Consumer Law & Policy Blog

Chamber of Commerce to Have Speaker at Next Week's CFPB Arbitration Hearing

The CFPB typically invites representatives from various organizations to speak at its field hearings.  According to an email report, U.S. Chamber Center for Capital Markets Competitiveness Executive Director Travis Norton will be one of the speakers at next Thursday's arbitration field hearing. 

Trying to Understand the Basis for the Latest Attack on the CFPB

by Jeff Sovern

Earlier this month, Allison posted a link to a story about the PHH case in which the D.C Circuit heard arguments about whether the CFPB's structure is constitutional (CFPB Monitor reports on the oral argument here).  The Wall Street Journal has now run an editorial (behind a paywall) arguing that the Bureau is unconstitutional because it is headed by a single director who cannot be removed by the president except for cause.  The editorial distinguishes agencies run by multimember commissioners; it specifically mentions the FTC, which has five commissioners who also cannot be removed except for cause, and plenty of other agencies have similar structures.  The editorial also noted that the Social Security Administration has a single administrator, but the WSJ argues that the SSA has less power than the CFPB. That last strikes me as somewhat subjective, but I don't know enough about the SSA to express an opinion. But here's the part that particularly confuses me: if the commissioners can't be removed except for cause, why does it matter for purposes of the constitution how many there are?  If the problem is that an agency is exercising an unconstitutional amount of power, why does sharing that power among, say, five people make it ok but concentrating it in one person does not?  When an agency has five commissioners, and divides in a 3-2 tie, doesn't the exercise of power still come down to that fifth vote?  And a problem with more decision-makers is that they become less accountable, while with one person, it is clear who is responsible and so accountability becomes easy.  And all this ignores the fact that other agencies are headed by a single person who cannot be removed excerpt for cause; in the financial arena, for example, the Comptroller of the Currency, who can't be removed without cause, arguably wields as much power as the CFPB's director (remember how the OCC declared state anti-predatory lending laws preempted as to national banks--something that might have contributed to the Great Recession?); is that office also unconstitutional? I'm not a constitutional law expert so I am hoping those who know more on the subject can enlighten me in the comments.

Regulation, Access to and Costs of Financial Services, and the Payday Lending Example

by Jeff Sovern

Critics of consumer protection regulation routinely assert that such regulation reduces access to credit and increases consumer costs.  For example, here is what Todd Zywicki wrote in his recent testimony before the Senate Banking Committee (footnote omitted):

By imposing a regulatory regime that substitutes the judgment of bureaucrats for consumer decisions, Dodd-Frank has raised prices and cut off access to mortgages, credit cards, and bank accounts, harming millions of American families that use credit to improve their lives and depressing economic growth.

 This critique also surfaces during discussions of payday lending.  Quoting again from Zywicki's testimony:

Choking off access to payday loans, auto title loans, and other similar products without ensuring the availability of reasonable alternatives could impose substantial harm on many consumers, resulting in bounced checks, eviction, termination of utilities, or even reliance on illegal loan sharks.

Curiously, on this point Zywicki cited to a 1968 congressional writing on loan sharks rather than more recent scholarship casting doubt on the so-called loan shark thesis.  See Robert Mayer, Loan Sharks, Interest-Rate Caps, and Deregulation, 69 Washington & Lee Law Review 807 (2012). But Zywicki often refers to loan sharks in general and Anthony "Fat Tony" Salerno in particular, even though Salerno has been dead for more than twenty years. 

Despite Zywicki's critique, sometimes the absence of consumer protection regulation might impose precisely the harm on consumers that Zywicki warns it causes.  Allison posted a link last week to a new CFPB Report about the effects of online payday lending. Among the findings:

Half of all accounts have at least one payment request that results in overdraft or failure due to NSF during the 18 month observation period. These accounts are charged an average of $185 in overdraft and NSF fees by their institution on attempted payment requests from online lenders during the 18 months.

In other words, appropriate payday lending could prevent the bounced checks that Zywicki suggests payday regulation will cause. And now, look at the report's findings about access to financial service:

Accounts of borrowers who use loans from online lenders are more likely to be closed by the end of the sample period than accounts generally (23% versus 6%, respectively). Accounts with any online payday loan payment request that fails are particularly likely to be closed, with 42% of such accounts closing by the end of the sample period.

To be sure, correlation is not causation. Maybe the accounts were heading for closure anyway.  But pending additional investigation, we now have more reason to believe that payday lending reduces access to financial services than that it contributes to loan-sharking. And just to be clear, regulation that reduces access to some financial services can be a good thing.  Think of the millions of consumers who lost their homes in the mortgage meltdown because of predatory loans.  Wouldn't they have been better off if they had never entered into those loans?

I wonder if Zywicki will now call for payday lending regulation, or if he will continue to rely on the loan shark boogeyman.

 

CFPB Announces Arbitration Field Hearing

Here.  Because the Bureau usually combines field hearings with announcements of related developments, it is likely to announce its proposed arbitration rules that day. 

More on the Senate Banking Committee Hearing

by Jeff Sovern

Yesterday I posted about Senator Elizabeth Warren's takedown of Leonard Chanin, formerly of the Fed and the CFPB, now of MoFo, at a Senate Banking Committee hearing. I have since finished listening to the hearing and wanted to say a few more things.

First, at the conclusion of the hearing. the Committee's chair, Republican Senator Richard Shelby, praised Mr. Chanin for his service to the country and said that he wished Mr. Chanin still worked for the government. Quite a contrast with Senator Warren's view that Mr. Chanin "played a key role in blowing up the economy."

Senator Shelby and several others at the hearing spoke of how they saw cost-benefit analysis as critical to effective regulation. One point that speakers made was that a possible cost of regulations is that they might reduce access to credit.  It was almost as if they didn't know that the Dodd-Frank Act (which also came in for criticism) commands the CFPB to consider cost-benefit analysis in formulating regulations, and that as part of doing so, the Bureau has to take into account any possible reduction in access to credit. See 12 U.S.C. § 5512(b)(2). Nor did Dodd-Frank's injunction to the CFPB not to declare acts unfair unless the acts cause substantial injury which are not outweighed by corresponding benefits draw praise.  See 12 U.S.C. § 5531(c). 

So why the focus on cost-benefit analysis?  CBA is often a pretext for opposition to regulation.  It sounds neutral--who could be against comparing the costs and benefits of a law?--but can be used to derail consumer protection laws.  At best it delays laws, sometimes for lengthy periods, during which consumers can be taken advantage of. But it can also serve to block needed protections, by, for example, giving industry the ability to argue that a regulator's CBA was insufficient and so a regulation should be invalidated. See Bus. Roundtable v. SEC, 647 F.3d 1144 (D.C. Cir. 2011).  Part of the problem is that it is often difficult to value benefits.  How are regulators to value giving consumers the ability to determine their mortgage costs, for example, as the TRID rule is intended to do? Or the ability to prevent the disclosure of information about their financial transactions, as Gramm-Leach-Bliley is supposed to accomplish?  CBA may be a great idea in theory, but when someone calls for its use, ask whether they really mean that they oppose the proposal under discussion.  I have written more about CBA here. 

 

 

Elizabeth Warren's Devastating Cross-Examination of Leonard Chanin at the Senate Banking Committee Hearing

by Jeff Sovern

On April 5, the Senate Banking Committee held a hearing titled Assessing the Effects of Consumer Finance Regulations.  I've been listening to the hearing, which has three witnesses--selected by the GOP majority--who spent much of their time attacking the CFPB, and one witness- chosen by the Democratic minority-- who supported the CFPB.  One of the witnesses critical of the CFPB was Leonard Chanin, currently of Morrison and Foerster LLP.  When it was her turn to question the witnesses, Senator Warren conducted an extraordinary takedown of Chanin.  I recommend watching the Q&A.  It's available at various places, including here on Youtube. Those who don't have time to watch the video and want to read a transcript can find one here, but the transcript might not have the same impact. Really, to have the full impact, you have to listen to the entire hearing, because like the thirteenth stroke of a clock, the exchange calls into question all that came before it, including the criticism of the CFPB.  But that's a big time commitment, so just give the Q&A a listen.

A couple of comments on Chanin's defense for the Fed's failure to act from 1994, when Congress gave the Fed the power to act, until 2008, when the economy tanked: Chanin said that no statistical evidence existed to show a meltdown in the mortgage market. Even assuming that to be true, shouldn't the Fed have conducted its own information-gathering?  And does Chanin believe that regulators should not prevent predatory lending until there is statistical evidence of a mortgage meltdown? How is it that the investors portrayed in The Big Short figured out that there was a problem when they didn't have access to the Fed's information-gathering resources but the Fed didn't?  Should the Fed really take nearly a decade and a half to figure out that something is wrong with predatory lending?  And isn't the fact that it didn't another argument for the CFPB?

House Financial Services Committee Again Passes Bill to Cripple CFPB

by Jeff Sovern

The Hill has the story with the headline House panel passes bills to ramp up CFPB oversight.  For more on why "oversight" will hurt consumers, see here and here.

American Banker's Rob Blackwell on House Financial Services Committee Oversight of the CFPB

Here (free content).  Makes for interesting reading.  An excerpt:

Time and again, lawmakers effectively stepped on their own lines, asking Cordray important questions and never bothering to let him respond. They allowed theatrics to trump (pun intended) substance, using their time to berate the CFPB chief instead of engaging in a productive discussion.

Generally, the exchanges worked like this:

The lawmakers asks a question.

Cordray starts to answer.

The lawmaker interrupts Cordray, yelling at him that he hasn't answered the question.

Blackwell provides examples of these exchanges in the column.

Hensarling on the CFPB

House Financial Services Chair Jeb Hensarling gave a speech today to the American Bankers Association Frank Act.   During the speech, he said the following about the CFPB:

[T]hey’re certainly not helped when Obama’s Financial Control Law [his name for the Dodd-Frank Act that created the CFPB, among other things] has killed off a benefit many, if not most, consumers once took for granted:  free checking.  Before it became law, 75 percent of banks offered free checking.  Just two years later, only 39 percent did so. 

Furthermore, as account fees rise due to Obama’s Financial Control Law, so do the number of low and moderate income households who are unbanked or underbanked – a number that stands at more than 34 million, according to the FDIC.

Only someone from Washington would dare call this “consumer protection.”

When it comes to the Orwellian-named Consumer Financial Protection Bureau, the Federal Reserve reports that – when fully implemented – one-third of black and Hispanic borrowers will be denied home ownership opportunities by the CFPB’s Qualified Mortgage rule.

Regrettably, it looks like the consumer protection agency is going to “protect” millions of Americans right out of owning a home.

If there were any justice in the world, consumers would be able to sue the CFPB for unfair, deceptive and abusive practices – early and often!

* * *

James Madison, in Federalist 47, . . . . wrote, “The accumulation of all powers, legislative, executive, and judiciary, in the same hands…may justly be pronounced the very definition of tyranny.”

If that doesn’t sound like the very definition of the CFPB, then I don’t know what does.  It is a case study in the overreach and pathologies of the unaccountable administrative state run amok.  At almost every opportunity, the Bureau abuses and exceeds its statutory authority, which is already immense.  The Bureau operates with such secrecy, unaccountability and bureaucratic tyranny it would make a Soviet Commissar blush!

It intentionally or, at best, negligently makes bad policy.  It acts as judge, jury and executioner – all without accountability and due process.  This should alarm every American.  Because as we become less governed by the rule of law and more governed by the whims of Washington regulators -- fear, doubt, uncertainty and pessimism are sown. 

The Bureau typifies not only the shadow regulatory system but also the unfair Washington system that Americans have come to loathe:  powerful government administrators, arbitrary rules, and unchecked power to punish or reward.   

Hensarling promised a GOP alternative to Dodd-Frank shortly.

CFPB Director Richard Cordray's Near-Term Goals

In a speech February 25 at the CFPB's Consumer Advisory Board meeting, CFPB Director Richard Cordray identified nine "key areas where we hope to make substantial progress over the next two years."  He also noted, however, that "these goals do not capture all of the important work we are doing." The nine goals are:

First, we envision a mortgage market where lenders serve the entire array of credit-worthy borrowers fairly, and where servicers have processes in place that result in fair and efficient outcomes for consumers.

Second, we envision a student loan market where student loans are serviced in a way that is transparent and fair to help students repay their debts.

Third, we envision a consumer reporting market with better data that is more accurate and inclusive of more consumers.

Fourth, we envision a market free from discrimination and where consumers have equal access to small business lending.

Fifth, we envision a market where consumers are savvy about their own finances, and they have reliable places to turn to for the tools and skill building to increase their own financial capability.

Sixth, we envision a market where consumer education and policy decisions about household finances are based on a deep understanding of how households use financial products and make choices about money and the effects on their lives.

Seventh, we envision an open-use credit market where payday and installment lenders rely on business models that succeed when consumers use credit as needed and are able to repay their debts when they come due.

Eighth, we envision a debt collection market where everyone who collects debts substantiates the debts they are collecting and communicates with debtors about their debts in a respectful, lawful, consumer-oriented manner.

Ninth, and finally, we envision an entire consumer financial marketplace where consumers will have the ability to effectuate their rights and hold institutions accountable for unlawful conduct.

It will be interesting to see how the Bureau interprets and implements those goals, including the eighth goal that would require debt collectors to substantiate the debts they collect, the fifth goal that seeks to insure that consumers are savvy about their own finances, and the ninth, which wants consumers to have the ability to effectuate their rights and hold institutions accountable.