The CFPB's Power to Investigate Potential Wrongdoing

Today's Blog of the Legal Times has this interesting post about the Consumer Financial Protection Bureau's use of investigatory demands on potential enforcement targets in the financial services industry.

CFPB Gets Settlement With Discover Over Add-On Services That Consumers Were Tricked Into Buying

As explained in this LA Times story, "[m]ore than 3.5 million Discover credit card customers will share $200 million in refunds in the wake of a federal investigation [by the Consumer Financial Protection Bureau and the FDIC] that determined the bank tricked people into signing up for payment protection plans and other add-on services." The director of U.S. PIRG's consumer program, Ed Mierzwinski, is quoted as saying that "[b]anks have been doing this for years," and attributed the federal enforcement in this case to the presence of the CFPB, noting that "we never had a [bank] regulator who protected consumers before."

Paper on Behavioral Economic Approach to Credit Reporting Consumer Protection

Adi Osovsky, a Harvard SJD candidate, has written The Misconception of the Consumer as a Homo Economicus: A Behavioral Economic Approach to Consumer Protection in the Credit Reporting System, forthcoming in the Suffolk University Law Review.  Here's the abstract:

The significant increase in the number of consumer transactions, along with the expansion of information technology, have created massive amounts of detailed information on each individual's credit history. Consumer credit reporting agencies ("CRAs") play an important role in this financial information market.

Although the credit reporting system has significant economic benefits, CRAs have a tarnished reputation as far as consumer protection is concerned. While making their business out of gathering, compiling and analyzing consumers' information, CRAs generally do not have privity of contract with those very same consumers and thus have little or no incentive to protect consumers' privacy and ensure the accuracy of every single credit report. Such lack of incentive has resulted in numerous consumer problems, including inaccuracies in credit reports and erroneous credit scores; infringement of consumers' right to privacy; contribution to the prevalence of identity theft; and the creation of a fertile ground for consumer manipulation through targeted marketing lists.

This paper suggests that the current regulatory system has been captivated by the misconception of the consumer as Homo Economicus. Existing regulation has given consumers a significant role in facilitating the production of more accurate credit, envisioning rational, vigilant and alert consumers, who regularly monitor their credit reports, dispute errors and opt-out from marketing lists. However, studies have shown that consumers' rationality in decision making is in fact doubtful, and so too is the justification of imposing monitoring responsibilities on consumers.

The paper challenges the economic regulatory approach through the behavioral economic approach – a relatively new model that aspires to explain consumers' biases and cognitive limitations, which are absent in the standard economic framework. The paper then explores two potential consumer protection mechanisms, drawn from the behavioral economic framework: applying psychological tools, such as disclosure and framing, for a better designed system; and enhancing consumer financial literacy.

9th Circuit to Rehear Case About Mandatory Arbitration of Claims for Public Injunctive Relief

In July, the Ninth Circuit Court of Appeals held in Kilgore v. Key Bank that, in light of AT&T Mobility v. Concepcion, California law holding that claims for public injunctive relief are not subject to mandatory arbitration is preempted by the Federal Arbitration Act. The court held that the California rule does not survive Concepcion because the rule “prohibits outright the arbitration of a particular type of claim” (quoting Concepcion). The court also rejected arguments that the arbitration agreement at issue in the case is unconscionable.

On Friday, the Ninth Circuit granted the plainitffs' petition for rehearing en banc. The en banc oral argument will take place during the week of December 10, 2012.

Congressman Randy Neugebauer Says CFPB Lacks Transparency

In this Wall St. Journal op-ed, Congressman Randy Neugebauer (R-TX) says that the Consumer Financial Services Bureau is not transparent about how it plans to spend its money. He also says that the CFPB pays its employees too much money:

A review of the bureau's salaries as of Aug. 28, 2012, reveals that approximately 60% of its 958 employees make more than $100,000 a year. Five percent of its employees are out-earning U.S. cabinet secretaries by raking in $200,000 or more annually. The director's secretary alone is paid $165,139 a year.

It sounds like the CFPB is transparent about what it pays its employees! As you will see if you read his op-ed, Rep. Neugebauer is very vague about his lack-of-transparency claim. In any event, I'd like to hear the rebuttal to Neubebauer's claim and whether it's true that 60% of the agency's employees make more than $100,000.

The Sex Discrimination Class Action Against Wal-Mart Lives On

We explained here that after the Supreme Court threw out the nationwide employment discrimination class action against Wal-Mart on behalf of hundreds of thousands of women, the class lawyers pushed ahead with smaller class actions and in helping women process individual claims against Wal-Mart. And now, district judge Charles Breyer in San Francisco has rebuffed Wal-Mart's efforts to dismiss a trimmed down class action (on behalf of women in California), noting that it's possible that the plaintiffs will be able to certify a class under the standards laid down in the Supreme Court's decision. The plaintiffs maintain that they have fresh evidence of intentional employment discrimination against Wal-Mart's female employees. Judge Breyer has set a class certification hearing for February. Read about it here and here.

Suppression of Negative Studies on Prescription Drugs

Read this extensive post at Naked Capitalism entitled "'The Drugs Don't Work': How the Medical-Industrial Complex Systematically Suppresses Negativess Studies." Here's a very brief excerpt:

[Although] the overt corruption of science at work in the drug arena ... comes to light from time to time, often in the context of litigation, the lay public is largely ignorant of how systematic and pervasive the efforts are to undermine good research practice in order to foist more, expensive, and sometimes dangerous drugs onto patients.

Amitai Etzioni Paper on Privacy Merchants

Amitai Etzioni has written The Privacy Merchants: What is to Be Done?  Here is the abstract:

Rights have been long understood, first and foremost, as protection of the private from the public, the individual from the State. True, we also recognize positive rights (such as socioeconomic rights) and the government’s duty to protect citizens from violations of rights by other actors besides the State. However, when violations of privacy are discussed, the first violator that typically comes to mind is “Big Brother” — that is, the State. This Article focuses on the growing threat to privacy from private actors, specifically profit-making corporations. It briefly outlines a range of options aimed at protecting individual privacy against encroachment by private actors, and it evaluates them within the prevailing normative, legal, and political context in the United States.

States join challenge to Dodd-Frank

Continuing what seems to have become a trendy move for Republican attorneys-general, the states of Michigan, Oklahoma, and South Carolina are joining a legal challenge to another signature Obama law.

Here's a helpful summary from the Blog of Legal Times:

Three states have joined a lawsuit challenging the constitutionality of the Dodd-Frank Act, complaining that it gives the government too much power to take over and liquidate nonbank companies whose failure would jeopardize the financial system.

The states of Michigan, Oklahoma and South Carolina joined a broader suit attacking Dodd-Frank that was filed in June in U.S. District Court for the District of Columbia by a Texas community bank, the Competitive Enterprise Institute and the 60 Plus Association.

You can read more about it here.

In other political news, you know it's been a bad week for Mitt Romney when he wants to talk about his tax returns.

National Law Journal Report on CFPB's Director Cordray's Appearance Before Congress Yesterday

Here.  The headline: A Sense of Déjà Vu in Latest Hill Appearance of CFPB Chief. An excerpt:

First came the obligatory complaint that Cordray's January recess appointment was illegal. "Dodd Frank made you a very powerful appointee, but not a legitimate appointee," Representative Jeb Hensarling (R–Texas) told the perpetually unflappable Cordray. "There's a big gray legal cloud hanging over your agency."

The agency's budget, which comes from Federal Reserve fees rather than congressional appropriations, was another favorite target. Representative Randy Neugebauer (R–Texas) described it as a "slush fund of half a billion dollars."

Democrats then rushed to support Cordray and his agency. "I would say you have tremendous credibility," said Representative Carolyn Maloney (D–N.Y.), who dismissed the criticism as "election year efforts by those who never wanted to create the agency in the first place."