Consumer Law & Policy Blog

Why Do Republicans Say a Commission Would Be More Accountable Than a Director?

by Jeff Sovern

Here we go again.

The Republicans have repeatedly tried to convert the Consumer Financial Protection Bureau to a commission structure. The latest effort, H.R. 1266, is sponsored by Representative Randy Neugebauer of Texas.  The bill would replace the CFPB's director with a five-member commission, of whom no more than three could be members of the same party.  The commissioners would serve staggered terms.

Representative Neugebauer justifies his bill in these words:

Over the last several years, the Bureau’s actions and record have proven it can’t function in a sustainable manner. Perhaps, more than any other Washington agency, the CFPB has demonstrated a lack of transparency and a lack of accountability. It has proven it is susceptible to political influence – bringing into question its independence.

“This is all the more troubling because the Bureau has an important mission: to protect consumers. I support consumer protection but we must ensure product choice, credit availability and cost of credit are considered before rushing to regulate. To better serve the American people, the Bureau must adopt a more balanced and consultative process to its rulemaking.

Where to begin?  First of all, it would have been nice if the representative had explained why he believes the Bureau is not functioning in a sustainable manner.  The Bureau has returned huge sums to consumers and has adopted numerous rules that protect consumers. Why isn't that sustainable? 

Second, what evidence supports the claim that the Bureau is not transparent and accountable? To mention only one thing, the Bureau holds frequent field hearings--one less than two weeks ago and another scheduled for this week--to keep the country very much informed about its activities.  Director Cordray frequently testifies before Congress about the Bureau's functioning. And what does the Representative mean by political influence?  By the way, according to the Center for Responsive Politics, Representative Neugebauer's biggest contributor is the Bank of New York.  Banks and a banking organization make up three of his five biggest contributors. Is that what he means by accountability?

Third, how does a commission structure improve accountability?  Why would five people running the show instead of one make the Bureau more accountable?  It seems to me that it would actually make the Commission less accountable.  Right now, the buck stops with Director Cordray. He can't duck responsibility. But if the Bureau had five commissioners, wouldn't each one be able to shift responsibility to the other commissioners?  A commission would diffuse responsibility, rather than enhancing accountability. I can see why banks might want a commission structure. Commissions act more slowly. When they lack their full number of commissioners, they may be paralyzed by tie votes, as has happened with some commissions recently.  That is good for those who oppose consumer protection. Not, of course, that Representative Neugebauer opposes consumer protection. Oh no. After all, he said he supports it. That must be why the banks are among his leading contributors. 

Richard Cordray's remarks on the CFPB arbitration report

Here's the text of CFPB Director Richard Cordray's remarks on the arbitration report, to be delivered at today's field hearing in Newark.  He summarizes the legal backdrop to the Bureau's report, its empirical approach, and its key findings (which I've highlighted in bold). Well worth reading in full.                                                                           

Prepared Remarks of Richard Cordray

Director of the Consumer Financial Protection Bureau

Field Hearing on Arbitration, Newark, New Jersey, March 10, 2015

Thank you for joining us for this field hearing of the Consumer Financial Protection Bureau.  We are here in Newark today to discuss the subject of arbitration.  At its most basic level, arbitration is a way to resolve disputes outside of the court system.  Parties can agree in their contract that if a dispute arises between them at a later time, rather than take it before a judge and perhaps a jury as part of a public judicial process, they will be required to turn instead to a non-governmental third party, known as an arbitrator, to resolve the dispute in private.  These contractual provisions are referred to as “pre-dispute arbitration clauses.”

Arbitration clauses were rarely seen in consumer financial contracts until the last twenty years or so.  Arbitration is often described by its supporters as a “better alternative” to the court system – more convenient, more efficient, and a faster, lower-cost way of resolving disputes. Opponents argue that arbitration clauses deprive consumers of certain legal protections available in court, may not provide a neutral or fair process, and may in fact serve to quash disputes rather than provide an alternative way to resolve them.

Long ago, prior to the Great Depression, Congress provided a general framework that located the role of arbitration in federal law.  Court decisions over the years refined the relationship between private arbitration and formal judicial proceedings under a number of federal business statutes, including the antitrust laws and the securities laws as well as under the labor laws.  More recently, however, Congress has taken an increased interest in arbitration clauses in consumer financial contracts.  In 2007, Congress passed the Military Lending Act, which prohibited such clauses in connection with certain loans made to servicemembers.  That was the first occasion on which Congress expressed explicit concern about the effect such clauses may have on the welfare of individual consumers in the financial marketplace.

In the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Congress went further and prohibited the inclusion of arbitration clauses in most residential mortgage contracts.  Another measure in that same law is of special interest because it leads directly to our discussion today.  In section 1028 of the Dodd-Frank Act, Congress directed the Consumer Bureau to conduct a study and provide a report to Congress on the use of pre-dispute arbitration clauses in consumer financial contracts.  Further, Congress provided that “[t]he Bureau, by regulation, may prohibit or impose conditions or limitations on the use of” such arbitration clauses in consumer financial contracts if the Bureau finds that such measure “is in the public interest and for the protection of consumers,” and findings in such a rule are “consistent with the study” performed by the Bureau.

We have set about this mandatory task to study the use of arbitration clauses with conscious care.  We began our study almost three years ago, when we issued a Request for Information seeking public input on the appropriate scope, methods, and data sources for this work.  We received dozens of written comments in response and held a series of stakeholder meetings to gather more informal input.  In December 2013, we released preliminary results from our study.  We wanted to provide a progress report to the public on our work, while also eliciting further comments on the work plan that we had developed.  In those results, we found that arbitration clauses are commonly used by large banks in credit card and checking account agreements.  We also found that these clauses can be used to prevent any litigation, including class litigation, from moving forward.  In addition, we observed that roughly nine out of ten such clauses barred arbitrations on behalf of a class of consumers.

Are Proposals for More Cost-Benefit Analysis a Stealth Attack on Dodd-Frank?

by Jeff Sovern

The American Banker had an article this week, Could the Fight Over Cost-Benefit Analysis Kill Reg Relief? that made some interesting points.  After noting that Senate Banking Committee Chair Richard Shelby advocates more cost-benefit analysis, the author, Victoria Finkle, wrote:

"The idea of rigorous cost-benefit analysis is like motherhood and apple pie which means Democrats will have a hard time explaining why it should not be determinative," said Aaron Klein, director of the Bipartisan Policy Center's financial regulatory reform initiative. "Cost-benefit analysis is great in theory, and where practicable it should be implemented, but the challenge is to find where it works in the real world and where quantifiable analysis is not possible and cost-benefit analysis doesn't make sense."

I think that cost-benefit analysis can be a great idea, and that's why I applaud Congress for directing the CFPB and the CPSC to consider cost-benefit analysis in drafting rules. The FTC's very organizational structure, including a Bureau of Economics, seems designed to carry out cost-benefit analysis, see Jonathan Baker, "Continuous" Regulatory Reform at the Federal Trade Commission, 49 ADMIN. L. REV. 859, 874 ( 1997), while the statutory definition of unfairness applicable to the CFPB and FTC alike has been called "[b]asically a cost benefit test."  See J. Howard Beales, III, Regulatory Analysis and the Independent Agencies, slide 4 (April 7, 2011).

But slavish adherence to cost-benefit analysis has costs of its own, as I argued here.  It can slow down adoption of regulations so much that it may become a weapon used by opponents of regulation not because of its merit but because of the delays it generates.  See, e.g., Editorial, Stuck in Purgatory, N.Y. Times, July 1, 2013 (noting that 72 draft rules had been under review for longer than the 90 days specified by executive order; 38 had been under consideration for more than a year; and three had been languishing since 2010);

Moreover, it is often hard to figure out how to value benefits to consumers.  For example, how do we value privacy?  Some people don't care about it at all, while others care greatly about it.  How can we tell how much those who care about privacy value it?  Do we pay attention to surveys or how people act--which seem to say very different things. If we focus on what people do, by, say, looking at how many opt-out of disclosure of their financial information under Gramm-Leach-Bliley, can we be sure that we are actually seeing how much they value privacy, or could it be that people don't realize from the privacy notices that their privacy is implicated and so discard the notices as junk mail?   As Ms. Finkle wrote:

 Critics of the push for greater cost-benefit requirements argue that such estimates can provide a false sense of precision when data is often based on assumptions or estimates.

So cost-benefit analysis can be a positive, but it shouldn't become an end in itself.  The relevant statutes provide for just the right amount of cost-benefit analysis. Those who seek more should bear the burden of showing that more would provide more benefits than costs. 

Consumer issues in tonight's State of the Union speech

The President highlighted consumer issues several times in his speech tonight.  Here's some of the relevant text:

• On Dodd-Frank and the CFPB: "We believed that sensible regulations could prevent another crisis, shield families from ruin, and encourage fair competition. Today, we have new tools to stop taxpayer-funded bailouts and a new consumer watchdog to protect us from predatory lending and abusive credit card practices."

• On vetoing GOP efforts to roll back Dodd-Frank: "We can’t put the security of families at risk by taking away their health insurance, or unraveling the new rules on Wall Street, or refighting past battles on immigration when we’ve got a system to fix. And if a bill comes to my desk that tries to do any of these things, it will earn my veto."

• On reducing crippling student-loan debt and making community college free: "Forty percent of our college students choose community college. ... Whoever you are, this plan is your chance to graduate ready for the new economy, without a load of debt. ... I want to spread that idea all across America, so that two years of college becomes as free and universal in America as high school is today. And I want to work with this Congress, to make sure Americans already burdened with student loans can reduce their monthly payments, so that student debt doesn’t derail anyone’s dreams."

• On middle class economics: "[A]t every moment of economic change throughout our history, this country has taken bold action to adapt to new circumstances, and to make sure everyone gets a fair shot. We set up worker protections, Social Security, Medicare, and Medicaid to protect ourselves from the harshest adversity. We gave our citizens schools and colleges, infrastructure and the internet — tools they needed to go as far as their effort will take them. That’s what middle-class economics is — the idea that this country does best when everyone gets their fair shot, everyone does their fair share, and everyone plays by the same set of rules."

Amato and Willis op-ed in L.A. Times

Lauren Willis (of Loyola Los Angeles) and Theresa Amato (of the Fair Contracts Project) have a great op-ed in today's Los Angeles Times on what to do about consumer financial illiteracy. "There are dozens of entities devoted to educating you about all things financial," they write, "[b]ut none of it is working very well." Financial literacy education isn't the answer; instead "[t]he financial marketplace must be structured so that ordinary people — people with limited time, math skills, attention and willpower, and an abundance of those wonderful American traits of trust and optimism — can navigate it safely and effectively." This means enforcing existing unfair-and-deceptive-practices laws, banning forced arbitration, and, perhaps most importantly, bringing financial industry incentives "into alignment with the interests of consumers."

If Republicans Take the Senate, What Happens to the CFPB?

Bloomberg story here, and here is one from InsideArm.com.

John Oliver on Payday Loans

John Oliver's comedy news-in-review show on HBO, "Last Week Tonight," had an excellent segment on payday loans last night. The show was well researched and probably exposed many people to these issues for the first time. Among other things, it covers the payday industry's reliance on recidivism (citing Center for Responsible Lending research and an exhibit from a recent CFPB enforcement action), its ability to skirt state-level regulation (citing a clip of oral argument in the Ohio Supreme Court), and its attempt to hide behind tribal sovereign immunity. Great stuff. Comedian Sarah Silverman also makes an appearance with a mock public-service ad about payday loans. Watch here:

 

 

The Hill: House rebuffs bid to limit congressional review of CFPB

by Jeff Sovern

Here.  To see why it is important to keep the CFPB's budget out of the appropriations process (just as with the other bank regulators), here's an excerpt from one of our posts from 2011 (the more things change, . . . ):

To see why this matters, you have only to read New York Times reporter Gretchen Morgenson's book (written with Joshua Rosner), Reckless Endangerment (2011).  The authors explain, at pages 28-29, that when Congress created the Office of Federal Housing Enterprise Oversight (OFHEO) to regulate Fannie and Freddie in 1992, Fannie lobbied to have OFHEO subject to annual appropriations by Congress.  The authors state:

The overseer would have to beg for money to operate. . . . [That, together with other constraints,] allowed Fannie to shift the power of oversight to congressional subcommittees, run by members who could be easily swayed by the company's lobbying efforts and campaign contributions.  Once his company's oversight was in the hands of Congress, [Fannie chief executive James A.] Johnson knew that he could work behind the scenes to derail any restrictions on the company's activities that OFHEO might suggest.

We all know how that ended.  OFHEO's efforts to regulate Fannie Fannie and its fellow enterprise Freddie failed miserably.  Fannie and Freddie needed a bailout of something like $160 billion, and OFHEO has since been replaced by a new regulator.  So this is really an attempt to enable financial institutions to regulate their regulator, the CFPB, and prevent effective consumer protection.

House Financial Services Committee's Continued Efforts to Weaken the CFPB

by Jeff Sovern

In its ongoing efforts to weaken the CFPB and consumer protection generally, the House Financial Services Comittee's Subcommittee on Financial institutions and Consumer Credit held a hearing on May 21 on eleven bills.  I will talk in this post about only one, the so-called ‘‘Preventing Regulatory Abuse Act of 2014, sponsored by Representative Barr. As regular readers of the blog are likely to know, the Dodd-Frank Act authorized the CFPB to take action against entities within its jurisdiction that engage in unfair, deceptive, or abusive practices.  Mr. Barr's bill would direct the CFPB to issue a proposed rule defining abusive within fifteen days of the bill's enactment and would block the Bureau from using its power under the abusive prong until the rule was issued.

I can appreciate that the industry would like to know what "abusive" means. Congress did too, and no doubt that's why it defined abusive in the statute.  Here's what Congress wrote:

The Bureau shall have no authority under this section to declare an act or practice abusive in connection with the provision of a consumer financial product or service, unless the act or practice—

            (1)             materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or         

             (2)             takes unreasonable advantage of—             

                 (A)                 a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service;             

                 (B)                 the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service; or             

                 (C)                 the reasonable reliance by the consumer on a covered person to act in the interests of the consumer.

 

That's a pretty good definition, in my view.  But the industry claims it needs to know more so it can predict whether particular actions are abusive.  Personally, I would love to hear examples of the conduct that the industry speculates might be abusive under that definition but isn't certain about.  So far, I haven't heard any, which makes me wonder whether the rule is really needed or whether this is part of a different agenda, the anti-consumer protection, anti-CFPB agenda.  I can't remember hearing calls for similar rules when the Fed was given the power to block abusive lending in 1994, a power the Fed basically ignored until 2008, though perhaps I just overlooked those calls.  Maybe what's really going on is that instead of an agency that was sympathetic to lenders having the power to ban abusive practices, the power is now in the hands of an agency charged with protecting consumers, and the industry wants to prevent that agency from using that power. But let's assume that the industry genuinely needs clarification.  That still leaves open the question of whether this is a good bill.

 

The bill calls upon the Bureau to act within 15 days!  Haven't they ever heard that haste makes waste, look before you leap, or Rome wasn't built in a day? Those cliches are cliches because they reflect a basic truth: that moving too quickly often leads to errors. if Mr. Barr genuinely wanted a good rule, wouldn't he want the Bureau to take the time to craft it well? No doubt the Bureau is still figuring out how best to use its abusiveness power.  The Federal Trade Commission had decades of experience with its power to ban deceptive practices before it issued its 1983 policy statement on deception, and likewise had decades of experience with its power to ban unfair practices before it issued its 1980 policy statement on unfairness.  The Bureau may not need decades before it is ready to issue a policy statement or rule on abusiveness, but surely it needs much more time than it has had.  And why a rule? Why isn't a policy statement, which was good enough for the FTC, good enough for the Bureau?  Yes, rules are subject to notice and comment, but is the industry having difficulty making its voice heard? Not, apparently, in the House.

New lawsuit by payday lending industry challenges "Operation Choke Point"

by Deepak Gupta

The payday lenders' main trade association, the Community Financial Services Association, brought an unusual lawsuit this week against three federal regulators -- the Fed, the FDIC, and the OCC -- in an effort to challenge a controversial federal initiative known as "Operation Choke Point." The case was filed in federal district court in Washington, DC.

At the heart of the industry's suit is a grievance that has been surfacing regularly among Republicans on the Hill of late: that the federal bank regulators are, in their view, unfairly using "coercive regulatory pressure" to get banks and other regulated financial institutions to end their relationships with payday lenders.

Here's how the complaint -- which you can read here -- puts it:

The Defendant agencies, under the guise of protecting the safety and soundness of banks, are waging a covert war against certain legitimate businesses that rely on banking services to function. What started as a set of diffuse sorties has now coalesced into a coordinated campaign, known as “Operation Choke Point,” designed by the Defendant agencies and the DOJ to eliminate certain lawful businesses that they disfavor, by using their regulatory and enforcement authorities to quietly coerce banks to terminate their relationships with the disfavored businesses.

The plaintiffs -- CFSA and a leading payday lender known as Advance America -- are represented by conservative superlawyer Chuck Cooper of Cooper & Kirk, who is best known for his unsuccessful defense of the California anti-same-sex marriage initiative, Proposition 8.  Legally speaking, the complaint alleges twelve different claims and appears to rely on at least four distinct theories: that the agencies' actions exceed their statutory authority, are arbitrary and capricious, were promulgated without observance of the procedures required by law, and deprive the plaintiffs of liberty interests without due process of law.

In essence, the payday lenders' beef is that banks have been threatened with greater regulatory scrutiny and reputational risk, through supervisory examinations and enforcement investigations, if they continue their relationships with payday lenders.

The payday lenders may have many reasons for bringing this suit -- including drawing attention to their plight and getting more traction with their friends on Capitol Hill -- but I fail to see how this thing flies in in court. On the facts, it's doubtful the banks will come forward and substantiate any of this. And even if they did, are the payday lenders challenging anything other than non-final, purely discretionary decisions about how these federal agencies deploy their supervisory and investigatory resources against third parties?  That's like suing a prosecutor because you don't like the investigations they're bringing.

Even setting all that aside, the truth is payday lending actually does entail serious risk to consumers that could threaten the banks themselves--a legitimate concern for any responsible regulator. It's interesting that neither the CFPB nor the Justice Department (or their top officials) were named as defendants. I wonder why.