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.
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
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.”
The bank worker panelists, representing varied regions of the country and a number of large financial institutions, told similar stories about the toxic work environment created by practices designed solely to provide maximum profit margins for the banks. Khalid Taha, an Iraqi immigrant to the United States, imagined his job with Wells Fargo as the fulfillment of the American dream; but it turned into a nightmare, he testified, when the cumulative pressure of persuading multiple customers to open new banking accounts every day led to his hospitalization for exhaustion.
The bank employees spoke of their commitment to quality customer service and their dismay at being compelled to engage in transactions they knew would result in great financial damage to consumers. Modern bank teller positions are entirely “sales oriented,” said Oscar Garza, who worked at JP Morgan from 2010 to 2012. Garza testified that he and other JP Morgan workers were instructed to open new accounts at “any cost” and even to falsify financial information to help customers qualify for loans. Similarly, the bank employees explained that quotas and incentives mandated by corporate offices tacitly encourage deceptive behavior. Cassaundra Plummer, formerly an assistant sales teller at a Maryland branch of TD Bank, remembered her manager’s instructions to “only focus on the positives” rather than fully explain the terms of the financial products she was supposed to be selling.
Banking on the Hard Sell includes many more personal accounts like these. Caitlin Connolly, the Coordinator of NELP’s campaign on sales quotas, emphasized the need for additional regulations to address the issue of aggressive bank sales tactics. The 2008 financial crisis stirred significant public discussion of the behavior and business practices of big banks, Connolly noted; but attention hasfaded since then, she said, with bad implications for bank employees and consumers alike.
A majority of the bank employees at the hearing said they had no knowledge of the consumer protections and other provisions of the Dodd-Frank Act – the landmark financial-reform measure enacted in the aftermath of the 2008 financial crisis.
The last panelist, Brian Simmonds Marshall, Policy Counsel for AFR, pointed out that federal regulators have taken significant steps under Dodd-Frank to prohibit compensation practices that could encourage risky or deceptive behavior on the part of high-level bank executives; the NELP report and the testimony of the bank employees, he said, underscore the need to apply the same kind of scrutiny to the compensation and
management of front-line bank workers. Financial oversight agencies, Marshall said, should not just be looking for violations of the rules, but for the root causes of those violations.
Following the briefing, bank employee panelists, along with AFR and NELP staff, held individual meetings with regulators at the Office of the Comptroller of the Currency and the Consumer Finance Protection Bureau to further discuss the issues raised at the event.
Last week, some members of the House Financial Services Committee lavished praise on a piece of legislation they said would “restore due process rights to all Americans.”
“All the bill says is that if somebody wants their day in court, they should have their day in court,” the bill’s sponsor, Rep. Scott Garrett (R-N.J.), explained, adding that “preserving the rights of Americans to defend themselves in a fair and impartial trial…is one of the most fundamental rights, and it is enshrined in our Constitution.”
Representative Jeb Hensarling (R-Texas), Chair of the committee, championed the measure as well. “Every American deserves to be treated with due process,” Rep. Hensarling declared. “They ought to have the opportunity to have a trial by jury. They ought to be able to engage in full discovery. They ought to be subject to the rules of evidence.”
A listener might have thought these legislators were standing up againstforced arbitration — “rip-off clauses” that big companies bury in the fine print of contracts to prevent people from suing them, even if they have broken the law.
Astoundingly and unfortunately, the legislators were actually moving in the opposite direction. They were extolling HR 3798, the so-called “Due Process Restoration Act,” which would extend special legal protections to Wall Street banks and other financial firms charged with violating federal securities law by the Securities and Exchange Commission (SEC).
This piece of legislation does nothing to restore due process to ripped-off consumers and investors. Instead, the “Due Process Restoration Act” makes it harder for the SEC to hold corporate wrongdoers accountable when they break the law.
Big banks and others charged in SEC hearings already possess several crucial legal protections that their investors and consumers lack in forced arbitration: robust opportunity for discovery, a public hearing, a trained adjudicator bound to make a ruling based in law, and — crucially — the right to two full appeal processes, including a review in federal court. Yet HR 3798 would make it harder for the SEC to prove its case and allow the accused party to unilaterally terminate the proceedings, forcing the SEC to either drop the charges or refile in federal court.
According to Professor Joseph Carcello of the University of Tennessee, giving companies this right to “choose the venue is unlikely to be in the best interest of society, and will almost certainly make it more difficult for the SEC to deter and punish securities law violations, including fraud.” Professor Carcello further emphasized that if fairness is a concern for members of the committee, then it is more unfair for citizens to be forced into arbitration in their contracts with financial institutions.
An amendment offered by Reps. Keith Ellison (D-Minn.) and Stephen Lynch (D-Mass.) threw the gap between the words and actions of HR 3798’s supporters into particularly stark relief. The amendment would have ensured that firms using forced arbitration against consumers and investors could not benefit from the bill’s special protections. Yet, in a display of staggering hypocrisy, this commonsense amendment was defeated on party lines.
Despite grandiose claims of due process, HR 3798 would only further tilt the playing field in favor of special corporate interests when it comes to battling financial fraud and corporate rip-offs. If lawmakers truly wish to “restore due process rights to all Americans,” they should pass legislation to ban forced arbitration and support the upcoming Consumer Financial Protection Bureau rulemaking on this abusive practice.
Wall Street firms and brokers accused of breaking federal law do not need special legal protections, but the right of ordinary Americans to have their day in court very much does need defending. Lawmakers should legislate accordingly.
Payday lenders may seem to be everywhere, but they were not always there. The first payday stores opened in the early 1990s – a byproduct of the same anything-goes deregulatory mania that led to a wave of booby-trapped mortgages and the financial and economic meltdown of 2008.
Almost as soon as they appeared on the scene, faith leaders and consumer and civil rights advocates called for rules to rein in the abuses of an industry whose business model is to advertise a form of “help” that consistently makes things worse, trapping people in long-term high-cost debt and imposing more economic distress on communities.
After a quarter of a century, these efforts are making progress. Fourteen states have meaningful regulations and the first nationwide rules are being developed by the Consumer Financial Protection Bureau (CFPB), the new agency established after the 2008 crisis to bring basic standards of fairness to the financial marketplace.
But the industry is also pressing ahead, employing new loan models and a battery of technological and legal ploys intended to skirt the rules, both existing and anticipated.
Senator Jeff Merkley D-Ore.), a longtime champion of consumer rights, has introduced legislation to address some of these evasive maneuvers. His Stopping Abuse and Fraud in Electronic Lending (SAFE) Act would make it easier to uphold the interest-rate caps and other measures taken by the states. Merkley’s bill would also bolster the effectiveness of the Consumer Bureau’s efforts to require payday-style consumer lenders to do what other lenders do: verify a borrower’s ability to repay before a loan can be issued.
One big problem, for the CFPB as well as the states, is the fact that more and more payday lenders now do business online. Some companies hide from view, using anonymous domain registrations and websites with no physical contact information. Others, while describing themselves as payday lenders, turn out to be “lead generators” who collect personal information and then auction it off to lenders and other marketers. It is very hard to take legal action against criminals who have encased themselves in online camouflage. It gets even harder when they claim to be doing business from overseas or from Native American reservations in order to assert tribal-sovereignty privileges.
Online or out on the street, the basic formula is the same. These lenders charge triple-digit interest rates (nearly 400% on average) and are prepared to issue a loan as long as they can gain access to someone’s bank account – regardless of whether the borrower can actually afford the loan. Their standard, in other words, is the ability to collect, not to repay. In fact, while the industry promotes its products as short-term loans, most of its profits come from people who remain on the hook for months at a stretch and often end up paying more in fees than they borrowed in the first place.
Those who borrow online face special perils. They are often required to provide personal and financial information in loan applications – data that may be bought and sold by unregulated lead generators, loan brokers, lenders, and others. In some cases, this information is used to defraud people two or three times over.
Senator Merkley’s bill seeks to address these problems in three ways – by helping consumers regain control of their own bank accounts; by establishing standards of transparency for online lenders; and by cracking down on lead generators and other third-party predators. More specifically, the SAFE Act would require banks and other lenders to abide by the rules of the states where they do business; prevent third parties from using remotely created checks (RCCs) to withdraw money without an account-holder’s express pre-authorization; prohibit overdraft fees on prepaid cards issued by payday lenders in order to gain access to consumers’ funds and pile on extra charges; and ban lead generators and anonymous lending.
The great majority of Americans, regardless of political party, favor strong action to end the scourge of abusive payday, car-title, and other high-cost, debt-trap consumer loans. By supporting the SAFE Act and standing up for the complementary efforts of the states and the CFPB, members of Congress can heed this loud, bipartisan call from their constituents.
— Gynnie Robnett
Robnett is Payday Campaign Director at Americans for Financial Reform. This piece was originally published on The Hill’s Congress Blog.
The Dodd-Frank Act created the Consumer Financial Protection Bureau (CFPB) to invigorate consumer financial protection by consolidating responsibility for those laws’ interpretation and enforcement in a single agency. Even before the CFPB opened its doors, industry forces set out to weaken it through bills that would change its single-director structure, among other means.
They lost that fight in Congress – repeatedly. But now the CFPB’s opponents have been given a glimmer of hope by the three-judge panel deciding a mortgage firm’s appeal of a CFPB enforcement order. If those judges follow Supreme Court precedent, however, that hope will be short-lived and the challenge to the CFPB’s structure will fail, just as it has intwo prior federal district court cases.
The latest case involves a company, PHH, which has been ordered to pay $109 million in restitution for illegal kickbacks to mortgage insurers that caused PHH’s customers to pay extra. After a full hearing before an Administrative Law Judge and then the CFPB’s Director, PHH appealed the CFPB’s decision to the U.S. Court of Appeals for the D.C. Circuit. Among a slew of arguments raised by the company, the court expressed particular interest in one. The three-judge panel, which will hear oral arguments on April 12, hasasked the parties to focus on the constitutionality of statutory limits on the president’s authority to remove the sole head of an agency like the CFPB.
By statute, the president may remove the CFPB Director only for “inefficiency, neglect of duty, or malfeasance in office.” 12 U.S.C. § 549(c)(3). PHH argues that the Constitution requires an agency headed by a single officer to be removable by the president without cause. Fortunately, Supreme Court precedents defining the scope of the removal power foreclose that argument.
The central flaw of PHH’s argument is that the Constitution is silent about whether an agency should be headed by a committee or a single officer. In fact, prior litigants have argued that multi-member heads of agencies are constitutionally suspect. The Supreme Court rejected that argument in Free Enterprise Fund v. Public Company Accounting Oversight Board (2010), embracing the view that agencies with a single head or a multi-member commission are constitutionally equivalent.
The Supreme Court decided in Humphrey’s Executor v. United States (1935) that statutory restrictions on the removal of Federal Trade Commission (FTC) commissioners, and by extension the heads of other administrative agencies, were constitutional. To support the flimsy claim that there is a constitutional difference between single-director and multi-commissioner agencies, PHH relies on stray language in Humphrey’s Executorreferring to the FTC’s character as a multi-member body and suggesting those passages add up to a constitutional limitation. But Humphrey’s Executor itself says that whether the Constitution requires the president to enjoy unfettered authority to remove the head of an agency “depend[s] upon the character of the office.”
As the Supreme Court explained in Wiener v. United States(1958), “the most reliable factor for drawing an inference regarding the president’s power of removal . . . is the nature of the function that Congress vested” in the agency. The CFPB is characteristic of the administrative agencies for which the Supreme Court has upheld for-cause removal. InHumphrey’s Executor, the Court explained that “[i]n administering the [prohibition] of ‘unfair methods of competition’ — that is to say in filling in and administering the details embodied by that general standard — the [FTC] acts in part quasi-legislatively and in part quasi-judicially.” The CFPB has the same quasi-legislative and quasi-judicial responsibilities to define and enforce the prohibition of “unfair, deceptive, or abusive act[s] or practice[s]” in consumer finance, 12 U.S.C. § 5531, as well as to make rules and enforce enumerated consumer finance statutes, 12 U.S.C. § 5481(12).
Ultimately, the concern animating the removal cases is whether, as the Court said in Morrison v. Olson (1988), “the Executive Branch [retains] sufficient control . . . to ensure that the President is able to perform his constitutionally assigned duties.” It’s certainly plausible that the president could find that a single officer was guilty of “inefficiency, neglect of duty, or malfeasance in office.” In Bowsher v. Synar (1986), the Supreme Court said those “terms are very broad and . . . could sustain removal . . . for any number of actual or perceived transgressions . . . .” But it is quite difficult to envision a scenario in which the president could plausibly claim that a majority of an agency’s commissioners met the criteria for removal. Moreover, responsibility for the failures of an agency headed by a multi-member commission are inherently more diffuse than for an agency with a single-director, giving the president less ability to identify the source of “inefficiency” and “neglect” in a multi-member commission than a single director. So PHH’s proposed rule – that the president’s removal power can only be limited for multi-member agencies – has it backwards. If anything, limitations on the removal power for a multi-member agency would be more suspect than those limitations on single-director agencies, so it’s not surprising that PHH cannot cite a single case adopting their proposed rule.
A decision striking down the CFPB’s structure would not only break new constitutional ground, it would have wide-reaching practical consequences as well. Such a holding would mean that the structures of at least three other agencies are also unconstitutional because they are headed by a single official removable only for cause:
the Federal Housing Finance Administration, 12 U.S.C. § 4512(b)(2) (removal “for cause”);
the Office of Special Counsel, 5 U.S.C. § 1211(b) (removal “only for inefficiency, neglect of duty, or malfeasance in office”); and
the Social Security Administration, 42 U.S.C. § 902(a)(3) (removal “only pursuant to a finding by the President of neglect of duty or malfeasance in office”).
For the president to remove the head of a fifth agency, the Office of the Comptroller of the Currency, “reasons” for the removal must be “communicated by [the President] to the Senate,” 12 U.S.C. § 2, suggesting that the president does not have the power to do so without cause. So if the attack on the CFPB’s structure succeeds, it will not hit the CFPB alone.
Unfortunately, PHH could hardly be more fortunate in thepanel drawn to decide this issue. All three judges were appointed by Republican presidents. One judge on the panel has suggested in a prior case that he believes the Constitution would be best interpreted to require that all agency heads be removable by the president without cause and that the Supreme Court was mistaken when it decided otherwise 80 years ago. But even if the three-judge panel rules that the CFPB’s structure is unconstitutional, it will hardly have the last word: The CFPB can seek further review by the full D.C. Circuit and the Supreme Court.
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