Tag Archives: attorney general

Consumer Protection, Going Forward

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photo by Lawrence Jackson

Warren, Obama and Cordray

The New York Times quoted me in Consumer Protection Bureau Chief Braces for a Reckoning. It opens,

Mild-mannered, lawyerly and with a genius for trivia, Richard Cordray is not the sort of guy you picture at the center of Washington’s bitter partisan wars over regulation and consumer safeguards.

But there he is, a 57-year-old Buckeye who friends say prefers his hometown diner to a fancy political reception, testifying in hearing after hearing on Capitol Hill about the agency he leads, the Consumer Financial Protection Bureau. Republicans would like to do away with it — and with him, arguing that the agency should be led by a commission rather than one person.

And with a Republican sweep of Congress and the White House, they may get some or all of what they wish.

Mr. Cordray, a reluctant Washingtonian who has commuted here for six years from Grove City, Ohio, where his wife and twin children live, is the first director of the consumer watchdog agency, which was created in 2010 after Wall Street’s meltdown. By aggressively deploying his small army of workers — he has 1,600 of them — Mr. Cordray has turned the fledgling agency into one of Washington’s most powerful and pugnacious regulators.

The bureau has overhauled mortgage lending rules, reined in abusive debt collectors, prosecuted hundreds of companies and extracted nearly $12 billion from businesses in the form of canceled debts and consumer refunds. In September, it exposed the extent of Wells Fargo’s creation of two million fraudulent customer accounts, igniting a scandal that provoked widespread outrage and toppled the company’s chief executive.

And, according to Mr. Cordray, he and his team have barely scratched the surface of combating consumer abuse.

“We overcame momentous challenges — just building an agency from scratch, let alone one that deals with such a large sector of the economy,” Mr. Cordray said in an interview at his agency’s office here. “I’m satisfied with the progress we have made, but I’m not satisfied in the sense that there’s a lot more progress to be made. There’s still a lot to be done.”

But his future and the agency’s are uncertain. Democrats in Ohio are encouraging Mr. Cordray to run for governor in 2018, which would require him to quit his job in Washington fairly soon, rather than when his term ends in mid-2018. Champions of the agency are imploring him to stay, arguing that if he leaves, the agency is likely to be defanged, its powers to help consumers sapped.

Opponents of the bureau just won a big legal victory: The United States Court of Appeals for the District of Columbia Circuit said last month that the structure of the Consumer Financial Protection Bureau was unconstitutional, and that the president should have the power to fire its director at will.

The agency is challenging the decision — which was made in a lawsuit brought by the mortgage lender PHH Corporation that contests the consumer bureau’s authority to fine it — and that has temporarily stopped the decision from taking effect. But the ruling has kept alive questions about whether too much power is concentrated in Mr. Cordray’s job, and whether the agency should be dismantled or restructured.

Mr. Cordray, who also battled on behalf of consumers in his previous jobs as Ohio’s attorney general and, before that, its treasurer, is praised in some circles as enormously effective, wielding the bureau’s power to restructure some industries and terrify others.

The bureau has “helped save countless people across the country from abusive financial practices,” said Hilary O. Shelton, the N.A.A.C.P.’s senior vice president for advocacy and policy.

Even the regulator’s frequent foes — including Alan S. Kaplinsky, a partner at Ballard Spahr in Philadelphia, who says the agency often overreaches — acknowledge its impact.

“I’ve been practicing law in this area for well over 40 years, and there’s nothing that compares to it,” Mr. Kaplinsky said. “Every company in the consumer financial services market has felt the effects.”

The Consumer Financial Protection Bureau has nearly replaced the Better Business Bureau as the first stop for dissatisfied customers seeking redress. It has handled more than a million complaints, many of which it has helped resolve.

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The housing crisis dominated the bureau’s early days. When Congress created the new overseer, it also dictated its first priority: making mortgages safer. The deadline was tight. If the bureau did not introduce new rules within 18 months, a congressionally mandated set of lending guidelines would automatically take effect.

The bureau made it with one day to spare.

It banned some practices that had fueled the crisis, like home loans with low teaser rates or no documentation of the borrower’s income, and steered lenders toward “qualified” loans with a stricter set of safeguards, including checks to ensure that customers could afford to repay what they borrowed.

After much grumbling — and many dire forecasts that the new rules would limit credit and harm consumers — mortgage lenders adjusted. They made nearly 3.7 million loans last year for home purchases, the highest number since 2007, according to government data.

“It seems like the financial services industry has figured out how to adapt to this new regulatory regime,” said David Reiss, a professor at Brooklyn Law School who studied the effects of the bureau’s rule-making. “We’ve moved from the fox-in-the-henhouse market in the early 2000s, where you could get away with nearly anything, to this new model, where someone is looking over your shoulder.”

Tough Edge for Financial Services

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Maria T. Vullo %>

Maria Vullo

 

 

 

 

 

 

 

Law360 quoted me in Cuomo’s DFS Nominee Likely To Keep Tough Edge (behind a paywall). It reads, in part,

Although New York Gov. Andrew Cuomo turned to a longtime BigLaw attorney to lead the New York State Department of Financial Services, observers say the agency is likely to continue taking the aggressive regulatory and enforcement stance that has become its calling card.

The governor tapped Paul Weiss Rifkind Wharton & Garrison LLP’s Maria T. Vullo to lead the DFS, completing a monthslong search to replace former New York Superintendent of Financial Services Benjamin M. Lawsky. In turning to Vullo, Cuomo brings on a litigator and former prosecutor with 25 years of experience in the law, including two decades of representing banks.

But given the reputation that the DFS has built up since it burst onto the scene with its $340 million sanctions violation settlement with the U.K.’s Standard Chartered PLC in 2012, advocates and observers believe that if confirmed, Vullo will continue to push for tough enforcement and big penalties against the banks, insurers and other financial firms that the DFS oversees.

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However, because Vullo comes from a BigLaw background with extensive experience representing financial firms, some have raised concerns that the agency will become less aggressive in enforcing New York state’s financial regulations.But observers who spoke to Law360 said her noncorporate experience gives a clearer picture of how she might run the DFS.

Vullo has been an advocate for women in the legal profession and represented women who sued for damages after being raped during the war in Bosnia between 1992 and 1995, helping secure a $745 million verdict in that case.

And in her work for Cuomo during his tenure as New York’s attorney general, Vullo oversaw a staff of around 200 that worked in the office’s investor protection, antitrust, real estate finance, consumer fraud and Internet bureaus.

In that position, she took action against Ezra Merkin and Ivy Asset Management for their roles in defrauding investors in Bernard L. Madoff’s $65 billion Ponzi scheme, as well as launching an investigation and action against Ernst & Young for investor losses in Lehman Brothers Holdings Inc.’s 2008 bankruptcy.

Those past experiences should allay any fears that Wall Street’s critics might have, said David Reiss, a professor at Brooklyn Law School.

“I thought that Governor Cuomo would seek an aggressive replacement for Lawsky,” Reiss said. “Vullo fits the bill.”

To that point, financial reform and other advocates said in interviews that they knew little about her, but were encouraged by what they did know.

“What we’re hoping is that the reputation that the department has established will continue through the new leadership,” said Andy Morrison of the New Economy Project, a New York-based advocacy group.

Indeed, Cuomo has an interest in maintaining an aggressive DFS.

The billions of dollars in fines it collected from banks have gone to fund state infrastructure projects, including the construction of a new Tappan Zee Bridge across the Hudson River north of New York City.

And that get-tough approach has also been a way to attract voters.

“My sense is he benefits from the halo effects of an aggressive DFS,” Reiss said.

Bank Settlements and the Arc of Justice

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Ron Cogswell

MLK Memorial in DC

Martin Luther King, Jr. said that the “arc of the moral universe is long, but it bends towards justice.” A recent report by SNL Financial (available here, but requires a lot of sign-up info) offers us a chance to evaluate that claim in the context of the financial crisis.

SNL reports that the six largest bank holding companies have paid over $132 billion to settle credit crisis and mortgage-related lawsuits brought by governments, investors and other financial institutions.

In the context of the litigation over the Fannie and Freddie conservatorships, I had considered whether it is efficient to respond to financial crises by allowing the government to do what it needs to do during the crisis and then “use litigation to make an accounting to all of the stakeholders once the situation has stabilized.” (121)

Given that the biggest bank settlements are now in the rear view window, we can now say that the accounting for the financial crisis comes in at around $132 billion give or take. Does that number do justice for the wrongs of the boom times?  I don’t think I have my own answer to that question yet, but it is certainly worth considering.

On the one hand, we should acknowledge that it is a humongous number, a number so big that that no one would have considered it a likely one at the beginning of the financial crisis. This crisis made nine and ten digit settlement numbers a routine event.

On the other hand, wrongdoing (along with good old-fashioned boom mentality) during the financial crisis almost sent the global economy into a depression.  It also wreaked havoc on so many individuals, directly and indirectly.

I look forward to seeing metrics that can make sense of this (ratio of settlement amounts to annual profits of Wall Street firms; ratio to bonus pools; ratio to home equity lost), but I will say that I am struck by the lack of individual accountability that has come out of all of this litigation.

Individuals who made six, seven and eight figure paychecks from this wrongdoing were able to move on relatively unscathed.  We should think about how to avoid that result the next time around. Otherwise the arc of justice will bend in the wrong direction.

 

Reiss on Lawsky Legacy

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Benjamin_Lawsky_picture

Law360 quoted me in Lawsky’s Aggressive Tactics Provided Model For Regulators (behind a paywall). It reads, in part,

New York Superintendent of Financial Services Benjamin Lawsky’s frequent, aggressive and often creative enforcement actions generated billions of dollars for the state and put his agency at the forefront in financial services regulation, and observers expect a similar approach from Lawsky’s successor when he leaves his post next month.

Confirmed to lead the New York Department of Financial Services in May 2011, few expected the new agency, which combined the state’s banking and insurance regulators, to make much of a mark. But after collecting $3.3 billion in penalties and forcing several traders and top executives out of their positions, Lawsky’s agency has proven to be a powerful enforcer.

“His biggest legacy is simply that he stood up a brand new regulator in one of the global financial centers and made it matter almost immediately,” said Matthew L. Schwartz, a partner at Boies Schiller & Flexner LLP and a former federal prosecutor. Lawsky, who announced his departure from the agency on May 20, established a name for himself and for the Department of Financial Services when he jumped ahead of federal banking regulators and prosecutors in announcing a $340 million settlement with British bank Standard Chartered PLC over its alleged violation of U.S. sanctions against Iran and other countries in August 2012.

That a newly formed state regulatory agency would move ahead with a stiff penalty and threaten to wield the most powerful of weapons — the pulling of Standard Chartered’s license to operate in New York state — reportedly rankled his federal counterparts

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“He made clear that consumer protection is integral to the mission of the agency,” Brooklyn Law School professor David Reiss said.

Despite Lawsky’s frequent reminders that he works for New York Gov. Andrew Cuomo — for whom he has also served as chief of staff — and the superintendent’s constant praise for his staff, there is fear among some reformers that the DFS won’t be the same without Lawsky at the helm.

“Lawsky proves that the character of individual regulators can make a crucial difference more than the letter of the law itself,” said Bartlett Naylor of Public Citizen.

“Ideally, he’ll inspire his successor and other regulators that honor awaits the vigilant and opprobrium will fall upon the indolent. More practically, however, the problems of regulatory capture by an enormously influential industry reliant on government favor can prove overwhelming,” Naylor added.

Others are more confident that the agency Lawsky set up will continue its work even after his move to the private sector.

In part, that’s because the penalties the DFS has wracked up have been a boon to New York’s budget.

Cuomo, the state’s former attorney general, has an interest in many of the issues Lawsky acted on, as well.

“I have every reason to expect that Cuomo would want to have a very vigorous enforcer to replace Lawsky,” Reiss said.

AG Lynch on Wall Street

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Loretta_Lynch_US_Attorney

Institutional Investor quoted me in Will New Attorney General Loretta Lynch Shake up Wall Street? It opens,

Those unhappy with the lack of personal accountability for the 2008–’09 financial crisis are running out of time to see justice served: In the U.S., the statute of limitations for many bank-related criminal charges is ten years. But the recent appointment of Loretta Lynch as the first black woman to the post of attorney general could present a window of opportunity.

Given mounting public frustration over the failure to punish financial executives who helped push the world to the brink of another Great Depression, Lynch may be well positioned to act where her predecessor, Eric Holder, was unsuccessful. The U.S. Department of Justice has often talked up its efforts to hold individuals responsible for crimes they may have committed, but there hasn’t been much progress. Last year, however, saw an uptick in the size of bank settlements related to the crash, including a $16.65 billion deal with Bank of America Corp. and a $7 billion agreement with Citigroup.

Some industry observers believe Lynch, who turns 56 on Thursday, could use this momentum to target people. “If she does anything differently [than Holder did], she may push her folks to try to make those cases against individuals higher up the corporate ladder,” says Glen Kopp, former assistant U.S. attorney in the Southern District of New York and a New York–based partner in the white-collar practice at law firm Bracewell & Giuliani.

Lynch’s critics have griped that she may be not be strict enough with Wall Street. They point to her 1980s stint with law firm Cahill Gordon & Reindel, which has counted among its clients BofA, Credit Suisse Group and HSBC Holdings, and to a spell early last decade at Hogan & Hartson (now Hogan Lovells), where she practiced white -collar criminal defense.

Detractors say both positions, as well as her tenure at the Federal Reserve Bank of New York from 2003 to 2005, have compromised her ability to prosecute big banks by establishing relationships that she may not wish to jeopardize as attorney general. During Lynch’s lengthy confirmation process, Republicans criticized her for being too soft on HSBC in a 2012 settlement; the British bank agreed to pay $1.92 billion in a money-laundering case after New York and federal authorities decided that criminal charges might bring down the institution.

But many in the legal community believe the more likely outcome will be somewhere in the middle.

“The financial industry will be dealing with an extremely well-informed AG who will seek to balance the competing concerns that arise when investigating and prosecuting large enterprises like those that dominate Wall Street,” says David Reiss, a professor at Brooklyn Law School with expertise in property, mortgage lending and consumer financial services matters.

Reiss on Airbnb

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MainStreet.com quoted me in Housing Activists Claim Airbnb Cuts Into Affordable Apartment Inventory in Manhattan. The story opens

Popular and trendy neighborhoods in Manhattan accounted for 30% of units booked as private rentals on AirBnB.com, according to information subpoenaed by New York Attorney General (AG) Eric T. Schneiderman that Airbnb fought against releasing.

Those neighborhoods include the Lower East Side, Chinatown, Chelsea, Hells Kitchen, Greenwich Village and SoHo. “Removing rental units from the marketplace by operating them as illegal hotels damages the availability of housing,” said Roxanne Earley, a blogger with the Association for Neighborhood & Housing Development (ANHD).

Another tidbit from the AG’s report based on subpoenaed records is that commercial users of the home-sharing website collected $168 million in rent last year, controlled one in five AirBnb units and one in three bookings. “Although Airbnb is marketing itself as a company that helps the majority of its hosts make some extra money to keep their homes, the reality is that a multi-billion dollar business is helping a small portion of commercial users rake in a disproportionate amount of profit,” Earley told MainStreet.

“The markup on short-term rentals is much higher than that of long-term residential use of apartments and this has resulted in landlords breaking the law and using their units, sometimes whole buildings as illegal hotels,” said Earley.

And that’s eating into affordable housing units that city residents could be living in. “Commercial users earn an incredible markup on short term rentals and take units that may otherwise be affordable off of the market for long term occupancy,” Earley said.

The existence of rent regulation is unique to cities like New York and San Francisco and further complicates the Airbnb factor. Administered by a court or public authority, rent regulation limits the changes in price that can be attached to renting a home, which balances the negotiating power of landlord to tenant.

“If rent regulated apartments become profit-centers, tenants may also be incentivized to hang on to their apartments longer than they would otherwise, negatively impacting the availability of affordable housing for those who would use it purely for their own personal residence,” said David Reiss, professor at Brooklyn Law School.

 

Reiss on Catching FIRREA

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Inside ABS & MBS quoted me in Experts: New AG Likely to Continue Aggressive Use of FIRREA Against Industry, Individual Executives Targeted (behind a paywall). It reads in part,

Mortgage industry executives should be aware and expect continued – and perhaps even more muscular – use of a 1989 federal law by government prosecutors to pursue mortgage-related claims. At the direction of Attorney General Eric Holder, the Department of Justice embraced the use of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) in MBS lawsuits. Despite Holder’s announcement late last month that he is stepping down after six years as AG, there is little reason to expect that President Obama’s new attorney general will surrender use of such a “potent statute” that has employed a lower burden of proof and long statute of limitations to exact large tribute from the mortgage industry, according to Marjorie Peerce of the Ballard Spahr law firm.

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Brooklyn Law School Professor David Reiss agrees. He added that throughout President Obama’s term, the White House at the highest level has set an agenda for corporate accountability so it’s likely that one of the chief mandates of Holder’s successor will be the continuation of the DOJ’s vigorous use of tools such as FIRREA.

During a speech last month prior to announcing his resignation, Holder called for making the FIRREA statute even stronger, with whistleblower bounties raised to induce more testimony. However, Reiss noted it’s unlikely the White House would be keen to encourage lawmakers to take another look at FIRREA given that Congress next year will likely be in Republican hands.

However, Reiss called attention to a part of Holder’s speech where the AG expressed frustration with the DOJ’s inability to hold financial services executives criminally liable for alleged misconduct. Holder suggested several ways for the DOJ to do so, including extending the “responsible corporate officer doctrine” to the financial services industry.

Under this doctrine, an individual may be prosecuted criminally under the Food, Drug and Cosmetic Act even absent culpable intent or knowledge of wrongdoing if the executive was in a position to prevent the wrongdoing and failed to do so.

“Focusing on individual culpability could be a new charge of the new attorney general,” said Reiss. “Given the events of the last 10 years, [a significant number of] people think that fewer individuals were held accountable for the financial crisis than should have been, so I think the Department of Justice may have heard that message as well.”