Federal Consumer Agency Ponders Its Next Crusades [Legal Monitor Worldwide]
(Legal Monitor Worldwide Via Acquire Media NewsEdge) The Consumer Financial Protection Bureau, which has already overcome considerable political resistance, has managed to pack some punches in the last few months on behalf of the purchasing public it represents.
In December, the agency ordered refunds by major companies for misleading business practices: American Express, more than $59 million; GE Capital Retail Bank, up to $34 million. A joint settlement with Ocwen Financial totaled about $2 billion. The list goes on.
And on Friday, new mortgage rules and consumer protections went into effect that were part of the financial overhaul bill that created the agency, which opened its doors just over two years ago.
Yes, there's a new sheriff in town. But the true test of the consumer watchdog's mettle will be in the year ahead, when the agency is set to take on several thorny issues that are likely to draw more resistance from the financial services lobby and give more impetus to Republican opponents in Congress who continue to try to reduce the bureau's power. As recently as November, a House committee passed several bills to do just that.
(The agency's new director, Richard Cordray, whose confirmation was being blocked by Republicans, was finally confirmed in July, two years after his appointment by President Obama.)
Consumer advocates say they will be watching several big issues closely, including something called forced arbitration, which amounts to waiving the right to sue in some kinds of cases, as well as debt collection and overdraft charges.
The consumer agency has already begun studying all of these areas, but how far it will go remains to be seen. Several consumer advocates, consumer law experts and others have weighed in on what they would like to see the agency accomplish in the year ahead on these issues and others:
ARBITRATION This involves the small print buried within many consumer contracts — from checking accounts and credit card agreements to payday loans — that says consumers must agree in advance to cede their right to sue, either individually or as part of a class-action suit.
The Dodd-Frank financial overhaul law mandated that the bureau conduct a study on the use of these clauses in consumer financial products and services, and gave it the power to issue regulations.
"If there's one issue that consumer groups are really upset about it is the rising use of binding mandatory arbitration, which the Supreme Court has unfortunately blessed in a number of recent cases," said Adam Levitin, a Georgetown law professor, who sits on the agency's advisory board, an unpaid position.
Ed Mierzwinski, consumer program director at the United States Public Interest Research Group, said this might be the single most important issue on the agency's agenda. "The biggest thing we are hoping for in 2014 is to finish or at least make major progress with the arbitration rule and ban forced arbitration in consumer contracts," he said. "In many of these cases you are ripped off for $10 or $100 each. But millions of consumers are ripped off. That's why we think it's a very big deal."
OVERDRAFT FEES Overdraft services allow consumers to overdraw their accounts for a fee, which generates about $31 billion for the banks, according to Moeb Services. In 2010, the Federal Reserve stopped banks from charging overdraft fees unless consumers signed up for the programs on their debit and A.T.M. cards.
Despite rules that let consumers choose to opt into the programs, the banks haven't completely changed their practices.
"Consumer advocates would like to see overdraft fees regulated to limit the number of times fees can be applied, how the fees are calculated and to have fees related to the amount of the overdraft," Professor Levitin said.
The consumer agency issued a report earlier this year that found that 61 percent of bank fees from consumer accounts were for overdrafts, so it will be a tricky issue to navigate. "The problem with such regulation is that many banks depend on overdraft fee income," added Professor Levitin. "Many U.S. banks are unprofitable absent overdraft income."
STUDENT LOANS The agency has broad oversight of the largest bank and nonbank loan servicers, which manage the loans for lenders. From October 2012 through September 2013, the agency received more than 3,800 complaints from student borrowers. Some of the most common ones include having too few options to reduce payments in times of financial distress. Borrowers also complained about inaccurate payment processing, particularly when making early or extra payments. "The C.F.P.B. has broad authority to prevent unfair, deceptive or abusive practices," said Pauline Abernathy, vice president at the Institute for College Access & Success.
Rohit Chopra, the agency's student loan ombudsman, suggested in an annual report that Congress assess whether reforms recently applied to both mortgages and credit cards — such as clear guidelines for payment applications and retention of records — should be applied to student loans.
For now, the agency can also try to get to the root cause of why so many students resort to private loans to begin with — particularly when so many of them don't first exhaust their federal loan options, which provide more flexible repayment options and lower interest rates, among other benefits.
"We also need campus-level data where students are borrowing private loans and how much they are borrowing," Ms. Abernathy said. "We need to know why they are borrowing so much more with private loans at certain schools versus others."
DEBT COLLECTION The agency received more than 31,000 complaints about debt collection since it opened its doors, and it indicated in November that it was laying the groundwork to determine what, if any, new actions or rules were needed.
Many consumers continue to be hounded by collectors about debts they already paid off, or never owed to begin with. As a result, consumer advocates would like debt collectors to be required to better substantiate that they have the right information about the debt, who actually owes it and what statutes of limitations may apply. Part of that can be improved by requiring better communication among creditors selling the debt, the buyers of the debt and the collection companies, advocates said.
"We want more information throughout the process, but we also want everyone in the process to be responsible to pass all of that information to the next buyer or collector of debt," said Margot Freeman Saunders, of counsel at the National Consumer Law Center. "There are no rules on the books like that right now."
CREDIT REPORT DISPUTES Disputes over the big three credit bureaus' process for fixing errors on credit reports are well known. But now that the consumer agency has broad authority to perform on-site examinations, check records and examine how disputes are handled, consumer advocates hope improvements will be made. "None of the three have been fined for sloppy practices or ignoring consumer disputes," said Mr. Mierzwinski.
They are also looking to the bureau to generate rules that would help consumers whose credit files are mixed with less creditworthy individuals — the stuff of nightmares for the consumers who cannot get the bureaus to permanently untangle their reports. The reason files become mixed to begin with can be traced back to the computer formula the bureaus use to match credit data to a specific person's credit report. For instance, the credit bureaus' system might add a delinquent credit card account to a credit report even if the Social Security number is off by two digits, but enough of the other identifying information matches.
"We would like to see matching based on all nine digits of the Social Security number," said Chi Chi Wu, a lawyer at the National Consumer Law Center who focuses on consumer credit issues.
PREPAID CARDS The agency indicated in 2012 that it was considering writing new rules for this rapidly growing but largely unregulated product, where consumers load and reload money on cards that can then be used like debit cards. There are no industry standards on fee disclosures or protections that may (or may not) come with the cards, which are often used by people without traditional bank or checking accounts.
Without strong regulations, consumer advocates say that they worry that prepaid cards will begin to look more like credit products that can charge hefty overdraft fees and high interest rates on loans.
"We are hoping a proposed rule will exclude the use of overdraft or credit features on what is really a prepaid product," said Tom Feltner, director of financial services at the Consumer Federation of America.
"They are trying to keep their nose to the grindstone," Lauren Saunders, another advocate with the National Consumer Law Center, said of the bureau. "But there are a lot of people trying to warn them away from doing their jobs protecting consumers."
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