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CFPB’s proposal for collection of decedent debt: a misguided approach (Part II)

Posted in Debt Collection

In my blog post yesterday, I shared my concerns regarding the potential consequences of the CFPB’s proposed 30-day hold on all collection contacts after the date of a consumer’s death.  A 30-day holding period in which collectors are prohibited from contacting a surviving spouse about a debt would, standing alone, have little impact on the way that decedent debt is collected today at the major agencies that specialize in this work.  However, combining the 30-day hold with the radical proposal to prohibit all collector contact with the tens of thousands of personal representatives who regularly administer the majority of probate estates would completely change the way decedent debt is collected.

Informal personal representatives who have not been court-appointed manage most decedent estates.  This has been true for decades.  The CFPB’s proposals would prohibit collectors from contacting these people.  Decedent debt collectors could only contact people who have “state- approved documentation,” showing that they are formally appointed to administer an estate.  Such a rule would not only gut the FTC’s enforcement policy, it would make informal estate administration useless.  The FTC’s research concluded that most estates do not go through formal probate and thus no executor or administrator is appointed.  Although precise data is difficult to ascertain, today no more than roughly 11% of decedent estates go through a formal process.  The overwhelming majority of personal representatives would thus be off-limits to collectors under the CFPB’s proposals.

The 30-day hold would not help informal representatives; it would complicate and impede their ability to pay creditors.  Nor would the hold protect surviving spouses.  Instead, it would expose them to difficulties that informal probate already resolves.  Here’s a typical example:

Dad passes away leaving an 87-year-old widow. The couple has 61-year-old son who is a CPA. The son is taking care of dad’s estate informally because there is no reason to incur the time and expense of formal probate.  Under the CFPB’s proposals, collectors could not communicate with the CPA son. Collectors would be required to communicate only with the widow.

A 30-day hold would also have the unwanted effect of encouraging collectors to use the option of forcing open estates.  Here’s what a typical scenario might look like:

Mom, who was a widow, passed away. She leaves a 55-year-old daughter who has an MBA. It took a creditor about five months to learn that mom has passed. The daughter is taking care of matters informally, and does not plan to open a formal estate. Collectors cannot legally contact the daughter, so they have no way to determine whether their bills will get paid.  They decide to force open the estate and appoint an executor.

The FTC’s enforcement policy is the principal reason why both above examples above are currently resolved differently.  Collectors can talk to the CPA son and not trouble his widowed mother.  Or they can contact the MBA daughter, get the information and cooperation they need and resolve her deceased mother’s debts without forcing open an estate.

The CFPB’s proposal to require collector contact only with formally-appointed executors and administrators is also inconsistent with existing CFPB rules implementing the CARD Act.  Under Section 504 of the CARD Act, credit card issuers must have procedures in place so that an “administrator” of an estate can timely resolve credit card balances.  The official staff commentary to Regulation Z (Comment 1026.11(c)-1) defines the term “administrator” as “an administrator, executor, or any personal representative of an estate who is authorized to act on behalf of the estate.” (Emphasis added). Thus, the definition recognizes that persons without a formal appointment can act on behalf of an estate.

The CFPB’s proposals would thus create a muddled scenario where a person acting as an informal personal representative has the right under the CARD Act to contact a credit card issuer and receive information about the decedent’s credit card balance, but the creditor’s collector could not follow-up and communicate with that same individual about payment.  The creditor would be forced to open an estate to get its bill paid.

Both the FTC in its policy statement and the Federal Reserve Board in adopting the CARD Act regulations (authority for which was later transferred to the CFPB) sought to spare consumers from the time and expense of having formal estates forced open against their wishes.  The FTC cautioned that it hoped to avoid “a hyper-technical reading of the [FDCPA] that allows contact only with statutorily mandated, but in reality, non-existent administrators or executors.”

Cost to Consumers.  The American Public has been turning away from the considerable expense of probate court ever since Norman Dacey wrote his best-selling book in 1965, How to Avoid Probate.  That’s why the overwhelming majority of estates are settled informally.  Thousands of families make this economically sensible rational and practical choice every week.  Congress, the FTC, and every state legislature all recognize informal estate resolution is a choice the public needs to be able to make.  The CFPB’s proposal takes this option away.

I don’t think the CFPB understands the magnitude of the cost shifting from debt owners and collectors to consumers that would result from its proposals.  What Dacey wrote more than 50 years ago is as true today as it was nearly 165 years ago when Dickens wrote Bleak House—probate court is the greatest engine for fees the legal profession has ever created.

If the CFPB is acting out of distaste for the decedent collection industry and thinks that a rule eliminating contact with informal representatives is going to deter collections, they are completely incorrect.  Their proposal will enrich creditors and shifts the entire cost of collection to consumers.

Currently, here’s how the economics of deceased collections play out:

Assume the decedent had a credit card bill of $1200.  The collection agency contacts the personal representative and they agree on a settlement of $1000.  The collection agency has a contingent fee arrangement of 20%–so the agency keeps $200 and sends the creditor $800.  The estate has paid $1000.  The creditor has incurred collection costs of $400: $200 in fees and $200 as a settlement discount.  The estate has saved $200.

Now let’s take the same scenario, except the CFPB has prohibited the collection agency from contacting the informal personal representative:

An attorney is retained to force open an estate and appoint an executor.  The attorney is not going to negotiate with himself over a $1200 bill, so he will send the executor a bill for the full $1200.  The attorney will then resolve other estate issues and receive very typical court-approved fees of $5000.  The creditor has paid collection costs of $0.  The estate has paid $6200.

Let’s assume that only 50,000 cases a year shifted from the current informal paradigm to forced administration.  That’s a very modest estimate, only a fraction of the annual new inventory of new deceased accounts.  Assume that the average fees for attorneys, accountants, appraisers and other professional involved in each formal estate are a frugal $5000.  The result would be an annual additional cost to consumers of $250,000,000.  In its introduction to the SBREFA outline, the CFPB states that it has recovered over $300 million for consumers.  Under its proposals for decedent debt collection, that amount of money would be disgorged from consumers in about fifteen months.

The current state of affairs in which informal probate administration is recognized is beneficial to all concerned.  The CFPB’s proposals would throw that system out of balance, if not destroy it.  Today, creditors, collectors, and personal representatives have managed to create arrangements where collection costs are kept low and estates are resolved quickly.  Time is of the essence for creditors when filing probate claims.  For example, in California there is an absolute deadline of one year from the date of death for filing a claim seeking payment from an estate.  If a collector cannot contact persons acting informally and there is a 30-day hold on contacting a surviving spouse, there will be an industry-wide shift towards creditors and collectors forcing open estates.

Once the economic benefits of that approach are understood, there will be no turning back.  The work of collection agencies will become much easier— if they cannot quickly settle the account with the surviving spouse or file a claim if there is an existing probate estate, they will take the next step of forcing open an estate.  Creditors will adjust because the delays they will experience in receiving most payments will be offset by the fact that they will have collection costs of near zero.  There will be no shortage of lawyers available to do this relatively simple and highly remunerative work.  Only the general public will suffer.

CFPB report on community networks to combat elder financial abuse and resource guide highlight role of financial institutions

Posted in Elder Financial Abuse

The CFPB has issued a new elder financial abuse report, “Report and Recommendations: Fighting Elder Financial Exploitation through Community Networks,” and a related resource guide, “A Resource Guide for Elder Financial Exploitation Prevention and Response Networks.”

While the CFPB found that hundreds of counties around the country have developed strong, collaborative elder financial exploitation prevention and response networks, it also found that networks do not exist in most communities with only 25 percent of all U.S. counties currently having a network for addressing elder abuse issues.  In developing the report, the CFPB attended network meetings and interviewed representatives from 23 elder protection networks and various experts in the field.  In the report, the CFPB highlights “what such networks do, how they work, how they can work even better, and how they can be established.”  The report found that these collaborative networks improve the prevention, detection, reporting of, and response to elder financial exploitation.

In the report, the CFPB makes recommendations to existing networks and key stakeholders for how to develop and improve their communities’ efforts to combat elder financial abuse.  These recommendations include:

  • Professionals and volunteers working with or serving older adults, such as bankers, lawyers, law enforcement officers, prosecutors, and social workers, should create networks in communities where they currently do not exist, especially in communities with a large number of older people.  Networks should seek participation of law enforcement as network members.
  • Because financial institutions “are uniquely positioned to detect that an elder account holder has been targeted or victimized and to take action,” networks should seek to include financial institutions as members and financial institutions should seek to join and participate in local networks.
  • Networks in areas with older populations of diverse linguistic, ethnic, and racial backgrounds should seek to engage stakeholders that can serve these populations and deliver appropriate educational and case review services.

The resource guide covers the steps involved in starting and operating a network, such as the role of coordinators, finding network members, funding, and activities.  The guide also describes available CFPB resources.  In the guide, the CFPB again highlights the role of financial institutions as network participants and includes the American Bankers Association’s website as a source of contact information for local, regional and state entities to help networks seeking to partner with banks.

Earlier this year, the CFPB issued an advisory and a report with recommendations for banks and credit unions on how to prevent, recognize, report, and respond to financial exploitation of older Americans.  The advisory and report were the focus of a webinar conducted by Ballard attorneys.

As we have previously observed, elder financial abuse prevention can be viewed to fall within a financial institution’s general obligation to limit unauthorized use of customer accounts as well as its general privacy and data security responsibilities.  As a result, a financial institution that fails to implement a robust elder financial abuse prevention program could be targeted by the CFPB for engaging in unfair, deceptive, or abusive acts or practices.  In addition, a bank or credit union subject to CFPB supervision should expect CFPB examiners to look at its program for preventing elder financial abuse.  Many states have laws that address elder financial abuse.


CFPB proposes rule expanding disclosure of confidential supervisory information to state AGs

Posted in CFPB Supervision

Without an announcement, the CFPB has proposed a rule that would expand its discretion to share confidential supervisory information (CSI) with state attorneys general and other agencies that do not have supervisory authority over companies.

The proposed rule, published yesterday in the Federal Register, would amend the CFPB’s information disclosure rules under 12 CFR 1070.43 to:

  1. Expand the agencies that can receive CSI from federal and state agencies to any “Agency” defined as a “Federal, State, or foreign governmental authority, or an entity exercising governmental authority” regardless of whether it has jurisdiction over the company whose CSI is shared.
  2. Lower the standard for disclosure of CSI from “having jurisdiction over [the] supervised financial institution” to disclosure if it is “relevant to the exercise of the Agency’s statutory or regulatory authority.”
  3. Replace the CFPB General Counsel as the person who decides whether to disclose CSI with the head of Supervision, Enforcement, and Fair Lending.

By the CFPB’s own admission in the proposal, these changes would eliminate the stricter standard for disclosing CSI and apply the more relaxed and subjective standard for non-supervisory confidential information.  The amendments mean that any agency (including local authorities such as the New York City Department of Consumer Affairs)—which doesn’t have jurisdiction over a company—could still receive the company’s CSI because it is “relevant” to the requesting agency’s authority.

The CFPB attempts to justify this radical and potentially far-reaching change by arguing that it has reached a “better” interpretation of Section 1022 of Dodd-Frank.  The proposed rule, however, deviates from the plain language in Section 1022:

“[T]he Bureau may, in its discretion, furnish to a prudential regulator or other agency having jurisdiction over a covered person or service provider any other report or other confidential supervisory information concerning such person examined by the Bureau under the authority of any other provision of Federal law.”

12 USC 5512(c)(6)(C)(ii) (Emphasis added).

The proposed rule, while alarming by itself, begs the question: Why does the CFPB want to expand its power to share CSI with state AGs and other agencies that don’t have supervisory authority, especially since the Bureau has been assuring companies that, under the current rules, such disclosures are rare?  The CFPB should answer this question and explain why highly sensitive, proprietary, and sometimes privileged CSI should be disclosed more widely and easily.  The proposed rule would affect supervised banks and non-banks alike.  We therefore urge industry stakeholders to submit comments by the deadline, which is October 24, 2016.


CFPB’s proposal for collection of decedent debt: a misguided approach (Part I)

Posted in Debt Collection

This blog post is the first of two on the proposals being considered by the CFPB regarding the collection of decedent debt.  In tomorrow’s blog post, I will share my thoughts on the CFPB’s proposal to prohibit debt collector contact with informal representatives.

Some background.  The CFPB has been sending signals for quite some time that it finds fault with decedent debt collection.  In its November 2014 report, “A Snapshot of Debt Collection Complaints Submitted by Older Consumers,” there is a reference to an older widow who sadly became upset during a phone call she placed to a collection agency.  The woman’s narrative did not indicate that the collector she talked to said anything wrong.  The CFPB’s underlying data for the period that was covered by the Snapshot had so few complaints about decedent debt collection that the category did not even register a slice on the Snapshot’s illustrative complaint pie chart.  It is thus somewhat remarkable that in the materials accompanying the CFPB’s outline of its debt collection proposals for the SBREFA panel, the CFPB reported that a survey it conducted just a few months later showed that of the consumers responding to the survey who had been contacted about a debt in collection, six percent reported they had been contacted about a decedent debt.

In an earlier blog post, I criticized the CFPB for failing to make any attempt at external validation of its complaints.  There is also reason to question the validity of its data on decedent debt.  Given that, for the reasons explained below, there is so little collection of decedent debts, it’s hard to believe that even a weighted sample of consumers who had a 60-day delinquency, a reported collection or both, would include that many consumers who had been contacted about decedent debt.

If someone were to review the approximately 10,000 FDCPA cases that are filed each year, he or she would find that there are very few lawsuits brought against collectors of decedent debt. The reason there are so few lawsuits is simple.  Those engaged in decedent debt collection are made aware daily that many consider the task distasteful.  Collectors operate knowing that a single misstep, never mind a violation of law, can result in bad press, a loss of business, investigations by regulators and attorneys general, and even the intervention of elected officials.  And collectors of decedent debt know that surviving spouses, personal representatives, administrators, and executors often have ready access to lawyers.  These factors mandate the exercise of restraint at every point.

Despite these facts, the debt collection proposals being considered by the CFPB would both upend the FTC’s successful and well-settled 2011 enforcement policy for the collection of decedent debt and destroy the ability of consumers to resolve estates through informal methods.  In developing its “Statement of Policy Regarding Communications in Connection with the Collection of Decedents’ Debts,” the FTC spent over a year investigating the decedent debt collection industry and conducting a comprehensive survey of state probate law.  (In fact, I have been told by two former senior FTC officials that they consider the Statement of Policy to be one of the best examples of guidance the FTC has ever produced.)

30-day hold. The proposals being considered by the CFPB would impose a 30-day hold on all collection contacts after the date of a consumer’s death.  The FTC considered and rejected this idea because it found that there was no significant incidence of contact by collectors immediately following a debtor’s death.  Contrary to common perception, there is no database that gives collectors (or anyone else) immediate information about recent deaths.  The FTC noted that it typically takes a significant period of time—weeks or even months for a creditor to learn of a debtor’s death and then it takes even more time for the creditor to transfer the account to an agency that specializes in decedent debt collection.

Many of the agencies that collect decedent debt have their own internal holds on some classes of accounts.  But a mandated 30-day hold is unlikely to be a universal solution for all creditors and collectors.  It is also unlikely to benefit survivors and estate administrators because it ignores the common fact that family members universally want quick resolution of a decedent’s financial matters.  Ask any probate judge and one will quickly learn that the most frequent complaint about the estate process is that it takes too long.

The 30-day hold will also create fertile ground for litigants to raise technical violations.  The collector who mistakenly sends a letter that is received on day 29 becomes a target. There are cases that occur daily where the consumer is alive at the time the debt goes to collection but dies while has his or her spouse is working with the collector towards resolution of the debt.  Would the CFPB place even common decency on hold, thereby exposing a collector who calls the spouse to express condolences to potential liability for a technical violation?

The proposed 30-day hold does not account for the fact that, under the FDCPA, many spouses have dual status.  A spouse who is a co-signer on a loan or lives in a community property state is a “consumer” under Section 803(3) of the FDCPA because that person has a legal obligation to pay the debt.  The spouse is also simultaneously a “consumer” under FDCPA Section 805(d) because the FDCPA includes a person’s spouse as a “consumer” with whom a collector can discuss that person’s debts.  Under the proposed rule, it appears that even where a surviving spouse has a legal obligation to pay the debt, collectors would be prohibited from contacting the surviving spouse for 30 days.


Student loan complaint update highlights IDR plan application issues

Posted in Student Loans

The CFPB’s Student Loan Ombudsman has released a new “Mid-year update on student loan complaints” that highlights issues related to income-driven repayment plan (IDR) application issues.

The update covers complaints submitted from October 1, 2015 through May 31, 2016.  During that period, the CFPB handled approximately 3,500 private student loan complaints and approximately 1,500 debt collection complaints related to private and federal student loans.  The CFPB began handling complaints related to federal student loan servicing in February 2016 and handled more than 2,400 such complaints during the period covered by the update.  (Previously, such complaints were directed to the Department of Education (ED).)

Although the CFPB has repeatedly said that it does not verify the accuracy of complaints, the update appears to treat all complaints as valid.  The update discusses borrower complaints involving delays in the processing of IDR applications (which includes recertifications) allegedly caused by servicers.  It then goes on to describe various adverse consequences that can result from such delays, including capitalization of interest, delayed access to interest subsidies, and decreased potential loan forgiveness.  The update also discusses problems reported by consumers related to IDR application rejections, such as the rejection of incomplete applications from “otherwise eligible borrowers” without providing an opportunity to remedy deficiencies and the rejection of applications due to the use of forbearance.

The “Ombudsman’s discussion” section of the update includes several recommendations (but carries the standard caveat that the discussion “represents the Ombudsman’s independent judgment and does not necessarily represent the views of the [CFPB].”)  The Ombudsman suggests “market participants may wish to consider immediate action to address the specific problems identified in this report.”  According to the Ombudsman, specific elements of the policy direction issued last month by the ED to Financial Student Aid related to student loan servicing practices “offer an approach that market participants may wish to consider to better serve their most vulnerable customers and to strengthen IDR processing.”  The Ombudsman describes the “specific, limited circumstances” set forth in the policy direction for denying enrollment in IDR plans and observes that “[a]ll other deficiencies that would otherwise cause an application to be denied should instead render the application incomplete, and the policy directive indicates the servicer should actively engage with the borrower to complete the application.”

The Ombudsman also suggests that “servicers seeking to strengthen communications related to certain types of incomplete applications may wish to provide borrowers with clear and actionable instructions to complete IDR applications.”  To that end, the CFPB has issued a prototype “Fix It Form” that “may be particularly helpful for borrowers seeking to enroll in an IDR plan who must submit Alternative Documentation of Income (ADOI) or provide a written attestation that they have no income.”  According to the Ombudsman, the form “offers one approach for servicers seeking to take immediate action to improve the level of service they provide to their customers applying for IDR.”  The form “documents any deficiencies with borrowers’ IDR applications and communicates to borrowers about how to address the deficiencies and get their applications back on track.”  The CFPB also published a blog post that informs consumers how they can use the Fix It Form when submitting an IDR application and includes a link for consumers to download the form.

The Ombudsman also calls for immediate action by policymakers to publish identifiable, servicer-level performance data related to the handling of IDR applications, such as recertification rates, processing time, approval and denial rates, and delinquencies and default following IDR plan enrollment and recertification denial.  As the Ombudsman notes, the ED, in its policy direction, called for the publication of servicer-level performance data covering a wide range of practices, including enrollment in IDR and other repayment plans.

Given its past practices, servicers need to be aware that the CFPB may well be signaling its firm intention to use its UDAAP authority in both examinations and enforcement actions to accelerate the timetable for changes in IDR servicing, changes that the ED has conceded require amendments to its existing contracts.  In that regard, footnote 4 in the update is particularly telling.  Footnote 4 provides an abbreviated history of the CFPB’s involvement with what it refers to as “auto-default” provisions, provisions under which a student loan would be in default if either the borrower or the cosigner filed for bankruptcy.  In its June 2015 mid-year update, the Ombudsman expressed concerns about alleged “auto-default” provisions in loan agreements.  Subsequently, as reported in the CFPB’s Winter 2016 Supervisory Highlights, which covered examinations completed between September 2015 and December 2015, examiners determined that one or more student loan servicers engaged in unfair practices in enforcing such provisions.



CFPB to Participate in FTC Workshop on Consumer Disclosures

Posted in CFPB General, Financial Literacy, FTC, Privacy, Research, UDAAP

On September 15th, the FTC will hold a workshop to examine the testing and evaluation of disclosures that companies make to consumers about advertising claims, privacy practices, and other information.  The FTC’s workshop will explore how to test the effectiveness of these disclosures to ensure consumers notice them, understand them, and can use them in their decision-making.  Companies should incorporate the principles articulated during the workshop by federal regulators such as the FTC and the CFPB into the development of their own consumer disclosures, especially relating to e-commerce and mobile initiatives.

The “Putting Disclosures to the Test” workshop will explore ways to improve the evaluation and testing of consumer disclosures by industry, academics, and the FTC related to:

  • Disclosures in advertising  designed to prevent ads from being deceptive;
  • Privacy-related disclosures, including privacy policies and other mechanisms to inform consumers that they are being tracked; and
  • Disclosures in specific industries designed to prevent deceptive claims.

Among the participants at the workshop will be Heidi Johnson, a research analyst from the CFPB Office of Research, who will present a case study entitled, “Disclosure Research in the Lab and Online.” The CFPB’s Decision Making and Behavioral Studies team is engaged in a strategic initiative to invest in research that explores the factors that influence a disclosure’s efficacy, how to use different methodologies to study disclosure, and the market effects of disclosure. Ms. Johnson’s work as a part of this team has included consumer research on overdraft and other financial products.

Trade groups comment on CFPB arbitration proposal

Posted in Arbitration

The American Bankers Association, the Consumer Bankers Association and The Financial Services Roundtable (Associations) have filed a joint letter commenting on the CFPB’s proposed rule regulating consumer arbitration agreements in financial services contracts. Ballard Spahr served as counsel to the Associations in preparing the comment letter.  The firm also served as counsel to the Associations in preparing comment letters on the CFPB’s March 2015 empirical study of arbitration and its April 2012 Request for Information Regarding Scope, Methods, and Data Sources for Conducting Study of Pre-Dispute Arbitration Agreements.

Section 1028 of the Dodd-Frank Act requires the CFPB to conduct a study of the use of arbitration in consumer financial services agreements.  It also provides that the CFPB “by regulation, may prohibit or impose limitations for the use of [such] an agreement” if it “finds that such a prohibition or imposition of conditions and limitations is in the public interest and for the protection of consumers.”  The findings in such a regulation must also be “consistent with the study.” (emphasis added).

In their comment letter, the Associations assert that the CFPB’s proposal is not in the public interest, is not for the protection of consumers, and is not consistent with the CFPB’s March 2015 empirical study of arbitration.  The Associations urge the CFPB to withdraw the proposal and not to issue a re-proposal unless it is consistent with the statutory requirements.

In support of their position, the Associations make the following arguments for why the proposal is not “in the public interest” and does not meet the requirement to provide for consumer protection:

  • The proposal would inflict serious financial harm on (1) consumers, (2) the American federal and state court systems, and (3) financial services providers.  The CFPB has estimated an unprecedented and staggering amount of costs to covered entities that will result from the additional class action litigation that will be filed if the proposal becomes final.  According to the CFPB, the proposal is estimated to cause 53,000 providers who currently utilize arbitration agreements to incur between $2.62 billion and $5.23 billion on a continuing five-year basis in defending against an additional 6,042 class actions that will be brought every five years after the proposed rule becomes final.  These costs are not one-time costs, but continuing costs as the increase in class action filings are perpetual.
  • Consumers will suffer if the proposal becomes final.  As taxpayers, they will pay for the increased costs to the court systems required to handle the permanent surge of 6,042 additional class actions every five years.  As litigants, they will suffer increased court backlogs that long delay resolution of their cases.  As customers of the providers, they will be saddled with higher prices and/or reduced services, because the billions of dollars in additional class action litigation costs will be passed through to them in whole or in part.  In at least 87% of those class actions, they will not benefit because, as the CFPB found in its study, consumers receive no compensation in 87% of class action settlements, and in the rare cases where they do receive a cash payment from a class action settlement, it will be a pittance–the CFPB’s study found that the average participant in the class actions who were granted any reward received $32.35.  Meanwhile, billions of dollars will be paid to the lawyers “representing” them.
  • While spending more as taxpayers and users of financial services, consumers will lose the many benefits of arbitration that the CFPB acknowledges in the proposal – resolving disputes in months, not years (at a fraction of the cost of litigation), receiving an average recovery of nearly $5,400 (166 times the average putative class member’s recovery of $32.35), and enjoying the much more accessible avenue of dispute resolution than  of not having to go to court.
  • Because arbitration is likely to disappear almost entirely if class action waivers are eliminated, consumers will lose access to a fast, efficient, less expensive, and more convenient dispute resolution system.  Most notably, it will no longer be a viable option for those who have small-dollar “non-classable” claims – i.e., claims that are not amenable to class action disposition because they do not implicate systemic conduct.  Consumers wanting to pursue non-classable claims will have to endure the inconvenience and costs of going to court.  This includes taking time off from work, paying court costs, and facing the challenges inherent in the court system to prosecute such claims.  Particularly for small dollar claims, consumers are likely to conclude that prosecuting the claim in court is more trouble than it is worth.
  • The CFPB has ignored other dispute resolution mechanisms that address the CFPB’s justifications for the proposal, specifically its concerns regarding resolution of small-dollar claims, redress for harms unknown to consumers, and the modulation of corporate behavior.  The CFPB has discounted the impact of informal resolutions, its own Complaint Response Portal, and social media.  It has also not mentioned the power of government enforcement actions, including its own, something the CFPB loudly touts in its public statements.  The CFPB also failed to consider, as required, alternatives that would address the CFPB’s concerns, such as allowing enforcement of class action waivers for matters that the financial services provider has identified and resolved prior to a class action being filed.

The Associations also argue that:

  • The proposal is not “consistent with” the CFPB’s study, as shown by the CFPB’s own data. The CFPB’s background discussion accompanying the proposal expressly confirms the Associations’ position that arbitration is faster, more economical, and far more beneficial to consumers than class action litigation and that the arbitration process is fair to consumers.
  • The study was incomplete on key issues that would have further demonstrated that the proposal is not in the public interest or needed for the protection of consumers.  The CFPB neglected to review the effect of its own administrative and enforcement activities and did not study consumer satisfaction with arbitration, as recommended.  Nor did it study either the impact on consumers and society if companies abandon arbitration or the costs to consumers and society of the additional 6,042 class actions that would be filed every five years.  It also did not investigate whether class actions are necessary as a deterrent given the impact of modern social media.  Finally, while its survey found a lack of awareness about arbitration as an option for dispute resolution, its Consumer Education and Engagement division spent none of its resources on educating consumers about arbitration.






CFPB announces new appointments to advisory groups

Posted in CFPB General

The CFPB has announced the appointment of new members to its Consumer Advisory Board, Community Bank Advisory Council, Credit Union Advisory Council, and Academic Research Council.  In January 2016, the CFPB published a notice in the Federal Register soliciting applications from individuals interested in becoming members.

According to the CFPB, the new members “include experts in consumer protection, financial services, community development, fair lending, civil rights, consumer financial products or services, representatives of community banks and credit unions, and scholars with relevant methodological and subject matter experience.”  New Consumer Advisory Board and Academic Research Council members will serve three-year terms and new Community Bank and Credit Union Advisory Councils members will serve two-year terms.

The new members are as follows:

Consumer Advisory Board Members

  • Lynn Drysdale, Managing Attorney, Consumer Law Unit, Jacksonville Area Legal Aid, Inc., Jacksonville, FL
  • Paulina Gonzalez, Executive Director, California Reinvestment Coalition, San Francisco, CA
  • William Howle, Head of U.S. Retail Bank, Citibank, New York, NY
  • Ruhi Maker, Senior Attorney, Empire Justice Center, Rochester, NY
  • Arjan Schutte, Founder and Managing Partner, Core Innovation Capital, Los Angeles, CA
  • Lisa Servon, Professor, The New School, New York University, New York, NY
  • Raul Vazquez, Chief Executive Officer, Oportun, Redwood City, CA
  • James M. Wehmann, Executive Vice President, Scores for Fair Isaac Corporation, Roseville, MN
  • Chi Chi Wu, Staff Attorney, National Consumer Law Center, Boston, MA

Community Bank Advisory Council Members

  • Melissa A. Ballard, Vice President and Director, First Iowa State Bank, Albia, IA
  • Menzo D. Case, President and Chief Executive Officer, Generations Bank, Seneca Falls, NY
  • Linda Feighery, Vice President and Community Reinvestment Act /Fair Lending Officer for Citywide Banks, Denver, CO
  • Brenda K. Hughes, Senior Vice President and Director of Mortgage and Retail Lending, First Federal Savings Bank of Twin Falls, Twin Falls, IA
  • Dion Kidd Johnson, President, Chief Operating Officer and Chief Risk Officer, Western Bank, Alamogordo, NM
  • Cal Ratcliff, Senior Vice President, Chief Compliance Officer, Bank of North Carolina, High Point, NC
  • Trent Sorbe, President, Central Payments Division, Central Bank of Kansas City, Kansas City, MO

Credit Union Advisory Council Members

  • Faith Lleva Anderson, Senior Vice President and General Counsel, American  Airlines Federal Credit Union, Fort Worth, TX
  • Daniel Berry, Chief Executive Officer, Duke University Federal Credit Union, Durham, NC
  • Patrick F. Harrigan, Chief Risk Officer and General Counsel, Service Credit Union, Portsmouth, NH
  • Ricardo Ledezma, Corporate Compliance Assurance Manager, San Antonio Federal Credit Union, San Antonio, TX
  • Sarah Marshall, Chief Executive Officer, North Side Community Federal Credit Union, Chicago, IL
  • Dayatra T. Matthews, Senior Vice President of Legal & Compliance, Local Government Federal Credit Union, Raleigh, NC
  • Amy Nelson, Chief Executive Officer, Point West Credit Union, Portland, OR
  • Raynor Zillgitt, Vice President Risk Management and General Counsel, Lake Trust Credit Union, Brighton, MI

Academic Research Council Members

  • Ian Ayres, William K. Townsend Professor, Yale Law School, New Haven, CT
  • Brigitte Madrian, Professor, Harvard University, Cambridge, MA

Both Professor Madrian and Professor Ayres hold a Ph.D. in economics.  According to her profile on the website of Harvard’s Kennedy School of Government, Professor Madrian’s current research is focused on “behavioral economics and household finance, with a particular focus on household savings and investment behavior.”  Professor Madrian’s research focus fits within the CFPB’s orientation towards the use of behavioral economics, an economic theory that has been playing a central role in the CFPB’s regulatory and enforcement agenda.  The CFPB seems reluctant to include neo-classical economists who do not subscribe to behavioral economics on its Academic Research Council.

Director Cordray has described Professor Ayres as having “deep experience in analyzing discrimination.  He also had been engaged in careful study of economic and legal issues related to consumer finance.”  Based on our review of Professor Ayres’ CV on the Yale Law School website, it appears he has written extensively on issues relating to gender and race discrimination, including discrimination in auto sales.  A 2014 article in the Michigan Journal of Race and Law described Professor Ayres as having spent much of his career “empirically documenting race and gender discrimination, including in the context of consumer purchasing.”

Director Cordray responds to letter from Senators seeking tailored rulemaking for community banks and credit unions

Posted in CFPB Rulemaking

Last month, a bipartisan group of 70 Senators were signatories to a letter sent to Director Cordray urging the CFPB to “carefully tailor its regulations to match the unique nature of community banks and credit unions.”  In their letter, the Senators referenced Dodd Frank Section 1022(b)(3)(A) which allows the CFPB to create exemptions from its rules for any class of covered persons, service providers, or consumer financial products or services as the CFPB “determines necessary or appropriate to carry out the purposes and objectives” of the Consumer Financial Protection Act after taking into consideration certain specified factors.  The Senators stated that they “believe the CFPB has robust tailoring authority and ask that you act accordingly to prevent any unintended consequences that negatively impact community banks and credit unions or unnecessarily limit their ability to serve consumers.”

In a letter sent last week responding to the Senators’ letter, Director Cordray acknowledged the CFPB’s exemption authority under Section 1022.  However, to the extent the Senators were suggesting that the CFPB create wide-scale exemptions for community banks and credit unions, Director Cordray did not appear to be receptive to that concept.  He stated only that “[a]s I have expressed in the past, the Bureau recognizes that community banks and credit unions did not cause the financial crisis.  For that reason, the Bureau is committed to ensuring that the regulations that we promulgate are well-tailored and effective.”

Most of Director Cordray’s letter consisted of a list of various actions the CFPB has taken as part of its “commitment to achieving tailored and effective regulations.”  For example, Director Cordray described the small creditor safe harbor in its qualified mortgage loan (QM) rule, the exemption for small creditors in rural and underserved areas from certain requirements applicable to QMs and HOEPA loans, exemptions for small mortgage servicers from certain TILA and RESPA requirements, and HMDA exemptions for lower-volume depository institutions.  He also noted the CFPB’s obligation to conduct SBREFA panels for rules that will have a significant impact on a substantial number of small entities and referenced various CFPB resources to help financial institutions understand CFPB rules.




Pew’s issue brief in support of the CFPB’s proposed arbitration rule: a flawed presentation

Posted in Arbitration

The Pew Charitable Trusts has released an issue brief, “Consumers Want the Right to Resolve Bank Disputes in Court,” in which it urges the CFPB to “expeditiously finalize” its proposed arbitration rule.  The CFPB’s proposal would prohibit covered providers of certain consumer financial products and services from using an agreement with a consumer that provides for arbitration of any future dispute between the parties to bar the consumer from filing or participating in a class action with respect to the covered consumer financial product or service.  The issue brief is an update to Pew’s 2015 “Checks and Balances” in which Pew pressed the CFPB to write new overdraft and other rules for checking accounts and eliminate binding arbitration provisions from checking account agreements.

The findings set forth in the issue brief are based on Pew’s (1) “nationally representative random-digit-dialing telephone survey of 1,008 adults on their attitudes toward arbitration and dispute resolution alternatives” conducted in November 2015, and (2) examination from 2015 to 2016 of “the disclosure boxes, fee schedules, and account agreements” for basic checking accounts used by “44 of the 50 largest banks based on domestic deposit volume as tabulated in June 2015 by the [FDIC].”

Pew’s findings include the following:

  • Pew states that “[e]ach year since 2013, Pew has evaluated the dispute resolution policies and practices disclosed by the 50 largest retail banks in the U.S.”  Pew found that among the 29 banks common to its four annual studies, the percentage of banks with an arbitration clause has risen from 59 to 72 percent, with nearly three-quarters of the 44 banks studied in 2016 using an arbitration provision.
  • Among the 29 banks common to all of Pew’s studies, the percentage of banks with class action waivers has risen from 52 to 66 percent since 2013, with nearly three-quarters of the 44 banks studied in 2016 using a class action waiver.
  • 95 percent of consumers want to be able to have a dispute with their banks heard in court.
  • Almost 9 in 10 consumers want to be able to participate in a group lawsuit.
  • 23 percent of consumers if faced with an issue at their bank would definitely take legal action.

Pew’s issue brief is flawed in numerous ways.  Pew states that the CFPB’s arbitration study and Pew’s poll “make clear that, in most cases, consumers would not take individual legal actions over a dispute but want the right to join class actions to hold companies accountable.”  Pew ignores, however, the critical fact that the CFPB’s study does not support the proposed rule.  The data in the CFPB’s study showed that individual arbitration is far more beneficial for consumers than class action litigation.  Had those data been part of Pew’s survey questions, they would have gotten a completely different result.  For example, if consumers had been asked, “If you had a dispute with your bank, and could choose between (A) going to arbitration and, if you won, recovering an average of $5,400 a few months after the arbitration started, or (B) being part of a class action in court in which 87% of the class members would never recover anything, while the remaining 13% would recover an average of $32 as part of a class settlement  after waiting for two or more years,” Pew would have found that consumers prefer arbitration to class action litigation and would not be urging the CFPB to finalize its proposed arbitration rule.

In addition, like the CFPB in conducting its study, Pew failed to survey consumers who have actually been through arbitration.  In April 2005, Harris Interactive released the results of an extensive survey of arbitration participants sponsored by the Institute for Legal Reform at the U.S. Chamber of Commerce.  That survey found high levels of satisfaction with the arbitration process among consumers who had actually participated in an arbitration.

In its conclusion, Pew states that “[c]lass action, in particular, is a cost-effective dispute resolution option”  but cites no authority for this bald, conclusory statement.  Once again, the statement is belied by the results of the CFPB’s arbitration study, which showed class actions to be a very costly and inefficient way of vindicating consumer rights.  87% of the class members received no relief whatsoever and of the 13% who received any relief, the average recovery was a paltry $32.35.  Pew also ignores the extraordinary burden on the court system and costs on the industry to defend class actions.  The CFPB itself has estimated that its proposed rule, if finalized, will cause 53,000 providers who currently utilize arbitration agreements to incur between $2.62 billion and $5.23 billion in costs on a continuing basis in defending against an additional 6,042 class actions that will be brought within the first five years after the rule becomes effective.  Since these costs will be passed through to consumers in whole or in part, consumers will suffer in the form of higher prices and/or reduced services and the plaintiffs’ class action bar will be the only beneficiaries of the CFPB’s rule.  It is very disappointing that Pew seems to be more concerned about the economic well-being of plaintiffs’ lawyers than of consumers themselves.

As noted above, based on its survey, Pew found that “almost 90% of consumers want the right to participate in class-action lawsuits against their banks.”  This finding is based on survey participants’ responses to the following statements:

I am going to describe a situation to you, and then ask how you would respond.  Imagine that you looked at your bank account statement and noticed that your bank had been charging you a fee for a service that you are sure you did not sign up for.  They may have been charging you this fee for a while now.  You called the customer service line, but the bank refused to do anything about the fees.  I am going to read you a list of legal options for what to do next in this situation.  For each tell me if you should or should not be allowed to do each of the following.”

Pew’s hypothetical scenario is flawed in that it assumes that the bank overcharge was a systemic issue affecting a class of consumers.  In fact, most overcharges are one-off unique events which are not amenable to class action treatment.

In describing the CFPB’s authority to promulgate an arbitration rule, Pew misstates what Section 1028 of the Dodd-Frank Act provides.  According to Pew, Dodd-Frank “authorizes the CFPB to limit or ban provisions in account agreements that restrict access to class-action litigation.”  This statement is inaccurate in three respects. First, Section 1028 directs the CFPB to conduct an arbitration study.  Second, it authorizes the CFPB to limit or ban pre-dispute arbitration agreements, not class action waivers.  Third, it only authorizes the CFPB to limit or ban pre-dispute arbitration agreements under prescribed conditions, namely if, based on its arbitration study, the CFPB finds doing so “is in the public interest and for the protection of consumers.”

We also question the significance of Pew’s finding regarding the increase in the percentage of large banks using arbitration provisions over four years.  Unless and until the CFPB issues a final rule that becomes effective, banks continue to have the legal right to adopt arbitration provisions. Based on Pew’s findings, 28 percent of the largest banks common to its four year study are not using arbitration.  And, of course, an even greater percentage of smaller banks do not use arbitration.  Nothing restricts the right of a consumer who does not like arbitration to change the bank he or she uses to one that does not use arbitration.

Finally, we have previously commented on the CFPB’s failure to devote any resources to educating consumers about the pro’s and con’s of arbitration and litigation, particularly class action litigation.  Like the CFPB, Pew has also devoted no resources to educating consumers about different dispute resolution methods.