Consumer Law & Policy Blog

Two Bloomberg Pieces on Disclosure Issues

Robert H. Gertner of Chicago's Booth School of Business has a particularly interesting piece, Consumer Protection Bureau Can Teach Financial Self-Help, on the limits of disclosures, the need for financial counselors, and how to make such counseling better and more accessible.  Here's an excerpt:

The only regulatory regime that has a chance of making substantial progress is one that helps the market-based solution for advice work better. Structuring disclosure regulation to make advice markets more efficient rather than to make disclosure more understandable to consumers should be a goal. For example, my Chicago Booth colleague Richard Thaler has recommended requiring standard machine-readable disclosure of all financial terms to reduce the costs of comparisons across offerings. In a world of individualized offerings, the savings could be huge.

A second policy is for the government to develop an effective certification program for consumer financial advisers. In addition to knowledge requirements, the government would require that advisers have no financial incentives to prefer some products to others. Rather than teaching financial literacy, outreach programs could focus on educating consumers on the need for a competent, unbiased, certified financial adviser.

In another piece, Bloomberg reports Senators Introduce Bill for Counseling on Private Student Loans.

 

Accountability and the CFPB

The Republicans who opposed CFPB director's confirmation claimed that he would not be accountable.  Well, he testified today before the House Financial Services Committee.  Here's a quote:

Before I became Director, I promised members of Congress in both chambers and on both sides of the aisle that I would be accountable to you for how the Consumer Bureau carries out the laws you enact. I said that I would always welcome your thoughts about our work. I stand by that commitment. I am pleased to be here with you today to tell you about our work and to answer your questions.

The people who work at the Consumer Bureau are always happy to discuss our work with the Congress. This is the 15th time that we have testified before either the House or the Senate.

When a Bureau that is less than a year old has testified 15 times, does that sound like it's making an effort to be accountable?

David Lazarus Interview with Richard Cordray on Proposed Rules for CFPB to Supervise Large Credit Bureaus and Debt Collectors

by Jeff Sovern

Here.  Lazarus has an interesting quote from Cordray: "Unlike most services or products where consumers can shop around among different providers, consumers can't do that with these businesses," Cordray said. "Consumers don't get to choose their debt collector, and they don't get to choose whether to have the consumer credit reporting agencies keep track of their credit history."

That's an important point.  Free-marketers argue that government regulation is generally unnecessary because the free market will discipline poorly-performing businesses.  But there is no free market as to debt collectors or credit bureaus, with the result that the market cannot be expected to address such businesses when they misbehave.  That's another reason we needed the CFPB as well as the Fair Credit Reporting Act and the Fair Debt Collection Practices Act.

 

Politico Articles and the CFPB

In Wall Street turns wrath — and cash — on Obama, Ben White reports that the financial industry is making enormous donations against President Obama.  In explaining which firms are making the contributions, and why, White notes: "Many smaller and midsize banks also recoiled over the creation of a powerful regulator in the Consumer Financial Protection Bureau, which they claim has far too much unchecked power and will drive up their compliance costs."  Meanwhile, CFPB head Richard Cordray published an op-ed, which, among other things, describes some of the Bureau's upcoming initiatives:

In the future, we will also issue new consumer protections around “force-placed insurance” — a term referring to hazard insurance that mortgage servicers secure at the borrower’s expense, typically at a very high cost, when they believe (even erroneously) that a borrower’s previous hazard insurance has lapsed.

Under the new law, we will write a rule to prevent servicers of most mortgages from charging for this insurance unless there is a reasonable basis to believe that borrowers have failed to maintain their own insurance. It will require servicers to provide consumers an opportunity to obtain their own insurance, which is generally less expensive than force-placed insurance obtained by the servicer.

We will also issue new disclosures for hybrid adjustable-rate mortgages — complicated loans that usually start with a “teaser” interest rate before resetting to a much higher rate. Consumers will be notified months ahead of their first interest rate adjustment and will receive a good-faith estimate of their new monthly payment, along with a list of alternatives they may pursue to head off the higher rate, including refinancing and renegotiation of loan terms

House Republicans Continue Efforts to Enable Financial Institutions to Regulate Their Regulator, the CFPB

The Washington Post reports that "The House GOP is now moving forward with bills that would remove the CFPB director from overseeing the Federal Deposit Insurance Company and allow Congress to directly control its funding every year."  As for why this would enable financial institutions to curb the CFPB, see here.  WaPo ominously notes: "[T]he GOP’s new bills provide a clear guide to what is likely to happen to the CFPB if Republicans take full control of Congress and/or the White House."

Will the Consumer Financial Protection Bureau Be Able to Regulate Rent-to-Own Establishments?

Rent-to-own contracts--under which consumers pay "rent" each week to buy a big-ticket item like a television, but typically have the option to cancel the contract after the first week--are an extremely expensive way to buy an item.  They are not regulated by the Truth in Lending Act, or the federal Consumer Leasing Act, which means that no federal law requires disclosures that will convey to consumers how much more they are paying than they would if, say, they bought the item and financed it through a more conventional loan.  An article in the Huffington Post, Rent-A-Center CEO: New Consumer Bureau Won't Have Authority Over Us, explores whether the CFPB will be able to regulate RTOs.  An excerpt:

The Consumer Financial Protection Bureau has yet to decide on a plan of action for rent-to-own retailers. "CFPB has reviewed the rent-to-own industry generally and is monitoring its impact on certain populations, such as military families," a spokeswoman wrote in an email. "We have not made any decision about what action, if any, would be appropriate."

Before the bureau can decide to investigate Rent-A-Center and its competitors, it must first prove that such businesses provide installment loans, not short-term leases, and therefore lie under its jurisdiction. In the past, Rent-A-Center has avoided regulation by shunning the label of "loan provider." The company has claimed that since customers pay on a weekly or monthly basis -- and can cancel contracts anytime by returning items -- its agreements aren't loans. Consumer advocates say that despite the flexibility offered by rent-to-own companies, people effectively use the service like an installment loan, paying small chunks over time toward a final purchase.

A Law Professor's View of Elizabeth Warren and What She Did in Creating the CFPB

Here.

Consumer Financial Protection Bureau News

Earlier this week the Bureau released its first semi-annual report on its activities.  You can also read reports of yesterday's hearing on the Bureau before the Senate Banking Committee in the L.A. Times and The Hill's On The Money Blog.  As for the Republican boycott of the hearing, the L.A. Times explained:

Amid talk of a boycott by other Republicans on the committee, the panel's top GOP member, Richard Shelby (R-Ala.), said he would attend. He left it up to each senator to decide whether to attend, and four others did, typical attendance for such a hearing.

Most of the media coverage focuses on the recess appointment controversy, rather than on what the Bureau is doing to help consumers, which is perhaps less interesting, but ultimately more important.  So to make sure we don't fall into the same trap, and because it's worth reporting, here's an excerpt from the Semi-Annual Report's Executive Summary:

In its first six months, the CFPB has taken significant steps to make consumer financial markets work better for consumers and responsible companies by:

1. resolving consumer complaints about credit cards and mortgages;
2. launching a supervision program that will promote compliance with consumer protection laws in the Bureau’s jurisdiction by financial companies of all kinds;
3. evaluating and developing disclosures that make the costs and risks of financial products easier for consumers to understand;
4. working to implement statutory protections for consumers who rely on consumer financial products, such as mortgages;
5. launching the Bureau’s website – ConsumerFinance.gov – and using it to engage the public in a range of projects;
6. creating several ways in which individuals can alert the CFPB about potential violations of consumer protection laws in the Bureau’s jurisdiction; and
7. improving information about the structure of consumer financial markets and consumer behavior through practical market intelligence and independent research.

Jeff Gelles Column Reviews the CFPB's First Six Months

Here.  An excerpt:

Although handicapping political battles is above my pay grade, I'm always surprised at GOP willingness to openly block basic rules and enforcement - a perspective shared by Travis Plunkett of the Consumer Federation of America.

"On the one hand, they say, 'Oh, we support consumer protection.' On the other, they've done everything except throw their bodies in front of the agency's headquarters to stop it," he says. "These members of Congress have lined up with Wall Street banks and others in the finance industry who never wanted consumers to have a full-time cop on the beat to watch over them."

Obscure Senator Raises Profile by Announcing Intention to Boycott Obscure Senate Hearing at Which CFPB Head Cordray to Testify

by Jeff Sovern

Story here.  Senator Wicker objects to Cordray's recess appointment, explaining:

"It is an affront to the democratic checks and balances as established by our Founders, and it constitutes a gross violation of precedent set by those who have come before us."

But because Senator Wicker joined the Republican letter refusing to confirm any nominee to the directorship of the Consumer Financial Protection Bureau unless structural changes were made in the Bureau, we can infer that he doesn't think it's an affront to the democratic checks and balances established by our Founders for senators to refuse to confirm a nominee for a position that Congress has created because of reasons that have nothing to do with the nominee.  Never mind that that letter was unprecedented. 

Incidentally, Senator Wicker is up for re-election this year, and commercial banks are the eleventh largest contributor to his campaign (measured by industry), according to the Center for Responsive Politics. Miscellaneous Finance is right behind at number twelve.