Consumer Law & Policy Blog

Carey Alexander Paper on the Meaning of "Abusive" in the Dodd-Frank Act

I've never before posted to the Blog a link to a paper written by one of my students, but this paper deserves to be seen by those interested in the Dodd-Frank Act. Carey Alexander has written Abusive: Dodd-Frank Section 1031 and the Continuing Struggle to Protect Consumers.  He does a professional job of tracing through the drafting history of the provision of the Act that gives the Consumer Financial Protection Bureau the power to ban abusive practices, and discusses its application to consumer protection problems.  Here's the abstract:

Section 1031 of the Dodd–Frank Wall Street Reform and Consumer Protection Act , which defines the powers of the new Consumer Financial Protection Bureau (CFPB), fundamentally reshaped the consumer protection landscape. Beyond empowering the CFPB to address unfair and deceptive practices, Congress established a broad new consumer protection doctrine to reach "abusive" practices. This Note first contextualizes the need for Section 1031 by examining the roots and shortcomings of existing consumer protection law as embodied in unfairness, deception, and unconscionability doctrines. Next, it chronicles Section 1031's enactment, paying close attention to the Obama Administration’s proposed definitions for unfairness, deception, and abusive, along with Congress’s replies. Finally, it applies the enacted definition of “abusive” to several widespread practices in the consumer credit market, urging the CFPB to adopt a broad interpretation of the term as consistent with Congress’s long–standing intent to protect consumers.

Kiplinger: Elizabeth Warren Explains What We Can Expect from the New Consumer Agency

Here.  Sounds like the initial focus is on making disclosures for credit cards and mortgages readable so that consumers can compare them.  That is a worthwhile goal, but some of us are skeptical about how much disclosures can accomplish.  Perhaps those limits will be addressed later--or maybe better disclosures will be more effective than some of us think.

WSJ Report: How Republicans Plan to Attack the CFPB

Here.  The article reports that two Members of Congress have "sent letters to the inspectors general of both the Treasury Department and the Federal Reserve, directing them to conduct an investigation into the work being done to establish the new bureau."

New America white paper on the CFPB: "Tools, Transitions, and Choices"

The New America Foundation has put out a handy white paper by Tim Fernholz that gives a very clear overview of the Consumer Financial Protection Bureau's authorities under the Dodd-Frank Act and its choices and opportunities over the near term. An appendix summarizes the major reports and studies that the Bureau will be responsible for producing. Read the paper here.

CFPB Starts Staffing Up

by Jeff Sovern

Today's Times has an interesting article, Adviser to Consumer Agency Had Role in Lending, about CFPB hiring (or perhaps, more accurately, Treasury hiring for what will become the CFPB).  Though the article is mostly about senior adviser Raj Date's role with a peer-to-peer lender that matches  would-be borrowers with lenders, the article also notes that the agency now has at least 54 employees, including Pat McCoy.  Anyone familiar with Pat's writing will know that she is a terrific choice for the agency. Another strong hire is Dan Geldon, who was very helpful to some of us in getting op-eds on the CFPB placed.

The Hill Op-Ed on the CFPB Agenda

My contribution. 

Would the Foreclosure Fraud Have Occurred if the CFPB Were Already Here?

An interesting article here.

Elizabeth Warren's Speech to the Bankers

by Deepak Gupta

Last week, Elizabeth Warren went into the lion's den, giving a dinner speech in Washington to the Financial Services Roundtable -- the banking industry's lobbying group. According to one account, she gave a "tough speech to bankers, comparing them to 'snakes' and their lending practices to 'garbage.'"

Or at least that's how the speech was characterized by certain news outlets. But if you go beyond the headlines and actually read the text of the speech, what you'll find is that Warren outlined a pragmatic, principles-based approach to regulation that contrasts sharply with a heavy-handed regime focused on technical disclosure requirements. Drawing inspiration from the SEC's first chairman, banker Joe Kennedy (pictured), Warren explained how smart regulation can create opportunities for good business to thrive. The heart of her speech focused on a proposal put forward by the Financial Services Roundtable itself:

Regulation can take two obvious forms: Regulators can make more pronouncements from on high, identifying suspicious practices in the various markets and banning them. Or regulators can layer on more disclosure requirements. But neither restores customer trust. In one case, it becomes the job of the agency to highlight industry shortcomings and pile on more and more “thou shalt not” rules, and, in the other case, consumers are hit with even more paperwork— and a growing suspicion that the game is rigged against them. . . .

But I’m here tonight to talk about an alternative recommended by the Financial Services Roundtable three and a half years ago: a principles‐based approach.

Instead of creating a regulatory thicket of “thou shalt nots,” and instead of using ever more complex disclosures that drive up costs for lenders and provide little help for consumers, let’s measure our success with simple questions. Your first principle is “Fair treatment for consumers.” I’ll paraphrase your explanation of how to tell if that principle has been met: Can customers understand the product, figure out the costs and risks, and compare products in the marketplace? Regulators should be aiming toward the goals you laid out.

Instead of layering on regulations that don’t fully protect consumers, a better approach would focus on how to give consumers the power to make the right choices for their families—and, at the same time, to ease the regulatory burden for the lenders. Best of all, if we do this right, perhaps together we can reassure families that the people in this room have met their own goal of fair treatment and that they should be treated as trusted friends.

More on Warren's vision for the new agency, below the jump.

Deception and the CFPB

by Jeff Sovern

The Dodd-Frank Act gives the Consumer Financial Protection Bureau the power to adopt regulations prohibiting deceptive, unfair, and abusive acts, and to bring actions against covered entities that are engaging in such acts.  Dodd-Frank defines unfair and abusive, but not deceptive.  So what qualifies as deceptive? 

One of the canons of statutory construction, the Doctrine of Presumed Adoption, says that when a legislature copies from another statute, it is presumed to adopt interpretations of that statute, unless the legislature says otherwise.  That suggests Congress intended the CFPB to use the same standard the FTC created and articulated in its 1983 deception policy statement: that conduct is deceptive if it is likely to mislead the consumer acting reasonably in the circumstances.

But one of my students, Carey Alexander, has brought to my attention a different argument.  Carey pointed out that § 4301(c)(2) of H.R. 4173, the House version of what became Dodd-Frank, included the following:

2) DECEPTIVE ACTS OR PRACTICES- Any determination by the Director and the Agency that an act or practice is deceptive shall be consistent with the policy statement adopted by the Federal Trade Commission pursuant to section 5 of the Federal Trade Commission Act and dated October 14, 1983.

That language did not end up in the final version of Dodd-Frank.  That suggests that Congress was open to the CFPB using a different definition of deceptive.  It may also be relevant that until 1983, the FTC framed its standard for deception differently: conduct was said to be deceptive if it had a capacity or tendency to deceive the credulous consumer.  The Congressional decision to omit the language quoted above from the final law permits the inference that Congress would find it acceptable for the CFPB to use the pre-1983 FTC standard--or perhaps still another standard.  Moreover, the policies pertaining to deception in the financial context are arguably different from those in conventional consumer transactions because consumer financial transactions tend to be more complex than other consumer transactions--which argues for finding deception more easily.

Given Chevron deference, it is likely that the courts would not upset a determination by the CFPB to use a different standard.  But we'll have to see if the CFPB even wants to.

NY Times: "Warren Seeks to Reassure Bankers on Protection Agency"

Here.  Excerpts from her remarks, as reported in the Times:

“First, in the weeks and months ahead, I’m going to listen more than I’m going to talk, and I’m going to keep my door open,”

“And second, I am committed to helping build a consumer credit structure that works — works for families, works for the financial services industry, and works for the American economy.”

“We have a chance to take a step back to ask: What vision should drive this agency? What test should be used to determine when the agency should act, when it should not, and which tools it should use when it does take action? What is the central aim of financial services regulation?”

“I come to Washington as a genuine believer in markets and a genuine believer that the purpose of regulating the consumer credit market is to make that market work for buyers and sellers alike: a level playing field where the best products at the best prices win,”

“Where I come from, nobody calls fine print, hidden fees and surprise penalties ‘negotiated contract terms’ or ‘innovations,’ ” 

“On a polite day, my brothers in Oklahoma call that kind of stuff ‘garbage.’ They don’t care if it is there because regulators required it, because the companies’ lawyers were trying to ward off lawsuits, or because it was a good place to hide another new fee. They simply see a world in which the financial institutions they do business with are not on their side.”