On September 15th, the FTC will hold a workshop to examine the testing and evaluation of disclosures that companies make to consumers about advertising claims, privacy practices, and other information.  The FTC’s workshop will explore how to test the effectiveness of these disclosures to ensure consumers notice them, understand them, and can use them in their decision-making.  Companies should incorporate the principles articulated during the workshop by federal regulators such as the FTC and the CFPB into the development of their own consumer disclosures, especially relating to e-commerce and mobile initiatives.

The “Putting Disclosures to the Test” workshop will explore ways to improve the evaluation and testing of consumer disclosures by industry, academics, and the FTC related to:

  • Disclosures in advertising  designed to prevent ads from being deceptive;
  • Privacy-related disclosures, including privacy policies and other mechanisms to inform consumers that they are being tracked; and
  • Disclosures in specific industries designed to prevent deceptive claims.

Among the participants at the workshop will be Heidi Johnson, a research analyst from the CFPB Office of Research, who will present a case study entitled, “Disclosure Research in the Lab and Online.” The CFPB’s Decision Making and Behavioral Studies team is engaged in a strategic initiative to invest in research that explores the factors that influence a disclosure’s efficacy, how to use different methodologies to study disclosure, and the market effects of disclosure. Ms. Johnson’s work as a part of this team has included consumer research on overdraft and other financial products.

The law firm Covington & Burling LLP has filed a Freedom of Information Act (FOIA) lawsuit against the CFPB in Washington, D.C. federal district court seeking  information relating to the CFPB’s report on, “Consumer Voices on Credit Reports and Scores.”  Covington argues that the information requested, “is necessary for the public to verify the quality of the study’s methodology.”  The Covington litigation is likely being filed on behalf of a client that prefers not to invoke the ire of the CFPB by requesting the information directly.  The litigation could lay the ground work for transparency into the CFPB’s research processes, not only when releasing reports, but also when compiling data and findings that could inform future CFPB actions, such as rulemaking.

The CFPB previously responded to Covington’s initial FOIA request by releasing only 187 full pages and 111 redacted pages of responsive records, but the CFPB withheld 1,196 pages.  The CFPB claimed that the pages are shielded from disclosure by:

  • FOIA Exemption 4 relating to “commercial or financial information obtained from a person that is privileged or confidential;”
  • FOIA Exemption 5 relating to “deliberative or decision-making processes within the agency;” and
  • FOIA Exemption 6 relating to “personal privacy.”

In the lawsuit, Covington challenges the CFPB’s FOIA response, claiming that the CFPB has failed to identify the documents withheld, establish any factual basis for their withholding, or establish that the documents contained no reasonably segregable factual information.  Covington’s appeal is focused on the following documents:

  • (1) records of the process of, and parameters for, selecting focus group participants and focus group locations;
  • (2) focus group participants’ responses; and
  • (3) demographic data of focus group participants.

The CFPB recently released a report that documents the results of a research project undertaken by the CFPB’s Office of Research to better understand the demographic characteristics of consumers without traditional credit reports or credit scores.  The Report concludes that the current credit reporting system is precluding certain populations from accessing credit and taking advantage of other economic opportunities.  Although the CFPB does not use the term “disparate impact”, the fair lending implications of the Report should be carefully considered by both the providers and users of credit reports and credit scores.

The CFPB press release highlighted four of the findings from the Report:

  • 26 million consumers (11% of U.S. adults) are “credit invisible” (i.e., they do not have a credit file with any of the three nationwide credit reporting agencies: Equifax, Experian, and TransUnion).
  • 19 million consumers (8% of U.S. adults) have “unscored” credit records (i.e., they have insufficient credit history to generate a credit score).
  • Consumers in low-income neighborhoods are more likely to be credit invisible or to have an unscored record.
  • Black and Hispanic consumers are more likely to have limited credit records.

Although the Report does not include any recommendations for the industry on how to address the Report’s findings, during a press call hosted by the CFPB prior to the release of the report, Kenneth Brevoort of the CFPB’s Office of Research noted that the CFPB will be working on the development of potential fixes to the problem either through regulatory actions or encouraging industry initiatives.  The CFPB should be cautious about taking any regulatory actions that undermine existing industry efforts to serve populations not currently being served by traditional credit reports or credit scores.

The Report notes that several industry participants have already developed scoring products that are aimed specifically at these populations.  As demonstrated in congressional testimony last year by Stuart Pratt, President and CEO of the Consumer Data Industry Association (CDIA), the trade association for the consumer reporting industry, “CDIA’s members are at the forefront of this movement and it is private investment which is expanding the data sets available for lenders to use as they reach new communities of consumers. These data ensure expanded fairness and access.”

If the CFPB is suggesting that there need to be additional sources of alternative credit reports and credit scores, these new products and services must be developed carefully to ensure the reliability of any predictions; otherwise, the potential harm could be felt across all relevant stakeholders, from businesses that make decisions with inaccurate information and consumers that are impacted by those decisions.

In prepared remarks, CFPB Director Richard Cordray acknowledged that, “Without credit reporting and credit scoring, it would be harder for financial service providers to assess and manage credit risk, and the supply of credit would be more expensive, more erratic, and more constrained.” The CFPB should be wary of any actions that could disrupt the U.S. credit reporting system, which the Report observes is currently serving 189 million American consumers.

On February 19, 2015, the CFPB released its credit report study, entitled “Consumer voices on credit reports and scores.”  After conducting focus groups with 308 consumers in four major metropolitan areas, the study concludes that while many consumers do access their credit scores and credit reports in various ways, confusion about both still persists.

In determining that credit confusion exists, the CFPB classified the consumers involved in the focus groups into three categories, based upon their familiarity with their own credit reports and scores: active checkers, former checkers, and noncheckers. The CFPB also remarked on perceived common characteristics and motivations influencing consumer behavior in each category. The CFPB did note that the focus groups did not represent a statistically valid sample of American consumers. Thereafter, the CFPB relied upon the observations of the focus groups to conclude that additional consumer outreach and education relating to credit is necessary.

But what is not clear is how the CFPB intends to do accomplish this objective, or how this objective may differ in its implementation across the various consumer groups identified in the study. Will education and outreach be achieved through initiatives put forth by the CFPB, the financial services industry, or both? Or will it be accomplished through enforcement? The CFPB is giving conflicting messages about how it would like to proceed down this path.

For one, in his prepared remarks relating to the study’s release, Director Cordray suggested that the CFPB intends to leverage its enforcement authority to more closely regulate the credit reporting industry: “Using our supervision and enforcement authorities,” “we are already bringing significant new improvements to the credit reporting system − and we are only getting started.” But this may not be the approach the CFPB actually intends to take, nor, in our opinion, is it the correct one.

Case in point: notwithstanding Cordray’s enforcement-related comments, in releasing the study, the CFPB also touted the fact that by working with financial services companies, over 50 million consumers now have free and regular access to their credit scores through monthly credit card statements or online. Indeed, the CFPB said that it believes the growing number of companies providing this information to consumers provides an opportunity to engage consumers and educate them about their credit.

But nothing from the CFPB yet suggests practical ways by which the CFPB would like the industry to achieve this desired “consumer engagement and education.” Instead, the study offers only a series of vague suggestions about potential messages to consumers about their credit. But when coupled with Cordray’s comments about expanding enforcement in the credit reporting arena, some companies may be hesitant to roll out new outreach initiatives without any idea how those initiatives will be received by the CFPB.

Our impression is that many in the consumer financial services industry would welcome an opportunity to engage with the CFPB on this issue. As one of the CFPB’s mandates under Dodd-Frank is to educate consumers about financial products, it makes sense for the CFPB to attempt to do this in conjunction with the industry, rather than through adversarial action. This is a perfect opportunity for productive dialogue between the CFPB and the industry – let’s hope the CFPB takes advantage of it.

In a report released on January 13, 2015, the CFPB announced that nearly half of consumers do not shop among multiple lenders before applying for a mortgage loan.  Even fewer—about one of every four—submit multiple applications to gauge the best deal, the Bureau says.

The report is the first to harness data gathered by the National Survey of Mortgage Borrowers, an ongoing research effort funded jointly by the Bureau and the Federal Housing Finance Agency (FHFA).  Its findings rely on responses gathered from roughly 1,900 consumers who took out home-purchase mortgages in 2013.

Among its salient points, the report concludes that the vast majority of consumers—about 70 percent—gather information about mortgage loans primarily from lenders and brokers.  Not surprisingly, the report expresses concern that these parties may not offer the most objective information, given their interest in closing the transaction.  In conjunction with the report’s publication, the CFPB announced steps that aim to provide another avenue for consumers to gather information about available mortgage products.  These steps are discussed below.

The report also concludes that consumers who identify as “unfamiliar” with the basic features of mortgage loans are less likely to shop around for the best deal, and that factors not related to cost, like a lender’s reputation and proximity of a branch office, are important to a significant minority of mortgage borrowers.

Though likely no surprise to the industry, the data and their attendant conclusions suggest that the new TILA/RESPA integrated disclosures, set to be implemented in August 2015, may not, by themselves, sufficiently address consumers’ failure to shop the mortgage market.  Federal regulatory efforts traditionally have focused on encouraging consumers to shop for mortgage loans through an easier, more streamlined loan application process.  The reality emphasized by the report, however, is that to the extent a consumer shops around for a mortgage, the shopping typically ends when the consumer submits a loan application.  Thus, prior efforts have targeted the wrong point in the process.  The report demonstrates that the CFPB is attempting to address this issue.

Alongside the report, the CFPB has rolled out a new landing page called the “Owning a Home Toolkit” within its existing website.  The toolkit includes factsheets to get potential homebuyers started shopping for a mortgage loan and checklists to prepare borrowers for a closing.  The toolkit’s brass ring, though, is its “Rate Checker” tool, which the Bureau disclaims is still in beta testing.  The Rate Checker allows a consumer to enter information about his or her location, credit profile, desired loan amount, and collateral value.  Pairing this information with daily-updated data from financial institutions (via a private research firm), the Rate Checker displays the prevailing interest rates for which the consumer may qualify, as well as the number of financial institutions offering those rates to consumers with the consumer’s profile.  Though wildly simplified and, at this point, a little clunky, this tool could provide potential borrowers with useful information about typical products in the mortgage market, and, toward the Bureau’s goal, it could help consumers better assess terms offered once they apply for a loan.  The concern, of course, is that consumers may unduly rely on information produced by the tool, which does not account for the full scope of consumers’ risk profiles.

At the end of the report, the CFPB notes that the current analysis did not evaluate the extent to which more shopping by consumers improves mortgage outcomes, such as better loan terms and fewer delinquencies and foreclosures.  The CFPB advises that the National Mortgage Database project (which is part of the CFPB’s joint endeavor with the FHFA) hopes to develop a much better understanding of consumer shopping behavior and how it affects mortgage outcomes.

Recently, the Research Integrity Council (RIC) held its first Research Academic Forum, a panel discussion that focused on how independent academic research can help inform the agency rulemaking process, especially at the CFPB.  As previously reported, the RIC’s objective is to ensure that good, quality research forms the basis for the rulemaking process.  RIC Executive Director Irving Daniels introduced the topics and panelists: Thomas Durkin, retired Senior Economist in the Federal Reserve Board’s Division of Research and Statistics; Howard Beales, Professor at George Washington University School of Business and former Director of the Federal Trade Commission (FTC) Bureau of Consumer Protection; and Todd Zywicki, Professor of Law at George Mason University School of Law, Senior Scholar of the Mercatus Center, and former Director of the FTC Office of Policy Planning.

Each panelist spoke about how robust data collection and strong research can inform the rulemaking process.  They described how providing agency staff with collected data and relevant research can help predict trends, provide insight on policy questions raised by agency staff, and potentially change the course of a proposed rule.

Mr. Durkin began the discussion with his insights on the research that has been made available by the CFPB so far.  He expressed concerns with the overall lack of transparency in how the CFPB conducts its research, including the failure to identify the researchers involved and the authors of research reports.  Mr. Durkin observed that there may not be sufficient collaboration taking place between the CFPB’s researchers and legal department, as at least one CFPB research questionnaire demonstrated an inherent failure in understanding of how the relevant law applied while another questionnaire captured the legal nuances, but was deficient in how the questions were structured, leading to faulty research.  He also stressed that the CFPB should be reaching out to industry, as needed, to obtain relevant data.

Professor Beales focused on the importance of independence and disinterested analysis in producing high-quality research.  He cautioned that without these defining characteristics, research can become malleable and used to pursue a specific agenda.  Professor Beales commented that without the availability of strong research, an agency may instead rely on policy presumptions when issuing rules, and with no data or research to refute these underlying assumptions, courts are likely to defer to the agency’s position.  By way of example, he discussed the flawed methodology widely observed in the survey that was the basis for the CFPB’s payday loan report.  Professor Beales suggested that had the CFPB research been conducted using strong scientific methods, the results contained in the CFPB report may have very different.  Professor Beales emphasized that to the extent an agency is not producing strong research internally, stakeholders should take advantage of opportunities to provide an agency with relevant data and research from external sources.

Professor Zywicki focused on how and why good research improves rulemaking; including how independent research differs from lobbying.  He stressed that, “bad research beats no research.”  If the only research available to an agency is flawed, whether produced internally or from an external source, then an agency will develop its rules based on the flawed research if there is no better research to refute the policy conclusions drawn from the flawed research.  Professor Zywicki urged interested stakeholders to be proactive and forward looking in any approach toward research.  He noted that because research takes time, and can be costly, it requires a long-term commitment from those individuals and organizations, including trade associations, that are interested in developing research.  In his view, this research should be conducted long before a proposed rule is issued by an agency.  Professor Zywicki also recommended that any such external research be conducted by academics to provide independent analysis of the raw data that can be collected by industries.  He emphasized that researchers should be given the freedom to conduct this research for the purpose of educating both the industry and any relevant agencies, rather than as a tool to lobby for a specific agenda.  Professor Zywicki stated, however, that strong, independent research can influence policy and prove to be a valuable resource during the rulemaking process.

During a question and answer session following the panel discussion, the panelists discussed how the RIC, and similar entities, could act as intermediaries between members of industry, academics, and agencies, such that each group could be kept up to date on the work of the others in order to maximize good research and help each group stay current, proactive, and forward looking.  The panelists agreed that since research requires such a long lead time, agencies should better communicate in what policy areas future rules are being contemplated, so that high-quality research can be made available to improve the rulemaking process.

The RIC plans to hold its next meeting later this year, which will feature a panel discussion with internal agency research personnel.

On May 6, 2014, the American Bankers Association (“ABA”) and Consumer Bankers Association (“CBA”) submitted comments to the CFPB’s “Debt Collection Survey from the Consumer Credit Panel” (the “Survey”). While the ABA and CBA applauded the CFPB’s collection of information regarding actual consumer experiences with the collection industry, both expressed concern that as currently formatted, the Survey will likely fall short of producing reliable and representative data that can be used to inform any related rulemakings or other agency actions.

For one, both the ABA and CBA are concerned that the Survey does not differentiate between consumer experiences with first-party creditors and third-party collectors. In adopting this generic approach, the ABA and CBA caution that the CFPB is missing a meaningful opportunity to investigate the extent to which consumer experiences differ with respect to creditors and collectors. For example, as the CBA remarked in its May 6, 2014 comments:

Unlike the relationship between third-party collectors and debtors, the creditor-borrower relationship is usually a long-standing one, covering the entire lifecycle of the loan. The creditor also has strong business incentives to foster this relationship as in many instances it has a multi-faceted relationship with the consumer.

The ABA and CBA suggest that drawing a clearer distinction in the Survey between first-party creditors and third-party collectors will likely show that consumers have materially different collection experiences with each. Moreover, this distinction will allow the Survey to provide meaningful data that is relevant to a number of the questions posed in the CFPB’s Advance Notice of Proposed Rulemaking. In addition, the ABA suggests that the Survey should allow consumers to identify not just the type of collector, but also the type of debt involved because that too could significantly impact the consumer’s collection experience.

Additionally, the ABA and CBA both question the CFPB’s decision to oversample data from consumers who are in collections or who have low credit scores. They fear this will skew the surveyed population to those who are more likely to have charged-off or past due debt. As the CBA remarked, this introduces confounding variables into the Survey results because these consumers are much more likely than the general population to hold unfavorable views about collectors. Further, this oversampling diminishes the experiences of consumers who may have different debt collection experiences where they were able to come current or otherwise resolve their account. To capture these consumer experiences, the ABA suggests that in addition to oversampling consumers in collections or with low credit scores, the CFPB also should oversample consumers whose credit reports show they were over 30 days late with a payment but do not show any further deliquency.

The ABA and CBA also both call on the CFPB to ensure transparency as to the Survey results by disclosing the underlying data and information collected. Moreover, the CBA asks the CFPB to make an effort to verify the validity of the experiences reported by consumers prior to drawing any conclusions from that information, in contrast to the CFPB’s current approach in publishing its consumer complaints. The ABA further suggests that the CFPB should pretest the Survey questions, evaluate any possible shortcomings, and make the results of that pretesting publicly available in order to maximize the Survey’s policymaking value.

Relatedly, the ABA also suggests that the Survey should be administered exclusively online to maximize response rates, include prescreening questions to identify potential response bias, and allow questions and answers to be randomized in order to minimize the potential for bias and other potential errors to impact the results. Moreover, the ABA believes that the online format will allow more formatting flexibility aimed at assisting consumers in understanding the Survey, as well as make the Survey collection and review process more efficient and streamlined by eliminating potential loading errors that can plague paper documents (i.e., keypunch errors).

Finally, both the ABA and CBA make specific suggests with regard to revising the various available responses in the Survey to more accurately reflect the options and situations that consumers confront during the collection process, including responses that cover situations where a consumer may not recall or know the specific answer. The ABA also suggests that the Survey should be shorter and more focused, again to minimize consumer response fatigue and confusion.

We share many of the same concerns about the Survey as those expressed by the ABA and CBA. As currently formatted, we too question whether the Survey will result in the collection of useful, verifiable data that is representative and accurate with regard to the overall consumer collection experience. Given that the Survey undoubtedly will play a major role in any future collection rulemaking or policy pronouncements by the CFPB, it is vital that the CFPB ensure the Survey is designed in a way to minimize the potential for producing skewed, biased data that may result in regulations and policies that do not reflect address actual collection issues in a meaningful and effective manner.

Moreover, we agree that public disclosure of the underlying data collected through the Survey is critical to ensuring the legitimacy of the Survey itself, as well as any resulting rulemaking or other regulatory action. As the ABA suggests, there is no reason such data cannot be scrubbed to protect personally identifiable information or other sensitive data, and then made available to the public for review and comment in connection with any findings and proposals born out of the Survey. The CFPB continues to state that it is a data-driven agency, but being data-driven is not enough – transparency also is required and should be something the CFPB welcomes since transparency serves to increase public understanding and acceptance of its actions. In contrast, closed door meetings and refusals to disclose information serves only to sow seeds of distrust, which is not a productive or efficient manner by which to effectuate lasting change. We hope the CFPB will give due regard to the legitimate concerns raised in these comments, as addressing the concerns raised therein will help to ensure that the Survey results in useful and statistically sound data.

Last week, a group of representatives from across a variety of industries met to discuss the formation of a Research Integrity Council (RIC), the purpose of which will be to make recommendations to improve the quality and veracity of the research being conducted by the CFPB to inform its rulemaking process. The CFPB has emphasized its goal of being a “data-driven” agency, but the effectiveness of any rules driven by the CFPB’s data could be at risk without a research process being conducted using scientifically sound, peer-reviewable, unbiased, open, and repeatable methods.

The RIC, a proposed voluntary coalition of industries subject to the CFPB’s jurisdiction, plans to seek out bipartisan experts with knowledge of effective research methodologies that have been adopted at other federal agencies. This panel of experts would review the research already released by the CFPB, in the form of reports and white papers, to identify any areas of improvement. The RIC will then develop a comprehensive research framework that could be adopted by the CFPB to produce the type of quality economic research that should be informing the CFPB regulatory process.

Despite the existence of an Academic Research Council, the RIC believes that more could be done to improve the process by which the CFPB conducts research, especially due to the lack of transparency into the activities of the Academic Research Council. Questions were posed as to why no meeting minutes for the Academic Research Council have been made available to the public since 2012, and why the minutes that have been posted on the CFPB website consist of only a single paragraph.

The RIC plans to advocate for the CFPB’s strict adherence to evidence-based regulations. Due to the potentially widespread impact of CFPB rules, the RIC will call on the CFPB to accept data from appropriate stakeholders during the research process as well as a strong review process for any research findings, both internally at the CFPB, but also through reviews by external experts. Regardless of CFPB adoption of the RIC’s recommendations, the RIC also plans to further the public discourse about the CFPB’s research by publishing reviews of future CFPB research.