Who’s the Boss? Behind the Power Struggle at the Consumer Financial Protection Bureau


Updated Nov. 28, 2017

The drama over who will lead the Consumer Financial Protection Bureau continued this week as two people battle over who will be the official acting director: one tapped by the agency’s former head, and the other appointed by President Donald Trump.   

Richard Cordray, the former director of the CFPB, named Leandra English as his successor hours before he resigned on Nov. 24. On the same day, President Trump appointed Mick Mulvaney, currently the head of the Office of Management and Budget, as the agency’s interim director.  

Two days after her appointment by Cordray, English filed a lawsuit against President Trump and Mulvaney seeking to block Mulvaney’s appointment. 

Despite the controversy, Mulvaney reportedly showed up for work at the CFPB on Monday, carrying a bag of doughnuts. A former South Carolina representative, Mulvaney had said in a 2014 interview with the Credit Union Times that the CFPB was “a joke…in a sick, sad kind of way.” In 2015, he co-sponsored a legislation to eliminate the agency. 

“He wants me to get it back to the point where it can protect people without trampling on capitalism,” Mulvaney said at a press briefing on Monday. 

Freshly appointed by Trump, Mulvaney announced a 30-day hiring freeze at the CFPB and an immediate halt on any new regulations, rules and guidances. 

English wasn’t at the bureau on Monday, but had identified herself as the acting director in an email to CFPB staff. “It is an honor to work with all of you,” she wrote in the email.  

Meanwhile, Reuters reported that Mulvaney had instructed CFPB employees to disregard instructions from English “in her presumed capacity as Acting Director.” 

The lawsuit 

Bloomberg reports that Washington U.S. District Court Judge Timothy Kelly, a Trump nominee who has been on the bench since September, was assigned to rule on the case. A hearing was scheduled for 4:30 p.m. on Monday.  Update: Kelly ruled against English on Tuesday evening. While the ruling cannot be challenged, Politico reported that English’s lawyer, Deepak Gupta, said they would be discussing next steps, saying, “This judge does not have the final word on what happens in this controversy, and I think he understands that.”

In their complaint, English’s attorneys claim that under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the 2010 financial reform legislation that created the CFPB, the CFPB’s existing deputy director will take over the acting director role in the absence of the director. 

The lawyers argued that Dodd-Frank’s provision on succession supersedes the Federal Vacancies Reform Act of 1988, which allows the president to name an acting official if the existing official resigns. 

“The President’s attempt to appoint a still-serving White House staffer to displace the acting head of an independent agency is contrary to the overall statutory design and independence of the Bureau,” the complaint reads. “The President’s purported or intended appointment is also unlawful as a violation of the foundational principles of agency independence that Congress codified by the Dodd-Frank Act.” 

What’s at stake 

The CFPB is a U.S. government agency responsible for consumer protection in the financial sector, established in the wake of the 2008 financial crisis. 

The agency has aggressively targeted bad actors in the financial industry since its creation, reclaiming $11.9 billion for more than 29 million consumers. Its latest high profile actions included the Wells Fargo unauthorized accounts scandal and creating new rules around payday lending.  

The Trump administration and Republicans have long sought to curtail the CFPB’s power as part of a broader effort to weaken federal regulation over financial institutions.   

In late October, Senate Republicans killed an arbitration rule that the consumer watchdog wrote and would have made it easier for Americans to file class action lawsuits against big financial institutions.  

Cordray was the agency’s first director, holding the office from 2013 until he announced he was cutting his tenure eight months short on Friday. He had been criticized by Washington conservatives and well-received by consumer advocates. 

Before taking on the role of the bureau’s acting director, English served as the agency’s chief of staff. She has held positions at the CFPB, the Office of Management and Budget and the Office of Personnel Management, according to the CFPB statement. 

“In considering how to ensure an orderly succession for this independent agency, I have also come to recognize that appointing the current chief of staff to the deputy director position would minimize operational disruption and provide for a smooth transition given her operational expertise,” Cordray said in a statement. 

What now? 

White House Press Secretary Sarah Sanders told reporters at a Monday press briefing that the administration has nothing against English, that she is still CFPB’s deputy director and has a legal standing in that capacity, “but not as the director.” 

“We believe that Director Mulvaney is the right person at this time to lead [the CFPB] and that’s why he’s over there,” Sanders said.  

Sen. Tom Cotton (R-Ark.) on Monday deemed the CFPB “a rogue, unconstitutional agency,” and that English “doesn’t have a legal leg to stand on” in her lawsuit. 

“Leandra English’s lawsuit to install herself as acting director against the president’s explicit direction is just the latest lawless action by the CFPB,” Cotton said in a statement. “The president should fire her immediately and anyone who disobeys Director Mulvaney’s orders should also be fired summarily. The Constitution and the law must prevail against the supposed resistance.” 

The National Consumer Law Center, a nonprofit organization dedicated to helping low-income and other disadvantaged people, said on Monday that Trump’s appointment of Mulvaney is “illegal.” 

“In an attempt to install a wrecking ball at the helm of the consumer watchdog, President Trump has ignored the law that dictates that the consumer bureau’s deputy director takes over until Congress can confirm a new director,” the National Consumer Law Center statement reads. 

“We should not forget that just 10 years ago, a focus on bank profits over consumer protection rules resulted in the worst financial collapse since the Great Depression, and many families have not yet recovered,” it continues. “It’s illegal and reckless to put someone who thinks that consumer protection is a joke in charge of our key financial watchdog.” 

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Why the CFPB Is in Danger of Getting Trumped

The Trump administration has taken a concerted effort to destroy, defang and scrap the Consumer Financial Protection Bureau. Here's why it's wrong.

Just beyond the Trump swelter of the hour, lawmakers have been busy concocting plans to dismantle key achievements of the Obama years. Among those accomplishments currently targeted is a concerted effort to destroy, defang, scrap (feel free to select the word) the Consumer Financial Protection Bureau.

The CFPB was created to protect consumers from the kinds of predatory practices that played a big part in the financial meltdown of 2007 to 2008. The idea was simple: Create a federal agency to be, to quote Sen. Elizabeth Warren, “the cop on the beat” in the financial sector. The CFPB was to have the ability to take decisive action to shut down questionable practices. The CFPB was designed to be the regulatory safeguard against future financial wipeouts. (Think: Batman.)

It’s Populist!

Given the populist nature of Mr. Trump’s ascent to the White House, it remains for me a real head-scratcher as to precisely why the CFPB is on the chopping block.

The agency is tasked after all with policing financial products (and practices) that specifically take advantage of consumers. It has jurisdiction over a host of consumer “favorites” like credit reporting agencies, payday lenders, debt collectors, debt settlement companies and student loan servicers, as well as banks, credit unions, credit card companies and many other financial services organizations operating in the United States.

With the power to ban financial products deemed “deceptive, unfair or abusive,” the CFPB also possesses the authority to impose significant penalties on financial predators.

What kind of penalties are we talking about? More than $5 billion so far, including a record $100 million against Wells Fargo in 2016 ($185 million all in). The CFPB has helped nearly 30 million consumers recover several billions of dollars in remedies from financial companies. All this, and in 2016 the CFPB, experiencing a huge amount of growth both in programs and staff, stayed $67 million under its budget cap.

So, if the CFPB hasn’t been too expensive for the federal government to run, what’s the problem? Follow the money.

Conservatives argue that the Dodd-Frank Wall Street Reform and Consumer Protection Act (aka Dodd-Frank, the law that authorized the creation of the CFPB) has cost businesses more than $24 billion in compliance-related expenses and 61 million paperwork hours. It’s also a federal agency, and it has a fairly big budget. This is what the Republicans are focused on.

You can almost hear President Trump: “So, why are we spending so much money on this thing? It’s sad, really.”

It’s Under Attack

Rep. Jeb Hensarling, chair of the House Committee on Financial Services, cited what he calls “the avalanche of regulations that smother the U.S. economic system” in his latest rally to kill the Consumer Financial Protection Bureau. This so-called “avalanche” was in response to an economic event that nearly destroyed the world economy.

Hensarling seems to be motivated primarily by conservative ideology, a central tenet of which being that too much centralized power is a bad thing. “The CFPB is arguably the most powerful, least accountable agency in U.S. history,” Hensarling wrote in a recent Wall Street Journal opinion piece. “CFPB zealots have the power to determine the ‘fairness’ of virtually every financial transaction in America. The agency defines its own powers and can launch investigations without cause, imposing virtually any fine or remedy, devoid of due process.”

In an Oct. 11, 2016, decision, a federal appeals court ruled that the president should have the authority to fire the director of the CFPB other than for cause. The agency is currently appealing the court’s decision. “Other than the President,” Judge Brett Kavanaugh wrote for the 2-1 majority, “the Director of the CFPB is the single most powerful official in the entire United States Government, at least when measured in terms of unilateral power.” Anticipating the popular response, Kavanaugh added, “That is not an overstatement.”

The reason I say the attacks are mainly ideological is complicated, but in essence it seems like pressure from financial sector lobbyists plays a big part in the pushback against the CFPB and that the focus on centralized power is really just putting sheep’s clothing on an influence-buying wolf.

I don’t know how else to view the willful misunderstanding of what the CFPB actually does, which is simple: It demands accountability from financial institutions. The idea that, as Hensarling said, the CFPB “requires lenders essentially to read their clients’ minds, know and weigh their clients’ comprehension levels, and forecast future risk” is absurd.

Consider, if you will, the various ways consumers got screwed by the Wild West years in the finance world that led to the Great Recession. There is no mind reading required, but plenty of policing is needed.

It doesn’t matter if it’s the latest SNL sketch or Trump’s policy man Stephen Miller proclaiming that the new administration accomplished more in three weeks than most presidents achieve in four or even eight years — a claim that was quickly quashed — though I suppose he was right if you consider chaos an accomplishment. What matters is that we’re getting distracted from assaults on real progress made since 2008.

Killing the CFPB is an ill-advised and dangerous move, and one that will backfire on Republicans in the long run. As we as consumers filter through the latest, greatest Trump outrage (or triumph), and as we focus on the news cycle, huge things are happening behind the scenes. This one might be a doozy, making America unacceptably vulnerable again.

This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.

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Your Prepaid Card Is About to Get Better


Clear, straightforward information on fees and more protections on prepaid credit accounts? That’s the goal of the new federal consumer protections finalized by the Consumer Financial Protection Bureau (CFPB) on Tuesday.

According to a release from the CFPB, the new rule will require significant oversight by financial institutions. That means limiting “consumers’ losses when funds are stolen or cards are lost,” the CFPB said, investigating and resolving errors, and offering consumers “free and easy access to account information.” Notably, the CFPB also finalized new “Know Before You Owe” disclosures for prepaid accounts.

“Many of these important protections stem from the Electronic Fund Transfer Act, and they are intended to be similar to those for checking account consumers,” CFPB director Richard Cordray said in a separate prepared statement. “For instance, error resolution rights will now be similar for both types of accounts.”

Prepaid Account Protections 

Among the fastest growing consumer financial products in the U.S., the CFPB said, prepaid accounts are typically bought at retail outlets and online. (These include mobile wallets like PayPal or Google Wallet, peer-to-peer payment products and other electronic prepaid accounts that hold funds.) In 2012, said the CFPB, consumers put nearly $65 billion on these “general purpose reloadable cards,” an amount that’s expected to nearly double to $112 billion by 2018.

Here’s a look at the protections the CFPB brought prepaid account consumers under the Electronic Fund Transfer Act.

Free and easy access to account info: “Financial institutions must make certain account information available for free by telephone, online, and in writing upon request, unless they provide periodic statements,” the CFPB said.

Protections for lost cards and unauthorized transactions: Consumers are now protected against withdrawals, purchases and other unauthorized transactions — that is if their prepaid cards are lost or stolen. With the rule, consumers now have a way to get back their money so long as they notify the financial institution within a reasonable timeframe.

Error resolution rights: “Financial institutions must cooperate with consumers who find unauthorized or fraudulent charges, or other errors, on their accounts,” the CFPB said. If funds need repayment, these institutions will be held responsible, and if they cannot repay within a certain period of time, they’ll be required to “provisionally credit the amount to the consumer while it finishes its investigation,” said the CFPB.

Know Before You Owe Disclosures 

“Standard, easy-to-understand, upfront information” — that’s how the CFPB described its new Know Before You Owe prepaid disclosures, which may help consumers have an easier time comparison-shopping and make smarter decisions when it comes to their wallets. Here’s what that entails.

Clear information: Two forms with simply written disclosures will now be required, the CFPB said. One, which is shorter, outlines prepaid account information, including key fees for ATM withdrawals and balance inquiries. A longer disclosure form will have a full list of fees. You can view samples of the disclosure forms on the CFPB’s website.

Publicly available agreements: The CFPB now requires prepaid account issuers to post their agreements to the general public. They will also be accessible on a “Bureau-maintained website,” as the CFPB called it, down the line.

“These important new protections fill gaps in the law for consumers,” Cordray said in closing. “The rapidly growing ranks of prepaid users deserve a safe place to store their money and a practical way to carry out their financial transactions.”

Play It Safe 

While the CFPB has introduced these disclosure requirements and other protections for consumers using prepaid cards and credit products tied to prepaid accounts, which let you spend more money than they’ve deposited to the account, there are things you can do as a consumer to make sure you’re being smart with your money. For starters, it’s helpful to read the terms and conditions of any financial tool you’re considering very carefully. If something gives you pause, speak up, and don’t be afraid to ask questions.

Remember, prepaid cards don’t generally help you build credit. But, no matter what type of card you’re using, it’s important to keep tabs on your credit to ensure you’re not the victim of fraud or other unscrupulous activities. You can view a free snapshot of your credit report by signing up for an account on Credit.com.

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What Happens When HAMP Expires at the End of This Year?

Nearly 10 million Americans lost their homes in the Great Recession. Millions more went through the arduous process of modifying their mortgages, either directly through banks or with the help of federal programs like the Home Affordable Modification Program (HAMP). Still more saw the value of their homes plummet, leaving them underwater and in financial peril.

Many at-risk consumers found themselves in a sea of red tape when trying to take advantage of the very federal programs designed to rescue them and their homes.

But things may be looking up.

Foreclosures have slowed, and the total number of underwater homes has dropped by half, from 11.6 million in 2011 to 4.3 million last year, according to CoreLogic. HAMP expires at the end of the year.

That’s not to say the housing market is out of the water, or that consumers who have trouble paying their mortgages don’t need help navigating the process. Solutions span forbearance and modifications to home-disposition options, and each of these is complicated.

To address the problem, this week the Consumer Financial Protection Bureau issued non-binding guidelines for mortgage services when dealing with at-risk homeowners. (The consumer agency refers to the guidelines as instructions for “Life After HAMP.”)

“We aim to help consumers avoid foreclosures, which upset their personal and financial lives,” CFPB Director Richard Cordray said in a press release. “The modification program was put in place to provide alternatives to foreclosure. Our principles will serve as helpful guardrails for servicers, investors and regulators to consider as we continue to protect consumers who are struggling to pay their mortgages.”

The CFPB believes consumers are on more solid footing today than they were before the recession. New rules, such as stricter “ability-to-repay” requirements, make future mass defaults less likely. However, “there is ample opportunity for consumer harm if loss mitigation programs evolve without incorporating key learnings from the crisis,” the bureau said in its report. To that end, it identified four overriding principals that financial institutions should follow when dealing with at-risk homeowners:

Accessibility: Consumers should easily be able to obtain and use information about loss mitigation options and how to apply for them.

Affordability: Repayment plans and mortgage loan modifications should generally be designed to produce a payment and loan structure that is affordable for consumers.

Sustainability: Loss mitigation options used for home retention should be designed to provide affordability throughout the remaining or extended loan term.

Transparency: Consumers should get clear, concise information about the decisions servicers make.

“Avoiding foreclosure is often in the best interests of both the investor and the consumer,” the CFPB said.

The main goal of the guidelines, the bureau said, is to prevent “avoidable foreclosures.”

In the recession, frustration with HAMP and proprietary lender modification programs was high. Some homeowners saw banks continue foreclosure proceedings even as they were delayed by the modification process. The CFPB banned that practice in 2013, but it shows how frustrating life can be for mortgage holders trying to save their homes. (You can see how a past or ongoing foreclosure may be affecting your credit by viewing two of your credit scores, updated each month, for free on Credit.com.)

“The principles announced today by the Bureau do not establish binding legal requirements but instead are intended to complement ongoing discussions among industry, consumer groups and policymakers,” the report said. “The CFPB believes these principles are flexible enough to apply to an array of approaches, and recognize the interests of consumers, investors and servicers.”

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Debt Collectors May Not Be Able to Call You As Often Under New Rules

Debt collectors would face strict new limitations on how (and when) they contact consumers under a sweeping proposal announced Thursday by the Consumer Financial Protection Bureau.

Collectors would be limited to 6 contacts per week while attempting to reach consumers, would have to work harder to prove validity of debts they are trying to collect, and they’d have to provide simple “tear-off” instructions for consumers to file disputes.

“Today we are considering proposals that would drastically overhaul the debt collection market,” CFPB Director Richard Cordray said in a press release. “This is about bringing better accuracy and accountability to a market that desperately needs it.”

The bureau has been weighing new debt collection regulations since it issued a notice of proposed rules back in November 2013. More than 35,000 comments piled into the bureau from consumer groups and industry representatives.

There are about 6,000 debt collection firms working in the $13.7 billion industry in the U.S., the CFPB says. But the industry has a bad reputation. Debt collectors attract the most complaints at the CFPB and the Federal Trade Commission every year. Since the bureau began accepting complaints in July 2013, 200,000 consumer complaints were compiled.

Many complaints involve attempts to collect a debt that consumers say they don’t owe. The bureau said about one-third of consumers contacted by debt collection firms claim an attempt to collect the wrong amount. (You can read more on your debt-collection rights here.)

“When consumers are contacted by collectors for debt they do not recognize, they often do not know what to do next,” the CFPB said in its note announcing the new rules. “They may feel pressure to resolve the debt, but do not have a clear understanding of their rights. Sometimes consumers pay a debt they don’t believe is accurate to make the collector stop contacting them. Other times, consumers spend significant time and money to dispute the debt. They may have to dig through old records to prove information to the collector or retain a lawyer.”

The CFPB proposal says the following:

  • Collectors would have to scrub their files and substantiate the debt before contacting consumers. For example, collectors would have to confirm that they have sufficient information to start collection.
  • Collectors would be limited to six communication attempts per week through any point of contact before they have reached the consumer.
  • The CFPB is also considering proposing a 30-day waiting period after a consumer has passed away, during which collectors would be prohibited from communicating with certain parties, like surviving spouses.
  • Collectors would be required to include more specific information about the debt in the initial collection notices sent to consumers.
  • The proposal under consideration would also add a “tear-off” portion to the notice that consumers could send back to the collector to easily dispute the debt, with options for why the consumer thinks the collector’s demand is wrong. The tear-off would also allow consumers to pay the debt.
  • If a consumer disputes – in any way – the validity of the debt, collectors would have to stop collections until the necessary documentation is checked. Collecting on debt that lacks sufficient evidence would be prohibited.

The rules also deal with a relatively new complaint about collector tactics sometimes called “debt laundering” that Credit.com has covered in the past. Occasionally when consumers dispute a debt, the collector does not respond to the dispute but instead sells the debt to another collector, who begins the process again, requiring the consumer to restart the dispute process. The new CFPB rules would prevent this.

“If debt collectors transfer debt without responding to disputes, the next collector could not try to collect until the dispute is resolved,” the CFPB proposal states.

In responding to the CFPB’s request for comment on rules, industry groups said that consumers dispute only 3.2% of the bills that debt buyers attempt to collect. They also warned that additional regulations could interfere with the credit market.

New rules that would require additional debt validation “would impose significant costs and burdens that would weigh on the cost and availability of credit,” the American Bankers Association and the Financial Services Roundtable said in a letter sent to the CFPB.

The tougher rules are required because debt collection is not a typical industry that responds to consumer dissatisfaction, the bureau argues.

“In the debt collection market, notably, consumers do not have the crucial power of choice over those who do business with them when creditors turn their debts over to third-party collectors. They cannot vote with their feet,” Cordray said in remarks prepared for an event to announce the new rules. “It is not surprising, then, that for many years, the debt collection industry has drawn more complaints than any other.”

As is standard in CFPB rule-making, a panel of small business experts will now convene to review the impact of the regulations on industry. After that panel issues a report, the CFPB will issue its final rules.

Remember, legitimate debt collection accounts can damage your credit. Too see if any are affecting yours, you can check your credit reports each year for free at AnnualCreditReport.com and view your free credit report summary, updated each month, for free on Credit.com.

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New Rules Aim to End Payday Loan ‘Debt Traps’, CFPB Says


Claiming Americans consumers have been “set up to fail” by the short-term lending industry, federal regulators on Thursday issued sweeping new rules that would drastically alter the payday and title lending industries.

Under the proposed rule from the Consumer Financial Protection Bureau, short-term lenders would have to verify borrowers’ ability to promptly repay loans, and be prevented from repeatedly issuing loans to the same consumers.

“The Consumer Bureau is proposing strong protections aimed at ending payday debt traps,” said CFPB Director Richard Cordray. “Too many borrowers seeking a short-term cash fix are saddled with loans they cannot afford and sink into long-term debt. It’s much like getting into a taxi just to ride across town, and finding yourself stuck in a ruinously expensive cross-country journey. By putting in place mainstream, common-sense lending standards, our proposal would prevent lenders from succeeding by setting up borrowers to fail.”

The CFPB has studied the short-term lending industry for several years, so the new rules were expected.

The ability-to-repay provision would require that lenders verify a borrower’s after-tax income, government benefits or other sources of income, and make sure that borrower can make timely loan payments while still being able to afford basics, like food and shelter. Lenders would also be required to check a consumer’s credit report to verify the amount of other outstanding loans and required payments. (You can get a free credit report summary on Credit.com to see where you stand.)

The new rules also include provisions designed to prevent consumers from being hit with drastic fees, such as repeated attempts to collect debts from depleted checking accounts.

“After two straight unsuccessful attempts, the lender would be prohibited from debiting (a borrower’s) account again, unless the lender gets a new and specific authorization from the borrower,” the CFPB said.

The proposal would also cap the number of short-term loans that can be made in quick succession. CFPB research has shown that while payday loans are designed for the short term, many borrowers simply renew their loans when payment is due. One CFPB study found that 80% of payday borrowers took another loan out within 30 days.

Alert to industry criticism that regulating the payday marketplace would make it impossible for consumers to get any short-term credit, the bureau tried to strike a balance, leaving some lending possibilities open.

Under the proposed rule, consumers will be allowed to borrow a short-term loan of up to $500 without passing the so-called “full-payment test,” as long as they have not used short-term loans for more than 90 days during the previous year and the loan is not secured with a car title. Lower interest short-term loans – with a total borrowing cost of 36% interest or less — will also be permitted in certain circumstances.

Consumer groups greeted the CFPB rules with enthusiasm.

“Since the CFPB was created, the Bureau has worked diligently to understand the payday and car title market, examine the consumer experience and develop focused and data-driven interventions to prevent harmful practices,” said Tom Feltner, Director of Financial Services at Consumer Federation of America.

Industry groups, however, warned that regulations to short-term loans could force Americans to turn to even less attractive alternatives.

“The Bureau continues to miss the mark for millions of Americans struggling to make ends meet and effectively forces most banks to stay on the sidelines due to greater compliance burdens,” said Richard Hunt, president and CEO of the Consumer Bankers Association. “Consumers across the country will now turn to pawnshops, offshore lending, and fly-by-night entities that will be more costly to them. We will continue to work with the Bureau to develop products and services that are reasonable and meet consumer needs,”

The public comment period on the new rules will begin shortly and continue until Sept. 14. The CFPB is expected to issue its final rule afterward.

More Money-Saving Reads:

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Op/Ed: Student Borrowers Will Continue to Struggle Despite the CFPB’s Efforts


The financial services industry erupted earlier this month, soon after the Consumer Financial Protection Bureau published a set of proposed rules for limiting the use of forced arbitration clauses by broad range of entities, including certain providers of financial products and services.

This longstanding practice, whose origin dates back to 1925, of incorporating language that requires consumers and others to waive their constitutional right to a jury trial is attracting a lot of attention these days because of concerns that it favors the interests of lenders over debtors, schools over students, services firms over customers, and even employers over employees.

Arguably, the most cherished and, at the same time, abhorred aspect of this contractual provision is how it prevents groups of (allegedly) unjustly treated parties from filing class-action lawsuits for damages.

The CFPB wants to change that.

Once the 90-day commentary period has lapsed and the bureau’s final rules are put into place, the first of these will prohibit the prospective use of litigation-limiting “arb-clauses” in certain consumer transactions. (Unfortunately, those who have existing contracts with this language will continue to be bound by its terms.)

The second serves as a sanity check of sorts. It stipulates that those companies and institutions that will become subject to the bureau’s new rules will also be required to “submit specified arbital records to the Bureau” at specific intervals.

In other words, the CFPB wants to know that what it ultimately implements is having the intended effect. If that’s not the case, presumably the bureau will consider revising the rules it set forth.

One of the many consumer financial products that the Dodd-Frank legislation authorizes the CFPB to regulate is private student loans. The bureau oversees the entities that originate these loans, along with the firms that administer the resulting contracts on their (originators and entities to which the loans may later be sold) behalf.

That’s great, except for the fact that private loans comprise barely 10% of outstanding education-related debts. So the obvious question is: What effect, if any, will the bureau’s new rules have on firms that service federal student loans, the 90% over which the CFPB has no regulatory oversight?

I ask because buried within its proposed rulemaking document, on the bottom of page 193, is a request for comments on whether businesses created by governmental entities (the State of Pennsylvania is the footnoted reference) should be exempted from these new rules as they are from other consumer protection laws such as the Fair Credit Reporting Act.

It’s an important question, not least because the Department of Education subcontracts a certain portion of its loan administration work to such firms (the Higher Education Loan Authority of the State of Missouri, or MOHELA, is one example).

But we’re just scratching the surface.

What about all the other loan servicing companies? They may not share MOHELA’s parentage, but they and others like them are collectively servicing more than $300 billion in Federal Family Education loans and nearly $1 trillion in Federal Direct loans.

To what extent are these firms similarly shielded? Let me ask this: Do you recall reading about any class action suit that was filed against any of these companies where the plaintiffs prevailed? Neither do I, and here’s why: federal preemption.

As the Center for Responsible Lending points out in its July 13, 2015 letter to Consumer Financial Protection Bureau Director Richard Cordray, although private student lenders and their agents (subcontracted loan servicers, in this instance) rely on the forced arbitration clauses that are embedded within the contracts that govern their transactions, certain federal student loan servicers have successfully “invoked preemption under the Higher Education Act (1965) to get lawsuits based on state-law claims dismissed.”

Once his case is tossed out of court, the consumer-plaintiff isn’t even entitled to seek recompense through arbitration.

Although the ED has signaled its intent to restrict the use of arb-clauses in college enrollment contracts (used to protect the institution against later challenge) and private lenders, it has yet to call on lawmakers to amend the Higher Education Act — which Congress is in in the process of overhauling — with regard to the matter of the broad protections the Act grants to servicers.

The fact that 90% of all student loans — involving some 40 million borrowers — are somehow off-limits for the regulator that was created to protect consumers is bad enough. But to prevent these student debtors — whether individually or in groups — from the legal recourse that is due them is indefensibly unjust.

This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.

More on Student Loans:

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Is This the End of Mandatory Arbitration?


Federal regulators moved one big step closer Thursday to banning contract language that prohibits consumers from joining class-action lawsuits against corporations.

The Consumer Financial Protection Bureau today issued a formal Notice of Proposed Rulemaking on the ban, opening a 90-day public comment period that’s sure to attract heavy rhetoric from both sides of the issue.

Consumer groups favor the ban, saying arbitration clauses in standard contracts prevent wronged consumers from having their day in court; industry groups say arbitration is more cost effective than class-action lawsuits. A CFPB field hearing will be held Thursday in New Mexico.

“Signing up for a credit card or opening a bank account can often mean signing away your right to take the company to court if things go wrong,” CFPB Director Richard Cordray said in a statement. “Many banks and financial companies avoid accountability by putting arbitration clauses in their contracts that block groups of their customers from suing them. Our proposal seeks comment on whether to ban this contract gotcha that effectively denies groups of consumers the right to seek justice and relief for wrongdoing.”

The proposed ban has a long legislative and political history. It was initiated by the Dodd-Frank financial reform bill, which instructed the Consumer Financial Protection Bureau to study the issue and make rules after the study as needed. (The CFPB study was released in March 2015.) The bureau then released its first version of the potential rule and convened a commission to study its impact on small business last fall. The group’s report was also made public on Thursday.

Consumer groups were quick to cheer the rule.

“Forced arbitration is a get-out-of-jail-free card that lets banks, payday lenders and debt relief scammers avoid accountability when they violate the law,” said Lauren Saunders, associate director of the National Consumer Law Center. “Forced arbitration and class action bans force consumers into a biased, secretive and lawless forum, preventing either a court or an arbitrator from ordering a lawbreaker to repay all of its victims.”

Stern objections can be expected from industry groups such as the U.S. Chamber of Commerce. In advance of Thursday’s field hearing, the chamber’s Center for Capital Markets Competitiveness wrote the CFPB asking Cordray to address some issues with the rule.

In the letter, signed by David Hirschmann, President and CEO of the center, the group questioned “whether a rule prohibiting class action waivers will have the practical effect of eliminating consumer arbitration from the financial services marketplace.”

It also stated eliminating arbitration would actually make it harder for consumers to obtain redress in situations where claims were small and too infrequent to result in a class-action lawsuit.

“For these claims, consumers will therefore have virtually no economically rational options for seeking redress: arbitration (in which most companies pay for consumers to bring claims against them, making it free to the consumer) will be gone; class action litigation will not be available; and rational consumers are not going to pay a $400 filing fee to pursue a $25 claim in court,” the letter stated.

Such consumers could potentially file small claims court claims, which can cost considerably less, however.

Here are some reasons the CFPB claims its rule will be good for consumers, per a press release.

A day in court: The proposed rules would allow groups of consumers to obtain relief when companies skirt the law. Most consumers do not even realize when their rights have been violated. Often the harm may be too small to make it practical for a single consumer to pursue an individual dispute, even when the cumulative harm to all affected consumers is significant. The CFPB study found that only around 2% of consumers with credit cards who were surveyed would consult an attorney or otherwise pursue legal action as a means of resolving a small-dollar dispute. With class action lawsuits, consumers have opportunities to obtain relief from the legal system that, in practice, they otherwise would not receive.

Deterrent effect: The proposed rules would incentivize companies to comply with the law to avoid group lawsuits. Arbitration clauses enable companies to avoid being held accountable for their conduct. When companies know they can be called to account for their misconduct, they are less likely to engage in unlawful practices that can harm consumers. Further, public attention on the practices of one company can affect or influence their business practices and the business practices of other companies more broadly.

Greater transparency: The proposed rules would make the individual arbitration process more transparent by requiring companies that use arbitration clauses to submit any claims filed and awards issued in arbitration to the CFPB. The Bureau would also collect correspondence from arbitration administrators regarding a company’s nonpayment of arbitration fees and its failure to adhere to the arbitration forum’s standards of conduct. The collection of these materials would enable the CFPB to better understand and monitor arbitration. It would also provide insight into whether companies are abusing arbitration or whether the process itself is fair.

You can read more about the credit laws that are on your side here.

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Image: Pierre Desrosiers

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