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. 

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

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.  

CFPB Politics Update

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.

Commentary on the CFPB Arbitration Rule

A few weeks ago, Adam did a great post about the CFPB's new arbitration rule, analyzing whether we would get a veto from the Financial Stability Oversight Council (FSOC). My own, much more modest effort, explaining the arbitration rule for our local NPR station (WILL) appeared this morning. With all the daily nonsense out of Washington, this story is falling through the cracks.

CFPB Arbitration Rulemaking--and Potential FSOC Veto

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.  

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

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.  

Senate Banking Committee Testimony

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. 

Jeb Hensarling's Alternative Facts

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. 

What Would a CFPB Commission Have Done Differently?

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

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).  

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

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. 

CFPB Commission Structure Proposals

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.

CFPB Tales Told Out of School (Updated)

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. 

Fake News, Special Carrie Sheffield CFPB Edition

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.

CFPB and ACICS Retrospective

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.  

How Consumers Use the CFPB's Complaint Function

I recently posted to SSRN my new article, Calling on the CFPB for Help: Telling Stories and Consumer Protection (Law & Contemporary Problems, forthcoming 2017). In the article, I survey a random sample of consumers' narratives detailing their complaints about consumer credit and financial service providers, with the goal of assessing how people engage with the complaint function in light of how the CFPB processes complaints. In short, consumers submit complaints via the CFPB's website and by phone, the CFPB forwards the complaints to companies, and the companies are required to respond. That the CFPB does not respond to complaints in the first instance may come as a surprise to some consumers, despite the CFPB's websites’ prominent statements about where it sends complaints. Importantly, the CFPB is not the only federal or state agency that maintains a complaint function. The DOJ, FTC, and other agencies similarly take complaints from constituents, and likewise often do not respond directly to the complaining individuals. Identifying when and how people are not understanding how their complaints will be processed may provide agencies an opportunity to further help constituents and to augment how they meet their goals.

The CFPB and Behavioral Economics

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).  

The CFPB and Consumer Welfare

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.  

Ironic Observation of the Day, CFPB Edition

I just want to observe the irony that while the anti-consumer echo chamber was jumping up and down in joy over the ruling in PHH v. CFPB (see, e.g., here, and here), Wells Fargo's CEO resigned over a consumer financial abuse scandal.  Hmmm.   But surely if the CFPB had been a multi-member commission or the Director were subject to at-will removal, all would be well. 

(I'd also point out that for all of the self-congratulations in these pieces, they don't seem to have realized how little the PHH ruling actually buys them. Maybe if they actually bothered to understand the agency, rather than just spout rhetoric, they might realize what a manqué victory this was.)

PHH v. CFPB: A Blessing in Disguise for the CFPB

The headlines look pretty bad:  the DC Circuit Court of Appeals held the CFPB's structure to be unconstitutional in a case call PHH v. CFPB, which deals with kickbacks in captive private mortgage reinsurance arrangements allegedly in violation of the Real Estate Settlement Procedures Act.  In fact, however, the ruling is a blessing in disguise for the CFPB. While the 110 page decision is filled with inflammatory rhetoric, it gives the CFPB's detractors very little succor in the end.  The CFPB lost on the decision's rhetoric, but won on the practical implications.  Although the CFPB’s current structure was declared unconstitutional, the court also immediately remedied the flaw by declaring that the CFPB Director is now removable by the President at will, rather than only "for cause" as provided for by the Dodd-Frank Act.  There are four critical implications from this ruling:   

• First, the CFPB’s existing rule makings and enforcement actions remain valid and unaffected.  That's a huge win for the CFPB.  It's business as usual at the CFPB for all intents and purposes. 

• Second, the CFPB’s Director is now under direct Presidential political control, but that doesn’t have partisan implications:  a GOP-appointed director could be removed as easily by a Democratic president as a Democratic-appointed director could be removed by a Republican president. Now the CFPB Director, instead of running on a five-year term will be on a five-year term that might get curtailed with every change in Presidential administration. That's not a particularly big deal. 

• Third, the CFPB remains budgetarily independent.  The importance of this cannot be over-emphasized.  It means that if anyone wants to affect the CFPB's ability to function it has to be done out in the open. The agency cannot be quietly asphyxiated through the appropriations process as has happened with the SEC and FTC. 

• And finally, the decision takes the wind out of sails of House GOP efforts to gut the CFPB by turning it into an ineffective commission structure and subjecting its budget to appropriations.  The House GOP has been attacking the CFPB as relentlessly as it has attacked Obamacare, and the DC Circuit just took away their leading argument, namely that the CFPB has to be removed wholesale because its structure is unconstitutional.  Not so said the court.  There was a very targeted surgical fix, and now the agency’s structure is kosher. Combine that with the Wells Fargo fake account scandal, which underscored the need for a strong CFPB, and the House GOP's attacks on the CFPB are standing on increasingly shaky ground. 

Is It Time for the CFPB to Regulate Retail Bank Employee Compensation?

It doesn't take a genius to figure out that incentive-based compensation like the type featured in Wells Fargo's current and previous consent orders has the potential to encourage fraud and steering of consumers into inappropriate products in order to make sales numbers. Here's the thing:  there's little regulation of retail banking employee compensation. Instead, banks are relied upon to self-regulate, to have the good sense not to have unduly coercive incentive compensation and to have internal controls to catch the problems incentive compensation can create. But when a leading bank like Wells Fargo repeatedly fails to have good sense and to have sufficient internal controls, it suggests that it might be time for more directed regulation that will create clearer lines that facilitate compliance.  

The CFPB already regulates the compensation of mortgage originators (loan officers and brokers), limiting compensation based on loan terms to 10% of total compensation. But this regulation applies only to mortgage loans. There's no regulation of retail banking employee compensation generally.  And there are some big wholes in the CFPB mortgage loan officer compensation regulation. In particular, the CFPB's regulation does not cover compensation based on the number of loans made or the size of the loans, only on the terms of the loans. That leaves the door open for banks to set up compensation schemes that pressure employees to engage in fraud to meet quotas and get bonuses. 

So what can be done going forward?  

CFPB Consumer Complaint Narratives: What They Say About Bankruptcy

The Consumer Financial Protection Bureau's consumer complaint database has contained narratives for over a year now. Each month, the CFPB publishes a report that summarizes the complaints received over the previous three months, and that focuses on a specific product and geographic area. (The latest report was published on August 31.) The higher-level summary offered by these reports is interesting and I have referenced them in class on occasion.

The consumer complaint narratives tell as interesting, but often different stories. However, they are harder to sort through systematically. In preparation for a symposium, I recently took a random sample of complaints with narratives published in the year period between May 2015 and April 2016. Having now read thousands of narratives, one trend stood out to me rather quickly -- narratives that talked about the consumer's prior bankruptcy or a relative's bankruptcy. About 5% of the narratives discuss bankruptcy.

The Bad CHOICE Act

I'm testifying before House Financial Services tomorrow regarding the "CHOICE Act," the Republican Dodd-Frank alternative.  My testimony is here.  It's lengthy, but it doesn't even cover everything in the CHOICE Act--there are just too many bad provisions, starting with the idea of letting megabanks out of Dodd-Frank's heightened prudential standards in exchange for more capital, then moving on to a total gutting of consumer financial protection, and ending with a very poorly conceived good bank/bad bank resolution system executed through a new bankruptcy subchapter.  The only good thing about the Bad CHOICE Act is that it has little chance of becoming law any time soon. 

Auto Title Lending: Exploding Toasters

The CFPB has a new report out on auto title lending, and the findings are jaw-dropping. If ever there was a consumer financial product that looks like an exploding toaster, it is an auto title loan.  Default rates on auto title loans are one in three, with one in five resulting in a repossession. Is there any consumer product that is tolerated when one out of three products blows up? Even one in five? 

There's a lot of good data in the report (which assiduously avoids any interpretation, but just presents the facts), but beyond the default rates, here's what really jumps out at me: over 80% of the loans roll over and around half result in sequences of 10 or more loans.  That means that rather than viewing auto title loans as short term products with an extension option, they are really used more like longer-term products with a prepayment option. But more importantly, it tells us something about how to interpret default rates.  

The CFPB's Proposed Rules on Consumer Financial Arbitration

As has been expected for some time, the Consumer Financial Protection Bureau has issued a proposed rule that would prohibit companies providing consumer financial services from pairing arbitration clauses with clauses that prohibit consumers from bringing or participating in class actions. The rule also imposes disclosure requirements on companies that use arbitration. The CFPB's announcement is here; the proposed rule is here. There are two main components.

First, covered providers of consumer financial products can still include pre-dispute arbitration clauses in their contracts, but those who do must explicitly state that the consumer retains the right to bring or participate in a judicial class action. The rule requires that the following language be included in the contract: "We agree that neither we nor anyone else will use this agreement to stop you from being part of a class action case in court. You may file a class action in court or you may be a member of a class action even if you do not file it." (As an aside, the CFPB rule only applies to class actions brought in court. Companies may forbid class action proceedings in arbitration, and I imagine that careful drafters will want to do so expressly.) Second, the Bureau proposes to require covered providers to submit information about claims filed by or against them in arbitration, including copies of the arbitration demand, any response, and the arbitrator's award (see p. 362-363 of the proposal). The Bureau apparently hasn't made up its mind about whether it will make this information public or will merely use it to monitor arbitration proceedings. 

 

The Politics of Indirect Auto Lending and the CFPB

Steve Davidoff Solomon has a Dealbook column on the CFPB's attempts to regulate auto lending that unfortunately gives the wrong impression about what the agency is up to, but which does tee up a really interesting question about the agency's politics.

Dear NY Times: Thank You For Letting Me Sue Only 500 Miles From My Home

So the New York Times has just finished a three-part series on arbitration. For such lengthy coverage, the Times reveals almost nothing that will be new to those who have been following debates over the use of pre-dispute arbitration agreements. But if you haven't been following the issue, the Times series is a good place to start. It highlights some pressing recent issues, such as the use of arbitration to eliminate class action liability, while also touching on issues that often escape attention, such as judicial enforcement of contracts requiring religious arbitration.

Discussions about arbitration can be frustrating. For one thing, it is hard to have them without sending (often unintended) ideological signals. Those who highlight flaws in anti-arbitration arguments--even if simultaneously supporting greater regulation--are often characterized as "defenders" of "forced arbitration," as if the only valid choice is to justify or oppose (rather than investigate) the practice. Meanwhile, lawyers for large business interests have the irritating habit of presenting themselves as defenders of the common good, rather than as zealous advocates for corporate clients. 

The Myth of the Disappearing Free Checking Account

A regular trope sounded by opponents of consumer financial regulations is that the regulations have resulted in the disappearance of free checking. Whether it's the Durbin Interchange Amendment, the CFPB, or the Dodd-Frank Act in general, all are variously blamed for the supposed demise of free checking.  As it turns out, free checking is a little like Mark Twain--reports of its death have been greatly exaggerated.  Most Americans with bank accounts report paying nothing for their services.  The prevalance of such respondents has actually increased since 2010, from 53% to 61% of respondents. 

Who's Afraid of a Republican CFPB?

My thoughts on the issue at The American Banker.  Short version: the possibility of a GOP presidential victory in 2016 isn't a good argument for changing the CFPB to a commission structure. 

Advertising and Payday and Title Lending: How Do Lenders Target Borrowers?

Are bigger payday and title lending companies better for low-income borrowers than smaller companies? Jim Hawkins (Houston Law Center) takes up that question in a new article which reports the results of his study of the advertisements of payday and title loan companies with storefronts in Houston, Texas. The results are quite timely given that the Consumer Financial Protection Bureau is poised to release regulations for payday lenders. Based on Colorado's experience with payday lending reform, these regulations have the potential to increase large lenders' market share. What might be the consequences of consolidation?

Hawkins begins to answer that question by comparing big and small lenders located in Houston based on their compliance with Texas regulations, prices, use of "teaser rates," and attempts to target minorities and women through storefront and online advertising -- all of which are practices that critics of payday and title lending have identified as particularly problematic or exploitative. His results overall are mixed. For instance, larger companies in Houston are more likely to feature minorities in advertisements, and smaller companies are more likely to feature women. Perhaps the most interesting finding is that there is price competition among these companies in Houston: larger companies tend to charge higher APRs than smaller companies. Given that the CFPB regulations will not cap interest rates, might there be unintended consequences of regulations that may bolster large lenders?

CFPB Data Collection

I've got an op-ed in the American Banker about the CFPB's data collection, which has become the latest inside-the-Beltway attack on the CFPB.  

The problem is that the CFPB's data collection critics (and here and here and here, among others) don't understand the first thing about the nature of the data collected by the CFPB.  Newt Gingrich, for example, worries about the civil liberties implications of the CFPB seeing your credit card bill. I'd be worried about that too, but that's not the data the CFPB's getting.  Nor is it getting metadata that can be used to reidentify accounts. Nor is the data that the CFPB collects useful to cybercriminals--it lacks account numbers, expiry dates, PINs, etc. And almost all of it is already commercially or publicly available and already collected by other government agencies.  But shoot first, ask questions later is how things often play out with attacks on the CFPB.  Would it be too much to ask for factually-grounded policy discourse every once in a while?

The Agency That's Got Your Back

Nice piece in Time Magazine on the CFPB here. 

Consumer Financial Protection Clinic Position

Here's an opportunity to supervise a consumer financial protection clinic that has done some great work - information on the position and how to apply here. 

Dodd-Frank's Constitutionality

I'm testifying tomorrow before Senate Judiciary Committee's Subcommittee on The Constitution (yes, that's the official capitalization), about the constitutionality of the Dodd-Frank Act.  

Short version: nothing to see here folks.

Slightly longer version: really nothing to see here.

Even longer version:  the plaintiffs in State National Bank of Big Spring v. Lew have a totally non-Originalist interpretation of the Bankruptcy Clause, namely that "uniform laws" apparently requires equal treatment of all similar creditors, so title II Orderly Liquidation Authority is unconstitutional.  Yes, that's the sound of me shaking my head.

My written testimony is available  here.  

Big Win for CFPB on Debt Collection

Yesterday, Judge Amy Totenberg of the Northern District of Georgia issued a very cogent 70-page opinion in the case of the CFPB v. Frederick Hanna & Associates, a large collection law firm with offices in Georgia, Florida, and South Carolina. The opinion denies Hanna's motion to dismiss in its entirety, and almost completely agrees with the CFPB's legal theory. In doing so, the opinion deals a serious blow to the collection law firm business model.

A brief recap of the case if you haven't been following. A year ago, the CFPB filed suit against the Hanna law firm essentially attacking the big collection law firm business model. Among other things, the CFPB alleged that the firm operated "less like a law firm than a factory" and that attorneys were not "meaningfully involved" in the collection lawsuits they filed. As an example, the CFPB alleged that one attorney in the Hanna firm signed about 138,000 lawsuits between 2009-10. That's 189 lawsuits per day, 7 days a week, 52 weeks a year.

The second CFPB claim was that in filing most of its lawsuits on behalf of debt buyers, the law firm "knew or should have known that many of the[] affidavits [they filed] were executed by persons who lacked personal knowledge of the facts." The Bureau sued under both the Fair Debt Collection Practices Act (FDCPA) and the Consumer Financial Protection Act (CFPA) for what it alleges were false or misleading and unfair acts and practices.

The opinion allows the Bureau to proceed on all of these claims. Specifically, Judge Totenberg (who incidentally, is Nina Totenberg's sister) found that the Bureau could regulate collection attorneys under the CFPA (the first time any court considered this issue), that the "meaningful involvement doctrine" extends to activities in litigation, and that the Hanna firm might be liable for filing affidavits given to it by its clients if the CFPB can prove its allegations.

The last two points are huge because it means that collection attorneys will have to spend some time reviewing the collection cases they file. (How much time and what constitutes enough "involvement" is up in the air). Nonetheless, this completely up-ends the business model of at least some collection law firms. As Joann Needleman has pointed out at InsideARM, an interlocutory appeal is unlikely to succeed here, so look for the CFPB to file more cases (or enter into consent decrees) with more law firms.

Searching CFPB Consumer Narratives

Yesterday the Consumer Financial Protection Bureau (CFPB) went live with its consumer complaint database, publishing over 7,700 consumer narratives detailing problems they have faced with banks, debt collectors, and other creditors. The CFPB also issued a request for information seeking public input on how it can make the data more useful to the public, including how to normalize the narratives to make them more comparable. Which prompted me to search through some of the narratives.

The website allows for viewing of the narratives online by products and services, as well as downloading of data. Some of the products are broken down by sub-product--such as medical specific debt collection and payday loan specific debt collection. The narratives in each product category seem to be searchable by words and phrases. For instance, I searched the payday loan product category by the name of a notorious lender.

Stale Debts in Bankruptcy

Should liability under the Fair Debt Collection Practices Act (FDCPA) lie against a creditor who submits a proof of claim past the statute of limitations in a consumer bankruptcy case?

That is the question the Supreme Court declined to review recently in LVNV Funding, LLC v. Crawford. In Crawford, the Eleventh Circuit applied the "least sophisticated consumer" standard to find liability for the debt buyer when it submitted a proof of claim in 2008 for a debt that was out of statute as of 2004. Other courts have held differently. In fact, just last month, district courts in Indiana and Pennsylvania dismissed FDCPA suits against debt buyers under essentially the same facts as Crawford. Other courts, including the Second Circuit, have seemingly held that FDCPA liability can never lie in a bankruptcy case.

Putting the merits of applying the FDCPA in a bankruptcy case aside, it seems to me that in this specific instance potential liability under the Act could serve very useful functions: namely efficiency and cost savings.

Lessons For Consumer Protection From The World Of Inclusive Capitalism

Lately I have been teaching courses with names such as "Global and Economic Justice" and "History, Impacts and Regulation of Consumer Credit" instead of "Bankruptcy," "Secured Transactions" and "Chapter 11 Reorganizations." So I have been reading different books and listening to different speakers. A lecture I attended recently by Xav Briggs  here brought to my mind a couple of books that I use in one of my courses, “Borrow” and “Debtor Nation” both written by Louis Hyman. In many ways Hyman's books remind me of "Credit Card Nation" the outstanding and "ahead of its time" book by Robert Manning which I used extensively when I created my consumer credit course in 2002. 

Part of the wisdom I find in each of these books is the caveat that you cannot understand consumer protection without understanding the nature of American capitalism or the drive for an above-market return. This was never clearer or more of a "blow to the side of the head" than during the frenzy in the early 2000's, and perhaps nothing demonstrates it more crassly than the rating agencies covering their eyes as they rated subprime securitizations allegedly in order to "keep the business." 

Insurance Capital Games and PMI Reinsurance Kickbacks

The New York Times carried an important story about the risky investment moves of life insurance companies. There's a lot of good stuff in the story, but it missed an important angle, namely the consumer harm that has already resulted from bank affiliation with captive reinsurers in the private mortgage insurance space, namely inflated and unecessary private mortgage insurance premiums because of illegal kickback arrangements. 

Auto Title Loans: Like Payday Loans, But Larger and Riskier

The Pew Charitable Trusts today released a report focusing on the market for auto title loans. The report brings together data from a wide variety of sources (including Slips contributor Nathalie Martin's work) to provide a clear, succinct, and thorough overview of the mechanics of this under-studied industry. It also, and most interestingly, includes the results of Pew's nationwide survey of borrowers and discussions with focus groups.

The empirical data underscore how similar auto title loans are to payday loans, and how regulation of this part of the alternative finance industry also is greatly needed. The report is particularly timely in light of the Consumer Financial Protection Bureau's anticipated upcoming release of payday loan rules, and its field hearing tomorrow in Richmond on payday lending.  

People reported taking out auto title loans for similar reasons as to why they take out payday loans: they make less than $30,000 a year and primarily need money to meet everyday expenses, though some use the money to pay unexpected expenses. People also reported having other options to borrow money or cut expenses. Even so, they focused on the ease of getting money, relying on lender location and advertisements, and word of mouth, rather than comparison shopping or considering other ultimately less expensive ways to obtain credit. What is perhaps most disturbing is that a sizable portion of people reported paying back these loans via the exact means that they rejected when taking out the loans: borrowing from friends and family, going to banks or credit unions, and using credit cards.

Who’s Looking Out for the Students?

Last week at the Brookings Institution, Consumer Financial Protection Bureau (“CFPB”) Director Richard Cordray described his greatest challenge as CFPB director as coordinating his agency’s response with those of other agencies whose responsibilities overlap with the CFPB. Although he didn’t mention the U.S. Department of Education (the “ED”) by name, perhaps he was thinking of them when he spoke, given the two agencies’ widely divergent responses to the ongoing Corinthian Colleges debacle. For those who aren’t aware, both agencies recently accused Corinthian Colleges of misleading students about their job prospects at graduation. But the agencies appeared to part ways on the appropriate response. 

Consumers Don't Shop for Mortgages and the CFPB Intends to Change That

Richard Cordray, the director of the Consumer Financial Protection Bureau, gave a short speech today at the Brookings Institution. In his speech, he outlined several steps the CFPB is taking to help fix the mortgage market. In his view, one of the chief problems with the mortgage market is that consumers do not shop around for mortgages the same way they shop for other products, including houses. According to a recent CFPB study, "almost half of all borrowers seriously consider only a single lender or broker before deciding where to apply."

The CFPB's aims to solve this problem with some new tools. More after the break.

Nostradamus-Style Predictions for Consumers in 2015

First some easy ones you all know:

1. The stock market will drop, perhaps precipitously, making now great time to rebalance retirement portfolios.

2. The price of gas will inch up and in the meantime, more states will add a little gas tax here and there to quietly fill empty coffers.

On Mortgage Lending:

3. There will be more low rate, “no closing costs” home refinancings available to good credit risks, as lenders try to figure out what to do with themselves. Not much of a spoiler here, since this is already happening.

4. More lenders will be answering the phones when borrowers want to settle up their mortgages. Lenders will be cutting the red tape that is costing them a fortune. Also, more lenders will be settling pending home foreclosure litigation. Something is better than nothing, some might be thinking. 

5. Cases that don’t settle will result in more large judgments against lenders, in part because lenders did not do some of the things mentioned above all along.

On High -Cost Lending:

6. The CFPB will announce its long-awaited payday lending rules, which will apply to all high-cost loans, including payday loans, title loans, and high-cost installment loans.  These new rules will go a long way (though perhaps not all the way) to curbing high-cost lending abuses and protecting consumers from the debt trap. After all, the bureau is called the Consumer Financial Protection Bureau. Lenders will not like the rules much and may even sue over them but they won’t have a high-cost leg to stand on.