The Hydraulic Effect of Loper Bright Enterprises in Consumer Finance: More Regulation By Enforcement

This term's Supreme Court decisions have completely remade administrative law, both by eliminating Chevron deference and by effectively eliminating the Administrative Procedures Act's statute of limitations. In Loper Bright Enterprises v. Raimondo, the Court held that as a constitutional matter federal courts could not give deference to federal agencies' interpretations of ambiguous statutes. And then the Court opened the door to APA challenges to virtually every existing federal regulation, no matter how old, with Corner Post Inc. v. Board of Governors of the Federal Reserve System, a statutory ruling that the APA's six-year statute of limitations runs from the date a plaintiff is allegedly injured by the regulation, rather than from the date of the regulation's finalization. That means that a business that is incorporated tomorrow has at least six years to challenge any regulation that affects it, and maybe more depending on when it is affected. In other words even New Deal or Progressive era regulations could be challenged tomorrow and there would be no deference to the agency's long-standing interpretation of the statute authorizing the regulations. I pity my colleagues who teach admin law--their course lost at least a credit hour's worth of material. Maybe they'll decide to take up commercial law....

These decisions are, taken together, a major rolling back of the administrative state. But these decisions will affect different agencies differently, and the Court's rulings may have some unintended consequences. To wit, many federal agencies have both rulemaking and enforcement powers. In some instances, enforcement is dependent on rulemaking, as the agency lacks a general statutory prohibition to enforce, but can only enforce its particular rules. The EPA is (I think) an example of this type of agency. It doesn't have a general statutory prohibition of "don't pollute." OSHA and the FDA and NLRB and Dept. of Commerce. For agencies in this category, Loper Bright Enterprises and Corner Post clip not only the agencies' rulemaking power, but also their enforcement power, because they will have to defend the rules they are enforcing. 

In other instances, however, the enforcement powers are independent of rulemaking, as there is a broad statutory prohibition that the agency can enforce without rules. This is where federal financial regulators sit.  In these cases, Loper Bright Enterprises and Corner Post will have a hydraulic effect:  agencies are going to do what they're going to do, so if they can't do it through rulemaking, they'll do it through enforcement and supervision. In other words, what the Supreme Court did was to supercharge regulation by enforcement in the financial regulatory space.

Second Time as Farce: the Absurdity of the New Anti-CFPB Arguments

Karl Marx's famously quipped how historical figures appear twice, "the first time as tragedy, the second time as farce." So too with the legal arguments about the constitutionality of the CFPB's funding: we are firmly in farce territory at this point. 

Nevertheless, over at Ballard Spahr's Consumer Finance Monitor blog my friend Alan Kaplinsky doesn't seem to get the joke and has earnestly taken issue with my criticisms of Hal Scott's claim that the CFPB's funding is unauthorized both by statute and under the Constitution. I find the legal arguments involved here so thin that I wouldn't bother with a second blog post about them, other than that they've found a welcoming audience from some members of Congress (yes, I can hear the remarks from the peanut gallery...).  So let's go through this again.

CFPB Bitter-Enderism

Retired Harvard Law Professor Hal Scott has a curious op-ed in the Wall Street Journal suggesting that despite (or because) of the Supreme Court's recent ruling in CFPB v. CFSA that the CFPB's funding is both unauthorized by statute and unconstitutional on account of the Federal Reserve System running a deficit currently (and projected through 2027).

It's a bizarre and incorrect argument, and were it coming from anyone other than Scott it could be dismissed as harmless and uninformed flibflab, but Scott is a personage with serious financial regulatory credentials, who is very tied in to the upper crust of anti-financial regulatory circles, such that one has to wonder if this is a trial balloon for a U.S. Chamber of Commerce or Bank Policy Institute-supported challenge. 

In any event, let me quickly explain why Scott is wrong on both the statutory and constitutional arguments.

Further Thoughts on CFPB v. CFSA

I have some further thoughts on the CFPB v. CFSA decision on Bloomberg Law: decision not only benefits consumers but ultimately benefits many financial services businesses by ensuring both a level of stability in regulation and the preservation of the "legal infrastructure" that the CFPB has created over the past 13 years, such as safe harbors, inflation adjustments, and advisory opinions. 

 

CFPB v. CFSA Analysis

The Supreme Court upheld the constitutionality of the CFPB's funding mechanism in its 7-2 decision in CFPB v. CFSA. Although I can't say I love the opinion's reasoning, the Court got to the right result, as Patricia McCoy and I urged in an amicus brief. The ruling does have some interesting omissions and politics, but its ultimately impact will be the normalization of the CFPB, something that's good for consumers and businesses alike.

The New Usury: The Ability-to-Repay Revolution in Consumer Finance

I have a new article out in the George Washington Law Review, entitled The New Usury: The Ability-to-Repay Revolution in Consumer Finance. The abstract is below:

American consumer credit regulation is in the midst of a doctrinal revolution. Usury laws, for centuries the mainstay of consumer credit regulation, have been repealed, preempted, or otherwise undermined. At the same time, changes in the structure of the consumer credit marketplace have weakened the traditional alignment of lender and borrower interests. As a result, lenders cannot be relied upon to avoid making excessively risky loans out of their own self-interest.

Two new doctrinal approaches have emerged piecemeal to fill the regulatory gap created by the erosion of usury laws and lenders’ self-interested restraint: a revived unconscionability doctrine and ability-to-repay requirements. Some courts have held loan contracts unconscionable based on excessive price terms, even if the loan does not violate the applicable usury law. Separately, for many types of credit products, lenders are now required to evaluate the borrower’s repayment capacity and to lend only within such capacity. The nature of these ability-to-repay requirements varies considerably, however, by product and jurisdiction. This Article terms these doctrinal developments collectively as the “New Usury.”

The New Usury represents a shift from traditional usury law’s bright-line rules to fuzzier standards like unconscionability and ability-to-repay. Although there are benefits to this approach, it has developed in a fragmented and haphazard manner. Drawing on the lessons from the New Usury, this Article calls for a more comprehensive and coherent approach to consumer credit price regulation through a federal ability-to-repay requirement for all consumer credit products coupled with product-specific regulatory safe harbors, a combination that offers the best balance of functional consumer protection and business certainty.

 

Securitization Trusts Are Subject to the Consumer Financial Protection Act

The CFPB won a significant case this week that could shake things up in the securitization world. In CFPB v. National Collegiate Master Student Loan Trust, the 3d Circuit held that a securitization trust is a "covered person," for the purposes of the Consumer Financial Protection Act, putting it within the enforcement ambit of the CFPB.  While securitization trusts themselves are basically passive holding entities for loans, they contract with third-parties (servicers) to manage the loans. That contracting was enough for the Third Circuit to find that the trusts are "engaged" in "extending credit or servicing loans," and language in the opinion suggests that merely holding the loans would be sufficient. The opinion means that securitization trusts—and therefore securitization investors—face the possibility of liability for servicer wrong-doing.

The CFPB's Proposed Overdraft Regulation

The CFPB proposed overdraft regulation came out today. It's a big deal. If it becomes effective, it will dramatically reduce overdraft fees at large banks.

Currently fees for “courtesy” overdraft—where the financial institution is not contractually obligated to allow the overdraft, as opposed to contractual overdraft lines of credit—are not “finance charges,” so the overdraft is not “credit” for purposes of the Truth in Lending Act/Regulation Z because credit requires either a finance charge or a requirement of repayment in over four installments. That means that TILA disclosure requirements do not currently apply to any courtesy overdrafts. 

The CFPB is proposing changing this for overdrafts that don't fall within a dollar amount safe harbor.

The Section 1071 Small Business Lending Data Collection Rule

The Senate voted 53-44 to overturn the CFPB's section 1071 small business lending data collection rule under the Congressional Review Act. If the House can ever function, I'd expect that there are the votes there too to overturn the rulemaking, but it's all sort of a show given that President Biden is threatening a veto and there aren't the votes to override a veto.

So three thoughts on this. First, doing a CRA resolution that has no chance of passing is a huge waste of the most precious commodity in DC, namely Senate floor time. But perhaps that is the point. More time on CRA resolutions, less time available for confirming judges, etc. I'm surprised we don't see continuous filing of CRA resolutions as itself a delay tactic in the Senate.

Second, imagine for a second that the CRA resolution passed. The CFPB would be precluded from promulgating another rule that is "substantially the same" without new Congressional authorization. But section 1071 would still stand. Is there any way the CFPB could do any data collection rule that is not "substantially the same," in terms of requiring production by small business lenders of data about the borrowers and loans? If so, then it suggests that "substantially the same" must actually be quite narrowly construed (e.g., if rule 1.0 asked about LTV and rule 2.0 did not, they are not "substantially the same"), which has important implications for the CFPB's ability to undertake a new arbitration rulemaking.

Third, assuming that the resolution fails, we will then have data collection regimes for mortgages and small business loans. That data is important for monitoring against discriminatory lending. Doesn't it seem strange to limit the data collection to just those markets? Why not extend it to the most obvious market, where there have long been concerns about discriminatory lending, namely auto lending, as some have previously suggested?

No Virginia, There Really Is No Such Thing as "the Fed"

Once again, the WSJ is publishing nonsense about the CFPB. It's really painful to see conservative admin law types write about federal agency structures when they don't understand the basic facts. The WSJ ran an op-ed by Adam White, a think-tanker at AEI and George Mason, that tries to take on the claim that if the CFPB's funding is unconstitutional, so is that of the Board of Governors of the Federal Reserve System. But Mr. White runs into trouble with his argument in his first paragraph when he refers to the "Federal Reserve" and "the Fed." The problem: there is no legal entity called "the Federal Reserve." We refer to it that way colloquially, but it's actually more complicated, and the complication really matters here. 

"The Fed" is actually "the Federal Reserve System," which consists of twelve private regional reserve banks and a federal government agency called the Board of Governors of the Federal Reserve System. The Board is a full-fledged federal regulatory agency. It makes rules, engages in supervision of financial institutions, brings enforcement actions, and undertakes administrative adjudication. In short, it does all the same type of things as the CFPB.

CFPB v. Community Financial Services of America

With oral argument in CFSA v. CFPB scheduled for tomorrow, it's no surprise that some unfounded claims about the CFPB are getting thrown around by the usual anti-regulation suspects, like the WSJ editorial page and George Will. Given that there's more attention than usual being paid to the Bureau, I figure it's the least I can do to flag what's wrong about these claims. Specifically, I want to address the claim that the Bureau is some uniquely ultra-power federal agency and that its funding has "dual insulation" from Congressional control. 

Most Powerful Agency, Ever?

Is the CFPB really the most powerful government agency ever? Puhlease. Federal agencies aren't Pokemon cards with a CP level that can be compared, but even so, it's just ridiculous to claim that the CFPB is the most powerful federal agency around. Its ambit is noticeably narrower than that of the Federal Reserve Board, for example. (There's a reason that Jerome Powell, the Fed Chair, is a household name, while Rohit Chopra, the CFPB Director, is not.) 

Let's get the headline number up. There are 33 million businesses in the United States. The CFPB has some form of regulatory authority over only around 40,000 of them. That 40,000 consists of ~23,000 payday lenders, ~4,800 credit unions, ~4,600 banks ~4,500 debt collection agencies, ~500 nonbank auto lenders, and 410 consumer reporting agencies, and some sundry other entities.  In other words, only 0.1% of all businesses in the United States are under any CFPB jurisdiction (and even that is quite limited, as we will see). That fact alone should be the end to the "most powerful agency, ever," nonsense. 

Community Financial Services of America v. CFPB Amicus Brief

This fall the Supreme Court will be hear a case captioned Community Financial Services of America v. Consumer Financial Protection Bureau, dealing with the constitutionality of the CFPB's funding mechanism. I'm pleased to announce that Patricia McCoy and I filed an amicus brief today in support of the CFPB. We were very capably represented by Greg Lipper of LeGrand Law.

The tl;dr version: if the 5th Circuit's opinion is upheld it will result in market chaos--all of the CFPB's existing regulations will be void, and that includes things on which market actors rely, such as TILA disclosure safe harbors and ability-to-repay rule safeharbors. Moreover, there's no way to cabin the 5th Circuit's opinion to the CFPB--if the Bureau's funding is unconstitutional, so too is that of every federal banking regulator, including the Federal Reserve Board. There's simply no credible way to do a surgical strike on the Bureau's funding without collateral damage of economic havoc.

SDNY: EFTA Applies to Crypto

I'm teaching cryptocurrency today in my Payment Systems class, and I'd been puzzling about why no one has applied the Electronic Fund Transfers Act and Reg E thereunder to crypto: after all, if you have a crypto account with an exchange, it would seem to be an "account" at a "financial institution" that is primarily for personal, family, or household purposes and is used for electronic transfers of "funds." In fact, I had just emailed Bob Lawless for a sanity check on this, when I came across a very recent SDNY decision that held that the EFTA applies to crypto. That's a huge consumer protection win. Reg E has important consumer protections regarding unauthorized transactions, error resolution, and provision of receipts and periodic statements. It also creates huge compliance headaches for crypto exchanges, which are not set up for dealing with any of those problems. All of the Zelle scam error resolution issues are now going to become crypto scam error resolution issues. And the ruling also indicates that consumer protection at cryptocurrency exchanges is now squarely within the existing regulatory authority of the Consumer Financial Protection Bureau. This could get interesting. 

Dual Insulation? The Fifth Circuit's Factual Misunderstanding of CFPB Funding

I know I’m carrying around some extra weight.  But I don’t think it’s quite double insulation.  That sounds like something you need if you’re going on a polar expedition or are really concerned about the heating bill.  But the concept of "dual insulation" plays a big role in the Fifth Circuit’s decision in Community Financial Services Association of America, Ltd. v. CFPB, which held the CFPB’s funding mechanism to be unconstitutional because it is not an annual appropriation from Treasury.   

In this post, I’ll discuss some of the background on the case, the poorly understood nature of the CFPB’s funding (factual mistakes about which loomed large in the Fifth Circuit’s decision), and the challenge the Fifth Circuit faced in trying to differentiate the CFPB’s funding from that of a host of other federal regulatory agencies (that’s where dual insulation comes in).

US Chamber of Commerce vs CFPB

One would have thought that after a dozen years the challenges to the CFPB’s constitutionality would have been over and that the Supreme Court’s decision in Seila Law would have put the matter to rest. But there are still a trio of suits pending that bring constitutional challenges to the Bureau, including one recently filed in the Eastern District of Texas by the US Chamber of Commerce and some banking and business associations. That’s the suit I’m going to focus on. 

The Chamber’s suit alleges that a recent change in the CFPB’s examination manual—guidance for CFPB examiners that the Bureau happens to make public as a courtesy—that indicates that examiners are to consider discrimination in non-credit services to be an unfair, deceptive, or abusive act or practice is a “legislative rule.” A legislative rule must comply with the Administrative Procedure Act, including adequate notice-and-comment, being based in law, and not being arbitrary and capricious. As a kicker, however, the Chamber’s suit adds in a count that the Bureau’s funding is unconstitutional. What's likely to happen?

 

New Book Alert: Delinquent

The University of California Press has published Delinquent: Inside America's Debt Machine by Elena Botella. 

Botella used to be "a Senior Business Manager at Capital One, where she ran the company’s Secured Card credit card and taught credit risk management. Her writing has appeared in The New Republic, Slate, American Banker, and The Nation."

Here's the description from the publisher between the dotted lines below: 

------------------

A consumer credit industry insider-turned-outsider explains how banks lure Americans deep into debt, and how to break the cycle.

Delinquent takes readers on a journey from Capital One’s headquarters to street corners in Detroit, kitchen tables in Sacramento, and other places where debt affects people's everyday lives. Uncovering the true costs of consumer credit to American families in addition to the benefits, investigative journalist Elena Botella—formerly an industry insider who helped set credit policy at Capital One—reveals the underhanded and often predatory ways that banks induce American borrowers into debt they can’t pay back.

Combining Botella’s insights from the banking industry, quantitative data, and research findings as well as personal stories from interviews with indebted families around the country, Delinquent provides a relatable and humane entry into understanding debt. Botella exposes the ways that bank marketing, product design, and customer management strategies exploit our common weaknesses and fantasies in how we think about money, and she also demonstrates why competition between banks has failed to make life better for Americans in debt. Delinquent asks: How can we make credit available to those who need it, responsibly and without causing harm? Looking to the future, Botella presents a thorough and incisive plan for reckoning with and reforming the industry.

---------------------

Looking forward to reading this book! Also expecting to see more from the University of California Press of direct interest to Credit Slips readers in the years ahead. 

Venmo's Unfair and Abusive Arbitration Opt-Out Provision

Venmo's changing the terms of its arbitration agreement, and the manner in which it is doing so is unfair and abusive to consumers. The CFPB and state attorneys general need to take action here to protect consumers.

Here's the story.  Last night I got an email from Venmo entitled "Upcoming Changes to Venmo." Nothing in the email's title (which is all I see on my devices) signals that there is a change in contractual terms, and I would have just deleted it without reading but for seeing consumer finance list-serv traffic light up about it.  So I looked at the email, and in the body it does explain that there are changes to the Venmo arbitration clause. It also tells me that I can opt-out of the Agreement to Arbitrate "by following the directions in the Venmo User Agreement by June 22, 2022".  The Venmo User Agreement is hyperlinked.  It is a 95 page document. The hyperlink takes me to the very top of the agreement, but the arbitration agreement starts on page 70.  It takes a lot of scrolling to get there, and nothing is particularly prominent about the arbitration agreement's text.

The arbitration agreement itself has a summary at the top that includes a few bullet points, one of which is "Requires you to follow the Opt-Out Procedure to opt-out of the Agreement to Arbitrate by mailing us a written notice." The term Opt-Out Procedure is a hyperlink to a form that can be printed (but not completed on-line).

What's so ridiculous about requiring a hand-written form to be sent through the mail is that Venmo will surely digitize the form. That means someone's gotta open the mail and do the data entry. Why not have the customer do that himself? Or for that matter, just have a check box on my Venmo account for opting out of the arbitration agreement? The only reason to use the paper form and posts is to make it harder for consumers to opt-out of the arbitration provision.

What Venmo's doing is unfair and abusive and therefore illegal under the Consumer Financial Protection Act. It's perfectly legal for Venmo to have an arbitration clause, and there is no requirement that consumers have a right to opt-out of arbitration, although a change in terms on an existing contract is a bit more complicated. Be that as it may, Venmo is the master of its offer, and by giving consumers a right to opt-out, but raising barriers to the exercise of that right, Venmo is engaging in an unfair or abusive act or practice. Venmo is trying to have its cake and eat it too, but pretending that consumers have a choice about arbitration, but not actually giving them one.

That's "unfair" under the Consumer Financial Protection Act because the practice makes it likely that consumers will lose their right to proceed as part of a class action. That is a substantial injury to consumers in aggregate. The ridiculous opt-out procedure makes this injury "not reasonably avoidable by consumers." The consumer would have to click on no less than two hypertext links, starting with an email the title of which gives no indication what is at stake, and then navigating through a 95 page agreement to find the second link. After that, the consumer must print, fill out, and mail a form. Whatever one thinks of the benefits of arbitration, there's no benefit to consumers or competition from making the opt-out difficult. To my mind, this is a very clearly unfair act or practice. It's also an "abusive" act or practice under the Consumer Financial Protection Act. Because the terms of the opt-out make it so difficult for a consumer to actually exercise the opt-out, the terms of the opt-out "take unreasonable advantage of —the inability of the consumer to protect the interests of the consumer in...using a consumer financial product or service."  (One might also even be able to argue that it is a deceptive practice--the opt-out right has been buried in fine print and hypertext links.) 

Both the CFPB and state attorneys general have the ability to enforce the UDAAP provisions of the CFPA against nonbanks like Venmo. I hope the CFPB and state AGs get on Venmo about this. It presents a good opportunity for the Bureau to make clear what it expects in terms of fairness for contract term modification and opt-out rights.

Getting Ahead of Consumer Loan Defaults Post-Pandemic

On this Tuesday, the Supreme Court refused to lift a ban on evictions for tenants that the Centers for Disease Control and Prevention recently extended through the end of July. The eviction moratoria is one of a handful of debt pauses put in place by the federal government during the COVID-19 pandemic that are set to expire soon. The student loan moratorium ends on September 30. The mortgage foreclosure moratorium ends on July 31. In anticipation of the end of the foreclosure moratorium, this week, the CFPB finalized new rules that put into place protections for borrowers that servicers must use before they foreclose.

Student loans and mortgages are most people's two largest debts. But they are not the only large loans that people are in danger of getting behind on post-pandemic. Indeed, when student loan and mortgage debts become due, people may prioritize paying them ahead of car loans, credit cards, and similar. In a new op-ed in The Hill, Christopher Odinet, Slipster Dalié Jiménez, and I set forth how the CFPB can use its legal authority to steer a range of loan servicers to offering people affordable modifications. As a preview, we suggest that the CFPB should issue a compliance and enforcement bulletin directing loan servicers to make a reasonable determination that a borrower has the ability to make all required, scheduled payments in connection with any modification.

The piece is a short version of our new draft paper, Steering Loan Modifications Post-Pandemic, which we wrote as part of the upcoming "Crisis in Contracts" symposium hosted by Duke Law's Law & Contemporary Problems journal. The paper contains more about what federal agencies already are doing to get ahead of mortgage modification requests, about why similar is needed for the range of consumer loans, and about the reasoning behind our suggestion that the CFPB use its prevent what we term modification failures.

Evictions in Violation of CDC Moratorium May Violate Fair Debt Collection Practices Act

The CFPB today released an important interim final rule that puts some real teeth behind the CDC's COVID eviction moratorium. Some jurisdictions (badly in need of a refresher on the Supremacy Clause) seem to be taking the CDC moratorium as merely advisory, rather than as binding law. The CDC moratorium applies only to "landlords" and "owners" of residential property.  It has criminal and civil penalties, but no private right of action, and I am unaware of the CDC having brought any enforcement actions under the moratorium. 

The CFPB's rule broadens the scope of the prohibition. Instead of covering "landlords" and "owners," the CFPB rule covers "debt collector" as defined under the FDCPA. That's a term that can include attorneys. The CFPB rule requires debt collectors to inform tenants of their rights under the CDC moratorium upon filing an eviction notice or eviction action. The rule also prohibits falsely representing that the tenant is ineligible for relief under the moratorium. 

Here's why the CFPB rule matters. First, it brings a bunch of additional parties into the scope of the prohibition. Unless the landlord is a DIY type, there's likely to be an attorney involved, and the CFPB rule regulates the behavior of those attorneys. And second, there's a private right of action under the FDCPA with actual damages, statutory damages, and attorneys' fees. What's more, one can bring a class action under the FDCPA, which starts to change the economic calculus of litigation. How many attorneys are going to want to assume this risk to further a foreclosure for a client? I suspect that an informed attorney will be much more inclined to counsel the client to follow the CDC moratorium.

That said, will eviction attorneys be properly informed of the risks they run? And will they gamble that there won't be CFPB or private enforcement? I suspect it will only take a couple of enforcement actions before word gets around that there are real risks with non-compliance. 

The Kraninger Discount

The CFPB has been chugging out enforcement actions and settlements at a fairly fast clip the last several months. Part of that might be businesses deciding to settle because they think they're going to get a better deal with Director Kraninger than under any Director appointed by President Biden. And here's the thing:  they might well be right because there is a clearly observable "Kraninger Discount" in CFPB enforcement statistics. Director Kraninger has suspended nearly 18% of civil monetary penalties and 11% of consumer redress. That's nearly 7x and 3x the rate penalty and redress suspensions under Director Cordray.

Seila Law v CFPB: Winners and Losers

The Supreme Court's long-awaited decision about the CFPB's constitutionality is out. It's a tricky opinion to parse politically. The Court, in a 5-4 partisan decision, held that the CFPB's structure violates the separation of powers because of the for-cause only removal provision for the CFPB Director in conjunction with the Bureau's other features. Accordingly, the Court found that the Director must be removable at will. Here's my attempt to lay out the winners and losers. As you'll see, they do not track with the headlines of the CFPB losing—the CFPB was actually the winner here for most purposes.  

The Brown M&M Theory of Telltale Minor Regulatory Violations or What's Wrong with "Earn a savings rate 5X the national average"?

A CapitalOne savings account ad has got me thinking about whether Van Halen has anything to teach regulators. Van Halen is famous for its use of a contract that requires provision of M&Ms for the band, but expressly prohibits provision of any brown M&Ms. It's not that they taste different, of course, but that if a concert promoter fails to adhere to the brown M&M term in the contract, it's a red flag that there might be other more serious problems, so the band will undertake a safety check of the stage and equipment. 

So what does this have to do with CapOne?  I'm one of the few folks in the world who bothers to teach the Truth in Savings Act, so I'm probably more inclined to pay attention to deposit account advertising than most folks. I was about to throw out an early May issue of The Economist (yes, my tastes run distinctly to middle brow), when a CapitalOne ad caught my eye.

The ad, which I've posted to the right says, "Why settle for average?  Earn a savings rate 5X the national average."  In smaller, less bold font it then says "Open a new savings account in about 5 minutes and earn 5X the national average." Under that, in smaller, but bold, "This is Banking Reimagined®." Faint, fine print on the bottom says "ONLY NEW ACCOUNTS FOR CONSUMERS. RATE COMPARISON BASED ON FDIC NATIONAL RATE FOR SAVINGS BALANCE < $100,000. OFFERED BY CAPITAL ONE, N.A. MEMBER FDIC © 2019 CAPITAL ONE" Above this is a photo featuring some random dude (or celebrity I don't recognize) with a croissant and coffee and faux casual outfit (jeans and a t-shirt, but a jacket with a pocket square) inviting the reader to join him. Breakfast and banking perhaps? But in the background, over his shoulder is a sign that says "Savings Rate 5X National Average" (its hard to read in the original, and doesn't come across in my photo, unfortunately).

So what's the problem here?

Hope for Helping the Prospective Payday Loan Customer

Short term (payday) loans and high interest consumer installment loans continue to deplete low income households of micro dollars and their communities of macro dollars. Although the CFPB seems intent on supporting the depletions, a good number of states have provided some relief.  Even in states without interest rate limitations there are a couple of ideas that can help.

Coercive "Consent" to Paperless Statements

If you've logged on to any sort of on-line financial account in the past few years, there's a very good chance that you've been asked to consent to receive your periodic statements electronically, rather than on paper. Financial institutions often pitch this to consumers as a matter of being eco-friendly (less paper, less transportation) or of convenience (for what Millennial wants to deal with paper other than hipsters with their Moleskines). While there is something to this, what's really motivating financial institutions first and foremost is of course the cost-savings of electronic statements. Electronic statements avoid the cost of paper, printing, and postage. If we figure a cost of $1 per statement and 12 statements per year, that's a lot of expense for an account that might only have a balance of $3,500—roughly 34 basis points annually.

I'm personally not comfortable with electronic statements for two reasons. First, I worry about the integrity of electronic records. I have no way of verifying the strength of a bank's data security, and I assume that no institution is hack proof. Indeed, messing around with our financial ownership record system would arguably be more disruptive to the United States than interference with our elections. FDIC insurance isn't very useful if there aren't records on which to base an insurance claim. Of course, the usefulness of a bank statement from two weeks ago for determining the balance in my account today is limited too, but if I can prove a balance at time X, perhaps the burden of proof is on the bank (or FDIC) to prove that it has changed subsequently. 

Now, I recognize that not everyone is this paranoid about data integrity. Even if you aren't, however, paper can play an important role in forcing one to pay attention to one's financial accounts, and I think that's valuable.  I am much more likely to ignore an email than I am a paper letter in part because I know that the chance the paper letter is junk is lower because it costs more to send than the spam.  As a result, I look at my snail mail, but often let my e-mail pile up unread. And even when I read, I don't always click on the link, which is what would be in an electronic bank statement.  Getting the paper bank statement effectively forces me to look at my accounts periodically, whereas an emailed link to a statement wouldn't. And monitoring one's accounts is just generally a good thing--it helps with fraud detection and helps one know one's financial status.  

So here's where this is going:  I've got no issue if a consumer wants to freely opt-in to electronic statements.  But the way my financial institutions communicate with me when I go on-line involves really coercive choice architecture. One bank presents me with a pre-checked list of accounts to be taken paperless, such that to not go paperless I have to uncheck several boxes.  I am essentially opted-in to paperless. Another bank has a prominent "I agree" button without an equivalent "I decline" button-the only way to decline paperless is to find the small link labeled "close" to close the pop-up window. "Consent" in this circumstances strikes me as iffy. This strikes me as an area in which regulators (I'm looking at you CFPB) really ought to exercise some supervisory muscle and tell banks to cut it out. If folks want to go paperless, that's fine, but don't try and coerce them. Doing so is contrary to the spirit of the E-SIGN Act at the very least and might enter into UDAAP territory.

Playing with Fire: The CFPB's Proposed Repeal of the "GSE Patch"

CFPB recently put out an advance notice of proposed rulemaking to amend the Qualified Mortgage (QM) Rule by letting the "GSE Patch" expire.  What the Bureau is proposing is potentially very dangerous.  While I haven’t liked some of the Bureau's other proposed rules (including under the Cordray Directorship), none of them were an all-out ideological gamble with the economy. This one, in contrast, is really playing with fire.  

What Is "Credit"? AfterPay, Earnin', and ISAs

A major issue in consumer finance regulation in mid-20th century was what counted as “credit” and was therefore subject to state usury laws and (after 1968) to the federal Truth in Lending Act. Many states had a time-price differential doctrine that held that when a retailer sold goods for future payment, the differential between the price of a cash sale and that of credit sale was not interest for usury law purposes. State retail installment loan acts began to override the time-price doctrine, however, and the federal Truth in Lending Act and regulations thereunder eventually made clear that for its purposes the difference was a “finance charge” that had to be disclosed in a certain way. 

 

Today, we seem to be coming back full circle to the question of what constitutes “credit.” We’re seeing this is three different product contexts: buy-now-pay-later products like Afterpay; and payday advance products like Bridgit, Dave, and Earnin’; and Income-Sharing Agreements or ISAs (used primarily for education financing). Each of these three product types has a business model that is based on it not being subject to some or all “credit” regulation. Whether those business models are well-founded legally is another matter.

 

Let me briefly recap what is “credit” for different regulatory purposes and then turn to its application to the types of products.

The Meaning of "Abusive" in the UDAAP Triad

On June 25, the CFPB will be holding a symposium on the meaning of "abusive" in the Consumer Financial Protection Act.  "Abusive" is an expansion of the traditional FTC Act couplet of "unfair or deceptive" acts and practices (UDAP) to a triad of "unfair, deceptive, or abusive" acts and practices (UDAAP). Although the Bureau has operated for the past eight years without defining the term "abusive", it has indicated in its long-term rulemaking agenda that it intends to undertake a rulemaking to define "abusive"—presumably in response to US Chamber of Commerce complaints about legal uncertainty chilling business.

The symposium will have two panels, one of academics, one of practitioners.  Credit Slips will be well represented on the first panel by me and our former guest blogger, Patricia McCoy.  We'll be joined by Howard Beales of GW University's Business School, and the inimitable Todd Zywicki of Scalia Law School.    

My (lengthy) written submission (a/k/a everything you wanted to know about "abusive" but were afraid to ask) is here.  Bottom line, there's no reason for the Bureau to undertake a definitional rulemaking, its legal authority to do so is suspect, it cannot bind state AG's to any definition... but if it does do so, there's no scienter requirement, no cost-benefit analysis required, and "taking unreasonable advantage" sounds in unjust enrichment.   

New Paper: Consumer Protection After the Global Financial Crisis

Historian Ed Balleisen and I have just posted a paper of interest to Credit Slips readers who are interested in consumer protection, financial crises, and inputs into post-crisis policymaking more generally. I will let the abstract speak for itself:

Consumer Protection After the Global Financial Crisis

Edward J. Balleisen & Melissa B. Jacoby

Abstract

Like other major events, the Global Financial Crisis generated a large and diffuse body of academic analysis. As part of a broader call for operationalizing the study of crises as policy shocks and resulting responses, which inevitably derail from elegant theories, we examine how regulatory protagonists approached consumer protection after the GFC, guided by six elements that should be considered in any policy shock context. After reviewing the introduction and philosophy of the Bureau of Consumer Financial Protection, created as part of the Dodd-Frank Act of 2010, we consider four examples of how consumer protection unfolded in the crises’ aftermath that have received less attention. Our case studies investigate a common set of queries. We sought to identify the parties who cared sufficiently about a given issue to engage with it and try to shape policy, as well as the evolving nature of the relevant policy agenda. We also looked for key changes in policy, which could be reflected in various forms—whether establishing an entirely new regulatory agency, formulating novel enforcement strategies, or deflecting policy reforms.

The first of our case studies focuses on operations of the Federal Trade Commission in the GFC’s aftermath. Although the Dodd-Frank Act shifted some obligations toward the CFPB, we find that the FTC continued to worry about and seek to address fraud against consumers. But it tended to focus on shady practices that arose in response to the GFC rather than those that facilitated it. Our second case study examines the Congressional adoption of a carveout from CFPB authority for auto dealers, which resulted from strong lobbying by car companies worried about a cratering sales environment, and the aftermath of the policy. Here, we observe that this carveout allowed a significant amount of troubling auto lending activity to continue and expand, with potentially systemic consequences. Loan servicer misbehavior, particularly in the form of robosigning, is the focus of our third case study. Although Dodd-Frank did not explicitly address robosigning, the new agency it created, the CFPB, was able to draw on its broad authority to address this newly arising problem. And, because the CFPB had authority over student loan servicers, the agency could pivot relatively quickly from the mortgage context to the student loan context. Our fourth and final case study is the rise and fall of Operation Choke Point, an understandably controversial interagency program, convened by the U.S. Department of Justice, which, with the GFC fresh in mind, attempted to curtail fraudulent activities by cutting off access to online payment mechanisms. Here, we see an anti-fraud effort that was particularly vulnerable to a change in presidential administration and political climate because its designers had invested little effort in building public awareness and support for the program.

The Article concludes with an overall assessment and suggestions for other focal points for which our approach would be useful. The examples span a range of other domestic and global policy contexts.

 

 

 

The Implication of Reasonable Consumers Not Reading Contracts of Adhesion

A final installment to this evening's blog storm (you can tell that I'm procrastinating on exam grading...).

The Consumer Financial Protection Act prohibits "unfair" acts and practices.  "Unfair" is defined as an act or practice that causes or is likely to cause substantial injury to consumers, that is not reasonably avoidable by consumers, and the harm of which is not outweighed by benefits to consumers or competition.  

Now consider that the reasonable consumer does not read prolix contracts in detail.  The reasonable consumer might look at a top-level disclosure, say the Schumer Box for a credit card, or maybe the TRID for a mortgage, but I don't think it's controversial to say that the reasonable consumer isn't going to get into the fine print that follows.  The reasonable consumer isn't going to bother doing this because (1) the consumer might not understand the fine print, (2) the consumer can't negotiate the fine print, and (3) the consumer knows there's a good chance that all of the competitors have similar or worse fine print, so a search for better fine-print terms is might be futile (and might come at the expense of worse top-line terms).  Only a fanatic or a masochist reads every line of a cardholder agreement.

If I'm right that a reasonable consumer doesn't bother reading the details in contracts of adhesion, then notice what the "unfairness" prohibition is doing:  it is requiring that the terms of the contract be substantively fair.  Any hidden tricks or traps, like the double cycle grace period language I highlighted in my previous post, are going to be unfair.  Add in the prong of "abusive" that deals with taking unreasonable advantage of consumers' lack of understanding, and I think the Consumer Financial Protection Act is effectively requiring that consumer finance contracts must be "conscionable" or else have all of the tricks and traps made very clear to the consumer.

That's actually pretty remarkable. That's a light year beyond prohibiting "unconscionable" contracts.  It's an really affirmative fairness requirement for contract terms. It's also exactly what it should be.  Contracts should be a mechanism for mutual (subjective) welfare enhancement, not for one party to hoodwink the other. I wonder how many compliance lawyers are looking at consumer finance contracts in light of the fact that a reasonable consumer doesn't read fine print.  They should be.  

A final thought:  where does this leave arbitration agreements?  Arguably they fall into the problem unfair and abusive category (although there may be some argument about consumer benefit).  Yes, the CFPB's arbitration rulemaking was overturned by the Congressional Review Act.  But the rulemaking was undertaken under a specific power.  Query whether that prevents a rulemaking that is substantially the same under the UDAAP power.  No one really knows.  

UDAAP Violation in BofA Credit Cardholder Agreements?

Heads up Kathy Kraninger:  you might want to look at whether Bank of America is engaged in an unfair or abusive act or practice in its credit cardholder agreements.  Here's the deal.  

The Credit CARD Act of 2009 prohibits so-called "double cycle billing" on credit cards:

Prohibition on double-cycle billing and penalties for on-time payments.  ...[A] creditor may not impose any finance charge on a credit card account under an open end consumer credit plan as a result of the loss of any time period provided by the creditor within which the obligor may repay any portion of the credit extended without incurring a finance charge, with respect to—

(A) any balances for days in billing cycles that precede the most recent billing cycle; or

(B) any balances or portions thereof in the current billing cycle that were repaid within such time period.

The prohibition in clause (A) is on calculating the average daily balance to which the APR is applied based on balances other than in the current billing cycle.  That was the practice of double cycle billing:  the average daily balance was the average of not just the current billing cycle but of the current and previous billing cycles.  So even if you had no charges this billing cycle and had paid off the balance, you'd still have a positive average daily balance because of the previous month and thus pay interest.  

The prohibition in clause (B) is supposed to get at "trailing interest"—no interest should accrue on balances to the extent they are paid off on time.  If you charged $100, but repaid $90 on time, you should only be paying interest on $10, not on $100.  But notice how it's drafted. It only applies if there is a loss of a grace period; there is no grace period required.   If there is no grace period, you can be charged interest on the $100, even if you repaid $90 on time.  

So consider, then, this term from Bank of America's current credit card holder agreements:

We will not charge you any interest on Purchases if you always pay your entire New Balance Total by the Payment Due Date. Specifically, you will not pay interest for an entire billing cycle on Purchases if you Paid in Full the two previous New Balance Totals on your account by their respective Payment Due Dates; otherwise, each Purchase begins to accrue interest on its transaction date or the first day of the billing cycle, whichever date is later.

Did you get that?  You only have a grace period allowing for interest-free repayment if you have paid in full the two previous billing cycles.  Otherwise, you're going to be charged interest even if you pay the current cycle's balance in full.

For Cause Removal of the CFPB Director?

Mick John Michael Mulvaney's callow pursuit of a CFPB name change raises an intriguing question:  what should be done with a CFPB Director who spends all of his or her time showboating with political issues rather than actually carrying out the law?  

The CFPB Director is removable only for cause, as the PHH case confirmed. Back with Richard Cordray was Director, Republicans reportedly were attempting to assemble a dossier to justify his for-cause removal.  In the case of Cordray, the gist of the allegations was that he overstepped his authority by daring to issue non-binding regulatory guidance about indirect auto lending or was profligate in the renovations of the CFPB's 1960s-era headquarters building. But here's the thing.  The "for cause" removal statute has actual statutory language, and it does not explicitly include either overstepping authority or profligacy.  Instead, it covers "inefficiency, neglect of duty, or malfeasance in office."  There's some imprecision in these words, but the statutory language seems aimed at failure to act, rather than over-zealous action.  This interpretation makes sense because the courts are available to prevent against over-zealous actions, but only the President can take care that the law is in fact faithfully executed.  

As long as Donald Trump is President, the for cause removal language is of little importance.  Kathleen Kraninger is about to be confirmed as the CFPB Director, and her five-year term will extend past 2020, which means she might potentially serve under a Democrat President's administration.  If Kraninger operates similar to Mulvaney, focusing on things like the name of the agency and internal restructuring designed to undermine the agency's effectiveness, rather than on carrying out the agency's mission, that "for cause" dismissal language could actually have some bite.  

Let me be clear.  Historically, for cause dismissal has never been used.  I am unaware of any past case approving the actual for cause dismissal of an agency head (but let me know if I missed one).  Yet I think the implicit political rules have changed over the last few years such that this is no longer something that is beyond the Pale.  If Kraninger follows in the footsteps of Mulvaney, then at the very least, a Democratic President in 2021 would have a credible threat of for cause removal of Kraninger (and there would certainly be political pressure for the President to act).  This counsels for Kraninger to take a more energetic approach to carrying out the CFPB's statutory mission than that pursued by Mr. Mulvaney, who has gotten hung up on the statutory name and political headlining at the expense of the agency's mission. 

The Cost of the CFPB Name Change

Mick John Michael Mulvaney's wanted to change the CFPB's name to the Bureau of Consumer Financial Protection (BCFP), and indeed, the Bureau has already changed its signage and the name it uses on some of its communications.  But the name change has not had full effect yet, and it is now reported that it would not only cost the CFPB more than as much as $19 million, but it could cost regulated firms as much as $300 million.  

It's worth comparing that $300 million cost to industry for Mulvaney's vainglorious renaming project to the funds that the Bureau has recovered from wrongdoer's on Mulvaney's watch.

CFPB "Abusive" Rulemaking?

Acting BCFP CFPB Director Mick John Michael Mulvaney announced this week that the CFPB would be undertaking a rulemaking to define "abusive," the third part of the UDAAP triad. The CFPB's key organic power is to prohibit unfair, deceptive, and abusive acts and practices.  Unfair and abusive have statutory definitions, whereas deceptive does not, but "abusive" is a new addition to the traditional UDAP duo of unfair and deceptive.  Mr. Mulvaney suggests that a definitional rulemaking is necessary so that regulated entities will know what the law is. 

Actually, it's very clear what "abusive" means, at least as applied by the CFPB to date.

Access to Justice, Consumer Bankruptcy Edition

The Great Recession, the CFPB's creation, the rise of debt buying, changes in the debt collection industry, and advances in data collection have encouraged more research recently into issues of access to justice in the context of consumer law and consumer bankruptcy. This spring, the consumer bankruptcy portion of the Emory Bankruptcy Development Journal's annual symposium focused on access to justice and "vindicating the rights of all consumers." Professors Susan Block-Lieb, Kara Bruce, Alexander Sickler, and I spoke at the symposium about how a range of consumer law, finance, and bankruptcy topics converge as issues of access to justice.

We recently posted our accompanying papers (detailed further below) to SSRN. My essay overviews what we know about the barriers people face entering the consumer bankruptcy system, identifies areas for further research, and proposes a couple ideas for improving access to bankruptcy. Susan Block-Lieb’s essay focuses on how cities can assist people dealing with financial troubles. And Kara Bruce’s and Alex Sickler’s co-authored essay reviews the state of FDCPA litigation in chapter 13 cases in light of Midland Funding v. Johnson and explores alternatives to combat the filing of proofs of claim for stale debts.

CFPB Enforcement Paralyzed

Normally we say that a law is as strong as its enforcement. On February 7, however, the Consumer Financial Protection Bureau raised questions about the enduring strength of the consumer financial laws in its third Request for Information under Acting Director Mick Mulvaney. This time, the topic is CFPB enforcement. It is not hard to guess where this third "RFI" is headed, insofar as only two new enforcement orders have been entered under Mr. Mulvaney to date. In contrast, from the CFPB's inception through November 2017 (when Mr. Mulvaney took office), the Bureau brought a total of 200 public enforcement actions.

The Government-by-Grift Mentality

Mick Mulvaney's entirely classless and petty firing of the CFPB's Consumer Advisory Board (CAB) has been amply covered elsewhere. Having served on the CAB from 2012-2015, however, I've got to comment on the statement by Mulvaney's henchman that “The outspoken members of the Consumer Advisory Board seem more concerned about protecting their taxpayer funded junkets to Washington, D.C., and being wined and dined by the Bureau than protecting consumers.”

Put aside that this statement is gratuitously offensive to a bunch of hard working folks who volunteer their time and expertise. The "junkets" I enjoyed from my CAB service involved flying coach with numerous connecting flights, staying at the Days Inn, being transported around in busses, attending full-day working meetings held in windowless rooms at community college campuses in small cities around the US, and then paying for my own dinner. But I sure made out with the free coffee, pastry, and box lunch. 

What's remarkable here is that Mulvaney's flunky believes that people serve in government or on advisory boards for the perks and self-enrichment.  In a world of Pruitt's first class flights, mattress, and security detail, Carson's dining room set, and Mnuchin and his Marie Antoinette jaunting off to see the eclipse on a military flight, not to mention the President and his emoluments plus tax-payer-funded vacations at his Mar-a-Lago timeshare, well, it's just natural to assume that's how everyone operates.  It's a new twist on "government for the people."  It's really sad that it doesn't enter the Mulvaney's dude's head that maybe some of us actually act out of true volunteerism and a desire to make the country a better place. 

OCC Payday Lending Bulletin

The Office of Comptroller of the Currency put out a Bulletin this week encouraging banks to make short-term small-dollar installment loans to their customers—basically bank payday loans.  The OCC seems to envision 2-12 month amortizing, level-payment loans, but they're meant to be a payday substitute.  

I suspect many readers of this blog will react with indignation and possibly shock (well, maybe nothing's shocking these days), but I think the issue is more complicated.  Depending on what one sees as being the policy problem posed by payday lending, bank payday lending might make a lot of sense.  Specifically, if one sees the policy issue with payday lending as being its high costs, then bank payday lending (like postal banking) holds out the promise of lower-cost loans. If, however, one sees the policy issue as being about payday borrower’s inability to repay even the principal on their loans, then bank payday lending (or postal payday lending) isn’t a solution at all, but a whitewash. Yet, as we'll see, there's surprising convergence between these positions on the ground in regulatory-land.

Shakespeare Meets ALJs: Much Ado About Nothing

In a recent oral argument before the U.S. Supreme Court, conservatives urged the Court to outlaw the use of administrative law judges (ALJs) in agency enforcement actions.  The Consumer Financial Protection Bureau is paying notice. On January 31, 2018, the CFPB reprised the ALJ debate in its second Request for Information under Acting Director Mick Mulvaney. This RFI asked:  should the CFPB shift course to litigate all of its enforcement cases in federal court and none before ALJs? Suffice it to say, there is less here than meets the eye.

How to Tie CFPB Enforcement Up in Knots

While Acting Director Mick Mulvaney is apparently on a tear to defang the Consumer Financial Protection Bureau, some of his actions have flown under the radar. In this and future guest blog posts, I will shine light on one key initiative that largely has gone unnoticed:  namely, the twelve Requests for Information that Mr. Mulvaney launched on January 26. These notices, dubbed "RFIs," seek public comment on scaling back every core function of the CFPB, from enforcement and supervision to rulemaking and consumer complaints. 

Although the RFIs provide the veneer of public participation, in reality they are slanted toward industry. Many are couched in such vague language that consumers and consumer advocates cannot tell which rollbacks are gaining traction behind closed doors. Just last week, Mr. Mulvaney raised new concerns that the RFI process is infected with bias when he personally pressed bankers attending a meeting of the National Association of Realtors to file responses to the RFIs. 

Call for Papers: The Consumer Financial Protection Bureau

On Friday, January 4 from 10:30-12:15 pm, the section on Commercial & Related Consumer Law and the section on Creditors’ and Debtors’ Rights are hosting a joint panel at the 2019 AALS Annual Meeting in New Orleans. We are also issuing a call for papers. 

The topic of the panel is: The Consumer Financial Protection Bureau: Past, Present, and Future. 

The Consumer Financial Protection Bureau was created following the 2008 financial crisis with the intended goal of making markets for consumer financial products and services work for all Americans. Congress granted the Bureau broad powers to enforce and regulate consumer financial protection laws and entrusted it with a number of consumer-facing responsibilities. This program will examine the tumultuous history of the CFPB, from its creation as part of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, its actions over Director Richard Cordray’s tenure, the legal fight over who currently leads the Bureau, and the actions of the interim director named by President Trump. Panelists will also discuss the possible future of the CFPB and the “lessons learned” from its history and what they tell us about future fights to ensure consumers are protected in the financial products marketplace.

Confirmed speakers include:

• Patricia McCoy, Liberty Mutual Insurance Professor of Law at Boston College Law and first Assistant Director for Mortgage Markets at the CFPB.
• Kathleen Engel, Research Professor of Law, Suffolk University School of Law, member of Consumer Financial Protection Bureau Board.
• Deepak Gupta, founding principal of Gupta Wessler PLLC and a former Senior Litigation Counsel and Senior Counsel for Enforcement Strategy at the CFPB. Gupta also represents Leandra English in English v. Trump.

Proposed abstract or draft papers are due by August 15, 2018 and should be submitted using this form to ensure blind review. Members of both sections’ executive committees will review and select papers for the program. The author(s) of the selected paper will be notified by September 28, 2018.

For more information, see the full description of the a call for papers here.

Please direct any questions about this Call to Professors Dalié Jiménez and Lea Krivinskas Shepard.

Congressional Review Act Confusion: Indirect Auto Lending Guidance Edition (a/k/a The Fast & the Pointless)

Part of the legacy of Newt Gingrich and his Contract with America (can I get damages for breach?) is the Congressional Review Act.  The CRA creates a mechanism whereby Congress can override an agency rulemaking on a simple majority vote in both houses, meaning that it is not subject to the filibuster in the Senate. Congress has only used this tool infrequently, most notably with the CRA resolution overriding the CFPB's arbitration rule. 

Some members of Congress have now turned their CRA sights on various regulatory "guidance" that they find objectionable. This guidance is not formally binding and enforceable law, but other sorts of communications from agencies that help regulated entities understand agency expectations, interpretations, and policies. Among this guidance is the CFPB's Indirect Auto Lending Guidance. I suspect that most of the folks who rail against it have never actually bothered to read it. It's a short document. Most of it is spent explaining what indirect auto lending is. In brief, you can get a car loan from a direct lender who makes the loan directly to you or you can get the loan from the dealer. If you get the loan from the dealer, the dealer will typically turn around and sell the loan to the real lender.  (The exception are buy-here-pay-here used car dealers who keep the loans.)  These indirect lenders include captive finance companies of auto manufacturers, but also banks (e.g., Santander has a large business in this space). The indirect lenders compete for dealer business, not for consumer business, and therein lies the problem. The indirect lenders set a "buy rate"--the minimum interest rate and other terms on the loan at which they will purchase it, but then allow dealers to markup the loan above the buy rate (this is the "dealer reserve," which looks an awful lot like the now-prohibited yield spread premiums on mortgages paid to mortgage brokers).  This sets up a situation in which dealers might engage in discriminatory markups in violation of the Equal Credit Opportunity Act. The question is whether the indirect lenders face any liability for such discriminatory markups.  

The CFPB's Indirect Auto Lending Guidance notes that this is a possibility as indirect lenders can potentially qualify as "creditors" under ECOA. The guidance then goes on to say that because there are compliance risks, here are some things that indirect lenders should consider doing as part of their compliance programs.  Critically, the guidance doesn't actually say that the CFPB believes that dealers ar "creditors" under ECOA, only that it is possible that they could be, nor does it require that dealers do anything.

It's not clear if there are the votes in Congress to pass the CRA resolution, but even if there are, there are still a bunch of legal questions about whether such a resolution can validly be passed in regard to the Indirect Auto Lending Guidance and what its impact would be. These are discussed below the break. My short answer is that it is very questionable whether the CRA has any application of the Indirect Auto Lending Guidance and even if it does, it is unlikely to have much impact as it doesn't invalidate ECOA or ECOA enforcement actions against indirect lenders. This then raises the question of why the (GOP) wants to spend political capital pursuing a rather pointless resolution.  

Preempting the states: US Ed to shield debt collectors from consumer protection

As if the power to garnish wages without going to court, seize federal income tax refunds and charge 25% collection fees weren't enough, debt collectors have now persuaded the Education Department to free them from state consumer protection laws when they collect defaulted student loans. Bloomberg News reports that a draft US Ed federal register notice announces the Department's new view that federal law preempts state debt collection laws and state enforcement against student loan collectors. This move is a  reversal of prior US Ed policy promoting student loan borrower's rights and pledging to "work with federal and state law enforcement agencies and regulators" to that end, as reflected in the 2016 Mitchell memo and the Department's collaboration with the CFPB.

Customer service and consumer protection will now take a back seat to crony profiteering by US Ed contractors. This news item has prompted a twitter moment.

Financial Education Isn't Consumer Protection

The CFPB is out with its Strategic Plan for FY 2018-2022, also known (without any apparent irony) as The Five Year Plan.  Lots to chew on in this doozy, starting with this:

If there is one way to summarize the strategic changes occurring at the Bureau, it is this: we have committed to fulfill the Bureau’s statutory responsibilities, but go no further. Indeed, this should be an ironclad promise for any federal agency; pushing the envelope in pursuit of other objectives ignores the will of the American people, as established in law by their representatives in Congress and the White House. Pushing the envelope also risks trampling upon the liberties of our citizens, or interfering with the sovereignty or autonomy of the states or Indian tribes.

I've written about envelope pushing and Mick-Mulvaney-Think previously, but there's two new things here.  First there's the claim that going beyond the Bureau's statutory responsibilities violates the will of Congress.  (Note the unusual addition of "the White House" to the formulation.)  Narrowly that's uncontroversial, but the way Mulvaney-Think approaches the Bureau's statutory responsibilities, if there isn't a statutory clearly and directly prohibiting something, then there's no prohibition. Standards-based regulation is gone, even if that is exactly what Congress (and the White House when the bill was signed into law) demanded.

Second, there is a curious solicitousness for the rights of states and Indian tribes.  The CFPB has never previously been accused of trampling the rights of states, but the inclusion of states is all the more confusing given the Bureau's newfound commitment to protecting the sovereignty of Indian tribes. The only relevance of Indian tribes to the CFPB is that a few of them partner with "fintechs" in rent-a-tribe schemes to avoid state regulation, particularly state usury laws. It would seem that upholding state sovereignty and rights would require cracking down on rent-a-tribe schemes; the idea that a tribe has immunity for commercial activities extending outside of tribal lands is clearly wrong--were it so all of federal law could be subverted. It looks like someone forgot to remove the "states rights" talking point from the usual GOP talking points deck because someone didn't realize that it conflicts with the new tribal rights talking point.  Oops.  

But let's turn the the actual plan itself, not just the opening rhetoric. I'm only going to focus here on item number 1:  more financial education. This might qualify as Worst. Consumer. Protection. Idea. Ever. 

Letting the Money Changers Back in the Temple

Golden Valley Lending, Inc. is a payday lender that charges 900% interest on consumer loans sold over the internet. Golden Valley relies on the dubious legal dodge of setting up shop on an Indian reservation and electing tribal law in its contracts to evade state usury laws. In April 2017 the Consumer Financial Protection Bureau filed an enforcement action asserting that Golden Valley and three other lenders were engaged in unfair debt collection practices because they violated state usury laws, and also failed to disclose the effective interest rates, violating the federal Truth in Lending law (enacted in 1969). 

 Mick Mulvaney, President Trump’s interim appointee to direct the CFPB, has now undone years of enforcement staff work by ordering that the enforcement action be dropped.  The advocacy group Allied Progress offers a summary of Mulvaney’s special interest in protecting payday lenders, in South Carolina and in Congress, and the campaign contributions with which the payday lenders have rewarded him.

 

 

Related articles

Report says Mulvaney has put CFPB probe of Equifax "on ice"

English v. Trump Amicus Brief

Slipsters/Slips Guest Bloggers Kathleen Engel, Dalié Jiménez, Patricia McCoy and I submitted an amicus brief (with numerous other co-signors) to the DC Circuit in support of appellant Leandra English in English v. Trump, which, despite its caption is not about assault and battery, but about who is the rightful acting Director of the CFPB.  We believe that the text, legislative history, and order of enactment of the relevant statutes makes clear that the Consumer Financial Protection Act, not the Federal Vacancies Act control.  We further argue that there are particular problems with the OMB Director serving as the acting Director of the CFPB given that OMB has certain oversight roles vis-à-vis CFPB, but is also in other case specifically precluded from exercising control over CFPB.  

Mick-Mulvaney-Think

A couple of weeks ago there appeared a remarkable memo written by Mick Mulvaney (who claims to be the Acting Director of the CFPB) to the CFPB staff. The Financial Institutions practice group at Davis Polk, one of the top financial institution practices nationwide, seems to have elevated the ideas expressed in the memo into what one might call “Mick-Mulvaney-Think.”

The basic idea behind Mick-Mulvaney-Think is “a deep commitment to the rule of law as a philosophical concept and as an important brake on agency discretion in the administrative state.” In other words, agencies should not undertake any discretionary actions, but only enforce clear violations of express statutory prohibitions. There are two problems with this idea.

OLC Legal Opinion and the Missing Legislative History

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

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. 

The Myriad Irregularities of the Mulvaney "Appointment"

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

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.