Consumer Law & Policy Blog

Ann Graham Article on the CFPA

Ann Graham of Texas Tech has written The Consumer Financial Protection Agency: Love It or Hate It, U.S. Financial Regulation Needs It, forthcoming in the Villanova Law Review.  Here's the abstract:

As the U.S. economy begins a tentative recovery from recession, Congress is debating financial regulatory reform legislation. Whether a stand-alone consumer financial protection agency becomes a centerpiece of the new regulatory regime or a throw-away bargaining chip remains to be seen. In any assessment of the subprime-mortgage-crisis-gone-global, with the benefit of honest hindsight, failures of consumer protection loom large.

In the wake of this crisis, just as in the aftermath of the banking collapse of the 1930s, Congress has an opportunity to restructure a broken financial regulatory system. More than band aids are required. If the reforms Congress adopts now are to secure a lengthy period of financial stability, as was the case following the New Deal era’s reenvisioning of financial regulation, consumer protection cannot continue to be marginalized. Congress could muster the leadership and political backbone to create a new, independent agency whose sole mission is to protect consumers of financial products from the abuses which contributed to the present financial crisis. The prospect of such a major shift in the allocation of regulatory authority has already raised a hue and cry from beneficiaries of the status quo in the federal regulatory agencies and the financial industry lobby.

This article analyzes The Consumer Financial Protection Agency Act of 2009, as passed by the House of Representatives. Each section of the article identifies a key point of controversy, with arguments pro and con, coming down in favor of an independent consumer financial protection agency.

OCC Does About Face, Says It Supports An Independent Consumer Agency

Shahien Nasiripour at Huffington Post has the story:

 After months of criticizing the Obama administration's proposal to create a consumer-focused agency dedicated to protecting borrowers from abusive lenders, the nation's top big-bank regulator has reversed course.

The regulator, the Office of the Comptroller of the Currency, now supports an independent consumer agency -- finding itself on the opposite side of the issue from an industry it polices and powerful lawmakers it answers to, who are firmly committed to killing the proposed agency. . .

In an interview, Garsson acknowledged that the OCC had placed roadblocks in the path of the proposed consumer agency before evolving its position. One argument that was used by the OCC, the bank lobby and its friends in Congress to stir up opposition to the proposal was that the banking industry's safety and soundness, or its profitability, would inevitably clash with the consumer agency's mandate to protect borrowers, leading to situations where the consumer agency's views "would always prevail," ultimately hurting the bottom lines of the nation's roughly 8,000 banks and thereby drying up credit.

The general reaction seems to be one of skepticism about OCC's sincerity and motives, which may be largely tactical.  More at ThinkProgress and Felix Salmon, among other places.

April 6 Webinar with Elizabeth Warren on the CFPA

Next week, on Tuesday, April 6th from 4:00-4:45pm EST, Americans for Financial Reform is hosting a special webinar discussion with Professor Elizabeth Warren and AFR Director Heather Booth for the general public. It will focus on where things stand in the movement for financial reform, and how everyday citizens can get involved in the fight to rein in the big banks and get the economy back on track.

• Find out about reform efforts in Congress-including the Senate bill currently being debated, and the House bill which passed in December.
• Learn why we need a Consumer Financial Protection Agency to protect us from abusive financial products.
• Ask Professor Warren and Heather Booth your question about financial reform.
• Hear about ways to join the fight around the country and online. 

Space is limited. Click here to sign up now.  For background, see the recent New York Times profile on Professor Warren, Behind Consumer Agency Idea, a Tireless Advocate, or this article in Politico.

Bankers Were for Separating Safety and Soundness Regulation from Consumer Protection Before They Were Against It

Here's a quote from Elizabeth Warren's op-ed yesterday in Politico, referring to the 2006 filing from the American Bankers Association:

In 2006, the ABA claimed to act on principle as it railed against an interagency guidance designed to exercise some modest control over subprime mortgages. It criticized the proposal for “combin[ing] safety and soundness guidance with consumer protection guidance, creating confusion that is best addressed by separating them.”

The ABA went on to argue that the “marriage of inconvenience between supervision and consumer protection appears to blur long-established jurisdictional lines.” And then: “ABA recommends that the safety and soundness provisions relating to underwriting and portfolio management be separated from the consumer protection provisions.”

Read that again: The ABA in 2006 said that policymakers should separate safety-and-soundness and consumer protection — exactly the opposite of its position today.

More on the Dodd Bill's Consumer Protection Veto Council

by Jeff Sovern

As we've noted in the past, Senator Dodd's bill subjects the proposed consumer financial protection bureau to a veto by a two-thirds vote of a Financial Stability Oversight Council. Raj Date, Executive Director, Cambridge Winter Center for Financial Institutions Policy, has prepared a series of slides exploring, among other issues, how the Council would have voted back in 2005 if it had considered non-traditional mortgage protection.  The conclusion:

Unfortunately, given the public pronouncements of key regulators at the time, it is quite likely that a Financial Stability Oversight Council -- if it had been in place during the credit bubble -- would have overruled a Consumer Bureau's attempts to rein in the non-traditional mortgage market. The existence of the veto provision, in other words, would have prevented the Consumer Bureau from taking its most significant potential actions to forestall the credit crisis.

Of course, it's impossible to know what would have happened with such a counterfactual, but given the importance of getting this right, taking unnecessary chances doesn't seem like a good idea.

Constitutional Challenges to Health Care Reform: Florida, et al. v. HHS and Virginia v. Sebelius

by Deepak Gupta

A few minutes after the President signed the Patient Protection and Affordable Care Act today, Virginia Solicitor General Duncan Getchell left his office and walked across the street to the federal courthouse in Richmond, where he filed Virginia's constitutional challenge to the new law. 

You can read the seven-page complaint in Virginia v. Sebelius here. It's not a model of legal writing, but it does have the virtue of being concise. It begins with a block quote from a hastily passed state statute affirming the right of all Virginians to choose not to maintain health insurance coverage. Unless I'm missing something, that statute is nothing more than a legally irrelevant political stunt.  The complaint goes on, however, to articulate what I take to be the only serious legal challenge to health care reform -- that the individual insurance mandate goes beyond Congress's Commerce Clause power.  Relying on United States v. Lopez and United States v. Morrison, Virginia appeals to history:

“It has never been held that the Commerce Clause … can be used to require citizens to buy goods and services. To depart from that history to permit the national government to require the purchase of goods and services would deprive the Commerce Clause of any effective limits ..."

This argument has some rhetorical force. It's also rooted in a radical conception of individual liberty that one can imagine attracting some judges -- why should I have to buy insurance simply as a condition of being alive? I'd prefer to live in a cabin and avoid any obligations to society -- but it's hard to square with existing law. In particular, it's difficult to reconcile the  argument with Gonzalez v. Raich. As with marijuana, individuals' decision to purchase health insurance can have a “substantial effect on supply and demand in the national market for that commodity." Id.; see also United States v. South-Eastern Underwriters Ass'n, 322 U.S. 533 (1944) ("No commercial enterprise of any kind which conducts its activities across state lines has been held to be wholly beyond the regulatory power of Congress under the Commerce Clause. We cannot make an exception of the business of insurance."). Even smart libertarians agree that the argument is exceedingly unlikely to succeed.

Down in good ole Tallahassee this afternoon, Florida AG Bill McCollum filed a 22-page complaint on behalf of himself and the AG's of 12 other states (South Carolina, Nebraska, Texas, Utah, Louisiana, Alabama, Michigan, Colorado, Pennsylvania, Washington, Idaho, and South Dakota). The Florida suit, whose architect is David Rivkin of Baker Hostetler in D.C., echoes Virginia's challenge to the individual mandate.  It also raises two arguments that have even less chance of success: (1) that the legislation violates the Tenth Amendment's anti-commandeering principle, and (2) that the penalty on uninsured persons is a capitation or direct "tax" that is not apportioned among the states according to census data, in violation of Article I, section 9 ("No Capitation, or other direct Tax shall be laid, unless in Proportion to the Census or enumeration herein before directed to be taken."); see Eisner v. Macomber, 252 U.S. 189, 206 (1920).  Huh?

Chamber of Commerce Will Not Work to Repeal Health Care Reform

 The Chamber knows when to fold 'em. As the Chamber's President Thomas Donahue puts it: "If people want to try and repeal [the health care reform legislation], let them. We're not going to spend any capital on that." On this score, the Chamber is at odds with the Republican Party, which is claiming that it will begin its repeal efforts before the ink is dry on President Obama's signature. 

Streamlined Rulemaking for the FTC’s Consumer Protection Mission?

Guest Post by Dee Pridgen

I was recently invited to testify at the March 17 hearing of the Senate Commerce Committee, Subcommittee on Consumer Protection, Product Safety and Insurance on some proposed FTC reforms that had previously been passed as part of the House bill on consumer financial protection. This was a follow-up to hearings held in February by the full committee. The proposals being discussed included:

• substituting APA informal rulemaking procedures for the FTC’s existing unwieldy and cumbersome Magnuson Moss rulemaking proceedings,
• providing the FTC with authority to seek civil penalties for direct violations of the statute, rather than only for violations of rules and orders, and 
• providing the FTC with explicit authority to pursue aiders and abetters of FTC Act violators.

I testified in favor of all three proposals. Due to the spotlight on healthcare reform this week on Capitol Hill, this hearing did not get much attention (outside of the affected industries) but these consumer protection proposals should be supported.

FTC Commissioner Thomas Rosch testified in favor; Edward Mierzwinski, Consumer Program Director of the U.S. Public Interest Research Group, spoke in favor. Linda Woolley of the Direct Marketing Association spoke against, as did Timothy Muris, former chair of the FTC and now a professor at George Mason University School of Law. Commissioner William Kovacic was not at the hearing but provided a statement opposing the proposals. All the statements of these witnesses, including mine, can be found here.

I favor these proposals because the current Magnuson-Moss rulemaking procedures are so cumbersome that they have become a “dead letter.” FTC is now relegated to issuing industry guides, which do not have the force of law, responding to directives of Congress to promulgate regulations under specific statutes, such as the Telemarketing Sales Act, or bringing individual adjudications resulting in injunctions or cease and desist orders. To say that the FTC should keep this current process is basically to say they should not have the power to issue industry-wide rules without a specific Congressional mandate. The opponents have said that the FTC with APA rulemaking power would be like a “kid in a candy store,” or the “FTC on steroids” because the statute broadly prohibits all “unfair and deceptive trade practices.” However, I point out that the law of “unfair and deceptive trade practices” has been constrained and tempered since Magnuson Moss was passed in 1975, mainly by FTC policy statements using consumer injury cost-benefit ideas in unfairness policy and implementing a “reasonable consumer” standard in deception doctrine, so the need for the “safeguards” of Magnuson Moss is diminished. Also, there is no reason to believe that the FTC would go into regulatory overdrive if it had APA rulemaking authority to enforce its general unfair and deceptive practices jurisdiction. If the FTC uses APA rulemaking, it will be governed by the safeguards of the APA, including notice requirements, regulatory statement of basis and purpose, and judicial review. All agency rules must comply with other safeguards such as the Regulatory Flexibility Act, the Congressional Review Act and review by the Office of Information and Regulatory Affairs.

The Direct Marketing Association spokesperson expressed concern that the FTC would use APA rulemaking authority to limit innovation in internet marketing by requiring that consumers “opt-in” to the use of online profiling to develop focused ads on websites. Tim Muris stressed that the FTC would likely go back to the “binge” of regulating that occurred in the late 70s if given APA rulemaking authority. I say “times have changed” and the FTC needs the tools that other agencies have to issue binding rules in consumer protection.

President Obama Speaks on Financial Reform and the Consumer Financial Protection Agency

President Obama's Saturday morning address was devoted to the need for financial reform legislation.  A significant proportion of his address urged the establishment of a truly independent Consumer Financial Protection Agency. The President said that the CFPA was a key component of any meaningful financial reform. He spoke favorably of the Senate bill recently introduced by Senator Dodd. But a number of posts to this blog --- here, here, here, and here --- have claimed that the Dodd bill is weaker than the legislation passed by the House, among other reasons because it would place the CFPA within the Federal Reserve and give banking regulators veto power over its regulations.  View the President's address:

Daniel Carpenter's Times Op-Ed on Why the CFPA Should Not be in the Fed

Here.  Excerpts:

The Fed has a long and largely undistinguished history of consumer protection. During the 1970s, officials at the Fed opposed the Community Reinvestment Act, which attacked home lending discrimination, and the Home Mortgage Disclosure Act, which compelled banks to reveal their lending patterns.

When these became law, the Fed limply enforced them; it gave the same treatment to the Home Ownership Equity Protection Act, passed in 1994.

* * *

Embedding consumer protection in the Fed could be worse than imperfect. By giving the imprimatur of a consumer protection office to an agency that has long resisted consumer protection, Congress risks creating a false sense of security among policymakers and the public. The Fed’s politically reactive posture is the exact opposite of the sustained care that consumer financial protection demands.