Category: Consumer Finance

  • Viewpoint Discrimination in Banking

    Posted by

    Adam Levitin

    I have a new draft article circulating, The Market for Ideas: Viewpoint Discrimination in Banking. The paper addresses both the positive claims that banks have engaged in viewpoint discrimination by “debanking” political conservatives and Christians and the normative claims from right and left that banks should be regulated as common carriers or public utilities. Basically, the evidence on debanking is remarkably weak; banks often have good reason to close accounts related to credit risk on charged-back payments and AML compliance burdens.  On top of that, the normative case for common carrier or public utility regulation makes little sense: banks are not natural monopolies, the very nature of their business requires discrimination for credit risk, and if they are acting solely out of animus, the market will price against them for it. 

    At core, however, the real issue is that if the First Amendment means anything, then viewpoints cannot be treated as a protected class. Ideas have to sink or swim in the marketplace on their own without government subsidization. 

    The abstract is below: 

                May banks engage in viewpoint discrimination? That is, may a bank deny service to an anti-vaxxer or an antifa or an election denier? Concerns about viewpoint discrimination in banking have been a conservative cause for a decade, with “viewpoint debanking,” seen as an extension of progressive cancel culture. Yet there is scant evidence that banks, even in the face of regulatory pressure, have engaged in viewpoint discrimination, aside from a few cases related to the January 6 insurrection. To the contrary, bank account closings can often be explained by viewpoint-neutral concerns over credit and anti-money-laundering compliance risk. 

                Despite the dearth of evidence of an actual viewpoint discrimination problem, scholars on the right and left have argued for treating banks as either common carriers or public utilities, both of which are subject to a general duty of non-discrimination, not just in regard to personal status, such as race, sex, or religion, but also regarding customers’ lines of business, and political or religious views. Banks, however, have never historically been regulated as common carriers or public utilities and with good reason: they do not raise the concerns about monopoly power that animate common carrier and public utility regulation, and the very nature of the service they provide requires discrimination based on individualized counterparty credit and compliance risk. Moreover, prohibiting viewpoint discrimination forces a cross-subsidy among bank customers in which low-risk customers are forced to subsidize the high-risk ones, which just transposes the problem: viewpoint subsidization is itself viewpoint discrimination. 

                Allowing viewpoint discrimination means that all viewpoints are subject to market discipline: if a customer’s viewpoint imposes risk on a bank, then the bank should be allowed to price against it, while if a bank discriminates against a viewpoint solely from animus—that is, an expression of the bank’s own viewpoint—then market will price against the bank, which will lose market share to non-discriminating banks. Banks should be free to reject customers for any reason unrelated to personal status, including viewpoint. Doing so is a business decision that is best left to private actors and checked by the marketplace, not government.

     

  • Fix Credit Card Competition with Market Improvements, Not Rate Caps

    Posted by

    Adam Levitin

    There’s a problem with competition in the credit card market. But rate regulation, like a 10% usury cap, is not the way to fix it. The problems in the credit card market are informational: consumers cannot see precise interest rates when they apply for cards, so there isn’t competitive pressure on rates. Instead, card issuers compete based on opaque, but much more salient, rewards programs.

    Since when is rate regulation the way we go about fixing informational problems? It’s the wrong tool for the job. Slapping on a 10% rate cap is a lot sexier and simpler than the sort of under-the-hood regulatory craftsmanship required to fix informational problems, but that doesn’t mean it’s the right solution. There are better ways to fix the consumer credit card market than a blunt tool like a rate cap that is likely to have a lot of unintended consequences.

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  • Bonfire at the Repo Lot

    Posted by

    Melissa Jacoby

     

    You hear a bump in the night. Is it Edgar Allan Poe’s Telltale Heart? Or someone hauling away your car? If you have missed some car payments, it probably is the latter. And while most of your creditors aren’t allowed to lurk in the dark to snatch your car, your car lender can.

    Recorded with steaks sizzling on a fire pit at a car repossession lot, a recent podcast from the Wall Street Journal discusses the physical risks and tight margins associated with the repo industry. Without mentioning the law that shapes this industry, the podcast shows how Article 9 of the Uniform Commercial Code, a law passed by all state legislatures and yet virtually unknown, is far from a niche subject. That’s also an implication, to say the least, from the downfall of FirstBrands, now in bankruptcy.

    Now is a good time for lawyers to ask their law schools if they regularly offer courses that include a hefty dose of UCC Article 9.

     

  • Unfair and Abusive Automatic CD Rollovers

    Posted by

    Adam Levitin

    Earlier this month the FTC finalized its “Click-to-Cancel” Rule to make it easier for consumers to get out of recurring subscriptions and memberships. The rule was promulgated under the FTC’s power to prohibit unfair and deceptive acts and practices in commerce, but the FTC’s jurisdiction under that power does not extend to banks, and banks have an auto-renew product that is in some instances much more problematic than automatic subscription renewals. What I’m talking about are automatic CD rollovers, which are sometimes done in an unfair and abusive way to rollover unsuspecting depositors into way-below-market-rate CD terms.

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  • The Hydraulic Effect of Loper Bright Enterprises in Consumer Finance: More Regulation By Enforcement

    Posted by

    Adam Levitin

    This term's Supreme Court decisions have completely remade administrative law, both by eliminating Chevron deference and by effectively eliminating the Administrative Procedures Act's statute of limitations. In Loper Bright Enterprises v. Raimondo, the Court held that as a constitutional matter federal courts could not give deference to federal agencies' interpretations of ambiguous statutes. And then the Court opened the door to APA challenges to virtually every existing federal regulation, no matter how old, with Corner Post Inc. v. Board of Governors of the Federal Reserve System, a statutory ruling that the APA's six-year statute of limitations runs from the date a plaintiff is allegedly injured by the regulation, rather than from the date of the regulation's finalization. That means that a business that is incorporated tomorrow has at least six years to challenge any regulation that affects it, and maybe more depending on when it is affected. In other words even New Deal or Progressive era regulations could be challenged tomorrow and there would be no deference to the agency's long-standing interpretation of the statute authorizing the regulations. I pity my colleagues who teach admin law–their course lost at least a credit hour's worth of material. Maybe they'll decide to take up commercial law….

    These decisions are, taken together, a major rolling back of the administrative state. But these decisions will affect different agencies differently, and the Court's rulings may have some unintended consequences. To wit, many federal agencies have both rulemaking and enforcement powers. In some instances, enforcement is dependent on rulemaking, as the agency lacks a general statutory prohibition to enforce, but can only enforce its particular rules. The EPA is (I think) an example of this type of agency. It doesn't have a general statutory prohibition of "don't pollute." OSHA and the FDA and NLRB and Dept. of Commerce. For agencies in this category, Loper Bright Enterprises and Corner Post clip not only the agencies' rulemaking power, but also their enforcement power, because they will have to defend the rules they are enforcing. 

    In other instances, however, the enforcement powers are independent of rulemaking, as there is a broad statutory prohibition that the agency can enforce without rules. This is where federal financial regulators sit.  In these cases, Loper Bright Enterprises and Corner Post will have a hydraulic effect:  agencies are going to do what they're going to do, so if they can't do it through rulemaking, they'll do it through enforcement and supervision. In other words, what the Supreme Court did was to supercharge regulation by enforcement in the financial regulatory space.

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  • SCOTUS National Bank Act Preemption Ruling

    Posted by

    Adam Levitin

    The Supreme Court issued an important ruling about the National Bank Act's preemption standard today that precludes broad, categorical preemption of state consumer financial laws, but instead requires a fact-specific analysis.This decision opens the way to more expansive state consumer financial regulation that affects banks.

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  • CFPB v. CFSA Analysis

    Posted by

    Adam Levitin

    The Supreme Court upheld the constitutionality of the CFPB's funding mechanism in its 7-2 decision in CFPB v. CFSA. Although I can't say I love the opinion's reasoning, the Court got to the right result, as Patricia McCoy and I urged in an amicus brief. The ruling does have some interesting omissions and politics, but its ultimately impact will be the normalization of the CFPB, something that's good for consumers and businesses alike.

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  • The New Usury: The Ability-to-Repay Revolution in Consumer Finance

    Posted by

    Adam Levitin

    I have a new article out in the George Washington Law Review, entitled The New Usury: The Ability-to-Repay Revolution in Consumer Finance. The abstract is below:

    American consumer credit regulation is in the midst of a doctrinal revolution. Usury laws, for centuries the mainstay of consumer credit regulation, have been repealed, preempted, or otherwise undermined. At the same time, changes in the structure of the consumer credit marketplace have weakened the traditional alignment of lender and borrower interests. As a result, lenders cannot be relied upon to avoid making excessively risky loans out of their own self-interest.

    Two new doctrinal approaches have emerged piecemeal to fill the regulatory gap created by the erosion of usury laws and lenders’ self-interested restraint: a revived unconscionability doctrine and ability-to-repay requirements. Some courts have held loan contracts unconscionable based on excessive price terms, even if the loan does not violate the applicable usury law. Separately, for many types of credit products, lenders are now required to evaluate the borrower’s repayment capacity and to lend only within such capacity. The nature of these ability-to-repay requirements varies considerably, however, by product and jurisdiction. This Article terms these doctrinal developments collectively as the “New Usury.”

    The New Usury represents a shift from traditional usury law’s bright-line rules to fuzzier standards like unconscionability and ability-to-repay. Although there are benefits to this approach, it has developed in a fragmented and haphazard manner. Drawing on the lessons from the New Usury, this Article calls for a more comprehensive and coherent approach to consumer credit price regulation through a federal ability-to-repay requirement for all consumer credit products coupled with product-specific regulatory safe harbors, a combination that offers the best balance of functional consumer protection and business certainty.

     

  • The Consumer Debt Default Judgments Act

    Posted by

    Melissa Jacoby

    MapConsumer debt has been a difficult topic for uniform state law movements, but here's one more attempt recently approved by the Uniform Law Commission and the American Bar Association, and introduced in Colorado last week.  You can access the materials here. Meanwhile, here is ULC's summary:

    Numerous studies report that default judgments are entered in more than half of all debt collection actions. The purpose of this Act is to provide consumer debtors and courts with the information necessary to evaluate debt collection actions. The Act provides consumer debtors with access to information needed to understand claims being asserted against them and identify available defenses; advises consumers of the adverse effects of failing to raise defenses or seek the voluntary settlement of claims; and makes consumers aware of assistance that may be available from legal aid organizations. The Act also seeks to provide a uniform framework in which courts can fairly, efficiently, and promptly evaluate the merits of requests for default judgments while balancing the interests of all parties and the courts.

    Would welcome Credit Slips posters and readers chiming in on this act in the comments, especially if you were involved in the drafting process and/or if will be weighing in on this act with their state legislatures.

    And for previous recent coverage of other uniform acts being urged on state legislatures, see here and here.

  • The CFPB’s Proposed Overdraft Regulation

    Posted by

    Adam Levitin

    The CFPB proposed overdraft regulation came out today. It's a big deal. If it becomes effective, it will dramatically reduce overdraft fees at large banks.

    Currently fees for “courtesy” overdraft—where the financial institution is not contractually obligated to allow the overdraft, as opposed to contractual overdraft lines of credit—are not “finance charges,” so the overdraft is not “credit” for purposes of the Truth in Lending Act/Regulation Z because credit requires either a finance charge or a requirement of repayment in over four installments. That means that TILA disclosure requirements do not currently apply to any courtesy overdrafts. 

    The CFPB is proposing changing this for overdrafts that don't fall within a dollar amount safe harbor.

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