Consumer Law & Policy Blog

No Surprise: Arbitration Critics Slam CFPB Rule

by Jeff Sovern

House Financial Services Chair Jeb Hensarling has already called for Congress to invalidate the CFPB arbitration rule by using the Congressional Review Act while the US Chamber of Commerce calls it a "Prime Example of [an] Agency Gone Rogue." 

Sigh.

Re De'pt of Educ efforts to eliminate protections for student borrowers

I try not to use the blog to tout Public Citizen's own work, but nonetheless want to provide two updates on our work to maintain protections for student borrowers in the face of a Department of Education no longer interested in doing so:

First, on Friday, Public Citizen and Harvard's Project on Predatory Student Lending filed suit on behalf of Meaghan Bauer and Stephano Del Rose, former students of the for-profit New England Institute of Art (NEIA) in Brookline, Massachusetts, to challenge the Department's delay of a rule designed to protect students defrauded by predatory for-profit colleges and career training programs. The students allege that NEIA, which is owned by Education Management Corporation, engaged in unfair and deceptive practices against them and other students that left them with a useless education, few job prospects and significant debt. The students intend to bring suit against the school for its conduct, and they had been counting on an Education Department rule finalized in 2016 that prohibits schools receiving federal funds from relying on forced arbitration clauses with their students. This Borrower Defense rule would ensure that Bauer and Del Rose have their day in court in a suit against NEIA. The rule also would provide Bauer and Del Rose with new protections and transparency when the Education Department considers their borrower defense applications. The suit filed on Friday explains that the delay violates the requirements of the Administrative Procedure Act.

The complaint is here.

Second, this week, Public Citizen is testifying at public hearings in Washington, D.C., and Dallas, Texas, to press for enforcement of a delayed U.S. Department of Education rule that would protect students from forced arbitration provisions buried in enrollment contracts with predatory schools. The rule, adopted in 2016 but delayed by President Donald Trump’s Department of Education, took more than a year to be finalized and would bring relief to tens of thousands of students of color, veterans and other Americans. Secretary Betsy DeVos has announced that the department intends to reconsider the 2016 rule in a new rulemaking. By delaying and revisiting the 2016 rule, the administration is revoking the rights of thousands of Americans who were deceived into taking on debt for worthless degrees at predatory schools, often concentrated in the for-profit college sector.

The testimony of Public Citizen's Julie Murray is here.

CFPB director Richard Cordray's prepared remarks on the agency's new arbitration rule

CFPB director Richard Cordray's prepared remarks on the new arbitration rule:

Thank you for joining us on this call. Today, we are announcing a final rule that prevents financial companies from using mandatory arbitration clauses to deny groups of consumers their day in court. A cherished tenet of our justice system is that no one, no matter how big or how powerful, should escape accountability if they break the law. But right now, many contracts for consumer financial products like bank accounts and credit cards come with a mandatory arbitration clause that makes it virtually impossible for people to sue the company as a group if things go wrong. On paper, these clauses simply say that either party can opt to have disputes resolved by private individuals known as arbitrators rather than by the court system. In practice, companies use these clauses to bar groups of consumers from joining together to seek justice by vindicating their legal rights. 

Group lawsuits, also known as “class action” lawsuits, have long been recognized as a means to secure relief under federal and state law. A small number of consumers can take a company to court to seek justice on behalf of all who were harmed by the company’s practices. By blocking group lawsuits, mandatory arbitration clauses force consumers either to give up or to go it alone – usually over relatively small amounts that may not be worth pursuing on one’s own. Including these clauses in contracts allows companies to sidestep the judicial system, avoid big refunds, and continue to pursue profitable practices that may violate the law and harm large numbers of consumers. 

And here is a CFPB video about why it's important to allow consumers to bring class actions (and so why it's important to bar class-action bans laundered through arbitration clauses)

Go here or click on the embedded video below.

 

 

Here's what the CFPB says about its brand-new arbitration rule

 

We’ve issued a new rule on arbitration to help groups of people take companies to court

July 10, 2017

 

If you have opened a bank or credit card account, it’s likely that your contract included an arbitration clause. Arbitration clauses can limit your options if you have a legal issue with a financial service provider.

Specifically, arbitration clauses can block people from bringing or joining group lawsuits, also known as “class action lawsuits.” No matter how many people are harmed by the same conduct, most arbitration clauses require people to bring claims individually against the company, outside the court system, before a private individual (an arbitrator). Companies know that people almost never spend the time or money to pursue relief when the amounts at stake are small, so few people do this. 

Our new rule will restore the ability of groups of people to file or join group lawsuits. In some cases, not only will companies have to provide relief, they will also have to change their behavior moving forward.

People who would otherwise have to go it alone or give up, will be able to join with others to pursue justice and some remedy for their harm. 

CFPB Issues Arbitration Rule

Here.

Guess How Many Public Complaints to the CFPB Complaint Database About Wells Fargo Unauthorized Accounts in 2015

by Jeff Sovern

As we have reported a number of times, Wells Fargo opened millions of unauthorized accounts over a period of years.  Estimates of how many range from two million to 3.5 million.  So you might expect many complaints about that to the CFPB complaint database.  On the other hand, considerable empirical research shows that consumers rarely complain about problems, see, e.g., Arthur Best & Alan R. Andreasen, Consumer Response to Unsatisfactory Purchases: A Survey of Perceiving Defects, Voicing Complaints, and Obtaining Redress, 11 LAv & Soc'Y REV. 701, (1977), and so there might be far fewer than millions of such complaints.  In addition, the Bureau doesn't post complaints unless consumers have agreed that it can do so, and so it might have received complaints that are not in the public record.  So what's your prediction about how many complaints?

I asked my research assistant, Amanda M. Schafer to read through the CPFB Complaint Database public complaints about Wells Fargo for one recent year, 2015, to see how many were about the unauthorized accounts.  We can't be certain that all the complaints she came up with involved Wells employees opening accounts, because often you can't tell from the narrative whether the account was opened by a Wells Fargo employee, an external identity thief, or an employee of a retailer which offered an affiliated Wells credit card.  But if we assume all of the possible complaints were about accounts opened by Wells employees, she found 19.  We still don't know how many consumers decided to keep their complaints private, but even if we assume that ten or twenty times as many did, that still doesn't seem like many complaints for a scam that snared millions.

What can we tell from this?  It tends to confirm that consumers rarely do anything when they are cheated (which tells us something about why class actions reach more consumers than individual arbitration).  It also suggests that consumers may not read bank statements.  Maybe those who complained communicated only with Wells and not the Bureau.  Any other thoughts? If so, please post them in the comments.

UPDATE: Amanda has calculated that only 26% of the Wells complaints filed in 2015 are public.  If we assume that the number of public complaints on an issue bears the same proportion to the total complaints on that issue as the number of public complaints does to total complaints, that would mean the Bureau received about 76 possible complaints about Wells employees opening unauthorized accounts.  Again, even if we assume that number understates the number of complaints by a factor of ten or twenty, it still seems very low for a scam the resulted in at least two million unauthorized accounts.

 

Critic of CFPB Structure Neomi Rao Nominee to Head OIRA

by Jeff Sovern

OIRA is the Office of Information and Regulatory Affairs (formerly headed by Cass Sunstein). It presides over the issuance of regulations by executive agencies, but not independent agencies (at least, not yet) like the CFPB.  President Trump has nominated for its director George Mason Professor Neomi Rao, a former clerk for Justice Thomas and counsel to the Senate Judiciary Committee under Senator Orrin G. Hatch; she also served in the Bush II administration. The Times has more here.   As for her views on the CFPB, Professor Rao has an article, Administrative Collusion: How Delegation Diminishes the Collective Congress, 90 N.Y.U.L. Rev. 1463 (2015), in which she states that "Reporting about the CFPB reflects the common understanding that the CFPB responds primarily to Senator Elizabeth Warren, who developed and helped to establish the Bureau," and "[A]gency officials and congressional staffers understand that Senator Elizabeth Warren and her staff exercise substantial influence and control over the CFPB, the agency she helped design." I've omitted the cites, but you can click on the linked article to find them if you want. Here's the article's abstract:

This Article identifies a previously unexplored problem with the delegation of legislative power by focusing not on the discretion given to executive agencies, but instead on how delegations allow individual congressmen to control administration. Delegations create administrative discretion, discretion that members of Congress can influence through a variety of formal and informal mechanisms. Members have persistent incentives for delegation to agencies, because it is often easier to serve their interests through shaping administration than by passing legislation. To understand the particular problem of delegation, I introduce the concept of the “collective Congress.” Collective decisionmaking is a fundamental characteristic of the legislative power. The collective Congress serves an important separation of powers principle by aligning the ambitions of legislators with the power of Congress as an institution. Although members represent distinct interests, the Constitution allows members of Congress to exercise power only collectively and specifically precludes them from exercising any type of individual or executive power. Delegation, however, provides opportunities for individual legislators to influence administration and poses a serious separation of powers concern by fracturing the collective Congress. This insight undermines the conventional view that delegations will be self-correcting because Congress will jealously guard its lawmaking power from the executive. Instead, members of Congress will often prefer to collude and to share administrative power with the executive. As a result, delegation destroys the Madisonian checks and balances against excessive delegation. This structural failure suggests a need to reconsider judicial enforcement of the nondelegation doctrine and to implement political reforms to realign Congress with its collective power.

 

Dadush Article on Identity Harm

Sarah Dadush of Rutgers has written Identity Harm, 89 University of Colorado Law Review (Forthcoming).  Here is the abstract:

In September 2015, the world learned that Volkswagen had rigged millions of its “clean diesel” vehicles with illegal software designed to cheat emissions tests. Contrary to what had been advertised, the vehicles are anything but clean. The fraud, referred to as “Dieselgate,” lasted for over seven years. When affected owners learned that their cars were much more toxic than advertised, what were they upset about? Was it that their cars were now worth fewer dollars? Or that they had been deceived into being bad global citizens, when they thought they were being good?

Coverage of Dieselgate strongly suggests that affected car-owners experienced both kinds of disappointment, economic and non-economic, and in heavy doses at that. But while the first kind of harm is relatively easy to recognize and address, this article shows that our protective regime is ill equipped to shield consumers from the second, a kind of “identity harm.” Identity harm refers to the distress experienced by consumers who learn that the companies they bought from did not honor their environmental or social promises. It arises when consumers realize that they have become unwittingly implicated in commercial arrangements that harm the planet and/or other human beings.

Today, an ever-growing number of consumers and corporations are becoming sensitized to sustainability challenges. They are also becoming more expressive about their commitment to addressing those challenges. As the “market for virtue” expands, so too does exposure to identity harm. This article introduces identity harm and argues for its deeper legal recognition.

Engstrom Article on Class Action History and the Litigation System

David Freeman Engstrom of Stanford has written Jacobins at Justice: The (Failed) Class Action Revolution of 1978 and the Puzzle of American Procedural Political Economy, 165 University of Pennsylvania Law Review (2017).  Here is the abstract:

In 1978, top DOJ officials in the Carter Administration floated a revolutionary proposal that would have remade the consumer class action and, with it, the relationship of litigation and administration within the American regulatory state. At the proposal’s core was a “public action” for widespread small-damages claims that would have replaced Rule 23 with a hybrid public-private enforcement model. Similar to the False Claims Act, this new mechanism would have granted private plaintiffs the power to bring lawsuits and recover a finder’s fee if successful, but it also gave DOJ substantial screening authority and control, including the ability to take over suits or dismiss them outright. Despite months of shuttle diplomacy among interest groups, a pair of bills in Congress, and full-scale committee hearings, this creative blend of private initiative and public oversight soon fizzled. Yet the story of the proposal’s rise and fall nonetheless provides a venue for wider reflection about American civil procedure and the political economy that produces it. Indeed, the failed revolution of 1978 reveals a contingent moment when the American litigation system was splintering into the pluralistic, chaotic one we now take for granted, including hard-charging state attorneys general, a federal administrative state with litigation authority independent of DOJ, and a sophisticated and politically potent plaintiffs’ bar. In retrospect, the proposal may have been the last best chance to counter the centrifugal tendencies of an American state that was progressively empowering ever more institutional actors within the litigation system. More importantly, lurking in the background of the story of 1978 is the bracing possibility that the Rules Enabling Act, for all its virtues in revising technocratic procedural rules, has systematically enervated efforts to address larger procedural design questions in an increasingly dense and interconnected regulatory world.