Consumer Law & Policy Blog

Reports on FTC-CFPB Debt Collection Roundtable

On Thursday, the FTC and CFPB held a joint roundtable titled Life of a Debt: Data Integrity in Debt Collection.  Journalist Fred Williams has a report at the Taking Charge blog. An except:

At Thursday's  meeting, [debt buyer and industry association president Richard] Munroe and other debt buyers didn't repeat the argument the collection  industry has advanced in the past: That regulation will block collection of  legitimate debt and injure the credit system. Instead, industry representatives  pleaded that the new rules, whatever shape they eventually take, be consistent  and nationwide.

And Trevor Salter at Ballard Spahr's CFPB Monitor also had posts here and here.

USA Today: Consumer protection bureau is under attack, but working

Here.

Rollcall: Portman Seeks Path to Break Impasse on Cordray Nomination

Here.  One possible compromise: create an inspector general for the CFPB. 

In Lawsuit Filed Today, CFPB Rolls Out Its "Abusive" Practices Authority For the First Time

Big news: The CFPB today filed the first lawsuit that invokes the agency's authority under the Dodd-Frank Act to police practices that are not just unfair or deceptive, but "abusive."  Observers of the agency have been eagerly anticipating the first use of that authority, which is new to the world of consumer law.

The Bureau's Action

The action targets a Florida debt-relief company alleged to have misled consumers across the country and charged illegal fees for their services.  A Bureau investigation found that American Debt Settlement Solutions, Inc. (ADSS) and its owner Michael DiPanni routinely charged consumers illegal upfront fees for debt-relief services that rarely, if ever, materialized. In total, the CFPB believes that in the course of their illegal conduct, the defendants charged approximately $500,000 in fees to hundreds of consumers in multiple states. 

The Bureau alleges that ADSS and DiPanni violated the Federal Trade Commission’s Telemarketing Sales Rule (TSR) and the Dodd-Frank Act by charging the illegal up-front fees and making misrepresentations to consumers about their debt-relief services. ADSS deceived consumers by making numerous misrepresentations to lure in consumers who were deeply in debt and in dire circumstances. The upfront fees and the company’s failure to provide the promised services often caused consumers to fall further into debt.

In addition, the Bureau believes that the defendants engaged in abusive acts or practices by signing up and charging fees to vulnerable consumers who the defendants knew had inadequate incomes to complete the debt-relief programs in which they were enrolled. More specifically, ADSS is alleged to have:

• Misled consumers by falsely promising them it would begin to settle their debts within three to six months when, in reality, services rarely materialized;
• Enrolled consumers despite knowing that their income level made it highly unlikely that they could complete the debt-relief programs;
• Collected upfront “enrollment” fees from consumers who ADSS knew could not afford the monthly payments required by these debt-relief programs, causing the consumers to spend their last savings on fees for services from which they ultimately would not benefit; and
• Failed to settle these consumers’ debts within the promised time, forcing many consumers to drop out of the program and forfeit their “enrollment” fees without having received any debt-relief services.

What is "Abusive"?

In the complaint, the CFPB puts some flesh on the bone of its "abusiveness" authority: “Despite receiving financial information showing that some consumers could not afford the monthly payments under the debt-relief program in which they were enrolled, [American Debt] nonetheless collects ‘enrollment’ fees from these consumers,” the complaint states. “This practice takes unreasonable advantage of consumers’ lack of understanding of how long it will take [American Debt] to settle their debts and therefore how much money they will spend before realizing any benefits from enrolling in [American Debt’s] debt-relief program.”

According to the statute, Section 1036(a)(1)(B) of the Consumer Financial Protection Act, an act or practice is abusive if it “takes unreasonable advantage of . . . a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service.”  The CFPB also said the actions were abusive because consumers reasonably relied on the company to “act in their interest by enrolling them in a debt-relief program that they can be reasonably expected to complete, and which will therefore result in the negotiation, settlement, reduction, or alteration of the terms of their debts.”

The Constitutional Cloud Over the CFPB

Carter Dougherty of Bloomberg has a must-read story on the practical effects of the constitutional controversy over Rich Cordray's appointment. The D.C. Circuit's ruling in Noel Canning, he reports, "has hampered the U.S. Consumer Financial Protection Bureau, slowing some enforcement, impeding recruitment of a second-in-command, and delaying joint ventures with the states."

Among other things, the Bloomberg story breaks the news that a Native American tribe operating an online lending business -- the Chippewa-Cree Tribe of Montana -- has resisted a civil investigative demand from the Bureau based in part on a challenge to the recess appointment:

The Chippewa-Cree challenged the request in part on grounds Cordray’s appointment was illegal. Cordray hasn’t acted on the petition, which could require him to address the constitutional question, the people said. By contrast, when three other companies filed similar petitions, Cordray published responses within 90 days, records show.

At the Volokh Conspiracy, CFPB opponent Todd Zywicki suggests that challenges of this sort by private parties, together with Jeb Hensarling's grandstanding in Congress, could be enough set up an argument against use of the de facto officer doctrine to defend the Bureau's past actions. I'm not so sure about that, and will have more to say about that argument soon.

Daniel Schwarcz Paper on Post-Sale Monitoring of Financial Products

Daniel Schwarcz of Minnesota has written Monitoring, Reporting, and Recalling Defective Financial Products, University of Chicago Legal Forum (2013).  Here is the abstract:

In recent years, innovations in consumer financial protection have drawn heavily from the law governing the safety of tangible products.   This short essay, prepared for a symposium entitled "Frontiers of Consumer Protection," extends this approach by evaluating whether the law governing post-sale product safety for tangible consumer products offers potential lessons for consumer financial protection. In particular, it considers the extent to which the law could require providers of consumer financial products to affirmatively monitor, report or correct regulatory problems with their products that come to light after sale.  Such post-sale self-policing by financial firms could offer benefits similar to those that justify standard product recall law: the sellers of financial products may be best situated to identify unintended negative consequences of their products that come to light after sale and to minimize the resulting costs through proactive market interventions.  The essay illustrates this approach by reconsidering the Consumer Financial Protection Bureau’s rules implementing the Dodd-Frank Act’s “ability to repay” requirement for mortgages.  It also suggests that the analytical frame embedded in post-sale safety requirements offers potential lessons for a number of other consumer financial protection issues, such as disclosure requirements and prohibitions on impermissible discrimination.

Politico: What if Senate continues to block Richard Cordray at CFPB?

Here.  An excerpt:

As a recess appointee, Cordray can stay in the job only through the end of this  year. But even that timetable will likely not be of much significance. After  Cordray departs, the agency will be run by the next in line and there is little  reason to think the bureau’s agenda would change at that point.

* * *

“We are still going to have a CFPB,” said John Socknat, a partner with the law  firm Ballard Spahr. “It’s going to continue to have very broad powers, and there  are going to be regulations that [financial institutions] are going to have to  deal with. The validity of Cordray’s appointment is not going to undo all of the  regulations that have been issued.”

Third Circuit Invalidates Recess Appointments

by Deepak Gupta

A divided panel of the Third Circuit today joined the D.C. Circuit in holding that President Obama's recess appointments to the NLRB are unconstitutional.  The case is NLRB v. New Visa Nursing and Rehabilitation.  From the majority opinion by Judge Smith, who is joined by Judge Van Antwerpen:

The central question in this case is the meaning of "the Recess of the Senate," which is the only time in which the president may use his power to recess appoint officers. Three definitions have been offered: (1) breaks between sessions of the Senate (i.e., "intersession breaks"); (2) these intersession breaks as well as breaks within a session (i.e., "intrasession breaks") that last for a non-negligible time, or (3) any break in Senate business that makes the body unavailable to provide advice and consent on the president‘s nominations. This is a difficult question that has never been addressed by our Court or the Supreme Court. We hold that "the Recess of the Senate" in the Recess Appointments Clause refers to only intersession breaks. As a consequence, we conclude that the National Labor Relations Board panel below lacked the requisite number of members to exercise the Board‘s authority because one panel member was invalidly appointed during an intrasession break. We will therefore vacate the Board‘s orders.

From Judge Greenaway's dissent:

The Majority's rationale undoes an appointments process that has successfully operated within our separation of powers regime for over 220 years.

In defining the scope of the Recess Appointments Clause, the critical issue is more straightforward than the Majority suggests: The issue is whether “the Recess” includes only intersession recesses (those between two regular sessions of Congress) or intersession recesses and intrasession recesses (those within a regular session of Congress). The Majority's three possible definitions of “Recess” can be distilled into one question: Are intrasession recesses included within the ambit of “the Recess”? I would hold that “the Recess” refers to both intrasession and intersession recesses because the Senate can be unavailable to provide advice and consent during both. The availability of the Senate to provide advice and consent is the crux of the Recess Appointments Clause because its operation depends on its complementary interplay with the Appointments Clause, which requires that the Senate be available to provide advice and consent.

The majority opinion is 102 pages long and the dissent is 55 pages long. It seems likely that the Supreme Court will have the last word.

American Banker: Payday Lenders Lash Out at CFPB

Brian posted in April on the CFPB's White Paper on payday lending. Payday lenders have fired back, as the American Banker reports here.

Why a Longstanding Legal Doctrine Supports Limiting Bank Overdraft Fees

Over the past decade, overdraft fees and abuses have spiraled out of control, snaring millions of consumers while generating billions in profits for banks. In 2011, consumers paid $29.5 billion in overdraft fees.

A new white paper by the National Consumer Law Center explores why overdraft fees should be subject to a “reasonable and proportional" standard, how overdraft fees are currently excessive and unreasonable, and why the ability to charge excessive overdraft fees encourages banks to engage in abusive practices to maximize overdrafts.  The white paper also describes how excessive overdraft fees are contrary to a centuries-old legal doctrine that prohibits punitive damage clauses in contracts. 

 The Consumer Financial Protection Bureau (CFPB) has legal avenues to restore the standard of “reasonableness” to overdraft fees. One venue is through the Credit Card Accountability, Responsibility, and Disclosures (CARD) Act of 2009, by treating debit cards as “credit cards” for which penalty fees must be “reasonable and proportional.”  Another avenue for the CFPB is to use its authority to prevent unfair, deceptive, or abusive practices.

Download a three-page issue brief with key points and solutions:
Common Sense from the Common Law: Why a Longstanding Legal Doctrine Supports Limiting Bank Overdraft Fees to a “Reasonable and Proportional” Standard at:
http://www.nclc.org/images/pdf/high_cost_small_loans/ib-common-sense-common-law.pdf

Download the white paper at:
http://www.nclc.org/images/pdf/high_cost_small_loans/common-law-overdraft-fees.pdf