We need regulators—but they are not a substitute for class actions

by Jeff Sovern

A frequent claim by class action critics is that we don’t need class actions because we have regulators.  For example. Alan Kaplinsky recently tweeted that class actions were not needed in the wake of the Equifax scandal because the CFPB is expected to act.  But the truth is we need both regulators and class actions.

The CFPB arbitration study looked into the overlap between administrative actions and class actions. Here is an excerpt from the summary of the findings (section 9.1):

[F]or the private class actions for which we sought to find related public enforcement action, we were unable to do so in 68% of the cases. This was particularly the case with class action settlements of less than ten million dollars, where we were unable to identify a corresponding public enforcement action for 82% of the time.

When we did find overlapping activity by government entities and private class action lawyers, public enforcement activity was preceded by private activity 71% of the time. In contrast, private class action complaints were preceded by public enforcement activity 36% of the time.

President Trump will get to nominate a new CFPB director in less than a year, and it could happen in less than a month.  I very much doubt that a Trump-nominated director will bring the enforcement actions that a Director Cordray would; indeed, from the White House’s perspective, the failure to bring some such actions would probably be a plus.  Consequently, the CFPB may soon be much less protective of consumers, with the result that class actions may become even more important as a consumer protection device.

But what do class actions offer when an administrative agency also becomes involved?  Take Wells Fargo, for example.  By January 2010, the Office of the Comptroller had received 700 whistleblower complaints about Wells Fargo opening unauthorized accounts.  The OCC raised the complaints with Wells, but then dropped the matter and Wells employees continued to open unauthorized accounts.  Not much of a record for regulators there.  At some point, the CFPB began investigating, but it was obviously after the OCC’s failed intervention because Congress had not even created the Bureau at that time and the Bureau didn’t open its doors until the summer of 2011.  The first Wells class action was filed in 2015, and then in 2016, the CFPB, joined by the OCC and the LA City Attorney’s Office (which had sued Wells in 2015), entered into the famous consent decree.  I will say more about the consent decree in a moment, but first, I want to point out that the CFPB, under a Trump-nominated director, might lapse into the kind of torpor that the OCC suffered from in 2010.  Notice too that the class action antedated the CFPB consent decree. I have no reason to believe that the class action contributed in some way to the CFPB getting involved or helped in some way, but neither do I know that it didn’t.

The consent order directed Wells to pay redress to consumers who have “incurred fees or other charges.” Wells agreed to put aside $5 million for that purpose.  So then, why do we need a class action?

Well, first, the class action settlement (assuming it is finally approved in the form in which it has been preliminarily approved) is for at least $142 million.  I say “at least” because the settlement could grow by up to $25 million if it is determined that $142 million is not enough.  Quite a bit more than the $5 million pool under the consent order. While I suppose Wells might have ended up paying more than that $5 million under the consent order (I’m not sure what would have happened if it was determined that Wells owed more than $5 million), I am skeptical that Wells would have ended up paying more than 28 times that number.

The settlement appears to provide injured class members several benefits they would not have received under the consent order. First, unlike the consent order, the settlement provides that class members will get at least $25 million in non-compensatory damages.  Second while the consent order provided that Wells could recoup any of the $5 million that was not needed to compensate injured consumers, the class action provides that none of the $142 million is to revert to Wells. Any money left over after paying expenses, fees and the individual amounts due under the settlement will go to class members. Attorney’s fees are capped at 15%.  Third, the settlement provides damages to those who suffered injuries because their credit scores went down.  I’m not certain, but I don’t think that is true of the consent order because it seems limited to “fees or other charges,” and I think that means fees or other charges imposed by Wells, rather than, for example, higher interest rates charged by other lenders because of damaged credit scores. There may be other ways consumers benefit from the class action over the consent order as well, but those will do to make my point. 

In short, class actions often do not overlap with actions by regulators, and are likely to do so even less frequently under a new CFPB director, but even when they do overlap, may still benefit consumers. To be sure, class actions do not always benefit consumers, but overall, consumers are better off with them than without them.

CORRECTION: An earlier version of this post referred to a letter Ted Frank published in the Wall Street Journal. Ted has indicated in a comment (below) that I misinterpreted his letter, and so I have omitted the sentence. I apologize for the error.

0 thoughts on “We need regulators—but they are not a substitute for class actions


    Another issue worth pondering is the effect of government enforcement actions on “private attorney general” enforcement or whatever it may be called in a particular jurisdiction.
    Case in point is the CFPB-mandated audit of NCSLT/TSI student loan collection cases to weed out the defaulted loans with time-bar defects (assuming the auditors can even work out which SOL applies).
    The unintended effect will be to reduce incentives for retail-level (non class-action) attorneys willing to represent debtors (generally not very lucrative clients) to take collection cases en masse because the caseload being litigated will contain fewer opportunities to file counter-claims or separate claims for violations of the FDCPA or state-side counterpart (such as Texas Debt Collection Act).
    While the defense of debt collection cases (even successful defense for those attorneys basing their fee on outcome at least in part) is not a highly profitable endeavor, the fair debt collection claims have at least a settlement value of a few thousand dollars per case.
    While the issue of making money off the debt collector’s violations may appear to be solely a bread-and-butter issue for consumer defense attorneys, it nevertheless will hurt consumers/debtors across the board (as an un-certified class, as it were) because greater quality control further up in the pipeline (such as is now being imposed on National Collegiate private student loan collection cases) reduces the ability of private attorneys to be compensated (through attorney’s fees) for enforcing the FDCPA through private actions.
    It may very well further reduce the supply of attorneys willing to take on the defense of collection cases, and will reduce revenues of those now laboring in these trenches.
    So, in that respect, the private case-specific enforcement of FDCPA liability for violations would be beneficial, and would arguably be preferable over both class-actions and government regulatory actions.
    It might even give legal aid organizations a source of much needed revenue. See, for example, Serna v Samara Portfolio (awarding $72,133.50 in attorney’s fees for service provided by legal aid attorney in FDCPA case that was appealed to the Fifth Circuit and resulted in a precedent-setting decision). https://scholar.google.com/scholar?scidkt=15886238913926715479&as_sdt=2&hl=en
    On the other hand, some types of questionable practices and even clear violations of law do not provide a private remedy, so the same legal services market dynamics would not apply.
    Case in point would be the Trusts’ filing of collection suits without proof of assignment, which does not appear to be actionable as an unfair debt collection practice, though it may be grounds to get the lawsuit dismissed. Mere lack of evidence (such as proof of assignment) is not the same as non-existence of the evidence. And in the case of NCSLT-securitized loans, the Pool Supplements and Deposit and Sale Agreements that evidence the student loan portfolio transfers at the pool level are readily available on the SEC’s Edgar web site. Courts may even be willing to take judicial notice of them. So the question of enforceability will likely vary depending on how judges and appellate panels resolve the issue of how much loan-level proof of assignment is needed to prove that a particular loan in a lawsuit was part of the transaction at the “pool” level. How can the auditors to be put in charge of perusing the entire population of loans that make up the collateral for the SLABS make that determination when the courts and trial-level judges even within the same jurisdiction are unpredictable in that regard?
    The already-conducted audit of PHEAA/AES commissioned by the successor to the trust owners revealed that loan-level assignment proof is lacking in 100% of the sample.
    Which is, of course, hardly surprising, given that there the “notes” were non-negotiable and given that they were mostly originated over the internet and via fax (meaning that the “notes” were images of the signature page) and that the whole system was designed to effect the transfer for securitization in bulk, rather than through transfer of actual “paperwork”.

  2. Ted F says:

    I was responding to a specific claim by Paul Bland in the WSJ criticizing my op ed because invalidating the CFPB rule would create “immunity” for Wells Fargo. That was an entirely bogus argument, and I note you don’t even begin to defend it.
    If we think regulators and criminal prosecutors and market discipline cannot provide sufficient protection, there are surely better answers than depriving consumers of the choice not to have a giant wealth transfer from their pockets to wealthy trial lawyers. But I see no evidence that the punishment Wells Fargo and its executives have already received and have yet to face will not be sufficient deterrence.

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