Consumer Law & Policy Blog

Barney Frank's Autobiography and "Gotcha" Remarks

by Jeff Sovern

I just finished listening to the audio version of Barney Frank's autobiography, Frank: A Life in Politics from the Great Society to Same-Sex Marriage, which Frank reads himself. I listened to it to learn more about consumer law--Frank was so involved in creating the CFPB that the statute doing so carries his name--but the book doesn't actually add much to what I have encountered elsewhere on the subject (though it adds a little, as noted below).  Nevertheless, the book is well worth listening to. Frank is an entertaining and informative writer and I loved his volume.  Regular readers of the blog will probably care about many of the issues Frank discusses and will likely enjoy learning more about Frank's insights into Congress and the electoral process. 

Despite what I just wrote, the book has a few interesting items on consumer protection issues.  Critics of the Dodd-Frank Act and other consumer protection laws often charge that government regulation led to the Great Recession in that lenders were forced to make unwise loans by laws supported by Democrats (see below).  This, of course, is hard to reconcile with the fact that at the time the Great Recession hit, we had had a Republican president for nearly eight years, and Congress had been in Republican control for much of that time. Yet somehow, the minority party ruled banking.  In fact, as Frank points out, Republicans opposed efforts to restrain subprime lending.  Here are a couple of memorable quotes Frank includes in an appendix:

In 2007, Jeb Hensarling, now chair of the House Committee on Financial Services, said the following during a Committee hearing to consider a bill to limit subprime lending:

We still have to remember that millions of people have homeownership opportunities due to a subprime market. I am very leery of any legislation that could under cut that market.

And from the Wall Street Journal, a November 6, 2007 editorial about the same bill, titled A Sarbox for Housing: 

Throughout the 1980s and '90s, Congress prodded, even strong-armed, banks into making more mortgage loans to low-income and minority families. Washington enacted anti-discrimination and community lending laws with penalties against lenders for failing to issue riskier mortgages to homebuyers living in poor neighborhoods or with low downpayments and subpar credit ratings. And so it was that the modern subprime mortgage market was born.

* * *

But for all the demonizing [of subprime lenders], about 80% of even subprime loans are being repaid on time and another 10% are only 30 days behind. Most of these new homeowners are low-income families, often minorities, who would otherwise not have qualified for a mortgage. In the name of consumer protection, Mr. Frank's legislation will ensure that far fewer of these loans are issued in the future.

In other words, even though bad government regulation created the subprime market, that market is so wonderful that we shouldn't regulate it. Of course, we all know what happened because that market was insufficiently regulated.  Oh, and just to make clear, I don't agree that bad regulation created the subprime market. 

 

Johnston Paper Questions Whether Product Bans Help Consumers

Jason Scott Johnston of Virginia has written Do Product Bans Help Consumers? Questioning the Economic Foundations of Dodd-Frank Mortgage Regulation. Here is the abstract:

The system of residential mortgage contact regulation enacted by the 2010 Dodd Frank Wall Street Reform and Consumer Protection Act of 2010 has been justified as necessary to prevent lenders from exploiting consumer misperception and impatience through the sale of complex mortgage contracts with back-loaded or postponed charges, fees and penalties. Among other things, Dodd Frank creates a regulatory regime under which complex mortgages are penalized, amounting to de facto regulatory restrictions on such contracts. While behavioral law and economics scholars and regulatory practitioners have criticized complex mortgages as exploiting consumer misperception and impatience, such scholars and practitioners have neither advocated nor rigorously analyzed the costs of Dodd Frank style contract restrictions. Drawing on a large body of both theoretical and empirical work in neoclassical (rather than behavioral) financial economics, this article argues that while some consumers undoubtedly did fail to understand such complex mortgages, the terms of those mortgages had a solid economic rationale and made welfare-increasing mortgage credit available to consumers when it otherwise would not have been available.  By severely discouraging complex mortgages from being written, Dodd Frank and regulations promulgated thereunder by the Consumer Financial Protection Bureau have priced out of the mortgage market entire groups of potential homeowners – including younger people, minorities and the self-employed.  Welfare losses to such people from restricting contractual freedom are very real, and must be balanced against the benefits to those consumers who are arguably protected against ex ante undesirable mortgage contracts and to others in society arguably harmed when mortgages default.  A policy of minimizing such harms by speeding and lowering the cost of recovery from mortgage contract failure is argued to be superior to policies, such as Dodd Frank’s mortgage contract restrictions, designed to prevent such failures by mandating or manipulating private contractual choice.

Will the Industry Attack the Constitutionality of the CFPB's Power to Regulate Arbitration Clauses?

by Jeff Sovern

Marc James Ayers of Bradley Arant Boult Cummings LLP has posted an item, Can the CFPB really prohibit pre-dispute arbitration agreements?  in which he wrote:

[S]hould the CFPB independently decide to adopt regulations limiting or prohibiting the use of pre-dispute arbitration agreements relating to consumer finance, that regulation could be seen as an amendment or partial repeal of the FAA. Those defending such a regulation would argue that by enacting Section 1028 [the statute authorizing the CFPB to regulate or ban arbitration clauses in consumer financial contracts], Congress delegated the power to amend or repeal the [Federal Arbitration Act] in this way.

However, a serious challenge could be raised to such a regulation: While Congress can delegate authority to an administrative agency to adopt rules fleshing out the details of some existing statute (in a manner consistent with that statute), Congress does not have the constitutional authority to empower an agency to repeal existing law at that agency’s discretion. A challenger could argue that authority to repeal existing law is constitutionally vested solely in Congress and cannot be delegated in this manner. The answer to this question may determine whether those in the financial services industry may continue to utilize arbitration provisions in their consumer products.

I'm not a constitutional law person and so have only a limited ability to evaluate this argument.  Ayers didn't cite any authority, leaving unclear the extent to which courts have adopted this limit to Congress's power.  But I have a few quick thoughts: first, the CFPB would not be repealing the FAA if it banned arbitration clauses. The FAA would remain in effect as to commercial contracts and consumer contracts, like cell phones, that did not involve consumer financial contracts. Second, if the CFPB were to ban arbitration waivers, while otherwise allowing companies to use arbitration clauses in consumer contracts, it would be much harder to sustain the argument that the Bureau has repealed arbitration clauses.  It could be argued that the Bureau would simply be interpreting the FAA as not applying to class action waivers (I recognize that Justice Scalia took a different view in Concepcion).  Finally, instead of inserting the provision giving the CFPB the power to regulate arbitration clauses in the US Code where it did, suppose Congress had amended the FAA to provide that the CFPB has the power to exclude certain contracts from the FAA or alternatively regulate what those contracts may say. Doesn't Congress have the power to do that?  Wouldn't that be what Ayers approvingly calls giving "authority to an administrative agency to adopt rules fleshing out the details of some existing statute"?   And how is that different from what Congress did?

Jeff Gelles Column: Lawsuits were stymied, but CFPB finally puts halt to rent-a-D.A. scheme

Here. Excerpt:

The ominous letter from the prosecutor's office was addressed to her grandfather, Albert Lachowicz, but it came to Jennifer Paczan because she was handling his finances.* * *

The letter was signed by Beaver County District Attorney Anthony J. Berosh, and was on the D.A.'s letterhead. It said Berosh's office had received reports alleging that Lachowicz had engaged in "criminal activity" by "issuing a fraudulent check."

Paczan, then a student at the University of Pittsburgh, knew that hadn't happened.* * *

So why was she getting a threat from the D.A. - followed several weeks later by another letter from Berosh topped even more ominously, "Warning of Criminal Charges"?

It turned out she wasn't. Instead, both came from a California company, National Corrective Group, that was behind an elaborate scheme to profit from simple mistakes made by people like Paczan.

* * *

The worst part of this story? That the scheme worked only thanks to the complicity of hundreds of local prosecutors around the country, who were invited to join in profiting from the deceptions. You might even call it "rent a D.A."

Replying to Alan Kaplinsky

by Jeff Sovern

Last Friday, I posted a comment on Alan Kaplinsky’s remarks, quoted in the Bloomberg Business story, Bank Customers May Get Their Day in Court, about the CFPB arbitration report.  Alan replied in a post captioned “Sovern v. Kaplinsky.” Here I offer a rebuttal.

In my original post, I expressed the view that consumers mostly don’t do anything when they have a problem with a company.  Alan noted in response that the Consumer Financial Protection Bureau reports having received more than 558,800 consumer complaints.  But that statistic, by itself, says little about the likelihood that consumers will complain when they have an issue because it talks about the absolute number of complaints rather than what percentage of consumers with problems complain.  To see what I mean, let’s focus just on credit cards.  The CFPB reports that 12% of the complaints are about credit cards, meaning that roughly 67,056 of the complaints involve credit cards.  As we reported in our arbitration study, “[e]stimates of the number of Americans with credit cards in recent years vary from 156 million to 226 million.” If we use the smaller figure and assume that only 156 million Americans have credit cards (and if I’ve done the math right and haven’t dropped a decimal point), that means that out of every million Americans with a credit card, about four have complained to the CFPB.  Suddenly, the number of complaints doesn’t seem so large. And even that probably overstates the percentage of complaining consumers, first, because it uses a low estimate of the number of credit card holders, and second, it also assumes that no consumer filed more than one complaint.  It seems likely that some consumers file multiple complaints, if only because the same issue may trigger complaints against a lender, credit bureaus , debt collectors, and so on. But even the four out of a million number doesn’t tell us much because we don’t know how many consumers have a problem with their credit card issuers. Maybe every unhappy consumer complains or maybe only a fraction of dissatisfied consumers complains. Without knowing how many consumers have an issue, we can’t determine the percentage who complain, but the research I’ve seen says it’s tiny. In that regard, here’s an excerpt from Director Cordray’s speech about the arbitration report:

In [a] survey, we asked consumers what they would do if they were charged a fee by their credit card issuer that they knew to be wrong and they had already exhausted all possible efforts to obtain relief from the company.  Only two percent of consumers said they would consider bringing formal legal proceedings or would consult a lawyer.  That is almost the same percentage of consumers who said they would simply accept responsibility for the fee.  Most people, in fact, say they would simply cancel their card.  The research thus indicates that consumers are very unlikely, acting alone, to even consider bringing formal claims against their card issuers – either through arbitration or through the courts.

In other words, consumers mostly don’t do anything—other than cutting off ties with the offending company--when they have a problem with a company.

I also took issue with Alan’s original statement that you don’t see a lot of arbitrations because consumers use other means to assert their grievances. I wrote “Does the benefit of arbitration derive from the fact that it drives consumers to use something else to resolve disputes?”  Alan responded to my critique by saying—correctly, I believe—that consumers  may prefer informal means of resolving disputes to arbitration or litigation because those means may be “faster, cheaper and more efficient for consumers than either arbitration or litigation.” I was less clear than I should have been and I appreciate that Alan's comment made that apparent.  What I should have said is that those informal means of dispute resolution are available for litigation just as they are with arbitration.  Consequently, we would expect that the availability of informal means would have the same effect on the amount of litigation as it has on the amount of arbitration.    But the CFPB found that individual consumers were more likely to file cases in court than bring arbitrations, suggesting that something other than the availability of informal dispute mechanisms is suppressing the number of arbitrations. Put another way, if Alan’s statement means that consumers subject to arbitration clauses use informal means to resolve disputes more than is true of litigation, that would suggest arbitration drives consumers to use informal means more than litigation does.

My favorite part of Alan’s post is that one “reason[] why “consumers don’t file arbitration claims” (Professor  Sovern’s words) are that . . . Professor Sovern and consumer advocates have railed against arbitration for almost two decades, thereby fostering a negative public perception of arbitration . . . .” Alan is very kind to say that consumers are listening to me--though he is also wrong on this score, of course. And I should add that while I often disagree with Alan, I think his blog is terrific. His clients are lucky to have him. 

Watch the CFPB's Payday Lending Hearing

The CFPB's field hearing on payday lending is underway, and is being livestreamed at the Bureau's website. Watch it here.

Where Are the Loan Sharks?

by Jeff Sovern

Not that I need one, but my question is prompted by my expectation that during the Consumer Financial Protection Bureaus's field hearing today on payday lending, the Bureau will propose new restrictions on payday lending.  Critics may claim that the restrictions will drive consumers to loan sharks.  For a past example of such views, see Todd Zywicki's Wall Street Journal op-ed, Dodd-Frank and the Return of the Loan Shark,  But here's the thing: some states, like New York, already effectively block payday lending. If restrictions on payday lending led to loan sharking, we would expect to see loan sharks operating in New York.  So where are they? 

Another GOP Attack on CFPB

by Jeff Sovern

According to ThinkAdvisor, Georgia Senator David Perdue has introduced an amendment that would subject the CFPB to the congressional appropriations process.  Calling the Bureau "reckless," Perdue added "the CFPB is a rogue agency that dishes out malicious financial policy and creates new rules and regulations without any oversight from Congress. As seems to be the usual Republican practice in these matters, Perdue did not give any examples of reckless, rogue, or malicious conduct. As we have blogged about before, efforts to subject the Bureau to the congressional appropriations process are really attempts to give the industry a veto over the Bureau's activities, so that the regulated control their regulator. If Senator Perdue is genuinely concerned about rogue financial industry regulators, maybe he should look into whether the determinations by the Office of Thrift Supervision (which has since been folded into the Office of the Comptroller of the Currency) and the National Credit Union Administration that his state's statute prohibiting predatory lending practices was preempted contributed to the disastrous lending that led to the Great Recession.

More on How Consumers Fare Under Class Actions

The CFPB arbitration report found that class actions can return significant sums to consumers. Adding to the literature on that topic, Brian T. Fitzpatrick of Vanderbilt and Robert C. Gilbert have written An Empirical Look at Compensation in Consumer Class Actions.  Here is the abstract:

Consumer class actions are under broad attack for providing little in compensation to class members.  One response to this charge is the argument that one of us has made elsewhere: consumer class actions should not be measured by their compensatory value but by their deterrence value.  But here we take up this critique of consumer class actions on its own terms: can they serve a meaningful compensatory role?  Scholars have taken up this question before, but they have been stymied by the lack of available data.  In this article, we present original data on the distribution of class action settlements in fifteen related small-stakes consumer class action lawsuits against some of the largest banks in the United States.  We obviously can make no claim that these settlements are representative of most consumer class actions.  Nonetheless, we believe our findings support the notion that, under certain circumstances, consumer class actions can indeed serve a meaningful compensatory role: when they eschew claim forms in favor of automatic distributions and when they rely on direct deposits or standard-sized checks rather than the cheaper, postcard-sized variety to make those distributions.

 

Why Do Republicans Say a Commission Would Be More Accountable Than a Director?

by Jeff Sovern

Here we go again.

The Republicans have repeatedly tried to convert the Consumer Financial Protection Bureau to a commission structure. The latest effort, H.R. 1266, is sponsored by Representative Randy Neugebauer of Texas.  The bill would replace the CFPB's director with a five-member commission, of whom no more than three could be members of the same party.  The commissioners would serve staggered terms.

Representative Neugebauer justifies his bill in these words:

Over the last several years, the Bureau’s actions and record have proven it can’t function in a sustainable manner. Perhaps, more than any other Washington agency, the CFPB has demonstrated a lack of transparency and a lack of accountability. It has proven it is susceptible to political influence – bringing into question its independence.

“This is all the more troubling because the Bureau has an important mission: to protect consumers. I support consumer protection but we must ensure product choice, credit availability and cost of credit are considered before rushing to regulate. To better serve the American people, the Bureau must adopt a more balanced and consultative process to its rulemaking.

Where to begin?  First of all, it would have been nice if the representative had explained why he believes the Bureau is not functioning in a sustainable manner.  The Bureau has returned huge sums to consumers and has adopted numerous rules that protect consumers. Why isn't that sustainable? 

Second, what evidence supports the claim that the Bureau is not transparent and accountable? To mention only one thing, the Bureau holds frequent field hearings--one less than two weeks ago and another scheduled for this week--to keep the country very much informed about its activities.  Director Cordray frequently testifies before Congress about the Bureau's functioning. And what does the Representative mean by political influence?  By the way, according to the Center for Responsive Politics, Representative Neugebauer's biggest contributor is the Bank of New York.  Banks and a banking organization make up three of his five biggest contributors. Is that what he means by accountability?

Third, how does a commission structure improve accountability?  Why would five people running the show instead of one make the Bureau more accountable?  It seems to me that it would actually make the Commission less accountable.  Right now, the buck stops with Director Cordray. He can't duck responsibility. But if the Bureau had five commissioners, wouldn't each one be able to shift responsibility to the other commissioners?  A commission would diffuse responsibility, rather than enhancing accountability. I can see why banks might want a commission structure. Commissions act more slowly. When they lack their full number of commissioners, they may be paralyzed by tie votes, as has happened with some commissions recently.  That is good for those who oppose consumer protection. Not, of course, that Representative Neugebauer opposes consumer protection. Oh no. After all, he said he supports it. That must be why the banks are among his leading contributors.