CFPB Getting Geared Up For Regulation of Credit Reporting Industry

The Consumer Financial Protection Bureau is getting ready for a big task starting this fall: regulation of the credit reporting industry, including the Big Three, Experian, TransUnion, and Equifax. Here's an excerpt from an LA Times story on this large undertaking:

Large credit reporting companies, which are playing an increasingly important role in the financial lives of Americans, will get new federal oversight from the nation's consumer watchdog. The Consumer Financial Protection Bureau said it would begin this fall to supervise the 30 largest credit reporting companies, which account for 94% of the market's annual receipts. Among the firms are the big three: Experian Information Solutions Inc., Equifax, Inc.and TransUnion. Combined, they issue more than 3 billion consumer credit reports each year and have files on more than 200 million Americans. "Credit reporting is at the heart of our lending systems and enables many of us to get credit, afford a home or get an education," said bureau Director Richard Cordray, who will announce the oversight at a hearing on credit reporting Monday in Detroit. "Supervising this market will help ensure that it works properly for consumers, lenders and the wider economy," he said. "There is much at stake in making sure it is both fair and effective."

Students Using More of Their Own Money for College

That's what this article by Ylan Miu explains, based on an annual study done by Sallie Mae. Students are paying for about 30% of the costs of college out of their own pockets to deal with the shrinking pool of loans, grants, and parental contributions. And, for the first time, Sallie Mae's annual report found that more than half of college students lived at home. Read Sallie Mae's study and a summary of it, and view the chart to the right, which shows how students' college eduations were financed in 2011.

J.W. Verret in Forbes: About The Dodd-Frank Act, George Washington Would Be Turning Over In His Grave

by Jeff Sovern

That's a pretty provocative title, right?  Verret turns out to be an assistant professor at George Mason and a Senior Scholar at the Mercatus Center Working Group on Financial Markets.  He has several complaints about the CFPB.  Thus:

The CFPB Director is indeed the czar of czars. He or she may only be removed for neglect or malfeasance in office. That is not true of most other financial regulatory agencies, where the President can replace the Chairman at will by designating another Commissioner as Chairman.

 

That's very cleverly put.  Notice the phrase "other financial regulatory agencies."  Put that broadly, the comparison is to agencies like the SEC, CFTC, etc. The problem is that those agencies are not agencies that regulate consumer financial transactions, and so are really a different animal.  Why didn't Verret confine himself to agencies that regulate consumer financial transactions?  Could it be because those agencies don't have the structure Verret describes?  The agencies that regulate consumer financial transactions tend to have structures like the CFPB's.  For example, the Comptroller of the Currency, the head of the Federal Reserve, and the head of the FDIC all have fixed terms and can't simply be removed at the president's will (I suppose the Federal Trade Commission, whose chairman the president can replace with another commissioner--though the former chairman retains the position of commissioner--might be an exception, except that it has little power over financial institutions). 

Here's Verret's lead: "In his farewell Presidential address, George Washington noted the 'love of power and proneness to abuse it which predominates in the human heart' and he suggested the 'necessity of reciprocal checks of political power...'" He uses that to suggest that the power exercised by the CFPB director would offend Washington.  I wonder why Verret doesn't mention the other financial regulators that exercise similar power, like the OCC?  Could it be because the OCC tends to be a darling of the financial industry, rather than an agency that restrains it?  I certainly don't know enough about Washington to know what his views were about consumer protection agencies, but I wonder how Washington would feel about the power exercised by financial institutions today. They are probably our most powerful lobby and bestow enormous sums on legislators (and who knows how much they are spending on campaigns after Citizens United).  Would Washington have approved of the LIBOR rate-fixing scandal, robo-signing, or the subprime crisis?  Given Washington's desire for checks on power, would he perhaps have liked an agency that would check the power of financial institutions?

Another quote from Verret: "The CFPB Director has authority to determine, for example, that credit card frequent flier miles are “abusive practices” that will be prohibited…and a federal judge would have limited ability to stop him." This is a classic lawyer's technique for arguing: you pick a crazy example that no one would ever want, and then you say that it could happen (remember the imaginary law that says you have to eat broccoli in the context of the Affordable Care Act--so-called Obamacare).  But this time, I'm not sure that it's even true that the crazy example is within the CFPB's power. The CFPB can only outlaw terms that satisfy a statutory test for being abusive. Here's the statutory text:

Abusive- The Bureau shall have no authority under this section to declare an act or practice abusive in connection with the provision of a consumer financial product or service, unless the act or practice—

(1) materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or

(2) takes unreasonable advantage of--

(A) a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service;

(B) the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service; or

(C) the reasonable reliance by the consumer on a covered person to act in the interests of the consumer

Personally, I don't see how frequent flyer miles take unreasonable advantage of people in the way described or materially interfere with the ability of a consumer to understand them,  but we already know Verret is more imaginative than I am. 

I'm disappointed.

Anti-Cooling-Off Period Advocacy

by Jeff Sovern

In the course of researching cooling-off periods for my article Written Notice of Cooling-Off Periods: A Forty-Year Natural Experiment in Illusory Consumer Protection and the Relative Effectiveness of Oral and Written Disclosure, I came across some over-heated comments by opponents of the rules.  Here is an excerpt quoting some (in the interests of brevity, I'm omitting the footnotes here, but if you want to know the sources and read fuller quotes, you can go to the article):

[S]ome complained that cooling-off periods were “contrary to fundamental business concepts,” “designed to undermine the foundation of the law of contracts,” “discriminatory in the worst way and probably unconstitutional,” would make contracts “a mere illusion,” “leave [consumers] in greater jeopardy than the 10 percent of our society that is out to take [consumers]” would “invite bad faith contracts,” and that cooling-off period rules were “class legislation.”[7]  It was said that cooling-off periods would occasion “agony” for consumers.  Byron D. Sher, a contemporaneous observe, summarized the economic arguments against the FTC rule as follows:

 [D]irect sellers also argue that giving buyers a right to cancel will have a disastrous effect on their business.  Their main contention is that the cooling-off period amounts to an “invitation to cancel” that will interfere with the “decision-making” process and frustrate the efforts of salesmen to facilitate the process.  * * *

But by 2009, industry views had shifted dramatically.  Another excerpt:

Periodically, the FTC solicits comments on its rules to see if they should be retained or revised.  It did so most recently for the Cooling-Off Period Rule in 2009.  The FTC’s Request elicited only six comments. One trade organization, the Direct Selling Association expressed the view “that the Rule serves a valuable purpose for consumers.”  The only merchant objection to the Rule came from a seller of fresh fish that complained that the Rule permitted buyers to cancel sales; by the time that seller could reclaim the fish, several weeks would have passed and so buyers could keep the fish for free.

What had changed?  For that, you should read the article. But in the meantime, perhaps this offers a lesson about how seriously to take critics of consumer protection rules.  Of course, as the rules seem not to have done much for consumers, the article is also a cautionary tale for consumer advocates.

San Francisco settlement will provide restitution for fraudulent lending and marketing practices

The San Francisco City Attorney's Office issued a press release this week announcing the start of an "outreach effort to refund up to $7.5 million to California consumers who obtained short-term installment loans from Money Mart and Loan Mart from 2005 through 2007, and oversized payday loans from Money Mart and Loan Mart in 2005." According to the press release, consumers who borrowed money from the two entities may be eligible for refunds ranging from $20 to $1,800. The refunds are the result of a settlement of a lawsuit brought by the City Attorney's Office in 2007 against the two payday lenders and an affiliated out-of-state bank for unfair and fraudulent business practices. The settlement agreement and the claim form are attached to the press release.

DOJ Reaches Historic Lending Discrimination Settlement With Wells Fargo for $175 Million

Wells Fargo Bank, the largest mortgage lender in the country, has agreed to pay more than $175 million in a landmark settlement with the Justice Deparment over allegations of racial discrimination against African-American and Hispanic borrowers. Wells is paying $7.5 million to the City of Baltimore to settle its separate fair-lending suit against the lender.

This is the second-highest fair lending settlement in history. According to the DOJ's press release, the settlement "provides $125 million in compensation for wholesale borrowers who were steered into subprime mortgages or who paid higher fees and rates than white borrowers because of their race or national origin," as well as "$50 million in direct down payment assistance to borrowers in communities" (including Baltimore) with large numbers of discrimination victims. The settlement also includes a review process with additional compensation for retail borrowers who were placed into subprime loans where similarly situated white borrowers received prime loans. The Los Angeles Times has an article on the settlement here, the DOJ press release is here, and the consent decree is here. 

Contempt Sanctions Imposed on Evan Stone Have Been Affirmed on Appeal

by Paul Alan Levy

The contempt sanctions imposed early this year on Dallas-area lawyer Evan Stone, who specializes in  the "strategy of suing anonymous internet users for allegedly downloading pornography illegally, using the powers of the court to find their identity, then shaming or intimidating them into settling for thousands of dollars," even if they may have a defense, were affirmed today by the Court of Appeals for the Fifth Circuit.  This may prove to have been an appeal that made things even worse for Stone than the original sanctions were, because not only is he liable for additional fees on appeal, but the grounds of the affirmance -- that Stone waived all of his appellate arguments by not presenting them properly in the trial court -- will not likely prove beneficial to his reputation as a litigator.

Paper on Written Notice of Cooling-Off Periods and the Relative Effectiveness of Oral and Written Disclosures

by Jeff Sovern

I've just posted to SSRN a draft of a paper titled Written Notice of Cooling-Off Periods: A Forty-Year Natural Experiment in Illusory Consumer Protection and the Relative Effectiveness of Oral and Written Disclosures.  Yes, I know: the title rolls trippingly off the tongue.  Anyway, it's very much a work-in-progress, so I would love to hear comments. Here's the abstract:

For more than forty years, a standard tool in the consumer protection tool box has been the cooling off period. Federal statutes, state statutes, and federal regulations all oblige merchants to give consumers three days to rescind certain contracts. This paper reports on a survey of businesses subject to such cooling-off periods. The study has two principal findings. First, the respondents indicated that few consumers rescind their purchases. Thus, the study raises doubts about whether cooling-off periods benefit consumers or whether they provide only illusory consumer protection.

Second, the study found that consumers who receive both oral and written notice of their rights are more likely to avail themselves of those rights than those who receive only written notices, and that the differences are statistically significant. Fifty-three percent of the Sellers who gave only a written notice and did not speak of the buyer’s right to cancel said buyers never cancelled, nearly double the percentage for sellers who did tell buyers (27%). Businesses that provided both oral in-person and written notices of the right to rescind were more than twice as likely to report that more than 1% of their customers cancelled contracts as those that provided only written notices. The article offers speculations about why cooling-off periods have been of such little value to consumers, and why oral and written notice combined have been more effective than written alone.

Finally, the survey asked respondents about the cost of cooling-off periods. More than four-fifths of the respondents who answered the question reported that the right to cancel had cost them either nothing or very little. This contrasts with the vehement opposition of opponents of such rules when they were first adopted in the 1960s and 1970s.

FINRA arbitrators rule for customer -- and get fired

Bloomberg View reported last Sunday on a FINRA securities arbitration of a dispute between a customer and Merrill Lynch. According to the article, after the 3-person arbitration panel awarded the customer $520,000, Merrill Lynch complained to FINRA. FINRA then fired all three arbitrators.

FINRA (Financial Industry Regulatory Authority) is the "self-regulatory organization" for Wall Street. According to its website, "FINRA's mission is to protect America's investors by making sure the securities industry operates fairly and honestly."

California Foreclosure Reform Legislation Signed Into Law

We told you a week or so ago about California's new landmark foreclosure relief legislation. Go here to learn about the law's key provisions. This article describes Governor Jerry Brown's approval of the law yesterday. Here's an excerpt:

A major overhaul of foreclosure laws in the Golden State has been signed into law by Gov. Jerry Brown. Last week, California lawmakers passed the legislation that would provide homeowners with some of the nation's strongest protections from foreclosure and aggressive bank practices. For instance, seizing a home while the owner is negotiating to lower mortgage payments will be restricted. At a boisterous signing ceremony in downtown Los Angeles, Brown said that the measures were an important step for an economy still suffering the fallout of the subprime mortgage crisis and housing bust." This is a very important day, to sign a very important bill, to clean up at least part of the mess that has been created by all sorts of people in the mortgage, the banking and servicing business that caused untold suffering to millions of people," Brown said. "People have lost their homes, they have lost their jobs. Families have broken down because of the insensitivity, the greed and the blindness of very powerful people who made millions of dollars personally, and billions of dollars for their respective entities."