Consumer Law & Policy Blog

Is There Any Chance the President Will Allow the CFPB Arbitration Rule to Go Into Effect?

by Jeff Sovern

Allison blogged earlier about CFPB Director Cordray's letter to the president urging him to allow the CFPB arbitration rule to go into effect.  While it would be wonderful if the president did so, there are many reasons to think he won't.  Among these: as regular readers will know, Vice President Pence broke the tie in the Senate against the rule and the Treasury Department opposed the rule.  In addition, after the Senate passed the resolution blocking the arbitration Rule, the White House issued a statement praising the Senate action. I've pasted it in below.  Perhaps the statement was written by White House aides without consultation with the president, though it purports to describe the president's view of the resolution.  Or perhaps Cordray's letter will change the president's mind.  We can but hope.  Anyway, here is the statement.

Statement Regarding Senate Passage of H.J. Res. 111

President Donald J. Trump applauds the Congress for passing H.J. Res. 111, Disapproving of the Consumer Financial Protection Bureau's (CFPB) Arbitration Agreements Rule. According to a recent report by the Department of the Treasury, the evidence is clear that the CFPB's rule would neither protect consumers nor serve the public interest. Rather, under the rule, consumers would have fewer options for quickly and efficiently resolving financial disputes. Further, the rule would harm our community banks and credit unions by opening the door to frivolous lawsuits by special interest trial lawyers. By repealing this rule, Congress is standing up for everyday consumers and community banks and credit unions, instead of the trial lawyers, who would have benefited the most from the CFPB's uninformed and ineffective policy.

Updated Version of Why We Need to Save the Consumer Financial Protection Bureau

Here, in The Conversation. Excerpt:

The House of Representatives has passed a bill that would cripple the CFPB by, for example, taking away the power it used to fine Wells Fargo for opening illegal accounts and concealing its complaint database from public view. In other words, it would force the bureau to sit idly by as financial institutions lie to consumers. Even if the bureau survives, it may be less protective of consumers when its current director, Richard Cordray, leaves. His term expires next summer, and he may step down even sooner. Then we might see a former banker or bank lawyer put in charge, just as has happened at the Treasury Department and comptroller’s office.

* * *

Consumers need protection from misbehaving companies. If the bureau is eliminated, significantly weakened or starts protecting banks rather than consumers, all consumers will suffer.

Senate Could Vote on CRA Resolution to Block Arbitration Rule Tonight . . .

by Jeff Sovern

. . .  or  it could come later in the week. Or not. My speculation is that the Senate leadership will call the vote if they think they have the votes to pass the resolution but otherwise they will let it go until closer to the deadline. So the real question is how many votes they have.

Am Banker Reports on Economists Who Are Critical of the OCC Claims in the CFPB-OCC Data Dispute

by Jeff Sovern

The article, by Kate Berry and Ian McKendry, is headlined Fight to kill CFPB arbitration rule could rest on whose data is right. Here's some of what the article says about the OCC claims, though the article has more than I can insert here.

"The uncertainty of the OCC's estimate is very large, it's a very noisy estimate, and there is quite a high chance that
the true effect is zero," said John Campbell, the Morton L. and Carole S. Olshan Professor of Economics at Harvard
University, who is a member of the CFPB's Consumer Advisory board. "The CFPB argues in its defense that the
effect can't be a large number like 3% because it's ridiculously large, relative to any reasonable estimates or costs
based on past class-action suits."

* * *

Other economists challenged the OCC's data, casting doubt on anyone's ability to predict consumers costs
resulting from the rule.

"Any statistically significant results would be highly questionable given the level of noise in the data," Alexei
Alexandrov, a senior economist at Amazon and a former senior economist at the CFPB, who had written a paper
that was the basis for the CFPB's own arbitration study.

* * *

However, Ted Frank, a senior attorney and director at the Competitive Enterprise Institute's Center for Class Action
Fairness, said that even if the CFPB's study found that an increase in credit card rates was not statistically
significant, that "does not mean it's not significant."

"They often cherry-pick their data," said Frank. "To say it's not statistically significant, therefore there's no effect,
that's wrong. What you can say is, we can't be confident there is an effect but there probably is an effect, and more
study is needed."

I'm not sure what the basis is for Frank's claim that there probably is an effect, but I'm not a statistician by any means.  If not using arbitration clauses increased lending costs, I remain confused why more credit card issuers don't use arbitration clauses out of self-interest (roughly half don't use arbitration clauses), or alternatively, where are the credit card issuers that don't use arbitration clauses and are charging more than those who don't?  I keep waiting for someone who supports the OCC position on this to address that point, but I'm not aware of anyone who has.  Perhaps that's because they can't.

UPDATE: Please see the comment below for the basis of Frank's claim and an argument for why some credit card issuers don't use arbitration clauses.

Politico Got Two Statisticians to Look at the CFPB-OCC Arbitration Statistical Dispute

by Jeff Sovern

The story is headlined 'Plague on both your houses': Cordray, Noreika get scolding from statisticians. Excerpt:

" * * * There isn’t strong evidence either way,” said Bruce Meyer, a professor at the University of Chicago.

“There is weak evidence that says more than likely there is a positive effect on the cost of credit,” Meyer said of the OCC analysis. “But the accepted approach is you don’t crow about something unless you have stronger evidence.”

As for Cordray’s rebuttal, “it was wrong, too,” Meyer said. “You can say that there’s an 88 percent probability if you believe that the study that’s being quoted. There are always potential problems with research studies.”

* * * 

Campbell Harvey, a Duke University professor and a past president of the American Finance Association, scolded both the bureau and OCC for fighting over things like p-values, which can be hacked or manipulated. He called the OCC’s probability calculations “vague” and said agency researchers “left themselves open to criticism that they don’t understand basic statistics.”

But he also said both sides should stop bickering and rethink what’s important. In that light, he noted that the CFPB couldn’t rule out the chance, however remote, that an arbitration ban could increase the cost of consumer borrowing by more than 3 percentage points.

“By standard methods we wouldn’t consider this significant. That doesn’t mean that you ignore it,” Harvey said. “While it’s not significant at traditional levels, so what? It could be economically important.”

There's more in the article. Two statisticians is better than we had, but still only a small (you should forgive the expression) sample.  I wonder what others would say. I would also like to know more about what Harvey meant when he said that the agency researchers left themselves open to the criticism that they don't understand basic statistics.  The agency in question seems to be the OCC rather than the Bureau, judging by the earlier reference in the sentence to the OCC.

The CFPB and Data Breaches, Plus WSJ: Equifax Hack Drives GOP Bill to Overhaul Credit Bureaus

by Jeff Sovern

The WSJ article is here.  Excerpt:

Rep. Patrick McHenry of North Carolina introduced a bill to require the three major credit firms—Equifax, Experian PLC and TransUnion—to submit to regular federal cybersecurity reviews for the first time. All three companies also would have to phase out their use of Social Security numbers to verify consumers’ identities by 2020.

* * * 

Separately, Sen. Mike Crapo (R., Idaho), chairman of the Senate Banking Committee, asked federal banking regulators if they needed more authority to supervise the credit-reporting firms to ensure they adequately protect consumer data. “I am concerned there may be a regulatory gap with respect to supervision of credit reporting agencies for data security standards,” Mr. Crapo wrote in a letter to the heads of the Federal Reserve, Office of the Comptroller of the Currency and Federal Deposit Insurance Corp.

On a related point, it looks as if the CFPB has very limited jurisdiction over the Equifax data breach, if it has any jurisdiction at all, as Ed Merizwinski pointed out in a comment earlier in the week (I had observed that critics had complained about the Bureau's failure to stop the Equifax breach, noting that "I haven't checked to verify that the Bureau has authority over data breaches at financial institutions, though others have argued that it does."). That conclusion comes from 15 USC 6801, which provides  (emphasis added):

(a) Privacy obligation policy

 

It is the policy of the Congress that each financial institution has an affirmative and continuing obligation to respect the privacy of its customers and to protect the security and confidentiality of those customers’ nonpublic personal information.

 

(b) Financial institutions safeguards

 

In furtherance of the policy in subsection (a), each agency or authority described in section 6805(a) of this title, other than the Bureau of Consumer Financial Protection, shall establish appropriate standards for the financial institutions subject to their jurisdiction relating to administrative, technical, and physical safeguards—

(1) to insure the security and confidentiality of customer records and information;

(2) to protect against any anticipated threats or hazards to the security or integrity of such records; and

(3) to protect against unauthorized access to or use of such records or information which could result in substantial harm or inconvenience to any customer.

 

 

Section 6804 gives the power to promulgate regulations in the area to the FTC.  I've seen claims that the Bureau could use its UDAAP powers against Equifax, so maybe there's something I'm missing, but I'm skeptical. Usually in statutory interpretation, the specific (here, the exclusion in section 6801) controls the general (the UDAAP powers). Going back to the WSJ article, it's interesting that Senator Crapo does not appear to have written to the FTC, though perhaps he did and the WSJ didn't report it.

   

Two Reasons Comptroller Norieka is Wrong About Arbitration Clauses

by Jeff Sovern

Acting Comptroller of the Currency and former bank lawyer Keith Norieka has an op-ed in The Hill, Senate should vacate the harmful consumer banking arbitration rule, that is seriously flawed.  I'm going to write about two of those flaws here.

First, Norieka concludes by writing:

Instead of mandating only one way to resolve disputes, consumers and banks should continue to have the option to resolve contractual differences in the same manner that they do today, and consumers should exercise their market power to choose among institutions that use such clauses and those that do not. Consumers know for themselves what their best options are, and their regulators need to know that too.

It is all very well to say that consumers should exercise their market power to choose institutions that don't use arbitration clauses, but the fact is, consumers can't do that.  A study I co-authored found that consumers not only did not understand arbitration clauses, many thought they were unenforceable.  Many of our findings were replicated in the CFPB's own study.  Not only has no study found that consumers understand arbitration clauses, but the industry itself has acknowledged that consumers don't read credit card contracts. If consumers don't read contracts, how can we expect them to recognize, let alone act, on whether a contract includes an arbitration clause?  Saying that Congress should block the rule because consumers should act in ways we know they don't is like saying doctors shouldn't treat obesity because people shouldn't overeat. 

Second, Norieka writes:

In September, OCC economists completed their review of the CFPB’s analysis. Their review found the data actually show an 88 percent chance of the total cost of credit increasing, and the expected increase is almost 3.5 percentage points [if the CFPB rule takes effect]. 

Elsewhere, Norieka notes that about half of all credit card issuers don't use arbitration clauses.  If Norieka's economists' findings were correct, that would imply that the half of credit card issuers who don't already use arbitration clauses prefer to charge much higher interest rates over adding an arbitration clause. But how likely is that?  Who are these credit card issuers who charge higher rates because they don't use arbitration clauses?  Why wouldn't they simply add an arbitration clause to their contracts to make their credit cards more competitive? There's no evidence that consumers would punish credit card issuers who use arbitration clauses by closing their accounts (remember that consumers don't read the contracts, so they wouldn't know about the clauses, and wouldn't understand them if they did read them), so just by adding a paragraph to their contracts, credit card issuers could make their cards more attractive, if Norieka's economists are right. This sounds like one of those cases in which economic analysis is at war with reality.

David Dayen in The Intercept: IN NEW LAWSUIT, CORPORATIONS BAND TOGETHER TO STOP CONSUMERS FROM BANDING TOGETHER

by Jeff Sovern

Here.  Lots of irony in this one, as you can tell from the headline.  A sample:

Eighteen groups representing thousands of corporations and banks filed the lawsuit against the Consumer Financial Protection Bureau last Friday in federal court in Dallas. Oddly, they did not attempt to individually resolve the dispute through an arbitration process, which they’ve consistently said yields speedier and better results for those wronged. “Arbitration gives consumers the ability to bring claims that they could not realistically assert in court,” the lawsuit reads.

But for corporations, banding together in courts apparently presents a better option.

* * *

[T]he arbitration rule harms the public interest, they claim, because “it precludes the use of a dispute resolution mechanism that generally benefits consumers (i.e., arbitration) in favor of one that typically does not (i.e., class-action litigation).”

So, really, they’re doing it for the consumers.

But the dispute resolution mechanism that allegedly doesn’t help ripped-off consumers is effectively the one they’re using.

A little harsh, perhaps, because as Ted Frank has pointed out, the Chamber might very well be happy to arbitrate its claim rather than having it heard in court. But still worth a read, even if only because of how well Dayen has written the essay. 

Critics Who Want to Weaken CFPB Complain It Doesn't Do Enough

by Jeff Sovern

There's been a steady drumbeat of criticism for the CFPB from certain members of Congress for not moving sooner on the Wells Fargo unauthorized account scandal.  These critics also tend to support legislation, like the Financial Choice Act, which would take away the power the CFPB used to fine Wells Fargo for its misconduct. Somehow, they overlook the fact that the OCC received hundreds of whistleblower complaints in 2010, before the CFPB existed, and dropped the matter until years later after discussing it with Wells leadership.  Now the critics are slamming the Bureau for not doing more about Equifax. Here's Iain Murray of the Competitive Enterprise Institute, no friend to the CFPB, in the National Review:

When CFPB powers were extended over credit reporting bureaus in 2012, the CFPB announced the “companies will be subject to review of compliance systems and procedures, on-site examinations, discussions with relevant personnel, and they will be required to produce relevant reports.” None of this seems to have helped the Bureau stop the Equifax security breach. The Bureau was also supervising Wells Fargo during its upselling excesses, yet it was the Los Angeles Times and California regulators who actually noticed what was going on. 

I haven't checked to verify that the Bureau has authority over data breaches at financial institutions, though others have argued that it does. Assuming that it does, it is asking a lot for the Bureau to prevent every data breach. Do the Bureau's critics also argue that the FBI should be weakened because we still have bank robberies after centuries of trying to stop them? The Bureau is still a young institution, and it is entitled to some time to find its way.  Even after it matures, some malefactors will slip through the cracks; some always do. But we are much better off with cops on the beat than without them. It is fair to ask the Bureau why it didn't discover the Equifax breach and whether there are steps it could take to prevent future such breaches.  But isn't it funny how the people who want the Bureau to do more also complain it does too much?

WSJ Again Calls on President to Fire "President Cordray"

In an editorial titled President Cordray Strikes Again. This time, it's the payday lending rule that has the WSJ up in arms. Here's the conclusion:

The recent rule-makings give the President more cause to dismiss the director, and a D.C. Circuit Court of Appeals panel has held that he can be removed at will. Mr. Cordray has appealed the panel’s ruling to the full circuit. If Mr. Cordray doesn’t now leave on his own, will the President have the will to fire him?

When they put it that way, it looks like they are daring the president.  

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