Consumer Law & Policy Blog

What Wall Street Reform Means for You

Yes, I'm posting White House propaganda, but in my humble opinion this short animated video is a pretty good attempt to explain in simple terms what Wall Street Reform is all about:

"The Strongest Consumer Financial Protections In History"

The President's remarks from today's singing ceremony:

...[U]nless your business model depends on cutting corners or bilking your customers, you have nothing to fear from this reform. 

 

 Now, for all those Americans who are wondering what Wall Street Reform means for you, here's what you can expect. If you've ever applied for a credit card, a student loan, or a mortgage, you know the feeling of signing your name to pages of barely understandable fine print. But what often happens as a result, is that many Americans are caught by hidden fees and penalties, or saddled with loans they can't afford. That's what happened to Robin Fox, hit with a massive rate increase on her credit card balance even though she paid her bills on time. That's what happened to Andrew Giordano, who discovered hundreds of dollars in overdraft fees on his bank statement – fees he had no idea he might face. Both are here today.

Well, with this law, unfair rate hikes, like the one that hit Robin, will end for good. And we'll ensure that people like Andrew aren't unwittingly caught by overdraft fees when they sign up for a checking account. 

With this law, we'll crack down on abusive practices in the mortgage industry. We'll make sure that contracts are simpler – putting an end to many hidden penalties and fees in complex mortgages – so folks know what they're signing. 

With this law, students who take out college loans will be provided clear and concise information about their obligations. 

And with this law, ordinary investors – like seniors and folks saving for retirement – will be able to receive more information about the costs and risks of mutual funds and other investment products, so that they can better make financial decisions that work for them. 

All told, these reforms represent the strongest consumer financial protections in history. And these protections will be enforced by a new consumer watchdog with just one job: looking out for people – not big banks, not lenders, not investment houses – in the financial system. 

Predatory Lender Tactics

by Jeff Sovern

Yesterday, the Pittsburgh Post-Gazette published my op-ed, Consumer Bureau is Just the First Step, which reports on the tactics one predatory lender used to persuade borrowers to enter into loans that were not in their best interest. Here it is:

Now that Congress has voted to create the Consumer Financial Protection Bureau, it will be up to the bureau to protect consumers from predatory lenders. The CFPB can be expected to face again the argument that the economic crisis was not a failure of consumer protection. With all the existing disclosure laws, how could consumers not have known what they were getting into?

An answer can be found in the confidential training manual of a predatory lender, the First Alliance Mortgage Co., attached to an affidavit in a Minnesota case by a former First Alliance loan officer, Greg Walling.

The manual instructs loan officers to point out forcefully, frequently and with the use of specified diagrams that a great deal of the money the borrower pays to the lender is interest and that much of that can be saved by prepaying the mortgage: "Did you realize that by the time you finish paying off this house, you actually agreed to pay off at least three houses?"

Nothing wrong with that. But it turns out to be a distraction from what is really going on.

Mr. Walling's affidavit explains that First Alliance charged high fees, but consumers overlooked that because the presentation "focuses the consumer's attention solely on the idea that the most important part of a mortgage is paying back the loan in a shorter time."

The presentation also undermined the legally mandated disclosures. Those disclosures undoubtedly showed a high APR -- that's how the interest rate is stated on the forms so consumers can comparison shop among different loans.

But before the consumer saw the final disclosures, Mr. Walling had explained that loans have three interest rates and that "the interest rate was what the consumer and I care about [and] the APR is what the federal government cares about ... APR was just an estimate and ... is always higher than the interest rate."

Though First Alliance's predatory practices ultimately brought it to a bad end, some of its practices did not die with it. Others have reported on mortgage originators who misled borrowers, while the complex loan terms often seen in subprime lending-payment option adjustable rate mortgages, hybrid ARMs and the like created their own distractions.

And the claim that disclosures did not cure the problem is, sadly, plausible.

Congress has made an important start down the road to protecting consumers. But now it will be up to the Consumer Financial Protection Bureau to take the next steps by realizing that disclosures are not enough to stop predatory lenders from deceiving consumers.

I've written more about the First Alliance manual and Mr. Walling's affidavit in my forthcoming Ohio State Law Journal article, Preventing Future Economic Crises Through Consumer Protection Law or How the Truth in Lending Act Failed the Subprime Borrowers, at pages 40-43.

Congress Passes Financial Reform; Much More Must Be Done to Rein in Wall Street

by Rob Weissman

More than a year and a half after Wall Street crashed the global economy, Congress has finally taken important action to rein in the Wall Street titans. The Wall Street reform bill is a crucial first step, passed despite the financial sector’s enormous investments in lobbying and campaign contributions. But Wall Street remains far too powerful in Washington, with the result that this bill does not contain crucial reforms that must be included in subsequent reform efforts.

On the positive side of the ledger, the bill contains stronger consumer financial protections and curbs on some of the worst practices in the derivatives markets.

Consumer Protection: The bill consolidates and streamlines existing consumer financial protection by creating a Consumer Financial Protection Bureau. This bureau will have the authority to crack down on unfair, deceptive and abusive practices in connection with consumer products such as payday loans, credit cards and mortgages by using new rules and enforcement powers. It also will have authority to ban particularly harmful practices such as forced arbitration. Had the bureau been in place and operating effectively during the run-up to the financial crisis, it would have prevented the predatory and abusive mortgage lending practices that led directly to the crash.

Transparency, Oversight and Stability in the Over-the-Counter (OTC) Derivatives Market: The bill also makes major progress on reining in reckless and unfair derivatives practices. It restricts the most egregious practices, such as federally insured banks engaging in risky proprietary trading and financial institutions making bets against their own clients. It requires the vast majority of previously unregulated OTC derivatives to be cleared and traded on regulated exchanges. Derivatives were a critical cause of the financial crisis; new clearing and exchange rules should go a long way toward stabilizing the system.

There are many other positive components of the bill. How effective they turn out to be will depend crucially on implementation over the next months and years. If Wall Street can regain control of the regulatory process, then many of the potential benefits from this bill will be lost.

Unfortunately, many important reforms are missing from the bill. Some key elements were jettisoned or weakened in the conference process. These include limits on commercial banks owning hedge funds, and the bulk of the requirement that commercial banks spin off their derivatives trading desks.

Financial Reform Passes!

Brian Beutler has the story at Talking Points Memo:

It's done. The Senate this afternoon, by a vote of 60-39 passed the final version of Wall Street reform legislation -- the exact same version the House passed two weeks ago, which will now go the White House for a signature. Senate Majority Leader Harry Reid (D-NV) said that the President plans to sign the bill next week.

The development, though expected for days, represents a major achievement for President Obama and congressional Democrats -- their first landmark bill since health care. And this time it's actually popular.

President Obama will sign the bill next week.

Lessons for Anti-SLAPP Work from Russell v ML-Implode.com

by Paul Alan Levy

A recent blog post by Aaron Krowne, castigating the rejection of an anti-SLAPP motion filed by his company ML-Implode.com as "bizarre ruling" and "blatant miscarriage of justice," has gained wide circulation on the Internet. Judge Deborah Chasanow of the United States District Court for the District of Maryland refused to grant a motion to dismiss, filed under Maryland's anti-SLAPP law, a libel suit brought against his company by individuals and entities who were criticized in an article published on the ML-Implode blog. The article said that the plaintiffs, a company arranging FHA loans in conjunction with the Penobscot Indian Tribe, were engaged in fraud. 

Although one can understand Krowne's dismay at the economic impact of the adverse ruling —  he indicates that his company will now have to file for bankruptcy —   it appears to be that the problem is not with the ruling but with Maryland's anti-SLAPP statute itself. As recited in the opinion, Maryland defines a SLAPP as a suit that was  "[b]rought in bad faith" against the party exercising free speech rights, Maryland Code, Courts and Judicial Proceedings § 5-807(b)(1), and was "intended to inhibit the exercise of [free speech] rights," § 5-807(b)(3).  The statute then allows a motion to dismiss only against "an alleged SLAPP suit." § 5-807(d)(1).

FTC Issues Major Report on Debt Collection and Forced Arbitration: System is "Broken"

by Deepak Gupta

The Federal Trade Commission today issued a major report on debt collection and the forced arbitration of consumer collection disputes. Concluding that "the system for resolving consumer debt collection disputes is broken," the FTC recommends a series of sweeping reforms. The new report, Repairing A Broken System: Protecting Consumers in Debt Collection Litigation and Arbitration, reflects information gathered at roundtable discussions following a February 2009 report on the same subjects. The vote to issue today's report was 5-0.

Given the heated debate in Congress and the courts over forced arbitration, the arbitration-related material in today's report is likely to receive the most attention. The report addresses concerns about requiring consumers to resolve debt collection disputes through binding arbitration without meaningful choice, bias or the appearance of bias in arbitration proceedings, and procedural unfairness in arbitration proceedings. The FTC's principal recommendations are:

• Consumers should have a meaningful choice about arbitrating debt collection disputes.
• Arbitration forums and arbitrators should eliminate bias and the appearance of bias.
• Arbitration forums should conduct proceedings in a manner that makes it more likely that consumers will participate.
• Arbitration forums should require that awards contain more information about how the case was decided and how the award amount was calculated.
• Arbitration forums should make their process and results more transparent.

Citing the scandal over the National Arbitration Forum, Commissioner Julie Brill issued a separate concurring statement in which she urged Congress to enact a temporary ban on the mandatory arbitration of consumer debt collection disputes:

Such a ban should remain in place until the arbitration process can be shown to be fair, transparent, and as affordable as traditional litigation, and until consumers have a meaningful opportunity to opt out of pre-dispute arbitration without losing access to the credit services they seek. Once these conditions have been met, Congress could lift the ban itself, or it could delegate that authority to the Federal Trade Commission or another appropriate consumer financial protection agency or bureau established in the future.

Today's report also recommended a number of sweeping reforms to consumer collection litigation:

• States should consider adopting measures to make it more likely that consumers will defend themselves in litigation, decreasing the prevalence of default judgments.
• States should require collectors to include more information about the alleged debt in their complaints.
• States should take steps to make it less likely that collectors will sue on debt on which the statute of limitations has run.
• Federal and state laws should be changed to prevent the freezing of a specified amount in a bank account including funds exempt from garnishment.

Not Everyone is Happy that the New CFPB Bill Will Give Denied Credit Applicants a Right to See Their Credit Score

by Jeff Sovern

Berin Michael Szoka of The Progress & Freedom Foundation has written The Dangerous Implications of a 'Right' to Free Credit Scores .  Here's the abstract:

Under the Fair Credit Reporting Act of 2003, every American has a right to a free credit report once a year from each of the three major credit bureaus - Experian, TransUnion, and Equifax. A search on any major search engine for "credit report" will lead the user (via the top search result) to AnnualCreditReport.com, which guides the user through getting these free reports after verifying their identity - a process that takes about 15 minutes. Having these reports empowers us all to take responsibility for verifying the accuracy of the borrowing history used to make assessments about our credit-worthiness, and also to detect fraud or identity theft. But for some lawmakers, this freebie isn't enough.

I was a little perplexed that the abstract doesn't provide any reason why free credit scores are a bad idea, so I had a quick look at the paper.  Szoka is concerned about something called "information socialism," which is the name Szoka gives to the idea that someone can create a score or algorithm or some such thing and the government can force them to turn it over to others without charge, thereby reducing the incentive to create new similar inventions that depend on information.  Szoka fears that this provision is the slippery slope bringing us closer to such a state generally.  Personally, I'm not persuaded that free credit scores will have the effects Szoka fears.  Even assuming that information socialism is a problem, the information here has already been paid for by the creditor who purchased it and used it to turn down the consumer's application. I would have been more worried that making credit scores available would facilitate gaming them to produce higher scores that don't actually reflect that someone is more creditworthy--except that since you've been able to buy your credit score for years from Fair Isaac, that bird has flown. 

Building a New Consumer Protection Agency

Will Liz Warren or someone else be tapped to run the new consumer financial protection agency? What will the agency look like, what will its priorities be, and how will it manage the transition?  In today's Wall Street Journal, Sudeep Reddy takes a look at these and other questions surrounding the new agency.  An excerpt:

The president's choice of a director, subject to Senate confirmation, is almost certain to be controversial, given the power of the position and the fight over whether to create the agency in the first place.

Like Joseph Kennedy Sr., the first chairman of the Securities and Exchange Commission, the new director will shape the powerful agency's public image, initial priorities and starting lineup.

Democratic leaders in Congress say their top pick for the post is Elizabeth Warren, the high-profile Harvard law professor and an outspoken critic of what she sees as a too-cozy relationship between government and bankers.

Other potential candidates include Michael Barr, a Treasury assistant secretary and University of Michigan law professor with a longstanding interest in consumer finance; Democratic state attorneys general Martha Coakley of Massachusetts, Lisa Madigan of Illinois and Lori Swanson of Minnesota; Susan Wachter of the University of Pennsylvania's Wharton School, who served in the Clinton Department of Housing and Urban Development; and Nicolas Retsinas of Harvard's Joint Center for Housing studies, a former bank regulator and a low-income housing specialist.

The Future of Financial Reform: Looking Ahead

A few days ago, the indefatigable consumer advocate Ed Mierzwinski of U.S. PIRG had these forward-looking thoughts about financial reform at his Consumer Blog.  "It will be critical," Ed observes, "for public interest groups and the media to do three things over the next few years:"

 

-- First, we need to participate in the implementation of the law to make sure that industry lobbyists, well-versed in the ways of regulatory bureaucracy, don't use the regulatory and transition process to delay or weaken the act's provisions. 

-- Second, we need to watchdog the Congress and make sure it fulfills the oversight and accountability role it largely dropped for over ten years. The proposed act did not take the approach of breaking up the big banks or banning most risky practices. Instead it provides a very good set of tools for regulators to ensure that the banks don't take imprudent risks or do anything stupid. For this to happen, Congress needs to make sure that the administration appoints good regulators and Congress needs to do its job by making sure that those regulators do their jobs. Congress needs also to act swiftly on presidential appointments to the financial system, such as on the President's current nominees for Federal Reserve governor, including Maryland Banking Commissioner Sarah Bloom Raskin. In early August, the president will have another critical appointment available, as the term of John Dugan, head of the obscure but powerful Office of the Comptroller of the Currency (OCC), expires. Dugan has long been a steadfast opponent of states and their attorneys general taking action to protect the public against predatory or risky bank practices at the same time as his own federal agency failed to enact or enforce strong rules. Lately, he has spent most of his time blaming other than his national banks for the crisis. Most people know better. The OCC needs better leadership as its powers as prudential bank regulator are expanded under the bill and the soon-to-be-defunct Office of Thrift Supervision is rolled into it. No one will miss the OTS, which missed the warning signs of numerous bank failures and covered up others. 

-- Third, we need to plan for the future by making sure Congress finishes its unfinished business that wasn't done in the mammoth act. High on that list will be solving the Fannie Mae/Freddie Mac conundrum as the firms are still bleeding billions of dollars. [And] although Congress enacted the landmark Consumer Financial Protection Bureau, it failed to modernize the Federal Trade Commission.

(As a litigator, I'd add that we need to be ready to bring and defend the inevitable litigation, including regulatory challenges, that will arise out of the new legislation and its implementing regs).

Henry Sommer, a distinguished consumer advocate and bankruptcy expert, is also thinking about the past and future of consumer rights, but in much broader terms. He's guest-blogging at Credit Slips and you can read the first in a series of his reflections here, suggesting we may be experiencing a return toward consumer protection after a thirty-year hiatus.