Consumer Law & Policy Blog

Paper Analyzes Testing of Consumer Disclosures

Talia B Gillis, a doctoral student at Harvard, has written Putting Disclosure to the Test: Toward Better Evidence-Based Policy. Here is the abstract:

Financial disclosures no longer enjoy the immunity from criticism they once had. While disclosures remain the hallmark of numerous areas of regulation, there is increasing skepticism as to whether disclosures are understood by consumers and do in fact improve consumer welfare. Debates on the virtues of disclosures overlook the process by which regulators continue to mandate disclosures. This article fills this gap by analyzing the testing of proposed disclosures, which is an increasingly popular way for regulators to establish the benefits of disclosure. If the testing methodology is misguided then the premise on which disclosures are adopted is flawed, leaving consumers unprotected. This article focuses on two recent major testing efforts: the European Union’s testing of fund disclosure and the Consumer Financial Protection Bureau’s testing of the integrated mortgage disclosures, which will go into effect on August 1, 2015.

Despite the substantial resources invested in these quantitative studies, regulation based on study results is unlikely to benefit consumers since the testing lacks both external and internal validity. The generalizability of the testing is called into question since the isolated conditions of testing overlook the reality of financial transactions. Moreover, the testing method mistakenly assumes a direct link between comprehension and improved decisions, and so erroneously uses comprehension tests. 

As disclosure becomes more central to people’s daily lives, from medical decision aids to nutritional labels, greater attention should be given to the testing policies that justify their implementation. This article proposes several ways to improve the content and design of quantitative studies as we enter the era of testing.

Some Comments on Comments on the CFPB Arbitration Study

by Jeff Sovern

Earlier this week, I posted a link to the Ballard Spahr comments, on behalf of various industry trade associations, on the CFPB Arbitration Study .  Their thesis is that the Bureau Study indicates that consumers fare better in arbitration than litigation in general and class actions in particular. For example, here is one excerpt from their comments:

Consumers who received cash payments in class action settlements obtained an average of only $32.35. * * *

By contrast, customers who prevailed in arbitration recovered an average of $5,389, compared to the $32.35 obtained by the average class member in class action settlements. Thus, the average customer who prevailed in arbitration received 166 times more in financial payments than the average class member in class action settlements.

Sounds like a big difference, except for one thing.  In the words of Director Cordray introducing the study:

For those consumers who do use arbitration, we observed that very few of them filed arbitration claims for small-dollar amounts. For example, there are almost no disputes over amounts less than $1,000.

And here's a quote from the Study itself (Section 1, p. 12):

The average consumer affirmative claim amount in arbitration filings with affirmative consumer claims was around $27,000. The median was around $11,500. Across all six product markets, about 25 disputes a year involved affirmative consumer claims of $1,000 or less.

Unfortunately, the CFPB was not able to gather much information about class action claim amounts.   But class actions are often brought to compensate individual consumers in amounts much smaller than $1,000, an amount that evidently is not even enough to cause consumers to file for arbitration.  In other words, the Ballard Spahr comments show that when consumers bring arbitration claims averaging $27,000, and almost never for under a thousand, they recover larger amounts than they do in class actions in which individual consumers have suffered far more modest damages.  Not exactly a surprise. Such an apples-to-oranges comparison is hardly evidence that consumers do better in arbitration than in class actions.

 

 

D.C. Circuit holds Texas bank has standing to challenge CFPB's constitutionality

Just one day after a Senate Judiciary Committee hearing focusing on the constitutional challenge to the CFPB in State National Bank of Big Spring v. Lew, the D.C. Circuit has issued an opinion allowing that challenge to go forward on the merits and reversing the district court's dismissal on standing grounds. I testified in defense of the Bureau yesterday, as did Adam Levitin of Georgetown Law; C. Boyden Gray, counsel to Big Spring bank, testified in support of his constitutional theories. Thankfully, neither Adam nor I ventured any predictions about standing. Instead, we confined our comments to the merits. And I remain just as confident that these challenges will fail on the merits--just as they have already failed in four other federal courts.

Today's D.C. Circuit decision, written by Judge Kavanaugh and joined by Judges Rogers and Pillard, is quite a narrow one. It does not say (or event hint) anything about the merits of any of Big Spring's separation-of-powers arguments. Instead, the court holds the following:

1. The bank has standing to challenge the CFPB's constitutionality because it is regulated by, among other things, the CFPB's Remittance Rule and has "alleged that it must now monitor its remittances" to ensure whether they fall within a safe harbor to the rule. The challenge is also ripe because the bank need not violate the law and wait for an enforcement action--it need not "bet the farm," in other words--to challenge "the legality of the regulating agency itself."

2. The bank likewise has standing to challenge President Obama's recess appointment, for the same reasons. But the D.C. Circuit "leave[s] it to the District Court to consider the significance of Director Cordray's later Senate confirmation and his subsequent ratification of actions he had taken while serving under a recess appointment." In practice, the confirmation and ratification will prove dispositive.

3. The bank lacks standing or ripeness to challenge the Financial Stability Oversight Council (FSOC) because the bank can't rely on the doctrine of competitor standing to argue that the designation of another entity as "too big to fail" somehow harms the bank. The designation by FSOC imposes a greater regulatory burden on designated entities; any harm to Big Spring as a result is attentuated at best.

4. The States lack standing and ripeness to challenge Dodd-Frank's Order Liquidation Authority (OLA) for several independent reasons--mainly because the challenge is based on speculation about the government might wield its authority in potential future proceeding.

The good news here is that the D.C. Circuit has set things up nicely for the bank's inevitable loss on the merits. Right now, political opponents of the CFPB are using constitutional rhetoric as ammunition for their critiques of the agency as some kind of unaccountable rogue regulator. That becomes harder after an unbroken string of losses in the courts.

The Hill: Cruz calls for abolishing the Consumer Financial Protection Bureau

Here.  But what is Trump's position on the CFPB?

Senate hearing on constitutionality of CFPB and Dodd-Frank

This afternoon (at 2pm), I'll be testifying before the Senate Judiciary Committee on the constitutionality of the Consumer Financial Protection Bureau and the Dodd Frank Act. The title for today's hearing gives you a flavor of the sweeping (and fringe) legal theories being advanced by the CFPB's opponents: "The Administrative State v. The Constitution: Dodd-Frank at Five Years."

As I explain in my written testimony, the challengers' theories (which have uniformly failed in court after court) are based on separation-of-powers arguments at odds with eight decades of settled precedent. They aren't so much attacks on the CFPB and Dodd-Frank as attacks on the modern administrative state itself. In that sense, the hearing's title is apt. 

Here's the bottom line: The Bureau's political opponents, lacking the votes to kill the agency through the normal democratic process, are trying to constitutionalize their objections. In so doing, they're asking the courts to roll back the clock to before 1935--the height of judicial hostility to the New Deal.

A parallel dynamic is playing out in the appropriations process as well, where Republicans who don't have the votes to pass regular legislation are attaching a variety of anti-CFPB riders to must-pass funding bills--including a troubling rider that would kill the CFPB's arbitration study through a strategy of paralysis by analysis.

The majority witnesses at today's hearing will be C. Boyden Gray (former White House Counsel to Bush I and lead counsel for the plaintiffs in State National Bank of Big Spring, Texas v. Lew); Mark Calabria (Cato Institute); and Neomi Rao (George Mason Law). I'll be testifying alongside Adam Levitin of Georgetown Law, whose written testimony is here.

You can watch the hearing live here.

Which Companies Are the Most Complained About to the CFPB?

CNBC has the story here.  Three of the top four are the big three credit bureaus. The Consumer Bankers Association is dismissive of the findings. Quoting now from Marketplace:

“They're basically in the shaming of banks business by providing what I call a ‘David Letterman Top 10 List’ of complaints,” says Richard Hunt, president of the Consumer Bankers Association.

Hunt is dissatisfied with the CFPB's methods of substantiating consumers’ beefs. And he says the largest institutions will naturally rack up the most complaints.

“I could’ve saved the CFPB a lot of taxpayer money deducing that,” he says.

Russell Paper on Separating and Pooling in Response to Consumer Financial Mistakes

Jacob Hale Russell of Stanford has written Misbehavioral Law and Economics: Separating and Pooling in Responses to Consumer Financial Mistakes. Here is the abstract:

Consumers’ choices in financial contracts do not always tell us what they really want. Put differently, revealed preferences are sometimes unreliable indicators of actual preferences. For instance, consider two consumers who take out the same high-interest payday loan. One may have accurately assessed that they have an investment, such as funding a car repair or bus ticket that will transport them to work, whose expected return exceeds the cost of the loan; the other may have made a costly miscalculation about their ability to repay, a mistake that will send them into a spiral of increasing fees and debt. The two consumers may be observationally equivalent, and policy responses will have opposing effects on each group.

This paper develops a new taxonomy of responses to potential mistakes. In designing regulations, policymakers face choices along two underappreciated dimensions: (1) between separating approaches that attempt to separate consumers’ choices accurately along their preferences, and pooling approaches that allow or require consumers to be pooled into a single choice even when preferences differ, and (2) between distributing decision-making at the individual consumer level and concentrating decisions through intermediaries or rules. The decision to separate or to pool is a first-order functional choice that logically precedes other formal aspects of policymaking (standards vs. rules, taxes vs. regulations, etc.).

This paper analyzes the inevitable tradeoffs in choosing among the four categories of regulatory responses revealed by this taxonomy. For example, all things equal, separating strategies may be preferable because they give people what they really want. In practice, however, the process of matching will be difficult and/or costly. The tradeoff between distributed and concentrated solutions may have largely to do with whether we think information asymmetries, which often exist in both directions in markets for financial products, are worse for the consumer or for the institutions offering financial products. Systematizing the tradeoffs through this taxonomy is more analytically neutral than the conventional arguments raised by interventionists and non-interventionists, who rely on often unresolvable claims about institutional competence and the level of externalities in a particular market.

Paul Bland Op-Ed on Womack-Graves Arbitration Amendment

Here.  Excerpt:

 

* * * Congressmen Steve Womack (AR-3) and Tom Graves (GA-14) wrote an amendment to an appropriations bill that ignores all the evidence in the [2015 CFPB Arbitration] report. Unsurprisingly, they both have received consistent financial support for years from banking lobbyists. Adopted by voice vote within a matter of minutes, the amendment revoked CFPB’s authority to create regulations for arbitration clauses until an entirely new study is conducted.

CFPB would be barred from restoring American consumers’ essential right to bring their disputes to court until they essentially repeat the study they just did. * * *

Video of CFPB Arbitration Field Hearing Now Available

Here.  (HT: Gregory Gauthier)

House Appropriations Committee Votes to Block Arbitration Reform

by Jeff Sovern

CFPB Monitor is reporting:

[T]he House Appropriations Committee has approved an amendment to the FY 2016 Financial Services Appropriations bill that would impose new requirements on the CFPB before it can issue a rule governing arbitration agreements.  The amendment, which was introduced by Republican Representatives Steve Womack and Tom Graves, reportedly would require the CFPB to produce a peer-reviewed study on arbitration and determine that the benefits of a new rule outweigh the costs before issuing an arbitration regulation.

They attribute the information to a Politico report.  The House Appropriations Committee web site indicates that the amendment was approved on a voice vote and that the Committee has approved the bill, as amended.