The plot to kill consumer protection

Big banks like Wells Fargo look forward to the day they can operate once again without the prying eyes of government regulators.

Big banks like Wells Fargo look forward to the day they can operate once again without the prying eyes of government regulators. Associated Press

Last month, former Equifax CEO Richard Smith plodded to Washington, D.C. for his congressional perp walk.

It wasn’t as satisfying as Cersei Lannister’s naked stroll through King’s Landing, but then Game of Thrones always has been more concerned with corruption than Congress has.

Smith testified about Equifax’s failure to apply a software patch, allowing hackers to make off with the credit information of 40 percent of the U.S. population. Members of Congress also questioned him about Equifax’s attempts to force anyone inquiring about their account to submit to arbitration, making them ineligible for future class-action suits.

Wells Fargo CEO Tim Sloan was there too, picking up where his predecessor John Stumpf left off last year, when he confessed his company opened 2.1 million unauthorized banking and credit card accounts. Stumpf claimed that was the limit of the bank’s wrongdoing.

It wasn’t, and he knew it.

Since then the number of crooked accounts has grown to 3.5 million, extending back more than a decade. Wells Fargo also made unauthorized auto insurance charges, overcharged small businesses for processing, changed mortgage terms without notice, and withheld car loan refunds, among other schemes.

Yet Wells Fargo protected itself with what experts describe as the most restrictive arbitration clause in the banking industry. Such clauses are a staple of consumer contracts for everything from phone service to financial advice.

Should a dispute arise, it forces consumers out of the court system and into a shadowy realm where appeals aren’t allowed, corporations historically wield a huge advantage—when not outright rigging the system—and details of misconduct are kept private.

It’s essentially a divide-and-conquer strategy, making customers challenge the bank’s malfeasance individually, instead of pooling their efforts to contest as one. In other words, if Wells Fargo sawed a woman in half, each of her body’s cells would have to bring its own case.

It’s allowed the company to continue to evade accountability, even after the Consumer Finance Protection Bureau (CFPB) fined it $185 million. Most cases haven’t made it to court, diverted by fine print into private arbitration hearings.

In July, the CFPB tried to even the odds, ruling that arbitration clauses can’t bar consumers from joining class-action suits. The GOP Congress leaped to Wells Fargo’s relief, plotting to repeal the rule. Then Equifax imploded, threatening the rescue mission—at least temporarily—with lousy optics.

After losing the financial data of 40 percent of the U.S. population, Equifax CEO Richard F. Smith tried to use fine print to keep people from suing.

After losing the financial data of 40 percent of the U.S. population, Equifax CEO Richard F. Smith tried to use fine print to keep people from suing. Carolyn Kaster, Associated Press

This was merely the latest Republican attack in its ongoing war with the CFPB, which formed in 2008 after the U.S. economy tanked under an onslaught of fraud and avarice. With consumer protection increasingly whittled away by keen lobbyists and cunning corporate lawyers, the idea was to build an agency whose sole mission was protecting consumers.

The CFPB scrutinizes everything from financial products to college loans to rent-to-own operations. It’s also charged with protecting people from deception and abuse, while informing them of their rights.

At times, it seems to be the only federal agency interested in stopping fraud. Though it has no criminal policing powers, it fined Bank of America and Citibank a collective $1.4 billion for deceptive credit card practices. It tuned up Transunion and Equifax with a $22 million fine for luring customers into revolving payments for credit monitoring. And it hit Corinthian College for $713 million for predatory student loans that funded near-worthless degrees.

During its brief life, the bureau has established itself as the only Washington agency more responsive to consumers than to lobbyists. Since 2011, it’s handled 1.2 million complaints, returning over $12 billion to consumers.

Minnesota Attorney General Lori Swanson calls the agency “vitally important to American consumers.... They mount large national enforcement actions that bring in millions of dollars on behalf of the public and return people’s rightful money to them when companies have committed fraud.”

In Washington, this only makes them dangerous.

The protection racket

In June, the House GOP passed the Financial Choice Act. It rolls back many of the provisions enacted to prevent the reckless behavior that provoked the 2008 financial crisis.

The “choice,” in this case, is largely for the benefit of big banks. It allows them to once again overextend their assets and engage in speculative trading. “Choice” also grants Congress (read: lobbyists) the power to oversee financial regulators, and dismantle rules for orderly bankruptcy proceedings should an institution go bust.

It’s essentially a return to the Wild West, all the lessons of the last crisis now dust in the wind. The legislation reads like a mash note to bankers, while systematically corroding consumer protection.

This hasn’t stopped Minnesota’s Republicans from desperately spinning it as a bonanza for the little guy. 

“I want to protect folks at home from being put on the hook for Wall Street’s bad behavior,” wrote Rep. Jason Lewis (R-Woodbury) in a June Facebook post. “Tax dollars have no business propping up massive financial institutions that are ‘too big’—or too well-connected—to fail.”

University of Minnesota law professor Prentiss Cox has a more pointed take: “This bill is plainly about protecting the [finance] industry.”

Congressman Jason Lewis voted for a bill that’s “plainly about protecting the [finance] industry.”

Congressman Jason Lewis voted for a bill that’s “plainly about protecting the [finance] industry.” Jeff Wheeler, Star Tribune

While Trump and Republicans imply that banks have struggled under laws enacted after the 2008 crash, don’t tell their bottom lines. They show record profits three of the last four years. Despite claims of tight credit, the total number of commercial and industrial loans reached pre-crash levels three years ago.

Yet Minnesota’s congressmen still pretend the sky is falling, hoping to cast themselves as the saviors of small banks.

“There was a lot of overreach—while well-intended—which has hurt a lot of community banks, credit unions, and small institutions, which provide support and the vast majority of loans go from those institutions to small businesses,” argues Rep. Erik Paulsen (R-Eden Prairie) in a video he created. “It’s constricted capital and hurt our economy to the point where we’ve literally lost one community bank each and every single day.”

Rep. Tom Emmer (R-Delano) doubled down down on that thesis: “Through the passage of the Financial CHOICE Act, we begin to undo the redundant and excessive bureaucratic regulations that are strangling our community banks and credit unions.”

Both trade in rhetoric unhinged to reality.

From 2008 to 2017, the number of commercial banks (community and otherwise) did fall from 7,175 to 4,982 last quarter, though the number of mid-size and large community banks has increased the last three decades.

For smaller institutions, consolidation is the real culprit. More than two-thirds of those closing or failing are acquired by other community banks, merely resulting in bigger entities. And they’re doing quite well, thank you. Last year, they posted a 10 percent increase in revenues, just a few percentage points behind their bigger peers.

The “Choice” Act also allows financial advisers to offer misleading retirement advice. Instead of forcing them to act in a customer’s best interest, it lets them funnel investments that may bring lower returns to the client but higher compensation to the adviser.

If Paulsen, Lewis, and Emmer have their way, the CFPB would lose authority to avenge the abusive practices of those hawking debt, mortgage, or foreclosure relief, and credit cards, and to police fraud among student loan lenders and debt collectors.

The agency would go from public defender to hapless security guard.

“The rhetoric is absurd here,” says Cox, a onetime CFPB board member. “The idea that this is somehow about financial choice is just totally bogus.... What you need to ask them is to name a specific enforcement action that was a misuse of their powers. You’ll get nothing.”

(We wanted to ask, but Paulsen, Lewis, and Emmer all failed to respond to repeated interview requests.)

The Choice Act also moves the agency’s funding from the Federal Reserve to congressional control, a structure originally avoided for fear lobbyists would bring the CFPB to heel. 

In April, more than 80 groups—including the Consumers Union, the NAACP, and the National Fair Housing Alliance—registered their opposition in a letter. Nineteen attorneys general, Swanson among them, wrote their own missive, claiming “it’s no surprise Wall Street wants to chain [the CFPB] up so it can’t do its work.”

“We created an agency out of a crisis, and it’s doing what it’s supposed to do,” Cox says. “It’s attacking an industry that had been under-regulated and essentially out of control as to consumer protection issues, and it’s done that very effectively. The result is a counterattack by the industry and those that are supporting them.”

The Fraudbusters

If you feel you’ve been defrauded, and you want to see if others have fallen prey to the same company, the CFPB has a sortable online database of complaints. The Choice Act will make it disappear. Even a move to list only verified complaints was quashed by the GOP, allowing offending companies to operate under cover.

The entire law seems designed to thwart those in need, like John Lukach.

He’s a graduate of Nazareth College in Rochester who received his master’s in social work from the University of Minnesota. His education was funded in part by loans from Navient.

Lukach worked as an adoption social worker, making $38,000 annually. But he soon discovered that student loans and rent were chewing up 80 percent of his income. He hoped to restructure his payments, but calls to Navient found him no respite.

“I’d call them repeatedly, just hoping the next person to pick up the phone would be, ‘Oh yeah, I have a great option for you,’” recalls Lukach. “But that didn’t happen. I’d get a person, but they would essentially just shut me down: ‘That’s just how it is.’”

There are programs that would cap his payments relative to his earnings. Navient reps just wouldn’t tell him—or anybody else, according to the CFPB—about them as part of a deceitful financial strategy.

Jack Remondi, CEO of Navient, appeared to admit as much in 2013: “It’s very expensive work, for example, to enroll a borrower in something like an income-based repayment program... [and] we don’t actually get paid for outperformance in that side of the equation.”

Lukach has seen the underside of that equation. “I finally got one person that said we can verify your income and see what’s available. Three months later the letter to verify my income came,” he says.

“At this point I was behind on payments and just hitting a dead end. So in December of 2015 I filed a complaint with the CFPB. Within two days of submitting that complaint, I received a call from what [Navient] called ‘a consumer ambassador’ and they basically said this department exists because of the CFPB.”

In January, the CFPB sued Navient, the country’s largest servicer of student loan debt, for abusive practices. The company was charged with deceiving and stonewalling borrowers, misleading them about repayment options, and steering them into options that pushed them further in debt.

Navient, which services one out of every four student loans, is accused of “systematically and illegally failing borrowers,” and creating “obstacles to repayment by providing bad information, processing payments incorrectly, and failing to act when borrowers complained.”

The company’s response reveals its true colors, arguing that it’s not contractually obligated to “act in the interest of the consumer.” Equally revealing: Trump’s Department of Education is refusing to cooperate with CFPB’s investigation.

“Unfortunately, I haven’t had a happy ending yet,” Lukach says. “I called them back several times and they ended up closing my case saying I never responded. I enrolled at community college, literally just to defer the loans because an entire semester part-time was cheaper than paying the loans.”

After finishing his master’s in June, Lukach’s back in the same boat, trying to manage his payments. The CFPB says he has options, even if Navient reps swear that’s a lie. He now knows better.

“Having a federal office behind that is so important. To have a company respond in two days when I’ve been trying for months to get anyone to listen to my story, that’s incredible. No wonder people are trying to get rid of it.”

And the bandits scheme

Navient’s issues metastasized because students signed contracts with a mandatory arbitration clause, forcing victims to fight back individually, rather than as a group. 

“The right to have your dispute resolved before a jury of your peers is as American as it gets; it’s a fundamental core American democratic principle,” says Attorney General Swanson. “To think that millions upon millions of consumers are forfeiting their fundamental right to have their day in court because of fine print in a contract....”

Congressman Tom Emmer claims to be rescuing small banks, despite all evidence to the contrary.

Congressman Tom Emmer claims to be rescuing small banks, despite all evidence to the contrary. Glen Stubbe, Star Tribune

Just ask Gretchen Carlson. The Anoka native had an arbitration clause in her contract with Fox News, preventing her from suing for sexual harassment.

“The arbitration process—often argued to be a quicker and cheaper method of dispute resolution for employees—instead has silenced millions of women who otherwise may have come forward if they knew they were not alone,” wrote Carlson in Time Magazine.

It’s not just sexual harassment. In 2012, California Naval Reservist Kevin Ziober says he lost his $180,000-a-year job after telling his bosses he was about to be deployed to Afghanistan, a violation of federal job protections for military members. The company claims he was fired for unrelated reasons, but Ziober can’t contest the matter in court. He too signed an employment contract forcing him into arbitration.

Though arbitration may sound preferable to the expense and anguish of court, it hands a major advantage to companies. The costs savings aren’t much: Arbitrators usually charge $300-$400 per hour minimum, and some bill into the thousands of dollars. But arbitration clauses typically bar the consumer from joining class-action suits. The strategy has emboldened fraud on a massive scale.

At one point, nearly every major bank was rigging accounts to generate overdraft fees. The scheme relied on the knowledge that customers wouldn’t spend hours in arbitration to recover $100 of improper fees.

Sen. Lindsey Graham (R-South Carolina) told the Wall Street Journal that such clauses are “a windfall for the companies, in terms of how you settle their cheating.

“You’ve had banks and credit-card companies nickel-and-diming consumers, and one of the things that makes them think twice is the idea of a massive lawsuit. Nobody is going to get a lawyer over a $10 overcharge, but when you overcharge millions of people $10, the bank or the credit-card company makes out like a bandit” in arbitration.

Even when someone does challenge them, arbitration rulings are usually private, with no appeals and little documentation. Like a tree falling in a vast forest, Wells Fargo’s customers didn’t hear the millions of other victims, and the press remained none the wiser.

The day of reckoning

Three years ago, Swanson went after Globe University and the Minnesota School of Business (MSB), which used arbitration clauses to avoid the reckoning when students discovered their $70,000 criminal justice degrees were unaccredited and useless.

In January, both schools were ordered to make restitution to 1,200 students. By July, the Minnesota Supreme Court ruled that the schools issued loans without proper licenses at illegally high interest rates. Swanson intends to seek forgiveness and/or refunds for all loans made after January 1, 2009.

“The schools had an arbitration clause, and it says all [legal] proceedings have to be instituted within 12 months of the date [they] lie to you, basically,” Swanson says. “Many of these students didn’t even know they had a claim until after 12 months go by, because it was later in their education they realized the program isn’t even accredited.”

In 2009, Swanson also brought a case against National Arbitration Forum, then the world’s biggest arbitration company, adjudicating over 200,000 cases annually. The St. Louis Park company portrayed itself as fair and independent. But it was actually owned by a private equity company that ran a bunch of collection companies, which sent National 60 percent of its claims.

This left National hardly impartial, with a devastating conflict of interest. Swanson sued for fraud. National closed.

“We heard from arbitrators that were blackballed and essentially told, ‘You’re not going to be an arbitrator anymore because you’re ruling for the consumer,’” she says. “That’s one of the problems with arbitration. The court system is paid by the taxpayers. Judges are neutral and their funding comes from the public.”

“I followed the money”

This summer, President Trump reversed a ban on arbitration clauses for nursing home residents. In an industry notorious for impropriety, it was a green light for abuse.

“I once talked to a CEO who had been in board meetings where they said, ‘We can’t do this because an attorney general might come after us,’ or ‘We can’t do this because somebody might file a lawsuit against us,’” says Swanson. “He said he’s never been in a boardroom where they said, ‘We can’t do this because someone might file an arbitration claim.’”

Minnesota Attorney General Lori Swanson sued over $10,000 criminal justice degrees that were worthless.

Minnesota Attorney General Lori Swanson sued over $10,000 criminal justice degrees that were worthless. Glen Stubbe, Star Tribune

Trump’s change is bad news for Plymouth lawyer Mark Kosieradzki, who’s handled several cases of nursing home neglect. One involved two eighty-something victims who were raped by employees. Another involved an employee thrice suspended for suspicion of sexual abuse.

Then there was the man suffering from dementia who became dehydrated because he’d forgotten how to drink. He went into a coma within two weeks of check-in, ultimately dying.

Kosieradzki handled the wrongful death case through arbitration. Three arbitrators collected $60,750. After expert witness and attorney’s fees, the man’s daughter received less than $20,000.

Kosieradzki fell upon the specialty somewhat by accident when a client arrived with a nursing home claim.

“Nobody was handling them,” he explains. “‘They’re old people.’ ‘They’re going to die anyway’ and ‘They’re going to live maybe three years.’ I’m thinking, ‘I don’t like the way that sounds. Someone’s old, so no harm, no foul? I don’t like that.’”

As he dug in, he concluded the main issues weren’t so much malicious behavior—though that existed. Rather, he found that homes were understaffed and underfunded, skating by on the lack of accountability afforded by arbitration.

“So I started doing what reporters have been doing since Watergate. I followed the money. What I realized is money gets siphoned out of these nursing homes legally into all of these other places—subcorporations and LLCs. Shell companies.

“These big real estate investment trusts and these major corporations are buying up nursing homes and they’re cutting costs like crazy. So they’re asking people to work harder for less money, longer hours, and fewer benefits. The main reason companies want to do these arbitrations is because they can control the risk. Even though it costs them more to get there, the costs also limit plaintiffs bringing claims.”

Don’t get any ideas

It often feels like the main purpose of the Financial Choice Act is to slap down increasingly frustrated consumers and put us back in our place—angry but defeated. There’s no other explanation for a clause prohibiting the CFPB from informing consumers of their rights.

The act also halts the agency from looking into predatory lending like payday loans, prepaid credit cards, and auto-title loans, or making rules governing such lenders. (That sound you hear is a thousand Nigerian princes clapping at once.)

The GOP’s move is designed to sabotage the new CFPB rule on payday lenders, which outnumber McDonald’s in this country. Most of their profits come from forcing borrowers to roll their debt over into new loans (with additional fees). So the CFPB placed restrictions on how often and how much lenders can lend beyond that first loan. It also limits how often lenders can attempt to pull money from a customer’s account when there are insufficient funds, saddling the consumer with expensive overdraft fees.

The agency found that nearly 70 percent of customers had to take out a second loan to cover the first. Twenty percent wind up carrying 10 or more loans, sentencing them to a treadmill of debt with little hope of righting their finances.

You don’t need to tell Brian Fullman about it. He works for ISAIAH MN, a 100-congregation coalition that works for biblically based social justice on issues like affordable housing and immigration. Fullman wound up with a payday loan after his wife flipped her car, breaking her neck.

“She broke three different vertebrae that protect her spine,” Fullman recalls. It left her unable to work, yet their mortgage required two salaries. They eked out the first few months until Fullman found himself $300 short on a payment.

When Richard Cordray steps down, Trump can merely sabotage the agency, like he’s done with the EPA.

When Richard Cordray steps down, Trump can merely sabotage the agency, like he’s done with the EPA. Jacquelyn Martin, Associated Press

“When I got the money I felt, ‘I’m being responsible. I’m taking care of stuff.’ But by that third month you feel like a complete fool for even dealing with them,” he says. “They become very shrewd and very arrogant retrieving their money and accrued interest, such that you really feel like you’ve been prostituted or swindled... and you blame yourself. ‘Why did I sign it? It’s my fault I’m in this position.’”

Fullman couldn’t afford to pay off the balance. So when he went to pay the interest a fourth time, his payday lender told him: “CFPB has put rules and regulations that we can’t continue to keep drawing interest and interest. You have to close that out or resolve it.”

To subvert that rule, they offered to open another loan. Otherwise they’d debit the full amount from his bank account, a serious threat to those living hand-to-mouth.

“They’d say, ‘Just give us the interest. We’ll do the paperwork like you paid off your loan, and then we’ll reopen it again,’” Fullman recalls. “If you’re desperate and don’t have the money, the last thing you want is your bank account to close because I get automatic withdrawal of a few of my bills.”

He eventually found his way out when he discovered Exodus Lending, a small, community lender formed when payday lenders moved into Minneapolis’ Longfellow neighborhood near Holy Trinity Lutheran Church.

“People in the church started opening up and sharing their own stories and their own experiences. Then they thought, ‘We need to get rid of this,’” says Exodus Executive Director Sara Nelson-Pallmeyer. “But they didn’t want to limit themselves to their block. They really thought this is something that affected people throughout Minnesota.”

The group went DIY, capitalism-style, starting a “competing” business with better terms.

“In 2015, we started paying off people’s loans and then asking them to pay us back, no interest, no fees,” Nelson-Pallmeyer says. Two years later, “We have helped 118 people and 53 paid back in full.”

They’ve been so successful, payday lenders want nothing to do with their clients.

“Now a lot of these poverty-profiteering places won’t accept Exodus payments anymore,” says Fullman, who paid off his loan a few months ago. “If they know you’re coming from Exodus, they don’t want your money. Isn’t that something?”

Even as the payday operators take heat, commercial banks are still getting wet. Fullman has been protesting commercial lenders, calling for them to divest from these companies at shareholder meetings. Wells Fargo and US Bank are big investors in companies like Cash America, Dollar Financial, and First Cash Financial, extending more than $1 billion to them.

“I’ve had an account with Wells Fargo for over 10 years and I can’t get a $300 loan from them?” he asks. “But you can give it to these people, so they can give it to me? It’s sad.”

Total Eclipse of the Consumer

For the moment, the Financial Choice Act awaits action in the Senate, where the GOP is discovering that governing is much more difficult than screaming from the sidelines. Its various health plans, designed to throw tens of millions of people out of their coverage, tumbled in flames.

Now Republicans are pitching massive tax cuts that would send 61 percent of the savings to the wealthiest 1 percent. With elections a year away, their willingness to leap directly into bankers’ pockets may have waned.

To kill the CFPB, the better option might be to run out the clock. The term of Director Richard Cordray, an Obama appointee, runs out next year. Trump could merely sabotage the agency by replacing him with a corporate yes-man, much the way he subverted the EPA by appointing an altar boy of Big Oil. Given the chaos already sown in Trump’s brief reign, he’s sure to try.

If that’s all we’re left with, at least consumers have the memory of a bureaucracy that worked for the people. For a brief moment, it could be said the American government was actually working on behalf of America.