Consumer Law & Policy Blog

Bloomberg: Consumer Bureau Said to Warn Banks of Auto Lending Suits

by Jeff Sovern

Here.  The first two sentences say:

The U.S. Consumer Financial Protection Bureau has told at least four banks that it may sue them over vehicle loans and interest-rate markups by auto dealers that appear discriminatory, according to three people briefed on the matter.

The banks received letters from the CFPB last week giving them 15 days to provide an explanation of the practice, said the people, who asked not to be identified because the plans aren’t public. The letters indicate the bureau believes the banks may have violated the Equal Credit Opportunity Act, a 1974 law that bars discrimination in lending.

It's hard to tell from the article exactly what the Bureau thinks the banks may have done, but in the past lenders have told car dealers a minimum interest rate that they were willing to offer customers and given the dealers discretion to offer higher rates (the lenders and dealers share the excess over the minimum rate). Consumer advocates later claimed that many dealers given such discretion charged higher rates to people of color, and so the act of the lenders of giving the dealers discretion led to discrimination against protected classes in violation of ECOA.  Perhaps the Bureau suspects that that is what is happening, or maybe something different is going on. 

Florida Opts for the Affordable Care Act's Medicaid Expansion

by Brian Wolfman

After the Supreme Court's decision last June largely upholding the Affordable Care Act (ACA), we asked this question: Which states, if any, will back out of the Medicaid expansion?

As you will recall, the Supreme Court ruled 7-to-2 that the states have the right to back out of the ACA's large Medicaid expansion -- that is, the states don't have to participate in the expansion if they turn down the federal funds available as part of that expansion (but they can still participate in the pre-existing Medicaid program). Also recall just how large that expansion is. The ACA seeks to cover most of the millions of Americans who lack health insurance using several methods, and none is bigger that the Medicaid expansion. With the expansion, nearly all Americans with incomes up to 133% of the federal poverty level are eligible for government funded medical care (if they live in states that don't opt out, that is). Before the ACA, Medicaid eligility not only required poverty -- extreme poverty in some cases -- but also inclusion in a category, such as disability, being above or below a certain age, etc.

Moreover, under the Medicaid expansion, the federal government funds all of the new Medicaid costs for the first two years of the expansion and at least 90% of it after that. So, in the long run, it's always struck me as unlikely that many (if any) states would opt out. But Florida's Governor, Rick Scott, was one of the Republican governors who hated the ACA and said, after the Supreme Court's decision, that his state would opt out of the Medicaid expansion.

As explained in this article by Sarah Kliff, Scott has changed his mind and now will accept the Medicaid expansion for his state (for at least three years, he says). Why? He says that “I believe in a different approach. ... But it doesn’t matter what I believe. The Supreme Court made its decision. We had an election in the fall, and the public made their decision. Now the president’s health-care law is the law.” But "the Supreme Court and the election made me do it" argument is just an attempt at gaining political cover. The Supreme Court's decision expressly authorizes Florida to opt out. He's participating now because it makes sense for his citizens to participate. Low-income people in his state, many of whom have no insurance, will receive health care, and the feds will foot almost all of the bill. That's a great deal for Floridians, isn't it? (Kliff's article says that "In Florida, analysts expect the Medicaid expansion to cover 1.3 million people and bring $73 billion in federal funds into the state over the course of a decade.")

Some states still say that they are going to opt out. Virginia's governor, for instance, says that he won't accept the Medicaid expansion unless the program undergoes "major reforms." But I suspect that eventually (if not immediately) all states will follow Florida's path.

UPDATE: This article by Phil Galewitz explains why "[a]lmost overnight, Florida has gone from being an ardent opponent of the federal health-care law to a laboratory for an ambitious experiment under it."

The Revolving Door Between Industry, Congressional Staffs, and Regulatory Positions

Read this piece by Jessie Eisinger of ProPublica. Eisinger begins by noting that there's a lot of discussion about the revolving door between industry and agency appointees. He refers to one instance that's gotten a lot of press: Mary Jo White's appointment to head the SEC. Aftter serving "as a tough United States attorney," Eisigner says, "Ms. White spent the last decade serving so many large banks and investment houses that by the time she finishes recusing herself from regulatory matters, she may be down to overseeing First Wauwatosa Securities." But Eisinger then turns to revolving doors that often go unmentioned:

Ms. White maintains she can run the S.E.C. without fear or favor. But the focus should be limited to whether she can be effective. For lobbyists, the real targets are regulators and staff members for lawmakers. Ms. White, at least, will have to sit for Congressional testimony, answer occasional questions from the media and fill out disclosure forms. Staff members, however, work in untroubled anonymity for the most part. So, while everyone knows there’s a revolving door — so naïve to even bring it up! — few realize just how fluidly it spins. (emphasis added)

Eisenger then goes on to describe some interesting examples. Worth reading.

CFPB Director Cordray Speaks to Consumer Advisory Board

Consumer Financial Protection Bureau Director Richard Cordray spoke today at the the CFPB Advisory Board's first meeting of 2013. He discussed the CFPB's current priorities, including unequal access to credit for minorities, deceptive marketing of consumer financial products, and debt traps. He also touched on the Bureau's efforts to be transparent, to respond to consumer complaints, and to develop consumer-friendly tools to provide information to consumers. His prepared remarks are posted here.

Senator Warren and the Confirmation of Richard Cordray to Head the CFPB

Politico puts out an often-interesting email newsletter, titled Morning Money, every weekday. This morning's edition quoted "a person close to" Senator Elizabeth Warren as saying the following:

'It should be obvious to anyone paying attention that the large banks would have more ground to stand on with Elizabeth if they figured out a way to get Rich Cordray confirmed finally.

"Some of the key trade associations and big banks spun up the opposition to the CFPB at the beginning and authored all the structural talking points, and they are responsible for the current stalemate in a lot of ways. ... They are also now happy with Cordray's work, and the agency is doing a lot of good for consumers. The fight over structure is settled, stale and going nowhere, and it would do everyone a lot of good if they could figure out how to bring the drama to an end, make some peace, and create long overdue certainty with Cordray's confirmation.'

There's a lot of interesting stuff in that quote.  It suggests that there might be a way to confirm Cordray.  There's also the claim that the banks are behind the effort to change the CFPB's structure from a single director to a commission.  If that's true, it would explain why the talking points have not included until recently changing other bank regulators to commissions, since those other regulators have tended to be far more supportive of banks than the CFPB.

Are There Common Threads in Financial Scandals That Harm Consumers?

As explained here (an interview with one of the authors), law professors William Bratten and Adam Levitin think so. The full article is here. Here is the abstract:

Three scandals have reshaped business regulation over the past thirty years: the securities fraud prosecution of Michael Milken in 1988, the Enron implosion of 2001, and the Goldman Sachs “Abacus” enforcement action of 2010. The scandals have always been seen as unrelated. This Article highlights a previously unnoticed transactional affinity tying these scandals together — a deal structure known as the synthetic collateralized debt obligation involving the use of a special purpose entity (“SPE”). The SPE is a new and widely used form of corporate alter ego designed to undertake transactions for its creator’s accounting and regulatory benefit. The SPE remains mysterious and poorly understood, despite its use in framing transactions involving trillions of dollars and its prominence in foundational scandals. The traditional corporate alter ego was a subsidiary or affiliate with equity control. The SPE eschews equity control in favor of control through pre-set instructions emanating from transactional documents. In theory, these instructions are complete or very close thereto, making SPEs a real world manifestation of the “nexus of contracts” firm of economic and legal theory. In practice, however, formal designations of separateness do not always stand up under the strain of economic reality. When coupled with financial disaster, the use of an SPE alter ego can turn even a minor compliance problem into scandal because of the mismatch between the traditional legal model of the firm and the SPE’s economic reality. The standard legal model looks to equity ownership to determine the boundaries of the firm: equity is inside the firm, while contract is outside. Regulatory regimes make inter-firm connections by tracking equity ownership. SPEs escape regulation by funneling inter-firm connections through contracts, rather than equity ownership. The integration of SPEs into regulatory systems requires a ground-up rethinking of traditional legal models of the firm. A theory is emerging, not from corporate law or financial economics but from accounting principles. Accounting has responded to these scandals by abandoning the equity touchstone in favor of an analysis in which contractual allocations of risk, reward, and control operate as functional equivalents of equity ownership, and approach that redraws the boundaries of the firm. Unfortunately, corporate and securities law hold out no prospects for similar responsiveness. We accordingly await the next alter ego-based innovation from Wall Street’s transaction engineers with an incomplete menu of defensive responses.

Case About Virignia Freedom of Information Act "Citizens-Only" Restriction to be Argued Today in the Supreme Court

This morning the Supreme Court will hear argument in McBurney v. Young, which presents the question whether under the Privileges and Immunities Clause of Article IV and the dormant Commerce Clause of the United States Constitution a state may limit the right of access to the state's public records to its own citizens. We have posted about the case before, including here. Both scotusblog and The Atlantic have case previews.

Sad News: Privacy Pioneer Alan Westin Dies

More here.  His work informed my writing and the work of countless others, and as it happens, as an undergraduate, I was fortunate enough to take a class with him .

Donald Trump, Paper Tiger?

by Paul Alan Levy  

Donald Trump consistently gets press by filing suits that show his thin skin about being criticized, but he gets less coverage for threats on which he never follows through.  A couple of months ago, his lawyer Alan Garten threatened to file a "major, multi-million dollar lawsuit" against Angelo Carusone for the "Dump Trump" movement, which seeks to persuade Macy's to stop promoting Trump's fashion brand.  The letter was long on rhetoric, claiming that the boycott effort is a tortious interference with contractual relations, but short on specifics.  When I called Trump's lawyer more than one month ago, he blustered that it was Macy's that wanted Trump to sue, and that couldn't remember any specific false factual statements about his client but would provide them later.   A follow-up letter explained that the First Amendment protects the right to organize a boycott for policy reasons, and reminded Garten that he had not yet provided any specifics.

Garten still hasn't responded, nor has Trump filed suit.  Good reason for others not to back down when his mouthpiece sends frivolous threats of litigation.

Big Tobacco and Anti-Tobacco Team Up Against Health Care Act Smokers' Surcharge

In this article, Sarah Kliff explains that the big tobacco companies and certain anti-cancer groups are allied against a provision in the Affordable Care Act that allows health insurers to charge 50% higher premiums to smokers. (In real terms, the 50% smokers' surcharge could be much higher because the Act also bars government subsidies to help smokers pay the premium surcharge, although those subsidies will be available to help pay premiums of low-income people generally.) No doubt the provision is intended to encourage people to quit smoking.

Big Tobacco is against it because a law that makes smoking more costly could cut into tobacco sales. Kliff says that health groups are against it because it could discourage smokers from getting health insurance, and, the groups explain, smokers tend to be relatively low-income people to begin with. The article says that the smoker surcharge is something of an anomaly because the Affordable Care Act seeks to curtail other group premium disparaties, demanding equal premiums between men and women and limiting disparate premiums for older people. Kliff also notes that the lobbying against the provision is going on at the federal and state levels, because states have power under the ACA to bar the tobacco surcharge. Absent repeal or modification, the surcharge will go into effect in 2014.