tag:theconversation.com,2011:/fr/topics/consumer-financial-protection-bureau-31322/articlesConsumer Financial Protection Bureau – The Conversation2022-12-14T15:24:20Ztag:theconversation.com,2011:article/1965422022-12-14T15:24:20Z2022-12-14T15:24:20ZBuying gifts? Why ‘buy now, pay later’ could be a dangerous option for many holiday shoppers<figure><img src="https://images.theconversation.com/files/500848/original/file-20221213-26186-pi89ao.jpg?ixlib=rb-1.1.0&rect=67%2C50%2C5540%2C3194&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Gift-giving can be a joyful part of the holiday – unless it leads to a raft of late fees.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/presents-under-the-christmas-tree-royalty-free-image/184621537?phrase=gifts%20tree">DNY59/E+ via Getty Images</a></span></figcaption></figure><p>Gift-givers hoping to splurge this holiday season despite the <a href="https://www.bls.gov/news.release/pdf/cpi.pdf">pinch of high inflation</a> have an easy option: buy now, pay later. </p>
<p>An ever-growing number of financial companies and apps are offering consumers what are essentially small, short-term loans that combine instant gratification with interest- and fee-free payments spread out in the new year. </p>
<p>As an <a href="http://businessmacroeconomics.com/">economist</a> who studies <a href="https://theconversation.com/how-to-pick-the-right-amount-to-spend-on-holiday-gifts-according-to-an-economist-127767">holiday spending</a>, I became intrigued with <a href="https://www.investopedia.com/buy-now-pay-later-5182291">buy now, pay later</a> plans while researching a book on the transition to a cashless society. I only heard about them in the past two or so years, but now many of my students are considering using the plans to buy holiday gifts. I wondered, are these offers too good to be true?</p>
<h2>‘Tis the season</h2>
<p>Consumer spending surges around the holidays as many people buy gifts for their loved ones, often to put under a Christmas tree. </p>
<p>This year, U.S. consumers are expected to <a href="https://nrf.com/media-center/press-releases/nrf-predicts-healthy-holiday-sales-consumers-navigate-economic">spend nearly US$1 trillion</a> – which would be a record amount – in November and December. That <a href="https://www.statista.com/chart/11979/holiday-season-retail-sales/">typically amounts to about 25%</a> of all retail sales during the year as consumers increase their spending. Per person, that averages to about $830. </p>
<p>In the old days, before credit cards, consumers had few options to account for this surge in holiday spending – beyond simply setting aside personal savings. Some banks offered so-called <a href="https://www.investopedia.com/terms/c/christmasclub.asp">Christmas savings clubs</a>, in which customers could make automatic deposits throughout the year that they could use for gifts at the end. To ensure accounts were not raided early, there were financial penalties for early withdrawals. These penalties were then distributed to people who waited longer for their savings.</p>
<p>Retailers, for their part, created the <a href="https://www.nytimes.com/2008/11/30/magazine/30wwln-consumed-t.html">layaway plan</a>, which allowed consumers to reserve a product in return for a down payment, with further payments made throughout the year. </p>
<p>Credit cards came about in the <a href="https://www.dinersclub.com/about-us/history/">1950s, with Diners Club being the first</a> multipurpose card. They allowed consumers to buy stuff and worry about paying for it later. The catch, of course, is that you have to pay the balance within a very short window to avoid high interest charges. </p>
<h2>Buy now …</h2>
<p>Buy now, pay later plans would seem to offer the best of both worlds: the ability to buy something immediately but without any cost – as long as you make payments on time. </p>
<p>Even better, <a href="https://www.zdnet.com/article/best-buy-now-pay-later-app/">many companies say they don’t check credit bureaus</a> to decide who gets to participate in these plans, instead using their own algorithms to determine who might be a credit risk. This means people without any credit history like teenagers or new immigrants may be able to take advantage of these plans. It also means people who have maxed out their credit cards can also participate. <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-study-details-the-rapid-growth-of-buy-now-pay-later-lending/">About three-quarters of all applicants are approved</a> almost immediately.</p>
<p>The <a href="https://files.consumerfinance.gov/f/documents/cfpb_buy-now-pay-later-market-trends-consumer-impacts_report_2022-09.pdf">general idea is simple</a>: When you see something to purchase, you pay 25% immediately, then make three more payments every two weeks. In six weeks, the purchase is paid off.</p>
<p>The market for these types of loans is growing fast. The Consumer Financial Protection Bureau <a href="https://files.consumerfinance.gov/f/documents/cfpb_buy-now-pay-later-market-trends-consumer-impacts_report_2022-09.pdf">recently surveyed five lenders</a>, including PayPal and Afterpay, that offer buy now, pay later plans and found that the total volume of such loans they offered surged from $2 billion in 2019 to $24 billion in 2021. One estimate suggests the total market <a href="https://phys.org/news/2022-11-buy-pay-impacts-financial-health.html">will hit $1 trillion by 2025</a>. </p>
<p>A 2021 survey <a href="https://www.fool.com/the-ascent/research/buy-now-pay-later-statistics/#:%7E:text=56%25%20of%20Americans%20have%20used,had%20used%20a%20BNPL%20service.&text=In%20July%202020%2C%20only%2037.71,in%20less%20than%20a%20year">found that electronics</a> are the most popular item to purchase using buy now, pay later, followed by clothing and fashion items. </p>
<p>Given these companies charge no interest and no fees, how do they make money?</p>
<p>Two ways: <a href="https://www.chargebackgurus.com/blog/buy-now-pay-later">They typically charge merchants</a> a percentage of every purchase, and customers who are unable to complete their payments on time pay <a href="https://www.nerdwallet.com/article/loans/personal-loans/buy-now-pay-later">late fees</a>.</p>
<h2>Pay more later?</h2>
<p>There are several downsides to buy now, pay later schemes. </p>
<p>One is that they can cause consumers to become overextended and spend more than they can fundamentally afford. One reason is the ease of signing up for these loans, which may take only a few clicks. A second is that the <a href="https://hbr.org/2002/09/pricing-and-the-psychology-of-consumption">price may seem lower</a> than it actually is because users may only see the per-payment rather than the total cost of the item. </p>
<p>The CFPB <a href="https://files.consumerfinance.gov/f/documents/cfpb_buy-now-pay-later-market-trends-consumer-impacts_report_2022-09.pdf">found that about 11%</a> of borrowers were charged at least one late fee in 2021, which suggests they overspent. Late fees are typically around $7, which is about 5% of the average loan size of $135. </p>
<p>Another problem is these payment plans are not very forgiving when people get into financial trouble. About 90% of these loans are tied to a debit card, which means the payments are automatically deducted from the borrower’s bank account. So when someone misses a payment, it’s likely because there were insufficient funds in their account. Besides the late fee, these borrowers will also end up getting charged an overdraft fee. As a result, research has found that new users of buy now, pay later loans <a href="http://dx.doi.org/10.2139/ssrn.4230633">experience a rapid increase</a> in overdraft charges. </p>
<p>While gift-giving over the holidays is an important part of the season, my advice is to be careful when taking advantage of these buy now, pay later loans. Don’t overextend yourself financially. If you are thinking about taking one of these loans, make sure you can really afford the payments.</p>
<p>Giving a gift that makes someone else happy but ruins your financial life is not a great trade-off.</p><img src="https://counter.theconversation.com/content/196542/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jay L. Zagorsky does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Offers of interest-free loans may sound appealing, but there are many risks as well.Jay L. Zagorsky, Clinical associate professor, Boston UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1444772020-09-14T11:50:59Z2020-09-14T11:50:59ZIt’s still a conservative Supreme Court, even after recent liberal decisions – here’s why<figure><img src="https://images.theconversation.com/files/357317/original/file-20200909-18-1y3hkrb.jpg?ixlib=rb-1.1.0&rect=0%2C25%2C5687%2C3677&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">DACA supporters rally at the Supreme Court on Thursday, June 18, 2020, after the court rejected the Trump administration's push to end DACA. </span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/dreamers-and-daca-supporters-rally-outside-of-the-u-s-news-photo/1220896140?adppopup=true">Bill Clark/CQ-Roll Call, Inc via Getty Images</a></span></figcaption></figure><p>The new Supreme Court term begins on the first Monday in October, <a href="https://constitutioncenter.org/blog/why-the-supreme-court-starts-on-the-first-monday-in-october">a date set more than 100 years ago by Congress</a>. As expected, the court’s upcoming docket will include <a href="https://www.scotusblog.com/case-files/terms/ot2020/">some politically controversial cases</a> – as did the term that ended in June. Less expected, that previous term featured some notable liberal victories – in cases about immigration, homosexuality and abortion. </p>
<p>Nevertheless, the last Supreme Court term was far from a liberal triumph, and for several reasons.</p>
<p>First, as commentators have <a href="https://www.washingtonpost.com/opinions/2020/07/12/think-this-was-liberal-term-supreme-court-you-probably-missed-some-cases/">noted</a>, the term also saw many conservative decisions. And as one court observer has <a href="https://www.nytimes.com/2020/07/16/opinion/supreme-court-roberts-religion.html?action=click&module=Opinion&pgtype=Homepage">argued</a>, the liberal decisions were made on narrow legal grounds, with limited scope and future applicability, whereas the conservative ones were broader.</p>
<p><a href="https://law.uoregon.edu/people/directory/ofer">As a scholar who specializes in the Constitution and the courts</a>, I see another reason why the last term was not a liberal triumph, and why the Roberts court remains a bastion of conservatism: the types of decisions that the court made. </p>
<p>Simply put, some Supreme Court decisions are enduring, while others are fleeting and easily changed. </p>
<h2>Different kinds of decisions</h2>
<p>The Supreme Court decisions that have the greatest impact on our governments and our laws are rulings that find violations of the Constitution, called “constitutional invalidations.” </p>
<p>When the court declares that some government action – a law or an executive order – is unconstitutional, that action must stop. Neither Congress nor the states can do anything to change this result, except through a constitutional amendment, which is almost impossible to attain (<a href="https://constitutioncenter.org/interactive-constitution/article/article-v">because it requires two-thirds majorities in both houses of Congress, plus the consent of three-quarters of the states</a>). </p>
<p>Notable historic examples of constitutional invalidations include <a href="https://supreme.justia.com/cases/federal/us/347/483/">Brown v. Board of Education (1954)</a>, which ended racial segregation in public schools; <a href="https://supreme.justia.com/cases/federal/us/377/533/">Reynolds v. Sims (1964)</a>, which announced the celebrated one-person-one-vote principle; or Roe v. Wade (1973), the abortion rights ruling which, despite enormous public opposition, is still with us.</p>
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<a href="https://images.theconversation.com/files/357320/original/file-20200909-20-1v2v3ud.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Chief Justice John Roberts." src="https://images.theconversation.com/files/357320/original/file-20200909-20-1v2v3ud.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/357320/original/file-20200909-20-1v2v3ud.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/357320/original/file-20200909-20-1v2v3ud.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/357320/original/file-20200909-20-1v2v3ud.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/357320/original/file-20200909-20-1v2v3ud.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/357320/original/file-20200909-20-1v2v3ud.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/357320/original/file-20200909-20-1v2v3ud.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Supreme Court Chief Justice John Roberts, center, provided the crucial fifth vote for decisions seen as liberal.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/supreme-court-chief-justice-john-roberts-departs-the-senate-news-photo/1204294954?adppopup=true">Mario Tama/Getty Images</a></span>
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<p>But most Supreme Court decisions do not declare constitutional violations. Most decisions either reject claims of constitutional violations, or else engage in statutory (as opposed to constitutional) interpretation – that is, they simply determine what a federal law requires in cases where that question is legally contested. </p>
<p>Unlike constitutional invalidations, the consequences of these other decisions are relatively easy to change.</p>
<p>First, the government can always stop doing what it has been doing, even if the court declared it has been acting constitutionally. And second, Congress can always amend or repeal the laws it has passed if it disagrees with the court’s interpretation of these laws.</p>
<p>The distinction between constitutional invalidations and other decisions therefore marks the difference between the most consequential exercises of Supreme Court power and decisions that are far less significant because they are more amenable to change by the other branches of government.</p>
<h2>The liberal decisions</h2>
<p>This difference shows why the recent Supreme Court term was far from a liberal triumph.</p>
<p>Two of the three principal decisions touted as liberal victories are <a href="https://www.supremecourt.gov/opinions/19pdf/18-587_5ifl.pdf">the reinstatement of DACA</a> – a program allowing people brought to the U.S. illegally as children to avoid deportation, which the Trump administration <a href="https://www.nytimes.com/2017/09/05/us/politics/trump-daca-dreamers-immigration.html">revoked in 2017</a> – and the <a href="https://www.supremecourt.gov/opinions/19pdf/17-1618_hfci.pdf">prohibition on employment discrimination against homosexuals or transgender individuals</a>. The decisions in both cases involved statutory interpretations, meaning they can be easily overriden. </p>
<p>The DACA decision rejected the claim that the government’s revocation of DACA violated the Constitution, ruling only that the revocation was carried out in a an arbitrary and capricious manner that violated a federal statute. </p>
<p>Either Congress or the Trump administration could therefore end DACA – the administration simply by following different, less arbitrary procedures. As Justice Brett Kavanaugh put it, “[T]he only practical consequence of the court’s decision…appears to be some delay.”</p>
<p>The decision providing protection from employment discrimination for gay and transgender people was also based on statutory interpretation. The justices found that the Civil Rights Act of 1964 provided remedies against such discrimination. Congress could therefore remove these protections by amending the Civil Rights Act – though it seems <a href="https://www.prri.org/research/broad-support-for-lgbt-rights/">unlikely to do so</a>.</p>
<p>The third ruling celebrated by Democrats – <a href="https://www.supremecourt.gov/opinions/19pdf/18-1323_c07d.pdf">striking down a Louisiana statute</a> that threatened to leave the state with a single abortion clinic – actually did find a constitutional violation. This 5-4 decision is therefore not subjected to legislative override. </p>
<p>On closer look, however, the case may actually undermine constitutional protections for abortion. The decision was based on a recent precedent which invalidated a similar statute from Texas merely <a href="https://www.supremecourt.gov/opinions/15pdf/15-274_new_e18f.pdf">four years earlier</a>. But Chief Justice Roberts, who cast the fifth and crucial vote in last term’s case, made clear he was willing to <a href="https://slate.com/news-and-politics/2020/06/john-roberts-abortion-june-medical.html">weaken that precedent in the future</a>. </p>
<h2>The conservative decisions</h2>
<p>By contrast, the three big conservative victories from the court’s last term involved two groundbreaking constitutional invalidations. </p>
<p>One constitutional invalidation weakened the independence of federal administrative agencies, a longstanding conservative ambition. In a 5-4 decision, the Supreme Court ruled that the structure of the Consumer Financial Protection Bureau – which was established in 2010 to protect American consumers in the financial markets – <a href="https://www.supremecourt.gov/opinions/19pdf/19-7_new_bq7d.pdf">violated the Constitution</a>. </p>
<p>The decision made that agency – and theoretically others like it – more vulnerable to political pressure from the White House. </p>
<p>In a second major 5-4 ruling, the Supreme Court <a href="https://www.supremecourt.gov/opinions/19pdf/18-1195_g314.pdf">declared it unconstitutional</a> for states seeking the separation of church and state to refuse government scholarships to pupils of private religious schools. This is a big victory for the religious right, which has long sought public funding for religious institutions. </p>
<p>Since these are constitutional invalidations, nothing short of a constitutional amendment – or a future change of heart at the Supreme Court – can undo these two decisions. </p>
<p>In a third decision, the court <a href="https://www.supremecourt.gov/opinions/19pdf/19-161_g314.pdf">ruled against</a> a Sri Lankan asylum-seeker who was ordered to leave the U.S. and was not allowed to appeal his deportation to the federal courts. A federal Court of Appeals <a href="https://www.leagle.com/decision/infco20190307136">found</a> the unavailability of an appeal to be unconstitutional. But the Supreme Court reversed, ruling that the asylum seeker had no constitutional right to appeal.</p>
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<a href="https://images.theconversation.com/files/357462/original/file-20200910-18-1lcgtl3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A woman holding a sign that says " src="https://images.theconversation.com/files/357462/original/file-20200910-18-1lcgtl3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/357462/original/file-20200910-18-1lcgtl3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/357462/original/file-20200910-18-1lcgtl3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/357462/original/file-20200910-18-1lcgtl3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/357462/original/file-20200910-18-1lcgtl3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/357462/original/file-20200910-18-1lcgtl3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/357462/original/file-20200910-18-1lcgtl3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">In one case, the court gave the Trump administration a victory in an anti-immigration policy.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/small-group-of-activists-from-bamn-protest-outside-the-u-s-news-photo/1204736670?adppopup=true">Drew Angerer/Getty</a></span>
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<p>The decision was not only a big practical win for the Trump administration, which has made the <a href="https://www.foxnews.com/politics/trump-administration-announces-major-crackdown-on-asylum-seekers">crackdown on asylum seekers one of its main policies</a>. It also deprived liberals of what had been a significant migrant rights victory at the lower court – significant, because it came in the form of a constitutional invalidation, which the Supreme Court has now reversed. </p>
<h2>A staunchly conservative court</h2>
<p>In short, when evaluating the court’s performance, it is crucial to distinguish between different types of decisions. The most formidable and enduring are those that find constitutional violations. </p>
<p>[<em>Deep knowledge, daily.</em> <a href="https://theconversation.com/us/newsletters/the-daily-3?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=deepknowledge">Sign up for The Conversation’s newsletter</a>.]</p>
<p>That is why the Roberts court is so staunchly conservative: In pivotal areas – from the <a href="https://www.supremecourt.gov/opinions/07pdf/07-290.pdf">right to bear arms</a> and <a href="https://www.supremecourt.gov/opinions/09pdf/08-205.pdf">campaign finance</a> to <a href="https://www.supremecourt.gov/opinions/06pdf/05-908.pdf">affirmative action</a> and <a href="https://www.supremecourt.gov/opinions/17pdf/16-111_j4el.pdf">religious freedom</a> – conservative victories often come in the form of enduring constitutional invalidations. </p>
<p>Meanwhile, important liberal decisions are often easy to circumvent – and unlikely to last.</p><img src="https://counter.theconversation.com/content/144477/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ofer Raban does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Those who say the Supreme Court’s last term was a liberal success fail to understand that the types of decisions they see as victories are fleeting triumphs that will not endure.Ofer Raban, Professor of Constitutional Law, University of OregonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1281822019-12-09T13:42:47Z2019-12-09T13:42:47ZPayday lenders have embraced installment loans to evade regulations – but they may be even worse<figure><img src="https://images.theconversation.com/files/305670/original/file-20191206-90603-1dkc76r.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A little cash can be costly.</span> <span class="attribution"><span class="source">AP Photo/Sid Hastings</span></span></figcaption></figure><p>Installment loans seem like a kinder, gentler version of their “predatory” cousin, the payday loan. But for consumers, they may be even more harmful. </p>
<p>Use of the installment loan, in which a consumer borrows a lump sum and pays back the principal and interest in a series of regular payments, <a href="https://www.wsj.com/articles/a-payday-loan-alternative-gains-ground-1470603307?mod=article_inline">has grown dramatically</a> since 2013 as regulators began to rein in payday lending. In fact, payday lenders appear to have developed installment loans <a href="https://www.bloomberg.com/news/articles/2013-05-29/payday-lenders-evading-rules-pivot-to-installmant-loans">primarily to evade</a> this increased scrutiny. </p>
<p>A closer look at the differences between the two types of loans shows why <a href="https://law.vanderbilt.edu/bio/paige-skiba">we believe</a> the growth in installment loans is worrying – and needs the same regulatory attention as payday loans.</p>
<h2>Possible benefits</h2>
<p>At first glance, it seems like installment loans could be less harmful than payday loans. They tend to be larger, can be paid back over longer periods of time and usually have lower annualized interest rates – all potentially good things. </p>
<p>While <a href="https://www.experian.com/blogs/ask-experian/how-payday-loans-work/">payday loans</a> are typically around US$350, installment loans tend to be in the <a href="https://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2016/08/from-payday-to-small-installment-loans">$500 to $2,000 range</a>. The potential to borrow more may benefit consumers who have greater short-term needs. </p>
<p>Because installment loans are repaid in biweekly or monthly installments over a period of six to nine months, <a href="https://www.propublica.org/article/installment-loans-world-finance">lenders say</a> consumers are better able to manage the financial strain that brought them to their storefront in the first place. </p>
<p>Payday loans, in contrast, typically require a lump sum payment for interest and principal on the borrower’s very next pay date, often just a few days away. Lenders offer cash in exchange for a post-dated check written from the borrower’s checking account for the amount borrowed and “fees” – what they often dub “interest” to skirt usury rules. </p>
<p>Finally, and perhaps most importantly, installment loans are often cheaper than payday loans, with annualized interest rates of <a href="https://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2016/08/from-payday-to-small-installment-loans">around 120%</a> in some states, compared with payday loans’ <a href="https://blog.risecredit.com/know-you-owe-installment-loans-vs-payday-loans/">typical 400% to 500% range</a>.</p>
<h2>Harmful to consumers</h2>
<p>Unfortunately, some of the structural features that seem beneficial may actually be harmful to consumers – and make them even worse than payday loans. </p>
<p>For example, the longer payback period keeps borrowers indebted longer and requires sustained discipline to make repayments, perhaps increasing stress and opportunities for error. </p>
<p>And the fact that the loan amounts are larger may cut both ways. </p>
<p>It is true that the small size of payday loans often isn’t enough to cover a borrower’s immediate needs. <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-finds-four-out-of-five-payday-loans-are-rolled-over-or-renewed/">About 80% of payday borrowers</a> do not repay their loan in full when due but “roll over” their loan into subsequent paycheck. Rolling over a loan allows borrowers to repay merely the interest, then extend the loan in exchange for another pay cycle to repay at the cost of another interest payment.</p>
<p>In a <a href="https://ssrn.com/abstract=3497095">recent study</a>, we explored the effect that the larger installment loan sizes have on borrowers. We used a dataset containing thousands of installment loan records in which some borrowers received a larger loan because they earned a higher income. Although similar in terms of factors such as credit risk and income level, slightly higher-income borrowers were offered a $900 loan, while others got only $600. </p>
<p>We found that borrowers with those larger loans were more likely to have subsequently taken out debt on other installment loans, storefront and online payday loans and auto title loans. Our results suggest that the higher initial installment loan might not serve its main purpose of helping borrowers manage their finances and actually may have caused increased financial strain.</p>
<h2>Misuse and abuse</h2>
<p>As some of <a href="https://doi.org/10.1111/jmcb.12175">our previous research has shown</a>, even payday loans, with their sky-high annualized rates and balloon payments, can be beneficial to consumers in some instances.</p>
<p>Installment loans are no different. When used carefully, they can help low-income consumers with no other credit access smooth consumption. And when they are paid back on time, the loans can certainly provide a net benefit. </p>
<p>But their nature means they are also rife for misuse and abuse. And any negative effects will apply to a broader group of consumers because they are deemed more “mainstream” than payday loans. Lenders are targeting consumers with higher credit scores and higher incomes than <a href="https://www.opploans.com/payday-news/who-uses-payday-loans-the-most/">those of the “fringe” borrowers</a> who tend to use payday loans.</p>
<p>Installment lending accounts for an <a href="https://www.clarityservices.com/wp-content/uploads/2019/04/2019-Alternative-Financial-Services-Lending-Trends.pdf">increasingly large portion</a> of the alternative credit industry. If regulatory crackdowns on payday lending continue, installment lending is likely to become the bulk of lending in the small-dollar, high-interest lending market. </p>
<p>Given the current lack of regulation of these types of loans, we hope they receive increased scrutiny.</p>
<p>[ <em>You’re smart and curious about the world. So are The Conversation’s authors and editors.</em> <a href="https://theconversation.com/us/newsletters/weekly-highlights-61?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=weeklysmart">You can get our highlights each weekend</a>. ]</p><img src="https://counter.theconversation.com/content/128182/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Use of installment loans has grown dramatically in recent years – all without the regulatory scrutiny that tamped down on abuses in the payday loan market.Paige Marta Skiba, Professor of Law, Vanderbilt UniversityCaroline Malone, Ph.D. Student in Law and Economics, Vanderbilt UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1132442019-03-15T10:42:55Z2019-03-15T10:42:55ZConsumer rights are worthless without enforcement<figure><img src="https://images.theconversation.com/files/264015/original/file-20190314-28471-1kb98g4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">John F. Kennedy's 1962 speech inspired the modern consumer rights movement.</span> <span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Watchf-AP-A-DC-USA-APHS418417-President-John-F-/bebb52dd0ea04966a5d03f275b49daeb/5/0">AP Photo/Bill Allen</a></span></figcaption></figure><p>57 years ago, President John F. Kennedy made an impassioned pitch for stronger consumer rights. </p>
<blockquote>
<p>“If consumers are offered inferior products, if prices are exorbitant, if drugs are unsafe or worthless, if the consumer is unable to choose on an informed basis, then his dollar is wasted, his health and safety may be threatened, and the national interest suffers.” </p>
</blockquote>
<p>Kennedy <a href="https://www.presidency.ucsb.edu/documents/special-message-the-congress-protecting-the-consumer-interest">offered these words of warning on March 15, 1962</a>, a date now celebrated as <a href="https://www.consumersinternational.org/what-we-do/world-consumer-rights-day/">World Consumer Rights Day</a>. He then called on Congress to enact legislation to protect four fundamental consumer rights: the right to safety, the right to be informed, the right to choose and the right to be heard. </p>
<p>The address has become known as the “consumer bill of rights.” But Kennedy also discussed an equally important issue: how such rights would be enforced. After all, without enforcement, consumer rights are just empty promises.</p>
<h2>Consumer rights flourish</h2>
<p>The idea of consumer rights was nothing new in 1962.</p>
<p>As I describe in <a href="http://www.hup.harvard.edu/catalog.php?isbn=9780674976238">my research on the history of consumer credit regulation</a>, the states took an early interest in protecting ordinary Americans against abuse by lenders and debt collectors, beginning in the earliest days of the republic. Most adopted usury laws limiting the price of credit in the colonial period, exemption laws shielding property from seizure by creditors in the 19th century and more tailored consumer credit regulations in the early and middle 20th century. </p>
<p>What was noteworthy about Kennedy’s address was not his push for more consumer rights, but rather his call for the federal government – “the highest spokesman for all the people” – to act on behalf of consumers instead of ceding the role of consumer protector to the states. </p>
<p>Congress heeded Kennedy’s call and passed a flurry of consumer legislation. </p>
<p>In the 1960s and ‘70s, it required lenders to clearly disclose loan terms through the <a href="http://uscode.house.gov/statviewer.htm?volume=82&page=146">Truth in Lending Act</a>, mandated <a href="http://uscode.house.gov/statutes/pl/91/508.pdf">fair credit reporting</a> and <a href="http://uscode.house.gov/statviewer.htm?volume=91&page=874">debt collection practices</a>, created <a href="http://uscode.house.gov/statviewer.htm?volume=80&page=718">safety standards for cars</a> and <a href="http://uscode.house.gov/statviewer.htm?volume=86&page=1207">other consumer products</a>, and banned <a href="http://uscode.house.gov/statviewer.htm?volume=82&page=81">discrimination in housing</a> and <a href="http://uscode.house.gov/statviewer.htm?volume=88&page=1521">consumer lending</a>. More recently, in 2010, <a href="http://uscode.house.gov/statviewer.htm?volume=124&page=1376">Congress created</a> the <a href="https://www.consumerfinance.gov/">Consumer Financial Protection Bureau</a> and tasked the agency with guarding consumers against unfair, deceptive or abusive acts and practices in financial services. </p>
<p>The states also reinforced their decades-old consumer laws in the 1960s and '70s <a href="https://www.repository.law.indiana.edu/cgi/viewcontent.cgi?referer=https://www.google.com/&httpsredir=1&article=1946&context=facpub">by banning unfair and deceptive acts and practices</a> under state “UDAP” laws.</p>
<p>Accordingly, consumer rights today are far more robust than they were when JFK gave his speech. To be sure, new business practices regularly require that <a href="https://www.congress.gov/bill/116th-congress/senate-bill/151/text">existing laws be updated</a> to address unanticipated threats. </p>
<p>But the biggest challenge today is not the need for new consumer rights. Rather, it is ensuring that existing rights are enforced. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/264016/original/file-20190314-28502-1hmef8i.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/264016/original/file-20190314-28502-1hmef8i.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=391&fit=crop&dpr=1 600w, https://images.theconversation.com/files/264016/original/file-20190314-28502-1hmef8i.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=391&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/264016/original/file-20190314-28502-1hmef8i.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=391&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/264016/original/file-20190314-28502-1hmef8i.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=491&fit=crop&dpr=1 754w, https://images.theconversation.com/files/264016/original/file-20190314-28502-1hmef8i.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=491&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/264016/original/file-20190314-28502-1hmef8i.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=491&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Sen. Elizabeth Warren has been a strong advocate for consumer protection and helped establish the Consumer Financial Protection Bureau.</span>
<span class="attribution"><a class="source" href="https://pictures.reuters.com/CS.aspx?VP3=SearchResult&VBID=2C0BXZSHDNUKTG&SMLS=1&RW=1440&RH=789&PN=3&POPUPPN=147&POPUPIID=2C0408WAOD1KD">Reuters/Joshua Roberts</a></span>
</figcaption>
</figure>
<h2>Legal fee recovery and class actions</h2>
<p>There are basically two ways to enforce a consumer right: privately with a lawsuit or publicly via regulators. </p>
<p>The biggest barrier to effective private enforcement is financial. First of all, the harm to an individual consumer from a rights violation is often small, reducing the economic incentive to sue. Secondly, to sue in court, <a href="https://doi.org/10.1111/j.1467-9930.1984.tb00321.x">a consumer generally requires the assistance</a> of an attorney, who must be paid. Finally, even if the individual goes to court and wins, the damage award is frequently too insignificant to deter the violator from engaging in profitable but illegal practices in the future. </p>
<p>Fortunately, two legal innovations have helped consumers overcome some of these hurdles.</p>
<p>One, rules allowing prevailing plaintiffs to recover attorneys’ fees, expanded with the raft of consumer rights legislation of the late 1960s. These provisions gave consumers the right to recover the costs of their legal representation along with any actual damages for some rights violations. </p>
<p>The other was the <a href="https://openscholarship.wustl.edu/cgi/viewcontent.cgi?article=6000&context=law_lawreview">birth of the modern class action lawsuit</a> in 1966, which allowed consumers who suffer similar monetary harms to aggregate their claims into a single large lawsuit, leading to <a href="https://www.reuters.com/article/us-bank-of-america-overdrafts/bank-of-america-settles-overdraft-lawsuit-for-66-6-million-idUSKBN1D22ER">multimillion dollar settlements</a>.</p>
<h2>Public enforcement</h2>
<p>The other way to give consumer rights teeth is through public enforcement. And besides the potential for monetary awards, this method opens the door to other types of remedies for consumers. </p>
<p>For example, <a href="https://www.courierpostonline.com/story/news/local/south-jersey/2019/03/07/nj-sues-kenneth-r-cohen-nu-2-u-auto-world-pine-valley-motors-predatory-loans-repossession-scam/3094508002/">the New Jersey attorney general recently sued two auto dealerships</a>, alleging that they sold damaged vehicles at unaffordable prices to “financially vulnerable” customers who were then left stranded when the dealers repossessed the cars without advance warning. The complaint seeks to ban the violators from selling car in the future, in addition to monetary relief. </p>
<p>Similarly, in 2018, the <a href="https://www.justice.gov/opa/pr/five-charged-elder-fraud-schemes">U.S. Department of Justice brought criminal charges</a> against the perpetrators of a multimillion dollar scheme to defraud elderly and vulnerable consumers with the false promise of cash prizes. The violators could be subject to both fines and imprisonment.</p>
<p><a href="https://www.ftc.gov/reports/annual-highlights-2017/enforcement#money">In 2017 alone</a>, the Federal Trade Commission directly returned almost $320 million to consumers through enforcement actions, not to mention its work overseeing the return by FTC defendants of over $6 billion to consumers. </p>
<h2>Enforcement shortfalls</h2>
<p>Recent developments, however, raise concerns about the future of consumer rights enforcement through both public and private channels.</p>
<p>The strength of public enforcement is subject to the whims of state and federal officials, who may reduce enforcement resources or refuse to bring enforcement actions. </p>
<p>A prime example is the weakening of the <a href="https://www.consumerfinance.gov/">Consumer Financial Protection Bureau</a>, which from 2011 through 2017 helped millions of consumers <a href="https://theconversation.com/why-we-need-to-save-the-consumer-financial-protection-bureau-87573">receive nearly $12 billion</a> back from misbehaving financial institutions. A <a href="https://consumerfed.org/reports/dormant-the-consumer-financial-protection-bureaus-law-enforcement-program-in-decline/">recent study found</a> that CFPB enforcement activity has declined significantly since the end of 2017, when Richard Cordray, its first director, stepped down.</p>
<p>His temporary replacement, Mick Mulvaney, <a href="https://www.nytimes.com/2018/04/02/us/politics/cfpb-mick-mulvaney.html">froze all new enforcement actions</a>. He subsequently <a href="https://www.americanbanker.com/news/cfpb-drops-probe-into-lender-that-gave-to-mulvaneys-campaigns">dropped one ongoing lawsuit</a> against a group of payday lenders and declined to file charges against another lender that had previously donated to Mulvaney’s political campaign. The head of its student loan office resigned last August, <a href="https://www.npr.org/2018/08/27/642199524/student-loan-watchdog-quits-blames-trump-administration">alleging that the current CFPB leadership</a> had “abandoned its duty to fairly and robustly enforce the law.” </p>
<p>In a similar vein, Kathy Kraninger, recently appointed as CFPB director, <a href="https://www.americanbanker.com/list/takeaways-from-trump-budget-cfpb-reform-fha-fees-and-student-loans">has proposed reducing her own agency’s budget</a> by about 4 percent in 2019 and 9 percent in 2020. </p>
<p>As for private enforcement, the ability of consumers to aggregate their claims has been endangered by the spread of mandatory pre-dispute arbitration agreements. These contract terms, found in a variety of consumer agreements, <a href="https://chicagounbound.uchicago.edu/uclrev/vol79/iss2/3/">prevent consumers from pursuing class relief in court</a>. </p>
<p>Each injured party must either bring an individual action, which may be economically unfeasible, or be left without a remedy. The U.S. Supreme Court’s <a href="https://www.law.cornell.edu/supct/pdf/09-893P.ZS">recent arbitration decisions</a> offer little hope that judges alone will keep the courthouse door open to consumer class actions. </p>
<p>Furthermore, <a href="https://www.americanbanker.com/news/senate-repeals-cfpb-arbitration-rule-in-win-for-financial-institutions">Congress narrowly voted in 2017 to repeal</a> a CFPB rule that would have prevented financial service providers from requiring consumers to waive their class action rights. </p>
<h2>Paper tigers</h2>
<p>Compared with 1962, when President Kennedy put consumer concerns on the national agenda, ordinary Americans now have far more robust rights to safety, to information, to choice and to a fair hearing. </p>
<p>But consumer rights do not enforce themselves. Public enforcement requires funding and willing leaders. Private enforcement requires legal devices that allow consumers to pay attorneys for their work. </p>
<p>Without an ongoing commitment to enforcement, consumer rights may become paper tigers, offering the appearance of protection without any teeth.</p><img src="https://counter.theconversation.com/content/113244/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Anne Fleming does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>JFK pushed consumer rights to the top of the national agenda in 1962, leading to a raft of new laws offering new protections. But without enforcement, such rights are meaningless.Anne Fleming, Associate Professor of Law, Georgetown UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/988422018-06-29T10:35:48Z2018-06-29T10:35:48ZMick Mulvaney turned the CFPB from a forceful consumer watchdog into a do-nothing government cog<p>Until last Thanksgiving, the <a href="https://www.consumerfinance.gov/">Consumer Financial Protection Bureau</a> was known for forcefully pursuing its core mission, returning nearly US$12 billion to about 30 million consumers who had been taken advantage of by financial institutions. </p>
<p>But since then, the bureau has been <a href="https://theconversation.com/consumers-are-biggest-losers-of-trumps-ongoing-war-on-regulations-91301">known</a> for … well, not much. After Obama-appointee Richard Cordray stepped down in November, President Donald Trump named as interim director, his budget chief Mick Mulvaney, <a href="https://www.vox.com/policy-and-politics/2017/11/16/16667266/mick-mulvaney-cfpb-cordray-omb-joke">who has long been a foe</a> of the CFPB. </p>
<p>The president <a href="https://www.msn.com/en-us/news/politics/trump-nominates-budget-official-kraninger-to-lead-consumer-bureau/ar-AAyPeeU">recently nominated</a> a new permanent director – who has no consumer finance experience but is one of Mulvaney’s own deputies at the Office of Budget and Management – for a five-year term, with hearings likely to take place later this year. </p>
<p>So what does this mean for the only government agency focused on protecting consumers from financial shenanigans? I’ve been writing about consumer law for more than 30 years and follow the work of the CFPB closely. Let me explain what it used to do, what it’s doing now and what the change means for consumers. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/225403/original/file-20180628-117440-1chske8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/225403/original/file-20180628-117440-1chske8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/225403/original/file-20180628-117440-1chske8.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/225403/original/file-20180628-117440-1chske8.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/225403/original/file-20180628-117440-1chske8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/225403/original/file-20180628-117440-1chske8.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/225403/original/file-20180628-117440-1chske8.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Richard Cordray left the CFPB last year to run for governor Ohio.</span>
<span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Ohio-Governors-Race-Democrats/111b04b4845540898f57e1daf66f6f06/14/0">AP Photo/John Minchillo</a></span>
</figcaption>
</figure>
<h2>The CFPB under Cordray</h2>
<p>The CFPB <a href="https://www.sec.gov/about/laws/wallstreetreform-cpa.pdf">was launched in 2011</a> in the aftermath of the 2008 financial crisis as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The goal was to protect consumers from deceptive or misleading practices in the financial industry.</p>
<p>So what has the agency accomplished in its short life span? A lot. Here are a few highlights. </p>
<ul>
<li><p>It <a href="https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-fines-wells-fargo-100-million-widespread-illegal-practice-secretly-opening-unauthorized-accounts/">fined Wells Fargo</a> $100 million and forced it to refund fees it had <a href="https://theconversation.com/how-wells-fargo-encouraged-employees-to-commit-fraud-66615">fraudulently charged customers</a> by <a href="https://dx.doi.org/10.2139/ssrn.2516432">opening millions of fake accounts</a> without their permission. The bank was also required to hire an independent consultant to review its procedures. This probably wouldn’t have happened nationwide without the CFPB.</p></li>
<li><p>It blocked debt collector attorneys from <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-takes-action-halt-illegal-debt-collection-practices-lawsuit-mill-and-debt-buyer/">suing consumers based on false information</a>. </p></li>
<li><p>It discovered systemic problems with consumer credit reports and forced companies to <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-oversight-uncovers-and-corrects-credit-reporting-problems/">correct errors</a>.</p></li>
<li><p>It compelled credit card companies to <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-orders-subprime-credit-card-company-to-refund-2-7-million-for-charging-illegal-credit-card-fees/">refund illegal fees</a>. </p></li>
</ul>
<p>And the list goes on and on. In addition, after the bureau began publishing <a href="https://www.consumerfinance.gov/data-research/consumer-complaints/">consumer complaints on its website</a>, financial institutions have responded <a href="https://www.consumerfinance.gov/data-research/consumer-complaints">more than 700,000 times</a>, often by providing remedies.</p>
<h2>What the CFPB’s been up to lately</h2>
<p>All that action came to a very sudden stop the day Mulvaney entered the building on Nov. 27. Although there was a <a href="https://www.nytimes.com/2017/11/28/us/politics/mick-mulvaney-leandra-english-consumer-bureau.html">brief tussle</a> over who had the right to run the bureau, Mulvaney quickly took charge and installed his own people. </p>
<p>Since then, Mulvaney has brought only <a href="https://www.consumerfinance.gov/about-us/newsroom/bureau-consumer-financial-protection-settles-security-group-inc/">two cases</a>, one of which was against <a href="https://www.consumerfinance.gov/policy-compliance/enforcement/actions/wells-fargo-bank-na-2018/">Wells Fargo</a> – the <a href="http://money.cnn.com/2017/12/08/investing/trump-twitter-wells-fargo/index.html">target of a Trump tweet</a> – over the bank forcing consumers to pay for car insurance they didn’t need. That contrasts sharply with the work of Cordray, who, for example, <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3072545">filed</a> nearly one case a week in 2015 and 2016. </p>
<p>Mulvaney has also sought to protect banks in other ways. After <a href="https://www.documentcloud.org/documents/4357880-Mulvaney-Memo.html">saying</a> the bureau should be guided by the number of complaints it receives, Mulvaney <a href="https://www.americanbanker.com/news/mulvaney-to-drop-public-complaints-against-firms-change-cfpb-name">raised</a> the possibility of concealing those complaints from the public, which would lower the complaint database’s profile, and probably reduce the number of complaints it receives. The proposal, which is still under discussion, would also <a href="http://www.nydailynews.com/opinion/cfpb-leaving-consumers-high-dry-article-1.4006220">make it harder</a> for consumers to obtain redress from misbehaving companies. </p>
<p>In June, Mulvaney fired the unpaid members of the bureau’s advisory committees, a move criticized by <a href="https://www.cnn.com/2018/06/08/opinions/mick-mulvaney-doing-the-financial-sectors-dirty-work-by-abolishing-cab/index.html">consumer advocates</a> and <a href="http://pubcit.typepad.com/clpblog/2018/06/where-are-the-defenders-of-mulvaneys-decision-to-fire-the-cab-members-anyone-bueller.html">financial industry figures</a> alike. The advisory committees gave the bureau an opportunity to talk to consumer, financial and scholarly experts about how it should act.</p>
<p><a href="https://www.nytimes.com/2018/06/07/opinion/cfpb-mick-mulvaney-consumer-advisory-board-fired.html">Shifting justifications</a> were offered for the firings in the subsequent days, from <a href="https://www.cnn.com/2018/06/08/opinions/mick-mulvaney-doing-the-financial-sectors-dirty-work-by-abolishing-cab/index.html">citing criticism</a> of the committees to <a href="https://www.americanbanker.com/news/mulvaneys-defense-of-cfpb-board-upheaval-im-trying-to-fix-leaks?brief=00000158-07c7-d3f4-a9f9-37df9bc10000">preventing leaks</a> – all of which didn’t add up or weren’t backed by evidence. Mulvaney’s spokesperson even <a href="https://www.americanbanker.com/news/mulvaney-makes-it-official-fires-cfpb-advisory-board-members">charged</a> that the complaining committee members were more interested in protecting their taxpayer-funded trips to Washington than in protecting consumers, a charge that was belied by the fact that some members <a href="https://www.washingtonpost.com/news/business/wp/2018/06/06/mick-mulvaney-fires-members-of-cfpb-advisory-board/?noredirect=on&utm_term=.89c2c50409a3">offered</a> to pay their own way. </p>
<h2>The next director</h2>
<p>Many are wondering what will change once the president’s nomination to helm the bureau, Kathy Kraninger, is confirmed. We can’t be certain, because Kraninger has never spoken publicly about her views on consumer protection, but, given that she serves as Mulvaney’s deputy, I fear the answer is not much.</p>
<p>Many observers were <a href="http://thehill.com/regulation/finance/392904-trump-surprises-with-consumer-agency-pick">surprised</a> by the pick of Kraninger, who is not known to have any experience with the laws that the bureau enforces and interprets.</p>
<p>You might think that’s not a big deal. After all, how difficult can it be to master consumer law, which ought to be readily understandable by consumers? </p>
<p>But the truth is that consumer law is <a href="https://www.wisbar.org/NewsPublications/WisconsinLawyer/Pages/Article.aspx?Volume=90&Issue=8&ArticleID=25822*">often terribly complex</a>. I still learn new things about consumer law every week, and I’ve been teaching it for 30 years.</p>
<p>Kraininger’s supporters have <a href="https://www.wsj.com/articles/kathy-kraninger-to-be-nominated-to-head-cfpb-1529183308?tesla=y">noted</a> that she acquired considerable managerial experience as an associate director at the Office of Management and Budget and deputy assistant secretary at the Department of Homeland Security. That may help her with management issues, but it’s hard to see how it will help her make decisions about which cases to bring or what protections consumers need. </p>
<p>To make the problem even worse, the CFPB’s jurisdiction is vast. The next director will have to work with laws governing credit cards, bank accounts, mortgages, student loans, car loans, debt collection, consumer leases, payday loans, credit reports, lending discrimination and much more. In short, the director’s work touches the life of nearly every American in multiple ways –which makes it important that the director know what she is doing.</p>
<p>Bureau critics <a href="https://www.consumeraffairs.com/news/cfpb-director-asks-congress-to-reduce-the-agencys-power-040318.html">complain</a> that it is too powerful, making ignorance of the law even more troublesome. In fact, even a conservative commentator has <a href="https://www.wsj.com/articles/kathy-kraninger-to-be-nominated-to-head-cfpb-1529183308?tesla=y">said</a> that Kraninger lacks the needed expertise, <a href="https://www.politico.com/story/2018/06/16/trump-consumer-protection-bureau-kathy-kraninger-650388">comparing</a> her nomination with President George W. Bush’s <a href="https://www.npr.org/2018/03/30/598115811/the-fall-of-harriet-miers-a-cautionary-tale-for-dr-ronny-jackson">ill-fated nomination</a> of Harriet Miers to the Supreme Court in 2005.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/225415/original/file-20180628-117374-1q6drbg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/225415/original/file-20180628-117374-1q6drbg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=436&fit=crop&dpr=1 600w, https://images.theconversation.com/files/225415/original/file-20180628-117374-1q6drbg.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=436&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/225415/original/file-20180628-117374-1q6drbg.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=436&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/225415/original/file-20180628-117374-1q6drbg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=547&fit=crop&dpr=1 754w, https://images.theconversation.com/files/225415/original/file-20180628-117374-1q6drbg.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=547&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/225415/original/file-20180628-117374-1q6drbg.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=547&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The president isn’t the only one who has cast a long shadow over the fate of the CFPB.</span>
<span class="attribution"><span class="source">AP Photo/Francisco Seco</span></span>
</figcaption>
</figure>
<h2>Casting a shadow</h2>
<p>Meanwhile, Mulvaney continues to run the CFPB, which is facing new threats to its existence, particularly over whether its structure – intended to shield it from interference from the executive branch – is constitutional. </p>
<p>Early this year, a federal appeals court <a href="https://www.cadc.uscourts.gov/internet/opinions.nsf/B7623651686D60D585258226005405AC/%24file/15-1177.pdf">ruled</a> that it was. In mid-June, a federal trial court in New York disagreed and <a href="https://www.citizen.org/sites/default/files/consumer-financial-protection-bureau-et-al-v-rd-legal-funding-llc.pdf">called</a> the CFPB’s design entirely unconstitutional.</p>
<p>While that court’s decision does not bind others, it casts a shadow over the CFPB and could encourage more lawsuits. </p>
<p>As for consumers, for now they will have to seek protection elsewhere than in this once-great consumer protection agency.</p>
<p><em>This article incorporates some material from a <a href="https://theconversation.com/why-we-need-to-save-the-consumer-financial-protection-bureau-80353">2017 article</a> written by the author along with Gina M. Calabrese and Ann L. Goldweber.</em></p><img src="https://counter.theconversation.com/content/98842/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jeff Sovern, together with three other then-employees of St. John's University, received a $29,510 grant from the American Association for Justice Robert L. Habush Endowment and a grant from the St. John’s University School of Law Hugh L. Carey Center for Dispute Resolution in 2014 to study arbitration. It resulted in an article. Along with Professor Kate Walton, he received a grant from the National Conference of Bankruptcy Judges Endowment for Education to study debt collection, resulting in another article. He is a member of the National Association of Consumer Advocates.</span></em></p>The president recently nominated a new permanent director to take over the Consumer Financial Protection Bureau. With the CFPB doing a fraction of the work it did under Obama, what kind of agency will she lead?Jeff Sovern, Professor of Law, St. John's UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/913012018-02-08T11:21:05Z2018-02-08T11:21:05ZConsumers are biggest losers of Trump’s ongoing war on regulations<figure><img src="https://images.theconversation.com/files/205371/original/file-20180207-74476-1tg0ftt.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Some worry Mick Mulvaney is putting banks before consumers as head of the CFPB. </span> <span class="attribution"><span class="source">Reuters/Yuri Gripas</span></span></figcaption></figure><p>President Donald Trump has been waging a <a href="https://www.politico.com/agenda/story/2018/01/20/trumps-regulatory-experiment-year-one-000620">war on regulation</a> since he got into office on the ground that government red tape costs the economy billions of dollars a year. </p>
<p>Among the victors in this battle have been energy companies, banks and the president himself, who <a href="https://www.nytimes.com/2017/12/14/us/politics/trump-federal-regulations.html">recently promised</a> he’s “just getting started.” Perhaps the biggest losers, however, have been consumers. </p>
<p>The best illustration of this is the <a href="http://www.latimes.com/opinion/editorials/la-ed-cfpb-mulvaney-payday-20180207-story.html">neutering</a> of the <a href="https://www.consumerfinance.gov/">Consumer Financial Protection Bureau</a>, which began immediately after Mick Mulvaney stepped in as interim director in November.</p>
<p>So how much harm could he do in two short months? As someone who has written about consumer law for more than 30 years, let me count the ways.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/205387/original/file-20180207-74512-qwsfe2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/205387/original/file-20180207-74512-qwsfe2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/205387/original/file-20180207-74512-qwsfe2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/205387/original/file-20180207-74512-qwsfe2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/205387/original/file-20180207-74512-qwsfe2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/205387/original/file-20180207-74512-qwsfe2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/205387/original/file-20180207-74512-qwsfe2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Mick Mulvaney is governing the CFPB very differently than his predecessor.</span>
<span class="attribution"><span class="source">AP Photo/Alex Brandon</span></span>
</figcaption>
</figure>
<h2>‘Pushing the envelope’</h2>
<p>The Consumer Financial Protection Bureau may be best known for levying a <a href="https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-fines-wells-fargo-100-million-widespread-illegal-practice-secretly-opening-unauthorized-accounts/">US$100 million fine</a> against Wells Fargo in 2016 after the bank opened millions of unauthorized accounts. </p>
<p>But the bureau, <a href="https://www.washingtonpost.com/news/wonk/wp/2014/01/11/a-watchdog-grows-up-the-inside-story-of-the-consumer-financial-protection-bureau/">originally conceived</a> by Sen. Elizabeth Warren, has done <a href="https://theconversation.com/why-we-need-to-save-the-consumer-financial-protection-bureau-80353">so much more</a> since Congress created the independent agency in 2010. Under Mulvaney’s predecessor, Richard Cordray, the bureau moved forcefully when it concluded companies had cheated consumers. </p>
<p>Through last summer, the bureau <a href="https://www.consumerfinance.gov/">recovered</a> nearly $12 billion for more than 29 million consumer victims of everything from <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-orders-subprime-credit-card-company-to-refund-2-7-million-for-charging-illegal-credit-card-fees/">illegal credit card fees</a> to <a href="https://www.consumerfinance.gov/about-us/blog/ally-to-repay-80-million-to-consumers-it-discriminated-against/">auto lenders that discriminated against people of color</a>. In 2016 alone, the bureau <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3072545">announced</a> 42 new enforcement actions, or nearly four new cases a month.</p>
<p>Mulvaney, who is also Trump’s budget director, <a href="https://www.wsj.com/articles/the-cfpb-has-pushed-its-last-envelope-1516743561">argued</a> his predecessor’s governing philosophy was to “push the envelope” in pursuing the bureau’s mission. Mulvaney, Trump and other Republicans <a href="https://www.bostonglobe.com/news/nation/2017/02/17/the-white-house-wants-fire-consumer-protection-head-but-political-and-legal-hurdles-make-tricky/joh8Y01GNPypcOuCyOhMsN/story.html">argue that the CFPB director</a> – who can’t be easily removed by the president – has too much <a href="https://financialservices.house.gov/news/documentsingle.aspx?DocumentID=401752">power</a>, making the bureau a prime target in their goal to eliminate regulation they believe puts a strain on the economy and small businesses. </p>
<p>While Cordray had <a href="https://alliedprogress.org/news/mulvaney-retract-wsj-op-ed-apologize-cfpb-staff/">previously never used</a> the “push the envelope” language in describing his mission, he reacted to Mulvaney’s charge by embracing it, tweeting that he did “push hard to see that people are treated fairly by big banks, debt collectors and payday lenders.” </p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"956195528034914304"}"></div></p>
<p>It seems unlikely that the bureau would take on a bank like Wells Fargo for similar fraudulent conduct or pursue many of Cordray’s other actions now that Mulvaney is in charge. His boss has even praised a <a href="https://www.congress.gov/bill/115th-congress/house-bill/10/text">bill</a> passed by the House that would strip the CFPB of the authority to go after banks for doing what Wells Fargo did, while Mulvaney himself has <a href="https://www.congress.gov/bill/114th-congress/house-bill/3118/cosponsors?overview=closed#tabs">co-sponsored legislation</a> aimed at killing the bureau.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/205388/original/file-20180207-74512-ti8o76.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/205388/original/file-20180207-74512-ti8o76.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=457&fit=crop&dpr=1 600w, https://images.theconversation.com/files/205388/original/file-20180207-74512-ti8o76.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=457&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/205388/original/file-20180207-74512-ti8o76.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=457&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/205388/original/file-20180207-74512-ti8o76.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=574&fit=crop&dpr=1 754w, https://images.theconversation.com/files/205388/original/file-20180207-74512-ti8o76.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=574&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/205388/original/file-20180207-74512-ti8o76.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=574&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Former CFPB Director Richard Cordray, center, embraced the idea that he ‘pushed the envelope’ to protect consumers.</span>
<span class="attribution"><span class="source">AP Photo/Steve Helber</span></span>
</figcaption>
</figure>
<h2>A new governing mission</h2>
<p>While Mulvaney <a href="https://www.documentcloud.org/documents/4357880-Mulvaney-Memo.html">agrees</a> that the bureau’s job includes protecting consumers such as credit card users, he says it also works for credit card issuers – despite the fact that its very name states that it exists to protect consumers, not banks. </p>
<p>One reason Congress wanted an agency to protect consumers was because <a href="http://www.nytimes.com/2007/12/18/business/18subprime.html">existing bank regulators</a> in the run-up to the Great Recession had not only failed to prevent predatory lenders from taking advantage of consumers, thus contributing to the subprime fiasco, but at least one <a href="http://www.washingtonpost.com/wp-dyn/content/article/2008/02/13/AR2008021302783.html?hpid=opinionsbox1">even protected them</a>. I believe the U.S. already has enough bank protection agencies, from the Federal Reserve to the Office of the Comptroller of the Currency, without adding the bureau to the list.</p>
<p>In January, Mulvaney <a href="https://www.documentcloud.org/documents/4357880-Mulvaney-Memo.html">told his staff</a> that the bureau’s actions should be guided by how many complaints it receives on a particular matter. </p>
<p>By that measure, the CFPB wouldn’t have gone after Wells Fargo because <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2961347">few consumers</a> seem to have complained to the bureau about the unauthorized Wells accounts. That may be because consumers often don’t bother to <a href="http://pubcit.typepad.com/clpblog/2017/07/guess-how-many-public-complaints-to-the-cfpb-complaint-database-about-wells-fargo-unauthorized-accou.html">complain</a> when they have suffered only a small loss. And yet collectively the Wells customers had much at stake, as demonstrated by the fact that Wells has agreed to settle the case for <a href="http://www.latimes.com/business/la-fi-wells-settlement-plan-20170421-story.html">$142 million</a>, a number that may yet grow. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/205390/original/file-20180207-74512-4p5wd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/205390/original/file-20180207-74512-4p5wd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/205390/original/file-20180207-74512-4p5wd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/205390/original/file-20180207-74512-4p5wd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/205390/original/file-20180207-74512-4p5wd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/205390/original/file-20180207-74512-4p5wd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/205390/original/file-20180207-74512-4p5wd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Sally Greenberg, with the National Consumers League, is among the groups that have voiced strong opposition to Mulvaney taking over the bureau.</span>
<span class="attribution"><span class="source">AP Photo/Jacquelyn Martin</span></span>
</figcaption>
</figure>
<h2>Enforcement – or lack thereof</h2>
<p>So what has Mulvaney actually done since taking over?</p>
<p>While he <a href="https://www.documentcloud.org/documents/4357880-Mulvaney-Memo.html">pledged</a> to be vigorous and consistent in <a href="http://pubcit.typepad.com/clpblog/2017/12/why-did-the-cfpb-eliminate-fair-enforcement-of-the-rules-from-its-description-of-itself.html">enforcement</a> of federal consumer financial law, he has also said that the bureau should bring cases <a href="https://www.wsj.com/articles/the-cfpb-has-pushed-its-last-envelope-1516743561?mod=searchresults&page=1&pos=2">reluctantly</a>. As such, you might wonder how many he is actually filing.</p>
<p>The answer would be none.</p>
<p>The bureau has instead <a href="https://www.bloomberg.com/news/articles/2018-01-18/trump-led-cfpb-signals-shift-by-dropping-payday-lender-lawsuit">dropped</a> a case, without explanation, against a group of payday lenders that charged consumers as much as 950 percent interest a year. </p>
<p>It also terminated at least one investigation, though we can’t know for sure how many it has ended because the bureau usually doesn’t publicly announce such actions. </p>
<p>That investigation was against a <a href="https://alliedprogress.org/news/breaking-mulvaney-drops-cfpb-case-predatory-lender-gave-thousands/">company that had made several campaign donations to Mulvaney</a>. A <a href="https://www.propublica.org/article/high-cost-lender-world-finance-target-of-federal-probe">ProPublica investigation</a> previously reported that the installment lender, World Acceptance Corp., trapped consumers in a cycle of debt with deceptively expensive loans.</p>
<p>We can’t know whether Cordray himself would have eventually ended that investigation anyway and thus determine if its termination was the result of a lack of evidence. But we can be fairly certain that he wouldn’t have done what Mulvaney did around the same time: say, he may <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-statement-payday-rule/">reconsider</a> a rule intended to keep payday customers from falling into endless debt traps. That rule took the unremarkable step of requiring lenders, before extending some loans, to verify that borrowers can repay the debt. </p>
<p>Another noteworthy move by Mulvaney concerns the CFPB’s Fair Lending Office. The law that originally set up the bureau <a href="https://www.gpo.gov/fdsys/pkg/PLAW-111publ203/html/PLAW-111publ203.htm">tasked this office</a> with enforcing laws prohibiting discriminatory lending. He <a href="https://www.inman.com/2018/02/02/mulvaney-revokes-powers-of-cfpb-fair-lending-office/">has revoked</a> that power, suggesting that preventing discrimination on the basis of race and gender will now be less important at the bureau. </p>
<p>For the next five months – or until the Senate confirms a permanent director – the CFPB is led by someone who once called it a <a href="https://www.bloomberg.com/news/articles/2017-11-16/trump-is-said-to-consider-naming-mulvaney-to-start-cfpb-revamp?utm_content=politics&utm_campaign=socialflow-organic&utm_source=twitter&utm_medium=social&cmpid%3D=socialflow-twitter-politics">“sad, sick” joke</a>. </p>
<p>What is sad and sick, in my view, is that an agency established to protect consumers may be more eager to protect predatory lenders than consumers. And that is no joke.</p><img src="https://counter.theconversation.com/content/91301/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jeff Sovern received a $29,510 grant from the American Association for Justice Robert L. Habush Endowment and by a grant from the St. John’s University School of Law Hugh L. Carey Center for Dispute Resolution in 2014 to study arbitration. It resulted in an article. Along with Professor Kate Walton, he received a grant from the National Conference of Bankruptcy Judges Endowment for Education to study debt collection, resulting in another article. He is a member of the National Association of Consumer Advocates.</span></em></p>Mick Mulvaney has only been in charge of the Consumer Financial Protection Bureau for two months, but he’s already made many decisions that will leave consumers worse off.Jeff Sovern, Professor of Law, St. John's UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/875732017-11-16T01:35:37Z2017-11-16T01:35:37ZWhy we need to save the Consumer Financial Protection Bureau<figure><img src="https://images.theconversation.com/files/194863/original/file-20171115-19836-1sajsrv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Consumer Financial Protection Bureau Director Richard Cordray, center, plans to step down at the end of the month.</span> <span class="attribution"><span class="source">AP Photo/Steve Helber</span></span></figcaption></figure><p>Republicans in <a href="https://www.forbes.com/sites/jimhenry/2017/05/30/congressional-critics-gunning-for-consumer-financial-protection-bureau/#24b1e09167ab">Congress</a> and the <a href="https://consumerist.com/2017/03/20/white-house-wants-authority-to-fire-consumer-protection-chief/">White House</a> have been very blunt about their desire to gut the <a href="https://www.consumerfinance.gov">Consumer Financial Protection Bureau</a> – and the threats to it are mounting. </p>
<p>The agency was launched in 2011 in the aftermath of the financial crisis as part of the <a href="https://www.sec.gov/about/laws/wallstreetreform-cpa.pdf">Dodd-Frank Wall Street Reform and Consumer Protection Act</a>. The goal was to protect consumers from deceptive or misleading practices in the financial industry. </p>
<p>At the moment, Republicans <a href="https://www.washingtonpost.com/news/wonk/wp/2017/10/24/wall-street-wins-big-as-senate-votes-to-roll-back-regulation-allowing-consumers-to-sue-their-banks/?hpid=hp_hp-more-top-stories_senatecredit-1055pm%3Ahomepage%2Fstory&utm_term=.57193830f520">seem focused</a> on blocking CFPB rules they don’t like, such as <a href="http://thehill.com/policy/finance/341313-consumer-bureau-releases-rule-to-prevent-banks-credit-card-firms-from-blocking">one that would have prevented</a> the use of arbitration clauses in financial contracts, making it easier for people to band together to sue banks for wrongdoing. </p>
<p>The Trump administration, which <a href="https://www.washingtonpost.com/news/wonk/wp/2017/10/23/treasury-department-sides-with-wall-street-opposes-elimination-of-mandatory-arbitration-clauses/?utm_term=.d70f3d07d92c">has been heavily critical</a> of the CFPB, now has an opportunity to reshape it from the top because its founding director, Richard Cordray, <a href="https://www.washingtonpost.com/news/business/wp/2017/11/15/richard-cordray-is-stepping-down-as-head-of-consumer-financial-protection-bureau/?utm_term=.3c363ba31d13">plans to step down by the end of November</a>. </p>
<p>So what would you miss if the agency suddenly disappeared or was weakened?</p>
<p>In short, a lot. We base this conclusion on the work the three of us have done in recent decades. One of us (Sovern) has been writing about consumer law for more than 30 years, while the other two of us direct a <a href="http://www.stjohns.edu/law/consumer-justice-elderly-litigation-clinic">legal clinic that represents elderly consumers</a>. We’ve seen the worst of what financial companies can do, and we’ve also witnessed how the CFPB has begun to reverse the tide. </p>
<h2>Life before CFPB</h2>
<p>If you are one of the more than 29 million consumers who have collectively <a href="https://www.consumerfinance.gov/">received nearly US$12 billion</a> back from misbehaving financial institutions because of the CFPB’s efforts, you already know its value. But even if you are not, you have probably benefited from the bureau’s existence.</p>
<p>Before Congress created the bureau, there was no federal agency that made consumer financial protection its sole mission. Rather, consumer protection was rolled into the missions of a bunch of different agencies. And, as we saw during the financial crisis, regulators often gave it a back seat.</p>
<p>Congress, for example, gave the Federal Reserve the <a href="https://www.federalreserve.gov/reportforms/formsreview/RegZ_20080730_ffr.pdf">power to bar unfair and deceptive mortgage lending</a> in 1994. Yet the central bank considered consumer protection a backwater and didn’t use that power until 2008 – too late to prevent the <a href="https://theconversation.com/us/topics/great-recession-13707">Great Recession</a>. Congress took it away two years later when it passed Dodd-Frank.</p>
<p>The Office of the Comptroller of the Currency regulates banks but was so preoccupied with ensuring lenders were safe that it failed to protect consumers from their predatory subprime mortgages – so much so that it prevented states from doing so too. And now President Trump has put a former bank lawyer in charge of it. The Federal Trade Commission, which is tasked with fighting deceptive business practices, lacked the power to prevent such <a href="https://www.federalreservehistory.org/essays/subprime_mortgage_crisis">dangerous lending</a>.</p>
<p>This meant consumer protection on financial matters fell through the cracks. </p>
<p><a href="https://theconversation.com/how-wells-fargo-encouraged-employees-to-commit-fraud-66615">Wells Fargo’s recent fraud scandal</a> is a case in point. In the early 2000s, Wells Fargo employees <a href="https://www08.wellsfargomedia.com/assets/pdf/about/investor-relations/presentations/2017/board-report.pdf">began opening fake accounts</a> in clients’ names without permission, leading in some cases to <a href="https://www.wsj.com/articles/wells-fargo-is-trying-to-fix-its-rogue-account-scandal-one-grueling-case-at-a-time-1482855852?mg=prod/accounts-wsj%20rt5y7u6">lower credit scores</a> and a variety of fees. The bank <a href="https://dx.doi.org/10.2139/ssrn.2516432">ultimately opened millions of fraudulent bank and credit card accounts</a> before the scheme came to an end last year. </p>
<p>But as early as 2010, before the CFPB was set up, regulators at the OCC were increasingly aware of what was happening at Wells Fargo thanks to hundreds of <a href="https://theconversation.com/why-companies-like-wells-fargo-ignore-their-whistleblowers-at-their-peril-67501">whistleblower complaints</a>. The OCC even confronted the bank, yet failed to take any action despite many red flags, according to an <a href="https://www.occ.gov/publications/publications-by-type/other-publications-reports/pub-wells-fargo-supervision-lessons-learned-41917.pdf">internal audit</a>. </p>
<p>It wasn’t until the <a href="http://freepdfhosting.com/29677883a9.pdf">Los Angeles city attorney</a> and the <a href="https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-fines-wells-fargo-100-million-widespread-illegal-practice-secretly-opening-unauthorized-accounts/">CFPB became involved</a> years later that Wells Fargo took forceful action to stop the fraud. The regulators <a href="https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-fines-wells-fargo-100-million-widespread-illegal-practice-secretly-opening-unauthorized-accounts/">fined Wells Fargo a total of $185 million</a> and forced it to refund fees it had charged customers and hire an independent consultant to review its procedures. </p>
<p>More importantly, they sent a clear message to other financial institutions: Cheat consumers and you will face the consequences.</p>
<h2>Protecting consumers</h2>
<p>Since its inception, the bureau has acted repeatedly to stop financial institutions from harming consumers. </p>
<p>It blocked debt collector attorneys from <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-takes-action-halt-illegal-debt-collection-practices-lawsuit-mill-and-debt-buyer/">suing consumers based on false information</a>. It discovered systemic problems with consumer credit reports and forced companies to <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-oversight-uncovers-and-corrects-credit-reporting-problems/">correct errors</a>. It compelled credit card companies to <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-orders-subprime-credit-card-company-to-refund-2-7-million-for-charging-illegal-credit-card-fees/">refund illegal fees</a>. It protected borrowers from <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-sues-nations-largest-student-loan-company-navient-failing-borrowers-every-stage-repayment/">unlawful student loan servicing practices</a>. It <a href="https://www.consumerfinance.gov/about-us/blog/ally-to-repay-80-million-to-consumers-it-discriminated-against/">made lenders repay</a> consumers they discriminated against. It <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-recovers-more-than-1-million-for-servicemembers-veterans-and-their-families/">recovered money for veterans</a> who complained of abusive financial practices. </p>
<p>When the bureau began publishing <a href="https://www.consumerfinance.gov/data-research/consumer-complaints/">consumer complaints on its website</a>, companies that might previously have ignored negative feedback paid attention. Financial institutions have responded to complaints to the CFPB <a href="https://www.consumerfinance.gov/data-research/consumer-complaints/">more than 700,000 times</a>, often by providing a remedy to the consumers.</p>
<p>Besides protecting consumers, however, Congress had a second motive in creating the bureau: to help prevent the kind of mortgage lending that helped cause the Great Recession. </p>
<p>To that end, the bureau has adopted <a href="https://www.consumerfinance.gov/policy-compliance/rulemaking/final-rules/2013-integrated-mortgage-disclosure-rule-under-real-estate-settlement-procedures-act-regulation-x-and-truth-lending-act-regulation-z/">rules</a> that help consumers to understand their mortgages – something that often <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1531781">wasn’t possible</a> under the previously misleading mortgage disclosures. It also issued <a href="https://www.consumerfinance.gov/policy-compliance/rulemaking/final-rules/ability-repay-and-qualified-mortgage-standards-under-truth-lending-act-regulation-z/">regulations</a> to prevent consumers from taking out mortgages that they couldn’t repay. And after borrowers take out a mortgage, <a href="https://www.consumerfinance.gov/policy-compliance/rulemaking/final-rules/2013-real-estate-settlement-procedures-act-regulation-x-and-truth-lending-act-regulation-z-mortgage-servicing-final-rules/">CFPB servicing rules</a> establish the procedures servicers must follow when communicating with borrowers, correcting errors, providing information and dealing with loan modification requests.</p>
<p>Two of us have personal experience with one of the bureau’s new mortgage rules, which powerfully illustrates the value of the CFPB.</p>
<p>In 2014, Alice, a client of our law school clinic, was struggling to pay the mortgage on her home – which she had refinanced a few years earlier – after a stroke forced her into retirement. <a href="http://www.stjohns.edu/law/consumer-justice-elderly-litigation-clinic">Our clinic</a> helped her apply for a modification of her loan. </p>
<p>But within weeks, instead of acknowledging Alice’s application, the loan servicer summoned her to court to begin foreclosure proceedings in violation of <a href="https://www.law.cornell.edu/cfr/text/12/1024.41">CFPB servicing rules</a>. Fortunately, our clinic was able to rely on those rules in getting the foreclosure action dismissed. Alice got her loan modified and remains in her home. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/177630/original/file-20170710-5982-qs3jpp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/177630/original/file-20170710-5982-qs3jpp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=482&fit=crop&dpr=1 600w, https://images.theconversation.com/files/177630/original/file-20170710-5982-qs3jpp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=482&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/177630/original/file-20170710-5982-qs3jpp.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=482&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/177630/original/file-20170710-5982-qs3jpp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=606&fit=crop&dpr=1 754w, https://images.theconversation.com/files/177630/original/file-20170710-5982-qs3jpp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=606&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/177630/original/file-20170710-5982-qs3jpp.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=606&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Demonstrators tried to draw attention to the subprime mortgage crisis back in early 2008.</span>
<span class="attribution"><span class="source">AP Photo/Matt Rourke</span></span>
</figcaption>
</figure>
<h2>Protecting the vulnerable</h2>
<p>This reveals how the bureau is particularly important to protect vulnerable consumers, like the elderly, who are frequently targeted by fraudsters and predatory lenders because of their cognitive and other impairments and because they often have accumulated substantial assets. The CFPB is the only federal agency with an office <a href="https://www.consumerfinance.gov/educational-resources/resources-for-older-adults/">specifically dedicated</a> to protecting the financial well-being of older adults. </p>
<p>The bureau has brought cases against companies that attempted to take advantage of seniors by, for example, <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-and-new-york-department-of-financial-services-sue-pension-advance-companies-for-deceiving-consumers-about-loan-costs/">misrepresenting the interest rates</a> on pension advance loans or <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-takes-action-against-reverse-mortgage-companies-deceptive-advertising/">deceptive advertising</a>. In 2015 alone, consumer complaints to the CFPB brought relief to <a href="https://data.consumerfinance.gov/dataset/Consumer-Complaints/s6ew-h6mp">more than 600 older Americans just through debt collection problems</a>.</p>
<p>The bureau has also worked to prevent financial abuse of the elderly, estimated to cost seniors <a href="https://www.truelinkfinancial.com/research">as much as $36 billion annually</a>. The CFPB has educated <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-issues-advisory-and-report-for-financial-institutions-on-preventing-elder-financial-abuse/">financial institutions</a>, <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-helps-assisted-living-and-nursing-facilities-protect-seniors-from-financial-abuse/">nursing facilities</a> and <a href="https://www.consumerfinance.gov/about-us/newsroom/director-cordray-remarks-on-money-smart-for-older-adults/">others</a> about recognizing and stopping elder financial abuse and exploitation.</p>
<h2>Consumer protection in peril</h2>
<p>Given Alice’s ill health, the consequences for her might have been disastrous if she had been thrown out of her home. But now she – and all of us – face the loss of the CFPB’s aid. </p>
<p>The CFPB <a href="http://www.latimes.com/business/la-fi-cfpb-cordray-hearing-20170405-story.html">is under attack</a> from Republican members of Congress who <a href="https://banks.house.gov/media/press-releases/banks-votes-choice-act-roll-back-dodd-frank-law">believe more in lifting bank regulations</a> than in protecting consumers. Some members have <a href="http://pubcit.typepad.com/clpblog/2017/02/ratcliffecruz-bill-would-eliminate-the-cfpb.html">proposed eliminating the agency altogether</a>. </p>
<p>The House of Representatives <a href="https://financialservices.house.gov/choice/">has passed a bill</a> that would cripple the CFPB by, for example, taking away the power it used to fine Wells Fargo for opening illegal accounts and concealing <a href="https://www.consumerfinance.gov/data-research/consumer-complaints/">its complaint database</a> from public view. In other words, it would force the bureau to sit idly by as financial institutions <a href="http://www.newsweek.com/your-bank-lying-you-619814">lie to consumers</a>. </p>
<p>Even if the bureau survives, it may be less protective of consumers when current director Richard Cordray leaves, which he said he plans to do by the end of the month. Then we might see a former banker or bank lawyer put in charge, just as has happened at the Treasury Department and comptroller’s office. Those officials opposed the CFPB’s arbitration rule and seem far less interested in protecting consumers than Cordray. It is even possible that Treasury Secretary Steve Mnuchin himself <a href="https://www.newyorker.com/business/currency/what-is-the-fate-of-the-consumer-financial-protection-bureau">might become</a> the interim leader of the CFPB.</p>
<p>Nearly every American has or will have a loan or bank account, a prepaid card, credit card, a credit report or some combination of those, and so has dealings with a financial institution policed by the CFPB. But <a href="http://press.princeton.edu/titles/10267.html">few of us read the fine print</a> governing these things or <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2516432">can understand it when we do</a>. That gives the companies that write these agreements the ability to draft them to suit their own interests at the expense of consumers. </p>
<p>Similarly, we do not always know when a financial institution takes advantage of us, just as Wells Fargo customers did not always know that it had opened unauthorized accounts that lowered their credit scores. </p>
<p>Consumers need protection from misbehaving companies. If the bureau is eliminated, significantly weakened or starts protecting banks rather than consumers, all consumers will suffer.</p>
<p><em>This is an updated version of an article originally published on July 10, 2017.</em></p><img src="https://counter.theconversation.com/content/87573/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Along with three co-authors, Jeff Sovern received a $29,510 grant from the American Association for Justice Robert L. Habush Endowment and by a grant from the St. John’s University School of Law Hugh L. Carey Center for Dispute Resolution in 2014 to study arbitration. It resulted in an article. Along with Professor Kate Walton, he received a grant from the National Conference of Bankruptcy Judges Endowment for Education to study debt collection, resulting in another article. He is a member of the National Association of Consumer Advocates.
</span></em></p><p class="fine-print"><em><span>Ann L. Goldweber is affiliated with NACA as a member.
</span></em></p><p class="fine-print"><em><span>Gina M. Calabrese is affiliated with the National Association of Consumer Advocates, New Yorkers for Responsible Lending, and the Association of the Bar of the City of New York (former chair, Committee on the Civil Court).
</span></em></p>The decision by the bureau’s founding director to step down this month offers Republicans and the Trump administration a chance to finally gut the bureau they’ve long despised.Jeff Sovern, Professor of Law, St. John's UniversityAnn L. Goldweber, Professor of Clinical Education, St. John's UniversityGina M. Calabrese, Professor of Clinical Education, St. John's UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/863792017-10-25T23:40:16Z2017-10-25T23:40:16ZWhy we need to save the Consumer Financial Protection Bureau<p>Republicans in <a href="https://www.forbes.com/sites/jimhenry/2017/05/30/congressional-critics-gunning-for-consumer-financial-protection-bureau/#24b1e09167ab">Congress</a> and the <a href="https://consumerist.com/2017/03/20/white-house-wants-authority-to-fire-consumer-protection-chief/">White House</a> have been very blunt about their desire to gut the <a href="https://www.consumerfinance.gov">Consumer Financial Protection Bureau</a> – and the threats to it are mounting. </p>
<p>The agency was launched in 2011 in the aftermath of the financial crisis as part of the <a href="https://www.sec.gov/about/laws/wallstreetreform-cpa.pdf">Dodd-Frank Wall Street Reform and Consumer Protection Act</a>. The goal was to protect consumers from deceptive or misleading practices in the financial industry. </p>
<p>At the moment, Republicans <a href="https://www.washingtonpost.com/news/wonk/wp/2017/10/24/wall-street-wins-big-as-senate-votes-to-roll-back-regulation-allowing-consumers-to-sue-their-banks/?hpid=hp_hp-more-top-stories_senatecredit-1055pm%3Ahomepage%2Fstory&utm_term=.57193830f520">seem focused</a> on blocking CFPB rules they don’t like, such as <a href="http://thehill.com/policy/finance/341313-consumer-bureau-releases-rule-to-prevent-banks-credit-card-firms-from-blocking">one that would have prevented</a> the use of arbitration clauses in financial contracts, making it easier for people to band together to sue banks for wrongdoing. Separately, the Trump administration <a href="https://www.washingtonpost.com/news/wonk/wp/2017/10/23/treasury-department-sides-with-wall-street-opposes-elimination-of-mandatory-arbitration-clauses/?utm_term=.d70f3d07d92c">has been heavily critical</a> of the CFPB, and its director <a href="https://www.reuters.com/article/us-cfpb-cordray/u-s-consumer-watchdog-chief-cordray-tests-ohios-election-waters-idUSKCN1BF1N5">is said to be considering leaving</a> before his term expires next July, which would allow the president to pick his replacement. </p>
<p>So what would you miss if the agency suddenly disappeared or got gutted?</p>
<p>In short, a lot. We base this conclusion on the work the three of us have done in recent decades. One of us (Sovern) has been writing about consumer law for more than 30 years, while the other two of us direct a <a href="http://www.stjohns.edu/law/consumer-justice-elderly-litigation-clinic">legal clinic that represents elderly consumers</a>. We’ve seen the worst of what financial companies can do, and we’ve also witnessed how the CFPB has begun to reverse the tide. </p>
<h2>Life before CFPB</h2>
<p>If you are one of the more than 29 million consumers who have collectively <a href="https://www.consumerfinance.gov/">received nearly US$12 billion</a> back from misbehaving financial institutions because of the CFPB’s efforts, you already know its value. But even if you are not, you have probably benefited from the bureau’s existence.</p>
<p>Before Congress created the bureau, there was no federal agency that made consumer financial protection its sole mission. Rather, consumer protection was rolled into the missions of a bunch of different agencies. And, as we saw during the financial crisis, regulators often gave it a back seat.</p>
<p>Congress, for example, gave the Federal Reserve the <a href="https://www.federalreserve.gov/reportforms/formsreview/RegZ_20080730_ffr.pdf">power to bar unfair and deceptive mortgage lending</a> in 1994. Yet the central bank considered consumer protection a backwater and didn’t use that power until 2008 – too late to prevent the <a href="https://theconversation.com/us/topics/great-recession-13707">Great Recession</a>. Congress took it away two years later when it passed Dodd-Frank.</p>
<p>The Office of the Comptroller of the Currency regulates banks but was so preoccupied with ensuring lenders were safe that it failed to protect consumers from their predatory subprime mortgages – so much so that it prevented states from doing so too. And now President Trump has put a former bank lawyer in charge of it. The Federal Trade Commission, which is tasked with fighting deceptive business practices, lacked the power to prevent such <a href="https://www.federalreservehistory.org/essays/subprime_mortgage_crisis">dangerous lending</a>.</p>
<p>This meant consumer protection on financial matters fell through the cracks. </p>
<p><a href="https://theconversation.com/how-wells-fargo-encouraged-employees-to-commit-fraud-66615">Wells Fargo’s recent fraud scandal</a> is a case in point. In the early 2000s, Wells Fargo employees <a href="https://www08.wellsfargomedia.com/assets/pdf/about/investor-relations/presentations/2017/board-report.pdf">began opening fake accounts</a> in clients’ names without permission, leading in some cases to <a href="https://www.wsj.com/articles/wells-fargo-is-trying-to-fix-its-rogue-account-scandal-one-grueling-case-at-a-time-1482855852?mg=prod/accounts-wsj%20rt5y7u6">lower credit scores</a> and a variety of fees. The bank <a href="https://dx.doi.org/10.2139/ssrn.2516432">ultimately opened millions of fraudulent bank and credit card accounts</a> before the scheme came to an end last year. </p>
<p>But as early as 2010, before the CFPB was set up, regulators at the OCC were increasingly aware of what was happening at Wells Fargo thanks to hundreds of <a href="https://theconversation.com/why-companies-like-wells-fargo-ignore-their-whistleblowers-at-their-peril-67501">whistleblower complaints</a>. The OCC even confronted the bank, yet failed to take any action despite many red flags, according to an <a href="https://www.occ.gov/publications/publications-by-type/other-publications-reports/pub-wells-fargo-supervision-lessons-learned-41917.pdf">internal audit</a>. </p>
<p>It wasn’t until the <a href="http://freepdfhosting.com/29677883a9.pdf">Los Angeles city attorney</a> and the <a href="https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-fines-wells-fargo-100-million-widespread-illegal-practice-secretly-opening-unauthorized-accounts/">CFPB became involved</a> years later that Wells Fargo took forceful action to stop the fraud. The regulators <a href="https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-fines-wells-fargo-100-million-widespread-illegal-practice-secretly-opening-unauthorized-accounts/">fined Wells Fargo a total of $185 million</a> and forced it to refund fees it had charged customers and hire an independent consultant to review its procedures. </p>
<p>More importantly, they sent a clear message to other financial institutions: Cheat consumers and you will face the consequences.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/177626/original/file-20170710-5939-45mbev.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/177626/original/file-20170710-5939-45mbev.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=440&fit=crop&dpr=1 600w, https://images.theconversation.com/files/177626/original/file-20170710-5939-45mbev.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=440&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/177626/original/file-20170710-5939-45mbev.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=440&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/177626/original/file-20170710-5939-45mbev.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=553&fit=crop&dpr=1 754w, https://images.theconversation.com/files/177626/original/file-20170710-5939-45mbev.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=553&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/177626/original/file-20170710-5939-45mbev.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=553&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Consumer Financial Protection Bureau Director Richard Cordray testifies on Capitol Hill in 2013.</span>
<span class="attribution"><span class="source">AP Photo/Manuel Balce Ceneta</span></span>
</figcaption>
</figure>
<h2>Protecting consumers</h2>
<p>Since its inception, the bureau has acted repeatedly to stop financial institutions from harming consumers. </p>
<p>It blocked debt collector attorneys from <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-takes-action-halt-illegal-debt-collection-practices-lawsuit-mill-and-debt-buyer/">suing consumers based on false information</a>. It discovered systemic problems with consumer credit reports and forced companies to <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-oversight-uncovers-and-corrects-credit-reporting-problems/">correct errors</a>. It compelled credit card companies to <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-orders-subprime-credit-card-company-to-refund-2-7-million-for-charging-illegal-credit-card-fees/">refund illegal fees</a>. It protected borrowers from <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-sues-nations-largest-student-loan-company-navient-failing-borrowers-every-stage-repayment/">unlawful student loan servicing practices</a>. It <a href="https://www.consumerfinance.gov/about-us/blog/ally-to-repay-80-million-to-consumers-it-discriminated-against/">made lenders repay</a> consumers they discriminated against. It <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-recovers-more-than-1-million-for-servicemembers-veterans-and-their-families/">recovered money for veterans</a> who complained of abusive financial practices. </p>
<p>When the bureau began publishing <a href="https://www.consumerfinance.gov/data-research/consumer-complaints/">consumer complaints on its website</a>, companies that might previously have ignored negative feedback paid attention. Financial institutions have responded to complaints to the CFPB <a href="https://www.consumerfinance.gov/data-research/consumer-complaints/">more than 700,000 times</a>, often by providing a remedy to the consumers.</p>
<p>Besides protecting consumers, however, Congress had a second motive in creating the bureau: to help prevent the kind of mortgage lending that helped cause the Great Recession. </p>
<p>To that end, the bureau has adopted <a href="https://www.consumerfinance.gov/policy-compliance/rulemaking/final-rules/2013-integrated-mortgage-disclosure-rule-under-real-estate-settlement-procedures-act-regulation-x-and-truth-lending-act-regulation-z/">rules</a> that help consumers to understand their mortgages – something that often <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1531781">wasn’t possible</a> under the previously misleading mortgage disclosures. It also issued <a href="https://www.consumerfinance.gov/policy-compliance/rulemaking/final-rules/ability-repay-and-qualified-mortgage-standards-under-truth-lending-act-regulation-z/">regulations</a> to prevent consumers from taking out mortgages that they couldn’t repay. And after borrowers take out a mortgage, <a href="https://www.consumerfinance.gov/policy-compliance/rulemaking/final-rules/2013-real-estate-settlement-procedures-act-regulation-x-and-truth-lending-act-regulation-z-mortgage-servicing-final-rules/">CFPB servicing rules</a> establish the procedures servicers must follow when communicating with borrowers, correcting errors, providing information and dealing with loan modification requests.</p>
<p>Two of us have personal experience with one of the bureau’s new mortgage rules, which powerfully illustrates the value of the CFPB.</p>
<p>In 2014, Alice, a client of our law school clinic, was struggling to pay the mortgage on her home – which she had refinanced a few years earlier – after a stroke forced her into retirement. <a href="http://www.stjohns.edu/law/consumer-justice-elderly-litigation-clinic">Our clinic</a> helped her apply for a modification of her loan. </p>
<p>But within weeks, instead of acknowledging Alice’s application, the loan servicer summoned her to court to begin foreclosure proceedings in violation of <a href="https://www.law.cornell.edu/cfr/text/12/1024.41">CFPB servicing rules</a>. Fortunately, our clinic was able to rely on those rules in getting the foreclosure action dismissed. Alice got her loan modified and remains in her home. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/177630/original/file-20170710-5982-qs3jpp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/177630/original/file-20170710-5982-qs3jpp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=482&fit=crop&dpr=1 600w, https://images.theconversation.com/files/177630/original/file-20170710-5982-qs3jpp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=482&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/177630/original/file-20170710-5982-qs3jpp.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=482&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/177630/original/file-20170710-5982-qs3jpp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=606&fit=crop&dpr=1 754w, https://images.theconversation.com/files/177630/original/file-20170710-5982-qs3jpp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=606&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/177630/original/file-20170710-5982-qs3jpp.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=606&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Demonstrators tried to draw attention to the subprime mortgage crisis back in early 2008.</span>
<span class="attribution"><span class="source">AP Photo/Matt Rourke</span></span>
</figcaption>
</figure>
<h2>Protecting the vulnerable</h2>
<p>This reveals how the bureau is particularly important to protect vulnerable consumers, like the elderly, who are frequently targeted by fraudsters and predatory lenders because of their cognitive and other impairments and because they often have accumulated substantial assets. The CFPB is the only federal agency with an office <a href="https://www.consumerfinance.gov/educational-resources/resources-for-older-adults/">specifically dedicated</a> to protecting the financial well-being of older adults. </p>
<p>The bureau has brought cases against companies that attempted to take advantage of seniors by, for example, <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-and-new-york-department-of-financial-services-sue-pension-advance-companies-for-deceiving-consumers-about-loan-costs/">misrepresenting the interest rates</a> on pension advance loans or <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-takes-action-against-reverse-mortgage-companies-deceptive-advertising/">deceptive advertising</a>. In 2015 alone, consumer complaints to the CFPB brought relief to <a href="https://data.consumerfinance.gov/dataset/Consumer-Complaints/s6ew-h6mp">more than 600 older Americans just through debt collection problems</a>.</p>
<p>The bureau has also worked to prevent financial abuse of the elderly, estimated to cost seniors <a href="https://www.truelinkfinancial.com/research">as much as $36 billion annually</a>. The CFPB has educated <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-issues-advisory-and-report-for-financial-institutions-on-preventing-elder-financial-abuse/">financial institutions</a>, <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-helps-assisted-living-and-nursing-facilities-protect-seniors-from-financial-abuse/">nursing facilities</a> and <a href="https://www.consumerfinance.gov/about-us/newsroom/director-cordray-remarks-on-money-smart-for-older-adults/">others</a> about recognizing and stopping elder financial abuse and exploitation.</p>
<h2>Consumer protection in peril</h2>
<p>Given Alice’s ill health, the consequences for her might have been disastrous if she had been thrown out of her home. But now she – and all of us – face the loss of the CFPB’s aid. </p>
<p>The CFPB <a href="http://www.latimes.com/business/la-fi-cfpb-cordray-hearing-20170405-story.html">is under attack</a> from Republican members of Congress who <a href="https://banks.house.gov/media/press-releases/banks-votes-choice-act-roll-back-dodd-frank-law">believe more in lifting bank regulations</a> than in protecting consumers. Some members have <a href="http://pubcit.typepad.com/clpblog/2017/02/ratcliffecruz-bill-would-eliminate-the-cfpb.html">proposed eliminating the agency altogether</a>. </p>
<p>The House of Representatives <a href="https://financialservices.house.gov/choice/">has passed a bill</a> that would cripple the CFPB by, for example, taking away the power it used to fine Wells Fargo for opening illegal accounts and concealing <a href="https://www.consumerfinance.gov/data-research/consumer-complaints/">its complaint database</a> from public view. In other words, it would force the bureau to sit idly by as financial institutions <a href="http://www.newsweek.com/your-bank-lying-you-619814">lie to consumers</a>. Even if the bureau survives, it may be less protective of consumers when its current director, Richard Cordray, leaves. His term expires next summer, and he may step down even sooner. Then we might see a former banker or bank lawyer put in charge, just as has happened at the Treasury Department and comptroller’s office. </p>
<p>Nearly every American has or will have a loan or bank account, a prepaid card, credit card, a credit report or some combination of those, and so has dealings with a financial institution policed by the CFPB. But <a href="http://press.princeton.edu/titles/10267.html">few of us read the fine print</a> governing these things or <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2516432">can understand it when we do</a>. That gives the companies that write these agreements the ability to draft them to suit their own interests at the expense of consumers. </p>
<p>Similarly, we do not always know when a financial institution takes advantage of us, just as Wells Fargo customers did not always know that it had opened unauthorized accounts that lowered their credit scores. </p>
<p>Consumers need protection from misbehaving companies. If the bureau is eliminated, significantly weakened or starts protecting banks rather than consumers, all consumers will suffer.</p>
<p><em>This is an updated version of an article originally published on July 10, 2017.</em></p><img src="https://counter.theconversation.com/content/86379/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Along with three co-authors, Jeff Sovern received a $29,510 grant from the American Association for Justice Robert L. Habush Endowment and by a grant from the St. John’s University School of Law Hugh L. Carey Center for Dispute Resolution in 2014 to study arbitration. It resulted in an article. Along with Professor Kate Walton, he received a grant from the National Conference of Bankruptcy Judges Endowment for Education to study debt collection, resulting in another article. He is a member of the National Association of Consumer Advocates.
</span></em></p><p class="fine-print"><em><span>Ann L. Goldweber is affiliated with NACA as a member.
</span></em></p><p class="fine-print"><em><span>Gina M. Calabrese is affiliated with the National Association of Consumer Advocates, New Yorkers for Responsible Lending, and the Association of the Bar of the City of New York (former chair, Committee on the Civil Court).
</span></em></p>Republican efforts to kill a rule designed to make it easier for people to sue banks are a reminder of why it’s so important to have a government agency that protects consumers.Jeff Sovern, Professor of Law, St. John's UniversityAnn L. Goldweber, Professor of Clinical Education, St. John's UniversityGina M. Calabrese, Professor of Clinical Education, St. John's UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/827232017-08-25T01:23:16Z2017-08-25T01:23:16ZWhy students need better protection from loan fraud<figure><img src="https://images.theconversation.com/files/182856/original/file-20170821-26863-1j6vju0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">How can we help the tens of thousands of college students who have been defrauded?</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/portrait-homeless-teenage-girl-on-street-268224728?src=6RgKpr6d7wbQApJwPDl5WQ-1-37">SpeedKingz/Shutterstock.com</a></span></figcaption></figure><p>A college education can set you up for a lifetime – though it can come with a hefty price tag: Some unfortunate students have gotten both a mountain of debt and an education that falls far short of their expectations.</p>
<p>Across the nation, a few for-profit colleges have been <a href="https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-takes-action-against-bridgepoint-education-inc-illegal-student-lending-practices/">deceiving students</a> into taking out private loans that cost more than advertised. Others have made <a href="http://www.fox8live.com/story/33730398/degree-of-debt-as-for-profit-college-students-struggle-school-leaders-are-getting-rich">false claims</a> about job placement rates or have offered credits that don’t transfer and – in some cases –<a href="http://www.denverpost.com/2013/12/05/argosy-university-denver-fined-3-3-million-for-deceptive-practices/">don’t qualify students</a> for the licenses they need.</p>
<p><a href="http://time.com/money/collection-post/3573216/veterans-college-for-profit/">Veterans</a> have been particularly targeted, with schools eyeing their GI benefits. And for-profit colleges generally attract a higher percentage of <a href="http://www.ihep.org/sites/default/files/uploads/docs/pubs/portraits-low-income_young_adults_attendance_brief_final_june_2011.pdf">low-income students</a>, making these students targets as well.</p>
<p>As a scholar of educational law and policy, I’ve spent many years studying student loans and the debt crisis. What’s clear is that students who have been victimized by fraud (particularly in the for-profit sector) need help when it comes to getting the justice they deserve.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/182842/original/file-20170821-28104-imsrce.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/182842/original/file-20170821-28104-imsrce.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/182842/original/file-20170821-28104-imsrce.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=393&fit=crop&dpr=1 600w, https://images.theconversation.com/files/182842/original/file-20170821-28104-imsrce.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=393&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/182842/original/file-20170821-28104-imsrce.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=393&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/182842/original/file-20170821-28104-imsrce.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=494&fit=crop&dpr=1 754w, https://images.theconversation.com/files/182842/original/file-20170821-28104-imsrce.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=494&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/182842/original/file-20170821-28104-imsrce.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=494&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">California Attorney General Kamala Harris successfully sued Corinthian Colleges for misrepresenting job placement rates and school programs to lure low-income state residents.</span>
<span class="attribution"><span class="source">AP Photo/Eric Risberg</span></span>
</figcaption>
</figure>
<h2>Corinthian Colleges</h2>
<p>Corinthian Colleges, a California-based for-profit that filed for <a href="https://www.insidehighered.com/news/2015/05/05/corinthian-enters-bankruptcy-us-responds-debt-relief-calls">bankruptcy</a> in 2015, is one of the prime culprits when it comes to student loan fraud. Last year, the California attorney general’s office obtained a <a href="http://www.latimes.com/local/lanow/la-me-ln-corinthian-colleges-judgment-false-advertising-20160323-story.html">judgment</a> against Corinthian for more than a billion dollars after a judge ruled that the school had engaged in deceptive advertising and unlawful lending practices.</p>
<p>Federal authorities have also challenged Corinthian. In 2015, the Consumer Financial Protection Bureau obtained a <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-secures-480-million-in-debt-relief-for-current-and-former-corinthian-students/">40 percent reduction</a> in the private loans owed for tuition at Corinthian Colleges.</p>
<p>More recently, the U.S. Department of Education <a href="http://www.mass.gov/ago/docs/press/2017/borrower-defense-multistate-letter.pdf">discharged student loan debt</a> for over 27,000 students who enrolled in one of Corinthian’s programs, and it has promised debt relief to 23,000 more former students seeking debt relief based on allegations of fraud.</p>
<h2>Student loan forgiveness</h2>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/182845/original/file-20170821-8916-9cdyht.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/182845/original/file-20170821-8916-9cdyht.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/182845/original/file-20170821-8916-9cdyht.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=900&fit=crop&dpr=1 600w, https://images.theconversation.com/files/182845/original/file-20170821-8916-9cdyht.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=900&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/182845/original/file-20170821-8916-9cdyht.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=900&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/182845/original/file-20170821-8916-9cdyht.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1131&fit=crop&dpr=1 754w, https://images.theconversation.com/files/182845/original/file-20170821-8916-9cdyht.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1131&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/182845/original/file-20170821-8916-9cdyht.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1131&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Many students who were defrauded by for-profit colleges are still weighed down by debt.</span>
<span class="attribution"><span class="source">AP Photo/Jacquelyn Martin</span></span>
</figcaption>
</figure>
<p>Unfortunately, efforts by state and federal agencies haven’t brought full relief to everyone who was defrauded. Of the <a href="https://nces.ed.gov/programs/digest/d14/tables/dt14_105.50.asp">approximately 3,400 for-profit educational institutions</a> in the U.S., at least 28 have <a href="https://www.brookings.edu/opinions/lots-riding-on-ed-dept-standard-for-student-loan-forgiveness/">undergone investigation</a>. Four of the eight largest companies have faced <a href="https://doi.org/10.1007/s12115-012-9541-0">significant legal action</a> for unscrupulous recruiting or business practices.</p>
<p>Corinthian alone has more than <a href="https://www.nytimes.com/2015/06/09/education/us-to-forgive-federal-loans-of-corinthian-college-students.html">350,000 former students</a>; and ITT Tech, another for-profit that filed for bankruptcy amid a cloud of fraud accusations, had more than <a href="http://www.latimes.com/business/la-fi-itt-tech-20170103-story.html">35,000 students</a> when it closed.</p>
<p>Tens of thousands of students have filed claims with the U.S. Department of Education seeking relief from loans they took out to enroll in fraudulent institutions like Corinthian, but these claims haven’t been processed expeditiously. In fact, the department has <a href="http://www.kalb.com/content/news/Records-Student-loan-forgiveness-has-halted-under-Trump-436811883.html">dragged its heels</a> since Education Secretary Betsy DeVos took over. Not a single loan relief application has been approved this year and the Department is <a href="https://consumerist.com/2017/07/06/states-say-education-secretary-betsy-devos-broke-law-by-delaying-protections-for-student-loan-borrowers/">reexamining</a> the rule that allows students to petition for debt relief.</p>
<h2>Legal loopholes</h2>
<p>The student loan forgiveness rules are designed to expedite claims against fraudulent institutions. These rules are vital for students who haven’t been able to successfully file their own lawsuits when they believe a college has defrauded them.</p>
<p>Students have been trying to sue Corinthian, for example, over its deceptive conduct since at least 2006. But Corinthian, <a href="https://www.washingtonpost.com/news/grade-point/wp/2016/04/28/its-almost-impossible-for-students-to-sue-a-for-profit-college-heres-why/?utm_term=.5561d38e51c3">like many other for-profit schools</a>, used fine-print forced arbitration clauses in its student enrollment contracts to have such cases dismissed. Students are instead forced to bring their claims one by one before a private arbitrator – one agreed to by the school. Even if a student wins, the arbitrator has no power to change the school’s future practices or address students in the same situation.</p>
<p>Mandatory arbitration agreements are quite common in contracts for car loans and credit cards, but many believe they’re <a href="https://www.insidehighered.com/news/2017/06/26/advocates-say-department-inaction-forced-arbitration-leave-defrauded-borrowers-bind">fundamentally unfair in the education sector</a>, since such agreements force students to relinquish their right to sue for damages as a condition of enrollment.</p>
<p>Yet, in 2013 (two years before Corinthian filed for bankruptcy), the Ninth Circuit Court of Appeals ruled that an arbitration clause imposed on students at Corinthian Colleges <a href="http://cdn.ca9.uscourts.gov/datastore/opinions/2013/10/28/11-56965.pdf">was enforceable</a> and dismissed a class action lawsuit filed by students who claimed to have been injured by Corinthian’s deceptive practices.</p>
<p>Had the lawsuit – and others like it – been allowed to proceed in a public court, plaintiffs might have obtained judgments that would have forced Corinthian to change the way it recruited and served its students.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/182848/original/file-20170821-4987-12p0zii.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/182848/original/file-20170821-4987-12p0zii.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/182848/original/file-20170821-4987-12p0zii.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=246&fit=crop&dpr=1 600w, https://images.theconversation.com/files/182848/original/file-20170821-4987-12p0zii.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=246&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/182848/original/file-20170821-4987-12p0zii.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=246&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/182848/original/file-20170821-4987-12p0zii.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=309&fit=crop&dpr=1 754w, https://images.theconversation.com/files/182848/original/file-20170821-4987-12p0zii.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=309&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/182848/original/file-20170821-4987-12p0zii.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=309&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">ITT Technical Institute, a for-profit college that shuttered its campuses in 2016, included mandatory arbitration clauses in its student enrollment contracts.</span>
<span class="attribution"><a class="source" href="https://commons.wikimedia.org/wiki/File:ITT_Technical_Institute_campus_Canton_Michigan.JPG">Dwight Burdette</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<h2>Help is on the way</h2>
<p>Fortunately, some help is on the horizon – if Congress and Secretary DeVos don’t block it. Last year, the Education Department enacted a rule to protect defrauded students. Under this rule, schools that take federal aid <a href="https://www.nclc.org/images/pdf/special_projects/sl/defend-doe-borrower-def-rule.pdf">cannot use forced arbitration</a> to prevent students from pursuing fraud claims in court. But DeVos has <a href="http://www.condemnedtodebt.org/search/label/mandatory%20arbitration">delayed the rule</a> and is considering <a href="https://www.usatoday.com/story/money/2017/06/14/trump-administration-will-re-do-two-student-loan-rules/102856170/">reversing it</a>.</p>
<p>Although most for-profit colleges are opposed to a federal rule that bans mandatory arbitration, they are not unanimous. <a href="https://www.insidehighered.com/quicktakes/2016/05/20/apollo-eliminates-mandatory-arbitration-clauses">Apollo Education Group</a>, the parent company of the University of Phoenix, announced in 2016 that it would eliminate mandatory arbitration clauses in student-enrollment agreements. Greg Cappelli, Apollo’s CEO, said at the time that the decision “is the right choice for all of our students.” The same month, <a href="https://www.washingtonpost.com/news/grade-point/wp/2016/05/23/two-of-the-biggest-for-profit-colleges-are-making-it-easier-for-students-to-sue/">DeVry University</a> also decided to eliminate mandatory arbitration clauses.</p>
<p>The Consumer Financial Protection Bureau also just issued a <a href="https://www.consumerfinance.gov/about-us/blog/weve-issued-new-rule-arbitration-help-groups-people-take-companies-court/">new rule</a> that will restore the ability of students, <a href="http://www.fairarbitrationnow.org/wp-content/uploads/Fact-Sheet-Service-Member-and-Veterans.pdf">service members</a> and other consumers to band together in court when banks, student lenders and other financial companies act illegally. The rule has widespread support, including from <a href="https://www.nclc.org/images/pdf/arbitration/military-coalition-letter-arb-rule.pdf">The Military Coalition</a>, <a href="http://www.fairarbitrationnow.org/wp-content/uploads/2016/05/Coalition-Letter-on-Final-CFPB-Arb-Rule.pdf">310 consumer and community groups</a> and over <a href="http://www.fairarbitrationnow.org/wp-content/uploads/CFPB-academics-arbitration-letter-2017-7-10.pdf">250 law professors and academics</a>.</p>
<p>This new Consumer Financial Protection Bureau rule will not just help students. It would have prevented Wells Fargo, which created up to <a href="https://www.bloomberg.com/news/articles/2017-05-12/wells-fargo-bogus-account-estimate-in-suit-grows-to-3-5-million">3.5 million fake accounts</a>, from using forced arbitration clauses to <a href="http://www.latimes.com/business/la-fi-wells-fargo-arbitration-20151205-story.html">kick people out of court</a>, allowing the fraud to <a href="http://www.latimes.com/business/hiltzik/la-fi-hiltzik-wells-arbitration-20160926-snap-story.html">continue</a>.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/182851/original/file-20170821-4987-ayrgqe.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/182851/original/file-20170821-4987-ayrgqe.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/182851/original/file-20170821-4987-ayrgqe.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/182851/original/file-20170821-4987-ayrgqe.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/182851/original/file-20170821-4987-ayrgqe.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/182851/original/file-20170821-4987-ayrgqe.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/182851/original/file-20170821-4987-ayrgqe.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/182851/original/file-20170821-4987-ayrgqe.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">If the administration blocks the new rules, students will be in danger of losing their ability to have loans forgiven.</span>
<span class="attribution"><a class="source" href="https://flic.kr/p/aAhJCP">jjinsf94115</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span>
</figcaption>
</figure>
<h2>What’s next?</h2>
<p>Unfortunately, Wall Street lobbyists are pushing Congress to <a href="https://www.americanbanker.com/news/fight-over-cfpb-arbitration-rule-may-just-be-starting">block the Consumer Financial Protection Bureau rule</a> through legislation. The U.S. House of Representatives voted to do so in July, and it’s now up to the Senate to decide the rule’s fate.</p>
<p>Meanwhile, for-profit schools continue to fight against the borrower defense rules that ban mandatory arbitration clauses. In fact, <a href="https://www.insidehighered.com/news/2016/07/11/proposed-federal-rules-student-debt-forgiveness-worry-some-nonprofit-colleges">even some nonprofits</a>, including <a href="https://www.insidehighered.com/sites/default/server_files/files/HBCU_BorrowerDefense.pdf">historically black colleges</a>, are requesting changes to other aspects rule, believing it could leave them vulnerable to the financial drain of frivolous lawsuits.</p>
<p>Students deserve the right to be protected from fraud – and to seek relief from the courts when they aren’t. If left as they are, both the Consumer Financial Protection Bureau and Department of Education rules would protect that right.</p><img src="https://counter.theconversation.com/content/82723/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Fossey does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Students across the country have been defrauded by for-profit schools. Fine print in their enrollment contracts has stopped them from bringing their cases to court, but new rules could help.Richard Fossey, Professor of Education, University of Louisiana at LafayetteLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/803532017-07-11T01:05:35Z2017-07-11T01:05:35ZWhy we need to save the Consumer Financial Protection Bureau<p>Republicans in <a href="https://www.forbes.com/sites/jimhenry/2017/05/30/congressional-critics-gunning-for-consumer-financial-protection-bureau/#24b1e09167ab">Congress</a> and the <a href="https://consumerist.com/2017/03/20/white-house-wants-authority-to-fire-consumer-protection-chief/">White House</a> have been very blunt about their desire to gut the <a href="https://www.consumerfinance.gov">Consumer Financial Protection Bureau</a> (CFPB). </p>
<p>The agency was launched in 2011 in the aftermath of the financial crisis as part of the <a href="https://www.sec.gov/about/laws/wallstreetreform-cpa.pdf">Dodd-Frank Wall Street Reform and Consumer Protection Act</a>. The goal was to protect consumers from deceptive or misleading practices in the financial industry. </p>
<p>So what would you miss if the CFPB suddenly disappeared?</p>
<p>In short, a lot, including a <a href="http://thehill.com/policy/finance/341313-consumer-bureau-releases-rule-to-prevent-banks-credit-card-firms-from-blocking">just-issued rule</a> that would prevent financial companies from using arbitration clauses to prevent people from having their day in court. </p>
<p>We base this conclusion on the work the three of us have done in recent decades. One of us (Sovern) has been writing about consumer law for more than 30 years, while the other two direct a <a href="http://www.stjohns.edu/law/consumer-justice-elderly-litigation-clinic">legal clinic that represents elderly consumers</a>. We’ve seen the worst of what financial companies can do, and we’ve also witnessed how the CFPB has begun to reverse the tide. </p>
<h2>Life before CFPB</h2>
<p>If you are one of the more than 29 million consumers who have collectively <a href="https://www.consumerfinance.gov/">received nearly US$12 billion</a> back from misbehaving financial institutions because of the CFPB’s efforts, you already know its value. But even if you are not, you have probably benefited from the bureau’s existence.</p>
<p>Before Congress created the bureau, there was no federal agency that made consumer financial protection its sole mission. Rather, consumer protection was rolled into the missions of a bunch of different agencies. And, as we saw during the financial crisis, regulators often gave it a back seat.</p>
<p>Congress, for example, gave the Federal Reserve the <a href="https://www.federalreserve.gov/reportforms/formsreview/RegZ_20080730_ffr.pdf">power to bar unfair and deceptive mortgage lending</a> in 1994. Yet the central bank considered consumer protection a backwater and didn’t use that power until 2008 – too late to prevent the <a href="https://theconversation.com/us/topics/great-recession-13707">Great Recession</a>. Congress took it away two years later when it passed Dodd-Frank.</p>
<p>The Office of the Comptroller of the Currency (OCC) regulates banks but was so preoccupied with ensuring lenders were safe that it failed to protect consumers from their predatory subprime mortgages – so much so that it prevented states from doing so too. And the Federal Trade Commission, which is tasked with fighting deceptive business practices, lacked the power to prevent such <a href="https://www.federalreservehistory.org/essays/subprime_mortgage_crisis">dangerous lending</a>.</p>
<p>This meant consumer protection on financial matters fell through the cracks. </p>
<p><a href="https://theconversation.com/how-wells-fargo-encouraged-employees-to-commit-fraud-66615">Wells Fargo’s recent fraud scandal</a> is a case in point. In the early 2000s, Wells Fargo employees <a href="https://www08.wellsfargomedia.com/assets/pdf/about/investor-relations/presentations/2017/board-report.pdf">began opening fake accounts</a> in clients’ names without permission, leading in some cases to <a href="https://www.wsj.com/articles/wells-fargo-is-trying-to-fix-its-rogue-account-scandal-one-grueling-case-at-a-time-1482855852?mg=prod/accounts-wsj%20rt5y7u6">lower credit scores</a> and a variety of fees. The bank <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2961347">ultimately opened millions of fraudulent bank and credit card accounts</a> before the scheme came to an end last year. </p>
<p>But as early as 2010, before the CFPB was set up, regulators at the OCC were increasingly aware of what was happening at Wells Fargo thanks to hundreds of <a href="https://theconversation.com/why-companies-like-wells-fargo-ignore-their-whistleblowers-at-their-peril-67501">whistleblower complaints</a>. The OCC even confronted the bank yet failed to take any action despite many red flags, according to an <a href="https://www.occ.gov/publications/publications-by-type/other-publications-reports/pub-wells-fargo-supervision-lessons-learned-41917.pdf">internal audit</a>. </p>
<p>It wasn’t until the <a href="http://freepdfhosting.com/29677883a9.pdf">Los Angeles city attorney</a> and the <a href="https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-fines-wells-fargo-100-million-widespread-illegal-practice-secretly-opening-unauthorized-accounts/">CFPB became involved</a> years later that Wells Fargo took forceful action to stop the fraud. The regulators <a href="https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-fines-wells-fargo-100-million-widespread-illegal-practice-secretly-opening-unauthorized-accounts/">fined Wells Fargo a total of $185 million</a> and forced it to refund fees it had charged customers and hire an independent consultant to review its procedures. </p>
<p>More importantly, they sent a clear message to other financial institutions: Cheat consumers and you will face the consequences.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/177626/original/file-20170710-5939-45mbev.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/177626/original/file-20170710-5939-45mbev.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=440&fit=crop&dpr=1 600w, https://images.theconversation.com/files/177626/original/file-20170710-5939-45mbev.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=440&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/177626/original/file-20170710-5939-45mbev.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=440&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/177626/original/file-20170710-5939-45mbev.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=553&fit=crop&dpr=1 754w, https://images.theconversation.com/files/177626/original/file-20170710-5939-45mbev.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=553&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/177626/original/file-20170710-5939-45mbev.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=553&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Consumer Financial Protection Bureau Director Richard Cordray testifies on Capitol Hill in 2013.</span>
<span class="attribution"><span class="source">AP Photo/Manuel Balce Ceneta</span></span>
</figcaption>
</figure>
<h2>Protecting consumers</h2>
<p>Since its inception, the bureau has acted repeatedly to stop financial institutions from harming consumers. </p>
<p>It blocked debt collector attorneys from <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-takes-action-halt-illegal-debt-collection-practices-lawsuit-mill-and-debt-buyer/">suing consumers based on false information</a>. It discovered systemic problems with consumer credit reports and forced companies to <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-oversight-uncovers-and-corrects-credit-reporting-problems/">correct errors</a>. It compelled credit card companies to <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-orders-subprime-credit-card-company-to-refund-2-7-million-for-charging-illegal-credit-card-fees/">refund illegal fees</a>. It protected borrowers from <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-sues-nations-largest-student-loan-company-navient-failing-borrowers-every-stage-repayment/">unlawful student loan servicing practices</a>. It <a href="https://www.consumerfinance.gov/about-us/blog/ally-to-repay-80-million-to-consumers-it-discriminated-against/">made lenders repay</a> consumers they discriminated against. It <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-recovers-more-than-1-million-for-servicemembers-veterans-and-their-families/">recovered money for veterans</a> who complained of abusive financial practices. </p>
<p>When the bureau began publishing <a href="https://www.consumerfinance.gov/data-research/consumer-complaints/">consumer complaints on its website</a>, companies that might previously have ignored negative feedback paid attention. Financial institutions have responded to complaints to the CFPB <a href="https://www.consumerfinance.gov/data-research/consumer-complaints/">more than 700,000 times</a>, often by providing a remedy to the consumers.</p>
<p>Besides protecting consumers, however, Congress had a second motive in creating the bureau: to help prevent the kind of mortgage lending that helped cause the Great Recession. </p>
<p>To that end, the bureau has adopted <a href="https://www.consumerfinance.gov/policy-compliance/rulemaking/final-rules/2013-integrated-mortgage-disclosure-rule-under-real-estate-settlement-procedures-act-regulation-x-and-truth-lending-act-regulation-z/">rules</a> that help consumers to understand their mortgages – something that often <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1531781">wasn’t possible</a> under the previously misleading mortgage disclosures. It also issued <a href="https://www.consumerfinance.gov/policy-compliance/rulemaking/final-rules/ability-repay-and-qualified-mortgage-standards-under-truth-lending-act-regulation-z/">regulations</a> to prevent consumers from taking out mortgages that they couldn’t repay. And after borrowers take out a mortgage, <a href="https://www.consumerfinance.gov/policy-compliance/rulemaking/final-rules/2013-real-estate-settlement-procedures-act-regulation-x-and-truth-lending-act-regulation-z-mortgage-servicing-final-rules/">CFPB servicing rules</a> establish the procedures servicers must follow when communicating with borrowers, correcting errors, providing information and dealing with loan modification requests.</p>
<p>Two of us have personal experience with one of the bureau’s new mortgage rules, which powerfully illustrates the value of the CFPB.</p>
<p>In 2014, Alice, a client of our law school clinic, was struggling to pay the mortgage on her home – which she had refinanced a few years earlier – after a stroke forced her into retirement. <a href="http://www.stjohns.edu/law/consumer-justice-elderly-litigation-clinic">Our clinic</a> helped her apply for a modification of her loan. </p>
<p>But within weeks, instead of acknowledging Alice’s application, the loan servicer summoned her to court to begin foreclosure proceedings in violation of <a href="https://www.law.cornell.edu/cfr/text/12/1024.41">CFPB servicing rules</a>. Fortunately, our clinic was able to rely on those rules in getting the foreclosure action dismissed. Alice got her loan modified and remains in her home. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/177630/original/file-20170710-5982-qs3jpp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/177630/original/file-20170710-5982-qs3jpp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=482&fit=crop&dpr=1 600w, https://images.theconversation.com/files/177630/original/file-20170710-5982-qs3jpp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=482&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/177630/original/file-20170710-5982-qs3jpp.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=482&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/177630/original/file-20170710-5982-qs3jpp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=606&fit=crop&dpr=1 754w, https://images.theconversation.com/files/177630/original/file-20170710-5982-qs3jpp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=606&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/177630/original/file-20170710-5982-qs3jpp.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=606&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Demonstrators tried to draw attention to the subprime mortgage crisis back in early 2008.</span>
<span class="attribution"><span class="source">AP Photo/Matt Rourke</span></span>
</figcaption>
</figure>
<h2>Protecting the vulnerable</h2>
<p>This reveals how the bureau is particularly important to protect vulnerable consumers, like the elderly, who are frequently targeted by fraudsters and predatory lenders because of their cognitive and other impairments and because they often have accumulated substantial assets. The CFPB is the only federal agency with an office <a href="https://www.consumerfinance.gov/educational-resources/resources-for-older-adults/">specifically dedicated</a> to protecting the financial well-being of older adults. </p>
<p>The bureau has brought cases against companies that attempted to take advantage of seniors by, for example, <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-and-new-york-department-of-financial-services-sue-pension-advance-companies-for-deceiving-consumers-about-loan-costs/">misrepresenting the interest rates</a> on pension advance loans or <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-takes-action-against-reverse-mortgage-companies-deceptive-advertising/">deceptive advertising</a>. In 2015 alone, consumer complaints to the CFPB brought relief to <a href="https://data.consumerfinance.gov/dataset/Consumer-Complaints/s6ew-h6mp">more than 600 older Americans just through debt collection problems</a>.</p>
<p>The bureau has also worked to prevent financial abuse of the elderly, estimated to cost seniors <a href="https://www.truelinkfinancial.com/research">as much as $36 billion annually</a>. The CFPB has educated <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-issues-advisory-and-report-for-financial-institutions-on-preventing-elder-financial-abuse/">financial institutions</a>, <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-helps-assisted-living-and-nursing-facilities-protect-seniors-from-financial-abuse/">nursing facilities</a> and <a href="https://www.consumerfinance.gov/about-us/newsroom/director-cordray-remarks-on-money-smart-for-older-adults/">others</a> about recognizing and stopping elder financial abuse and exploitation.</p>
<h2>Consumer protection in peril</h2>
<p>Given Alice’s ill health, the consequences for her might have been disastrous if she had been thrown out of her home. But now she – and all of us – face the loss of the CFPB’s aid. </p>
<p>The CFPB <a href="http://www.latimes.com/business/la-fi-cfpb-cordray-hearing-20170405-story.html">is under attack</a> from Republican members of Congress who <a href="https://banks.house.gov/media/press-releases/banks-votes-choice-act-roll-back-dodd-frank-law">believe more in bank protection</a> than consumer protection. Some members have <a href="http://pubcit.typepad.com/clpblog/2017/02/ratcliffecruz-bill-would-eliminate-the-cfpb.html">proposed eliminating the agency altogether</a>. </p>
<p>The House of Representatives <a href="https://financialservices.house.gov/choice/">has passed a bill</a> that would cripple the CFPB by, for example, taking away the power it used to fine Wells Fargo for opening illegal accounts and concealing <a href="https://www.consumerfinance.gov/data-research/consumer-complaints/">its complaint database</a> from public view. In other words, it would force the bureau to sit idly by as financial institutions <a href="http://www.newsweek.com/your-bank-lying-you-619814">lie to consumers</a>. </p>
<p>Nearly every American has or will have a loan or bank account, a prepaid card, credit card, a credit report or some combination of those, and so has dealings with a financial institution policed by the CFPB. But <a href="http://press.princeton.edu/titles/10267.html">few of us read the fine print</a> governing these things or <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2516432">can understand it when we do</a>. That gives the companies that write these agreements the ability to draft them to suit their own interests at the expense of consumers. </p>
<p>Similarly, we do not always know when a financial institution takes advantage of us, just as Wells Fargo customers did not always know that it had opened unauthorized accounts that lowered their credit scores. </p>
<p>Consumers need protection from misbehaving companies. If the bureau is eliminated or significantly weakened, all consumers will suffer.</p><img src="https://counter.theconversation.com/content/80353/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Along with three co-authors, Jeff Sovern received a $29,510 grant from the American Association for Justice Robert L. Habush Endowment and by a grant from the St. John’s University School of Law Hugh L. Carey Center for Dispute Resolution in 2014 to study arbitration. It resulted in an article. Along with Professor Kate Walton, he received a grant from the National Conference of Bankruptcy Judges Endowment for Education to study debt collection, resulting in another article. He is a member of the National Association of Consumer Advocates. </span></em></p><p class="fine-print"><em><span>Ann L. Goldweber is affiliated with NACA as a member.</span></em></p><p class="fine-print"><em><span>Gina M. Calabrese is affiliated with the National Association of Consumer Advocates, New Yorkers for Responsible Lending, and the Association of the Bar of the City of New York (Chair, Committee on the Civil Court).</span></em></p>Republicans are hoping to eliminate or at least defang the only federal agency tasked solely with protecting consumers from financial abuses. What would we miss if they succeed?Jeff Sovern, Professor of Law, St. John's UniversityAnn L. Goldweber, Professor of Clinical Education, St. John's UniversityGina M. Calabrese, Professor of Clinical Education, St. John's UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/656312016-09-19T01:22:57Z2016-09-19T01:22:57ZShould Wells Fargo execs responsible for bilking customers be forced to return their pay?<figure><img src="https://images.theconversation.com/files/138136/original/image-20160918-17018-15hcbki.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">In Wells Fargo's case, a discussion often wasn't required. </span> <span class="attribution"><span class="source">Wells Fargo via www.shutterstock.com</span></span></figcaption></figure><p>Having spent five years supervising large financial institutions on Wall Street, I am rarely surprised by the latest news of banks behaving badly. </p>
<p>But even the most hardened cynics, such as myself, were taken aback by the <a href="http://www.wsj.com/articles/wells-fargo-to-pay-185-million-fine-over-account-openings-1473352548">recent announcement</a> that Wells Fargo was being fined US$185 million for fraudulent sales practices that included opening over two million fake deposit and credit card accounts without informing its customers. </p>
<p>Adding to my shock was the revelation that the firm fired 5,300 employees over the course of five years for engaging in this behavior, clearly evidence that this was more than just a few bad apples.</p>
<p>The financial crisis and its aftermath have taught us that it is unlikely any of Wells Fargo’s senior executives will face criminal charges. The <a href="https://www.amazon.com/Capital-Offenses-Business-Punishment-Corporate/dp/039324783X">reasons for this are numerous</a>, but essentially prosecutors have a hard time identifying criminal intent within the upper ranks of bank management.</p>
<p>At the very least, don’t Wells Fargo’s customers have a reasonable expectation that executives who profited off their misfortune be required to return some of their ill-gotten gains?</p>
<p>The good news is that in April, U.S. regulators released a <a href="https://www.gpo.gov/fdsys/pkg/FR-2016-06-10/pdf/2016-11788.pdf">proposed rule</a> requiring financial institutions to do just that. Unfortunately for fraud victims seeking a pound of flesh from Wells Fargo executives, the rule is not scheduled to be finalized until November, although the bank claims to be in adherence with the proposal’s main provisions. </p>
<p>Nonetheless, I thought it would be interesting to examine the text of the proposed incentive-based compensation rule through the lens of the Wells Fargo situation to try and understand its potential implications.</p>
<h2>Cultural failure</h2>
<p>On the surface Wells Fargo’s fraud appears to be an all-too-familiar case of cultural failure within a big financial institution. Apparently CEO John Stumpf disagrees. </p>
<p>In a <a href="http://www.wsj.com/articles/wells-fargo-ceo-defends-bank-culture-lays-blame-with-bad-employees-1473784452">Wall Street Journal interview</a> shortly after the story broke, Stumpf refused to admit any institutional failure at the bank, claiming the behavior of the terminated employees “in no way reflects our culture nor reflects the great work the other vast majority of the people do.” </p>
<p>If Stumpf thinks that over 5,000 unethical people just so happened to find their way to Wells Fargo, he may want to rethink the company’s hiring practices.</p>
<p>Thus far the company has declined to say how many branch, regional or corporate managers were among those let go. The initial readout seems to be that most of those dismissed were low-level branch employees – hardly your typical Wall Street villains.</p>
<p>The spotlight has now turned to senior managers, and what they did or did not know. It is shining brightest on Carrie Tolstedt, who has run Wells Fargo’s community banking division since 2008 and is set to retire at the end of the year. <a href="http://money.cnn.com/2016/09/12/investing/wells-fargo-fake-accounts-exec-payday/index.html">Tolstedt appears to have profited handsomely</a> from the sales practices in question. </p>
<p>A <a href="https://www08.wellsfargomedia.com/assets/pdf/about/investor-relations/annual-reports/2015-proxy-statement.pdf">2015 company filing</a> indicates that part of Tolstedt’s 2014 inventive compensation award of roughly $8 million stems from:</p>
<blockquote>
<p>“success in furthering the company’s objectives of cross-selling products from other business lines to customers, reinforcing a strong risk culture and continuing to strengthen risk management practices in our businesses.” </p>
</blockquote>
<p>It now appears that cross-selling products and strengthening risk management were competing objectives.</p>
<h2>Clawing back compensation</h2>
<p>As noted earlier, Wells Fargo says it’s already in compliance with the main provisions of the proposed rule.</p>
<p>Specifically, in a <a href="https://www08.wellsfargomedia.com/assets/pdf/about/investor-relations/annual-reports/2016-proxy-statement.pdf">recent filing</a>, the bank claims: </p>
<blockquote>
<p>“Wells Fargo has strong recoupment and clawback policies in place designed so that incentive compensation awards to our named executives encourage the creation of long-term, sustainable performance, while at the same time discourage our executives from taking imprudent or excessive risks that would adversely impact the Company.” </p>
</blockquote>
<p>This means the bank can cancel, or claw back, any incentive-based executive compensation, such as deferred bonuses or stock options, from executives who engaged in misconduct or who received such compensation based upon materially inaccurate information, “whether or not the executive was responsible.” </p>
<p>Thus far the company has given no indication it intends to claw back any of Tolstedt’s compensation, although <a href="http://www.wsj.com/articles/lawmakers-intensify-pressure-on-wells-fargo-1474048652?tesla=y">pressure</a> from the public and regulators may soon change this. </p>
<h2>The proposed rule</h2>
<p>So let’s imagine the new incentive-based compensation rule was already in place and consider how it would work. </p>
<p>The rule’s most stringent requirements apply to “level 1” financial institutions like Wells Fargo with over $250 billion in consolidated assets. Its provisions cover all employees who receive incentive-based compensation, with enhanced requirements for individuals referred to as senior executive officers and significant risk takers.</p>
<p>As head of a major business line, Tolstedt would qualify as a senior executive officer, and her compensation would be subject to:</p>
<ul>
<li><p>higher minimum deferral requirements – the percentage of incentive-based compensation that cannot be cashed in until the passing of a specific amount of time (meant to encourage long-term thinking);</p></li>
<li><p>forfeiture of “unvested” compensation (that is, compensation that has been awarded but has yet to be fully transferred to the employee); and</p></li>
<li><p>clawbacks for so-called vested compensation that has already been transferred to the employee.</p></li>
</ul>
<p>Since Tolstedt is retiring soon, the rule’s minimum deferral requirements are less relevant here. But for past performance periods, unvested compensation could be forfeited and vested pay could be clawed back.</p>
<p>Even if one generously assumes Tolstedt was unaware of the fraud taking place, she was still likely responsible for setting the sales goals and compensation structure that incentivized so many employees to defraud customers. Indeed the firm’s own <a href="https://www08.wellsfargomedia.com/assets/pdf/about/investor-relations/annual-reports/2014-proxy-statement.pdf">filings</a> with the SEC seem to confirm this. Using these assumptions and applying the text of the proposed rule, it is clear that nearly all of her unvested incentive-based compensation could be forfeited, and her vested compensation could also be at risk of being clawed back. </p>
<p>The proposed rule identifies several types of events that would require covered firms to initiate a forfeiture review. Those most relevant in the Wells Fargo situation include: </p>
<ul>
<li><p>inappropriate risk-taking, regardless of the impact on financial performance; </p></li>
<li><p>material failures of risk management or control; or</p></li>
<li><p>noncompliance with statutory, regulatory or supervisory standards that results in enforcement or legal action against the covered institution brought by a federal or state regulator or agency. </p></li>
</ul>
<p>The proposal leaves it to the firm to determine the amount to be forfeited, provided it can support its decisions.</p>
<p>The standards that trigger a review of whether vested compensation should be clawed back are higher (though firms can loosen them). Such situations include a senior executive officer engaging in misconduct that results in significant financial or reputational harm to the institution, fraud or intentional misrepresentation of information used to determine the employee’s incentive-based compensation. </p>
<p>Based on the facts as we currently know them, it would be difficult to prove Tolstedt met the rule’s clawback criteria, since it’s not known if she actually engaged in the fraud herself. If she had, all of the incentive-based compensation that had vested since the fraudulent activity began would be subject to being clawed back. </p>
<h2>‘Standard-bearer of our culture’</h2>
<p>Assuming the rule was currently in effect, and Wells Fargo was adhering to it, how much would Tolstedt stand to lose? </p>
<p>This is almost impossible to determine given that she has worked at the firm for 27 years, we don’t know how long the fraudulent activity went on for, publicly available information on her compensation is limited and the rule leaves it up to the firm to determine the dollar amount that is forfeited and/or clawed back. </p>
<p>The Consumer Financial Protection Bureau’s <a href="http://files.consumerfinance.gov/f/documents/092016_cfpb_WFBconsentorder.pdf">Wells Fargo ruling</a> indicates the “relevant period” lasted from Jan. 1, 2011, to Sept. 8, 2016. Over that time frame, Tolstedt received at least $36 million in incentive-based compensation, compared with $8.5 million in base salary. </p>
<p>Under the terms of the proposed rule, Wells Fargo would be able to get back at least half of the $36 million. If Tolstedt was found to have known about the fraud taking place within her division, they could likely get it all back. </p>
<p>When the firm announced in July that Tolstedt would be retiring at the end of the year, <a href="http://fortune.com/2016/09/12/wells-fargo-cfpb-carrie-tolstedt/">Stumpf referred to her</a> as a “standard-bearer of our culture” and “a champion for our customers.” At the time, the firm was winding down its five-year employee purge. </p>
<p>Knowing what we know now, Stumpf could have easily fired her and attempted to claw back a significant amount of her pay. Instead he chose loyalty to a long-time employee over loyalty to his customers. Next time that choice may be off the table.</p><img src="https://counter.theconversation.com/content/65631/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Lee Reiners spent five years working at the Federal Reserve Bank of New York. During that time, he supervised several large financial institutions. He did not supervise Wells Fargo.</span></em></p>Regulators fined Wells Fargo US$185 million for fraudulently opening up more than two million fake deposit and credit card accounts. Will the victims get their pound of flesh from those responsible?Lee Reiners, Director of Global Financial Markets Center, Duke UniversityLicensed as Creative Commons – attribution, no derivatives.