Consumer Law & Policy Blog

Washington Post Columnist Steven Pearlstein Reports Compromise Near in Senate on CFPA

Here.  Here's the paragraph on the CFPA:

The compromise hammered out between Dodd and Corker would establish a single regulator of federally chartered banks with a dual mission and an independent source of funding, based on my conversations with several key players. One division would promulgate and enforce rules to protect consumers; the other would fulfill the traditional role of supervising banks for safety and soundness. Supervisors from both divisions would participate in the periodic reviews of bank operations, and any conflicts between the two would be resolved by the head of the agency.

The CFPA Debate: Policy versus Politics

by Deepak Gupta

Reid Cramer of the New America Foundation released what looks like a handy new paper yesterday on the proposal to create a Consumer Financial Protection Agency. The paper summarizes the case for the new regulatory agency, the contents of the House bill, and key policy issues at stake. It looks like a useful primer on the issues, particularly for those who haven't been closely following this debate.

Unfortunately, I fear that the real debate right now is not about the policy merits of a new agency, what it would do to prevent another financial crisis, or what the agency should look like. Instead, as the Washington Post recently reported, the new strategy of the legislation's opponents, developed by the Orwellian pollster Frank Luntz, is not to discuss the actual legislation at all, but to "depict it as filled with bank bailouts, lobbyist loopholes and additional layers of government bureaucracy," using words like "bloated bureaucracy," "big bank bailout bill," "wasteful Washington spending" and "unintended consequences."

Think that must be some kind of joke? Then you must have missed this ad (which Jeff Sovern and Ed Mierzwinski blogged about last week), brought to you by the fine folks at the Committee for Truth in Politics:

Dishonest Ad Attacks CFPA Bill

by Jeff Sovern

Ed Mierzwinski of the excellent US PIRG Consumer Blog has a mind-boggling piece in the Huffington Post about an ad opposing the financial regulatory bill the House passed in December that would, among other things, create a Consumer Financial Protection Agency.  The ad, which purports to be made by the Committee for Truth in Politics is so dishonest that I hope it's a spoof.  It claims that the bill would provide for a $4 trillion bailout to banks.  In fact, as explained by the Annenberg Public Policy Center's Fact checkers, the bill would limit the Fed's existing unlimited authority to $4 trillion.  Is broadcasting lies the best opponents of the CFPA can do?

CFPA Supporters Need a Soundbite; Any Ideas?

by Jeff Sovern

I am convinced that one reason the CFPA has run into trouble in the Senate is that it's an issue that can't easily be boiled down to a soundbite, and hence generates little passion.  By contrast, Congress voted for the Credit CARD Act, despite opposition from the same bank lobby that opposes the CFPA, because voters felt credit card issuers had taken advantage of consumers.  It's harder to generate that same kind of passion about which agency should regulate consumer credit transactions, however, because the connection between who makes the rules and what those rules are, is complex, and explaining how competition between regulators for business generates a race to the bottom, or that the Fed has paid too little attention to consumer protection cannot be explained in a single phrase.  So I'm announcing a contest: if you have a good soundbite for the CFPA, post it in the comments below.  I don't have a prize to offer, except my congratulations.

My own entrant: "The banks have plenty of government agencies looking out for them; consumers want just one."

And now, an update on the CFPA: The Huffington Post reportsthat Senator Dodd, chair of the Senate Banking Committee will unveil his latest Consumer Financial Protection Agency bill later this month, and perhaps as early as this week.  Though HuffPo characterizes the Dodd version of the CFPA as independent in the headline, the article indicates that it will "likely" be housed within the Treasury Department.  Meanwhile, Elizabeth Warren, has an op-ed in the Wall Street Journal (paid subscription required) arguing for the CFPA.

Times Reports that Senate Financial Regulation Talks Break Down Over Consumer Financial Protection Agency

by Jeff Sovern

Here.  The article reports that Democrats will proceed on their own with the proposal.  The ranking Republican on the Committee, Richard Shelby, explained his position:

“I fully support enhancing both consumer protection and safety and soundness regulation,” Mr. Shelby said. “I will not support a bill that enhances one at the expense of the other, however. In order to strike the appropriate balance they must be integrated with each other, not separated from each other.”

And Senator Dodd's bargaining stance was reported as follows:

Several people involved in the Dodd-Shelby negotiations, who spoke on the condition of anonymity out of deference to Mr. Dodd, said the chairman had agreed in principle to concede a new agency in favor of a new consumer protection unit within an existing regulatory body. But these people said Mr. Dodd and Mr. Shelby could not agree on the degree of independence of that unit.

Senator Shelby has been the subject of withering criticism lately on an unrelated issue: his placing of a hold on all of President Obama's pending nominations.  For example, Sandy Levinson has referred to him as an "extortionate thug" on the Balkinization Blog, while Times columnist Gail Collins ridiculed his hold as "a dramatic gesture, one Shelby must have felt was so important that he took time out from his normal duties blocking all progress on creating a consumer protection agency for financial products."

 

Posner on Car Title Loans, Predatory Lending, and the Commerce Clause

by Deepak Gupta

Yesterday, Judge Posner issued an opinion that may be of some interest to those following the great debate over predatory lending and behavioral economics. As with many Posner opinions, its significance is of course enhanced by the author's identity. Although it doesn't actually take sides, the opinion devotes an unusual amount of space (for a judicial opinion) to citing and summarizing the leading research on predatory lending, including work by scholars such as Elizabeth Warren and Ronald Mann and consumer advocates such as Jean Ann Fox and Kathleen Keest, as well as their opponents on the right (e.g. Todd Zywicki). The opinion even takes note of the pending legislation to create a Consumer Financial Protection Agency, citing opinions pro and con, again without taking a position. But as we've noted here before, Posner has already taken a position on the legislation in his extrajudicial writings: He doesn't like it, and doesn't feel contrained by his judicial role from saying so.

The case concerns the constitutionality of an Indiana statute regulating car title loans (also known as car title pawns) -- loans with interest rates in the neigborhood of 300%, secured by cash-strapped consumers' vehicle titles, in which a lender advances a fraction of the vehicle's value to the consumer, who forks over a set of car keys to facilitate easy reposession in the event of default.  Indiana strictly regulates such loans through licensing requirements and interest-rate caps. But in neighboring Illinois, thanks to industry influence on state politics, it's a free-for-all. Concerned that Illinois-based lenders were evading the Indiana law by advertising directly to Hoosiers and entering into transactions on Indiana-titled vehicles, Indiana added a "territorial application" provision extending coverage to lenders that advertise to Hoosiers and then enter into transactions with them out of state.

Yesterday's decision strikes down that provision. It acknowledges that there's no economic protectionism or outright discrimination against interstate commerce at work here. Nevertheless, the court relies on a series of decisions forbidding extraterritorial regulation, including the Supreme Court's decision in Healy v. Beer Institute, 491 U.S. 324 (1989). The opinion concedes that Indiana isn't interfering with transactions with residents of another state, as in Healy, but focuses instead on the extraterritorial effect of interference with a commercial activity taking place in another state: "The contract was, in short, made and executed in Illinois, and that is enough to show that the territorial-application provision violates the commerce clause." 

The opinion makes some characteristically Posnerian analogies to illustrate that point, likening the law to an attempt by Indiana to ban its citizens from gambling in Las Vegas. "Of course the loan proceeds were probably spent in Indiana, but the same would be true of the winnings of a Hoosier at a Nevada casino. The consequences of a commercial transaction can be felt anywhere. But that does not permit New York City to forbid New Yorkers to eat in cities in states that do not ban trans fats from their restaurants."

So much for Indiana's attempt to protect its own consumers from one of the worst forms of predatory lending. But I wonder if Indiana can still get at the problem another way. The opinion notes that the loan company notifies the Indiana DMV of the loan as soon as it was made, so that the lender's security interest is protected against subsequent creditors, and that the repossessions occur in Indiana and the cars are auctioned off in Indiana. Surely Indiana would be well within its rights to regulate such conduct--particularly the use of its own DMV to prioritize the security interest--all of which occurs through the machinery of its own state government or within its own borders.

The case is Midwest Title Loans, Inc. v. Mills.  (Disclosure: Public Citizen, along with several other consumer groups, joined an amicus brief in this case authored by the Center for Responsible Lending.)

The Fight for the CFPA Continues

The Times reports that President Obama met with Senator Dodd yesterday to push for the CFPA.  Over the weekend, Times columnist Gretchen Morgenson wrote a piece, Credit Cards and Reluctant Regulators, about how credit card companies are doing an end run around the Credit CARD Act restraints and how it falls to the OCC, rather than a CFPA to protect consumers.  The entire column is worth a read, but here's an excerpt:

[S]uch attempts by card issuers [should] be met with an aggressive regulatory response.

That, however, would be a lot to ask, given that the Office of the Comptroller of the Currency is tasked with enforcing the new rules at most card issuers. This institution not only failed in its oversight of risky practices at Citigroup, to cite just one case — it more recently objected to one of the sound credit card rules the Fed is putting into effect.

“The O.C.C. to the end fought the rules and tried to get huge exceptions, carrying water again for the large banks they were regulating,” said Travis B. Plunkett, legislative director for the Consumer Federation of America. “Now they have to enforce this law that they disagreed with.”

* * *

For years, consumer protection has been of little interest to the major financial regulatory agencies, with the exception of the F.D.I.C.

THERE is no reason to believe that this mind-set will change, given that the same folks who failed to rein in abusive practices years ago are still in place at these shops. And it is just plain boneheaded to entrust consumer protection to agencies run by people who seem to care more about the interests of the financial institutions they regulate.

Opponents of the Consumer Financial Protection Agency, which is part of the financial reform working its way through Congress, say that such a thing smacks of “the nanny state.” But isn’t that preferable to “the pirate state” that brought this economy to its knees?

Consumer Financial Protection Agency Proposal Said to be in Trouble in Senate

by Jeff Sovern

The Wall Street Journal story is here.  Senator Dodd is said to be willing to settle for a beefed-up consumer protection agency within another federal agency, perhaps the Treasury.  Of course, the Office of the Comptroller of the Currency is such an agency, and it has been more of a hindrance to consumer protection than a help.  Settling for such a half-step--and maybe it's not even that--would be a huge disappointment.  The Huffington Post has Elizabeth Warren's take on this proposal and Reuters has this story on her reaction.

Stephen P. King Paper on Tort Law Reform's Effect on Consumers

Stephen P. King of the Faculty of Business and Economics, Monash University has written Does Tort Law Reform Help or Hurt Consumers?.  Here's the abstract:

Legal limits on insurance damages claims have been introduced in Australia, the United States and other jurisdictions. In this paper I construct a simple competitive model to analyze the effect of tort law reforms on consumers. The model shows that reforms to limit non-economic losses make consumers unambiguously worse off ex ante. Although insurance premiums fall and these reductions are passed on to consumers in full, this gain is more than offset by the increased risk that consumers are forced to bear. In contrast, reforms for income related (i.e. economic) losses lead to ambiguous outcomes. The potential benefits from limits to economic loss arise due to the inability of insurers to price discriminate on the basis of income or expected loss. Because of this there is an implicit cross-subsidy from low-income to high-income consumers that is embedded in the insurance premium and relevant product price. Tort law reforms partially unwind this cross subsidy.

The results presented in this paper show that tort law reforms may achieve their stated goal, such as lowering monetary prices, but can still make consumers worse off by introducing an uninsurable risk. There is also an important difference between reforms that limit claims for economic and non-economic losses. Insurance for economic loss will generally include an implicit cross-subsidy and, as a consequence, reforms can alter the ex ante utility for different groups of consumers in different ways.

More on Vincent DiLorenzo's Mortgage Market Article and the CFPA

by Jeff Sovern

In October, I posted a link to my colleague Vince DiLorenzo's article Mortgage Market Deregulation and Moral Hazard: Equity Stripping Under Sanction of Law.  I've since had a chance to read the article, and wanted to post an additional comment. The article demonstrates the gulf between Congress's intent in enacting various consumer protection measures--generally, to protect consumers--and the philosophy that underlies the actions of administrative agencies in interpreting and implementing those measures--generally, a much more pro-business, anti-regulatory approach.  Though the article never mentions the idea of a Consumer Financial Protection Agency, it offers considerable support for such an agency by documenting how dramatically existing agencies failed to live up to the legislative intent.