Consumer Law & Policy Blog

Paul Bland Op-Ed on Womack-Graves Arbitration Amendment

Here.  Excerpt:

 

* * * Congressmen Steve Womack (AR-3) and Tom Graves (GA-14) wrote an amendment to an appropriations bill that ignores all the evidence in the [2015 CFPB Arbitration] report. Unsurprisingly, they both have received consistent financial support for years from banking lobbyists. Adopted by voice vote within a matter of minutes, the amendment revoked CFPB’s authority to create regulations for arbitration clauses until an entirely new study is conducted.

CFPB would be barred from restoring American consumers’ essential right to bring their disputes to court until they essentially repeat the study they just did. * * *

House Appropriations Committee Votes to Block Arbitration Reform

by Jeff Sovern

CFPB Monitor is reporting:

[T]he House Appropriations Committee has approved an amendment to the FY 2016 Financial Services Appropriations bill that would impose new requirements on the CFPB before it can issue a rule governing arbitration agreements.  The amendment, which was introduced by Republican Representatives Steve Womack and Tom Graves, reportedly would require the CFPB to produce a peer-reviewed study on arbitration and determine that the benefits of a new rule outweigh the costs before issuing an arbitration regulation.

They attribute the information to a Politico report.  The House Appropriations Committee web site indicates that the amendment was approved on a voice vote and that the Committee has approved the bill, as amended.  

Scholars show support for Dodd-Frank's too-big-to-fail authority

by Deepak Gupta

One of the most important but under-appreciated features of the Dodd-Frank Act was its establishment of the Financial Stability Oversight Council—a new entity with a clear statutory mandate to identify and respond to systemic risks to the entire U.S. economy. The authority was inspired by the failures of entities like the insurance giant AIG, which had to be rescued by taxpayers to prevent catastrophic effects on the U.S. (and world) economy.

But when FSOC designated MetLife as a systemic risk (in common parlance, "too big to fail"), MetLife fired back with a lawsuit challenging FSOC’s authority, among other things, to designate a nonbank insurance company in this manner. MetLife is represented by Gene Scalia—a Washington lawyer who's made a cottage industry of challenging financial-reform regulation. Earlier this month, FSOC moved to dismiss the case (or in the alternative, for summary judgment). On the eve of the Memorial Day holiday weekend, several groups of distinguished scholars filed amicus briefs in support of FSOC. 

• Our firm serves as counsel to a group of prominent insurance-regulation scholars, led by Daniel Schwarcz of the University of Minnesota Law School, who filed a brief arguing that the patchwork of state-insurance regulations—on which MetLife urges the court to rely—is insufficient to regulate the systemic risk posed by massive financial conglomerates such as MetLife.

• A distinguished group of scholars of financial regulation and administrative law, led by Robert Jackson and Gillian Metzger of Columbia and Kate Andrias and Michael Barr of the University of Michigan, filed a brief arguing that Congress had intended to give FSOC broad powers to regulate nonbank financial firms, subject only to limited judicial review.

• Viral Acharya and a group of other distinguished NYU economists filed a brief arguing that, as a matter of economic reality (drawing on the group's considerable research in this area), insurance companies such as MetLife can pose systemic risk to the entire economy. 

• Finally, Better Markets, a non-profit organization focusing on financial regulation, submitted a brief arguing that Congress gave FSOC wide latitude to designate risky financial firms and that Congress chose not to require a “cost-benefit analysis” before any designation.

The case is now before U.S. District Judge Rosemary Collyer, who's expected to hold argument on the motion to dismiss. But it's unlikely that the district court will have the last word; the case has clearly been set up as a test case of Dodd-Frank's systemic-risk authority over nonbanks. No matter what happens, it's safe to say that the case is headed upstairs.

Is Senator Shelby Trying to Sabotage Mortgage Disclosures? Does He Want Another Great Recession?

by Jeff Sovern

Senator Shelby, chair of the Senate Banking Committee, Housing and Urban Affairs Committee, has released a discussion draft of “The Financial Regulatory Improvement Act of 2015.” The draft provides in Section 117, that the CFPB's new mortgage disclosures (sometimes called the "TRID Rule"), promulgated way back in November of 2013 and scheduled to take effect this August, could be ignored by lenders providing the old mortgage disclosures (you know, the ones that consumers couldn't understand) until thirty days after the CFPB Director certifies that the new disclosures "are accurate and in compliance with all State laws."  Some in the industry have complained that 19 months wasn't enough time to comply with the new rules for forms.  The CFPB Monitor Blog explains "Potentially the concept is intended to address a concern raised by the industry that many state laws in some fashion incorporate the existing disclosures under TILA and RESPA, and have not been updated to reflect the Loan Estimate and Closing Disclosure under the TRID rule." So under this bill, if a single state wants to keep the new rules from taking effect in the entire country, all it would have to do  is refuse to amend its laws to comply with the new rule.  Which means that lobbyists just have to block action in one state to shoot down a rule for the entire country.  Oh, and in case anyone forgot, the mortgage disclosures that Senator Shelby would preserve are barely changed from the ones that led to the subprime crisis that led to the Great Recession.  After all, waiting for the states to fix their laws is more important than preventing another Great Recession.

American Banker: Shelby Releases Full Draft of Reg Relief Bill

Here.

Elizabeth Warren Expected to Propose Bill to Give CFPB Power to Regulate Auto Dealer Lending

The Hill has the story here.

American Banker Reports House Voted to Cap CFPB Funding Requests

The headline reads Battle Over CFPB Funding Erupts Anew in House and the story is here.

McClatchey: Obama threatens to veto bill that would cut funding for consumer agency

by Jeff Sovern

Here. Excerpt:

The bill as amended lowers the bureau’s budget cap by $9 million over 10 years. The cap is set at 618.7 million for fiscal year 2015.

Given that the law already caps the bureau’s funding and allows increases it only in line with the government’s employment cost index, the lower cap proposed in the amendment “is solely intended to impede the (bureau’s) ability to carry out its mission of protecting consumers in the financial markets,” said the White House Office of Management and Budget in a statement released Tuesday.

“These reductions to the caps could result in, among other things, undermining critical protections for families from abusive and predatory financial products,” the statement said.

If the bill came to the president’s desk as amended, his senior advisers would recommend he veto it, the statement said.

A spokesman for the GOP-controlled House Committee on Financial Services said in an email that the bill doesn’t cut funding; it just lowers the maximum amount the bureau could request from the Federal Reserve during two of the next 10 years by 0.1 percent.

“If this budget cap were applied to the typical American family with a household income of $50,000 a year rather than Washington bureaucrats, it would be the equivalent of tightening their budget by $7 per year,” wrote the spokesman, Jeff Emerson. “Most every American has done much more than that in the Obama economy. Surely the (consumer bureau) can, too.”

I wonder if Emerson would like to see similar reasoning applied to proposals to cut the defense budget.  Most Americans do without tanks and fighter planes.  Surely the Department of Defense can too.  I look forward to a fuller explanation of why reducing the amount the Bureau can request is not a funding cut but it is nevertheless equivalent to "tightening" household budgets.

 

 

 

 

 

 

Read more here: Inhttp://www.mcclatchydc.com/2015/04/21/263903/obama-threWhatatens-What intertWhat o-veto-bill-that.html#storylink=cpy

 

Barney Frank's Autobiography and "Gotcha" Remarks

by Jeff Sovern

I just finished listening to the audio version of Barney Frank's autobiography, Frank: A Life in Politics from the Great Society to Same-Sex Marriage, which Frank reads himself. I listened to it to learn more about consumer law--Frank was so involved in creating the CFPB that the statute doing so carries his name--but the book doesn't actually add much to what I have encountered elsewhere on the subject (though it adds a little, as noted below).  Nevertheless, the book is well worth listening to. Frank is an entertaining and informative writer and I loved his volume.  Regular readers of the blog will probably care about many of the issues Frank discusses and will likely enjoy learning more about Frank's insights into Congress and the electoral process. 

Despite what I just wrote, the book has a few interesting items on consumer protection issues.  Critics of the Dodd-Frank Act and other consumer protection laws often charge that government regulation led to the Great Recession in that lenders were forced to make unwise loans by laws supported by Democrats (see below).  This, of course, is hard to reconcile with the fact that at the time the Great Recession hit, we had had a Republican president for nearly eight years, and Congress had been in Republican control for much of that time. Yet somehow, the minority party ruled banking.  In fact, as Frank points out, Republicans opposed efforts to restrain subprime lending.  Here are a couple of memorable quotes Frank includes in an appendix:

In 2007, Jeb Hensarling, now chair of the House Committee on Financial Services, said the following during a Committee hearing to consider a bill to limit subprime lending:

We still have to remember that millions of people have homeownership opportunities due to a subprime market. I am very leery of any legislation that could under cut that market.

And from the Wall Street Journal, a November 6, 2007 editorial about the same bill, titled A Sarbox for Housing: 

Throughout the 1980s and '90s, Congress prodded, even strong-armed, banks into making more mortgage loans to low-income and minority families. Washington enacted anti-discrimination and community lending laws with penalties against lenders for failing to issue riskier mortgages to homebuyers living in poor neighborhoods or with low downpayments and subpar credit ratings. And so it was that the modern subprime mortgage market was born.

* * *

But for all the demonizing [of subprime lenders], about 80% of even subprime loans are being repaid on time and another 10% are only 30 days behind. Most of these new homeowners are low-income families, often minorities, who would otherwise not have qualified for a mortgage. In the name of consumer protection, Mr. Frank's legislation will ensure that far fewer of these loans are issued in the future.

In other words, even though bad government regulation created the subprime market, that market is so wonderful that we shouldn't regulate it. Of course, we all know what happened because that market was insufficiently regulated.  Oh, and just to make clear, I don't agree that bad regulation created the subprime market. 

 

Johnston Paper Questions Whether Product Bans Help Consumers

Jason Scott Johnston of Virginia has written Do Product Bans Help Consumers? Questioning the Economic Foundations of Dodd-Frank Mortgage Regulation. Here is the abstract:

The system of residential mortgage contact regulation enacted by the 2010 Dodd Frank Wall Street Reform and Consumer Protection Act of 2010 has been justified as necessary to prevent lenders from exploiting consumer misperception and impatience through the sale of complex mortgage contracts with back-loaded or postponed charges, fees and penalties. Among other things, Dodd Frank creates a regulatory regime under which complex mortgages are penalized, amounting to de facto regulatory restrictions on such contracts. While behavioral law and economics scholars and regulatory practitioners have criticized complex mortgages as exploiting consumer misperception and impatience, such scholars and practitioners have neither advocated nor rigorously analyzed the costs of Dodd Frank style contract restrictions. Drawing on a large body of both theoretical and empirical work in neoclassical (rather than behavioral) financial economics, this article argues that while some consumers undoubtedly did fail to understand such complex mortgages, the terms of those mortgages had a solid economic rationale and made welfare-increasing mortgage credit available to consumers when it otherwise would not have been available.  By severely discouraging complex mortgages from being written, Dodd Frank and regulations promulgated thereunder by the Consumer Financial Protection Bureau have priced out of the mortgage market entire groups of potential homeowners – including younger people, minorities and the self-employed.  Welfare losses to such people from restricting contractual freedom are very real, and must be balanced against the benefits to those consumers who are arguably protected against ex ante undesirable mortgage contracts and to others in society arguably harmed when mortgages default.  A policy of minimizing such harms by speeding and lowering the cost of recovery from mortgage contract failure is argued to be superior to policies, such as Dodd Frank’s mortgage contract restrictions, designed to prevent such failures by mandating or manipulating private contractual choice.