Consumer Law & Policy Blog

More on the CFPA, Credit Card Issuers, and Car Dealers

For more on Brian's post of yesterday about how credit card issuers are finding new ways to generate revenue, notwithstanding the Credit CARD Act, and how the CFPA could stop such actions, here's Jeff Gelles's take, In related news, BusinessWeek weighs in on the exclusion for car dealers in the House's  CFPA bill.  The headline: A Green Light for Car Dealers to Rip Off Buyers?  Anyone see a theme on what we expect of the CFPA? 

House Passes Consumer Financial Protection Agency Bill

Times coverage here.  Ed Mierzwinski has more of the details leading up to passage on his blog.

House to Consider Consumer Protection Bill Next Week

According to the House Financial Services Committee, it has completed work on the Wall Street Reform and Consumer Protection Act, (H.R. 4173), which would create the Consumer Financial Protection Act and also contains mortgage reform and anti-predatory lending provisions, and the House is scheduled to vote on the bill next week.

Banks Fear Consumer Confusion as House Moves Up Effective Date for Credit CARD Act

by Jeff Sovern

Earlier this week, as the Times reported, the House passed a bill to move up the effective date of some of the Credit CARD Act provisions to December 1.  Here's an excerpt from the Times article:

Industry executives, however, said the move could backfire by prompting companies to restrict the availability of credit at a time when the economy is in a recession.

“This will create significant confusion for consumers and will further restrict access to credit for both consumers and small businesses, all to the detriment of the broader economy,” said Kenneth J. Clayton, a senior vice president at the American Bankers Association.

It's a relief to see that banks are concerned about consumer confusion.  I wish that concern extended to their consumer contracts.

Vincent DiLorenzo on Market Deregulation and Moral Hazard in the Mortgage Market

My colleague, Vincent DiLorenzo of St. John's, has written Mortgage Market Deregulation and Moral Hazard: Equity Stripping Under Sanction of Law.  Here's the abstract:

This article examines the failure of the current regulatory structure to adequately protect consumers against risks in a home mortgage lending market characterized by complexity and limited transparency. It explores the reliance of bank regulators, particularly the Federal Reserve Board, on market discipline to control risks and the failure of market discipline. It also explores the Federal Reserve’s view that market intervention is only justified based on net societal benefits. This is a viewpoint that prevented regulatory intervention until the financial sector was in crisis, and a viewpoint that is at odds with the view of the Congress. This article urges a rejection of the net societal benefits standard as the determinant of regulatory intervention in the mortgage market.

Fed Action on Bounce Loans?

In Senate testimony last Wednesday, Federal Reserve governor Daniel Tarullo promised a final regulation on bounce loans (overdraft fees) within the month.  Banks are charging an average fee of $34 for average overdrafts of $17.  One hot issue raised by the proposed rule is whether customers should have to opt in to overdraft loans and fees, or whether banks can enroll them automatically while allowing them to opt out.  Any behavioral economist will tell you that far more consumers will "choose" to avoid overdraft fees if an opt-in mechanism is required than if they are required to opt out.

 

USA Today recently reported that the Fed has decided to require banks to have consumers affirmatively opt in before paying overdrafts and charging hefty fees, based on Wednesday's testimony.  The Wall Street Journal also announced the Fed's decision.  I watched the video of the exchange between Senator Shumer and governor Tarullo, and did not hear the governor announce any decision on the opt-in/opt-out issue.  On the other hand, given the intense pressure to demonstrate some consumer protection moxie, or lose jurisdiction to the proposed CFPA, it would not be surprising to see the Fed opt consumers out of expensive bounce loans, and require banks to get them to opt back in.

Interesting Newsweek Take on CFPA Proposal

The story is titled You Call This Financial Reform?  Why there's been a lot of talk about protecting consumers but little action . . .

Joe Nocera Column Calling for Consumer Financial Protection Agency

by Jeff Sovern

Joe Nocera has a terrific column in today's Times, Have Banks No Shame?, supporting the Consumer Financial Protection Agency.  The column should be required reading for anyone interested in consumer protection.  Here's my favorite part:

The current bank regulators, [bankers] point out correctly, already have consumer protection as part of their portfolios. “All they need to do is enforce the regulations already on the books,” one top banker told me recently.

Exactly!  But they won't because the existing regulatory structure discourages regulators from enforcing consumer protection.  That's why we need the CFPA--because regulators focused on other matters (safety and soundness, for example) lose sight of consumer protection. And because the existing structure, with financial institutions able to choose which regulator they will be subject to, pits regulators against each other in a competition for financial institutions to regulate.  Regulators competing for financial institutions are not likely to impose strict rules on those institutions; instead, they have every incentive to race for the bottom.  And that is undoubtedly a big part of the reason financial institutions prefer the current system: they would rather control the regulators than be controlled by them.

Could a Consumer Financial Protection Agency Have Prevented the Economic Crisis?

That's the title of my op-ed at FinReg21.  Here are the first two paragraphs:

The economic crisis was caused in part by millions of borrowers taking out loans on which they later defaulted. Perhaps if the Obama administration’s proposed Consumer Financial Protection Agency (“CFPA”) had existed in time, things would have been different. The administration’s proposal would give the CFPA the power to ban unfair, deceptive, and abusive lending practices, as opposed to the laws in place at the time of the borrowing binge, which required lenders to disclose loan terms to borrowers and assumed—incorrectly, as it turned out—that that was all borrowers needed to make good decisions.

We are still studying why disclosures failed to warn borrowers off of the doomed loans. Until recently, mortgage originators were not obliged to show many borrowers their final loan terms until the closing. My research assistant, Sabihul Alam, and I recently conducted a survey of more than a hundred mortgage brokers in 26 states to discover how borrowers use those disclosures. The brokers, who collectively participated in over fifty thousand loan closings, were nearly unanimous in saying that borrowers never withdrew from a loan after reading the final disclosures at the closing, and never used those disclosures for their stated purpose of comparison shopping for loans. Our survey also indicates that many consumers spend a minute or less with the disclosures—even though a mortgage may be the largest, longest-term, and most complex obligation a consumer ever assumes. In other words, we cannot depend on these disclosures to keep consumers from entering into loans with toxic terms.

Adam Levitin Paper on the Consumer Financial Protection Agency

Still more on the proposed CFPA (a theme of the last few days): Adam Levitin of Georgetown, and one of the signatories of our letter, has written The Consumer Financial Protection Agency.  Here's the abstract:

The Obama administration has proposed restructuring financial services regulation by transferring all consumer protection functions from existing agencies to a new Consumer Financial Protection Agency (CFPA). The goal of the CFPA legislation is to address the flaws in the regulatory architecture that have inhibited effective responses to the substantive problems, rather than mandate specific new substantive consumer protection laws.

The current consumer financial protection is based on disclosure regime and is policed through supervisory feedback, enforcement actions, and occasionally prohibitions on terms, products, and practices that are deemed inherently unfair and deceptive. On the federal level, consumer protection in financial services is divided among a number of agencies: the OCC, OTS, NCUA, Federal Reserve Board, FDIC, FHFA, HUD, VA, FTC and DOJ. Some of these agencies have the ability to promulgate regulations, some also exercise supervisory authority over financial institutions, and some may only enforce existing regulations. Sometimes authority is over a class of institutions, and sometimes it is over a particular type of product.

There are four main structural criticisms of the current regulatory structure: that consumer protection is a so-called 'orphan' mission; that consumer protection conflicts with, and is subordinated to, safety-and-soundness concerns; that no agency has developed an expertise in consumer protection in financial services, and; that regulatory arbitrage of the current system fuels a regulatory race-to-the-bottom.

Consolidation of consumer financial services protection authority could: place all financial services companies, regardless of the form of their charter, under a single regulator, thus ending its orphan status; separate consumer protection from safety-and-soundness regulation, thus ending subordination; encourage the development of a deep bench of regulatory expertise and knowledge, and; end the opportunity for regulatory arbitrage and any potential race to the bottom.

There are several potential concerns about a CFPA: conflicts with prudential regulators; ambiguity with respect to Consumer Reinvestment Act authority, and; potential overregulation resulting in higher costs of financial products, less product availability, and discouragement of innovation. Still, there are compelling reasons to believe that the present regulatory architecture cannot produce the optimal consumer protection regime and will continue to fail in its task, resulting in unfair treatment of consumers and a potentially significant source of systemic risk. To this extent, consideration of a CFPA should strive to distinguish between the basic thrust of the legislation - a consolidation of the regulatory authority of - and the proposed new substantive powers granted to the agency.