CL&P Blog

What is the optimal structure for the Consumer Financial Protection Bureau?

That's the topic of Commissioning the Consumer Financial Protection Bureau by law prof Jolina Cuaresma. Here's the abstract:

There has been much debate over the Consumer Financial Protection Bureau’s lack of executive and congressional oversight: its single director removable only for cause and its operations are not subject to appropriations. This paper explains how this very leadership and accountability structure — intended to politically insulate the agency — had the perverse effect of politicizing it. Since Director Cordray’s departure, there has been increased regulatory uncertainty, discouraging financial innovation and harming consumer welfare. This paper recommends that Congress restructure the Bureau into a multi-member, bipartisan commission to provide industry regulatory predictability and ensure that consumer protection retains its independent seat in the financial regulatory system.

Will New York catch up to Mississippi in protecting consumers?

by Jeff Sovern

Many states allow their consumers to sue misbehaving companies for unfair practices, including red and purple states like Mississippi, Georgia, North Carolina, Tennessee and West Virginia, states that we normally don't think of as being in the vanguard of consumer protection.  This power can be important in protecting consumers. For example, the CFPB used its own ability to stop unfair practices when it pursued Wells Fargo for opening unauthorized accounts, rather than its power to block deception. But New York has lagged behind these states, as well as its neighbors like Connecticut, Pennsylvania, and Massachusetts, in leaving unfairness out of its UDAP statute. Thus, New Yorkers could not have sued Wells Fargo for unfair conduct in opening unauthorized accounts.

But now that may change. The New York legislature is considering a bill to put the U in its UDAP statute.  The bill would also eliminate New York's requirement that plaintiffs in UDAP cases demonstrate that the offending conduct is "consumer-oriented," a requirement that no other state has adopted and that does not even appear in New York's statute; instead it was added by a court that evidently eschewed textualism as a method of statutory interpretation.

Unfortunately, but predictably, the bill is encountering heavy industry opposition. One argument made against the bill is that it "will open the flood gates for litigation."  But many other states permit consumers to sue for unfair conduct and don't require consumer-oriented conduct and have not experienced a flood of litigation (even assuming there is something wrong with a flood of litigation against bad actors). The items I have listed merely bring the statute into conformity with other states.

The statute currently provides for only $50 in statutory damages. As a number of studies have demonstrated, consumers almost never bring claims for $50.  It just isn't worth it to them.  So preserving $50 as the amount of statutory damages would be essentially the same as having no statutory damages.  The bill addresses this problem by increasing the amount of statutory damages to $2,000, an amount which is more likely to be enough to cause consumers to enforce the statute, though still less than the red state of Kansas, which allows statutory damages of fives times as much, or 200 times what the New York statute currently provides. Of course, businesses object to this too: they prefer that the amount be so low as to render private enforcement virtually nonexistent in the absence of large actual damages.

New York has a chance to offer its consumers not just the protection they need, but that they deserve. It should leap at the opportunity. 

How the New US News Scholarly Impact Ranking Could Hurt Niche Subjects, Like Consumer Law

by Jeff Sovern

There's been a lot of talk among law professors about the US News plan to measure faculty scholarly impact in part by citations to faculty scholarship (see here for a blog post citing to commentary).  While for now US News says it will not incorporate the citation rankings into its general law school rankings, US News may in the future replace the faculty reputation measure to some extent with a measure of how frequently professors are cited.  That could create disturbing incentives for faculty hiring and retention, as well as affect what professors write about. 

To be more concrete, imagine that a law school is hiring a new professor and has two candidates.  One candidate writes about criminal law and the other writes about consumer law.  The law school wants to maximize its ranking, and so wants to hire the candidate whose work will be cited more.  The universe of people writing scholarly articles about criminal law is much larger than the universe of professors writing about consumer law, and so, all other things being equal, the criminal law professor is likely to rack up more citations and so help with the school's ranking more.  How do we know more people write about criminal law?  I did a search for "consumer law" on SSRN and got 637 hits. "Criminal law" by contrast elicited 7,867 hits, or more than a dozen times as many. Every law school offers criminal law courses, probably all have a full-time professor teaching in the area, and many have one or more professors writing in the area. But as of 2014, only about a third of law schools had a consumer law course of one sort or another (yes, I need to update that), and many of the courses were taught by adjuncts who have a day job and so are unlikely to find time to write about consumer law.  Fewer professors writing in an area means fewer people likely to cite your work. And so that means hiring the consumer law scholar could hurt your ranking as compared to hiring the criminal law professor. It also means that those seeking to become law professors should write in widely-taught areas to make themselves more attractive to law schools.

Now maybe you're thinking that even within broad areas like criminal law, professors are apt to specialize when it comes to writing and so as a practical matter writing about a consumer law topic is no different than writing about a criminal law topic. So let's compare the number of papers on SRRN in a couple of specific areas within criminal law and consumer law.  Homicide drew 767 hits while "mens rea" got 479 hits. "Debt collection" elicited 179 hits while "credit reporting" got 135.  Those differences are less dramatic, but the number of criminal law hits are still multiples of the consumer law hits. No doubt SSRN is an imperfect measure of the amount of scholarship in a particular area, but it would have to be off by a lot to make those differences insignificant. It makes intuitive sense that a subject that is taught at fewer law schools will be written about less--and so generate fewer citations. 

This isn't just bad for consumer law scholars. It's also bad for consumer law, and indeed any subject that isn't taught at all or nearly all law schools.  If you think, as I do, that scholarship is valuable, and law schools stop producing consumer law scholarship because they stop hiring consumer law professors, then society will have lost something. Society will have gained instead more articles about widely-taught subjects, but surely the marginal value of yet another article on criminal law is less than the marginal value of an article in an area less traveled.

 

Representative Katie Porter to Join House Financial Services Committee

by Jeff Sovern

The media has devoted considerable attention to Representative Alexandria Ocasio-Cortez's joining the House Financial Services Committee. I'm glad she is on the committee--the more members who are not beholden to banks, the better--and I suspect few realize how intelligent Ocasio-Cortez is (taking second place in the Intel competition is an impressive accomplishment).  But I believe the rookie member of the committee who is likely to have the most impact is former professor Katie Porter.  Not only is Porter brilliant, she is also extremely knowledgeable about consumer law and bankruptcy, having studied and written about them for years. She also brings the practical experience that comes from having monitored the mortgage settlement in California. During hearings, she may know more than some witnesses about the matters the witnesses are testifying about. She promises to be a formidable member of the committee, and I hope its members defer to her judgment.

Bloomberg Law Insight: Why the ABA Is Wrong on Amending Debt Collection Bill

by Jeff Sovern

That's the title of my essay my colleague Gina Calabrese and I wrote here in Bloomberg Law.  Excerpt:

The ABA argues that consumers don’t need protection from unscrupulous lawyers because lawyers are already subject to state ethics rules largely written by the ABA itself. Experience tells us otherwise. When a law firm sued consumers for debts they did not owe, the Consumer Financial Protection Bureau needed the FDCPA to stop it. One of us teaches in a law school consumer clinic and has observed that ethical rules do not stop attorneys from deceiving consumers.

* * * 

One of us has seen an attorney tell a court—under penalty of perjury—that a large balance remained on a debt that had been fully paid. The firm later admitted it was wrong, but only after it was held accountable under the FDCPA. Lawyers have frozen our law clinic’s clients’ bank accounts, blocking their access to their own funds, for debts that had already been paid. In none of these cases did the attorneys face ethics sanctions. Indeed, courts routinely excuse such missteps.

The ABA's wrongheaded goal of enabling lawyers "engaged in litigation activities" to ignore debt collection law

by Jeff Sovern

The federal Fair Debt Collection Practices Act provides consumers a variety of protections. Collectors, for example, are barred from making false statements and engaging in unfair practices, and are obliged to give consumers certain disclosures.  But the American Bar Association wants to excuse lawyers "engaged in litigation activities" from complying with the FDCPA.  In the ABA's view, state courts and ethical rules provide all the protection consumers need. The House Committee on Financial Services has already reported a bill, H.R. 5082, to accomplish the ABA's goals.

In my view, lawyers should not seek or obtain exclusions from the FDCPA.  The robo-signing scandal was only a few years ago, and lawyers did not exactly cover themselves in glory on that one. Robo-signing may have gone on for years, despite state courts and ethical rules.  The CFPB has brought a number of cases against lawyers behaving badly in debt collection matters.  In one case, for example, the CFPB complaint alleged (I reformatted the paragraphs and omit paragraph numbers for ease of reading):

Defendants, a law firm and its principal partners, have sued hundreds of thousands of Georgia consumers to collect debts that the consumers allegedly owe to others. To produce so many lawsuits, the Firm operates less like a law firm than a factory. It relies on an automated system and non-attorney support staff to determine which consumers to sue. The non-attorney support staff produce the lawsuits and place them into mail buckets, which are then delivered to attorneys essentially waiting at the end of an assembly line. The Firm’s attorneys are expected to spend less than a minute reviewing and approving each suit. Using high-volume litigation tactics, Defendants collect millions of dollars each year, often from consumers who may not actually owe debts or may not owe debts in the amounts claimed.

That case terminated in a consent order under which the firm agreed to pay a penalty of more than $3 million. That does not exactly suggest that we need fewer consumer protections against misbehaving lawyers. Will state courts force attorneys to compensate consumers when law suits allege the wrong amount of the debt? When lawyers sue the wrong consumer? When lawyers bring time-barred claims? Will consumers be told of their rights?  The ABA would do better to devote its energy to making sure attorneys behave appropriately in debt collection than to insulate attorneys from complying with existing debt collection laws.

Trump Administration's Student Loan Policy

Student loan debt has jumped from $1 trillion to $1.5 trillion in the last 5 years. The Education Department's official default rates

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seriously understate the share of young borrowers who default, or are not able to repay their loans. In the face of the growing student loan debt crisis, the Administration's corrupt policy is to undo the Obama administration's gainful employment rule for colleges, grease the wheels for fraudulent for-profit schools, curb loan relief to victims of school fraud, and sabotage consumer protection enforcement by the CFPB and state regulators (by asserting preemption) against student loan servicers who mislead and abuse borrowers. This article sums it up nicely.

More Results from an Empirical Study of Consumer Understanding of Debt Collection Validation Notices

by Jeff Sovern

We just posted to SSRN the draft of our article, Validation and Verification Vignettes: More Results from an Empirical Study of Consumer Understanding of Debt Collection Validation Notices, Forthcoming in the Rutgers U. L. Rev. (with Kate Walton & Nathan Frishberg). Comments welcome! Here's the abstract:

The federal Fair Debt Collection Practices Act obliges debt collectors to provide certain notices to consumers from whom they are attempting to collect debts. This article is our second to report findings from the first academic study of consumer understanding of one of those notices, commonly called the validation notice or “g notice.” We showed consumers different versions of collection letters and then asked questions to measure their understanding of the notices. Our findings raise serious questions about the efficacy of a commonly-used form of validation notice, especially when read in conjunction with the findings in our first article. 

In this article, we report that a fifth of the respondents who said they would write a letter if told they needed to do so to dispute a debt they did not owe failed to realize that the letter they saw said that the collector would have to verify the debt if they wrote 25 days after receipt of the collector’s demand for payment—even though the demand letter had been approved by the Seventh Circuit. Most respondents did not find the validation notice salient enough to mention when asked an open-ended question about the contents of the two-page collection letter they saw. We also found a gulf between what many consumers expect when requesting verification of a debt and what some courts say collectors must provide. 

Some consumers also seemed to run out of patience to dispute debts. Significantly fewer consumers said they would dispute a debt with a second collector when they had already disputed it once, though most said they would dispute the debt a second time. Because some collectors sell disputed debts to other collectors, that finding suggests that consumers will surrender some rights simply because they grow tired of asserting them. On the positive side, we found that seeing a validation notice made a difference on some questions, though not on others. After discussing these and other findings, the article offers some recommendations to lawmakers for addressing the problems revealed in our study.

House Appropriations Committee Votes to Subject CFPB to Annual Appropriations

by Jeff Sovern

The Hill has a report here. I don't think that can pass the Senate unless the Senate abolishes the filibuster rule or nine Democratic senators go along with it, so it seems unlikely to pass unless Democrats make a deal to do something they see as more important--which hasn't happened in the years the Republicans have been trying to get this through and so seems unlikely to happen this year.

Jeb Hensarling, the Financial Choice Act, and Wells Fargo

by Jeff Sovern

When the Bureau fined Wells Fargo $1 billion, it did so using its power to prohibit unfair practices in 12 USC 5531(c), 5536(a)(1)(B). (see pages 9 and 12 of the consent order). House Financial Services Committee Chair Jeb Hensarling's Financial Choice Act, passed by the House, would eliminate that power.  But don't take my word for it: the bill's Executive Summary says it would "Remove the [CFPB's] opaque and ill-defined 'unfair, deceptive, or abusive acts and practices' (UDAAP) authority (emphasis added)." The relevant section of the statute is 736, which provides that the bill would repeal section 5531 altogether and would also repeal subsection 5536(a)(1)(B), the two provisions under which the Bureau proceeded. So I was mystified when Congressman Hensarling praised the $1 billion fine--which would have been impossible under the power the Bureau used if he had gotten his way--as "well-deserved." 

During a recent interview, Politico's Ben "Morning Money" White asked Hensarling about the conflict. Hensarling first asked why the Bureau would not have had the power to assess the fine under his bill, and then said it would have. Certainly that would not be true under the powers the Bureau actually used. 

Mr. Hensarling also complained during the interview that the Bureau's use of its power to bar financial institutions from engaging in abusive practices is itself abusive.  His bill would also eliminate that power.  While the Bureau did not use its "abusive" power in connection with the billion dollar fine, it did use it, along with its unfairness power, when it fined Wells $100 million for opening unauthorized accounts. When discussing the unauthorized accounts scandal, Mr. Hensarling mentioned the Truth in Savings Act and Truth in Lending Act and seemed to suggest that the Bureau could have taken the same actions under those statutes.  As for the billion dollar fine, given that Interim Director Mulvaney's party thinks that the Bureau should not have the power to punish financial institutions for behaving unfairly, it is odd that Mr. Mulvaney would have used it if he had alternatives, especially given Mr. Mulvaney's view that he will do only what the law requires of him, and the use of the unfairness power necessarily requires some discretion.

CORRECTION: As Jonathan Joshua has pointed out to me, 15 USC § 1642 prohibits the issuance of credit cards in the absence of a "request or application."  So Wells did violate the Truth in Lending Act when it issued credit cards without such a request or application.  While Wells Fargo issued unauthorized credit cards, I'm not sure how many unauthorized credit cards it issued, and how many ordinary bank accounts it opened, though I have the impression that it opened many more bank accounts. I'm still not sure what Mr. Hensarling thinks in the Truth in Savings Act bears on the opening of bank accounts.