Consumer Law & Policy Blog

Bloomberg: Banks’ Billions in Overdraft Fees Seen Dodging Tough U.S. Rules

Here.  (HT: Matt Bruckner). Excerpt:

After studying overdraft fees for more than three years, the Consumer Financial Protection Bureau is leaning against subjecting banks to tough new rules that would cap the size of charges or limit how frequently they can be imposed on consumers, said two people briefed on the agency’s work.

More likely, when the CFPB proposes regulations later this year or in early 2016, it will probably bar lenders from reordering transactions in a way that triggers overdrafts and also require better disclosure of policies that allow consumers to avoid the fees, said the people who asked not to be named because the agency hasn’t finalized its rules.

Times Reports on Attempts to Postpone Mortgage Disclosure Rules

Here.  An excerpt:

The American Bankers Association, however, says its members aren’t ready. And it blames the vendors who supply the software and system upgrades needed for regulatory compliance.

In a survey released earlier this month, 79 percent of responding banks said their vendors either had not verified a delivery date for the software updates or had said the systems wouldn’t arrive before June.

“When the systems are received late, there’s not time for training, installation, debugging,” said Bob Davis, the association’s executive vice president for mortgage markets. “With that occurring, there will be a lot of uncertainty about performance of the systems and staff.”

Scholars show support for Dodd-Frank's too-big-to-fail authority

by Deepak Gupta

One of the most important but under-appreciated features of the Dodd-Frank Act was its establishment of the Financial Stability Oversight Council—a new entity with a clear statutory mandate to identify and respond to systemic risks to the entire U.S. economy. The authority was inspired by the failures of entities like the insurance giant AIG, which had to be rescued by taxpayers to prevent catastrophic effects on the U.S. (and world) economy.

But when FSOC designated MetLife as a systemic risk (in common parlance, "too big to fail"), MetLife fired back with a lawsuit challenging FSOC’s authority, among other things, to designate a nonbank insurance company in this manner. MetLife is represented by Gene Scalia—a Washington lawyer who's made a cottage industry of challenging financial-reform regulation. Earlier this month, FSOC moved to dismiss the case (or in the alternative, for summary judgment). On the eve of the Memorial Day holiday weekend, several groups of distinguished scholars filed amicus briefs in support of FSOC. 

• Our firm serves as counsel to a group of prominent insurance-regulation scholars, led by Daniel Schwarcz of the University of Minnesota Law School, who filed a brief arguing that the patchwork of state-insurance regulations—on which MetLife urges the court to rely—is insufficient to regulate the systemic risk posed by massive financial conglomerates such as MetLife.

• A distinguished group of scholars of financial regulation and administrative law, led by Robert Jackson and Gillian Metzger of Columbia and Kate Andrias and Michael Barr of the University of Michigan, filed a brief arguing that Congress had intended to give FSOC broad powers to regulate nonbank financial firms, subject only to limited judicial review.

• Viral Acharya and a group of other distinguished NYU economists filed a brief arguing that, as a matter of economic reality (drawing on the group's considerable research in this area), insurance companies such as MetLife can pose systemic risk to the entire economy. 

• Finally, Better Markets, a non-profit organization focusing on financial regulation, submitted a brief arguing that Congress gave FSOC wide latitude to designate risky financial firms and that Congress chose not to require a “cost-benefit analysis” before any designation.

The case is now before U.S. District Judge Rosemary Collyer, who's expected to hold argument on the motion to dismiss. But it's unlikely that the district court will have the last word; the case has clearly been set up as a test case of Dodd-Frank's systemic-risk authority over nonbanks. No matter what happens, it's safe to say that the case is headed upstairs.

Lauren Willis Article on the CFPB and Consumer Comprehension

Lauren E. Willis of Loyola Los Angeles has written what looks like another important article,  The Consumer Financial Protection Bureau and the Quest for Consumer Comprehension.  Here is the abstract:

To ensure that consumers “understand [financial products’] costs, benefits, and risks,” the CFPB has been redesigning mandated disclosures, primarily through iterative lab testing. But no matter how well disclosures perform in experiments, firms will run circles around them when studies end and marketing begins. To meet this challenge, the Bureau should require firms to demonstrate that their customers understand the products they buy. Comprehension rules would induce firms to educate consumers and to simplify products, tasks that firms are better equipped than the Bureau to perform. Such performance-based regulation is crucial for adaptive management of the dynamic twenty-first century consumer financial marketplace.

Is Senator Shelby Trying to Sabotage Mortgage Disclosures? Does He Want Another Great Recession?

by Jeff Sovern

Senator Shelby, chair of the Senate Banking Committee, Housing and Urban Affairs Committee, has released a discussion draft of “The Financial Regulatory Improvement Act of 2015.” The draft provides in Section 117, that the CFPB's new mortgage disclosures (sometimes called the "TRID Rule"), promulgated way back in November of 2013 and scheduled to take effect this August, could be ignored by lenders providing the old mortgage disclosures (you know, the ones that consumers couldn't understand) until thirty days after the CFPB Director certifies that the new disclosures "are accurate and in compliance with all State laws."  Some in the industry have complained that 19 months wasn't enough time to comply with the new rules for forms.  The CFPB Monitor Blog explains "Potentially the concept is intended to address a concern raised by the industry that many state laws in some fashion incorporate the existing disclosures under TILA and RESPA, and have not been updated to reflect the Loan Estimate and Closing Disclosure under the TRID rule." So under this bill, if a single state wants to keep the new rules from taking effect in the entire country, all it would have to do  is refuse to amend its laws to comply with the new rule.  Which means that lobbyists just have to block action in one state to shoot down a rule for the entire country.  Oh, and in case anyone forgot, the mortgage disclosures that Senator Shelby would preserve are barely changed from the ones that led to the subprime crisis that led to the Great Recession.  After all, waiting for the states to fix their laws is more important than preventing another Great Recession.

American Banker: Shelby Releases Full Draft of Reg Relief Bill

Here.

Elizabeth Warren Expected to Propose Bill to Give CFPB Power to Regulate Auto Dealer Lending

The Hill has the story here.

Arbitration and Shots, or Why It Often Won't Matter If Arbitration is Cheaper Than Litigation

by Jeff Sovern

I don't know anyone who likes getting a shot.  One of my daughters, as a small girl, would hide under chairs at the pediatrician's office to avoid them, which by the way, was not an effective strategy.  But most of us are willing to get stuck with needles if the payoff is large enough, like avoiding a serious illness.  Even so, millions of Americans apparently do not judge reducing the risk of getting the flu a sufficient tradeoff for getting a flu shot.

Arbitration is similar.  Few consumers wake up in the morning looking forward to arbitration (though I'm not aware of any who hide under chairs to avoid it),  but some will tolerate it in pursuit of a significant payoff.  How big does that payoff have to be?  One lesson from the CFPB Arbitration Report is that the payoff has to exceed $1,000 for just about all consumers, because consumers just don't file arbitration proceedings for less than that. 

One argument frequently made for arbitration is that, as Alan Kaplinsky recently put it in an essay, Even in the CFPB’s Numbers, Arbitration Benefits Consumers,  33 Alternatives to the High Cost of Litigation, No. 4 at  55, 56 (Apr 2015):

Arbitration is a great solution for both consumers and companies because everyone benefits from a process that is faster, cheaper and more efficient and congenial than court litigation.

Assuming for the sake of argument that that is an accurate description of arbitration, it doesn't actually matter unless the payoff from using arbitration is large enough. That's for the same reasons most of us wouldn't get a shot no matter how fast, cheap, or efficient it is, just to avoid a single sneeze. When consumers have small stakes at issue, it is irrelevant whether litigation or arbitration is faster or cheaper, more efficient or congenial, because consumers, by and large won't choose either. Some consumers, though, will bring class actions, and other consumers can benefit from those class actions. That's because the existence of class actions deters corporate misconduct, and because some consumers will obtain compensation by complying with the requirements for doing so, assuming the class action results in a settlement or judgment awarding compensation (often not so many as would obtain compensation in a perfect world, but in a perfect world, we wouldn't need class actions).  The point is, for disputes of less than a thousand dollars or so, talk about whether arbitration is "faster, cheaper and more efficient and congenial" than litigation is a red herring.

American Banker Reports House Voted to Cap CFPB Funding Requests

The headline reads Battle Over CFPB Funding Erupts Anew in House and the story is here.

McClatchey: Obama threatens to veto bill that would cut funding for consumer agency

by Jeff Sovern

Here. Excerpt:

The bill as amended lowers the bureau’s budget cap by $9 million over 10 years. The cap is set at 618.7 million for fiscal year 2015.

Given that the law already caps the bureau’s funding and allows increases it only in line with the government’s employment cost index, the lower cap proposed in the amendment “is solely intended to impede the (bureau’s) ability to carry out its mission of protecting consumers in the financial markets,” said the White House Office of Management and Budget in a statement released Tuesday.

“These reductions to the caps could result in, among other things, undermining critical protections for families from abusive and predatory financial products,” the statement said.

If the bill came to the president’s desk as amended, his senior advisers would recommend he veto it, the statement said.

A spokesman for the GOP-controlled House Committee on Financial Services said in an email that the bill doesn’t cut funding; it just lowers the maximum amount the bureau could request from the Federal Reserve during two of the next 10 years by 0.1 percent.

“If this budget cap were applied to the typical American family with a household income of $50,000 a year rather than Washington bureaucrats, it would be the equivalent of tightening their budget by $7 per year,” wrote the spokesman, Jeff Emerson. “Most every American has done much more than that in the Obama economy. Surely the (consumer bureau) can, too.”

I wonder if Emerson would like to see similar reasoning applied to proposals to cut the defense budget.  Most Americans do without tanks and fighter planes.  Surely the Department of Defense can too.  I look forward to a fuller explanation of why reducing the amount the Bureau can request is not a funding cut but it is nevertheless equivalent to "tightening" household budgets.

 

 

 

 

 

 

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