A lawsuit filed by the CFPB earlier this month underscores the importance of its efforts to take on the abuses of the debt-collection industry, both by enforcing the law, and through a rulemaking process that is already underway.
The lawsuit – against two debt-collection magnates operating out of Buffalo, N.Y. – involves a nationwide operation that is said to have engaged in outrageous practices, causing massive harm to millions of people. In its filing, the Consumer Bureau describes the two men, Douglas MacKinnon and Mark Gray, as the “ringleaders” of a network of companies that “harassed, threatened, and deceived” consumers, making tens of millions of dollars a year in the process. Since 2009, the action charges, McKinnon, Gray and their companies have been buying up payday loans and other defaulted debt for pennies on the dollar, routinely adding $200 to each acquired debt (regardless of whether the law allows that), and using a variety of illegal practices to collect. Some consumers have reportedly been pressured to pay as much as six times more money than they really owed.
Employees of MacKinnon’s and Gray’s companies, the lawsuit charges, impersonated law-enforcement officials (sometimes using “call-spoofing” programs to create the impression that they were phoning from government offices) and threatened legal action they had neither the power nor the intent to actually take – arresting a consumer for “check fraud,” for example.
According to the suit, MacKinnon and Gray manage three Buffalo-based debt collection companies – Northern resolution Group, LLC (NRG), Enhanced Acquisitions, LLC (Enhanced), and Delray Capital, LLC (Delray), and have set up a network of at least 60 firms “to collect on the debt portfolios that NRG, Enhanced, and Delray purchased.” The defendants directed and encouraged these illegal acts, and profited significantly from them, the lawsuit holds, adding that “tens of millions of dollars annually” were “funneled back to MacKinnon, his relatives, and Gray through payments to various sham companies controlled by them.
The lawsuit charges MacKinnon and Gray with violating the Fair Debt Collection Practices Act and the Dodd-Frank Wall Street Reform and Consumer Protection Acts, which prohibit unfair and deceptive acts or practices in the consumer financial marketplace. The Bureau is seeking to shut down their operation and secure compensation for victims as well as a civil penalty against the companies and its partners. “[T]his suit sends the message that debt collectors that employ abusive tactics will be held accountable,” New York Attorney General Schneiderman said in a joint announcement of the action. — Veronica Meffe
Wall Street will set still another record for political spending this election cycle.
So far in 2015 and 2016, banks and financial interests have put more than $1.4 billion into efforts to elect and influence holders of national political office, according to Wall Street Money in Washington, a new report released this week by Americans for Financial Reform based on data compiled by the Center for Responsive Politics.
That spending total works out to more than $2.3 million a day!
Financial sector companies, employees, and trade associations have reported making nearly $800 million in campaign contributions since the start of 2015, more than twice the spending level of any other specific business sector in the Center for Responsive Politics database.
Some of the financial industry’s biggest donors have been hedge funds, with James Simons’ Renaissance Technologies and Paul Singer’s Elliot Management leading the way at $37.5 million and $20.2 million respectively. Of the campaign contributions that can be clearly linked to one political party or the other, 61 percent have gone to Republicans and 39 percent to Democrats.
The financial industry’s expenditures – about $667 million through the second quarter of 2016 – place the sector in third place, behind a category of “Miscellaneous Business” companies and trade associations at $780 million and health-related companies at $775 million.
These figures do not count much of the so-called “dark money” contributed to nonprofits that engage in political advocacy or the money spent on lobbying-related research and support activities. Nor do they include spending by “Miscellaneous Business” entities like the U.S. Chamber of Commerce, a national business group that lobbies extensively on financial issues.
Wall Street political spending has increased sharply since 2009 and 2010, when industry forces were trying to blunt or defeat the reform legislation that came to be known as Dodd-Frank. The legislation was eventually enacted over industry objections in 2010, but that just marked the end of one chapter and the beginning of another.
Since Dodd-Frank’s passage, big banks and other financial interests have been working nonstop to block, delay, and weaken important elements of that law – as well as the agencies responsible for carrying it out. At the same time, they’ve also been working to stymy efforts in Congress to move forward on the next steps needed to make sure Wall Street serves Main Street, instead of continuing to put us all at risk.
Another new AFR report, Where They Stand on Financial Reform: Votes Cast in the 114th Congress, details many of the financial industry’s latest efforts to avoid needed reform. Wall Street has enjoyed some real success in this lower-visibility phase of the battle, using a “must pass” 2014 budget bill, for example, to repeal an important provision of Dodd-Frank and let big banks go back to using insured deposits and other taxpayer subsidies to gamble on the riskiest of financial derivatives.
Since 2010, Wall Street-backed deregulation proposals have continuously clogged the legislative pipeline. In the current Congress alone, lawmakers friendly to Wall Street have introduced 10 separate legislative proposals to limit the authority or political independence of the new Consumer Financial Protection Bureau.
Meanwhile, despite polls that show lopsided majorities of Republicans as well as Democrats and Independents favoring tougher Wall Street regulation, Congress has yet to vote on a single bill that would move things in that direction.
The $2.3 million a day Wall Street executives are spending on politics certainly rates as a lot of money. But measured against the many special privileges that the financial industry and its execs continue to enjoy, that expenditure amounts to a smart investment – for Wall Street.
Recently, House Financial Services Committee Chairman Jeb Hensarling (R-Tex.) suggested that it took the Consumer Financial Protection Bureau (CFPB) too long to find out about the bank’s misconduct. Yet Chairman Hensarling’s Financial CHOICE Act includes provisions that would make it harder for the CFPB to learn about future abuses by banks and lenders.
The Financial CHOICE Act would preserve the financial industry’s use of forced arbitration, a relatively new phenomenon designed to allow corporations to keep misconduct out of public view, evade the law, and escape accountability. Buried in the fine print, “ripoff clauses” force consumer and worker claims into arbitration – a secretive, rigged system where the corporation gets to pick the arbitration provider and which rules will apply – and bars people harmed in similar ways from joining together in class actions to challenge systemic abuses.
Because agencies have limited resources, individual and class action lawsuits brought by consumers and workers often act as the canary in the coal mine to alert agencies to fraud and abuse. The CFPB is in the midst of a rulemaking that would restore consumers’ right to join together to hold banks accountable for predatory behavior like the Wells Fargo scandal. Since May, more than 100,000 individual consumers and 281 consumer, civil rights, labor, and small business groups wrote in to support the proposed rule.
The CHOICE act would bar CFPB from restoring consumers’ rights to take banks to court –preserving the secrecy and lack of accountability that allowed Wells Fargo to get away with this misconduct for so long.
Background on the Wells Fargo Scandal
At least 3,500 Wells Fargo employees opened approximately 1.5 million bank accounts and approximately 565,000 credit cards without the consent of their customers. According to the CFPB, its “investigation found that since at least 2011, thousands of Wells Fargo employees took part in these illegal acts to enrich themselves by enrolling consumers in a variety of products and services without their knowledge or consent.” In February 2012, Wells Fargo started using forced arbitration clauses in all of its customer checking and savings account agreements, shortly after evidence began emerging that it was defrauding its customers.
Customers have been trying to sue Wells Fargo over fraudulent accounts since at least 2013. However, the bank forced those customers into secret, binding arbitration by invoking fine print in consumers’ legitimate account agreements to block them from suing over fake accounts. This practice helped keep Wells Fargo’s massive fraud out of the spotlight for so long.
Shariar Jabbari & Kaylee Heffelfinger et al. v. Wells Fargo (U.S. District Court, N.D. Cal.)
Consumers filed a lawsuit against Wells Fargo claiming that the bank unlawfully opened a series of accounts in their names and then charged fees in connection with those unauthorized accounts. The lawsuit specifically alleged the existence of a corporate policy compensating employees based on the number of accounts opened.
Since this practice was so widespread, the consumers filed their suit on behalf of all consumers subjected to this conduct. In 2015, Wells Fargo vigorously denied the allegations, describing its culture as “focused on the best interests of its customers and creating a supportive, caring, and ethical environment for our team members.”
Shariar Jabbari opened two accounts in January 2011. By April 2011, two additional accounts were opened in his name, with $100 transferred to each from his savings account. By June 2011, five more accounts were opened for Jabbari without his knowledge or consent.
Wells Fargo invoked its newly-added arbitration clause to dismiss the complaint, arguing that disputes, including any dispute over whether the clauses applied at all, must be decided by a private arbitrator hired by the bank. The bank claimed that these customers “agreed” to arbitrate everything because the fake accounts “could not have been opened had [the customer] not opened the legitimate accounts which he admits to opening.” Therefore, even completely unauthorized accounts could not escape the “expansive terms of the arbitration agreements.”
Another customer in the class action, Kaylee Heffelfinger, claimed that Wells Fargo opened two accounts in her name in January 2012, weeks before she opened legitimate accounts in March 2012. Wells Fargo argued that “it is at least plausible that [its] employees generated the unauthorized accounts in January 2012 after Heffelfinger initiated a relationship with, and provided information to, the Wells Fargo branch where her legitimate accounts were opened” and thus even those claims should be forced into arbitration.
Incredibly, the federal district court granted Wells Fargo’s demand for individual arbitration on each of these claims. The customers appealed, and on September 8, 2016 – the day the CFPB announced its enforcement action – Wells Fargo settled with the customers on the condition they not disclose the details of their case.
David Douglas v. Wells Fargo (Superior Ct of Los Angeles, CA)
A customer named David Douglas tried to sue Wells Fargo on his own after he learned that three of the local employees at his Wells Fargo branch used his personal information to open at least eight accounts under his name without his permission, charging him fees for those accounts. More than three years ago, Douglas alleged that Wells Fargo “routinely use[d] the account information, date of birth, and Social Security and taxpayer identification numbers…and existing bank customers’ money to open additional accounts.”
Wells Fargo moved to compel forced arbitration over the disputed accounts, suggesting that “[s]ince the information allegedly misused was provided in connection with the original account, by definition any such claim of misuse arises out of or relates to the original account.” The bank similarly claimed that Douglas’ allegation that Wells Fargo transferred money into these fake accounts without his permission “is the most routine kind of claim covered by the Arbitration Agreement that one can imagine.”
Douglas opposed these arguments, adding that he never could have signed a forced arbitration agreement for those unauthorized accounts because they were opened without his knowledge. Incredibly, the court granted Wells Fargo’s demand for arbitration, relying on the arbitration clause from his original, non-fraudulent account with Wells Fargo which claimed to cover “all disputes” between him and the bank.
By pushing these cases into secret arbitration, Wells Fargo was able to keep this scandal out of public view for years and continue profiting from massive fraud. This culture of secrecy was pervasive. As CFPB Director Richard Cordray described at the Senate Banking Committee hearing on September 20, when the Los Angeles City Attorney brought an action against the bank, “one of the first things Wells Fargo did…was aggressively seek a protective order to keep the proceedings as much as possible from public view.” These actions, along with forced arbitration, allowed the bank to evade accountability and transparency for at least five years.
Senate Banking Committee Hearing on September 20
At the Senate Banking Committee hearing, Senator Sherrod Brown (D-Ohio) asked Wells Fargo CEO John Stumpf if the bank would continue to argue in court that mandatory arbitration clauses covering real accounts should apply to fake accounts, forcing defrauded consumers into arbitration. Stumpf was non-committal, replying that he would “have to talk to my legal team, and we can get back to you on that.”
During the second panel, Senator Brown asked Director Cordray, how the agency’s proposed rule to restrict forced arbitration in consumer financial contracts would have helped customers that sued the bank over fraudulent accounts. Cordray replied that Wells Fargo’s arbitration clause might defeat a class action, noting that “as happened here, when there’s massive wrongdoing on a wide scale, but small amounts of harm to individual consumers, it will be very difficult to get any relief other than through a class action.”
Senator Elizabeth Warren (D-Mass.) then asked Director Cordray if he thought that “forced arbitration clauses make it easier for big banks to cover up patterns of abusive conduct, including the years of misconduct by Wells Fargo in this case.” Cordray answered, “I do think so, yes.”
Senator Warren went on to note that the CFPB has “proposed strong new rules that would ban forced arbitration clauses that prevent consumers from joining together to bring a public action in court,” and “[i]f we had class actions on this back in 2010, 2009, 2008, then the problem never would have gotten so out of hand.”
House Financial Services Committee Hearing on September 29
At the House Financial Services Committee Hearing, Representative Brad Sherman (D-Calif.) asked Stumpf if he would continue to invoke ripoff clauses to deprive consumers of their day in court in light of this scandal. Stumpf refused to end this practice.
On Friday, the Federal Reserve finally responded to years of calls to re-examine the role of big banks in commodity markets. Numerous observers, ranging from Senate investigators to regulators, have found evidence that banks have manipulated these crucial markets. Sherrod Brown, the Ranking Member of the Senate Banking Committee, has been a leader in the effort to control bank commodity activities, holding multiple hearings on the issue and urging the Federal Reserve to implement rules limiting bank commodities activities. Americans for Financial Reform has also called on the Fed to take strong action to establish firewalls between banking and commodity markets.
The Federal Reserve has now advanced a real proposal to limit commodities involvement by banks. The proposal substantially increases capital charges for commodities holdings by banks, meaning that banks will have a significant economic incentive to exit these markets. It also improves disclosures and bans banks from a number of specific commodity markets activities that permit control of commodity supplies, including directing the specific activities of storage and transportation facilities, and being involved in energy management and tolling. All of these activities have been linked to commodity market manipulation.
Along with the Federal Reserve’s recent report on the activities and investments of supervised banks, which recommended that Congress place additional limits on bank activities in commercial markets, this proposal indicates that the Fed is finally taking more seriously the need to restructure banks to better comply with the separation between banking and commerce that is laid out in the Bank Holding Company Act and a long tradition of American banking law. While these measures are still too limited to reverse the enormous expansion of universal banks that has taken place over the last few decades, they are a good step.
But on one topic (you’ll be surprised which), they actually agreed: Breaking up too big to fail banks. Both parties’ platforms include calls to re-instate the Glass Steagall firewall between boring banking (you know, lending money to people and businesses) and risky casino-style investment banking (think “credit default swaps”).
Election day is fast approaching and Congress’s approval rating has barely improved from a few years back when it lagged behind root canals. So you’d think agreement on a major policy — particularly one with broad and deep public support — might be occasion for swift enactment of a bi-partisan bill. Indeed, the 21st Century Glass-Steagall Act is championed by both Elizabeth Warren and John McCain, popular leaders in their respective parties. Instead, with Congress set to adjourn this week until after election day, Congressional leaders have yet to take a single step to live up to the words of their platforms.
Wells Fargo’s CEO John Stumpf deserves every bit of the anger that the Senate Banking Committee directed at him for leading Wells Fargo while it created more than 2 million fake deposit and credit-card accounts, and then charged unknowing customers for them.
Stumpf has tried to lay the blame at the feet of workers. But this was not the behavior of a few out-of-control workers. The problem was systematic, and it followed from Wells Fargo’s use of high-stakes sales quotas for its employees. As the Los Angeles City Attorney’s office explained in its lawsuit, these quotas were often impossible to fulfill, and yet employees who fell short were often fired.
But Wells Fargo’s failure points to a broader problem. After all, this is hardly the first time Wells has faced scrutiny for illegal acts. As Senator Sherrod Brown (D-OH) pointed out, this is only one of 39 enforcement actions that Wells has faced in the last ten years.
Last week, we learned from an important joint enforcement action by the CFPB, OCC and Los Angeles City Attorney that Wells Fargo had opened accounts for 2 million customers without their consent. Bank employees had been pressured to do so by aggressive sales quotas that could not be met through actual sales. This week, we are appalled by the further news that the executive who oversaw the unit responsible for this fraud was not fired, and in fact is retiring with nearly $125 million in compensation.
Regulators have a tool in front of them to make it harder for bank executives to get away with giant pay packages in cases of lawbreaking and abuse. Section 956 of Dodd-Frank and Section 39 of the Federal Deposit Insurance Act give the watchdogs a mandate to stop banks from rewarding executives for practices designed to produce short-term gains with long-term risks. The regulatory agencies should exercise their existing authority to compel banks to use pay-clawback mechanisms, and they should make sure the final rule implementing Section 956 requires banks to take back pay from executives who oversee lawbreaking. In addition, the CFPB and OCC should refer their findings to the Department of Justice for a full investigation.
In the meantime, it is important that the penalties resulting from the illegal activity at Wells fall on the executives responsible for putting an abusive system in place and allowing it to continue. Wells Fargo and its CEO John Stumpf should claw back the $125 million going to the company’s head of consumer banking, Carrie Tolstedt, who supervised the employees directly engaged in these illegal acts. The company should also recover the bonuses received by Stumpf himself during the time period covered by the abuses. This money should be used to pay the penalties and refunds.cfp
This week, the House Financial Services Committee will consider an extraordinarily dangerous bill that takes many of the worst ideas concocted by Wall Street lobbyists and their political friends and combines them into one toxic package.
The bill, the “Financial CHOICE Act” (H.R. 5983) is authored by House Financial Services Chairman Jeb Hensarling (R-TX-5), and it not only rolls back key portions of the Dodd-Frank Act, it also guts regulations that came before it. If passed, it would make financial regulation even weaker than it was even prior to the 2008 crisis. It also eviscerates the Consumer Financial Protection Bureau (CFPB) mere days after the CFPB fined Wells Fargo $100 million for widespread unlawful sales practices and ordered Wells Fargo to issue full refunds to all scammed customers. With banks continuing to abuse their own customers we need MORE accountability, not less.
At a time when private equity funds are in the news and under scrutiny by the regulators, the House is set to consider a bill that rolls back the clock to a time when private fund advisers operated in the shadows, without meaningful oversight.
The Investment Advisors Modernization Act of 2016 (H.R. 5424) would allow private funds to evade SEC examinations, and to distribute misleading and even fraudulent advertising materials. The bill also allows private funds to evade SEC examinations, and to distribute misleading and even fraudulent advertising materials. In addition, it eliminates key systemic risk information for regulators by dramatically reducing the number of funds who must report complete information on their leverage and holdings on a confidential form (Form PF) used to track risks to the financial system. Finally, the bill exempts private equity firms and hedge funds from having to provide independent confirmation that they own the securities they claim to own – a change that could open the door to the next Madoff-style Ponzi schemes.
This dangerous deregulation would put at risk the retirement savings of teachers, firefighters, police officers, and other public servants who rely on the one-quarter of funding from private equity funds in public pensions. We expect this bill will be considered by the full House of Representatives this Friday, September 9th.
The SEC has found serious investor protection issues at over half of the private equity funds they have examined. And private equity funds have come under additional scrutiny by the agency in recent weeks for disclosure violations and possible illegal fee practices. Yet the H.R. 5424 seeks to take away the very tools the SEC uses to oversee these funds.
The U.S. Consumer Financial Protection Bureau’s (CFPB) proposed rule to restrict forced arbitration – a tactic banks and lenders use to block consumers from challenging illegal behavior in court – has been met with widespread support. Below are selected highlights of comments from individual consumers, elected officials, advocacy groups and newspaper editorial boards who weighed in during the public comment period, which ended on Aug. 22, 2016.
More Than 100,000 Consumers Across the Country Support the Rule
Between the proposed rule’s announcement on May 5, and the close of the comment period on Aug. 22, at least 100,000 individual consumers across the country submittedcomments or signedpetitions urging the CFPB to restrict forced arbitration in consumer finance. On the other side, FreedomWorks – a conservative political group affiliated with the Tea Party – claims it “generated nearly 15,000 responses opposed to the rule.”
Of the 100,000-plus positive comments, 69 percent of consumers voiced general support for the proposed rule, emphasizing that “[b]arring consumers from joining class actions directly opposes the public interest.” Another 31 percent pushed the CFPB to expand the rule’s coverage and “take the extra step to prohibit individual arbitration in the final rule.”
This overwhelming support for action against forced arbitration echoes a recent national poll, which found that, by a margin of 3 to 1, voters in both parties support restoring consumers’ right to bring class action lawsuits against banks and lenders.
“Recognizing the urgent need to address these troubling practices, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010 to improve accountability, strengthen the financial system and establish the CFPB. Dodd-Frank included several restrictions on the use of forced arbitration, including a mandate for the CFPB to take action on arbitration. Congress specifically directed the CFPB to study the use of forced arbitration in connection with the offering of consumer financial products and services, and authorized it to ‘prohibit or impose conditions or limitations on the use of’ such agreements based on the study results.”
“Consistent with the bureau’s exhaustive study on forced arbitration, which found that forced arbitration restricts consumers’ access to relief in disputes with financial service providers by limiting class actions, the proposed rule is a critical step to protect the public interest by ensuring that consumers receive redress for systemic unlawful conduct… There is overwhelming evidence that class-action waivers in financial products and services agreements undermine the public interest.”
“Although we believe consumers will be best served by the total prohibition of mandatory, pre-dispute clauses in consumer financial contracts and we encourage the bureau to consider regulations to that effect, the proposed rules provide a substantial benefit to consumers by restoring their fundamental right to join together to be heard in court when common disputes arise in the commercial marketplace. Many of our respective consumer protection laws include private right of action provisions, the purpose of which is to complement and extend the reach of our state enforcement efforts.”
This blog is maintained by AFR as a forum for ongoing news and commentary about the fight for effective financial reform. Blog posts represent the opinions of their authors / posters, and do not necessarily represent the views of the AFR coalition or coalition members.