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.

QRM's Missed Opportunities for Financial Stability and Servicing Reform

There are three major new regulations shaping the housing finance market:  QM (qualified mortgage), QRM (qualified residential mortgage) and Reg X.  QM is a safe harbor from the statutory ability-to-repay requirement that applies to all mortgages.  QRM is a safe harbor from the statutory risk retention requirement that applies to mortgage securitization.  And Reg X are the new mortgage servicing regulations.  It's important to understand how these three regulations interact and how they're going to affect the housing finance market.  (There's also new TILA/RESPA disclosure stuff, but I don't think that's particularly impactful, in part because I don't think disclosure regulation is especially effective in most real world circumstances.) 

Flagstar Servicing Enforcement Order

The CFPB entered into a Consent Order with Flagstar Bank regarding its default mortgage servicing practices. This order is really important. It's the first enforcement action of the CFPB's new servicing rules, and its "benching" remedy that prevents Flagstar from most default servicing until it demonstrates compliance shows that the Bureau is serious about cleaning out the Augean stables of servicing. (The Ocwen order had a much larger dollar figure attached, but was about pre-2014 conduct).

The details given in the consent order tell an all-too-common picture about mortgage servicing.  

In 2011, Flagstar had 13,000 active loss mitigation applications but only assigned 25 full-time employees and a third-party vendor in India to review them. For a time, it took the staff up to nine months to review a single application. In Flagstar’s loss mitigation call center, the average call wait time was 25 minutes and the average call abandonment rate was almost 50 percent. And Flagstar’s loss mitigation application backlog numbered well over a thousand. 

And we wonder why loss mitigation hasn't been more effective?

Apple Pay and the CFPB

Apple Pay has been getting a lot of attention, and I hope to do a longer post on it, but for now let me highlight one possible issue that does not seem to have gotten any attention. I think Apple may have just become a regulated financial institution, unwittingly. Basically, I think Apple is now a "service provider" for purposes of the Consumer Financial Protection Act, which means Apple is subject to CFPB examination and UDAAP. 

Pick up A Copy of Financial Justice: The People’s Campaign to Stop Industry Abuse (but first watch three cool videos here)

I recently read a review of the book Financial Justice: The People’s Campaign to Stop Industry Abuse, by economist Larry Kirsch and University of Utah professor Robert N. Mayer. The favorable review induced me to sit down and read the book, all in one sitting. This book about how grassroots efforts helped create the CFPB is a page-tuner. Written for lawyer and non-lawyer alike, it chronicles the entire political battle, along with the political personalities, the policy, the compromises, and the people who made it happen, both up front and behind the scenes. Written for lawyers and non-lawyers alike it is, informal, campy in a good way, and very entertaining.

It is a celebration of Senator Elizabeth Warren and all that she has done, but is also an example of we what we all can do to bring about our own version of justice. Incidentally, it contains a few quotes from credit slips, as well as a quote from our colleague Katie Porter. It also references these two fantastic video, here and here  about the CFPB process.  Although not mentioned in the book, these videos reminded me of another video about the Senator I rather enjoy, found here.
Even though the Senator has now written her own book about her life and others have written about her too, Financial Justice is worth your time,  not just for what it says about the Senator but what it says about the capacity of the rest of us as well.It's a truly populist story.

Small-Dollar Loans to Servicemembers, the Electronics Version (or an Easy Way to Get Around the Military Lending Act)

Yesterday the Consumer Financial Protection Bureau, along with 13 state attorneys general (including from my new home state of Indiana), announced a $92 million settlement and issued an enforcement action against Colfax Capital Corporation and Culver Capital, LLC, known as Rome Finance, for targeting military families (and other consumers) with predatory loans to buy electronics, such as computers and televisions.

Rome Finance would offer credit to consumers for the purchase of such electronics primarily at mall kiosks near military bases, promising instant financing and no money down. Rome Finance then jacked up the price of the electronics, thereby masking true finance charges and APRs, withheld information on bills about balances and payments, and violated various states' laws in collecting the debts. In some instances, service members would receive statements indicating that the APR on their loan was 16% when the APR really was over 100%. The scheme is a reminder of the endless variations that companies peddling alternative financing / high-cost credit may use, and how broad laws against predatory lending need to be in order to be effective.

CFPB: Let Consumers Make Their Complaints Public; All Rejoice

This week the CFPB announced it's seeking public comments on a proposed policy that would allow consumers who file a complaint with the agency to share all of the (non-personally identifying) details of that complaint with the public as part of its Consumer Complaint Database. (Right now the database only identifies the financial product complained about, name of the company, and a category identifying the topic of the complaint).

As a researcher, I am beyond thrilled at the possibility of being able to drill down into the details of complaints. This might allow us to go even further than the CFPB or Ian Ayres and others did last year in analyzing the complaint database. 

Good players in the consumer finance space should be thrilled too: more data will allow us to really separate those who are doing right by consumers from those who aren't. It would allow the public or researchers to decide for themselves whether someone was making a mountain out of a molehill or if was identifying a real problem in their complaint. The fact that we currently don't have transparecy into complaints is a common (and justified) complaint by the debt collection industry. The CFPB is also proposing to make public the institution's response to the complaint (at their option). Anyone could then evaluate whether they think particular industries/institutions are responding appropriately to complaints. 

New Data and Thoughts on Payday and Other Alternative Lending

The Consumer Financial Protection Bureau's new study (published 3/25/14) regarding payday loans has received substantial press coverage over the past couple days. The study focuses on repeat customers and finds that 80% of payday loans effectively are rolled over--that is, another loan is taken out within 14 days of repayment of the prior loan. (Some states have legislated cooling-off periods for payday loans; in those states, loans cannot be rolled over, but customers are free to come back a few days later.) The study further finds that the loaned amount goes up as loans are rolled over and that nearly 50% of all loans are in a sequence at least 10 loans long. This means that payday loans generally are not used by customers as short-term "stopgap" loans to keep them out of a cycle of debt. Rather, customers are in debt effectively for months, as Credit Slips contributor Nathalie Martin's research previously has suggested.

The study's release coincided with yesterday's Senate Committee on Banking, Housing and Urban Affairs, Subcommittee on Financial Institutions and Consumer Protection's hearing titled, "Are Alternative Financial Products Serving Consumers?" -- at which Nathalie testified. The hearing raises larger questions about the federal government's role in regulating the landscape of alternative lending. This includes payday loans and, as Nathalie noted in her testimony, similar short-term loans that are designed in part to bypass state laws regulating "traditional" payday loans.

Some Reflections on the "Big Club Behind the Door"

Autonomous administrative agencies are anathema to certain sorts of lawmakers, e.g., those who think that we are always better off with less regulation.  Recent legislation – H.R. 3193 – passed the House last week looking to make the Bureau of Consumer Financial Protection more accountable.  Yesterday I posted a quick blog on this bill on Credit Slips, but want to explore the issue a little more deeply today from the perspective of positive political theory (“PPT”).

Off with their heads!

Hey, Everyone!  Great to be back on CreditSlips.  

Adam blogged earlier on the politics of consumer financial protection regulation (here); I'm writing to add a quick "hear, hear!" Just a few days ago, the House passed H.R. 3193, which in its own words would "amend the Consumer Financial Protection Act of 2010 to strengthening the review authority of the Financial Stability Oversight Council of regulations issued by the Bureau of Consumer Financial Protection" but really it looks to gut the CFPB -- I mean -- make it more accountable to Congress. This bill is an example of legislation with no hope of legislating, enacted not to resolve some policy impasse but rather to irritate and possibly count as newsworthy somewhere (here, here, and here).

Argh. I've written elsewhere that the claim that the CFPB lacks accountability is a red herring (here and here). But I don't feel the need to revisit these arguments. Oh, wait; I just did.

Debt Collection Complaints and Regulation: Last Chance to Comment on ANPR

Today is your last chance to comment on the CFPB's Advanced Notice of Proposed Rulemaking on Regulation F, regarding debt collection.  I had the pleasure of working with Pat McCoy on a joint comment to the ANPR.  Our comment addresses documentation and information requirements for collectors, chain of title issues, and debt repositories.

After reading two reports released yesterday I'm even more convinced that these are among the most critical issues.  The FTC announced their top 2013 complaints (debt collection still the top industry complained about) and US PIRG released a report on the more than 11,000 complaints the CFPB received on debt collection over a six month period.  The PIRG report in particular highlights just how important the integrity of the information and documentation passed from collector to collector is (and how badly this is working right now).  Most consumers were complaining that the debt was not theirs (25%), they were not given enough information to verify the debt (13%), or that the debt had already been paid (11%).  

This is exactly the underlying issue that we address in our ANPR comment: something is very wrong when a debt buyer only gets a spreadsheet with some information about the debt, gets no documents in connection with the debt, signs a contract where the seller doesn't stand behind the information sold (and sometimes specifically says amounts or interest may be wrong), and then attempts to collect on that debt. I've argued that this violates the FDCPA.  In our comment we try to propose some ways to fix this problem going forward.

I urge Credit Slips readers to send in your comments before the 11:59pm deadline.

CapitalOne Contract Not Just Creepy But Illegal?

CapOne's taken a lot of flack today over its apparent desire to check what's in your wallet by visiting you at home and at work.  The LA Times story got even bigger when it made it to Twitter and  great (and lots of bad, see previous sentence) puns started rolling in.

The company answer seems to be that language from a security agreement for snowmobiles got "mixed in" with the credit card language (and no one over there is reading their 6-page contracts). They are now "considering creating two separate agreements given this language doesn’t apply to our general cardholder base."  

I wonder if that means that they'll also revisit the part of the credit card agreements that takes a security interest in anything you buy from Best Buy, Big Lots, Jordan's Furniture, Neiman Marcus/Bergdorf Goodman, or Saks?  (I should note, your clothes are only in danger if you have a Saks "retail" card; if your card is a Platinum or World card not only is your interest rate likely lower but it seems your stuff is also safe).

Debt Collection Industry Poised for Changes

Like Pamela, I’m very delighted to join Credit Slips. As Bob mentioned in his kind introduction, I spent a year as a policy fellow at the Consumer Financial Protection Bureau. One of the most things I got to work on while I was there were the rules defining "large market participants" in the debt collection and credit reporting markets. After issuing final rules, the CFPB began to supervise these non-bank entities; marking the first time any federal regulator had the authority to do so. 

Recently, the Bureau published an Advanced Notice of Proposed Rulemaking on debt collection (comments are due by February 28). The ANPR marks the first time that a regulator will interpret the Fair Debt Collection Practices Act, a statute that has barely changed since its enactment in 1977. What's more, because of its UDAAP authority; the CFPB will be able to write rules defining unfair, deceptive, and abusive practices that apply to both collectors and creditors. I've written elsewhere about how the systemic problems in the collections ecosystem begin at the creditor, so this is exciting news. What might be surprising though is that the collections industry seems to share in this excitement.

How Risky Is It to Make a Non-QM Mortgage? And Is QM Going to Hold Back Access to Credit?

        One of the huge questions hanging over the mortgage market today is what will happen to access to credit for credit impaired or non-traditional borrowers. There is a real concern that the Dodd-Frank Act’s mortgage reforms will reduce the availability of mortgage credit because lenders’ fear liability for making mortgage loans that fail to qualify as “Qualified Mortgages” (QM) and are thus potentially subject to an Ability-to-Repay (ATR) defense. I've blogged on aspect of QM before (here, here, here, here, here, here, here, and here). Based on a preliminary analysis, I think this concern is overblown, and in this very long post I attempt to work through the potential liability for lenders that make non-Qualified Mortgages. (I note that all of this is my tentative readings of the statute; we really don’t know how courts will interpret it, and others may see better readings than I do now.) 

        Still, my back-of-the-envelope calculation suggests that it is quite low in terms of loss given default and could probably be priced in at around 18 basis points in additional cost for a portfolio with weighted average maturities (actual) of five years.  Even with rounding up, that's 25 basis points to recover additional credit losses, which is not a big impact on credit availability. I invite those who would calculate this differently to weigh in in the comments—it’s quite possible that there are factors I have overlooked here, as this is a really preliminary analysis.

        Ultimately, I don't think ATR liability really matters in terms of availability of credit. What matters is the lack of liquidity--meaning a secondary market--in non-QM loans, as lenders aren't going to want a lot of illiquid loans on their books, and that is a function of the GSEs' credit box, not CFPB regulation.

        Because this post is REALLY long (the Mother of All QM Posts), here’s where it goes (yes, I feel like I'm doing one of those unwieldy 100+ page UFTA decisions, so I'm going to have a table of contents!):

CFPB What Have You Done for Me Lately? The Cash America Case, For One Thing

The CFPB just settled an enormous enforcement action against payday lender Cash America. Under the settlement, Cash America will pay $5 million in penalties and $14 million in refunds to overcharged customers. The CFPB found that Cash America or its affiliates robo-signed documents in debt collection lawsuits, made loans to military servicemen in violation of the federal Military Lending Act, and even destroyed documents during discovery. 

My student Andrew Anders is writing a paper about the other enforcement actions the CFPB has been bringing. As most of you know, the Dodd-Frank Act gives the CFPB various enforcement powers including the authority to engage in administrative enforcement actions (typically followed by a consent order) and to bring civil litigation proceedings. The CFPB is required to report all public enforcement actions to which it is a party, which is where Andy got his data, all from 2012.

During the time period of January 1, 2012 through December 31, 2012, the CFPB was involved in nine public enforcement actions. Of these actions, five were administrative actions and four were

Another Myth of Consumer Law?

As the CFPB gears up to regulate arbitration clauses, a timely article by Omri Ben-Shahar has been posted on ssrn. Part of Ben-Shahar’s “Myths of Consumer Law” project (see here, here, and here ), The Myth of Access-to-Justice in Consumer Law  contains some provocative insights, but key blind spots lead the piece to unwarranted conclusions.

The conclusions are that pre-dispute arbitration and class action waiver clauses in consumer contracts benefit weak consumers. To get there, Ben-Shahar first notes that consumers are not a homogeneous group and access to justice in the courts is far from evenly distributed. Because elites are more likely to sue and are likely to collect higher damages (one of the many reasons they are more likely to sue), giving all consumers the right to sue is, in effect, a regressive cross-subsidy from poorer consumers to those elites.

Who is Mel Watt?

On May 1, President Obama nominated Rep. Mel Watt (D-N.C.) to be the director of the Federal Housing Finance Agency, the conservator for the mortgage giants Fannie Mae and Freddie Mac.

These two entities together currently back a large majority of new mortgages and hold or guarantee about half of all U.S. mortgages. Like other entities immersed in the mortgage market, Fannie and Freddie suffered great losses in the mortgage meltdown and were taken over by the federal government at the end of the Bush administration in September 2008.

Watt could be a key figure in the late stages of the mortgage crisis and in redefining the role of Fannie Mae and Freddie Mac going forward.  So who is this eleven-term congressman and what does he care about most?

Probably the most important points to stress are these:  He rose from humble beginnings through the meritocracy and is a Yale-educated lawyer who likes to immerse himself in the facts.  He is broadly respected at home in Charlotte, N.C., and represents a safe district where he has biracial support.  He carefully listens to the financial services industry, a major player in his community, and one that has supported his campaigns.  Most important of all, he has made working for the economic well-being of African Americans his life’s work, whether as a lawyer in private practice representing minority businesses or as a lawmaker seeking to shore up consumer protection, particularly to strengthen the legal basis for challenging predatory lending, often used against racial minorities and other vulnerable populations.

A Final Pet Peeve: The Right to Consumer Financial Industry Data

Thank you to the Credit Slips team for allowing me to use their soapbox for the last few weeks.  I leave you with a final pet peeve: Why does the government have to rely on commercially-collected financial industry data sets or voluntary surveys of financial firms to discover the effects of policies the government has put in place? This is just embarrassing. The U.S. government has so little power over the financial industry – an industry that only exists by virtue of the full faith and credit, payments systems, FDIC insurance, etc. provided by the U.S. government – that it cannot demand data from banks and financial firms, but instead must ask politely for voluntary survey answers or search the data market and pay for information like a commoner? 

National Consumer Protection Week and Disclosure 3.0

It’s National Consumer Protection Week (NCPW)!   Federal, state, local, and nonprofit consumer protection agencies and organizations are making extra efforts to promote consumer awareness. 

First I have to get out of my system thoughts of Tom Lehrer’s song, National Brotherhood Week:

                Step up and shake the hand/Of someone you can’t stand . . .

                It’s only for a week so have no fear/Be grateful that it doesn’t last all year.

But to get back on message, of particular interest to Credit Slips readers is this part of the mission of consumer protection described on the NCPW website:

    "Financial Fraud Scams: American consumers owe a whopping $11.31 trillion dollars in debt and are behind on paying about $1.01 trillion of that amount. Mortgages, student loans, and credit cards account for a large portion of that debt. Consumers are often haunted with huge monthly payments, and fraudsters take advantage of that with debt relief scams, tax scams, and other financial fraud scams. Scams target individuals who are in financial distress, but they fail to fulfill their promises, and typically leave consumers worse off than when they started."

Let me say that Lauren Willis has done a great job on this site recently taking us, patiently and painstakingly, through the many problems with the idea that disclosure can be refined into a digital juggernaut to protect consumers. See here  and here and here.

Disclosure 2.0: Disclosure in the Lab

If, as I suggested in my last post, making the consumer smarter is hopeless, at least for those of us whose prenatal and early childhood environments can no longer be altered, what about disclosure?  Could point-of-sale disclosure equip consumers to make good financial decisions? 

Simple disclosures appear effective in directly aiding consumer decisionmaking in some domains, the A, B, and C restaurant hygiene grades being the classic example.  But because financial products have many varying features that consumers need to understand to make good decisions, financial product disclosures are inevitably much more complex.  As a recent article by Omri Ben-Shahar and Carl Schneider details, generally speaking, consumers do not read, or if they do read they do not understand, or if they do understand they do not use correctly, the information presented in complex product disclosures.

Which Consumer Financial Education Programs Are Most Effective?: Assuming a Fact Not in Evidence

Thank you to the Credit Slips team for inviting me to guest blog.  First I must warn the reader that I am not a real blogger (I’m a bit of a Luddite - I don’t even have a smartphone).  But I’m going to join the 21st Century for a bit here.  Over the next couple of weeks I’ll be sharing my thoughts and some recent research pertinent to modes of consumer financial protection, from financial literacy education to policy defaults to product regulation.  As some of you already know, I have been critical of all of these.  But here I will also suggest some underexplored alternative routes to achieve the same ends of consumer financial well-being that have eluded us in the past.

I'll start today with financial education.  The CFPB would like your comments on “effective financial education approaches that create opportunities for consumers to improve their financial decision making capabilities.”  I thought I had blown up this myth already.  And others keep proving me right.  If you were at this past year’s Boulder Summer Conference on Consumer Financial Decision Making you know that a soon-to-be released exhaustive meta-analysis of past studies demonstrates that financial education does not produce better financial outcomes, and another study using a much larger dataset and a more robust set of controls than past work finds that financial literacy does not lead to improved financial outcomes. 

Challenge to CFPB Authority

In the wake of the D.C. Circuit's decision striking down recess appoints, Carter Dougherty at Bloomberg reports what may be the first example of a defendant raising the CFPB's lack of authority as a defense in an enforcement proceeding. Stay tuned.

The Bubble According to Todd

Todd Zywicki has a long blog post criticizing the CFPB's Qualified Mortgage (QM) rule and using it as a jumping-off point for a call to transform the CFPB's leadership from a single Director to a commission.  Zywicki's primary criticism of the QM rule is that it fails to address what he believes was the root cause of the mortgage default crisis:  strategic borrower behavior, which he believes needs to be addressed through down payment requirements and real liability for mortgage deficiency judgments, so that there is borrower skin-in-the-game.  As Zywicki sees it, the housing bubble and its collapse as the result of ruthlessly strategic borrowers playing lenders.  In other words, the bubble was a safety-and-soundness problem, not a consumer protection problem.  The lenders were just helpless dopes, fooled by coldly rational borrowers.

The blame the borrowers move we see here is the same one Zywicki pulled during the bankrutpcy reform debates leading up to BAPCPA, and again it is made without an empirical basis.

NLRB and CFPB: Recess Appointments

The DC Circuit's decision in Noel Canning v. NLRB invalidated an National Labor Relations Board ruling on the grounds that three of the NLRB's five members were not validly appointed, so the NLRB lacked the necessary quorum to act.  The DC Circuit's held on two separate grounds that the NLRB members were not validly appointed.  All of the NLRB members in question were appointed as so-called "recess" appointments by the President, meaning that they were appointed without the advice and consent of the Senate.  First, the DC Circuit held that these appointments were invalid because they were appointed under the Recess Appointments power at a time when the Senate was not in recess.  And second, the DC Circuit held that the appointments were invalid because the Recess Appointments power only applies to vacancies that arise during a recess, not vacancies that are continuing during a recess, and the vacancies in question arose before the (non-)recess. The ruling is based on the DC Circuit's close textual reading of the Recess Appointments clause of the Constitution (in particular, the use of the term "the Recess" instead of "a Recess"), but is also butressed by policy arguments.

Recess at the CFPB?

As has been widely reported , the D.C. Circuit today ruled unconstitutional the president's power to make recess appointments. This is a good thing. The ruling draws into question not only draws into question the National Labor Relations Board's power but also draws into question the regulatory powers of the Consumer Financial Protection Bureau because its current directors, Richard Cordray, was a recess appointment. This is a bad thing -- a very bad thing.

Usury Laws Are Dead. Long Live the New Usury Law. The CFPB's Ability to Repay Mortgage Rule

[Updated 1.14.13] The CFPB has come out with its long awaited qualified mortgage (QM) rulemaking under Title XIV of the Dodd-Frank Act.  The QM rulemaking is by far the most important CFPB action to date and will play a crucial role in determining the shape of the US housing finance market going forward. The QM rulemaking also represents a return in a new guise of the traditional form of consumer credit regulation—usury—and a move away from the 20th century’s very mixed experiment with disclosure.

CFPB's Anti-Abuse Authority: A Promising Development in Substantive Consumer Protection

The Consumer Financial Protection Bureau is doing something promising with its anti-abuse authority under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.  It is going after credit industry exploitation of consumers, particularly when business models involve using confusing terms that disclosure cannot adequately address.  See my paper on this topic. So I was not surprised to see George Will attacking this development.   We can't have smart, effective consumer protection, no matter how popular it might be.

In a column published in many newspapers this week,Will wrote: “The CFPB's mission is to prevent practices it is empowered to ‘declare’ are ‘unfair, deceptive, or abusive.’ Law is supposed to give people due notice of what is proscribed or prescribed, and developed law does so concerning ‘unfair’ and ‘deceptive’ practices. Not so, ‘abusive.’”

The flaws in Will's critique are legion. First, the CFPB has given lots of notice of what it is doing, in a detailed examination handbook.