Friday, January 27, 2017

The Emoluments Clause

Is Donald Trump entitled to conduct his businesses as usual while he is president?  Or, are the people entitled by the Constitution to a president who serves free of conflicts of interests created by his other full time job?  The answer to this question may lie in part in the US Constitution "emoluments clause," Article I, section 9, clause 8:  No Title of Nobility shall be granted by the United States:  And no Person holding an Office of Profit or Trust under them, shall, without the Consent of the Congress, accept of any present, Emolument, Office, or Title, of any kind whatever, from any King, Prince, or foreign State."  The Heritage Guide to the Constitution provides an interesting explanation of the origins and purposes of this clause.  With regard to the prohibition on accepting an "emolumnent" from a foreign government or sovereign without consent of Congress, Alexander Hamilton noted in The Federalist No. 22:  "One of the weak sides of republics, among their numerous advantages, is that they afford too easy an inlet to foreign corruption."  The founders were worried that economic entanglements between American government officials (persons holding an office of profit or trust) could undermine the republic.

Constitutional scholars and legal ethicists are debating about what exactly the emoluments clause prohibits, who is entitled to enforce it, and what remedy a court could order if it found Trump's conduct a violation of the clause.  It's not clear whether a foreign corporation should be treated as a "King, Prince, or foreign State."  Nor is it clear whether a payment received in an arms' length transaction for services rendered-- for example, payment for a stay by a foreign official at a hotel connected to Trump-- is a "present" or "Emolument."  Another clause in the constitution makes bribery an impeachable offense for the president, but the emoluments clause doesn't say what the consequences are for violating it, and because it doesn't specifically mention the president, some argue that it may not apply to the president at all.

Friday, January 20, 2017

CFPB Challenges TCF Bank's "Opt-In" Sales Strategy for Overdraft Protection

The CFPB's enforcement action against Minnesota-based TCF National Bank is the latest chapter in the American consumer's love hate relationship with "overdraft protection."

Leaving aside the the handful of people who kite checks as a profession, checking account customers, particularly those who maintain low balances, worry about bouncing checks.  It's embarrassing.  And, it's expensive.  Banks offered "overdraft protection" as a form of automatic short term credit. The bank pays the otherwise bouncing check, book a loan to the customer in the amount of the check and charge an "overdraft fee" for the service.  For customers with a linked savings account, the bank  automatically transfers funds from the savings account to cover the overdraft, usually for free (depending on minimum balance) or at a nominal account transfer fee. 

Overdraft protection was truly a deep backup in case of a mistake about an account balance, or an emergency.  Customers who used paper checks learned to record each check in the register, deduct the amount of the check from the account balance, and reconcile the register balance with their paper bank statement when  it arrived in the monthly mail.  (Shout out to my mother who took pride in this anxiety-packed monthly ritual until I just  recently persuaded her to stop). 

Then came the debit card as a deposit account access device.  Unlike a checkbook, a debit card has no register.  New debit card customers, particularly young customers who never used paper checks for payment, had no habit of maintaining account balance records.  Banks continued to offer overdraft protection as a standard and automatic account feature, in the package along with stop payment services, for a per transaction fee.  But,the expensive consequence of bouncing a check came as a surprise to debit account customers (and their parents), who in retrospect, would have preferred the embarrassment of a declined transaction to a $35 overdraft charge on a $5 transaction at Taco Bell.  With the rise in debit card use among consumers, overdraft transactions rose and overdraft fees became a significant revenue source for banks.  Outraged consumers complained to their elected representatives, and consumer advocate groups took the view that banks were fiendishly using overdraft protection on debit cards to exploit low-balance customers by hiding both the existence and the cost of the service they provided. 

In 2010, federal regulations were enacted to prohibit banks from charging overdraft fees on ATM wintdrawals and debit card point of sale (POS) transactions unless the bank obtained the consent of the customer to the overdraft protection. To impose a charge for an overdraft, the bank had to show that the customer "opted in" to the service.  Banks responded by informing existing and new customers about overdraft protection and requiring the customer to click to "opt in." 

According to the CFPB, TCF National Bank responded by implementing an aggressive sales program to induce customers to "opt in" to overdraft protection.  According to the CFPB's press release issued yesterday,  66% of TCF's customers opted in, about 3 times more than the opt in rate at other banks.  The CFPB alleges that TCF tricked its customers into opting in, by deliberately obscuring the optional nature of overdraft protection among other mandatory "I agree" boxes on the account opening online forms, by obscuring what "opting in" would mean (fees) and by over-emotionalizing the value of overdraft protection by explaining it as an emergency source of funds.  The CFPB's case seems to be that TCF sold overdraft protection too hard.  The key evidence seems to be TCF's impressive success in getting customers to "opt in." 

I don't think consumers are quite as gullible as CFPB presumes when it comes to bank services and the fees that come with them. The CFPB, in 2015, posted a two page Consumer Advisory explaining "You've got options when it comes to overdraft."  Not that complicated.

Thursday, January 19, 2017

Who's Got to Watch the Clock?

When a debt collector files a claim in a consumer bankruptcy case that is time-barred under state statute of limitations law, whose problem is it? Does the burden of raising the statute of limitations defense fall on the trustee in the consumer debtor's bankruptcy case who must affirmatively object to the claim as not "allowable" because of the time bar?  Or, should the burden fall on the debt collector creditor because the act of filing a time barred claim in a bankruptcy case violates the Fair Debt Collection Practices Act's (FDCPA) prohibition on false or deceptive debt collection practices?

The issue was before the Supreme Court yesterday in Midland Funding v. Johnson.  A transcript of the oral argument is here.  The Eleventh Circuit in 2014 held that when a debt collector files a time -barred claim in a bankruptcy case it violates the FDCPA.  Every other circuit court that has considered this question has held the opposite.

The case presents a clash between two federal statues, the Bankruptcy Code and the FDCPA.   The Code  defines "claim" broadly and deliberately to bring within the jurisdiction of the bankruptcy court all of the debtor's liabilities, even unmatured, contingent, unliquidated or disputed liabilities, so that all such claims can be addressed and potentially forgiven in his bankruptcy case.  In a bankruptcy case, a debt that may be subject to one or more defenses is still a "claim."  It is common for the debtor to identify a creditor, give that creditor notice of his bankruptcy case, and invite the creditor to file a claim even if the debtor intends to object to it.  The debtor's goal is to obtain court-ordered discharge (forgiveness) of as much liability (or potential liability) as possible. And, no "claim" can be discharged in a bankruptcy case if the creditor holding it did not receive notice and an opportunity to be heard (due process).  The Eleventh Circuit and all courts considering this issue have held that a creditor on a debt subject to a statute of limitations defense holds a "claim" under the Code.

The Eleventh Circuit held that although a time-barred debt is a "claim" under the Bankruptcy Code, the debt is "unenforceable" under the FDCPA so that when a debt collector asserts such a claim in a bankruptcy case, it violates the FDCPA, which prohibits "false, deceptive, or misleading representation" or "unfair or unconscionable means" to collect a debt.

At the oral argument yesterday, several of the justices asked the debt collector's attorney why debt collectors file time barred claims in the first place.  The Eleventh Circuit noted in its opinion:  "A deluge has swept through U.S. Bankruptcy courts of late.  Consumer debt buyers-- armed with hundreds of delinquent accounts purchased from creditors-- are filing proofs of claim on debts deemed unenforceable under state statutes of limitations."  Creditors have always filed claims in consumer bankruptcy cases that are or might be subject to defenses.  But, large scale debt collectors like Midland Funding can locate debtors and assert claims more efficiently than ever before.

The Fourth Circuit, in Dubois v. Atlas Acquisitions held in favor of the debt collector-- filing a time barred claim in a consumer's bankruptcy case does not violate the FDCPA.  It noted that a contrary ruling would create an incentive for debt collectors to refrain from filing claims in consumer bankruptcy cases to avoid the risk of violating the FDCPA (which provides consumers with a statutory penalty and a right to recover attorneys fees).  The Fourth Circuit noted that this effect runs contrary to the purpose of the claims process in a bankruptcy case.

Observers at the oral argument yesterday generally noted that based on the questions of the justices, it appeared that five were concerned about the implications of a consumer friendly decision.  The Court will decide the case by the end of June.

Wednesday, January 18, 2017

Compensation at Wells Fargo Now

Wells Fargo Bank is putting the pieces together after the sales team compensation scandal in September 2016.  Post scandal, the OCC announced that it would review sales incentive practices at all the large and midsize banks it supervises.  Bankers have been watching what Wells Fargo would do to appease the OCC and other critics of its performance-based pay strategies.  Wells Fargo's new plan doesn't eliminate incentive pay entirely. But, the new plan draws Wells Fargo in line with compensation plans that are common throughout the retail banking industry. 

Sales quotas based on account opening data are gone. Compensation is based primarily on salary. Bank tellers' compensation is 95% salary.  Entry level bankers' get incentive pay based on the performance of their team, not individual sales results. 

What will the reputational damage and tilt in compensation toward base pay and team results mean for Wells Fargo's ability to recruit and retain the best bankers?  American Banker reports that pay cuts for current employees are in the offing and morale is low.