Consumer Law & Policy Blog

American Banker: How to CFPB-Proof New Financial Products

by Jeff Sovern

Here (behind a paywall, unfortunately). But here's the part that's not behind the paywall:

To avoid unwanted scrutiny from the Consumer Financial Protection Bureau and other regulators, banks need to start thinking about "what is fair, not just what is legal," banking attorneys say.

And isn't that one of the reasons we needed a CFPB?  Because lenders ignored what is fair? 

One point that the article makes is that disclosures don't save an objectionable product, especially if they're confusing.  That's the direction the FTC has been going in with privacy, but it seems a (welcome) departure from the idea of the duty to read.  The article also claims that the Bureau believes that if products generate enormous profits, they had better generate similarly large benefits for consumers.

The article also notes that the Bureau has not defined what it considers unfair, deceptive or abusive practices ("UDAAP") beyond the statutory definitions.  I can understand why lenders would want the Bureau to do so, because that would enable them to predict when they might fall afoul of those rules.  On the other hand, such a definition might hem the Bureau in too much at a time when it is still finding its way in this area.  My own opinion is that the Bureau should resist calls to offer greater specificity about how it will use its UDAAP powers until it is more experienced.  It would be unfortunate if the Bureau said it would not use its powers to prohibit certain conduct, and then lenders found a way to engage in that conduct inappropriately. 

I don't want to summarize the whole piece, but it's definitely worth a look.

Obama Administration Takes Its Defense of Recess Appointments to the Supreme Court

by Deepak Gupta

Earlier today, Solicitor General Don Verrilli filed the government's petition to the Supreme Court, challenging the D.C. Circuit's Noel Canning decision. (Background: There's been a lot of blogging here about Noel Canning, which invalidated President Obama's intersession recess appointments to the National Labor Relations Board and thereby threatened the validity of his simultaneous appointment of Richard Cordray to be Director of the Consumer Financial Protection Bureau. Brian recently posted on a Congressional Research Service report discussing the decision's implications here. On the day of the decision, I posted about the "de facto officer" doctrine and other reasons to be wary of some of the most sweeping claims regarding the decision's implications for the CFPB. I've also been commenting elsewhere--yesterday at NPR's Marketplace here and at Talking Points Memo here.)

The SG's petition has been expected for months now and has been previewed in court of appeals briefing, but it still makes for a good read.  It's a powerful and compelling piece of advocacy, combining rigorous historically-grounded arguments with a plea based on the pressing practical need for the Supreme Court's intervention. The petition has an unusually large number of Justice Department lawyers on the cover.

The CFPB isn't mentioned explicitly, but the petition makes clear that that the decision "threatens a significant disruption of the federal government’s operations" and that its effects can "be expected to extend to a wider range of federal agencies and offices."

Here's a quotation from the petition that provides an executive summary of the government's arguments:

The court of appeals’ decision would dramatically curtail the scope of the President’s authority under the Recess Appointments Clause.  Before that decision, Executive practice had long been predicated on the understanding that the Recess Appointments Clause authorizes the President to fill vacancies that exist during a recess of the Senate, regardless of whether the recess occurs between two enumerated sessions of Congress or during a session, and regardless of when the vacancies first arose.  The decision below also conflicts with the decisions of three other federal courts of appeals and with the central objects of the Recess Appointments Clause.  It would deem invalid hundreds of recess appointments made by Presidents since early in the Nation’s history.  It potentially calls into question every order issued by the National Labor Relations Board since January 4, 2012, and similar reasoning could threaten past and future decisions of other federal agencies.

I would be quite surprised if the Court does not grant the petition and set the case for argument early in the next term. Given the splits and the enormous practical implications, it seems like that rare case that virtually comes to the Court with a presumption of a grant.

Lyle Denniston has a summary at SCOTUSblog. Nothing yet at the Volokh Conspiracy, but John Elwood is an expert on the subject and I wouldn't be surprised if he posts something worth reading soon. Stay tuned.

An Item on My Wish List

by Jeff Sovern

Tonight marks the start of the NFL draft, a time when hope blooms for all fans of an NFL team, because they can always suppose that their team has used the draft to get better--and many teams will.  Many fans create wish lists--what they want for their teams.  In that spirit, I have a wish list of what I want in consumer protection. One item would shed significant light on whether discrimination actually occurs in lending.  I wish the CFPB would work with the credit bureaus to create records on imaginary individuals.  These individuals would each be paired with another fictitious person with an identical or nearly identical record, except that one of the two would appear to be a white male, and the other either a person of color or a woman or both.  The credit files would not actually indicate race or gender, but would signal such characteristics through zip codes, names, etc.  Then the Bureau would have the imaginary people apply for credit.  By comparing the applicants' grant and denial rates, and, for those who are offered credit, the terms of the offer, the Bureau would go a long way to showing that discrimination does or does not occur in the granting of credit.

To be sure, this would require making false statements to lenders, which might violate federal law. Perhaps the relevant laws have exceptions for such experiments; if not, the remedy would be to seek enactment of such an exception, which seems unlikely to happen in the current environment, but you never know. The idea is not very different from the testers that have been used to determine if realtors and others are engaged in housing discrmination.

What's on your consumer protection wish list?

House Financial Services Committee Chair Hensarling Blocks Cordray From Testifying About the CFPB

by Jeff Sovern

The Wall Street Journal has the story here and the American Banker here (one or both may be behind a paywall). Mr. Hensarling argues that as Cordray has not been confirmed, he is not the lawful head of the bureau and so cannot testify. But he adds in his letter to Mr. Cordray that "the Committee intends to conduct rigorous oversight of the CFPB's activities, and will expect the CFPB's cooperation in those efforts, including making other employees available to testify at Committee hearings and responding fully to Committee requests for documents and information."

So let me get this straight: Cordray can't testify because he hasn't been confirmed but his subordinates who also haven't been confirmed by the Senate can testify.  And the committee's "rigorous oversight" includes hearing from subordinates but not from their boss as to what the Bureau is doing. 

That, of course, makes no sense. Either the Committee wants to conduct appropriate oversight or it doesn't.  If it does, it should hear from Mr. Cordray as to matters as to which he is the most knowledgeable. If it doesn't, then it shouldn't hear from anyone from the Bureau.  The letter makes clear that the goal is not to conduct appropriate oversight but to make political points.  I don't know which is worse: how embarassing the letter's internal inconsistency is, or the fact that Mr. Hensarling expects people not to realize the inconsistency.

 

 

Henderson Paper on Mortgage Industry Self-Regulation

M. Todd Henderson of Chicago has written Self-Regulation for the Mortgage Industry. Here's the abstract:

This Article proposes an alternative to direct government regulation of mortgage brokers: self-regulation of the mortgage industry that mimics the arguably successful self-regulation of the securities industry that has occurred over the past two centuries. Although not without its problems, self-regulation of securities brokers operates more efficiently than government regulation. For example, self-regulation allows for industry expertise to be deployed at low cost and is built on trust and reciprocity, which reduce enforcement costs. In addition, self-regulation locates power at its smallest point and encourages efficient resolution of disputes by ensuring commensurable regulatory intervention. Most crucially for the mortgage industry, self-regulation is capable of policing behavior that does not rise to the level of fraud but is nevertheless socially undesirable. This Article explores the reasons why self-regulation can be effective, as well as some of its limitations in the context of securities brokers. It then looks at its potential application to mortgage brokers, comparing the self-regulatory approach with the governmental approach taken by the Dodd-Frank Act and the Consumer Financial Protection Bureau. However effective the federal approach to mortgage industry regulation is likely to be, there are aspects of such regulation that would be better administered by the industry itself, subject, of course, to oversight by the government to protect against the cartelization threat.

CPFB Issues Annual Report on FDCPA Activity

The CFPB has released its annual report on activities under the Fair Debt Collection Practices Act. You can read it here. The report summarizes consumer complaint data, the Bureau's new supervision program, amicus briefs, and enforcement actions (not much to report in that category), and significant enforcement and other actions taken by the FTC, among other things.  Some snippets from Rich Cordray's introduction:

• "As we continue to emerge from the devastating fiscal crisis of 2007-2008, we find that debt collection constitutes one of today’s most important consumer financial concerns. Currently, about 30 million consumers, nearly one out of every ten Americans, are subject to debt collection activities, for amounts that average about $1,500 apiece."

• "Under the larger participant rule recently adopted by the CFPB, any firm with more than $10 million in annual receipts from consumer debt collection activities is now subject to our supervisory authority. This authority extends to about 175 debt collectors, which accounts for over 60% of the industry’s annual receipts in the consumer debt collection market."

American Banker: Car Dealers Fight Back Against CFPB Auto Financing Rule

by Jeff Sovern

Here. The piece begins:

 Auto dealership advocates are warning that costs will rise for borrowers if the Consumer Financial Protection Bureau presses banks to curtail auto loan markups determined by dealers.

The warning followed the CFPB's bulletin this week that said banks are responsible for discrimination if their partner dealers mark up the interest rates on loans for minority borrowers or engage in other fair lending abuses. The agency is encouraging lenders to adopt a flat-fee model for dealer compensation.

But dealer industry representatives said doing so would hurt competition and ultimately boost car prices.

Of course, the industry always argues that regulation will increase costs.  But in this case, it's not clear why that would occur.  At present, some lenders sometimes tell dealers the lowest rate they would provide a particular consumer and then allow the dealer to negotiate a higher rate.  The Bureau claims that some dealers respond to that ability to negotiate by consistently charging higher rates to protected groups. If dealers can no longer bargain for a higher rate, won't everyone get the lowest rate, including protected groups?  Or is the thinking that lenders will increase the lowest rate they will charge to offset the loss from discriminatory pricing? In that case, some groups will pay higher rates than they now get because of disrimination. It's hard to see as a bad thing that some consumers won't benefit from discrimination that others pay for. 

Will the CFPB Hold Banks Responsible for Their Contracting Parties?

by Jeff Sovern

The American Banker has an interesting article titled CFPB Focuses on Consumer Choice - or Lack Thereof which discusses the speech Director Cordray gave to the Consumer Advisory Board last month (Allison blogged about it here). Excerpt from the article follow:

[Cordray said] added, "When people cannot vote with their feet, their clout is limited, even though these products and services can have a profound influence on their lives."

"Without consumer choice, a key element of market discipline is lacking," Cordray said in the Feb. 20 speech. "The result is to permit or even facilitate a distinct indifference to the interests of individual consumers."

And what does the Bureau do with that fact?  Here's more:

Cordray's speech last month to the bureau's Consumer Advisory Board goes farther than earlier regulatory edicts. The remarks suggest that the relationship between a bank and a debt collector may be fundamentally unfair to the consumer, no matter how much due diligence the bank does on the debt collection firm.

"When a consumer does not pay back a debt, the creditor may decide to sell it to or contract with a debt collector to secure payment of what is still owed," Cordray noted.

"Once this occurs, the paying business relationship has shifted; it now lies between the debt collector and the creditor, not the consumer and the creditor. This can lead to mistreatment of the consumer, who becomes, in effect, a kind of 'bystander' to the new business relationship. In this situation, creditors may have little reason to ensure that debt collectors treat consumers fairly and appropriately or that they maintain and use accurate information."

Cordray also listed mortgage servicing, student loan servicing, and credit reporting as examples of industries where the interests of consumers can become largely incidental.

"From the perspective of the credit reporting firm and its clients," he said, "inaccurate reports may be no more than a statistic or an error rate. But for individual consumers whose reports are incorrect, the damage done to their lives can be severe and lasting."

So, to repeat, where does the Bureau go with this?  Toward increased regulation of the entites that don't contract with consumers?  In that case, why mention the banks?  Or to holding banks responsible?  We will see.

Automotive News Survey Finds Many Dealers Expect CFPB to Bar Use of Arbitration Clauses

Here.  An excerpt:

* * * Nearly 40 percent of dealers responding to a recent unscientific Automotive News survey also expressed concern that they soon will lose  the arbitration option.

"I think arbitration is on its last legs," said Tom Hudson, a partner in the  Hudson Cook law firm in Hanover, Md., who predicts the bureau could issue such a  ruling before year end.

Senate Banking Committee Approves Cordray Nomination 12-10

Now it goes to the floor, again, where Republicans are expected to prevent it from ever getting to a vote. The Washington Post has the story here.