My Latest Law Review Article: Free-Market Failure: The Wells Fargo Arbitration Clause Example

by Jeff Sovern

It's for an arbitration symposium at Rutgers and is available for download here.  I would love to hear comments!  Here's the abstract:

In September 2016, regulators charged Wells Fargo with opening millions of unauthorized accounts on behalf of its customers. When some of those customers filed class actions against Wells, the bank initially responded by moving to compel arbitration on the ground that the consumers had agreed to arbitrate disputes and waive their class action rights. Because most customers with claims in small amounts would probably have foregone filing an arbitration claim, the effect would have been to leave their damages uncompensated except for the refunding of fees, which Wells agreed to in the consent order it entered into with regulators.

The Consumer Financial Protection Bureau has proposed a regulation which, if it had been in effect at the relevant time, would have enabled the injured Wells customers to obtain class action relief. But the proposed rule is encountering objections in Congress, based partly on free-market economic theory. This Article argues that free-market economics is not sufficient to protect consumers from the type of problem present in the Wells Fargo case for two reasons. First, free-market economics assumes that consumers have complete information while empirical evidence shows that consumers do not understand arbitration clauses, much less that consumers realize that such clauses would bar class actions as to fraudulent accounts that the consumers did not know about. Second, the number of primary checking accounts at Wells consistently increased as the fraud became public, suggesting that the free market did not discipline Wells for its misconduct until regulators intervened, and did so only modestly at that point. It is even possible that by enforcing arbitration clauses as written, free-market economics prolonged the Wells fraud, thus enabling more consumers to be injured.

In short, some device beyond the free market is necessary to prevent financial institutions from cheating many consumers out of small amounts. Class actions are one such device, but arbitration clauses as currently enforced enable financial institutions to prevent their use, thus reducing their incentive to comply with the law.

Federal preemption (or not) and the regulation of driverless cars

Sarah Light has written about the concept of Advisory Nonpreemption, using regulation of driverless cars as an example. Here's the abstract:

We are living in an era of dramatic and unpredictable technological and business innovation. Federal agencies have been at the forefront of updating substantive legal rules to meet new challenges not originally contemplated by Congress. Yet some of these new challenges – for example, new technologies like autonomous vehicles – upset longstanding legislative boundaries not only for substantive legal rules, but also for federalism. Significant uncertainty about whether local or national concerns will predominate as innovations develop requires temporary flexibility in the allocation of regulatory authority among the federal, state, and local governments to address these concerns. This Article identifies a new method that federal agencies can use to promote such flexibility before the initiation of a rulemaking – advisory nonpreemption. Ordinary preemption shifts the balance of power from the states to the federal government. Advisory nonpreemption has the opposite effect. It is a federal agency’s advisory statement in policy guidance that it has regulatory authority, and a suggestion to states to limit their regulatory actions. But the statement does not actually preempt states from regulating – at least temporarily. And the agency sets a timetable to revisit the issue. Advisory nonpreemption can open a dialogue among the federal government, the states, and industry not only about the best substantive rules to address innovation, but who ought to govern and enforce those rules. Most importantly, advisory nonpreemption is a method of inserting de facto overlapping, dynamic jurisdiction temporarily into an existing dual federalism scheme. This Article both describes advisory nonpreemption, and defends its use as a normative matter, using autonomous vehicle technology safety regulation as a case study. The approach’s costs in temporary regulatory uncertainty are outweighed by its benefits in promoting innovation, transparency, and the public interest.

Dalie Jimenez and Others Developing Self-Help Kits for Consumers with Debt Problems

Report here. Excerpt:

One of Jiménez’s biggest undertakings to date is the Financial Distress Research Project, an initiative she supervises with James Greiner and Lois Lupica, law professors at Harvard and the University of Maine law schools respectively. The goal of the enterprise – a signature project of the Access to Justice Lab at Harvard – is to help low- and moderate-income individuals successfully deal with the legal consequences of debt if they become entangled in the system. In the next few weeks, Connecticut Legal Services will begin implementing the project, which employs a randomized design built around a self-help kit that provides information on, among other things, how to litigate a collection action; pull, review, and correct errors in a credit report; and negotiate with creditors.

* * *

In a forthcoming article in the Indiana Law Journal, “Self-Help, Reimagined,” Jiménez, Greiner, and Lupica explain the rationale behind that approach. Unlike other self-help material, theirs considers the many psychological and cognitive barriers that prevent low- to moderate-income individuals from successfully making use of other self-help materials. 

* * *

Jiménez and her team are using state court records to identify individuals being sued in debt collection. Those that meet income and asset eligibility criteria will be put in one of four groups receiving varying degrees of self-help and professional support. The project will follow participants over three years to determine if the self-help kits have had a positive impact on their financial health. Jiménez and her partners will track credit score attributes in each of three years before the project, survey study participants when they enter the project, and for each of the three years after entering the project will measure their overall financial well-being, perceived financial stress levels, and other wellness indicators.

House Financial Services Committee By Party Vote Passes Choice Bill To Cripple CFPB

The HIll report is here. Excerpt:

The CHOICE Act also places major restraints on the Consumer Financial Protection Bureau (CFPB), an agency created by Dodd-Frank that the GOP has long called unaccountable, abusive and redundant.

The bill renames the CFPB the Consumer Law Enforcement Agency and reduces its power to enforce pre-existing consumer protection laws. Its sole director would be removable at will by the president, and its budget would be controlled by Congress through the traditional appropriations process.

* * *

The bill could likely pass in the House along party lines, though it’s widely considered a long-shot to be taken up in the Senate.

The Hill: Warren blasts Trump for replacing top banking regulator [at OCC]

Here. Excerpt from Senator Warren's statement:

I am deeply concerned by the Administration's decision to remove an experienced, independent regulator like Comptroller Curry and replace him with a career bank lawyer.

The Hill Reports House Financial Committee Expected to Vote on Choice Act Wednesday While Morning Consult Says Thursday

The report about tonight is here while the report about tomorrow is here. In either case, it's soon. Not surprisingly, in light of the makeup of the Committee, CFPB supporters' proposals are being rejected.

What Would Stop Illegal Student Loan Schemes if the Choice Act is Enacted?

by Jeff Sovern

Rohit Chopra senior fellow at the Consumer Federation of America and formerly student loan ombudsman at the CFPB, testified last week on the Choice Act and listed a few of student loan cases that could not have been brought under the Choice Act.  Here is his list:

While many know of Wells Fargo’s years-long fake accounts scandal leading to blockbuster fines in September 2016, just two months earlier the CFPB also fined Wells Fargo millions for illegal student loan practices, including allocating borrower payments in order to maximize late fees. This action would not be possible under the proposal.

In 2015, the CFPB announced that it had caught Discover, another big student lender, for illegal billing and debt collection practices, which would also not be possible under the proposal.

In 2014, the CFPB sued Corinthian Colleges for an illegal student loan scheme coupled with strong-armed debt collection tactics to shake down their students. Ultimately, the CFPB secured $480 million in debt relief for borrowers and Corinthian is no longer operating. This action would not be possible under the proposal.

And just this year, the CFPB sued student loan behemoth Navient, formerly known as Sallie Mae, for illegally cheating borrowers out of their repayment rights through shortcuts and deception at every stage of the repayment process so that it can pad its own profits. The allegations are severe, impacting millions of borrowers. This action would not be possible under the proposal, since the consumer agency would simply lack the authority to enforce critical consumer protection laws.

If the CFPB couldn't stop these schemes, who would?

 

Jessica Rich, former director of FTC's Bureau of Consumer Protection, goes to Consumer Reports

Consumer Reports announced today that Jessica Rich, former director of the Federal Trade Commission’s Bureau of Consumer Protection, has joined the organization as Vice President of Consumer Policy and Mobilization.

Consumer Reports' press release is here.

Should the Financial Choice Act be Called the Accountability to Lobbyists Act?

by Jeff Sovern

During hearings on the CFPB and the Choice Act, I kept hearing critics of the CFPB saying they want to increase its accountability (I haven't started listening to the markups yet, but it's probably a recurring theme there too).  In fact, the CFPB is accountable.  But assume it isn't for the moment.  CFPB critics argue that one way it should be made more accountable is by subjecting it to the congressional appropriations process.  While that sounds good in theory, the problem is that the voices of lobbyists are much louder at appropriations committee proceedings than the voices of consumers. Corporate lobbyists have the resources to pay attention to the inside baseball of appropriations while ordinary consumers busy making a living and providing for their families don't.  The result of such "accountability" in the past has been that lobbyists urge members of Congress to starve regulators of funds if the regulators don't play ball with the lobbyists--and that in turn leads to regulatory capture.  That is exactly what happened with Fannie and Freddie's former regulator, which was a disaster.  Critics of the Choice Act have been calling it the Wrong Choice Act, but they could also call it the Accountability to Lobbyists Act, because that's what it would create.

Noreika to Take Over as Acting Comptroller of the Currency

. . . as was reported yesterday to be under consideration. The announcement is here.