Consumer Law & Policy Blog

CFPB Finalizes Payday Lending Rule

According to the press release:

"The Consumer Financial Protection Bureau (CFPB) today finalized a rule that is aimed at stopping payday debt traps by requiring lenders to determine upfront whether people can afford to repay their loans. These strong, common-sense protections cover loans that require consumers to repay all or most of the debt at once, including payday loans, auto title loans, deposit advance products, and longer-term loans with balloon payments. The Bureau found that many people who take out these loans end up repeatedly paying expensive charges to roll over or refinance the same debt. The rule also curtails lenders’ repeated attempts to debit payments from a borrower’s bank account, a practice that racks up fees and can lead to account closure."

The full release is here.

Though CFPB Found Credit Card Issuers That Dropped Arb Clauses Didn't Raise Prices, OCC's Norieka Claims CFPB Arb Rule Will Raise Cost of Lending 25%

by Jeff Sovern

The ABA Banking Journal (that's the banking ABA, not the lawyers' ABA) has the story here.  Except:

The OCC has conducted a study finding that the Consumer Financial Protection Bureau’s arbitration rule is likely to increase the cost of credit by about 25 percent once lenders factor in the cost of class action litigation, Acting Comptroller Keith Noreika said today at a fintech conference hosted by the Federal Reserve Bank of Philadelphia.

* * * 

 He said the OCC conducted the study because it wanted to review the effects of the CFPB’s rule — which virtually bans mandatory arbitration agreements in contracts for financial products and services — on banks and the customers they serve. “What originally caught my eye…was the potential impact that may have on small institutions…that really may face a massive litigation exposure,” he said.

 

That study, which I couldn't find on the OCC web site, conflicts with the CFPB study, which reported that banks that dropped arbitration clauses did not raise their prices.  It is also hard to reconcile the statement in the second paragraph quoted above about the impact on small institutions, with the fact that many small institutions, such as credit unions, have not added arbitration clauses to their contracts.  Norieka, a former bank lawyer, is temporarily serving as Comptroller.  It will be interesting to see if, when he leaves the OCC, he represents banks that would benefit if Congress blocks the CFPB rule from going into effect.   A new comptroller may soon be confirmed, as earlier this month the Senate Banking Committee voted to confirm the nominee, Joseph Otting. I look forward to seeing the OCC study when it becomes available.

 

UPDATE: While I still cannot find the OCC report on the OCC web site, it has now surfaced on a Ballard Spahr web site.  The report spans five pages. It takes issue with the CFPB's finding that the companies which abandoned arbitration clauses did not raise their prices, and so I am changing my headline above. I'm afraid I am not sufficiently comfortable with my understanding of statistics to offer a useful comment about the report.

Senate Could Vote on CFPB Arb Rule This Week, Even Today

by Jeff Sovern

Why this week?  Deepak Gupta speculated on Twitter:

Why is GOP pushing this vote now? Possibly to get ahead of hearings next week at which Equifax and Wells Fargo execs will have to testify.

But if that's true, that means that arbitration supporters expect that those hearings will generate opposition to arbitration. That in turn means that senators who vote against the CFPB rule will put themselves in a worse position with their constituents by voting against the rule.  Is that really something they want to do? We may find out.

More Than 400 Professors From All 50 States Support CFPB Arb Rule; Oppose Blocking It

The letter is here.  Marketwatch has a report headlined 400 college professors say you should be able to sue Equifax and other financial institutions. Excerpt from the report:

The professors are sending the letter Monday because it is Sept. 25, the anniversary of when Congress passed the Seventh Amendment to the U.S. Constitution in 1791, which states: “In suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved.”

And here are some quotes from a press release:

“Equifax’s massive data breach and the company’s effort to force people to give up their day in court are strong reminders of why Congress should not take away our 7th Amendment rights,” said Creola Johnson, the President's Club Professor of Law at the Ohio State University Moritz College of Law.

“143 million Americans were impacted by the Equifax data breach, making it unrealistic for them to get relief if they are forced to bring claims alone, one-by-one, in individual arbitrations,” said David Cluchey, Professor of Law Emeritus at the University of Maine School of Law in Portland.

* * *

As a scholar, I’m offended by the false claims by lobbyists that the average person wins $5,389 in arbitration,” said Professor Jean Sternlight, Saltman Professor of Law and Director of the Saltman Center for Conflict Resolution, University of Nevada, Las Vegas Boyd School of Law. “That number is based on only 16 people a year who pursued and won in arbitration. The vast majority of people won’t even pursue a claim against a big corporation alone and will get nothing if they can’t participate in a class action.”  And, added Sternlight, “in the very rare situation when consumers file arbitration claims against companies, they rarely win.”

Report that CFPB Could Use UDAAP Powers House Has Voted to Repeal Against Equifax

by Jeff Sovern

Reuters has a report here.  Excerpt:

The U.S. consumer finance watchdog agency is expected to punish Equifax for its cyber breach with the wide-ranging powers it has used with Wall Street, former agency officials and lawyers said this week.

The credit-reporting company is subject to five federal laws governing listed companies, the use of public data and the fair treatment of customers, and the Federal Trade Commission and the Department of Justice are examining the hacking theft of personal information on up to 143 million people.

I haven't looked into the matter of whether the CFPB's UDAAP powers (the power to act against consumer financial institutions which commit unfair, deceptive, or abusive acts) extend to Equifax yet myself, and so found the remainder of the article instructive.  Both the House-passed Financial Choice Act and the House-passed appropriations bill would repeal the Bureau's UDAAP powers.

 

We need regulators—but they are not a substitute for class actions

by Jeff Sovern

A frequent claim by class action critics is that we don’t need class actions because we have regulators.  For example. Alan Kaplinsky recently tweeted that class actions were not needed in the wake of the Equifax scandal because the CFPB is expected to act.  But the truth is we need both regulators and class actions.

The CFPB arbitration study looked into the overlap between administrative actions and class actions. Here is an excerpt from the summary of the findings (section 9.1):

[F]or the private class actions for which we sought to find related public enforcement action, we were unable to do so in 68% of the cases. This was particularly the case with class action settlements of less than ten million dollars, where we were unable to identify a corresponding public enforcement action for 82% of the time.

When we did find overlapping activity by government entities and private class action lawyers, public enforcement activity was preceded by private activity 71% of the time. In contrast, private class action complaints were preceded by public enforcement activity 36% of the time.

President Trump will get to nominate a new CFPB director in less than a year, and it could happen in less than a month.  I very much doubt that a Trump-nominated director will bring the enforcement actions that a Director Cordray would; indeed, from the White House’s perspective, the failure to bring some such actions would probably be a plus.  Consequently, the CFPB may soon be much less protective of consumers, with the result that class actions may become even more important as a consumer protection device.

But what do class actions offer when an administrative agency also becomes involved?  Take Wells Fargo, for example.  By January 2010, the Office of the Comptroller had received 700 whistleblower complaints about Wells Fargo opening unauthorized accounts.  The OCC raised the complaints with Wells, but then dropped the matter and Wells employees continued to open unauthorized accounts.  Not much of a record for regulators there.  At some point, the CFPB began investigating, but it was obviously after the OCC’s failed intervention because Congress had not even created the Bureau at that time and the Bureau didn’t open its doors until the summer of 2011.  The first Wells class action was filed in 2015, and then in 2016, the CFPB, joined by the OCC and the LA City Attorney’s Office (which had sued Wells in 2015), entered into the famous consent decree.  I will say more about the consent decree in a moment, but first, I want to point out that the CFPB, under a Trump-nominated director, might lapse into the kind of torpor that the OCC suffered from in 2010.  Notice too that the class action antedated the CFPB consent decree. I have no reason to believe that the class action contributed in some way to the CFPB getting involved or helped in some way, but neither do I know that it didn’t.

The consent order directed Wells to pay redress to consumers who have “incurred fees or other charges.” Wells agreed to put aside $5 million for that purpose.  So then, why do we need a class action?

Well, first, the class action settlement (assuming it is finally approved in the form in which it has been preliminarily approved) is for at least $142 million.  I say “at least” because the settlement could grow by up to $25 million if it is determined that $142 million is not enough.  Quite a bit more than the $5 million pool under the consent order. While I suppose Wells might have ended up paying more than that $5 million under the consent order (I’m not sure what would have happened if it was determined that Wells owed more than $5 million), I am skeptical that Wells would have ended up paying more than 28 times that number.

The settlement appears to provide injured class members several benefits they would not have received under the consent order. First, unlike the consent order, the settlement provides that class members will get at least $25 million in non-compensatory damages.  Second while the consent order provided that Wells could recoup any of the $5 million that was not needed to compensate injured consumers, the class action provides that none of the $142 million is to revert to Wells. Any money left over after paying expenses, fees and the individual amounts due under the settlement will go to class members. Attorney’s fees are capped at 15%.  Third, the settlement provides damages to those who suffered injuries because their credit scores went down.  I’m not certain, but I don’t think that is true of the consent order because it seems limited to “fees or other charges,” and I think that means fees or other charges imposed by Wells, rather than, for example, higher interest rates charged by other lenders because of damaged credit scores. There may be other ways consumers benefit from the class action over the consent order as well, but those will do to make my point. 

In short, class actions often do not overlap with actions by regulators, and are likely to do so even less frequently under a new CFPB director, but even when they do overlap, may still benefit consumers. To be sure, class actions do not always benefit consumers, but overall, consumers are better off with them than without them.

CORRECTION: An earlier version of this post referred to a letter Ted Frank published in the Wall Street Journal. Ted has indicated in a comment (below) that I misinterpreted his letter, and so I have omitted the sentence. I apologize for the error.

Senate Banking Committee To Hold Equifax Hearing; Equifax CEO Only Witness

by Jeff Sovern

More here.  We can expect that the senators will attempt to outdo each other in attacking Mr. Smith, but that some will still try to protect Equifax when the cameras are off, by weakening regulators (as some members of Congress are attempting to do in the House-passed Financial Choice Act, by eliminating the CFPB's UDAAP powers), or creating roadblocks to bringing class actions (as many of the same members are trying to do by eliminating the CFPB's arbitration rule).  I wonder what tone Mr. Smith will strike.  Perhaps he will attempt to mollify consumers in some way.  The same committee is to hear from the Wells Fargo CEO the preceding day, in a hearing titled Wells Fargo: One Year Later.  That hearing may include some praise for settling the class action but also some criticism for other Wells Fargo problems. I hope some senators ask Mr. Sloan to justify Wells's invocation of its arbitration clauses in some cases but not in the class action in which the unauthorized account scandal has been settled. While the CEOs are the only witnesses named for the hearings thus far, others could yet be added.

More and More Republicans Support the CFPB Arbitration Rule

by Jeff Sovern

The latest example is an op-ed by Dean Clancy, a former senior Republican official in Congress and the White House, in the American Banker, CFPB arbitration rule is an undeniable win for consumers.  Clancy takes issue, as I did, with a recent American Banker piece by Joseph Cioffi.  Clancy explains:

[Cioffi assumes] Individual arbitrations are more efficient, and therefore, less costly than class actions. The evidence for this is thin, if not nonexistent. Instead, we have some pretty good anecdotal evidence pointing the other way. 

Clancy then summarizes that evidence. Clancy also writes:

To be sure, some class-action attorneys do engage in off-putting and even unethical behavior. But that problem can be managed without having to deprive people of their access to court.

Class actions serve a useful purpose and offer unique benefits. As the congressional House Liberty Caucuswrote in a statement on Facebook: “[Class actions] are a market-based solution for addressing widespread breaches of contract” and “a preferable alternative to government regulation because they impose damages only on bad actors rather than imposing compliance costs on entire industries.”

Will Equifax Change the Prospects for Congress Blocking the CFPB Arbitration Rule?

by Jeff Sovern

That's the question discussed in Ian McKendry's article in the American Banker, GOP undeterred by Wells, Equifax in seeking arbitration rule repeal. Arbitration advocates hope and predict it won't, as this except shows:

"I don't necessarily want to conflate" the Equifax breach "with the arbitration rule," said [Senator Thom] Tillis [R-SC].

The financial services industry is also fighting back against that comparison. Ryan Donovan, chief advocacy officer at the Credit Union National Association, said using the breach as a reason to support the arbitration rule is a "red herring because it is a totally different situation in which consumers who had no established relationship with Equifax could have been forced to arbitrate certain claims."

* * *

Senate Banking Committee Chairman Mike Crapo, R-Idaho, who authored the Senate resolution, said he is confident that Republicans won't be changing their mind because of the Equifax breach.

"I believe the issue is out there and they are well informed already," said Crapo.

That last seems like an admission that arbitration sharks won't allow newly-learned facts to influence their opinions. And here is an interesting perspective:

"The arbitration issue has become so muddied that it is increasingly difficult for Democrats to draw a straight line from the scandals on the front page to the arbitration Congressional Review Act resolution itself," said Isaac Boltansky, an analyst at Compass Point. "First, Wells Fargo is the reason the arbitration rule needs to be protected and then it's Equifax and at that point it is a confluence of different scandals that make it more difficult to hone a clear and crisp message for those supporting the rules."

I'm afraid I disagree with Mr. Boltansky: Wells Fargo and, perhaps to a lesser extent, Equifax, are examples of why we need the CFPB arbitration rule.  And if that rule is defeated, we can count on other such examples in the future.    

Have the Arbitration Sharks Jumped the Shark?

by Jeff Sovern

On Saturday, I posted an entry, Kaplinsky & Levin Concede "Consumers rarely pursue individual arbitration" But Miss Mark on Why. Maybe it irritated Alan and Mark, because they then posted Professor Sovern Disagrees with Senator Warren and Concedes that Consumers Do Well in Arbitration But Raises Another Red Herring. I guess I should set the record straight in case anybody believed that headline (or cares what I think, something that I have learned from having teenage children not to expect).

First, while I am sure I disagree with Senator Warren about many things (she seems to root for the Patriots, for example), I absolutely agree with her about the value of the CFPB arbitration rule.  Second, I do not concede that consumers do well in arbitration.  As a general matter, I think consumers do better when they can bring class actions than when they unwittingly surrender their class action rights and are limited to arbitration. I would have thought Alan and Mark knew my views on this point, in part because they once wrote an op-ed, titled Consumers Fare Better with Arbitration, responding to an op-ed that I had written.  So I’m at a loss to know why they headlined their post the way they did. I wondered if maybe they were trying, in a tongue in cheek way, to suggest that they had not actually made the concession I said in my post that they had made--by claiming I had conceded something I didn’t concede.  But as their post doesn’t actually contradict my claim that they had conceded that consumers rarely pursue arbitration, I don’t think that was what was going on.

On to substance: Alan and Mark praise the CFPB complaint database in their post, asking “What do class actions accomplish for consumers that is better than this?”  I certainly agree that the complaint database is a positive for consumers. But I don’t think it’s a substitute for class actions. And even if I did, as members of Congress have called for barring public access to the complaints in the database, continued access to that database is far from guaranteed.