Consumer Law & Policy Blog

The Hill Reports on the GOP's Continuing Effort to Cripple the CFPB

by Jeff Sovern

Here. Eleven proposed bills this time.  It creates an interesting contrast with the just issued CFPB's Supervisory Highlights report, which reports, for example, that the CFPB found that one collection firm violated debt collection laws approximately 17,000 times and a creditor has been selling debts on which consumers were no longer liable.  And those are only two examples from one law covered in the report; there are plenty of others. If the Republican House members get their way, what would stop those violations of the law from continuing?

A Comment on the Senate Banking Committee Hearing on Alternative Financial Products

by Jeff Sovern

Last week, the Senate Banking Committee held a hearing on Alternative Financial Products. The
American Banker account is here, albeit behind a paywall.   I found most interesting the payday lending discussion, and in particular the arguments made against regulation.  At one point, a Senator (I think Toomey, Republican of Pennsylvania), questioned a witness, Stephanie Klein, Director of NetCredit Consumer Lending, Enova International, about payday lending. The senator seemed to be trying to make the point that payday lending need not be regulated because payday lenders already verified borrowers' ability to repay loans and also face competition, therefore forcing them to charge low rates or else lose market share, and was trying to elicit answers from Klein to support that position.  The only problem was that the witness, Klein, while working for a payday lender, does not seem to have anything to do with payday lending!  Rather, she works with installment loans. Consequently, while she was able to testify that her company verifies borrowers' ability to repay installment loans and faces competition in offering such loans, she was not able to speak to payday loans.  The senator's attempt therefore was what my 11-year old son would call an epic fail.

Senator Toomey's opening statement included an argument against payday lending regulation.  According to the American Banker report:

"What about allowing free men and woman to decide what works for them?" said Sen. Pat Toomey, R-Penn., the top Republican on the Senate financial institutions subcommittee. "I've got to say there's a breathtaking underlying arrogance by the presumption of wealthy people who have never been in those circumstances that they know better than those people who make these 'foolish' decisions and borrow money from these institutions."

I think we all agree that people should be able to decide what they want to do, within limits. The question is what should those limits be. The law blocks people from doing certain things that are harmful to themselves or others. Thus, "free men and women" can't buy heroin even if they think it "works for them" because heroin is harmful to them.   Nor can they get antibiotics without a prescription just because they want them because overuse of antibiotics is harmful to all of us.  So it is with payday lending for some people. Payday lending is like alcohol: a positive for some but a disaster for others (according to the CFPB's latest report, about which Brian blogged here, it's a disaster for many more people than it helps).  The argument for restricting people's freedom with payday loans is that (1) payday loans harm some payday borrowers; and (2) just as bad borrowing and lending brought down the economy in the Great Recession, bad payday borrowing can harm others.  To paraphrase then-professor, now-Senator Elizabeth Warren, we wouldn't allow people to buy a toaster which would start a fire that would destroy lives, nor should we allow people to borrow in a way which would destroy their lives. This isn't to say that payday lending should be barred in all circumstances; the CFPB's goal is to craft rules which make payday lending available to those who benefit from it while keeping those who would be destroyed by it away. It will be interesting to see what mechanisms they come up with to do that. And if expressing those views means I am breathtakingly arrogant (not that I'm wealthy), then I guess that's something I share with those who banned the sale of heroin. 

Ed Mierzwinski: What Congress Should Do About Data Breaches

Here. A look at the bigger picture, and a lot of sage advice.

House to Vote this Week to Make CFPB Less Effective

by Jeff Sovern

Housing Wire reports in Congressional Republicans mull bill to add CFPB oversight, that the House will vote this week on a bill to replace the CFPB's director with a commission and subject it to the congressional appropriation process.  The bill is not expected to receive a warm welcome in the Senate or at the White House.  Though the bill is described as increasing accountabilty for the Bureau, the effect of the changes would be to reduce the Bureau's ability to protect consumers.  For example, while the proposal to subject the Bureau to the appropriations process sounds unobjectionable, when Fannie and Freddie Mac's regulator were subject to that system, the regulator ended up toothless and unable to prevent the conduct that led to the GSEs needing gigantic bailouts.  Ultimately, the regulator was replaced, as we have previously discussed.   And commission structures, which often require that different commissioners be of different parties, frequently produce deadlocks. Would the CFPB commissioners include bank lobbyists, just as the OCC was formerly led by a bank lobbyist, who sued states to block them from stopping predatory lending (see here)? If so, how much protection would the Bureau provide consumers?

Here is how House Financial Services Chair Jeb Hensarling is quoted in the article as justifying the bill:

“These are modest, common-sense reforms that bring a modicum of accountability and transparency to the CFPB. We know that this is an agency that was designed to be unique, if not perhaps rogue; it is an agency like no other. Arguably it is the single most powerful and least accountable Federal agency in the history of our nation and thus demands rigorous oversight. The American people deserve better,” said House Financial Services Committee Chairman Jeb Hensarling, R-Texas.

“They now have witnessed a failed stimulus plan, trillions of dollars of unsustainable debt… revelations of NSA domestic data collection and a broken promise of ‘if you like your health insurance, you can keep it.’ The American people rightfully demand accountability from this administration, and H.R. 3193 is a step in the right direction,” Hensarling said.

Of course, the items he mentions in the second paragraph have nothing to do with the Bureau or financial regulation and some are inaccurate. As for the first paragraph,the Bureau has less independence than the OCC. It is interesting that Representative Hensarling fails to note that the CFPB was designed to prevent future Great Recessions. If we are worried about rogues, perhaps we should worry about those who destroyed the country's economy more than about those who are merely protecting consumers.  And speaking of rogues, I wonder how Mr. Hensarling feels about Sarah Palin, a self-described rogue.

CFPB Files Brief Opposing Tribal Lenders' Quasi-Preemption Argument

Last week, the CFPB filed an amicus brief in the Second Circuit in Otoe-Missouria Tribe of Indians et al. v. New York Department of Financial Services, a case in which online tribal payday lenders are challenging regulation by New York State. The CFPB's brief takes issue with the lenders' argument that Title X of the Dodd-Frank Act and Congress's creation of the Bureau indicates a federal interest in protecting tribal lenders from otherwise applicable state regulation. To the contrary, the brief explains, Section 1041 of the Act makes clear that Title X does not displace state law except to the extent that it is inconsistent with Title X and the Act defines “State” to include “federally recognized Indian tribe[s]." So if the court applies a balancing test, no federal interest favors the tribe's position.

Debate with Senator Vitter on the CFPB & Consumer Law in New Orleans

by Deepak Gupta

If you'll be in New Orleans tomorrow (Friday, Nov. 15),  I hope you'll drop by the Hyatt French Quarter for the Louisiana Bar's consumer law seminar. Among other things, Professor Dalie Jimenez of the University of Connecticut (a former CFPB colleague) will discuss her research on debt buyers.

At 4pm, you can watch me debate U.S. Senator David Vitter on a range of hot topics surrounding the creation and role of the CFPB. Our debate will be moderated by Judge Douglas Dodd of the U.S. Bankrtupcy Court. It should be fun. Details here.

Mount Holly and the future of disparate impact: history, deference, and constitutional avoidance

by Deepak Gupta 

On April 4, 1968, Dr. Martin Luther King Jr. was assassinated as he stood on the balcony of the Lorraine Motel in Memphis. His killing sparked a fresh round of riots in cities nationwide. Nearly two dozen representatives immediately changed positions and urged passage of the Fair Housing Act. Within a week, with armed National Guardsmen still quartered in the basement of the Capitol to protect it from surrounding violence, the House passed the Act and President Johnson signed it into law. The legislators who voted for the Act sought to combat the “practical effect" of facially neutral policies (not just overt discrimination) that resulted in residential segregation in American cities.

Mount Holly, a major civil rights case now before the U.S. Supreme Court, has big implications for whether the intent of those legislators will continue to govern discrimination in housing and lending. Today, my colleague Jon Taylor and I filed a brief on behalf of current and former members of Congress, including Senator Edward Brooke—one of the two key sponsors of the Fair Housing Act of 1968. You can find the rest of the papers in the case here.

The Fair Housing Act broadly prohibits discrimination in the sale or rental of housing and in housing-related brokerage and loan services. The Equal Credit Opportunity Act provides parallel protection in the consumer credit context. The question in Mount Holly is whether the FHA prohibits policies and practices that have a discriminatory effect—i.e., a “disparate impact” on a protected class—in addition to instances of intentional bias (“disparate treatment”). For years, the federal government and private parties have used disparate-impact theory to challenge discriminatory rental, sale, and lending policies. HUD recently issued regulations embracing disparate impact. The CFPB has embraced it as well. And every federal court of appeals to consider the issue (11 out of 11) has endorsed disparate impact as a valid means of enforcing the Fair Housing Act’s promise of equal housing opportunity. At issue in Mount Holly is continued vitality of this key enforcement tool. 

Our brief focuses on history. We demonstrate that the Act, understood in its proper historical context, was intended to allow disparate-impact claims. That was true when the Act was first enacted in 1968 and it was even more apparent in 1988, when Congress revised the Act. By that point, the strong and uniform consensus in the courts of appeals was that disparate impact claims are cognizable. That was also HUD's position. The main effect of the 1988 legislation was to delegate considerably more enforcement authority to HUD. If Congress didn't want to continue allowing disparate-impact claims, it would have been very strange to give the agency far more authority without altering the scope of substantive liability. Congress also added new language that presupposed the existence of disparate-impact liability and repeatedly rejected attempts to introduce an intent requirement. 

The brief also touches on a difficult question lurking behind the case: What role, if any, should the constitutional-avoidance canon play?  And how does it intersect with ordinary principles of agency deference? The petitioner, the Township of Mount Holly, raises constititional objections based on the Equal Protection Clause and the Tenth Amendment. But those constitutional challenges aren't actually presented in the case and nobody has raised them in other cases. Should the Court nevertheless interpret the statute narrowly to "avoid" those issues? Does that mean that Chevron deference goes out the window?  

Here's our take in the brief: Constitutional avoidance is supposed to show judicial restraint and respect for Congress. But applying the constitutional-avoidance canon in Mount Holly—where no constitutional claims have been presented, no similar claims have ever been asserted, and Congress has expressly stated that the Act’s remedial scope fully extends to constitutional limits—would show disrespect for Congress. The upshot of doing so (no disparate-impact claims ever) would be the same as reaching the potential constitutional issues not presented and prematurely resolving them against disparate impact in all cases. That's the opposite of judicial restraint.

NCLC report: Urgent need for reform of state property exemption laws to free up courts and protect basic family assets

A new report from the National Consumer Law Center surveys the property exemption laws of the 50 states, the District of Columbia, Puerto Rico, and the Virgin Islands that protect wages, assets in a bank account, and property from seizure by creditors. No Fresh Start: How States Let Debt Collectors Push Families into Poverty finds that not one jurisdiction’s laws meet basic standards so that debtors can continue to work productively to support themselves and their families.

States’ archaic exemption laws fuel the lucrative and fast-growing debt-buyer industry. For example, nine of the nation’s largest debt buyers purchased (for just a few pennies on the dollar) nearly 90 million consumer accounts with a face value of $143 billion, according to a January 2013 Federal Trade Commission (FTC) study. Consumers disputed at least one million of these debts, yet only half of the disputed debts were verifiable at all by the debt buyer. 

Despite the importance of state exempt property laws, this National Consumer Law Center report finds that not one state meets five basic standards:

• Preventing debt collectors from seizing so much of the debtor’s wages that the debtor is pushed below a living wage;
• Allowing the debtor to keep a used car of at least average value;
• Preserving the family’s home—at least a median-value home;
• Preventing seizure and sale of the debtor’s necessary household goods; and
• Preserving at least $1200 in a bank account so that the debtor has minimal funds to pay such essential costs as rent, utilities, and commuting expenses. 

The NCLC report recommends that state exemption laws should be reformed to:

• Preserve the debtor’s ability to work, by protecting a working car, work tools and equipment, and money for commuting and other daily work expenses.
• Protect the family’s housing, necessary household goods, and means of transportation.
• Protect a living wage for working debtors that will meet basic needs and maintain a safe, decent standard of living within the community.
• Protect a reasonable amount of money in bank accounts so that debtors can pay commuting costs as well as upcoming rent and utility bills.
• Protect retirees from destitution by restricting creditors’ ability to seize retirement funds.
• Be automatically updated for inflation.
• Close loopholes that enable some lenders to evade exemption laws. For example, states that allow payday lending enable these lenders to evade state laws that protect wages and exempt benefits from creditors. States that allow lenders to take household goods as collateral enable these lenders to avoid state household good exemptions.
• Be self-enforcing to the extent possible, so that the debtor does not have to file complicated papers or attend court hearings.

Model language for states to achieve these goals is provided in the National Consumer Law Center’s Model Family Financial Protection Act. The model law also includes steps that states can take to reduce the pervasive abuse of the court system by debt buyers. Seizure of debtors’ wages and property would not be such a problem if debt buyers did not churn out such an endless stream of judgments on old, poorly documented debts—many of which are based on mistaken claims. 

By updating exemption laws, states can prevent over-aggressive debt buyers from reducing families to poverty. These protections also benefit the state by keeping workers in the work force, helping families stay together, and reducing the demand on funds for unemployment compensation and social services.

The report includes each state’s overall rating and ratings for the five primary asset-preservation standards as well as appendices with specific exemption information on all 53 jurisdictions. Also included: Recommendations for the minimal exemption amounts that will allow a debtor to continue to work to support a family. 

Is the Solution to Payday Lending Better Disclosures?

by Jeff Sovern

As I have noted before, payday lending and deposit advances present a conundrum for me: how to permit those who genuinely have a short-term borrowing need and who can't get the money elsewhere to borrow without creating a long-term debt trap.  Recently I listened to hearing held by the Senate Special Committee on Aging titled Payday Loans: Short-term Solution or Long-term Problem?  The hearings included poignant testimony from Annette Smith in which she described how a deposit advance loan became a debt trap for her. The short version: her sole income comes from her Social Security payments.  More than five years ago, she took out a $500 loan to fix her car.  The following month that amount, plus a $50 fee was automatically deducted from her bank account when she received her Social Security. But she couldn't live on the remaining funds, and so borrowed again. The cycle repeated the following month, and went on for five years.  In all, she borrowed money 63 times, costing her nearly $3,000.  In effect, she paid nearly $3,000 to borrow $500 for five years.  And that's not unusual. According to the CFPB White Paper, Payday Loans and Deposit Advance Products, 14% of payday borowers/deposit advance customers borrow at least twenty times a year, and another 34% borrow between eleven and nineteen times a year. 

But another group takes advantage of such loans only occasionally: the Bureau's white paper found 13% borrowed once or twice a year. Some believe that payday lending should be banned even as to them because of its great expense, but suppose you want to permit the occasisional borrowers to use payday lending but not create a debt trap. How could that be done?

One possible solution might be a disclosure remedy in the hope that the disclosure would dissuade those who might fall into a debt trap from taking out the loans but not prevent the occasionals from using the loans.  I am not generally enthusiastic about disclosures, but one study, Marianne Bertrand & Adair Morse, Information Disclosure, Cognitive Biases and Payday Borrowing, 66 J. Fin. 1865, 1872-73 (2011), found a modest effect on payday borrower behavior when borrowers were shown a table comparing the cost of credit card borrowing and payday borrowing.  On the other hand, during the Senate hearing, industry spokespeople stated that consumers already receive disclosures warning that the loan they are contemplating is expensive. We know that that has not eliminated the debt trap but perhaps something stronger would.  The goal would be to construct a disclosure that is the equivalent of cigarette warnings, though as cigarette warnings have not completely succeeded in eliminating smoking, maybe something even more powerful is needed.

What should the warning look like?  Ideally, that would be the function of consumer testing.  My co-author, Chris Peterson, has argued that payday lenders should have signs reading "Warning: Predatory Lender." Perhaps that would do the trick, but I would like to see something more specific, like WARNING: This loan is so expensive that you should consider it only if you are DESPERATE to borrow the money, you cannot borrow the money elsewhere more cheaply, and you have a plan to pay it back next month so that you do not need to borrow it again and become trapped in debt, as many have."  I would then like the warning to list alternate lenders that might be cheaper. 

Another solution would be to require payday lenders to verify that their borrowers can repay the loans without becoming trapped, similar to the requirements imposed on mortgage lenders in some circumstances. But as that might drive the cost of such borrowing even higher, it would be better to avoid that route, if possible.  I would start with consumer testing to see if a warning reduced the number of people caught in a debt trap.

 

Roll Call: How Cordray Snagged 17 Republicans

by Jeff Sovern

Here.  According to the story, Republicans agreed to vote for Cordray because he promised to testify before (Portman's phrasing) brief (according to the CFPB spokesperson) the Appropriations Committee on the CFPB budget. Another piece of the agreement, according to Portman, is that the Bureau will implement cost-benefit analysis of CFPB regulations, though the Bureau spokesperson would not confirm that.  Assuming that the Senator is correct, that may not represent a change as Dodd-Frank already requires the Bureau to "consider . . . the potential benefits and costs to consumers
and [the entities it regulates]" before promulgating regulations.  12 U.S.C. § 5512.  I would have been concerned if the compromise required the Bureau to submit its regulations to the Office of Information and Regulatory Affairs for cost-benefit analysis, as the proposed Independent Agency Regulatory Analysis Act would require, since review by that office seems to slow adoption of regulations significantly.  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 have been languishing since 2010).  But that seems not to be the case, and besides that would require congressional action rather than just a decision by Cordray.