Consumer Law & Policy Blog

Today's House Hearing on the CFPA

You can access here the written testimony from today's House subcommittee hearing on the proposed Consumer Financial Protection Agency -- including that of Assistant Treasury Secretary Michael Barr, and of Gail Hillebrand on behalf of national consumer groups -- as well as complete video of the hearing.

White House Proposal Includes Authority to Ban Forced Arbitration

by Deepak Gupta

Included in President Obama's proposed Consumer Financial Protection Agency Act of 2009 is the following provision giving the new agency the authority to ban pre-dispute mandatory binding arbitration clauses:

SEC. 1025. AUTHORITY TO RESTRICT MANDATORY PRE-DISPUTE ARBITRATION.

The Agency, by rule, may prohibit or impose conditions or limitations on the use of agreements between a covered person and a consumer that require the consumer to arbitrate any future dispute between the parties arising under this title or any enumerated consumer law if the Agency finds that such prohibition, imposition of conditions, or limitations are in the public interest and for the protection of consumers.

This is a big step forward for arbitration fairness.

The measure follows up on a specific recommendation in the Treasury Department's blueprint for financial regulatory reform, which also suggests that the SEC should explore banning forced arbitration . (Jump to pages 62-63 and 72 of the report.) The Wall Street Journal wonders whether this is "The Beginning of the End of Mandatory Arbitration."

NPR's All Things Considered recently ran this excellent report on the forced arbitration debate, featuring Public Citizen's David Arkush.

White House Sends Consumer Financial Protection Bill to Capitol Hill

by Deepak Gupta

Today, President Obama sent a bill to Capitol Hill that would create a Consumer Financial Protection Agency.  You can read the text of the proposed Consumer Financial Protection Agency Act of 2009 here. The package also includes amendments to the Federal Trade Commission Act. The Washington Post has a story on the announcement here.  

Additional information is available at www.financialstability.gov and at the website of Americans for Financial Reform, a two-week-old coalition of 200 national, state and local consumer, employee, investor, community and civil rights organizations that Public Citizen has helped to launch. 

Here's the administration's press release:

With leaders in Congress committed to enacting regulatory reform by the end of the year, the Administration today delivered to Capitol Hill a bill that would create the Consumer Financial Protection Agency. The agency will be dedicated to looking out for American families when they take out loans or use other financial products or services – with a mission to promote access and protect consumers from unscrupulous practices across the market. This new agency will implement and enforce the new credit card bill signed into law by President Obama and Congress and have authority to combat the worst abuses in mortgage markets. This legislation creates an agency to promote transparency, simplicity, fairness, accountability, and access – laying the cornerstone for the effort to fundamentally reform our system of financial regulation.

“This agency will have the power to set standards so that companies compete by offering innovative products that consumers actually want – and actually understand. Consumers will be provided information that is simple, transparent, and accurate. You'll be able to compare products and see what's best for you. The most unfair practices will be banned. Those ridiculous contracts with pages of fine print that no one can figure out – those things will be a thing of the past. And enforcement will be the rule, not the exception.”  - President Obama

The Role of Predatory Lending in the Collapse of Detroit

by Laura MacCleery

After listening to a stirring speech by Professor Elizabeth Warren of the Senate Congressional Oversight Committee on the bailout last Saturday at the American Constitution Society convention, I was struck by the many similarities between credit card company practices in moving the profitability of financial products towards the “back end” penalties and fees, and those I uncovered several years ago in the automobile lending context.

The coverage of the auto bailout and the collapse of the domestic auto industry has lacked real understanding of how risk was fed into the auto purchase marketplace. The same full range of predatory practices affecting home mortgages were widely used – and perhaps even to a greater extent – by the automobile industry to sell vehicles. 

In general, Detroit has been inattentive to the serious problem of oil dependency for its profitability model, pushing far larger SUVs and pickups on consumers than was justified by transportation needs. It has also been hostile to safety advances, and managerially backwards. These problems are well known. Less well understood is that, through predatory lending practices, they’ve been taking their customers to the poorhouse with them.

When I was at Public Citizen, we wrote a report in 2003, entitled Rip-Off Nation, detailing many of the fraudulent and misleading aspects of auto purchases. We worked closely with a whistleblower who had been an auto dealership employee and was familiar with many of the tricks and traps then being used to saddle consumers with overpriced auto loans, and published real examples of actual auto lending documents demonstrating the scams. Without the mortgage lending example to illustrate the problem and its potential economic costs, our work to raise the issues largely fell on deaf ears.

Yet the situation has only worsened since, and the number of consumers who are underwater in their loans continues to climb. In December 2008, as The Denver Post reported, both the number of “upside-down” new vehicle purchases and the amount that consumers owe on auto loans have ballooned:

Peanut Butter and the Proposed Consumer Financial Protection Agency

by Jeff Sovern

Once upon a time, in a not-so-distant country, peanut butter sales were regulated in a distinctive way.  Grocery stores that sold peanut butter were regulated by one agency; supermarkets by another agency; and convenience stores that sold peanut butter by a third agency.  Stores that were chartered by the federal government had one set of regulators while those chartered by states had a different set.  These agencies had many different responsibilities, including some that conflicted at times.  They were charged with insuring that the peanut butter was appropriate, but also that the stores they regulated used their resources wisely.  Peanut butter sellers could choose which agency would regulate them by deciding whether they were a supermarket, grocery store, or convenience store or whether they would be chartered by the federal government or a state.  And because some peanut butter regulators received their revenue from fess paid by the peanut butter sellers they regulated, the regulators had an incentive to attract and keep peanut butter sellers to regulate.  The more peanut butter sellers you regulated, the more revenue you had.  That meant they had an incentive to regulate lightly and protect peanut butter sellers.

One day, one of the sellers came up with a new kind of peanut butter which combined some old and some new ingredients and was cheaper at first than the old peanut butter.  It began selling this new peanut butter to people who could not formerly afford peanut butter.  Lots of people bought the new kind of peanut butter and soon other peanut butter sellers began selling it too.  They made lots of money for a while.  Regulators weren’t worried about the new type of peanut butter because the ingredients were all listed on the jar.  In fact, some thought it was great that some people who formerly couldn’t afford peanut butter could now buy it.  Besides, if they intervened to prevent sale of the peanut butter, the peanut butter sellers they regulated would just change what kind of business they were and get a different regulator, and that would cost the regulators revenue—and wouldn’t keep the sellers from selling the new kind of peanut butter.  Some also believed that too much peanut butter regulation would make peanut butter too expensive and choke off innovation in peanut butter.  When some state peanut butter regulators tried to prevent sale of the new peanut butter, federal regulators went to court to stop them.

But the consumers who bought the new kind of peanut butter weren’t able to figure out from the list of ingredients what effect the peanut butter would have on them over the long term.  The list of ingredients was long and confusing, and the consumers lacked the experience needed to make sense of it.  After a while, a lot of the consumers started getting sick from the peanut butter.  They stopped doing things that they had formerly been able to do, and that hurt even people who hadn’t bought the new peanut butter.  Some of them stopped paying for their peanut butter, and that hurt the peanut butter sellers.  Some of the sellers started losing money, so much money that some of them went out of business.  The government became concerned that peanut butter would no longer be available, and so it gave lots of money to some of the biggest peanut butter sellers to keep them in business. 

Then some people said that a new agency was needed to protect consumers from peanut butter that was bad for them.  This said that protecting people from bad peanut butter was so important that the agency should have that as its sole mission instead of having it as one of several goals that might sometimes conflict with protecting people from bad peanut butter.   They pointed out that other products, like jelly were regulated in such a way and that jelly regulators just thought about whether the jelly was safe and sound, rather than thinking about whether the jelly sellers were safe and sound.  They said that having the ingredients listed on the jar wasn’t always enough and that this agency should have the power to ban peanut butter that contained ingredients that were harmful.  They said that the agency should have the power to regulate all peanut butter sellers whether they were a grocery store, convenience store, or supermarket.  They said that the new agency should have the power to make stores sell plain peanut butter and that if stores wanted to sell peanut butter with special ingredients, they should have to do more to explain to consumers what was special about it.

But the peanut butter makers thought this was a bad idea.  They argued that the new agency would impose a new set of regulations.  They pointed out that most peanut butter sellers had not sold the bad peanut butter but would have to pay for complying with the new regulations.  They wondered how the new agency would be paid for.  They were concerned about how the new agency would decide what plain peanut butter was and feared that the agency would stifle innovation.  Because the peanut butter sellers were rich and gave lots of money to politicians, could afford to hire very good advocates to make clever arguments, and knew things about the peanut butter business that no one else knew, they were listened to carefully.  Of course, the peanut butter sellers were not thinking about the fact that the new agency would not have to compete with other agencies to attract sellers to regulate and so would not tailor its regulations to attract such sellers. They were solely concerned with the public good.

And consumers put peanut butter and jelly on sandwiches even though the two were subject to different regulators and rules.

More on the Proposal for the Consumer Financial Protection Agency

by Jeff Sovern

The White House proposal can be found here.  Ed Mierzwinski has collected many valuable links on the proposal over at the U.S. PIRG Consumer Blog.

A couple of random comments: the only statute referred to by name in the brief CFPA White House proposal is the Community Reinvestment Act, which some, of course, have blamed for the subprime crisis--in my view, unfairly. The proposal states that the new agency will "strongly enforce" the CRA. 

The proposal contains a lot of language about disclosures and requiring lenders to offer "plain vanilla" loans. That sounds like something out of Cass Sunstein and Richard Thaler's Nudge: let consumers have choice but change the "choice architecture" to help them make decisions.  But the proposal also would give the agency the power to ban unfair terms, so that goes further.  In the context of mortgage lending, the proposal calls for giving the agency the power to ban yield-spread-premiums and prepayment penalties, provisions that many consumers seem to lack the savvy to protect themselves from.  So I wonder if the goal is to preserve consumer choice in areas where consumers are likely to be competent to make decisions, perhaps with a nudge, but bar terms that consumers are less well equipped to deal with.  That would be great.

The proposal also calls for giving the agency the power to impose "heightened duties of care on financial intermediaries that reflect reasonable consumer expectations." I wonder if that means a fiduciary duty or suitability standard, as some have urged.  The proposal gives mortgage lending as an example, and states the agency would have authority to "[r]equire mortgage brokers to owe a duty of best execution among available mortgage loans to avoid conflicts of interest between themselves and the homeowners, as well as a duty to determine the mortgages they sell are affordable to borrowers."

What I like best about this proposal is that unlike many of the agencies that already have some role to play in consumer lending, this agency's mandate would be to focus on consumer protection.  Its primary role would not be to insure the safety and soundness of financial institutions or to keep the economy running.  I wrote an op-ed in the Pittsburgh Post- Gazette in March of last year calling for an agency to oversee consumer credit transactions that would not be tasked with other asignments as well.  I elaborated on this in a blog post on March 19, 2008 about Alan Greenspan's memoir, The Age of Turbulence, after noting that the book largely ignored the many consumer credit regulations the Fed oversees:

[I]sn't something wrong when the memoir of the person at the head of what is probably the agency with the greatest power over the rules governing consumer credit transactions gives those rules such short shrift?  Not that I blame Greenspan.  He was appointed to the job because of his mastery of macroeconomics.  But again, shouldn't someone who has mastered the law of consumer credit run the principal agency devoted to that subject?  In other words, at the risk of beating a dead horse, is the Fed the best agency to administer consumer credit laws?

Obama Reported to Want New Consumer Financial Protection Agency

Bloomberg News is reporting that tomorrow President Obama will propose creation of the Consumer Financial Protection Agency "to protect consumers of financial products with the power to punish offending firms and stripping the Federal Reserve of some of its powers."

Obama Administration Considering New Financial Consumer Protection Agency

The Times has the story here.

Congress Sends Credit Card Bill to President

The Times has the story here.

I'm sure that in the days to come we'll see blog coverage of the bill, and of course there's already been quite a bit of news and blog coverage.  Here's one thought: one apparent goal of the bill is to make credit card contracts more accessible. To that end, the bill requires credit card companies to post their contracts on the web.  That may prove to be a treasure trove for academics but I wonder how helpful it will be to consumers; will consumers read through competing credit card contracts looking for the best terms?  I'm skeptical but would love to be proved wrong.  I've seen accounts in the press about how the bill will require plain English for contracts (e.g., see the editorial in today's Times here), but all I can see in the bill that serves that purpose is the usual requirement that disclosures be "clear and conspicuous," which has been in the Truth in Lending Act for decades.  Am I missing something?

Senate Passes Credit Card Bill

The Times story is here.