Consumer Law & Policy Blog

Media Coverage of the Battle Between Auto Dealers and the Military Over the CFPA

The Times story is here and the Washington Post's coverage here.

Mike Konczal on Why Preemption of State Consumer Law is a Bad Idea

Here. It's an excellent summary of the argument.

Elizabeth Warren on the CFPA on Colbert

Here.  A highlight: Colbert, after noting that we already have bank regulators, asked why we need both belts and suspenders.  The reply: "Right now, we don't have any pants on."  (HT: New Deal 2.0). 

The President's Speech Today

by Jeff Sovern

I was lucky enough to be invited to attend President Obama's speech at Cooper Union today on financial reform, thanks to the thoughtfullness of Norm Silber of Hofstra.  Here's what the President said about the CFPA:

[T]his plan would enact the strongest consumer financial protections ever. This is absolutely necessary. Because this financial crisis wasn't just the result of decisions made in the executive suites on Wall Street; it was also the result of decisions made around kitchen tables across America, by folks taking on mortgages and credit cards and auto loans. And while it's true that many Americans took on financial obligations they knew - or should have known - they could not afford, millions of others were, frankly, duped. They were misled by deceptive terms and conditions, buried deep in the fine print.

And while a few companies made out like bandits by exploiting their customers, our entire economy suffered. Millions of people have lost homes - and tens of millions more have lost value in their homes. Just about every sector of our economy has felt the pain, whether you're paving driveways in Arizona or selling houses in Ohio, doing home repairs in California or using your home equity to start a small business in Florida.

That's why we need to give consumers more protection and power in our financial system. This is not about stifling competition or innovation. Just the opposite: with a dedicated agency setting ground rules and looking out for ordinary people in our financial system, we'll empower consumers with clear and concise information when making financial decisions. Instead of competing to offer confusing products, companies will compete the old-fashioned way: by offering better products. That will mean more choices for consumers, more opportunities for businesses, and more stability in our financial system. And unless your business model depends on bilking people, there is little to fear from these new rules.

The President also spoke about the opposition to the bill.  Another excerpt:

We've seen battalions of financial industry lobbyists descending on Capitol Hill, as firms spend millions to influence the outcome of this debate. We've seen misleading arguments and attacks designed not to improve the bill but to weaken or kill it. And we've seen a bipartisan process buckle under the weight of these withering forces, even as we have produced a proposal that is by all accounts a common-sense, reasonable, non-ideological approach to target the root problems that led to the turmoil in our financial sector.

But I believe we can and must put this kind of cynical politics aside.

Later the President quoted from a Time magazine report on bankers' reaction after passage of a reform bill:

 "Through the great banking houses of Manhattan last week ran wild-eyed alarm. Big bankers stared at one another in anger and astonishment. A bill just passed ... would rivet upon their institutions what they considered a monstrous system... Such a system, they felt, would not only rob them of their pride of profession but would reduce all U.S. banking to its lowest level." That appeared in Time Magazine - in June of 1933. The system that caused so much concern and consternation? The Federal Deposit Insurance Corporation - the FDIC - an institution that has successfully secured the deposits of generations of Americans.

Those last two quotes connect to the President's response to claims that the bill will lead to future bailouts.  Here's what he said about that:

[W]hat is not legitimate is to suggest that we're enabling or encouraging future taxpayer bailouts, as some have claimed. That may make for a good sound bite, but it's not factually accurate. In fact, the system as it stands is what led to a series of massive, costly taxpayer bailouts. Only with reform can we avoid a similar outcome in the future. A vote for reform is a vote to put a stop to taxpayer-funded bailouts. That's the truth.

Nevertheless, on the way home, I heard Sean Hannity on the radio describing the bill as a bailout bill.  And that in turn connects to what the President said about the CFPA, already quoted above: "unless your business model depends on bilking people, there is little to fear from these new rules."  Unless your advocacy model depends on misrepresenting the facts, there is little to oppose in this bill. 

Jeff Gelles Column About How a Bank May Have Misrepesented Debit Card Law

by Jeff Sovern

Here's the column, and follow up posts can be found here and here.  Basically, someone made unauthorized charges of $5,208 to a couple's bank account in December, as reflected in the bank's statement which came in January.  The couple didn't open the bank statement until March, when they reported the loss to the bank.  The bank told the couple that they had to bear the loss because they didn't notify the bank until 63 days after the bank statement went out.  The problem is that that's not what Regulation E provides. Reg E, § 205.6(b)(3) does provide that the consumer is liable for unauthorized withdrawals that take place more than 60 days after the statement goes out, but here the withdrawals were all well before that date.  The Reg imposes a $50 cap for consumer liability if the consumer reports the loss within two days of learning of it.  I can't tell whether the couple reported the loss within two days of opening the statement or not, but if they failed to do so, under § 205.6(b)(2), their exposure should be limited to $500.  So the bank was wrong.  Even more troubling is Gelles's experience trying to get federal agencies to comment.  Here's a quote, from one of the blog posts:

It took me several days to sort through the misinformation – partly, I have to suspect, because of the lack of a strong, focused consumer-protection agency for financial services. The Federal Reserve's Washington press office did not return at least two phone messages requesting help – not a good sign for an agency that seems to want to preserve its role in consumer protection and has resisted proposals for an independent Consumer Financial Protection Agency.

A spokesman for the Office of the Comptroller of the Currency, which oversees the bank in question, wasn't familiar enough with the rules to comment initially, and tried to refer questions back to the Fed, anyway. "They write the rules. It's their job to interpret them."  It's a common response from the OCC, and one that reflects our fractured system of bank oversight.

This time, the spokesman was helpful after I reminded him that it's the OCC's job to enforce the rules when it comes to national banks. Enforcing them requires understanding them, doesn't it?

Late Friday, I finally got a response from the OCC – not about the Mannings' case specifically, but at least about the pattern of facts.

Is it me, or do all roads lead to the need for a single federal consumer financial protection agency?

AARP Financial Reform Bill Music

Here.

New Studies on the Effect of Federal Preemption of State Lending Laws on the Foreclosure Crisis

by Deepak Gupta

A new study, The Preemption Effect: The Impact of Federal Preemption of State Anti-Predatory Lending Laws on the Foreclosure Crisis (PDF), conducted by UNC-Chapel Hill's Center for Community Capital, concludes that federal action to exempt large national banks from state consumer protection laws led to increased numbers of home foreclosures and risky lending practices. The study analyzes data from 2.5 million mortgages before and after federal preemption in states with and without anti-predatory lending laws, controlling for other factors to isolate the impact of preemption. 

In a companion study, The APL Effect: The Impacts of State Anti-Predatory Lending Laws on Foreclosures, the researchers demonstrate the effectiveness of state laws by studying the quality of loans, from both the loan level and neighborhood level, in states with and without state anti-predatory lending laws. "Our research confirms that state consumer protection laws work, but that when one group of lenders is handed a regulatory free pass, they are going to take advantage of it," says Center for Community Capital Director Roberto G. Quercia. "In this scenario, unfortunately, we see preemption shifting the activities of federally insured banks to riskier activities than they would otherwise have pursued."

The research “proves that that vigorous state consumer protection laws make a positive difference for consumers throughout the country,” said Jim Tierney of Columbia Law School's National State Attorneys General Program, which funded the study. Contrary to the claims of two Comptrollers of the Currency last week, federal preemption of stricter state consumer protection laws has worsened the effects of the housing crisis on homeowners, according to the study.

A summary of both reports is provided below the jump.

Texas Consumer Laws Prevented Banking Crisis

by Richard Alderman

Paul Krugman's editorial in the New York Times today compares the results of the financial crisis in Georgia with Texas, noting that Texas did not face similar problems. He states, "Why didn’t the same thing happen in Texas? The most likely answer, surprisingly, is that Texas had strong consumer-protection regulation. In particular, Texas law made it difficult for homeowners to treat their homes as piggybanks, extracting cash by increasing the size of their mortgages. Georgia lacked any similar protections (and the Bush administration blocked the state’s efforts to restrict subprime lending directly). And Georgia suffered from the difference."

Krugman is correct that throughout the 1990s, Texas law prohibited home equity loans and made it difficult for consumers to get over their heads in what appeared to be low interest rate debt. What he doesn't note, however, is that Texas has since amended its law to permit home equity loans. Although the Texas law does have some consumer protections, I don't think we will fare as well in the next economic crisis.

American Bankers Association Predicts Tougher Federal Rules Will Reduce Availability of Credit

by Jeff Sovern

The rules in question extended the HOEPA loan protections to more subprime loans. The thing is, they were adopted by the Fed in 2000, over objections by the ABA that they would reduce the availability of credit. See Sandra Fleishman, Fed Favors Tougher Loan Rules: Abuses in Subprime Lending Are Targeted, Washington Post, Dec. 14, 2000, at E01. Yet the volume of subprime lending skyrocketed after adoption of the rules, ultimately leading to the subprime crisis and the Great Recession. So if the ABA's predictions were so wrong back then, how much credibility do they have now when making similar claims?

A Bank President on the CFPA

by Jeff Sovern

According to the News and Record of Greensboro, North Carolina, here's what one bank president said of the CFPA proposal:

The consequences to the consumer will be equal or worse than what they’re trying to legislate away,” said Robert Braswell, president of Greensboro-based Carolina Bank.

The regulations proposed in the measure would duplicate some limits already on the books, he said.

Banks, he said, will pass on added costs to consumers or stop offering some services, such as free checking. Braswell said when he has been on lobbying trips to Washington on behalf of bankers groups, congressmen and congressional staffers did not seem receptive to points made by those in the industry.

“There is no consideration to (whether it’s duplicative); there’s no consideration as to cost,” he said. “Those who are behind this legislation are absolutely ill-informed and under-educated ... They refuse to consult with anyone who does possess the requisite knowledge.”

I'm not going to bother responding to the idea that Harvard law professor Elizabeth Warren is "ill-informed and under-educated." But I have to say something about the complaint that the measure is duplicative. The CFPA is needed precisely because agencies that had the power to protect consumers failed to use it.  So those powers would be taken away from the agencies that failed to prevent the subprime crisis and given to the CFPA.  Accordingly, the CFPA would not be duplicative. 

As for Braswell's claim that the CFPA might increase costs or reduce the availability of credit, first, it's impossible to know what the CFPA will do, so it's impossible to know whether it will generate any costs or reduce the availability of credit.  But second, personally, I hope it will adopt measures that will reduce the availability of the types of loans on which consumers are now defaulting in the millions.  Third, does Braswell really believe that the CFPA's cost to the consumer will exceed the cost of the bailout or the cost in misery to consumers who have been foreclosed upon  (and personally, I'd like to know whether he favored the bailout and whether his bank accepted bailout money)?

Finally,  Braswell complains that members of Congress and their staffs aren't listening to him.  Of course we don't know what he said, but if his argument was that the CFPA would be duplicative or Elizabeth Warren is under-educated, perhaps they shouldn't have listened to him.  But the sad reality is that someone is listening to him, or someone like him--because if they weren't listening, we would already have a CFPA.  (for more, see Baseline Scenario's view on Braswell's comments)

Update: ProPublica reports that in fact Carolina Bank did accept bailout money. (HT: Paul Kiel)