advance notice of mass layoffs. Failure to provide such notice results in statutory damages, even though there might not be any actual damages. For example, imagine that a debtor provided notice of a plant closing but not sufficiently in advance--it was one day too late. Where's the harm?  I think under Spokeo there wouldn't Article III standing for a suit seeking damages. If so, that's a nice boon to unsecured creditors because WARN Act claims are going to be priority claims that get paid ahead of them. Going foward, I would think that Official Committees of Unsecured Creditors should be challenging WARN Act claims. Thoughts?    

Visa's Maginot Line: Chip Cards and the Equifax Breach

posted by Adam Levitin

The media attention on the Equifax breach has been primarily on consumer harm.  There's real consumer harm, but it's generally not direct pecuniary harm.  Instead, the direct pecuniary harm from the breach will be borne by banks and merchants, and it's going to expose the move to Chip (EMV) cards in the United States without an accompanying move to PIN (as in Chip-and-PIN) to be an incredibly costly blunder by US banks.  Basically, Visa, Mastercard, and Amex have built the commercial equivalent of the Maginot Line. A great line of defense against a frontal assault, and totally worthless against a flanking assault, which is what the Equifax breach will produce.  

Continue reading "Visa's Maginot Line: Chip Cards and the Equifax Breach" »

Equifax: A Call for Public Utility Regulation of Consumer Reporting Agencies

posted by Adam Levitin

This post diagnoses what went wrong with Equifax and proposes a solution:  a public utility regulation regime for consumer reporting agencies in which the CRAs would be restricted in their ability to pay dividends and executive compensation unless they meet certain performance metrics in terms of reporting accuracy, dispute resolution, and data security.  Here goes: 

Continue reading "Equifax: A Call for Public Utility Regulation of Consumer Reporting Agencies" »

More on Madden

posted by Adam Levitin

I have a more refined piece on the problems with the Madden fix bills in the American Banker.  See here for my previous thoughts. 

Guess Who's Supporting Predatory Lending?

posted by Adam Levitin

Guess who’s sponsoring legislation to facilitate predatory lending? It’s not just the usual suspects from the GOP, but it looks like a number of centrist “New Democrats” are signing up to help predatory financial institutions evade consumer protections. 

Yup, you heard me right: Democrats. Ten years after the financial crisis, it seems like we’ve gone back to the mistakes of the Clinton years when centrist Democrats rode the financial deregulatory bandwagon. What I’m talking about is the McHenry-Meeks Madden “fix” bill, the “Protecting Consumers’ Access to Credit Act of 2017”. The bill effectively preempts state usury laws for non-bank finance companies like payday lenders in the name of ensuring access to credit, even if on extremely onerous terms.

Right now there's only one Democratic co-sponsor, but others seem to be preparing to join in. They shouldn't, and if they do sign onto this bill, it should only be in exchange for some solid consumer protections to substitute for the preempted state usury laws. This bill should be seen as a test of whether New Democrats "get it" about financial regulation. I'm hoping that they do. If not, perhaps its time to find some new Democrats.   

Continue reading "Guess Who's Supporting Predatory Lending?" »

CFPB Politics Update

posted by Adam Levitin

Time for a CFPB politics update:  FSOC veto, Congressional Review Act override of the arbitration rulemaking, Director succession line, and contempt of Congress all discussed below the break.

Continue reading "CFPB Politics Update" »

CFPB Arbitration Rulemaking--and Potential FSOC Veto

posted by Adam Levitin

Today the CFPB finalized the most important rulemaking it has undertaken to date.  This rulemaking substantially restricts consumer financial service providers' ability to prevent consumer class actions by forcing consumers into individual arbitrations. I believe this is by far the most important rulemaking undertaken by the CFPB because it affects practices across the consumer finance space (other than mortgages, where arbitration clauses are already prohibited by statute). 

Let's be clear--the issue has never really been about arbitration vs. judicial adjudication.  It's always been about whether consumers could bring class actions.  I don't want to rehash the merits of that here other than to say that the prevention of class actions is effectively a license for businesses with sticky consumer relationships to steal small amounts from a large number of people.   For example, am I really going to change my banking relationship (and its direct deposit and automatic bill payment arrangements and convenient branch) over an illegal $15 overcharge?  Rationally, no, I'll lump it, not least because I have no easy way of determining if another bank will do the same thing to me. In a world of profit-maximizing firms, we know what will happen next:  I'll get hit with overcharges right up to my tolerance limit.  Given that consumer finance is largely a business of lots of relatively small dollar transactions, it is tailor made for this problem. Class actions are imperfect procedurally, but they at least reduce the incentive for firms to treat their customers unfairly.  

The financial services industry seems to be circling the wagons for a last ditch defense of arbitration. There appear to be three prongs to the defense strategy.  First, there will be intense lobbying to get Congress to overturn the rulemaking under the Congressional Review Act.  There's a limited window in which that can happen, however, and it will be an uncomfortable vote for members of Congress, particularly with the 2018 election looming.  This one will be an albatross for them.  Second, there's an effort afoot to have the Financial Stability Oversight Council veto the rulemaking.  And finally, if the rule isn't quashed by Congress or the FSOC, there will assuredly be a litigation challenge to the rulemaking. 

I want to focus on the FSOC veto strategy, which has just popped up in the news.  

Continue reading "CFPB Arbitration Rulemaking--and Potential FSOC Veto" »

Dodd-Frank's "Abusive" Standard: The Dog that Didn't Bark

posted by Adam Levitin

The Trump Treasury Department's Dodd-Frank Act report spends more pages on the CFPB (including mortgage regulation) than on any other issue.  There's a whole bunch of blog posts that one could write about the Treasury report, but I want to limit myself here to one item that has long been on the GOP/industry complaint list about the CFPB:  that its power to proscribe "abusive" acts and practices is a problem because the term "abusive" is novel and undefined and that this creates uncertainty that is chilling economic growth.  Total hooey.  The Treasury's report is a lazy document is totally unconnected to the realities of how the CFPB has operated. It's a shame that some commentators are buying into it

Here's the story of the "abusive" power in a nutshell:  it's the dog that didn't bark.  The CFPB's critics have been complaining about the vagueness of the "abusive" power ever since the Dodd-Frank Act was in the legislative process.  Those arguments didn't hold a lot of water then because the term is defined by statute and has a history (namely HOEPA, the FDCPA, the Telemarketing Sales Rule, and the FTC's interpretation of "unfair" from 1962 to 1980), and the codification of "unconscionability" in the Uniform Consumer Credit Code.  But we now have the advantage of six years of CFPB enforcement activity to understand how the agency has used this power and what it means. Unfortunately, it seems that no one at Treasury bothered to look through the CFPB's enforcement actions to see how the agency has actually used its power to prosecute "abusive" acts and practices.  I did.  Here's the two things that stand out.  

Continue reading "Dodd-Frank's "Abusive" Standard: The Dog that Didn't Bark" »

New HMDA Regs Require Banks to Collect Lots of Data...That They Already Have

posted by Adam Levitin

The Home Mortgage Disclosure Act  of 1975 is a key piece of fair lending legislation.  It requires mortgage lenders to report data on loan applications and loans funded that enables both government and private groups to monitor lending patterns for violations of the Fair Housing Act and Equal Credit Opportunity Act (as well as state fair lending laws).  In 2015 the CFPB adopted a new HMDA rule that would expand the number of data fields collected by some 25 fields, effective Jan. 1, 2018.  This is being decried as an unreasonable burden on small institutions and a bipartisan collection of Senators on the Senate Banking Committee have proposed a bill that would exempt financial institutions that made less than 500 open-end loans or 500 close-end loans in each of the previous two years from the new HMDA reporting requirements.  

There's no question that the new HMDA requirements add something to financial institutions regulatory burden. But a look at what these requirements are shows that the burden is really de minimis.  It's not going to make-or-break a small financial institution.  Below is a list of all 25 new data fields.  As you will see, after each one I have indicated whether it is data that is already required for the TILA-RESPA Integrated Disclosure (TRID) or would normally be in a loan underwriting file.  If it is in either, then it is simply a matter of having adequate software to plug that data into HMDA reporting.  Asking a bank to have integrated mortgage underwriting and reporting software doesn't seem like an unreasonable request, but none of this is stuff that should take very long to do even by hand-entry of data (something I've done plenty of). I've dotted all my i's and crossed my t's here, but the bottom line is this.  Almost every piece of information required under the new HMDA rule is already being collected by the lender for either its own underwriting purposes or for compliance with other regulatory requirements.  In other words, this just ain't a big deal.  My guess would be that the total additional compliance costs is a few thousand dollars per year for this.  

The CFPB itself estimates (see p. 66308) per the Paperwork Reduction Act requirement that for truly small banks total HMDA compliance costs (which includes existing costs) will be between 143 and 173 hours of time annually.  Even at $100/hr (which is far more than a compliance staffer at a small bank makes), this would total, at most, $17,300 annually.  Around half the fields are new, so we're looking at around $8,650 annually in additional costs for small banks as the high-end estimate.  So this leave me wondering why the pushback against the new HMDA rule.  

Am I missing something here?   This just doesn't seem to be a game changer for small financial institutions, and it will cause some serious damage to HMDA data in some communities and even some entire states in which large financial institutions don't have much of a presence.  

Continue reading "New HMDA Regs Require Banks to Collect Lots of Data...That They Already Have" »

Wells Fargo Fake Accounts and Arbitration

posted by Adam Levitin

Jeff Sovern has an excellent new article about arbitration clauses and class action waivers that uses the Wells Fargo fake account scandal as a test case.  He also does a monster job knocking down the Johnston-Zwyicki arbitration study.  As Sovern points out, the Johnston-Zywicki study makes a big deal out of some data on a Texas bank's voluntary refunds of fees in consumer disputes.  But as Sovern observes, Johnston and Zywicki aren't able to differentiate between fees due to bank misconduct and fees due to consumer behavior (account inactivity, overlimit, etc.), much less why the bank refunded the fees in some cases.  Highly recommended and relevant in the run-up to the anticipated CFPB arbitration rulemaking.  

[Link corrected 6/15/17 at 4:04pm ET]

Senate Banking Committee Testimony

posted by Adam Levitin

I'm testifying before the Senate Banking Committee this week about "Fostering Economic Growth: The Role of Financial Institutions in Local Communities".  It's the undercard for the Comey hearing.  The big point I'm making are that the problem is not one of economic growth, but economic distribution.  While the US economy has grown by 9% in real terms since Dodd-Frank, real median income has fallen by 0.6%.  That's pretty grim.  The gains have all gone to the top 10% and particularly the top 1%.  

None of the various deregulatory proposals put forward by the financial services industry have anything to do with growth, and they have even less to do with ensuring equitable growth. For example, changing the CFPB from a single director to a commission or switching examination and enforcement authority from CFPB to prudential regulators shouldn't have anything to do with growth.  It's a reshuffling of regulatory deck chairs.  

The banking industry has been doing incredibly well since Dodd-Frank, outperforming the S&P 500, for example.  You'd never know it, however, from their trade association talking points. It really takes a certain kind of chutzpah to demand the repeal of consumer protection laws and laws designed to prevent the privatization of gains and socialization of losses when you are already doing so much better than the typical American family.

My complete written testimony can be found here

Midland Got It Right (Sort Of)

posted by Adam Levitin

The Supreme Court got it right in Midland Funding LLC v. Johnson, which holds that it is not a violation of the Fair Debt Collection Practices Act to file a proof of claim in a Chapter 13 bankruptcy based on a debt whose statute of limitations has expired.  

I suspect that I might be the only bankruptcy professor whose name doesn't start with the last two letters of the alphabet who isn't outraged by Midland (which gives a nice shout out to our former co-blogger Katie Porter's scholarship!), and I'm going to catch hell for writing this, but one of the great things about tenure is that I can say things like this.  So here goes.  I don't think Midland is a very persuasive opinion; it's not the reasoning I would adopt, but I think it gets the right answer, even if it is uncomfortable as a policy result (it's hard to defend an industry whose economics are dependent upon careless trustees and debtors). 

Continue reading "Midland Got It Right (Sort Of)" »

Where's the Bear?

posted by Adam Levitin

For all of the attention that has been given to the Fearless Girl and Charging Bull statues on Wall Street, I've been marveling at what's missing from the picture:  a bear. It's not just that an ursine addition adds whimsy to virtually everything. It's what its absence says about our market culture. 

The bull, of course, is the symbol of a rising market, the bear, a falling one. And Americans love bulls and hate bears.  When they "do the numbers" on the news (the biggest waste of airtime), it's always a good thing when markets are up, and bad when they're down.  This is idiotic.  We should want market prices to be right, which should mean an indifference between short and long positions.  I love the Fearless Girl statue, but if we're telling a market story, not a gender equality story, then the Charging Bull should be faced off by a Roaring Bear.  

Continue reading "Where's the Bear? " »

Consumer Rights to Know Regarding Adverse Action

posted by Adam Levitin

Four core federal consumer financial laws—the Truth in Lending Act (and Reg Z), the Electronic Fund Transfer Act (and Reg E), the Real Estate Settlement Procedures Act (and Reg X) and the Equal Credit Opportunity Act (and Reg B)—all have a mechanism whereby a consumer has a right to know why a financial institution denied a claim of an error or a credit application.  I've often puzzled over how much work these provisions really do--TILA and EFTA and RESPA are attempts at informal dispute resolution, while ECOA is a way of policing discriminatory lending (if the creditor cannot come up with a plausible reason for the denial, there's a problem).  But at the end of the day, there's no guaranty of any relief for consumers from these provisions.  

Today, however, I started to understand these provisions better because of the mess that's going on with student loan forgiveness.  The federal government has a major loan forgiveness program for those who work 10 years in public service or at non-profits. Apparently some applications for loan forgiveness eligibility have been denied without any explanation. That really puts borrowers at a loss--they can't tell if the problem is simply a missing form or incorrect paperwork or that they truly aren't eligible or that's the government's loan servicing agent has made a mistake.  That's a pretty awful situation because without more information, a consumer cannot figure out if there's a simple, low-cost way to resolve the issue, if the only solution is through litigation, or if the consumer is truly in the wrong.  

On a related note, the potential revocability of the loan forgiveness eligibility letters strikes me as teeing up the mother of all promissory estoppel cases. 

Supreme Court Strikes Down State No-Surcharge Law

posted by Adam Levitin

The Supreme Court ruled today in Expressions Hair Design v. Schneiderman.  The Court unanimously ruled for the merchant plaintiff that was challenging New York State's no-surcharge law on the basis that a law criminalizing credit surcharges (but not cash discounts) was impermissibly vague.  The Court declined to rule on the plaintiff's First Amendment challenge because the Second Circuit Court of Appeals had held that New York law regulated conduct, not speech, so the Court of Appeals had never considered whether there was a First Amendment violation if the pricing was a form of speech.  The Supreme Court determined that the law regulates speech and remanded the First Amendment issue to the Court of Appeals.  

Five Justices were on the majority opinion with a pair of concurrences driven by procedural concerns (Alito + Sotomayor) or a fear that the case will be used as a precedent for attacking economic regulation via the First Amendment (Breyer).  

Technically the opinion is narrow, as it addressed only an as-applied challenge based on a pricing regime in which two prices are simultaneously listed, with neither labeled a surcharge or discount, but I suspect that the effect of the opinion will be much broader.  If, on remand, the plaintiff's First Amendment argument is accepted (and I suspect it will be), the opinion will be pretty important in terms of development of payment systems.  Prior to today there were two obstacles to effective price discipline on consumer payment choice:  state no-surcharge laws and credit card networks' merchant rules.  The state no-surcharge laws are gone now, leaving only the card networks' merchant rules.  MasterCard and Visa had previously agreed to substantially rollback their rules on surcharging in an overturned class action settlement.  It's going to be hard for them to argue against making that concession now, unless they are willing to admit that it wasn't previously made in good faith because they knew that surcharging wouldn't be used on any scale in the presence of state no-surcharge laws.  

Congratulations to Deepak Gupta, who quarterbacked this litigation!  

Everything You Wanted to Know About Bond Workouts But Were Afraid to Ask

posted by Adam Levitin

There's a great new paper available on out-of-court restructuring and the Trust Indenture Act.   The New Bond Workouts is up on SSRN.  From the abstract it sounds pretty darn amazing—a new, empirically based analysis of bond restructurings that rediscovers a long-forgotten intercreditor duty of good faith: 

Continue reading "Everything You Wanted to Know About Bond Workouts But Were Afraid to Ask" »

Jeb Hensarling's Alternative Facts

posted by Adam Levitin
House Financial Services Committee Chairman Jeb Hensarling (R-Texas 5th) has an alternative fact problem. In a Wall Street Journal op-ed Hensarling alleged that "Since the CFPB’s advent, the number of banks offering free checking has drastically declined, while many bank fees have increased. Mortgage originations and auto loans have become more expensive for many Americans.
 
The problem with these claims?  They are verifiably false.  Free checking has become more common, bank fees have plateaued after decades of steep increases, and both mortgage rates and auto loan rates have fallen. One can question how much any of these things are causally related to the CFPB, but using Hensarling's logic, the CFPB should be commended for expanding free checking and bringing down mortgage and auto loan rates. Hmmm.  
 
Below the break I go through each of Chairman Hensarling's claims and demonstrate that each one is not only unsupported, but in fact outright contradicted by the best evidence available, general FDIC and Federal Reserve Board data. 

Continue reading "Jeb Hensarling's Alternative Facts" »

What Would a CFPB Commission Have Done Differently?

posted by Adam Levitin

Here’s the question CFPB commission proponents need to be able to answer convincingly:  what would the CFPB have done differently over the past five and a half years if it had been a commission, rather than a single director?  What supposed overreach would not have occurred?  

So, CFPB commission proponents, here's your chance. Comments are open.

More Evidence that a For-Cause Removal of CFPB Director Corday Would Be Pretextual

posted by Adam Levitin

If Trump is planning on attempting to remove CFPB Director Richard Cordray "for cause" he's hardly going about it in a smart way.  The Trump administration keeps generating more and more evidence that any for-cause removal would be purely pretextual, which strengthens Corday's hand were he to litigate the removal order (as he surely would).  

Continue reading "More Evidence that a For-Cause Removal of CFPB Director Corday Would Be Pretextual " »

The Real Reason Behind the Calls for Firing Richard Corday (and the Costs of Doing So)

posted by Adam Levitin

The calls for Donald Trump to fire CFPB Director Richard Cordray are getting louder (see here and here). It's worthwhile understanding what's really afoot here. Cordray's term as CFPB Director expires in July 2018, so firing him in January 2017 doesn't seem to accomplish a lot.  If Cordray is fired, the Deputy Director automatically becomes the Acting Director and is fully empowered to do everything that the Director would otherwise do, until and unless a replacement Director is confirmed by the Senate (or recess appointed), a process that will take a while.  So we're probably talking about speeding up Republican control of the CFPB by less than a year.  Does that really matter?

Actually yes. It is hugely important to the financial services industry in general and to the payday lending industry in particular. The CFPB has two major rule makings pending, one restricting binding mandatory pre-dispute arbitration clauses that are used to prevent class actions and a second imposing an ability-to-repay requirement on payday and auto title loans. It is not clear when the CFPB will publish final rules on the topics; there is some speculation that the arbitration rule might be out before Inauguration Day. But the thinking is that a change in CFPB leadership might come in time to stave off these rule makings.  (Note that both rulemakings would be subject to Congressional override under the Congressional Review Act, but it's quite possible that a few Republicans in the Senate defect on both rulemakings.) In other words the calls to remove Cordray aren't about real outrage over dated employment discrimination allegations at the CFPB, but just shilling for the financial services industry, which is trying to head off the payday and arbitration rulemakings. 

One can see the appeal to a Trump administration of firing Corday. It's a chance for Donald to parade out his trademarked "you're fired" line and to quickly claim a victory and please part of its base. I would hope, however that the Trump administration has good enough counsel to recognize that there is real risk from attempting to fire Cordray, such that the cost of firing Corday is likely to outweigh any benefits. Put in Trump terms, it's a bad deal. 

Continue reading "The Real Reason Behind the Calls for Firing Richard Corday (and the Costs of Doing So)" »

Trump Post Office Mechanic's Liens

posted by Adam Levitin

It's not often that one finds mechanic's liens in the news.  I think this is ripe for inclusion in secured credit casebooks.

Update:  After thinking about this more, this gets more interesting than a plain vanilla mechanic's lien.  Recall that Trump doesn't own the Old Post Office.  He has a leasehold, and the building is owned by the federal government.  So this raises the question about whether the lien reaches to the fee simple ownership of the federal government or if it is a lien on the leasehold.  I have no idea. There are some states in which a mechanic's lien triggered by work done by a tenant reaches the landlord's fee simple ownership if the work was done with the landlord's consent (see here, e.g.). I don't know what, if anything, DC caselaw says on this.  (If the lien is filed against the federal government itself, there's a different process through the Miller Act, but I doubt that applies since the federal government was probably not a party to the construction contract.) 

A potential further complication is the status of federal property in DC. Can it be subject to mechanic's liens?  Can it be foreclosed on?  Where does sovereign immunity come into play?  

Finally, what is the effect of a lien on the property on Trump's leasehold?  I can't imagine that there's any way to actually foreclose on Trump's leasehold--the lease for the Old Post Office isn't going to be freely transferable.  If so, what good does a mechanic's lien do, other than embarrass Trump?  Is it an Event of Default under the lease if Trump suffers it to persist?  If so, that would give the contractors some leverage, but this all seems much messier than a typical mechanic's lien situation. 

I'm somewhat perplexed.  Trump doesn't own the Old Post Office.  He has a leasehold.  So is the mechanic's lien filed against his leasehold or against the building?  I don't see what good it does to file it against a.  A mechanics lien gets paid in one of two ways.  Either it gets paid when the building is sold or it gets paid after foreclosure by the unpaid contractor following a successful suit for the unpaid balance.  Given that the building is federally owned, I'm not sure what either of this means.  

CFPB Commission Structure Proposals

posted by Adam Levitin

I have an op-ed in American Banker about proposals to convert the CFPB into a commission structure.  Basically, the idea that a commission structure increases accountability and policy stability and reduces arbitrary or abusive actions by an agency just doesn't hold water upon examination.  

Not included in the piece is a brief history of independent agency structure. The reason that so many independent agencies are structured as commissions has absolutely nothing to do with a perceived superiority of the commission structure from any sort of good governance perspective. You'll be hard pressed to find any Congressional debate about single director versus multi-member commission structures. The prevalence of multi-member commissions is a matter of path dependency and Congressional desire to maximize patronage opportunities, not any considered debate.

Continue reading "CFPB Commission Structure Proposals" »

CFPB Tales Told Out of School (Updated)

posted by Adam Levitin

Former CFPB enforcement attorney Ronald Rubin has a lengthy attack on the CFPB in the National Review. It's got lots of sultry details, but there's nothing new and verifiable in the piece.  Instead, it's all tales told out of school, unverifiable personal anecdotes by Rubin, who seems to have an particular axe to grind with certain other CFPB staffers, and an ideological one too. Incredibly, Rubin, a former Managing Director for legal and compliance at Bear Stearns, holds up the oft-feckless SEC as a model of good enforcement practice, and criticizes the CFPB for any departures from that practice. 

The point of the piece seems to be that the CFPB is an agency gone rogue and that this wouldn't have happened if the CFPB had just been structured as a bi-partisan commission. That's hogwash. Assume that everything Rubin claims is true and correct. Even if so, every single problem Rubin identifies in the piece could just as easily have occurred at a bi-partisan commission. Partisan hiring? Of course that can happen because the staff hiring decisions (other than those of the personal staffs of the commissioners) are done by the commission chair and people the chair has selected. Secrecy and stonewalling Congress? We see allegations about that regarding agencies all the time (and that from agencies not facing partisan witch-hunts). Unhappy employees? Check. Pressure on regulated firms to settle enforcement actions? Check. Claims of discrimination by employees? Check. These are problems that can occur at any agency, irrespective of its structure or funding. 

Continue reading "CFPB Tales Told Out of School (Updated)" »

Fake News, Special Carrie Sheffield CFPB Edition

posted by Adam Levitin

The "fake news" phenomenon has gotten a lot of attention of late, but there's also the problem of its kissing cousins, faux academic research and opinions piece that springboards off of fake news and faux research.  A comically bad example of the latter category is the hatchet job Carrie Sheffield tries to pull on the CFPB in a piece on Salon.com.  In a nutshell, Sheffield (1) accuses the CFPB of being "rampant with internal racism and anti-woman bias," (3) claims that the CFPB has resulted in an increase in bank fees, and then (3) makes a big deal out of CFPB employees' political donations tilting toward Democrats.  The first and second points are simply false and not supported by the evidence Sheffield cites.  The third point is just irrelevant, but shows Sheffield to be nothing more than a partisan hack.  Sheffield's piece really doesn't merit a response intellectually, but given the current political climate, it's necessary to respond to any calumny, no matter how ridiculous.  So a point by point follows, after which I share a few thoughts on the political price tag that will come with trying to get rid of the CFPB.

Continue reading "Fake News, Special Carrie Sheffield CFPB Edition" »

CFPB and ACICS Retrospective

posted by Adam Levitin

The Department of Education just stripped the Accrediting Council for Independent Colleges and Schools of its accreditation role.  (For those of you not in academy, this accreditation is critical for schools to get DoE funds, among other things.  It's part of what enables the ABA's on-going tyranny of legal education.)  Some of you might remember that in 2015, the CFPB issued a Civil Investigative Demand to ACICS, the authority for which ACICS challenged successfully.  At the time some of the CFPB's critics held the CID up as an example of improper over-reach, and the District Court bought the argument that there was no connection between accreditation and private student lending.  (Of course there is, but that's another story.) I'm just wondering if those folks who thought the CFPB acted improperly with the CID might be singing a different tune now.  It sure looks like the CFPB was on the right track with the CID.  

The CFPB and Behavioral Economics

posted by Adam Levitin
This post is an extended aside from my previous post about David Evans' argument about the CFPB's mindset and institutional incentives.  The point isn't critical to Evans' argument, but I'm writing because it really irks me because it shows such a lack of understanding about the CFPB.  Specifically, Evans suggests that the CFPB's supposed emphasis on preventing consumer harms rather than maximizing consumer welfare stems from the CFPB’s “intellectual foundation in behavioral economics.” This just wrong.  The CFPB really doesn’t have a behavioral economics DNA. (Heck, behavioral economics hasn't made much of a mark on government in general).  

Continue reading "The CFPB and Behavioral Economics" »

The CFPB and Consumer Welfare

posted by Adam Levitin
David Evans has an interesting article on PYMNTS that argues that "The fundamental problem with the CFPB ... isn’t who’s on top. It is that the CFPB does not have an institutional desire, or incentives, to make sure that the financial services industry supplies consumers with products that consumers need, including loans.” It’s refreshing to hear a CFPB critic argue that the issue isn’t really with the CFPB’s structure, but with its worldview. But Evans is still wrong.  

Continue reading "The CFPB and Consumer Welfare" »

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