Consumer Law & Policy Blog

Elizabeth Warren in HuffPo: The Banking Industry's Transparent Attempt to Weaken the CFPB

Here. The entire essay is worth reading, but here's an excerpt to whet your appetite:

 

The latest industry-sponsored bill would fundamentally change the structure of the CFPB by replacing the agency's single, independent director with a commission of political appointees.

* * * [T]he agency is working, which may be exactly why the big banks and their Republican friends are pushing so hard to tangle it up with a different administrative structure. 

* * *

Let's face it: The quickest way to undermine an agency's effectiveness is to make it a commission -- which is why I want a single director and the banking industry doesn't.

* * *

Votes over the CFPB present the same choice today that they always have -- a choice between big banks and predatory lenders on one side and families on the other.

Experts Disagree Over Whether Earth is Flat and CFPB Has Power to Regulate Arbitration Clauses

by Jeff Sovern

Did Congress give the CFPB the power to ban or regulate arbitration clauses in consumer financial contracts?  Not according to a Pepper Hamilton partner, according to a pair of recent reports.  Here's an excerpt from a piece at credit.com. The CFPB’s Arbitration Ban Could Be the Next Supreme Court Showdown:

“It comes down simply to whether the (bureau) can now make rules that run directly counter to clear Supreme Court findings [interpreting the Federal Arbitration Act],” said Matt Adler, a law professor at the University of Virginia and chair of the arbitration practice at Pepper Hamilton law firm.

* * *

Now comes the CFPB, offering its own ban on class-action waivers — seemingly in direct contradiction of these Supreme Court rulings.

“It’s really going to come down to whether an agency rule can overcome those cases. There’s absolutely going to be test litigation,” Adler said.

His opinion was clear-cut — absent an explicit amendment to the 1925 Federal Arbitration Act, the CFPB rule won’t survive.

“I think you’re going to need a Congressional Amendment,” he said. “The court will most certainly not roll over in face of an agency rule.”

And here's what an American Banker article, Fierce Battle Ahead for CFPB Arbitration Plan, had to say:

Matthew Adler, a partner at Pepper Hamilton, said a 2013 Supreme Court decision in a case involving American Express made it difficult to invalidate such arbitration clauses without a legislative amendment to the Federal Arbitration Act. Adler said the provisions in the Dodd-Frank do not go that far.

"It's going to be very difficult, without Congress amending the Federal Arbitration Act to invalidate class action waivers, for an administrative agency to do that on its own," said Adler.

As any first-semester law student knows, the starting place to answer a question involving a statute is the statute itself. So let's go to the Dodd-Frank Act, 12 USC § 5518(b):

The [Consumer Financial Protection] Bureau, by regulation, may prohibit or impose conditions or limitations on the use of an agreement between a covered person and a consumer for a consumer financial product or service providing for arbitration of any future dispute between the parties . . . .

I cannot imagine how that statute could be interpreted so as not to give the CFPB the power to "prohibit or impose conditions or limitations" on arbitration clauses in contracts within the Bureau's jurisdiction.  Because Dodd-Frank was enacted decades after the FAA, it is obvious that Dodd-Frank was intended to supersede the FAA as to the authority Dodd-Frank grants the Bureau.  Put another way, Dodd-Frank amends the FAA. As a result, it takes precedence over cases, even decided by the Supreme Court, interpreting the FAA, just as any congressional amendment to a statute can overturn Supreme Court decisions interpreting the statute in question--as has happened many times. 

 

Michael Barr Article on Arbitration

Michael S. Barr of Michigan has written Mandatory Arbitration in Consumer Finance and Investor Contracts, 11 New York University Journal of Law and Business (2015). Here is the abstract:

Mandatory pre-dispute arbitration clauses are pervasive in consumer financial and investor contracts — for credit cards, bank accounts, auto loans, broker-dealer services, and many others. These clauses often ill serve households. Consumers are typically presented with contracts on a “take it or leave it” basis, with no ability to negotiate over terms. Arbitration provisions are often not clearly disclosed, and in any event are not salient for consumers, who do not focus on the importance of the provision in the event that a dispute over the contract later arises, and who may misforecast the likelihood of being in such a dispute. The lack of salience means that there is no meaningful competition over arbitration provisions or likely any price effect. Some arbitration proceedings lack procedural protections, and unbiased arbitrator selection essential for fair outcomes. In addition, many arbitration provisions contain “gag” rules barring disclosure of reasoning, evidence, or outcomes. Moreover, arbitration clauses typically preclude consumers from banding together in aggregated actions, which diminishes redress and weakens deterrence. In the wake of the financial crisis, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which authorizes the new Consumer Financial Protection Bureau and the U.S. Securities and Exchange Commission to prohibit or condition the use of arbitration clauses in consumer finance and investment contracts, respectively. It is well past time for these agencies to use this authority.

Housing Wire: House passes bipartisan TRID grace period bill 303-121

by Jeff Sovern

Here. The first paragraphs read:

Defying the threat of a White House veto, the House on Wednesday afternoon passed bipartisan legislation to help homebuyers avoid delays and disruptions when closing on their new homes by a bipartisan vote of 303-121.

The bill, the Homebuyers Assistance Act, provides a four-month grace period for businesses that are working in good faith to comply with a new 1,888-page rule from the Consumer Financial Protection Bureau that went into effect Oct. 4.

The article doesn't note until the eleventh paragraph the purpose of the regulations (to enable consumers to learn their mortgage payment obligations, ignorance of which contributed to the defaults and foreclosures leading to the Great Recession), and fails to mention at all that the regulations were announced nearly two years ago.

CFPB Considering Ban on Class Action Waivers in Arbitration Clauses

The Bureau's announcement is here.  An excerpt:

Today the Consumer Financial Protection Bureau (CFPB) announced it is considering proposing rules that would ban consumer financial companies from using “free pass” arbitration clauses to block consumers from suing in groups to obtain relief. Buried in many contracts for consumer financial products like credit cards and bank accounts, most arbitration clauses deny consumers the right to participate in group lawsuits against companies. With this free pass, companies can sidestep the legal system, avoid big refunds, and continue to pursue profitable practices that may violate the law and harm countless consumers. The CFPB’s proposals under consideration would give consumers their day in court and deter companies from wrongdoing.

“Consumers should not be asked to sign away their legal rights when they open a bank account or credit card,” said CFPB Director Richard Cordray. “Companies are using the arbitration clause as a free pass to sidestep the courts and avoid accountability for wrongdoing. The proposals under consideration would ban arbitration clauses that block group lawsuits so that consumers can take companies to court to seek the relief they deserve.”

No doubt we will hear more in the Field Hearing at 1:00 ET.

WSJ: Dodd-Frank's Effect on Small Banks is Muted; Law has raised costs, but by some measures community banks are quite healthy; low interest rates pose bigger hit to profits, observers say

Despite complaints from some that Dodd-Frank has led to the closing of community banks, the Wall Street Journal reports something different here. Some excerpts:

It's a favorite lament of community banks: The 2010 Dodd-Frank law is squeezing small financial firms and crimping access to credit for Main Street, all in the name of protecting the country from another financial crisis.

A look at the data shows the reality is more complicated, and small banks are proving surprisingly resilient by some measures.

* * *

There's no doubt Dodd-Frank has disproportionately raised compliance costs for small banks, which don't have the size and scale to absorb new costs as easily as larger firms, though exact tabulations are hard to come by. But in some ways, community banks are the picture of health.

* * *

In the second quarter, the profitability of small banks--which earned a 0.95% return on assets--barely lagged behind the 1.08% return of the big banks, according to the FDIC. That's a big change from the margin when Dodd-Frank passed, when the gap was more than three times as wide.

* * *

The number of community banks has been falling for decades. Although the decline accelerated over the past 10 years, in part because of the wave of bank failures during the financial crisis and tighter regulatory restrictions on new bank formation, almost two-thirds of banks that closed were bought by other community banks, according to the FDIC.

MarketWatch: Dodd-Frank is not killing mortgage access for home buyers

The story, based on a Fed study, is here. Excerpt:

New rules designed to make sure borrowers can repay their mortgages haven’t curtailed the ability to buy a home, a Federal Reserve study says.

* * *

The Fed study didn’t find any evidence of credit restriction as a result of the rules.

For instance, black and Hispanic borrowers, who tend to have fewer assets and lower credit scores, actually saw their share of mortgages rise in 2014 after several years of decline. There also wasn’t much of a change in the frequency in which debt-to-income was cited by lenders as a reason for denial (it rose slightly for purchase applications and fell slightly for refinancing).

The Fed suggests the new rules had little effect because lenders had already tightened standards after the 2008 financial crisis. Lenders may also have adjusted to the new rules prior to implementation.

CFPB Announces Arbitration Field Hearing

October 7, in Denver.  More here.  Will the Bureau announce proposed arbitration rules? (HT: Gregory Gauthier)

LA Times's David Lazarus Replies to GOP Presidential Candidates on CFPB

by Jeff Sovern

Here. Some excerpts: First, the attacks:

Ben Carson, second only to Donald Trump in Republican presidential polling, has called the Consumer Financial Protection Bureau the "ultimate example of regulatory overreach."

Candidate Carly Fiorina, former chief executive of Hewlett-Packard, says the watchdog agency's investigative powers worry her "a whole lot more" than the National Security Agency.

And Texas Sen. Ted Cruz, also seeking the Republican nomination, introduced legislation in July that would erase the bureau from existence.

"The agency continues to grow in power and magnitude without any accountability to Congress and the people," he warned. "The only way to stop this runaway agency is by eliminating it altogether."

And now some of Lazarus's response:

Despite the ominous, fearful and largely bogus criticism by its Republican critics, the bureau has been steadily doing what it was created to do: safeguarding consumers from the greedy practices of businesses that think they can act without regard for the law.

* * *

In the four years since its founding, the Consumer Financial Protection Bureau has, among other actions:

•Forced credit card companies to return nearly $2 billion to consumers who were duped into signing up for costly add-on programs such as unneeded identity theft or disability coverage.

•Required that mortgage lenders verify in advance that a borrower can repay a loan. The subprime mortgage crisis during the Great Recession was precipitated in part by lenders irresponsibly handing out cash to almost anyone who applied.

•Helped secure $480 million in debt forgiveness for students saddled with high-priced loans from Corinthian Colleges Inc. For-profit Corinthian filled for Chapter 11 bankruptcy protection in May and closed dozens of schools.

* * *

I'm not sure what Republicans mean when they complain about the bureau's "regulatory overreach" or describe it as a "runaway agency."

Any reasonable observer would think these guys seem pretty darn good at their jobs.

I can't do the column justice here, but if you are interested enough to have read this far, you should click on the link above and read the whole thing.

 

A Comment on Kaplinsky & Levin's "CFPB Makes Consumer Arbitration a Numbers Game—and the Numbers Overwhelmingly Support Consumer Arbitration"

by Jeff Sovern

The following is the body of an email I sent to the editor of the Consumer Financial Services Law Report (a very useful newsletter on developments in consumer finance):

The August 9, 2015 issue of the Consumer Financial Services Law Report includes an advocacy piece by financial industry lawyers Alan S. Kaplinsky and Mark J. Levin titled CFPB Makes Consumer Arbitration a Numbers Game—and the Numbers Overwhelmingly Support Consumer Arbitration, that comments on an article I co-authored. I write to set the record straight.

Our article reports on an online survey my co-authors and I conducted of 668 consumers approximately reflecting adult Americans in various demographic categories.  We provided consumers with a representative credit card contract that included an arbitration clause printed in bold, italics, and ALLCAPS. The arbitration clause was more readable than most such arbitration clauses. We then asked consumers questions about the arbitration clause as well as about arbitration clauses in general.  The responses indicated that few respondents understood the arbitration clause and that many believed that they could not lose their rights to judicial process, including the rights to litigate in court and to participate in class actions, by agreeing to what one respondent termed a “whimsy little contract.” 

Our findings raise serious questions about whether consumer consent to pre-dispute arbitration clauses is informed and thus whether it can be called consent in any meaningful sense.  The results thus create doubt about arbitration’s legitimacy, because any such legitimacy must be rooted in consent: consumers cannot be forced to arbitrate unless they have agreed to do so.

Messrs. Kaplinsky and Levin do not question our findings. Indeed, it would be difficult for them to do so, given that the CFPB’s telephone survey echoed some of our results, and that an industry group, the American Financial Services Association, has acknowledged both that consumers usually do not read contracts and that it is unlikely they are aware of credit card arbitration clauses.  See Letter from Bill Himpler, American Financial Services Association to CFPB re Telephone Survey Exploring Consumer Awareness of and Perceptions Regarding Dispute Resolution Provisions in Credit Card Agreements (Aug. 6, 2013), http://www.afsaonline.org/library/files/legal/comment_letters/CFPBArbitrationSurvey.pdf.

Instead, Messrs. Kaplinsky and Levin claim that a “methodological flaw” in our study “is the critical fact that the authors did not interview consumers who actually had participated in arbitration and who would likely have positive comments about their experience.” Next we will see tobacco companies charging that studies showing smoking is harmful suffer from a “methodological flaw” because the studies did not ask smokers whether they enjoy smoking.  Our study was intended to shed light on whether consumers understood what they were doing when they surrendered constitutional rights, including the right to have a court decide their disputes and to a jury trial, among other rights.  Perhaps Messrs. Kaplinsky and Levin should focus on what we found, rather than on things they wish we had found.

I will leave to others the task of rebutting other claims Messrs. Kaplinsky and Levin made (I have previously responded to some of them on the Consumer Law and Policy Blog, which can be found at http://pubcit.typepad.com/).  But I want to make one more point.  For some reason, Messrs. Kaplinsky and Levin departed from conventional norms by referring to our article without including the names of the authors, the name of the article, or a link where it can be found. My co-authors are Elayne Greenberg, Paul Kirgis, and Yuxiang Liu and the article is titled “Whimsy Little Contracts” with Unexpected Consequences: An Empirical Analysis of Consumer Understanding of Arbitration Agreements. The article will appear in the Maryland Law Review and can be downloaded from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2516432.   It provides a much fuller accounting of our findings than I can here.