Consumer Law & Policy Blog

Bloomberg Story on CFPB's Arbitration Rule-Making

Here (behind paywall, unfortunately).  Excerpt:

When the CFPB may [issue its arbitration rule] is unknown. A spokesman told Bloomberg BNA that the bureau continues to gather information from stakeholders on the arbitration rulemaking. A final regulation is unlikely to take effect before late 2017 or 2018, Joe Olson, a partner and class action defense specialist with Michael Best & Friedrich LLP, told Bloomberg BNA. The 2010 Dodd Frank Act calls for a 180 day interim from final action on an arbitration rule to its effective date.

 

 

Are Consumers Using the New CFPB Mortgage Disclosures to Shop Around?

Not so much, according to this story in the Boston Herald. Excerpt:

[Apparently [buyers are] not [using the disclosures] so much. Bill Emerson, chief executive of Quicken Loans, the country’s second highest volume mortgage lender, says his firm is seeing no surge in shopping by applicants using the Loan Estimate. “I don’t think consumers are changing the way they shop simply because” they have a new tool to do so, Emerson said in an interview. * * *

Paul Skeens, president of Colonial Mortgage Group in Waldorf, Md., says barely 5 percent of his clients are using the Loan Estimate to comparison shop, while 95 percent “are doing it the old way.” Seattle area mortgage banker Charley Murphey told me he has “heard of no borrowers walking away with a Loan Estimate in hand to go shopping for a better deal.’’

Joe Adamaitis, vice president and residential lending manager for Insignia Bank in Sarasota, Fla., says “buyers do not have the time to shop due to the pressures of meeting commitment and closing dates. Most lenders are priced the same and it comes down to which lender the Realtor referred them to.”

* * *

For its part, the CFPB is taking the long view and recognizes that changing consumer behavior takes time. * * *

Homo Lex? Will Law Make the Same Transition Economics Is?

by Jeff Sovern

Bear with me for a moment.  As is well-known, Richard H. Thaler and Cass R. Sunstein,in their important book Nudge, describe how classical microeconomics assumes that all people are rational. They call such rational people "Homo Economicus" or, for short, "Econs." But, as they also describe, and as Thaler elaborates on in his new and also excellent book, Misbehaving, real people are often not rational.  They make predictable errors, and the study of these errors has led to the development of behavioral economics.  Thaler, Sunstein, and many others have argued that economic models should be revised to take into account these discoveries to make the models more accurate in describing human behavior, and thus more useful in predicting that behavior. 

In Misbehaving, Thaler reports on how behavioral economics' model of the irrational person is winning the battle against classical microeconomics' Econs. Law has a similar war going on.  Classical legal rules also make assumptions about people that have been proved not to describe human behavior accurately. For example, contract law's duty to read--which usually holds people to their contract whether they have read the contract or understand it or not--assumes that people read contracts. Another example: in evaluating the 1692g validation notice debt collectors are obliged to provide to consumers, courts assume that the consumer has read that notice, and uphold the validity of the notice whether or not consumers have actually read it, as long as the notice is not overshadowed (by, for example, larger print demanding payment) or is not contradicted (by, for example,  demands for payment before the thirty days allotted for validation have expired.

But extensive literature, often referred to on this blog, makes clear that few people read contracts, and that many don't understand them when they do (I'll have more to say about consumer understanding of validation notices another time).  The law thus employs rules which appear to be designed for people who don't actually exist, rather than the people who do, just as the economics models did.  I've been trying to come up with a name for the imaginary humans the law assumes. Home Lex?  Lexons for short?  (Yes, I know "lexon" is not consistent with Latin, but "leges" doesn't have the right sound. And Lexis is taken.) If you have a better idea, please mention it in the comments.

This is a bit of an overstatement, but it seems to me that most common law consumer law rules are made for Lexons, while some statutes (but far from all) recognize that people are not always rational. The CFPB's rules partake of both. To the extent that the Bureau attempts to use disclosures to solve problems (e.g., the TILA/RESPA disclosures--and yes, I know the Bureau was commanded to do so by Congress), it is making rules for Lexons. To the extent that it prohibits self-destructive decisions (likely to be true of the forthcoming payday lending rules), it is making rules for real, fallible people.  We probably won't see a clear victory for either side across the board, but I predict one side or the other wins a victory in one area or another. I would love to see any comments people care to post on this.

Braucher & Litwin Article on Examination as a Method of Consumer Protection

The late Jean Braucher of Arizona and Angela K. Littwin of Texas have written Examination as a Method of Consumer Protection, 87 Temple Law Review, 807 (2015).  Here is the abstract:

Lack of compliance with consumer protection law has been a crucial problem in the field for as long as such law has existed. The Consumer Financial Protection Bureau (CFPB) has the potential to change this state of affairs, especially with its supervision powers, which provide for dedicated consumer protection examination, a new development in the law. Although examination commands resources both from the agency and regulated entities, it is far less resource-consuming than litigation. It thus provides a relatively cost-effective way for an agency to obtain both changes in company practices and compensation for victims.

For a symposium honoring the scholarship of Professor William C. Whitford, we apply to the CFPB’s supervision program a framework Whitford developed for predicting whether a consumer protection law will produce compliance. Our answer to this question is a tentative yes. The CFPB’s statutory structure enables a strong commitment to consumer protection, especially with respect to supervision. In practice, the CFPB relies heavily on this robust regulatory tool, and there is evidence the CFPB is using this power to the fullest. If the CFPB maintains this level of commitment, its supervision program has the potential to radically reshape the market for consumer financial services. Reading the Bureau’s reports on its supervision activities is like stepping into an alternate universe in which consumer protection is the norm. Major problems that academics, advocacy groups, and the news media have been documenting for the past several years are now being written up as official government findings and followed with corrective action. But supervision is necessarily a confidential process, which makes it susceptible to agency capture. The CFPB, however, is currently implementing two strategies that may mitigate this risk in the future — so long as political forces do not eliminate the agency outright.

Times: Consumer Bureau Faulted on Auto Lending inquiry

Here. 

 

A Reply to Alan Kaplinsky's Comment on My Claim about the Industry's Supposed Love of Arbitration

by Jeff Sovern

In a recent American Banker essay, I argued that businesses praise arbitration not because they genuinely value it, but because it enables them to block class actions.  I said that for two reasons: first, that if businesses truly believe arbitration is superior to litigation, as they say they do, they should prefer arbitration even for resolving disputes in individual actions when class actions are not available.  Yet financial industry organizations have stated that if they cannot use arbitration to block class actions, they will not use arbitration at all in consumer disputes. Second, a study found that in business-to-business contracts, where class actions are rare and so not relevant to deciding whether to use arbitration, companies use arbitration clauses far less often than in their consumer contracts, suggesting that they don’t see value in arbitration except when class actions are a possibility.

In return, Alan Kaplinsky, a leading arbitration advocate and financial industry lawyer, responded in an American Banker piece of his own. But he never actually grapples with my claim that the actions of businesses show they prefer litigation to arbitration when class actions are off the table.  In fact, his argument proves my point.

First, Mr. Kaplinsky argued that “arbitration is superior to class action litigation for consumers and companies alike [emphasis mine].” The Consumer Financial Protection Bureau study disagreed, but I understand that Mr. Kaplinsky claims the bureau went off the track on that one.  However, my essay was based on what businesses want to do with disputes when class actions are not involved. As I noted above, they want to litigate, not arbitrate. 

Second, Mr. Kaplinsky wrote that I said “the evidence points to few individual arbitrations occurring in the first place.”  He then stated that there had been thousands of such individual actions, including the 1,750 the CFPB studied.  Well, that might have been a good argument if I had actually said that few individual arbitrations have occurred. Except that I didn’t.  It’s irrelevant.

Moving on from that straw man, Mr. Kaplinsky says that businesses incur extra expenses in defending claims in arbitration and that they would not be willing to incur those expenses if they must also pay for class actions.  In other words, Mr. Kaplinsky agrees that if arbitration clauses can’t prevent the use of class actions, business won’t want to use arbitration.   But as I said in my original piece, if businesses genuinely believe arbitration is superior to litigation, shouldn’t they choose arbitration whenever they can, whether or not it enables them to avoid class actions?

But what about the arbitration expense Mr. Kaplinsky cites?  Is that the explanation?  Ask yourself why businesses are willing to assume that expense now.  It’s not to sell their products: no business advertises that you should choose them because they pay for arbitration if you have a dispute with them.  Rather, it’s because they get some other benefit out of assuming that expense. And that benefit, of course, is blocking class actions. What else could it be?

In short, businesses prefer arbitration because, as CFPB Director Richard Cordray said, it gives them a “free pass” to avoid accountability to their customers. It enables them to block class actions.  Maybe it’s time they admitted it.

Times: Bipartisan Bill Would Protect Service Members’ Right to Avoid Arbitration

Here.

More From the Times on Arbitration: Efforts to Rein In Arbitration Come Under Well-Financed Attack

Here. Excerpts:

[T]he U.S. Chamber of Commerce, the most powerful business lobby in the country, started a new effort to block the Consumer Financial Protection Bureau by lobbying lawmakers to attach a rider to the federal budget bill that would force the regulator to conduct a new study before issuing any rule, according to people with direct knowledge of the strategy.

* * *

On Wednesday, the Justice Department issued a proposal to protect military service members from arbitration requirements. Earlier this month, Senator Al Franken, Democrat of Minnesota and a longtime opponent of arbitration, renewed his push for Congress to pass a bill he introduced this year that would prevent companies from requiring employees to go to arbitration.

Several Democrats are expected to introduce bills intended to more widely curtail the use of arbitration clauses, according to the people. But with Congress deeply divided, some Democrats are calling on President Obama to use his executive authority to prevent federal contractors from including arbitration clauses in their contracts with customers and employees.

My Latest American Banker Op-ed: CFPB Arbitration Plan Provokes Dubious Industry Claims

 by Jeff Sovern

Here.  Excerpt:

[C]ompanies can use class action waivers to block consumer protection laws unless consumer protection laws find a way to block class action waivers.

* * *

Last month, the bureau made public a proposal to block class action waivers in arbitration clauses. A leading advocate for arbitration in the financial industry, Alan Kaplinsky, responded with [a] forecast of how the industry would respond: "We firmly believe that, should the CFPB enact its proposal to ban class action waivers, most companies will abandon arbitration with the result that arbitration will no longer be available as a quick, efficient and inexpensive way of resolving disputes."

But if the industry truly believes that arbitration is so much better than litigation at resolving disputes, shouldn't it prefer arbitration to litigation for resolving individual disputes, where there is not a threat of a class action? Or should we be shocked, shocked, to discover the industry's love of arbitration is about barring class actions?

 

American Banker: Why that Orwellian Anti-CFPB Ad Could Backfire

Allison posted yesterday about the anti-CFPB ad.  The American Banker's Rachel Witkowski and Rob Blackwell have more here. Among their reasons for saying it could backfire: "the ad is over the top;" "Consumer credit isn't tighter since the CFPB's creation;" and "The ad's sponsor has connections to a company under investigation by the CFPB."