More Coverage of Rent-A-Center v. Jackson

by Deepak Gupta

 Last week, I blogged about Rent-a-Center v. Jackson, a very important arbitration case that will be argued before the U.S. Supreme Court on April 26. My post focused on the bottom-side amicus briefs in the case, particularly a brief of arbitrators and arbitration scholars supporting the plaintiff/respondent. You can read more coverage of the case at Text & History, PrawfsBlog, and ContractsProfBlog.  The Virginia Law Review's online component has just published an interesting essay by David Horton (Loyola Law School, Los Angeles) called "The Mandatory Core of Section 4 of the Federal Arbitration Act."  Here's an abstract:

This Essay . . . argues that parties cannot arbitrate the issue of whether the arbitration clause is unconscionable, even when there is "clear and unmistakable" evidence of their intent to do so, because courts possess the exclusive right to decide whether all or part of an arbitration clause is valid. The judiciary's monopoly on settling this matter arises from Section 4 of the FAA, which provides that if the "making of the arbitration agreement" is "in issue," the "court shall proceed summarily to the trial thereof." In fact, Section 4 only allows a court to submit a case to arbitration if it is "satisfied that the making of the agreement for arbitration . . . is not in issue." This language bars parties from contracting around the judicial duty to evaluate "the making of the arbitration clause." Moreover, this reading dovetails with the FAA's legislative history, which reveals that the statute's proponents cited this layer of judicial protection to allay concerns about privatizing a customary governmental function.

A Bank President on the CFPA

by Jeff Sovern

According to the News and Record of Greensboro, North Carolina, here's what one bank president said of the CFPA proposal:

The consequences to the consumer will be equal or worse than what they’re trying to legislate away,” said Robert Braswell, president of Greensboro-based Carolina Bank.

The regulations proposed in the measure would duplicate some limits already on the books, he said.

Banks, he said, will pass on added costs to consumers or stop offering some services, such as free checking. Braswell said when he has been on lobbying trips to Washington on behalf of bankers groups, congressmen and congressional staffers did not seem receptive to points made by those in the industry.

“There is no consideration to (whether it’s duplicative); there’s no consideration as to cost,” he said. “Those who are behind this legislation are absolutely ill-informed and under-educated ... They refuse to consult with anyone who does possess the requisite knowledge.”

I'm not going to bother responding to the idea that Harvard law professor Elizabeth Warren is "ill-informed and under-educated." But I have to say something about the complaint that the measure is duplicative. The CFPA is needed precisely because agencies that had the power to protect consumers failed to use it.  So those powers would be taken away from the agencies that failed to prevent the subprime crisis and given to the CFPA.  Accordingly, the CFPA would not be duplicative. 

As for Braswell's claim that the CFPA might increase costs or reduce the availability of credit, first, it's impossible to know what the CFPA will do, so it's impossible to know whether it will generate any costs or reduce the availability of credit.  But second, personally, I hope it will adopt measures that will reduce the availability of the types of loans on which consumers are now defaulting in the millions.  Third, does Braswell really believe that the CFPA's cost to the consumer will exceed the cost of the bailout or the cost in misery to consumers who have been foreclosed upon  (and personally, I'd like to know whether he favored the bailout and whether his bank accepted bailout money)?

Finally,  Braswell complains that members of Congress and their staffs aren't listening to him.  Of course we don't know what he said, but if his argument was that the CFPA would be duplicative or Elizabeth Warren is under-educated, perhaps they shouldn't have listened to him.  But the sad reality is that someone is listening to him, or someone like him--because if they weren't listening, we would already have a CFPA.  (for more, see Baseline Scenario's view on Braswell's comments)

Update: ProPublica reports that in fact Carolina Bank did accept bailout money. (HT: Paul Kiel)

GM Claims It Is on the Road to Profits, Will Pay Back Government Bailout by June

We reported here last December that Bank of America paid back its $45 billion government bailout. And now General Motors claims that it has positive cash flow, will turn a profit in 2010, and will pay back its federal bailout by June.

George Bailey, Where Have You Gone?

Once upon a time, banks and thrifts served the important function of intermediating savings deposits and home mortgage loans.  Those days are gone.  My shiny new Mortgage Market Statistical Annual reveals that 86% of all mortgages, first and second, in 2009 were funded by securitization, not by bank deposits.  Out of $1.8 trillion in mortgages last year, banks and loan companies funded $80 billion in conforming first mortgages, $92 billion in jumbo loans, $10 billion in subprime mortgages and $77 billion in second mortgages and home equity lines. The securitization market was totally dominated by FNMA and Freddie Mac, with private market securitizations accounting for about 3% of mortgage-backed securities.

In other words, without Fannie and Freddie (and the Federal Reserve to buy their mortgage-backed securities),we would have a catastrophic shortage of mortgage capital.  Whatever you may think about the future role of Fannie and Freddie, they have provided a vital backstop to the moribund private capital markets in the current crisis.

Total bank deposits in the US, according to the FDIC, are at about $7 trillion, so what are banks doing with their deposits?  Funding credit cards, home equity lines of credit, and commercial loans, among other things. Oh and also buying mortgage-backed securities.

Mortgage Crisis Update: Treasury Tinkers with Failed HAMP Program, Delinquencies and Foreclosures Stubbornly Refuse to Go Away

By Alan White

While the stimulus package and bank bailouts have treated the symptoms of the crisis and saved the banking and mortgage finance systems from collapse, the foreclosure crisis itself is about as bad as ever.  As the foreclosure crisis enters its fourth year, there are some signs that things are not getting worse, but little evidence they will get better any time soon.  New foreclosure starts reached a peak of about 250,000 monthly in the third quarter of 2009, or about quadruple their level in mid-2006 just before the crisis.  The fourth quarter saw a significant decline in foreclosures starts, in both the Mortgage Bankers survey and the OCC/OTS report, to something like triple the pre-crisis numbers.  On the other hand the inventory of foreclosures remains at their peak of more than three times pre-crisis levels, as do total delinquent mortgages (about one in seven mortgages are now delinquent or in foreclosure, compared to less than one in twenty just before the crisis began.) 

Something like 2.2 million foreclosure sales have been completed since July 2007, which should have eliminated almost half a trillion dollars in mortgage debt.  On the other hand, an equal number of mortgages have been modified, in the majority of cases resulting in significant increases in mortgage principal through capitalization.  Net mortgage borrowing for all Americans has been negative for the past six quarters, but total mortgage debt has declined only slightly, from $10.5 trillion to about $10.2 trillion, from the peak in March 2008 to the Fed’s latest sounding on December 31, 2009.  The deleveraging of American homeowners has a long way to go (total mortgage debt was less than $5 trillion at the beginning of 2001.) 

Another way to think about it is to compare the drop in mortgage debt to the drop in home values, i.e. just how underwater are we?  The Case-Shiller index of home prices has declined about 30% from its peak, and mortgage debt is down by only 3%.  This can’t be good.  Incidentally, credit card and other consumer debt is down only about 5% from its 2008 peak, after a 30% runup in the five years prior.

The Administration’s HAMP program to address foreclosures by paying servicers to modify mortgages they should be modifying anyway, has failed.  It has resulted in a net decline in monthly modifications and no perceptible dent in the foreclosure inventory.  The HOPE NOW servicer coalition claims that in January 2010 for the first time HAMP modifications plus modifications servicers did without Treasury help rose to 150,000, significantly higher than the 120,000 monthly total modifications done before HAMP was launched in March 2009.  If true this would be good news, but the investor reports I follow are not showing the large increase in modifications HOPE NOW is touting.  In any event, 100,000 to 150,000 monthly modifications, even if they were all successful, does not solve the problem of 200,000 new foreclosures filed every month and an inventory of 6 million mortgages delinquent or in foreclosure. 

Ann Graham Article on the CFPA

Ann Graham of Texas Tech has written The Consumer Financial Protection Agency: Love It or Hate It, U.S. Financial Regulation Needs It, forthcoming in the Villanova Law Review.  Here's the abstract:

As the U.S. economy begins a tentative recovery from recession, Congress is debating financial regulatory reform legislation. Whether a stand-alone consumer financial protection agency becomes a centerpiece of the new regulatory regime or a throw-away bargaining chip remains to be seen. In any assessment of the subprime-mortgage-crisis-gone-global, with the benefit of honest hindsight, failures of consumer protection loom large.

In the wake of this crisis, just as in the aftermath of the banking collapse of the 1930s, Congress has an opportunity to restructure a broken financial regulatory system. More than band aids are required. If the reforms Congress adopts now are to secure a lengthy period of financial stability, as was the case following the New Deal era’s reenvisioning of financial regulation, consumer protection cannot continue to be marginalized. Congress could muster the leadership and political backbone to create a new, independent agency whose sole mission is to protect consumers of financial products from the abuses which contributed to the present financial crisis. The prospect of such a major shift in the allocation of regulatory authority has already raised a hue and cry from beneficiaries of the status quo in the federal regulatory agencies and the financial industry lobby.

This article analyzes The Consumer Financial Protection Agency Act of 2009, as passed by the House of Representatives. Each section of the article identifies a key point of controversy, with arguments pro and con, coming down in favor of an independent consumer financial protection agency.

More Regulatory Change from the Obama Administration: Fuel Economy and Montaintop Coal Mining

The Obama Administration has made official its deal with the auto industry to increase average fuel efficiency standards for cars and light trucks. Those vehicles will have to average 35.5 miles per gallon by 2016. It's estimated that these requirements will add about $1,000 to the cost of a new vehicle but save the consumer $4,000 in fuel costs over the life of the vehicle. And vehicles will burn less fuel (on a per mile basis anyway). Take a look at this chart from the Washington Post on the predicted up-front costs and long-term savings.  Read the EPA's press release and view the agency's relevant documents.

The Administration also announced yesterday that it would sharply curtail mountaintop coal mining, the controversial practice that blasts off Appalachian mountaintops to extract coal and then dumps the debris in nearby valleys. EPA head Lisa Jackson announced the new policy through a guidance, saying that science shows that when rain filters through the debris it becomes polluted by toxins and poisons adjacent streams.

OCC Does About Face, Says It Supports An Independent Consumer Agency

Shahien Nasiripour at Huffington Post has the story:

 After months of criticizing the Obama administration's proposal to create a consumer-focused agency dedicated to protecting borrowers from abusive lenders, the nation's top big-bank regulator has reversed course.

The regulator, the Office of the Comptroller of the Currency, now supports an independent consumer agency -- finding itself on the opposite side of the issue from an industry it polices and powerful lawmakers it answers to, who are firmly committed to killing the proposed agency. . .

In an interview, Garsson acknowledged that the OCC had placed roadblocks in the path of the proposed consumer agency before evolving its position. One argument that was used by the OCC, the bank lobby and its friends in Congress to stir up opposition to the proposal was that the banking industry's safety and soundness, or its profitability, would inevitably clash with the consumer agency's mandate to protect borrowers, leading to situations where the consumer agency's views "would always prevail," ultimately hurting the bottom lines of the nation's roughly 8,000 banks and thereby drying up credit.

The general reaction seems to be one of skepticism about OCC's sincerity and motives, which may be largely tactical.  More at ThinkProgress and Felix Salmon, among other places.

Should A Company's Hand-Picked Arbitrator Get to Decide Whether It's Fair for the Company to Hand Pick the Arbitrator?

by Deepak Gupta

Even prominent arbitrators agree: Decisions about whether arbitration clauses in the consumer and employment context are unconscionable shouldn't be left entirely in the hands of arbitrators themselves. Instead, courts must be able to step in and prevent abuses.

That’s the upshot of an amicus brief filed yesterday by 23 nationally prominent professional arbitrators and arbitration scholars in Rent-A-Center v. Jackson, a case that will be argued before the U.S. Supreme Court on April 26.

It was one of seven friend-of-the-court briefs filed Wednesday by a broad coalition of civil rights organizations, labor unions, and consumer groups. Although the Rent-A-Center case has so far received little media attention, the case could radically alter the landscape of access to the civil justice system for consumers, employees, and franchisees.

As many readers of this blog are probably aware, Section 2 of the Federal Arbitration Act makes arbitration agreements "enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." The Supreme Court has made clear that one of the grounds encompassed in that savings clause is unconscionability under state law. So one would think that courts would lack power to enforce, i.e. compel arbitration under, an unconscionable arbitration agreement.  But, as I'll explain below, Rent-a-Center's legal theory challenges that very proposition.

April 6 Webinar with Elizabeth Warren on the CFPA

Next week, on Tuesday, April 6th from 4:00-4:45pm EST, Americans for Financial Reform is hosting a special webinar discussion with Professor Elizabeth Warren and AFR Director Heather Booth for the general public. It will focus on where things stand in the movement for financial reform, and how everyday citizens can get involved in the fight to rein in the big banks and get the economy back on track.

• Find out about reform efforts in Congress-including the Senate bill currently being debated, and the House bill which passed in December.
• Learn why we need a Consumer Financial Protection Agency to protect us from abusive financial products.
• Ask Professor Warren and Heather Booth your question about financial reform.
• Hear about ways to join the fight around the country and online. 

Space is limited. Click here to sign up now.  For background, see the recent New York Times profile on Professor Warren, Behind Consumer Agency Idea, a Tireless Advocate, or this article in Politico.