Top Behaviorial Economist to Head CFPB's Office of Research

The Treasury Department today announced the hiring of behavioral economist Sendhil Mullainathan to serve as head of the CFPB's Office of Research.  The Wall Street Journal had this report on Mullainathan:

The leading behavioral economist of his generation, his research has focused on how people’s biases and weaknesses lead them to make bad economic decisions. He is also a founder, with Esther Duflo and Abhijit Banerjee, of MIT’s Jameel Poverty Action Lab.

His research has provided much of the intellectual foundation for the establishment of the CFPB, which is tasked with making “markets for consumer financial products and services work for Americans.”

“He’s more or less exactly what the CFPB should be: evidence based, appropriately suspicious of concentrated interests, and he understands that real people can make mistakes,” said Wharton School economist Justin Wolfers.

Mr. Mullainathan, 38, got an early lesson in how regulatory changes can affect people’s lives, and how fragile their livelihoods can be when a new rule in the 1980s disallowed foreign aerospace workers from doing defense-related projects. In practice, this meant that foreign workers couldn’t work on aerospace at all, since the delineation between defense and nondefense projects was fuzzy. His Indian father, an engineer at McDonnell Douglas, lost his job.

“There was this feeling of fragility, wow if my dad doesn’t get a job, then what?” Mr. Mullainathan recalled in a recent interview. “I still have that feeling very strongly, I understand it. It informs my thinking on this stuff and my motivation to work on it.”

A more extended WSJ piece is here.  According to a new blog post on the agency's website, the CFPB's Office of Research will not only publish findings under the agency's own name but will also encourage scholars to engage in independent research:

Frequently . . . researchers will choose their own topics, data, and methodology themselves, draw their own conclusions, and publish in their own names.  . . .  [W]e encourage this kind of “self-directed” research because it promotes evidence-based, rather than myopic or narrow, policymaking. Self-directed research will help us remain true to the core values that underpin our policymaking: honest investigation, independent thinking, and open discussion.

By offering our research staff the opportunity to pursue original ideas, the CFPB will also be in a better position to attract the best-trained researchers with the skills to strengthen our understanding of the benefits and costs of potential policies. Under the CFPB’s research policy:

• Researchers may elect to dedicate a substantial portion of their time to self-directed research. They may focus on household finance or behavior, consumer financial firms or markets, or other areas relevant to the mission of the consumer bureau. Other federal financial regulators also provide researchers time for independent research. For example, the portion of time provided at the CFPB will be comparable to that provided across the Federal Reserve System. Researchers who choose to conduct independent research will be evaluated based on research performance, such as their record of publications.
• Researchers are also encouraged to publish or present their work in peer-reviewed journals and other scholarly venues. The CFPB will not review or censor findings of self-directed research presented externally for policy content, so long as the researcher includes a disclaimer that the work does not necessarily represent the views of the CFPB.

Encouraging original inquiry and independent conclusions will help us act wisely on behalf of the American people. Allowing researchers to publish their findings will increase transparency – and that will help the public to hold us accountable

Oral Argument in Fourth Circuit Appeal on Health Care Reform Legislation

The U.S. Court of Appeals for the Fourth Circuit heard argument yesterday in two cases challenging the Affordable Care Act, one brought by the Commonwealth of Virginia and the other brought by Liberty University. On the merits, the question is whether Congress had the power under the Commerce and Necessary and Proper Clauses to establish the health care "mandate," which would impose on some people the obligation to obtain health insurance or pay a fine or tax. Apparently, the appeals court was skeptical of Virginia's standing to bring the suit. Read about the argument here, here, and especially here (discussing the Fourth Circuit panel's apparent bafflement over the plaintiffs' argument that distinguishes between activity, which the Commerce Clause may reach, and inactivity, which the Commerce Clause may not reach).

New Review of 40 States’ Unemployment Compensation Prepaid Cards

This new groundbreaking report from the National Consumer Law Center looks at unemployment compensation (UC) prepaid cards currently used by 40 states (the remaining states are expected to soon follow suit). The comprehensive survey includes a state-by-state highlights comparison chart, including bank issuer and notable fees; a national overview of fees; and recommendations for card improvements.

Unemployment Compensation Prepaid Cards: States Can Deal Workers a Winning Hand by Discarding Junk Fees, analyses the payment options, fees, and access to account information available to workers in every state that uses UC prepaid cards. It also surveys the laws that do (or do not) protect workers and offers recommendations for how states can design a card that works well for both the state and its unemployed workers.

The report singles out as especially problematic the overdraft fees that U.S. Bank has on prepaid cards in five states: Arkansas, Idaho, Nebraska, Ohio, and Oregon. No other bank’s UC prepaid card charges overdraft fees, which the U.S. Department of Labor (DOL) has found are “inconsistent with federal law.” And the Tennessee card (issued by JP Morgan Chase) draws the two of clubs for the card with the most junk fees, including ATM, PIN debit, denied transaction, and balance inquiry fees.

So who holds the winning hand? California and New Jersey currently have the best UC cards (both issued by Bank of America), although both could benefit from fees more clearly and prominently displayed on websites. The State of California loses one trick for not offering direct deposit.

The report urges the new U.S. Consumer Financial Protection Bureau, which starts work in July, and U.S. Department of Labor to work together to ban overdraft fees and other unfair fees and to improve transparency and competition by posting all fee schedules in one place so that states and consumers can compare who has the best hand.

The trump card? States can design an unemployment prepaid card that works well for both the state and doesn't lose workers in the shuffle. They are generally an improvement over paper checks for the unbanked but there is room for improvement to ensure they deliver every penny to unemployed Americans (at last count, more than 13 million folks).

Now that National Consumer Law Center has laid the cards on the table, let's hope states use the report to cut a better prepaid card deal for their unemployed workers.

Bluehost’s Servile Response to Koch Industries Shows It Is an Unreliable Hosting Company

by Paul Alan Levy

Deepak Gupta has just posted about an excellent decision firmly rejecting both Koch Industries’ trademark and other claims over a satirical press release making fun of the Koch brothers’ funding of climate change denial, as well as Koch’s effort to obtain information identifying the critics.  But there is an important consumer issue in the case that has received much less attention than it should — the disgraceful reaction on the part of Bluehost, the company whose services were used to obtain the domain name and host the satirical web site.

Federal Court Dismisses Koch Brothers' Trademark Suit Over Climate-Change Prank

by Deepak Gupta

Although it's not a consumer law case, I thought I should mention our victory today in an interesting First Amendment case that I argued last week in Utah. The case involved political criticism of a corporation, but it could also provide an important precedent for cases involving critical commentary by consumers about goods and services.  The Salt Lake City Tribune ran this article about the argument last week; you can read early coverage of the decision here, here, and here.  Dan Berman of Politico covered the case here.

The court's thorough and well-reasoned 18-page decision dismissed Koch Industries’ lawsuit against my clients, a group of anonymous climate-change activists known as Youth for Climate Truth.  The judge ruled that Youth for Climate Truth had a First Amendment right to issue a satirical press release and website – in which the group impersonated Koch and announced that the company had reversed its position on climate change – in an effort to call attention to Koch’s notorious bankrolling of efforts to deny climate change.

The U.S. District Court for the District of Utah rejected all of Koch’s legal claims, which alleged trademark infringement, unfair competition, cybersquatting, computer hacking and breach of the company website’s terms of use. The judge also issued an order barring Koch from using any identifying information it had already obtained about our clients via subpoena.

I'm pleased that the court affirmed our clients’ First Amendment right to engage in anonymous political speech and rejected Koch’s sweeping legal theories. The case is particularly noteworthy for its rejection of Koch's terms-of-use and Computer Fraud and Abuse Act claims, which as far as I can tell were unprecedented. Ultimately, the court seems to have seen the suit for what it was: nothing but a well-financed attempt by Koch to bully its political opponents into submission.

For more background on the case, see this article in The New York Times. Our papers are available here.

Young Adults Taking Advantage of Affordable Care Act Coverage in Large Numbers

Many provisions of the the federal health reform legislation, known as the Affordable Care Act, did not go into effect immediately. For instance, the Act's key provision, the insurance "mandate," does go into effect until 2014. One part, however, that went into effect shortly after enactment is the requirement that an insurer cover adults under age 26 if the insurer already provides coverage for the young adult's parent(s). This provision has expanded coverage considerably. Kaiser Health News is reporting that

Hundreds of thousands of young adults are taking advantage of the 2010 health-care-law provision that allows people younger than 26 to remain on their parents' health plans, some of the nation's largest insurers are reporting. That pace appears to be faster than the government expected. WellPoint, the nation's largest publicly traded health insurer, with 34 million customers, said the provision on dependents was responsible for adding 280,000 members. That was about one-third of its total enrollment growth in the first three months of this year. Other large insurers said they had also added tens of thousands of young adults. Aetna, for example, added fewer than 100,000; Kaiser Permanente, about 90,000; Highmark Inc., about 72,000; Health Care Service Corp., about 82,000; Blue Shield of California, about 22,000; and United Healthcare, about 13,000.

According to the Kaiser report, government officials estimate that young adult coverage mandated by the Act will increase the cost of family health insurance premiums by about 1%. Here's more information on this aspect of the Act.

U.S. Tax Burden Historically Low

You hear the rhetoric all the time. Americans are being taxed to death. That's the cause of our economic woes.  Don't believe it.The total tax burden is lower than it has been in nearly three decades.

EFFICACY OF RESPA’S CLOSING COST DISCLOSURES

Guest Post by Elizabeth Renuart, Assistant Professor of Law, Albany Law School, based on the forthcoming paper in Housing Policy Debate she co-authored with Jen Douglas (who served as project coordinator of the NMDR during data collection and received her master’s degree in public policy from the University of Massachusetts Boston), titled The Limits of RESPA: An Empirical Analysis of the Effects of Mortgage Cost Disclosures:

As noted in an earlier blog post, the revised RESPA GFE and Settlement Statement became effective in January, 2010.  The new forms remain controversial and will get a second look over the next year.  In the Dodd-Frank Wall Street Reform and Consumer Protection Act enacted in July 2010, Congress instructed the Bureau of Consumer Financial Protection to review and combine both the Truth In Lending Act and RESPA cost disclosures into a single, integrated form for mortgage loan transactions by the summer of 2012. 

Congress passed the Real Estate Settlement Procedures Act in 1974 based upon documented instances of kickbacks between settlement service providers, unearned fees, and expensive and unnecessary closing fees paid by buyers and sellers of residential real estate.  It opted for a disclosure strategy accompanied by few substantive prohibitions.  Over the last thirty-five years, only a handful of studies attempted to measure the success of the mortgage loan disclosures by analyzing slices of the mortgage market. My co-author, Jen Douglas, and I used a uniquely rich database to examine this question in our working paper titled: The Limits of RESPA: An Empirical Analysis of the Effects of Mortgage Cost Disclosures. 

Due to the lack of detailed public data, the National Consumer Law Center collected loan data from attorneys, state agencies, and housing counselors.  In total, this dataset included 1,922 loans with either a GFE or HUD-1/1A, of which 779 loans had both a Good Faith Estimate (GFE) and a Settlement Statement (HUD-1/1A).  These 1,922 loans were made in 28 states by 318 lenders.

From these loans, we found evidence that borrower closing costs as a percentage of loan amount increased by 418% and by 182% for a subset of purchase loans since 1972.  Meanwhile, fee types doubled.  The early cost estimates underestimated the final closing costs and projected cash to borrowers in a majority of cases, lending credence to complaints of baiting and switching.  

We used our observations about the loans originated before the new forms became effective to opine upon whether the amended disclosure regime might improve or have no effect on specific problems we noted.   We expect that the new GFEs will more closely match the HUD-1/1As than those in our collection.  This should reduce the bait and switch concerns.  Further, HUD’s requirement that certain fee types be bundled into one number should increase the standard placement of fees.  Less clear is whether the changes will reduce the problem of fee proliferation, cryptic fee names, and similar concerns which we noted in our dataset.  Lack of transparency is the trade-off, however, since the bundled charges are no longer itemized.    Finally, we found important disclosure discrepancies occur when settlement agents chose to use the HUD-1, rather than the HUD-1A for refinance loans, a choice that HUD did not eliminate in 2010.   

While HUD vetted the new forms with focus groups, the agency has not investigated the worth of its forms in relation to the statutory goals in any consistent or routine way since 1974.  Our findings call into question the efficacy of the RESPA disclosure scheme.  Further, they point to the need for detailed data collection, routine monitoring of whether RESPA is meeting its legislative directive, and rigorous debate about whether RESPA’s goals can be achieved more effectively by another strategy.

Could the Senate GOP Block a Recess Appointment?

Kate Davidson and Cheyenne Hopkins of the American Banker have the story:

WASHINGTON — Republicans are strongly considering using a rare procedural move to prevent President Obama from making a recess appointment to install a director of the Consumer Financial Protection Bureau.

Forty-four GOP senators signed a letter last week vowing to block any nominee absent several significant changes to the bureau, a move that political analysts said all but guarantees the president will use his recess appointment powers. But Republican lawmakers are weighing tactics to make that option much less appealing or prevent it altogether by leveraging their power over other financial services nominees.

"If they were to go the recess appointment route, I believe Senate Republican leadership would use every tool at their disposal and there would be a major response from Senate Republicans," a Republican Senate staffer said Friday. "It could result in costs to other nominees, and I think it would ultimately affect the legitimacy of whoever is recess appointed to run the CFPB."

Republicans are attempting to box Obama in, preventing him confirming a permanent director to CFPB or allowing a temporary one to be put in place. Under the Dodd-Frank law, the CFPB is limited in what actions it can take unless it has a formal director. (While Elizabeth Warren, the architect of the agency, has been its de facto head since last year, she is an administration appointee and does not technically count as its director.)

Republicans are eying a tactic first employed by Democrats when President Bush was in power to hold "pro forma sessions" — short sessions during which no business is conducted — that prevents the Senate from being considered in "recess." Republicans used the tactic successfully last year after agreeing to confirm 54 of the president's nominees, but preventing him from making any recess appointments.

More on the Likelihood of a Recess Appointment to Head the CFPB

We just blogged about David Arkush's piece explaining a change in Republican tactics regarding the Consumer Finanical Protection Bureau: Instead of opposing Elizabeth Warren to head the agency, they are now opposing any director unless the agency's structure is fundamentally changed. This tactic, in turn, virtually guarantees that President Obama will make a recess appointment to head the agency. Go here, here, and here for more media commentary on the prospect of a recess appointment and whether that appointment will be Prof. Warren.