Consumer Law & Policy Blog

Elizabeth Warren's Devastating Cross-Examination of Leonard Chanin at the Senate Banking Committee Hearing

by Jeff Sovern

On April 5, the Senate Banking Committee held a hearing titled Assessing the Effects of Consumer Finance Regulations.  I've been listening to the hearing, which has three witnesses--selected by the GOP majority--who spent much of their time attacking the CFPB, and one witness- chosen by the Democratic minority-- who supported the CFPB.  One of the witnesses critical of the CFPB was Leonard Chanin, currently of Morrison and Foerster LLP.  When it was her turn to question the witnesses, Senator Warren conducted an extraordinary takedown of Chanin.  I recommend watching the Q&A.  It's available at various places, including here on Youtube. Those who don't have time to watch the video and want to read a transcript can find one here, but the transcript might not have the same impact. Really, to have the full impact, you have to listen to the entire hearing, because like the thirteenth stroke of a clock, the exchange calls into question all that came before it, including the criticism of the CFPB.  But that's a big time commitment, so just give the Q&A a listen.

A couple of comments on Chanin's defense for the Fed's failure to act from 1994, when Congress gave the Fed the power to act, until 2008, when the economy tanked: Chanin said that no statistical evidence existed to show a meltdown in the mortgage market. Even assuming that to be true, shouldn't the Fed have conducted its own information-gathering?  And does Chanin believe that regulators should not prevent predatory lending until there is statistical evidence of a mortgage meltdown? How is it that the investors portrayed in The Big Short figured out that there was a problem when they didn't have access to the Fed's information-gathering resources but the Fed didn't?  Should the Fed really take nearly a decade and a half to figure out that something is wrong with predatory lending?  And isn't the fact that it didn't another argument for the CFPB?

Hensarling on the CFPB

House Financial Services Chair Jeb Hensarling gave a speech today to the American Bankers Association Frank Act.   During the speech, he said the following about the CFPB:

[T]hey’re certainly not helped when Obama’s Financial Control Law [his name for the Dodd-Frank Act that created the CFPB, among other things] has killed off a benefit many, if not most, consumers once took for granted:  free checking.  Before it became law, 75 percent of banks offered free checking.  Just two years later, only 39 percent did so. 

Furthermore, as account fees rise due to Obama’s Financial Control Law, so do the number of low and moderate income households who are unbanked or underbanked – a number that stands at more than 34 million, according to the FDIC.

Only someone from Washington would dare call this “consumer protection.”

When it comes to the Orwellian-named Consumer Financial Protection Bureau, the Federal Reserve reports that – when fully implemented – one-third of black and Hispanic borrowers will be denied home ownership opportunities by the CFPB’s Qualified Mortgage rule.

Regrettably, it looks like the consumer protection agency is going to “protect” millions of Americans right out of owning a home.

If there were any justice in the world, consumers would be able to sue the CFPB for unfair, deceptive and abusive practices – early and often!

* * *

James Madison, in Federalist 47, . . . . wrote, “The accumulation of all powers, legislative, executive, and judiciary, in the same hands…may justly be pronounced the very definition of tyranny.”

If that doesn’t sound like the very definition of the CFPB, then I don’t know what does.  It is a case study in the overreach and pathologies of the unaccountable administrative state run amok.  At almost every opportunity, the Bureau abuses and exceeds its statutory authority, which is already immense.  The Bureau operates with such secrecy, unaccountability and bureaucratic tyranny it would make a Soviet Commissar blush!

It intentionally or, at best, negligently makes bad policy.  It acts as judge, jury and executioner – all without accountability and due process.  This should alarm every American.  Because as we become less governed by the rule of law and more governed by the whims of Washington regulators -- fear, doubt, uncertainty and pessimism are sown. 

The Bureau typifies not only the shadow regulatory system but also the unfair Washington system that Americans have come to loathe:  powerful government administrators, arbitrary rules, and unchecked power to punish or reward.   

Hensarling promised a GOP alternative to Dodd-Frank shortly.

Homo Lex? Will Law Make the Same Transition Economics Is?

by Jeff Sovern

Bear with me for a moment.  As is well-known, Richard H. Thaler and Cass R. Sunstein,in their important book Nudge, describe how classical microeconomics assumes that all people are rational. They call such rational people "Homo Economicus" or, for short, "Econs." But, as they also describe, and as Thaler elaborates on in his new and also excellent book, Misbehaving, real people are often not rational.  They make predictable errors, and the study of these errors has led to the development of behavioral economics.  Thaler, Sunstein, and many others have argued that economic models should be revised to take into account these discoveries to make the models more accurate in describing human behavior, and thus more useful in predicting that behavior. 

In Misbehaving, Thaler reports on how behavioral economics' model of the irrational person is winning the battle against classical microeconomics' Econs. Law has a similar war going on.  Classical legal rules also make assumptions about people that have been proved not to describe human behavior accurately. For example, contract law's duty to read--which usually holds people to their contract whether they have read the contract or understand it or not--assumes that people read contracts. Another example: in evaluating the 1692g validation notice debt collectors are obliged to provide to consumers, courts assume that the consumer has read that notice, and uphold the validity of the notice whether or not consumers have actually read it, as long as the notice is not overshadowed (by, for example, larger print demanding payment) or is not contradicted (by, for example,  demands for payment before the thirty days allotted for validation have expired.

But extensive literature, often referred to on this blog, makes clear that few people read contracts, and that many don't understand them when they do (I'll have more to say about consumer understanding of validation notices another time).  The law thus employs rules which appear to be designed for people who don't actually exist, rather than the people who do, just as the economics models did.  I've been trying to come up with a name for the imaginary humans the law assumes. Home Lex?  Lexons for short?  (Yes, I know "lexon" is not consistent with Latin, but "leges" doesn't have the right sound. And Lexis is taken.) If you have a better idea, please mention it in the comments.

This is a bit of an overstatement, but it seems to me that most common law consumer law rules are made for Lexons, while some statutes (but far from all) recognize that people are not always rational. The CFPB's rules partake of both. To the extent that the Bureau attempts to use disclosures to solve problems (e.g., the TILA/RESPA disclosures--and yes, I know the Bureau was commanded to do so by Congress), it is making rules for Lexons. To the extent that it prohibits self-destructive decisions (likely to be true of the forthcoming payday lending rules), it is making rules for real, fallible people.  We probably won't see a clear victory for either side across the board, but I predict one side or the other wins a victory in one area or another. I would love to see any comments people care to post on this.

Times: Bipartisan Bill Would Protect Service Members’ Right to Avoid Arbitration

Here.

More From the Times on Arbitration: Efforts to Rein In Arbitration Come Under Well-Financed Attack

Here. Excerpts:

[T]he U.S. Chamber of Commerce, the most powerful business lobby in the country, started a new effort to block the Consumer Financial Protection Bureau by lobbying lawmakers to attach a rider to the federal budget bill that would force the regulator to conduct a new study before issuing any rule, according to people with direct knowledge of the strategy.

* * *

On Wednesday, the Justice Department issued a proposal to protect military service members from arbitration requirements. Earlier this month, Senator Al Franken, Democrat of Minnesota and a longtime opponent of arbitration, renewed his push for Congress to pass a bill he introduced this year that would prevent companies from requiring employees to go to arbitration.

Several Democrats are expected to introduce bills intended to more widely curtail the use of arbitration clauses, according to the people. But with Congress deeply divided, some Democrats are calling on President Obama to use his executive authority to prevent federal contractors from including arbitration clauses in their contracts with customers and employees.

Elizabeth Warren in HuffPo: The Banking Industry's Transparent Attempt to Weaken the CFPB

Here. The entire essay is worth reading, but here's an excerpt to whet your appetite:

 

The latest industry-sponsored bill would fundamentally change the structure of the CFPB by replacing the agency's single, independent director with a commission of political appointees.

* * * [T]he agency is working, which may be exactly why the big banks and their Republican friends are pushing so hard to tangle it up with a different administrative structure. 

* * *

Let's face it: The quickest way to undermine an agency's effectiveness is to make it a commission -- which is why I want a single director and the banking industry doesn't.

* * *

Votes over the CFPB present the same choice today that they always have -- a choice between big banks and predatory lenders on one side and families on the other.

Housing Wire: House passes bipartisan TRID grace period bill 303-121

by Jeff Sovern

Here. The first paragraphs read:

Defying the threat of a White House veto, the House on Wednesday afternoon passed bipartisan legislation to help homebuyers avoid delays and disruptions when closing on their new homes by a bipartisan vote of 303-121.

The bill, the Homebuyers Assistance Act, provides a four-month grace period for businesses that are working in good faith to comply with a new 1,888-page rule from the Consumer Financial Protection Bureau that went into effect Oct. 4.

The article doesn't note until the eleventh paragraph the purpose of the regulations (to enable consumers to learn their mortgage payment obligations, ignorance of which contributed to the defaults and foreclosures leading to the Great Recession), and fails to mention at all that the regulations were announced nearly two years ago.

The Hill: Grassley to roll out student loan bill

Here. Excerpt:

Under Grassley's legislation, all students who are going to take out a federal loan to help pay for college would have to undergo counseling that would include an estimate of how much the student will likely make upon graduating versus their loan debt. Students would also look at potential options for scholarships or work to help offset costs. * * *

* * * [Grassley] added that the "federal government ... has a responsibility to at least ensure that students know what they’re getting themselves into before they get in over their heads. " 

D.C. Circuit holds Texas bank has standing to challenge CFPB's constitutionality

Just one day after a Senate Judiciary Committee hearing focusing on the constitutional challenge to the CFPB in State National Bank of Big Spring v. Lew, the D.C. Circuit has issued an opinion allowing that challenge to go forward on the merits and reversing the district court's dismissal on standing grounds. I testified in defense of the Bureau yesterday, as did Adam Levitin of Georgetown Law; C. Boyden Gray, counsel to Big Spring bank, testified in support of his constitutional theories. Thankfully, neither Adam nor I ventured any predictions about standing. Instead, we confined our comments to the merits. And I remain just as confident that these challenges will fail on the merits--just as they have already failed in four other federal courts.

Today's D.C. Circuit decision, written by Judge Kavanaugh and joined by Judges Rogers and Pillard, is quite a narrow one. It does not say (or event hint) anything about the merits of any of Big Spring's separation-of-powers arguments. Instead, the court holds the following:

1. The bank has standing to challenge the CFPB's constitutionality because it is regulated by, among other things, the CFPB's Remittance Rule and has "alleged that it must now monitor its remittances" to ensure whether they fall within a safe harbor to the rule. The challenge is also ripe because the bank need not violate the law and wait for an enforcement action--it need not "bet the farm," in other words--to challenge "the legality of the regulating agency itself."

2. The bank likewise has standing to challenge President Obama's recess appointment, for the same reasons. But the D.C. Circuit "leave[s] it to the District Court to consider the significance of Director Cordray's later Senate confirmation and his subsequent ratification of actions he had taken while serving under a recess appointment." In practice, the confirmation and ratification will prove dispositive.

3. The bank lacks standing or ripeness to challenge the Financial Stability Oversight Council (FSOC) because the bank can't rely on the doctrine of competitor standing to argue that the designation of another entity as "too big to fail" somehow harms the bank. The designation by FSOC imposes a greater regulatory burden on designated entities; any harm to Big Spring as a result is attentuated at best.

4. The States lack standing and ripeness to challenge Dodd-Frank's Order Liquidation Authority (OLA) for several independent reasons--mainly because the challenge is based on speculation about the government might wield its authority in potential future proceeding.

The good news here is that the D.C. Circuit has set things up nicely for the bank's inevitable loss on the merits. Right now, political opponents of the CFPB are using constitutional rhetoric as ammunition for their critiques of the agency as some kind of unaccountable rogue regulator. That becomes harder after an unbroken string of losses in the courts.

Senate hearing on constitutionality of CFPB and Dodd-Frank

This afternoon (at 2pm), I'll be testifying before the Senate Judiciary Committee on the constitutionality of the Consumer Financial Protection Bureau and the Dodd Frank Act. The title for today's hearing gives you a flavor of the sweeping (and fringe) legal theories being advanced by the CFPB's opponents: "The Administrative State v. The Constitution: Dodd-Frank at Five Years."

As I explain in my written testimony, the challengers' theories (which have uniformly failed in court after court) are based on separation-of-powers arguments at odds with eight decades of settled precedent. They aren't so much attacks on the CFPB and Dodd-Frank as attacks on the modern administrative state itself. In that sense, the hearing's title is apt. 

Here's the bottom line: The Bureau's political opponents, lacking the votes to kill the agency through the normal democratic process, are trying to constitutionalize their objections. In so doing, they're asking the courts to roll back the clock to before 1935--the height of judicial hostility to the New Deal.

A parallel dynamic is playing out in the appropriations process as well, where Republicans who don't have the votes to pass regular legislation are attaching a variety of anti-CFPB riders to must-pass funding bills--including a troubling rider that would kill the CFPB's arbitration study through a strategy of paralysis by analysis.

The majority witnesses at today's hearing will be C. Boyden Gray (former White House Counsel to Bush I and lead counsel for the plaintiffs in State National Bank of Big Spring, Texas v. Lew); Mark Calabria (Cato Institute); and Neomi Rao (George Mason Law). I'll be testifying alongside Adam Levitin of Georgetown Law, whose written testimony is here.

You can watch the hearing live here.