CL&P Blog

Daniel Schwarcz Paper on Post-Sale Monitoring of Financial Products

Daniel Schwarcz of Minnesota has written Monitoring, Reporting, and Recalling Defective Financial Products, University of Chicago Legal Forum (2013).  Here is the abstract:

In recent years, innovations in consumer financial protection have drawn heavily from the law governing the safety of tangible products.   This short essay, prepared for a symposium entitled "Frontiers of Consumer Protection," extends this approach by evaluating whether the law governing post-sale product safety for tangible consumer products offers potential lessons for consumer financial protection. In particular, it considers the extent to which the law could require providers of consumer financial products to affirmatively monitor, report or correct regulatory problems with their products that come to light after sale.  Such post-sale self-policing by financial firms could offer benefits similar to those that justify standard product recall law: the sellers of financial products may be best situated to identify unintended negative consequences of their products that come to light after sale and to minimize the resulting costs through proactive market interventions.  The essay illustrates this approach by reconsidering the Consumer Financial Protection Bureau’s rules implementing the Dodd-Frank Act’s “ability to repay” requirement for mortgages.  It also suggests that the analytical frame embedded in post-sale safety requirements offers potential lessons for a number of other consumer financial protection issues, such as disclosure requirements and prohibitions on impermissible discrimination.

Politico: What if Senate continues to block Richard Cordray at CFPB?

Here.  An excerpt:

As a recess appointee, Cordray can stay in the job only through the end of this  year. But even that timetable will likely not be of much significance. After  Cordray departs, the agency will be run by the next in line and there is little  reason to think the bureau’s agenda would change at that point.

* * *

“We are still going to have a CFPB,” said John Socknat, a partner with the law  firm Ballard Spahr. “It’s going to continue to have very broad powers, and there  are going to be regulations that [financial institutions] are going to have to  deal with. The validity of Cordray’s appointment is not going to undo all of the  regulations that have been issued.”

Third Circuit Invalidates Recess Appointments

by Deepak Gupta

A divided panel of the Third Circuit today joined the D.C. Circuit in holding that President Obama's recess appointments to the NLRB are unconstitutional.  The case is NLRB v. New Visa Nursing and Rehabilitation.  From the majority opinion by Judge Smith, who is joined by Judge Van Antwerpen:

The central question in this case is the meaning of "the Recess of the Senate," which is the only time in which the president may use his power to recess appoint officers. Three definitions have been offered: (1) breaks between sessions of the Senate (i.e., "intersession breaks"); (2) these intersession breaks as well as breaks within a session (i.e., "intrasession breaks") that last for a non-negligible time, or (3) any break in Senate business that makes the body unavailable to provide advice and consent on the president‘s nominations. This is a difficult question that has never been addressed by our Court or the Supreme Court. We hold that "the Recess of the Senate" in the Recess Appointments Clause refers to only intersession breaks. As a consequence, we conclude that the National Labor Relations Board panel below lacked the requisite number of members to exercise the Board‘s authority because one panel member was invalidly appointed during an intrasession break. We will therefore vacate the Board‘s orders.

From Judge Greenaway's dissent:

The Majority's rationale undoes an appointments process that has successfully operated within our separation of powers regime for over 220 years.

In defining the scope of the Recess Appointments Clause, the critical issue is more straightforward than the Majority suggests: The issue is whether “the Recess” includes only intersession recesses (those between two regular sessions of Congress) or intersession recesses and intrasession recesses (those within a regular session of Congress). The Majority's three possible definitions of “Recess” can be distilled into one question: Are intrasession recesses included within the ambit of “the Recess”? I would hold that “the Recess” refers to both intrasession and intersession recesses because the Senate can be unavailable to provide advice and consent during both. The availability of the Senate to provide advice and consent is the crux of the Recess Appointments Clause because its operation depends on its complementary interplay with the Appointments Clause, which requires that the Senate be available to provide advice and consent.

The majority opinion is 102 pages long and the dissent is 55 pages long. It seems likely that the Supreme Court will have the last word.

American Banker: Payday Lenders Lash Out at CFPB

Brian posted in April on the CFPB's White Paper on payday lending. Payday lenders have fired back, as the American Banker reports here.

Why a Longstanding Legal Doctrine Supports Limiting Bank Overdraft Fees

Over the past decade, overdraft fees and abuses have spiraled out of control, snaring millions of consumers while generating billions in profits for banks. In 2011, consumers paid $29.5 billion in overdraft fees.

A new white paper by the National Consumer Law Center explores why overdraft fees should be subject to a “reasonable and proportional" standard, how overdraft fees are currently excessive and unreasonable, and why the ability to charge excessive overdraft fees encourages banks to engage in abusive practices to maximize overdrafts.  The white paper also describes how excessive overdraft fees are contrary to a centuries-old legal doctrine that prohibits punitive damage clauses in contracts. 

 The Consumer Financial Protection Bureau (CFPB) has legal avenues to restore the standard of “reasonableness” to overdraft fees. One venue is through the Credit Card Accountability, Responsibility, and Disclosures (CARD) Act of 2009, by treating debit cards as “credit cards” for which penalty fees must be “reasonable and proportional.”  Another avenue for the CFPB is to use its authority to prevent unfair, deceptive, or abusive practices.

Download a three-page issue brief with key points and solutions:
Common Sense from the Common Law: Why a Longstanding Legal Doctrine Supports Limiting Bank Overdraft Fees to a “Reasonable and Proportional” Standard at:
http://www.nclc.org/images/pdf/high_cost_small_loans/ib-common-sense-common-law.pdf

Download the white paper at:
http://www.nclc.org/images/pdf/high_cost_small_loans/common-law-overdraft-fees.pdf

American Banker: How to CFPB-Proof New Financial Products

by Jeff Sovern

Here (behind a paywall, unfortunately). But here's the part that's not behind the paywall:

To avoid unwanted scrutiny from the Consumer Financial Protection Bureau and other regulators, banks need to start thinking about "what is fair, not just what is legal," banking attorneys say.

And isn't that one of the reasons we needed a CFPB?  Because lenders ignored what is fair? 

One point that the article makes is that disclosures don't save an objectionable product, especially if they're confusing.  That's the direction the FTC has been going in with privacy, but it seems a (welcome) departure from the idea of the duty to read.  The article also claims that the Bureau believes that if products generate enormous profits, they had better generate similarly large benefits for consumers.

The article also notes that the Bureau has not defined what it considers unfair, deceptive or abusive practices ("UDAAP") beyond the statutory definitions.  I can understand why lenders would want the Bureau to do so, because that would enable them to predict when they might fall afoul of those rules.  On the other hand, such a definition might hem the Bureau in too much at a time when it is still finding its way in this area.  My own opinion is that the Bureau should resist calls to offer greater specificity about how it will use its UDAAP powers until it is more experienced.  It would be unfortunate if the Bureau said it would not use its powers to prohibit certain conduct, and then lenders found a way to engage in that conduct inappropriately. 

I don't want to summarize the whole piece, but it's definitely worth a look.

Obama Administration Takes Its Defense of Recess Appointments to the Supreme Court

by Deepak Gupta

Earlier today, Solicitor General Don Verrilli filed the government's petition to the Supreme Court, challenging the D.C. Circuit's Noel Canning decision. (Background: There's been a lot of blogging here about Noel Canning, which invalidated President Obama's intersession recess appointments to the National Labor Relations Board and thereby threatened the validity of his simultaneous appointment of Richard Cordray to be Director of the Consumer Financial Protection Bureau. Brian recently posted on a Congressional Research Service report discussing the decision's implications here. On the day of the decision, I posted about the "de facto officer" doctrine and other reasons to be wary of some of the most sweeping claims regarding the decision's implications for the CFPB. I've also been commenting elsewhere--yesterday at NPR's Marketplace here and at Talking Points Memo here.)

The SG's petition has been expected for months now and has been previewed in court of appeals briefing, but it still makes for a good read.  It's a powerful and compelling piece of advocacy, combining rigorous historically-grounded arguments with a plea based on the pressing practical need for the Supreme Court's intervention. The petition has an unusually large number of Justice Department lawyers on the cover.

The CFPB isn't mentioned explicitly, but the petition makes clear that that the decision "threatens a significant disruption of the federal government’s operations" and that its effects can "be expected to extend to a wider range of federal agencies and offices."

Here's a quotation from the petition that provides an executive summary of the government's arguments:

The court of appeals’ decision would dramatically curtail the scope of the President’s authority under the Recess Appointments Clause.  Before that decision, Executive practice had long been predicated on the understanding that the Recess Appointments Clause authorizes the President to fill vacancies that exist during a recess of the Senate, regardless of whether the recess occurs between two enumerated sessions of Congress or during a session, and regardless of when the vacancies first arose.  The decision below also conflicts with the decisions of three other federal courts of appeals and with the central objects of the Recess Appointments Clause.  It would deem invalid hundreds of recess appointments made by Presidents since early in the Nation’s history.  It potentially calls into question every order issued by the National Labor Relations Board since January 4, 2012, and similar reasoning could threaten past and future decisions of other federal agencies.

I would be quite surprised if the Court does not grant the petition and set the case for argument early in the next term. Given the splits and the enormous practical implications, it seems like that rare case that virtually comes to the Court with a presumption of a grant.

Lyle Denniston has a summary at SCOTUSblog. Nothing yet at the Volokh Conspiracy, but John Elwood is an expert on the subject and I wouldn't be surprised if he posts something worth reading soon. Stay tuned.

An Item on My Wish List

by Jeff Sovern

Tonight marks the start of the NFL draft, a time when hope blooms for all fans of an NFL team, because they can always suppose that their team has used the draft to get better--and many teams will.  Many fans create wish lists--what they want for their teams.  In that spirit, I have a wish list of what I want in consumer protection. One item would shed significant light on whether discrimination actually occurs in lending.  I wish the CFPB would work with the credit bureaus to create records on imaginary individuals.  These individuals would each be paired with another fictitious person with an identical or nearly identical record, except that one of the two would appear to be a white male, and the other either a person of color or a woman or both.  The credit files would not actually indicate race or gender, but would signal such characteristics through zip codes, names, etc.  Then the Bureau would have the imaginary people apply for credit.  By comparing the applicants' grant and denial rates, and, for those who are offered credit, the terms of the offer, the Bureau would go a long way to showing that discrimination does or does not occur in the granting of credit.

To be sure, this would require making false statements to lenders, which might violate federal law. Perhaps the relevant laws have exceptions for such experiments; if not, the remedy would be to seek enactment of such an exception, which seems unlikely to happen in the current environment, but you never know. The idea is not very different from the testers that have been used to determine if realtors and others are engaged in housing discrmination.

What's on your consumer protection wish list?

House Financial Services Committee Chair Hensarling Blocks Cordray From Testifying About the CFPB

by Jeff Sovern

The Wall Street Journal has the story here and the American Banker here (one or both may be behind a paywall). Mr. Hensarling argues that as Cordray has not been confirmed, he is not the lawful head of the bureau and so cannot testify. But he adds in his letter to Mr. Cordray that "the Committee intends to conduct rigorous oversight of the CFPB's activities, and will expect the CFPB's cooperation in those efforts, including making other employees available to testify at Committee hearings and responding fully to Committee requests for documents and information."

So let me get this straight: Cordray can't testify because he hasn't been confirmed but his subordinates who also haven't been confirmed by the Senate can testify.  And the committee's "rigorous oversight" includes hearing from subordinates but not from their boss as to what the Bureau is doing. 

That, of course, makes no sense. Either the Committee wants to conduct appropriate oversight or it doesn't.  If it does, it should hear from Mr. Cordray as to matters as to which he is the most knowledgeable. If it doesn't, then it shouldn't hear from anyone from the Bureau.  The letter makes clear that the goal is not to conduct appropriate oversight but to make political points.  I don't know which is worse: how embarassing the letter's internal inconsistency is, or the fact that Mr. Hensarling expects people not to realize the inconsistency.

 

 

Henderson Paper on Mortgage Industry Self-Regulation

M. Todd Henderson of Chicago has written Self-Regulation for the Mortgage Industry. Here's the abstract:

This Article proposes an alternative to direct government regulation of mortgage brokers: self-regulation of the mortgage industry that mimics the arguably successful self-regulation of the securities industry that has occurred over the past two centuries. Although not without its problems, self-regulation of securities brokers operates more efficiently than government regulation. For example, self-regulation allows for industry expertise to be deployed at low cost and is built on trust and reciprocity, which reduce enforcement costs. In addition, self-regulation locates power at its smallest point and encourages efficient resolution of disputes by ensuring commensurable regulatory intervention. Most crucially for the mortgage industry, self-regulation is capable of policing behavior that does not rise to the level of fraud but is nevertheless socially undesirable. This Article explores the reasons why self-regulation can be effective, as well as some of its limitations in the context of securities brokers. It then looks at its potential application to mortgage brokers, comparing the self-regulatory approach with the governmental approach taken by the Dodd-Frank Act and the Consumer Financial Protection Bureau. However effective the federal approach to mortgage industry regulation is likely to be, there are aspects of such regulation that would be better administered by the industry itself, subject, of course, to oversight by the government to protect against the cartelization threat.