The CFPB Turns Six (and Ten)

The Consumer Financial Protection Bureau is marking a double birthday. As an institution, it turns six this week. As an idea, it goes back ten years – to the summer of 2007 and an article by a little-known expert on bankruptcy and household debt named Elizabeth Warren.

Writing in the wonky pages of Democracy magazine, then-Professor, now-Senator Warren pointed out that you couldn’t buy a toaster with “a one-in-five chance of bursting into flames and burning down your house.” And yet it was entirely possible “to refinance an existing home with a mortgage that has the same one-in-five chance of putting the family out on the street.”

One big reason for that difference, Warren wrote, was the Consumer Product Safety Commission, which had been watching over the world of toasters, power saws, baby cribs and the like since 1972. By contrast, the task of guarding consumers against defective financial products was scattered across half a dozen federal agencies; and their main concern, as she noted, was “to protect the financial stability of banks and other financial institutions, not to protect consumers.” Indeed, one of those agencies, the Office of Comptroller of the Currency, had repeatedly encouraged banks to thumb their noses at the handful of state regulators who were trying to crack down on predatory lending in the years leading up to the 2008 financial crisis.

As a remedy, Warren urged Congress to establish a watchdog agency with the full-time job of guarding consumers against deceptive and unfair practices in the financial marketplace, removing dangerous products before they could be peddled to the public.

Five years later, Warren was free to run for the U.S. Senate because the financial industry and its allies had blocked her appointment as director of the agency that Congress had gone ahead and created as part of the Dodd-Frank financial reform law. (Another birthday there: Dodd Frank was signed into law in July 2010 – seven years ago.)

Fortunately, President Barack Obama found a highly capable candidate in former Ohio Attorney General Richard Cordray. Under his leadership, the Consumer Bureau has racked up an impressive record of accomplishment. All told, CFPB enforcement actions have delivered more than $17 billion in financial relief to roughly 29 million consumers cheated in various ways by financial companies large and small.

Through its rulemaking and supervision as well as enforcement work, the Bureau has challenged a number of the financial industry’s cherished tricks and traps, like mortgages with teaser rates that adjust sharply upward after a year or two, and auto loan incentives that cause borrowers of color to be charged more than white borrowers of the same credit-worthiness. The CFPB has gone after abusive practices on the part of debt collectors, check cashers, private student lenders, and bogus “credit repair” services, as well as large-scale fraud committed by some of the country’s biggest banks, including JP Morgan Chase, Bank of America, and Wells Fargo.

In short, this is an agency that has been doing its job, standing up for ordinary consumers and resisting the power of the financial industry. But that power remains very great.

Since last fall’s elections, Wall Street lobbyists and their allies in Congress and the Trump administration have waged an all-out campaign to undermine the Bureau’s funding and authority as well as a number of its specific actions. Just this week, they launched an effort, with wide backing in both the House and Senate, to undo a CFPB rule reining in the industry’s use of fine-print forced arbitration clauses with class-action bans.

The industry’s attachment to this practice is easy to understand. Arbitration can be a just and efficient mechanism for resolving disputes between relatively equal parties who voluntarily agree to it. But the process works very differently when one party is a huge corporation and the other is a lone consumer required by a take-it-or-leave-it contract to direct all complaints of illegality to a private arbitration firm – one that has typically been chosen and paid by the company. The damages suffered by any one victim, moreover, are almost never large enough to justify the cost of pursuing a grievance, regardless of the venue. Thus the great majority of wronged consumers, once they learn that individual arbitration is the only path open to them, decide to do nothing. That’s just what happened, for example, with many of the victims of Wells Fargo’s phony accounts, enabling the bank to keep its scam under wraps for years.

In the same way, payday lenders have used these clauses to go on making triple-digit interest loans in defiance of state laws. Arkansas, for example, has a 17-percent interest rate cap inscribed in its constitution; yet it took authorities many years to make headway against lenders who continued to operate there, relying on arbitration clauses to squelch resistance.

This fight is crucial because forced arbitration, in practice, functions as a Get Out of Jail Free card for banks and lenders, allowing them to chisel lots of money out of lots of people, a little at a time. Naturally, the lobbyists and their political allies claim to be defending the “right” of consumers to choose arbitration. In reality, consumers have no say in the matter. The point of the CFPB rule is precisely to give them a choice.

Unsurprisingly, the great majority of Americans support the CFPB on this question, just as they want the Consumer Bureau itself to survive as a strong and effective agency.

It will if lawmakers heed their constituents and stop regurgitating Wall Street’s nonsensical talking points.

— Jim Lardner

Special Protections for Wall Street, No Day in Court for the Rest of Us

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.

– Amanda Werner, Arbitration Campaign Manager

This post originally appeared on Medium.com.

Special Protections for Wall Street, No Day in Court for the Rest of Us

scales of justice

Image Credit: Michael Coghlan (CC BY-SA 2.0)

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 against forced 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.

— Amanda Werner