Dozens of Law Professors Join Letter Supporting Creation of the Consumer Protection Financial Agency

by Jeff Sovern

74 law professors teaching in areas related to consumer and banking law have joined in a letter supporting creation of the Consumer Financial Protection Agency.  The professors, who teach at law schools in 28 states and the District of Columbia, are legal experts who do not have an economic stake in creation of the CFPA but support the agency because they believe it would be better for the country than the current regulatory system. 

The principal drafter of the letter was Professor Norman Silber; I contributed, Profesors Charles B. Shafer, Teresa M. Schwartz, and Alan M. White generously provided cite-checking assistance, and others made thoughtful suggestions. During the last two weeks, the letter was circulated privately among law professors, and many--too many to thank here--passed it on to colleagues.  Though the letter is now public and will be sent to its addressees--Congressional leaders--today, we welcome additional signatories.

As the accompanying press release explains:

The Statement concludes that on balance, the existing regulatory structure places “a higher value on protecting the interest of financial product vendors who promote complex debt instruments using aggressive sales practices, than on protecting the interests of consumers in transparent, safe, and fair financial products.”

The body of the Statement is 8 pages long, single-spaced. It refers specifically to dozens of scholarly articles and studies demonstrating that at “critical moments of consumer confusion and vulnerability,” the existing regulators “have been unwilling to expend resources to develop appropriate rules and guidelines and to police mortgage and credit instruments.” The Statement urges passage of H. 3126 because “consolidated authority and a dedicated consumer-oriented mission would be likely to improve public confidence in the safety and efficiency of the vast consumer financial products marketplace.” It further provides an analysis of desirable aspects of the legislation and points to extensive scholarship supporting the need for a new approach to handling consumer financial regulation.

Update: Coverage at the Banking Law Prof Blog,  Commercial Law Blog, Huffington Post, US PIRG Consumer Blog, and Wall Street Journal Real Time Economics Blog,

Comments

[Cheap lots in Costa Rica]

That creation will be interesting, I enjoyed the reading and I would like if you can update when it's possible, thanks!

[A F "Bob" Blair Jr]

Implicit in our land of the free is the intuitive concept that the title of a federal act is a summation of the contents of the act. Unfortunately, the title of the Truth in Lending Act (TILA) is sophistry (not in Black’s Law Dictionary) … something that sounds plausible, but is not accurate, euphemistic for “it is NOT true”. In TILA the method of calculating the Annual Percentage Rate (APR) is the simple-interest APR, named in the Act as the Nominal APR (NAPR), and also the Actuarial or U. S. Rule method. The act does not say it is the true APR, it does state that it is used for comparison. The Treasury and the President’s Advisory Council on Financial Literacy do not seem to have any interest in discussing the disparity. A Consumer Financial Protection Agency should not be under the wing of the Treasury … or it will be business as usual.
Short History of TILA: Senator Paul Douglas (D. IL, 1892-1976) in his book, “In the Fullness of Time”, stated that some legislation was introduced as early as 1935, but it was not until 1960 that he, with Senator William Proxmire (D. WI, 1913-2005, author of “Uncle Sam – The Last of the Bigtime Spenders”) had a bill on Consumer Credit Protection considered in the Banking Committee. The bill was oppose in committee by Republicans and did not get passed. Pressure became great on Congress to pass something because consumers were being duped by advertised ads stating false APRs. In late 1967 a hearing of the Subcommittee on Consumer Affairs of the Committee on Banking and Currency of the House of Representatives heard testimony on the Consumer Credit Protection Act (Federal Document Y 4.B 22/1:C 76/3/pt.2). The then Undersecretary (later Secretary for only 31 days) of the Treasury, Joseph Barr (1918-1996), told the Subcommittee (p. 82), “‘Annual percentage rate' means the nominal rate determined by the actuarial method. I would like to emphasize that this annual percentage rate become real and true as it is actually applied to the periodic credit balance.” Mr. Barr had a Masters degree in Economics from Harvard (Wikipedia), so surely he was “financially literate” and knew the Actuarial (NAPR) method was not the mathematically-true APR, but that the compounded (also mentioned in Y 4.B), Effective APR (EAPR) was the mathematically-true APR. Douglas was not reelected in 1966. Proxmire and Representative Leonor K Sullivan (D. MO, 1902-1988) introduced legislation in late 1967 and apparently they acquiesced on the compounded method to get something passed … which President Lyndon Johnson (D. TX, 1908-1973) signed on May 29, 1968.
The difference between the NAPR and EAPR increases as period rates increase and payment periods become shorter. An extreme example of that disparity is a case listed in the Consumer Reports in February. A school principal took-out a loan for $400 to be paid is 16 days with $120 in interest. The NAPR on that loan is a shocking 684.375%, calculated as the rate for a period multiplied by [*] the number of periods in a year, [Excel notations are used] (120/400)*(365/16). Three decimals are expressed since TILA required that the tolerance of accuracy in stating the APR is 1/8 of 1 percent (0.125%). The compounded [^] EAPR is 39,649.597%, calculated as the rate for a period compounded for the number of payments in a year, ((1+(120/400))^(365/16))-1. The EAPR is not merely slightly over 1 of those 0.125%s from the NAPR, it is 311,721 of those 0.125%, calculated as (39,649.597%-684.375%)/0.125%.
The Truth in Savings Act uses the compounded EAPR and calls it the Annual Percentage Yield (APY), probably to obfuscate its relationship to the method in TILA.
There are currently listed in the Senate Finance Committee many bills that reference TILA. An amendment to change the TILA to the mathematically-true EAPR is as simple as changing in the TILA the words “multiplied by”: to “compounded for”. If you don’t understand, or disagree, or concur send an email to me.
By A F “Bob” Blair Jr afblair@internet8.net
CC: Norman Silber: norman.i.silber@hofstra.edu