Consumer Law & Policy Blog

Adam Levitin Paper on the Consumer Financial Protection Agency

Still more on the proposed CFPA (a theme of the last few days): Adam Levitin of Georgetown, and one of the signatories of our letter, has written The Consumer Financial Protection Agency.  Here's the abstract:

The Obama administration has proposed restructuring financial services regulation by transferring all consumer protection functions from existing agencies to a new Consumer Financial Protection Agency (CFPA). The goal of the CFPA legislation is to address the flaws in the regulatory architecture that have inhibited effective responses to the substantive problems, rather than mandate specific new substantive consumer protection laws.

The current consumer financial protection is based on disclosure regime and is policed through supervisory feedback, enforcement actions, and occasionally prohibitions on terms, products, and practices that are deemed inherently unfair and deceptive. On the federal level, consumer protection in financial services is divided among a number of agencies: the OCC, OTS, NCUA, Federal Reserve Board, FDIC, FHFA, HUD, VA, FTC and DOJ. Some of these agencies have the ability to promulgate regulations, some also exercise supervisory authority over financial institutions, and some may only enforce existing regulations. Sometimes authority is over a class of institutions, and sometimes it is over a particular type of product.

There are four main structural criticisms of the current regulatory structure: that consumer protection is a so-called 'orphan' mission; that consumer protection conflicts with, and is subordinated to, safety-and-soundness concerns; that no agency has developed an expertise in consumer protection in financial services, and; that regulatory arbitrage of the current system fuels a regulatory race-to-the-bottom.

Consolidation of consumer financial services protection authority could: place all financial services companies, regardless of the form of their charter, under a single regulator, thus ending its orphan status; separate consumer protection from safety-and-soundness regulation, thus ending subordination; encourage the development of a deep bench of regulatory expertise and knowledge, and; end the opportunity for regulatory arbitrage and any potential race to the bottom.

There are several potential concerns about a CFPA: conflicts with prudential regulators; ambiguity with respect to Consumer Reinvestment Act authority, and; potential overregulation resulting in higher costs of financial products, less product availability, and discouragement of innovation. Still, there are compelling reasons to believe that the present regulatory architecture cannot produce the optimal consumer protection regime and will continue to fail in its task, resulting in unfair treatment of consumers and a potentially significant source of systemic risk. To this extent, consideration of a CFPA should strive to distinguish between the basic thrust of the legislation - a consolidation of the regulatory authority of - and the proposed new substantive powers granted to the agency.

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,

Did Google Yield Too Easily to a Baseless Court Order?

Once again, a judge in the Northern District of California has issued an overbroad temporary restraining order at the behest of a bank in a case over which federal jurisdiction was highly questionable.

Last year, Judge Jeffrey White issued a temporary restraining order at the behest of Bank Julius Baer, attempting to take down the Wikileaks web site based on a suit claiming that it had wrongfully published confidential documents supplied by an anonymous third party.   After Bank Julius Baer had to face real opposition instead of a compliant ISP that couldn’t be bothered to protect its absent customer’s rights, not only did Judge White have to admit that his injunction was an improper prior restraint, he also acknowledged that he probably did not have diversity jurisdiction because there were foreign parties on both sides of the caption. 

Last week, Judge James Ware issued a temporary restraining order at the behest of Rocky Mountain Bank, ordering both Google and the anonymous owner of a gmail account not to disseminate information that a Bank employee had, more than a month earlier, mistakenly sent to the gmail account.    Google was also ordered to freeze the gmail account, and to disclose the identity of the anonymous account owner.

Discussions of this case have focused on several troubling facts, which are bad enough.  First, after making its own serious mistakes, Rocky Mountain went to court with a lawsuit that blamed the innocent gmail recipient.  Second, the Court compelled the suspension of a gmail account based on an emergency motion with no opportunity to respond.  The articles recounted the many First Amendment and Due Process flaws in what happened here.  But so far as I have been able to discern, nobody has addressed two ”technical” problems – Rocky Mountain’s complaint does not state a cause of action against either Google or the anonymous email account owner, and the complaint was filed under diversity jurisdiction that was plainly lacking under settled precedent.  And yet Google — which had initially refused to comply with Rocky Mountain’s demands unless it got a court order, just rolled over and obeyed the court order instead of opposing it and seeking a stay pending an appeal to be sure that its customer’s rights — not least the right to notice and an opportunity to object — were respected.

Jeff Gelles of Philadelphia Inquirer Column on Why TILA Failed in the Subprime Crisis

Here.  Disclosure: the column discusses my survey of mortgage broker which found that many borrowers spent too little time with the final TILA disclosures to understand them and that borrowers virtually never pull out of the loans upon receiving those disclosures.

Interesting Financial Services Committee Press Releases

The House Financial Services Committee, chaired by Barney Frank, issued two particularly interesting press releases yesterday.  The first, excerpted below, compares the work of the Democrats with the Fed in connection with consumer protection.  It emphasizes how the Fed failed to use its power to protect consumers.  The press release makes a strong case for creation of the Consumer Financial Protection Agency to insure that consumer interests are attended to by regulators.

Issue:   Democrats Act:   The Fed Responds:

Mortgages and In 1994 the Democratic Congress passed the Home Ownership & Equity Protection Act (HOEPA), which included a host of specific consumer mortgage protections and authorized the Federal Reserve to issue comprehensive rules ending abusive lending practices.	3/27/07: Committee action on mortgage reform begins with a Financial Institutions Subcommittee hearing and continues through 2007. 10/22/2007: H.R. 3915, legislation to regulate subprime mortgages, is introduced in House. 11/9/2007: H.R. 3915 passed by the Financial Services Committee. H. Rept. 110-441. 11/15/2007: H.R. 3915 passed by the House: 291-127 (Roll no. 1118). 5/7/2009: The House approves similar legislation, H.R. 1728, to regulate subprime mortgages.	The Fed’s action on predatory and subprime lending followed House action on the issue.  In June 2007, the Fed held hearingson changes to HOEPA. The Fed issues its first proposal for new rules in December 2007, after the House passed its bill.  The rules were made final in July 2008, and will take effect in October 2009.
Credit Card RulesSimilarly, like lending rules, the Federal Reserve has had the tools to restrict abusive and unfair industry practices under the Unfair and Deceptive Acts or Practices passed in the early 1970s.  Specifically, the Fed had UDAP authority pursuant to Section V of the Federal Trade Commission Act.	2/7/2008: H.R. 5244, the Credit Cardholders’ Bill of Rights Act, introduced in House 9/16/2008: H.R. 5244 is passed by the Financial Services Committee. H. Rept. 110-857. 9/23/2008: H.R. 5244 is passed by the House: 312-112 (Roll no. 623). Consideration of credit card reform resumed in 2009, and the bill was signed into law on 5/22/09.	The Fed’s action followed House action on H.R. 5244, the Credit Cardholders’ Bill of Rights Act. The Fed issued its first proposal for new rules in May 2008, after the bill was introduced in the House.  The rules were made final in December 2008 and take effect in January and July 2010.
Abusive Overdraft Protections Like subprime mortgages, the Federal Reserve has had the power for many years, in two different statutes, to regulate overdraft services that banks offer to consumers who overdraw their balance. These overdraft services, which are often considered to be loans, many times come with hefty fees and outrageous interest rates.	2/18/07: Congresswoman Carolyn Maloney initiates H.R. 946  to “extend the protections of the Truth in Lending Act to overdraft protection programs and services provided by depository institutions, to require customer consent before a depository institution may initiate overdraft protection services and fees, to enhance the information made available to consumers relating to overdraft protection services and fees, to prohibit systematic manipulation in the posting of checks and other debits to a depository account for the purpose of generating overdraft protection fees, and for other purposes.” 7/11/2007: The Financial Services Committee holds a hearing on overdraft protection and fair practices for consumers.	The Fed’s action followed House action on H.R. 946, the Consumer Overdraft Protection Fair Practices Act. 12/18/2008: The Fed proposes rules to protect consumers that use overdraft services offered by their bank.  The rule solicits public comment on proposed amendments to Regulation E (Electronic Fund Transfers) intended to provide consumers a choice regarding their institution's payment of overdrafts for automated teller machine withdrawals and one-time debit card transactions.  No further action was initiated by the Federal Reserve and the regulations have not been implemented.
Consumer Protection Pursuant to the Unfair and Deceptive Acts or Practices Act Because the Federal Reserve never issues regulations to protect consumers to comply with UDAP, the other banking regulators were unable to use their existing authorities to better protect consumers.	Chairman Frank in 2007 asks the Federal Reserve to act on UDAP Chairman Frank introduces legislation in 2007 calling on the Federal Reserve to implement the law. If the Fed did not want to use the UDAP authority, Congress would find federal regulators who would. 9/14/2007: H.R. 3526, to authority to issue UDAP rules to OCC and FDIC as well as FRB, OTS and NCUA, introduced in the House. 12/5/2007: H.R. 3526 is reported by the Committee on Financial Services. H. Rept. 110-472, Part I. 12/5/2007: H.R. 3526 is reported by the Committee on Energy and Commerce. H. Rept. 110-472, Part II. 12/5/2007: H.R. 3526 is passed by the House on motion to suspend the rules and pass the bill, as amended agreed to by voice vote.

 The second press release announced that Representatives Frank and Maloney, who chairs the Joint Economic Committee, will propose a bill today "regarding the effective date of the recently enacted Credit Card Accountability, Responsibility, and Disclosure (CARD) Act."  Presumably that will move the effective date up.

Ray Brescia on Improving Financial Sector Practices Through Voluntary Codes of Conduct

Ray Brescia of Albany has written Trust in the Shadows: Law, Behavior and Financial Re-Regulation, Buffalo Law Review.   Here's the abstract:

In the deep throes of the Great Depression, in an effort to restore faith in America’s economy, the Roosevelt Administration promoted the development of voluntary codes of conduct to govern employment and manufacturing practices across hundreds of industries. Compliance with these codes permitted a company to display a Blue Eagle, which was supposed to signify support for New Deal efforts, and that the company was trustworthy. In this way, the Blue Eagle served as a heuristic - a cognitive shortcut - that helped consumers identify those companies engaged in fair practices so that those consumers could show their support for the recovery effort by patronizing compliant companies. Could this Depression-era technique - the use of the Blue Eagle or some similar, useful symbol - serve important ends today? Could it help restore consumer trust in institutions and actors in the financial system so that they might earn consumer trust, and prove trustworthy?

At present, the United States faces a crisis of trust not unlike that which plagued recovery efforts during the Depression. This crisis is one of a lack of trust in our financial institutions. Efforts to restore trust to the financial system are foremost on the agenda of the Obama Administration and Congress. While restoring trust to the financial system will be no small feat, the financial crisis was, in many respects, a product of too much trust: in lenders, brokers and the Bernie Madoffs of the world. And this faith operated within a regulatory philosophy that believed that the market, left to its own devices, could operate at optimal efficiency. In the end, this web of trust fostered predation, overconfidence and unregulated risk; it brought about financial ruin for many and has caused incalculable hardship across the globe. For all the talk of restoring trust in the financial system, the proper focus of such efforts must be the restoration not just of trust, but of trustworthiness. To accomplish one without the other would simply invite the same set of pathologies that helped to bring about the current crisis.

An approach directed at restoring trustworthiness to the financial system will require an appreciation for what makes such a system - and the actors within that system - trustworthy. Informed by the principles of Behavior Economics, psychology and game theory, research shows that there are certain conditions likely to foster either trustworthy or untrustworthy behavior: with weak rules against cheating, and little oversight, it is more likely that people will cheat; that when in long-term relationships in which cooperative behavior can be developed, nurtured and rewarded, individuals are more likely to cooperate in the pursuit of mutually beneficial ends; that in situations with greater social distance between people, they are more likely to act in a less trustworthy fashion towards others; that where communication encourages cooperation, people tend to act in a more cooperative and trustworthy fashion.

After assessing the role these principles can play in informing efforts at re-regulation in several key areas within the financial sector, in concluding this piece I propose that regulatory agencies develop a set of voluntary codes of conduct for financial sector firms. To the extent such firms follow these codes, they will be able to market this information to consumers in an easily communicated manner: in the same way the Roosevelt Administration utilized the symbol of the Blue Eagle to reflect compliance with codes of conduct across a range of industries. These codes will reflect an appreciation for the fact that most lay people will be unable to assess for themselves the extent to which financial institutions are trustworthy or not. Instead, through the development of voluntary codes of conduct, built around the principles that are more likely to lead to trustworthy behavior, consumers will be well positioned to place their faith in those firms following these codes, which will, in the end, generate strong market share for such firms.

Representational plaintiff status lives!

Despite the best efforts of many defense firms, the DC consumer protection law retains its unique status of being the only true "private attorney general" law in the country. (California used to share this distinction, until a ballot initiative rewrote its Business & Professions Code Section 17200 to take away representational plaintiff standing, instead creating a standing requirement that is probably a little harder to meet than standing in federal court.)

The DC Court of Appeals issued an opinion last week that affirms what was always pretty clear to those of us fighting the good fight:

"We agree that the 2000 Amendments to the CPPA [DC's consumer law] permit [Plaintiff] to pursue his CPPA claim on behalf of himself and the general public regardless of whether he has experienced an injury in fact as a result of the appellees’ trade practices."

The court was also quite clear that Article III standing was not mandatory outside of federal court--the Court held that it “is not bound by the case or controversy requirement of Article III.”

I know, DC doesn't have all that many consumers, but the CPPA allows injunctive relief, which is often all that's needed to stop a deceptive practice that's going on all across this great country.

Huzzah, I say, huzzah!

Jennifer S. Martin on Depositary Account Overdraft Fees

Jennifer S. Martin of Oregon has written How Your $4 Coffee Can Cost You $39 or More if You Use Your Debit Card! Federal Level Consumer Protection and Modern Payments Transactions, University of Memphis Law Review.  Here's the abstract:

In early 2009, the Federal Reserve Board, along with the Office of Thrift Supervision (OTS) and the National Credit Union Administration (NCUA) (the "Agencies") proposed new rules primarily targeted to ATM and debit card transactions "intended to ensure that consumers have clear and timely information about their account balances, so that they can properly manage their accounts and avoid unexpected overdraft charges" (Proposed Overdraft Rules). This Article advocates the adoption of an opt-in regulatory mechanism for depositary account overdraft fees of the general type proposed by the Agencies, but cautions against proposals that do not provide adequate disclosure to consumers or that result in the imposition of overdraft fees even where consumers have elected not to have overdraft protection for ATM and POS transactions. This Article also advocates elimination of banking practices that place consumers into overdraft fee systems by default, or which increase the amount of fees, such as holds for purchases like gasoline and restaurants and reordering daily transactions to subtract the highest-dollar amounts first.

This Article further argues that the Treasury's Blueprint's failure to address specific consumer protection deficiencies (such as debit cards) is not a signal that they are unimportant to regulation of the financial industry. As payment systems continue to change and the products offered by depositary institutions expand, in fact, the issues associated with developing payment systems may require more frequent attention. This Article concludes that successful regulation of the financial system on a longer term necessitates a reworking of our current regulatory framework beyond the slow-moving split-authority structure currently prevailing. While the specific approach to future financial regulation is subject to debate, the concentration of responsibility for consumer issues under one Business Conduct Regulator would mark a progressive change to our experience. We should not hesitate to abandon a regulatory framework that no long continues to adequately respond to market innovations and consumer needs.

Article on Some Relationships Between Payday Borrowing and Credit Card Borrowing

Sumit Agarwal of the Federal Reserve Bank, Paige Marta Skiba of Vanderbilt and Jeremy Tobacman of Penn have written Payday Loans and Credit Cards: New Liquidity and Credit Scoring Puzzles?  Here's the abstract:

Using a unique dataset matched at the individual level from two administrative sources, we examine household choices between liabilities and assess the informational content of prime and subprime credit scores in the consumer credit market. First, more specifically, we assess consumers' effectiveness at prioritizing use of their lowest-cost credit option. We find that most borrowers from one payday lender who also have a credit card from a major credit card issuer have substantial credit card liquidity on the days they take out their payday loans. This is costly because payday loans have annualized interest rates of at least several hundred percent, though perhaps partly explained by the fact that borrowers have experienced substantial declines in credit card liquidity in the year leading up to the payday loan. Second, we show that FICO scores and Teletrack scores have independent information and are specialized for the types of lending where they are used. Teletrack scores have eight times the predictive power for payday loan default as FICO scores. We also show that prime lenders should value information about their borrowers' subprime activity. Taking out a payday loan predicts nearly a doubling in the probability of serious credit card delinquency over the next year.

Developments about Adaptive Marketing's suit to identify critical blogger

Yesterday I posted about a disturbing lawsuit seeking to identify an anonymous Internet blogger, Flaneur de Fraude, because she criticized Adaptive Marketing for what Flaneur and Reuters blogger Felix Salmon called a “predatory bait and switch.”  Two interesting factoids emerged from discussion of this case in the blogosphere.

Felix Salmon, whose blog post about the Ben Stein TV commercial began this whole brouhaha, points out that Adaptive has never been in touch with him (or with Flaneur for that matter) to complain about the content of the discussions of its business or to ask for any corrections.   Now, there is no legal obligation to ask for a correction, of course, but generally speaking, a polite letter to someone who has made a false statement, pointing out what the truth is, tends to be a lot cheaper than hiring counsel and seeking discovery, not to speak of litigating a defamation suit.  If there is a serious defamation issue, it is also a lot cheaper for the blogger to fix the problem than to litigate – even with pro bono counsel (which Flaneur did not have at that point).  So what does it say about Adaptive’s agenda here that it did not even try that?

And Gary Weiss points out a delicious irony of the fact that the discovery proceeding was directed at Yahoo!: Ben Stein blogs for Yahoo! Finance.

The September 21 hearing has been postponed to permit Adaptive to file a written response to our brief.  The new hearing is October 13 in Superior Court in Stamford.  Stay tuned.