Consumer Law & Policy Blog

American Banker: Cordray Loses Cool After House GOP Attacks

by Jeff Sovern

Here (behind a paywall). Cordray was testifying before the House Financial Services Committee and, according to the article, was subject to some attacks that seem absurd, at least to me. Excerpt:

[Rep. Stevan Pearce, R-N.M] suggested that data collection undertaken by the CFPB could be passed onto political campaigns.

"But I will say that the collection of data like you’re collecting has tremendous value in political campaigns and I worry that there might just be someone down the system who might release that information,² Pearce said.

I have not yet listened to this hearing, but the issue of the Bureau's data collection has routinely come up in other hearings, and Cordray has stated more than once that much of the data the Bureau receives about consumer borrowing comes without information identifying the particular consumer.  It's hard to see how information that doesn't identify specific people would be of value in a political campaign.  When consumers complain directly to the Bureau, the Bureau would know who they are--except that's information that consumers decide to provide the Bureau.  Meanwhile, businesses collect plenty of information about consumers they can identify.  I wish Representative Pearce cared more about the information businesses collect, which the businesses can use for their own purposes (and who knows if they sell it to political campaigns?  Is that where Pearce got the idea?), as opposed to the information collected by the Bureau, which is supposed to be used only for the benefit of consumers.

Representative Pearce is also quoted in the article as saying that Cordray is waging war on the poor. Would those be the poor people for whom the Bureaus has secured refunds? Incidentally, according to the Center for Responsive Politics, commercial banks have given more to Pearce's current reelection campaign than all but three other industries and his fourth largest contributor is a bank.

 

Mother Jones: The Obama Administration Wants to End Racial Discrimination by Car Dealers. Why Are 35 Dems Getting in the Way?

Here.  An excerpt:

In late March, the Consumer Financial Protection Bureau—the consumer watchdog agency dreamt up by Sen. Elizabeth Warren (D-Mass.)—issued new, voluntary guidelines aimed at ensuring car dealerships are not illegally ripping off minorities. Since then, 13 Senate Democrats, including Sens. Heidi Heitkamp (D-N.D.) and Mary Landrieu (D-La.); and 22 House Dems, including Reps. Debbie Wasserman-Schultz (D-Florida) and Terri Sewell (D-Ala.), have joined 19 House and Senate Republicans in signing letters to the agency objecting to the anti-discrimination measure. Consumer advocates and congressional aides say the lawmakers' backlash against the anti-discrimination rules is unjustified, and that Dems have backtracked on civil rights in this instance because of the colossal power of the car dealership lobby, which has spent millions lobbying Congress in the months since the CFPB issued these new guidelines.

Did the CFPB Discover a Natural Experiment on the Impact of Arbitration Clauses on the Willingness of Consumers to Bring Claims?

by Jeff Sovern

I'm finally getting around to reading the CFPB's December 12 report, Arbitration Study: Preliminary Results, about which Brian blogged here. Though the Bureau does not make much of it, perhaps because the natural experiment has some flaws (as natural experiments often do), the CFPB Study sheds some light on the impact of arbitration clauses on the willingness of consumers to file claims.  At page 70, the Study states "consumers filed more than four times as many federal court credit card disputes as AAA credit card arbitrations" from 2010 to 2012.  Combine that with two other items noted in the Study. At page 12, the Study reports that "just over 50% of credit card loans outstanding are subject to" arbitration clauses.  The other item is how frequently AAA is identified in credit card contracts as the arbitration provider.  At page 34, the Study explains:

Nearly half (48.5%) of credit card arbitration clauses in the sample listed AAA as the sole option.  Three listed JAMS and three listed NAF as sole options. * * *Counting clauses in which AAA is at least an option yields * * *  83.3% for credit card arbitration clauses . . . .

What does all this mean? To some extent, it allows us to compare the incidence of consumers bringing claims under contracts containing arbitration clauses and under contracts not containing such clauses. If arbitration clauses had no impact on the willingness of consumers to file claims, we would expect to see slightly more consumers filing arbitration claims than consumers filing claims in court, to reflect the fact that slightly more credit card loans are subject to arbitration clauses than aren't.   But we don't: in fact, we see four times as many claims filed in federal court as in AAA arbitrations.  That seems like a huge difference and suggests that arbitration clauses substantially reduce the willingness of consumers to file credit card cases.

But now we get to the flaws. First, we don't know that the people with credit card loans subject to arbitration clauses are similar to those whose credit cards are not subject to arbitration clauses.  For example, if different types of consumers were drawn to different credit card issuers, that could conceivably account for the differences.  Second, not all the arbitration clauses designated the AAA as the provider. While nearly half the credit card contracts with arbitration clauses list AAA as the sole arbitration provider, that still leaves about a third who could choose a different provider and nearly a fifth who, if they opt for arbitration, must go with a different provider.  But that doesn't fully explain the differences  Even if we assume that everyone who has a choice about going to AAA selects an alternative provider, we end up with about half the consumers subject to arbitration clauses filing claims with the AAA (assuming also that the number of consumers filing claims is evenly distributed among those with arbitration clauses)--which explains only half the difference the Bureau found between AAA filings and federal court filings.   And how likely is it that consumers with a choice would consistently reject the AAA?  Finally--and this suggests that the CFPB comparison understates the scope of the effect--the CFPB compared only federal court filings with arbitration filings, and obviously cases are also filed in state courts. Indeed, many arbitration clauses do not bar consumers from filing claims in state small claims courts. 

So it's not a perfect comparison by any means, but it sure suggests that arbitration clauses result in fewer filings than contracts lacking such clauses.  That's not a surprise (after all, many in the industry, which benefits from fewer filings, support arbitration clauses, and consumer advocates oppose them), but still it's interesting to have some support for something that many have long suspected.

The CFPB's Past, Present, and Near Future

WaPo has the article about the past and present, A watchdog grows up: The inside story of the Consumer Financial Protection Bureau, while the Times covers the future in Federal Consumer Agency Ponders Its Next Crusades.  Both are worth a read.  (HT: Ed Mierzwinski)

CFPB Finds Amex Engaged in Illegal Credit Card Practices, Orders $59.5 Million Refund

The CFPB statement is here; Times coverage here. From the Bureau's statement:

Some consumers were led to believe that if they bought the Account Protector product, their minimum monthly payment would be cancelled if they experienced a qualifying life event. In reality, the benefit payment would be limited to 2.5 percent of the consumer’s outstanding balance, up to $500. In many cases, that amount was less than the minimum payment due.

* * *

 Consumers were charged fees as soon as they enrolled in identity protection add-on products, even when American Express or its vendors had not yet obtained the authorization necessary to begin monitoring the consumers’ credit information. American Express did not inform consumers that they needed to complete a second step in the enrollment process to obtain all of the advertised benefits. Approximately 85 percent of consumers who enrolled in the identity protection products paid the full product fee without receiving all of the advertised benefits. In some cases, consumers paid for these services for several years without receiving all of the promised benefits.

* * * The unfair monthly fees that customers were charged sometimes resulted in customers exceeding their credit card account limits. This then led to additional fees for the customers. Some consumers also paid interest charges on the fees for services that were never received.

Clarke & Zywicki Paper on Payday Lending and Bank Overdraft Protection

Robert L. Clarke of Bracewell & Giuliani LLP and Todd J. Zywicki of George Mason University (Zywicki notes in an "about the authors" that he is a former director of the FTC's Office of Policy Planning but omits his links to the industry) have written Payday Lending, Bank Overdraft Protection, and Fair Competition at the Consumer Financial Protection Bureau forthcoming in the Review of Banking and Financial Law.  Here is the abstract:

The Consumer Financial Protection Bureau (CFPB) is considering new regulation of payday lending and bank overdraft protection. The Dodd-Frank Act, which established the CFPB, recognizes that consumers benefit from competition among providers of consumer credit products. That law requires the CFPB to preserve fair competition by providing consistent regulatory treatment of similar products offered by both bank and nonbank lenders. We illustrate how this mandate for fair competition applies to the regulation of payday lending and bank overdraft protection, products that are offered by different entities but attract an overlapping customer base, compete with each other directly, and raise similar consumer protection concerns. Unequal regulation would provide a competitive advantage for one product over another, resulting in reduced choice and higher prices for consumers, without a corresponding increase in consumer protection. Therefore, as the CFPB considers new regulation of these products, it should be careful to regulate them similarly to preserve fair competition.

Times Evaluations of the TILA/RESPA Disclosure Rules and the QRM-QM Proposal

The Times today published an editorial,What You Don’t Know About Mortgages, about the CFPB's new mortgage TILA/RESPA disclosures.  Though the editorial praised some aspects of the disclosure rules, it also called them disappointing, stating

[T]he forms fall short in the crucial task of helping consumers assess and compare the total cost of various loans. Without that information, it is difficult for borrowers to know whether they are getting the best deal.       

What’s needed, as the National Consumer Law Center has pointed out, is prominent display of the loan’s full annual percentage rate, a single measure of the cost of credit that incorporates the interest rate, closing costs and other fees. On the new forms, that number is not reported until Page 3. Worse, it is calculated in a way that understates the loan’s cost, because it omits the cost of title insurance and some other closing charges.

Yesterday, Floyd Norris had a column, Mortgages Without Risk, at Least for the Banks, on qualified residential mortgages, qualified mortgages, and other mortgages, how the rules governing them were intended to avoid a repeat of the subprime meltdown, and the take of Barney Frank and others on the pending proposal. Unless you already are well acquainted with the issues, the column is definitely worth reading.

CFPB Files Brief Opposing Tribal Lenders' Quasi-Preemption Argument

Last week, the CFPB filed an amicus brief in the Second Circuit in Otoe-Missouria Tribe of Indians et al. v. New York Department of Financial Services, a case in which online tribal payday lenders are challenging regulation by New York State. The CFPB's brief takes issue with the lenders' argument that Title X of the Dodd-Frank Act and Congress's creation of the Bureau indicates a federal interest in protecting tribal lenders from otherwise applicable state regulation. To the contrary, the brief explains, Section 1041 of the Act makes clear that Title X does not displace state law except to the extent that it is inconsistent with Title X and the Act defines “State” to include “federally recognized Indian tribe[s]." So if the court applies a balancing test, no federal interest favors the tribe's position.

After Mount Holly: What's Next?

by Deepak Gupta

Jeff and Brian have already posted on the news of a final settlement in Mount Holly. Although we've known all along that a settlement was likely, this is still big news.

Let's put this in perspective: For the second time in just two years, an eleventh-hour settlement before oral argument has denied the conservatives on the Supreme Court the opportunity to do away with disparate-impact claims under the Fair Housing Act (and by extension, the Equal Credit Opportunity Act). The settlement in the previous case, Magner v. Gallagher, provoked heated controversy on Capitol Hill, with allegations by Republicans that the Justice Department's Civil Rights Division exerted undue pressure on the municipal defendant. This settlement may be viewed in a similar light in some quarters.

As I remarked to Bloomberg last week, when news of the deal first came to light, the Mount Holly settlement amounts to a temporary stay of execution for a critically important civil-rights enforcement tool. 11 of the 11 circuits that have considered the question have concluded that disparate-impact claims are indeed cognizable under the FHA. In light of that unanimity, and the federal government's longstanding position, the Court's decision to grant certiorari on the question twice in two years cannot bode well for disparate impact. That's why civil rights and consumer advocates were so eager for a settlement.

So what happens now?  First, I think we can expect a replacement vehicle to land on the doorstep of One First Street within short order. The D.C. Circuit -- the only regional circuit that has not yet weighed in on whether disparate impact is cognizable under the FHA, and a court with influential conservatives -- is the logical place to bring that challenge. That's presumably why two insurance trade groups, represented by veteran Supreme Court advocate Kannon Shanmugam of Williams & Connolly, have already filed a lawsuit in federal district court in Washington, directly challenging the HUD rule. (Kannon also wrote an amicus brief for insurance groups in Mount Holly, so you can get a preview of how he'll brief the case here.)

As I noted in a previous post, the insurance groups claim not only that the rule is contrary to the FHA but also that it is reverse-preempted under the McCarran-Ferguson Act because (as applied to insurance companies) it impermissibly regulates the "business of insurance," a province of state regulation. If the court adopts the far narrower McCarran-Ferguson reverse-preemption theory, the case could cease to be a vehicle for a broader challenge to disparate impact. But I doubt that the financial services industry will allow that to happen. I've already heard talk that groups representing the mortgage industry and others affected by disparate impact liability are considering intervening in the case to prevent that soft landing. Either way, a replacement vehicle will be available soon enough. And a case brought by industry and designed as a test case won't be removed from the docket with a settlement.

What about the practical implications going forward?  That will be the subject of a webinar next Wednesday, November 20 that I'll be jointly presenting with the industry-side law firm Ballard Spahr. Among other things, we'll discuss the use of disparate-impact evidence by regulators to support "pattern and practice" intentional discrimination claims -- a trend that can be expected to accelerate as agencies brace for the impact of a Supreme Court decision.

Debate with Senator Vitter on the CFPB & Consumer Law in New Orleans

by Deepak Gupta

If you'll be in New Orleans tomorrow (Friday, Nov. 15),  I hope you'll drop by the Hyatt French Quarter for the Louisiana Bar's consumer law seminar. Among other things, Professor Dalie Jimenez of the University of Connecticut (a former CFPB colleague) will discuss her research on debt buyers.

At 4pm, you can watch me debate U.S. Senator David Vitter on a range of hot topics surrounding the creation and role of the CFPB. Our debate will be moderated by Judge Douglas Dodd of the U.S. Bankrtupcy Court. It should be fun. Details here.