Consumer Law & Policy Blog

Adam Levitin on the Mortgage Servicing Settlement

Over at Credit Slips, Adam Levitin has this lengthy, eye-opening post on the mortgage servicing settlement negotiations based on his analysis of internal documents that have been made public. Among other things, he concludes that the documents reflect an estimate that "the banks made $24B from servicing fraud. That's the largest consumer fraud in history. This isn't just some chump game with cutting corners on affidavits. It's that doing that (and lots of other bad stuff) has saved the banks $24B in costs."  He surmises that "the negotiations are over a substantially bigger figure than $20B. And this explains everything about the banks' negotiating strategy including the recent attacks on Elizabeth Warren by the Wall Street Journal's editorial page and by Congressional Republicans on the CFPB."  While you're there, check out this other recent post by Levitin sketching out what he calls a broad "anti-consumer agenda," ranging from AT&T v. Concepcion to attacks on the CFPB.

 

Top Behaviorial Economist to Head CFPB's Office of Research

The Treasury Department today announced the hiring of behavioral economist Sendhil Mullainathan to serve as head of the CFPB's Office of Research.  The Wall Street Journal had this report on Mullainathan:

The leading behavioral economist of his generation, his research has focused on how people’s biases and weaknesses lead them to make bad economic decisions. He is also a founder, with Esther Duflo and Abhijit Banerjee, of MIT’s Jameel Poverty Action Lab.

His research has provided much of the intellectual foundation for the establishment of the CFPB, which is tasked with making “markets for consumer financial products and services work for Americans.”

“He’s more or less exactly what the CFPB should be: evidence based, appropriately suspicious of concentrated interests, and he understands that real people can make mistakes,” said Wharton School economist Justin Wolfers.

Mr. Mullainathan, 38, got an early lesson in how regulatory changes can affect people’s lives, and how fragile their livelihoods can be when a new rule in the 1980s disallowed foreign aerospace workers from doing defense-related projects. In practice, this meant that foreign workers couldn’t work on aerospace at all, since the delineation between defense and nondefense projects was fuzzy. His Indian father, an engineer at McDonnell Douglas, lost his job.

“There was this feeling of fragility, wow if my dad doesn’t get a job, then what?” Mr. Mullainathan recalled in a recent interview. “I still have that feeling very strongly, I understand it. It informs my thinking on this stuff and my motivation to work on it.”

A more extended WSJ piece is here.  According to a new blog post on the agency's website, the CFPB's Office of Research will not only publish findings under the agency's own name but will also encourage scholars to engage in independent research:

Frequently . . . researchers will choose their own topics, data, and methodology themselves, draw their own conclusions, and publish in their own names.  . . .  [W]e encourage this kind of “self-directed” research because it promotes evidence-based, rather than myopic or narrow, policymaking. Self-directed research will help us remain true to the core values that underpin our policymaking: honest investigation, independent thinking, and open discussion.

By offering our research staff the opportunity to pursue original ideas, the CFPB will also be in a better position to attract the best-trained researchers with the skills to strengthen our understanding of the benefits and costs of potential policies. Under the CFPB’s research policy:

• Researchers may elect to dedicate a substantial portion of their time to self-directed research. They may focus on household finance or behavior, consumer financial firms or markets, or other areas relevant to the mission of the consumer bureau. Other federal financial regulators also provide researchers time for independent research. For example, the portion of time provided at the CFPB will be comparable to that provided across the Federal Reserve System. Researchers who choose to conduct independent research will be evaluated based on research performance, such as their record of publications.
• Researchers are also encouraged to publish or present their work in peer-reviewed journals and other scholarly venues. The CFPB will not review or censor findings of self-directed research presented externally for policy content, so long as the researcher includes a disclaimer that the work does not necessarily represent the views of the CFPB.

Encouraging original inquiry and independent conclusions will help us act wisely on behalf of the American people. Allowing researchers to publish their findings will increase transparency – and that will help the public to hold us accountable

New Review of 40 States’ Unemployment Compensation Prepaid Cards

This new groundbreaking report from the National Consumer Law Center looks at unemployment compensation (UC) prepaid cards currently used by 40 states (the remaining states are expected to soon follow suit). The comprehensive survey includes a state-by-state highlights comparison chart, including bank issuer and notable fees; a national overview of fees; and recommendations for card improvements.

Unemployment Compensation Prepaid Cards: States Can Deal Workers a Winning Hand by Discarding Junk Fees, analyses the payment options, fees, and access to account information available to workers in every state that uses UC prepaid cards. It also surveys the laws that do (or do not) protect workers and offers recommendations for how states can design a card that works well for both the state and its unemployed workers.

The report singles out as especially problematic the overdraft fees that U.S. Bank has on prepaid cards in five states: Arkansas, Idaho, Nebraska, Ohio, and Oregon. No other bank’s UC prepaid card charges overdraft fees, which the U.S. Department of Labor (DOL) has found are “inconsistent with federal law.” And the Tennessee card (issued by JP Morgan Chase) draws the two of clubs for the card with the most junk fees, including ATM, PIN debit, denied transaction, and balance inquiry fees.

So who holds the winning hand? California and New Jersey currently have the best UC cards (both issued by Bank of America), although both could benefit from fees more clearly and prominently displayed on websites. The State of California loses one trick for not offering direct deposit.

The report urges the new U.S. Consumer Financial Protection Bureau, which starts work in July, and U.S. Department of Labor to work together to ban overdraft fees and other unfair fees and to improve transparency and competition by posting all fee schedules in one place so that states and consumers can compare who has the best hand.

The trump card? States can design an unemployment prepaid card that works well for both the state and doesn't lose workers in the shuffle. They are generally an improvement over paper checks for the unbanked but there is room for improvement to ensure they deliver every penny to unemployed Americans (at last count, more than 13 million folks).

Now that National Consumer Law Center has laid the cards on the table, let's hope states use the report to cut a better prepaid card deal for their unemployed workers.

Could the Senate GOP Block a Recess Appointment?

Kate Davidson and Cheyenne Hopkins of the American Banker have the story:

WASHINGTON — Republicans are strongly considering using a rare procedural move to prevent President Obama from making a recess appointment to install a director of the Consumer Financial Protection Bureau.

Forty-four GOP senators signed a letter last week vowing to block any nominee absent several significant changes to the bureau, a move that political analysts said all but guarantees the president will use his recess appointment powers. But Republican lawmakers are weighing tactics to make that option much less appealing or prevent it altogether by leveraging their power over other financial services nominees.

"If they were to go the recess appointment route, I believe Senate Republican leadership would use every tool at their disposal and there would be a major response from Senate Republicans," a Republican Senate staffer said Friday. "It could result in costs to other nominees, and I think it would ultimately affect the legitimacy of whoever is recess appointed to run the CFPB."

Republicans are attempting to box Obama in, preventing him confirming a permanent director to CFPB or allowing a temporary one to be put in place. Under the Dodd-Frank law, the CFPB is limited in what actions it can take unless it has a formal director. (While Elizabeth Warren, the architect of the agency, has been its de facto head since last year, she is an administration appointee and does not technically count as its director.)

Republicans are eying a tactic first employed by Democrats when President Bush was in power to hold "pro forma sessions" — short sessions during which no business is conducted — that prevents the Senate from being considered in "recess." Republicans used the tactic successfully last year after agreeing to confirm 54 of the president's nominees, but preventing him from making any recess appointments.

Diane Rehm Roundtable on the CFPB's Future

This morning, the Diane Rehm show on NPR hosted a roundtable discussion on "The Future of the Consumer Financial Protection Bureau," featuring Travis Plunkett of the Consumer Federation of America; Maya Jackson Randall, a financial reporter for Dow Jones Newswires; and Mark Calabria, director of financial regulation studies at the Cato Institute.  The show also features a call-in interview with Rep. Barney Frank. Listen here.

NYT Editorial Links Anti-CFPB Legislation to Campaign Cash

The New York TImes has this editorial, arguing that the true purpose of today's markup is to raise cash for the next election:

Republicans on the House Financial Services Committee are having a campaign fund-raiser this week.

Starting on Wednesday, the committee’s majority is expected to pass bills to cripple the Consumer Financial Protection Bureau, one of the most important innovations in the 2010 Dodd-Frank financial reform law.

The bureau has one purpose: to shield consumers from unfair, misleading and deceptive lending. The purpose of the Republican bills is twofold. One is to deprive the agency of the power to fulfill its mission. Another is to attract campaign money. As long as the Senate and White House are controlled by Democrats, the bills are unlikely to become law. But by advancing them in the House, Republicans can demonstrate how thoroughly they would dismantle reform if they controlled Washington and, in the process, rake in Wall Street donations.

American Bankers Association Supports Warren Nomination

Breaking news from the American Banker:

Frank Keating, the head of the American Bankers Association, said Tuesday he would back Elizabeth Warren as director of the Consumer Financial Protection Bureau, if nominated by the president.

"If she is the nominee, we would be fully support of her," said Keating, who, like Warren, hails from Oklahoma.

Keating, a former governor of Oklahoma, joined the ABA as president and chief executive on Jan. 1. Speaking to reporters after his inaugural speech before the Women in Housing and Finance, Keating made clear he would not object to any nomination made by the president to head the new agency, including Warren's, even if at times they might disagree over certain issues.

Timing of a nomination by the president, which is highly anticipated, could not be any better given the political capital he gained after the death of Osama bin Laden.

"Because of that lift to the president it may well be that he does decide to nominate her," said Keating. "She's very bright, very capable."

 

"A knife in the ribs"

On the Daily Show last week, before the big news from Pakistan sucked up all the media oxygen, Elizabeth Warren told Jon Stewart that opponents of financial reform were attempting to “stick a knife in the ribs” of the new Consumer Financial Protection Bureau. “Right now there are bills pending in Congress to delay the agency, to defund the agency, to defang the agency and," she said, "to kill the agency outright before it is able to take one step on behalf of middle class families.”  At the Daily show website, you can watch an extended online version of the interview here.

 

 

Melissa Jacoby on the CFPB

Melissa B. Jacoby of North Carolina has written Dodd-Frank, Regulatory Innovation, and the Safety of Consumer Financial Products, 15 North Carolina Banking Institute Journal 99 (2011).  Here's the abstract:

Among the many parts of the Dodd-Frank Wall Street Reform and Consumer Protection Act, few have received as much mainstream attention as the creation of the Bureau of Consumer Financial Protection. As is often the case with legislation in recent years, though, some of the most vocalized critiques of the Bureau lack a foundation in Dodd-Frank as enacted or in the Bureau’s start-up efforts. This brief essay explores the nature of the Bureau and its promising possibilities for regulatory innovation that should transcend stale debates about regulatory overreach or command-and-control approaches. This commentary also reviews the unusual dialogue preceding Dodd-Frank about whether medical providers and other service businesses fall within the Bureau’s jurisdiction.

Not-so-Standardized Insurance Form Contracts

Professor Dan Schwarcz of Minnesota Law has posted an excellent empirical study of homeowner's insurance contract forms, finding important variations in coverage, most of which reduce the level of protection from the presumed industry standard.  The paper offers a meticulous review of insurance policy contract forms from the top ten insurers in six different states, revealing a dizzying variety of provisions for events such as water damage, pollution damage, theft losses, and replacement cost standards. 

Even obtaining the actual contract terms in use proved to be a significant challenge.  In part III Professor Schwarcz recounts his exhaustive efforts to obtain copies of contract terms, from insurers themselves, from insurance agents, and from state regulators.  Shockingly, state insurance departments who all profess to require contract forms to be submitted and approved, and to be publicly available, are systematically unable to produce insurance policy forms on request.  The bottom line is that consumers cannot possibly shop for coverage terms because they cannot discover contract terms without purchasing a policy.

This is the sort of careful study of actual consumer financial markets and practices that the research division of the new CFPB ought to be doing, to inform consumer education and regulatory strategies going forward.