Monday, August 11, 2014

Consumer Complaint Database and Public Narratives

Lou Holtz, the renowned football coach, is reported to have quipped “Never tell your problems to anyone...20% don't care and the other 80% are glad you have them.” Leaving aside the pleasure of Schadenfreude when competitors get their comeuppance, lingering in the shadows is our own fear that we just might be the next recipient of some imputation of blame! Indeed, lest we fall into the downward drift of reputation risk, the general modus operandi has been to resolve controversial issues affecting consumer complaints as quickly as possible. So, we are usually able to avoid hanging out our dirty laundry to dry in the acidic air of public opinion. Until now!

Before I jump into the deep pool of consumer complaint machinations of the Consumer Financial Protection Bureau (“Bureau”), I would like to offer a definition of a word. That word is “allegation.” Here’s my definition of an “allegation”, liberated from its legalistic moorings: ‘An accusation that someone has done something illegal or wrong, which may be true or may be false, typically made without proof, or sufficient proof, and eventually may or may not lead to somebody being found innocent or guilty of doing something illegal or wrong.’ Please keep my definition in mind as we explore together the Bureau’s new Proposed Policy Statement regarding consumer complaints, issued on July 16, 2014.[i]

For some time we have known about the Bureau’s “Consumer Complaint Database” (“Database”). The Bureau’s new proposal would expand the “public-facing database” to include “unstructured consumer complaint narrative data” (“Narratives”). The Bureau promises that only those Narratives for which an opt-in consumer consent has been obtained and a “robust personal information scrubbing standard and methodology” applied would be subject to disclosure. The expansion, therefore, supplements and extends the Bureau’s existing Policy Statements that established the Database.[ii]

The Database actually had the Narratives feature associated with it from the start. The Bureau planned to include Narratives from as far back as the original announcement of the Database on December 8, 2011, when it notified the public about its plans to disclose certain data about the credit card complaints that consumers submitted to the Bureau.[iii] Its final policy statement was issued on June 22, 2012.[iv] At the time that this policy became official, it also announced its plans to disclose data from consumer complaints about financial products and services other than credit cards.[v] Finally, the Bureau rendered its final policy statement for these other financial products and services on March 25, 2013.[vi] In effect, the July 16, 2014 supplements the Bureau’s existing Policy Statements.

Here is the timeline:

·       Credit Card Complaints:
o   December 8, 2011: “December 2011 Proposed Policy Statement”
o   June 22, 2012: “June 2012 Policy Statement”
·       Financial products and services other than credit cards:
o   June 22, 2012: “June 2012 Proposed Policy Statement”
o   March 25, 2013: “March 2013 Policy Statement”
·       Supplement to credit card and financial products and services other than credit cards:
o   July 16, 2014: “July 2014 Proposed Policy Statement”[vii]

It should be noted that the June 2012 Proposed Policy Statement did not propose the inclusion of public Narratives in the Database. The volume of comments in response to including the such Narratives was “significant”: there were consumer, civil rights, and open government groups, supporting disclosure “on the grounds that disclosing narratives would provide consumers with more useful information on which to base financial decisions and would allow reviewers to assess the validity of the complaints; and privacy groups wanted an opt-in, because of concerns about the risk of publishing “non-identifiable” data; but trade and financial industry groups “nearly uniformly” opposed the disclosure of consumer complaint narratives.[viii] 

Responding to these comments, the Bureau noted in the March 2013 Policy Statement that it would not post public Narratives to the Consumer Complaint Database – at least not until it could assess whether there were “practical ways” to disclose narrative data submitted by consumers without undermining consumer privacy.[ix] The stage was now set to determine how and when to expand the policy to include these Narratives.


The Bureau believes that there are three areas of interest that need to be considered in order to implement its plan to include the Narratives: (1) the direct and indirect benefits to consumers, (2) the benefit to the Bureau, and (3) the advancement of open government principles. Permit me to provide a synopsis of each of these vectors.

Direct Benefits to Consumers: Consumers may share their experience with other consumers.
Complainants would be able to provide information they deem useful to others who may be considering doing business with a particular financial institution. Or, the Narrative would be a means of letting others know about a company, offering and experiencing similar situations, thereby letting them “know that they are not alone.”[x] The Bureau contends that the public is not served if it only discloses the non-narrative portions of the complaint. It seems to me that the Bureau is crossing into the realm of the Confidence Fairy[xi] when it opines that “some consumers may choose to submit a complaint only if they will have the opportunity to share their story and other consumers may overcome their reticence to submit a complaint by reading the experiences of others.”[xii] The Bureau believes that this direct benefit may expand the number of complaints submitted to the Bureau, thereby improving the value of the Database.

Indirect Benefits to Consumers: The marketplace will be more responsive to consumers, because the effect of the Narratives will be to influence consumer purchasing decisions. The Bureau claims that research shows that “consumer word of mouth (which includes consumer reviews and complaints) is a reliable signal of product quality that consumers consult and act upon when making purchasing decisions.”[xiii] While the Bureau does not provide such research, it is a rudimentary premise of economic theory that, through their purchases, consumers signal competitive information to market participants. However, the device of a Database with Narratives is not itself the market. As the eminent semanticist, Alfred Korzybski, said, "the map is not the territory."[xiv] Or, as mathematician Eric Temple Bell said, "the map is not the thing mapped."[xv] The signal is not coming from within the market itself but mysteriously from a contrived database. This is what I would call the “Angie’s List Fallacy,” the notion that a list of pros and cons about vendors can substantially move the overall pricing and enhance customer service across a huge market. The theory seems wonderful; the practice does not deliver. Yet, the Bureau believe that the Narratives will be “responsive to the effect word of mouth can have on sales, adjust prices to match product quality and improve customer service in order to remain competitive.”[xvi] The Confidence Fairy reappears, when the Bureau asserts the indirect benefits of the “powerful first person voice of the consumer talking about their (sic) experience,” and the “ability for local stakeholders to highlight consumer experiences in their community,” and empowerment provided “by encouraging similarly situated consumers to speak up and be heard.”[xvii]

Given the direct and indirect benefits to the consumer, the Bureau seems to have arrived at the following algorithm: the aforementioned increase in benefits and utility leads to an increase in consumer contacts, which leads to a positive effect on Bureau operations, which leads to a “critical mass” of complaint data being achieved and exceeded, which leads to the representativeness of Bureau complaint data increasing. The July 2014 Proposed Policy Statement provides no information in support of effectiveness of this process nor does it offer how the “critical mass” will be sliced and diced, except to claim that the “complaint data” will be used by the Bureau’s Offices of Supervision, Enforcement, and Fair Lending, Consumer Education and Engagement, and Research, Markets, and Rulemaking.

Benefits to the Bureau: The Bureau sees itself as a vehicle to open and transparent government. As such, it takes the position that the expansion of the Database is needed in order to “further establishing itself as a leader in the realm of open government and open data.”[xviii] In support of this mission, it mentions the “Open Government Directive,” issued on December 8, 2009 by the Office of Management and Budget (“OMB”), which requires agencies to “take prompt steps to expand access to information by making it available online.”[xix] The Bureau indulges in a bit of spin when it asserts that “agencies have historically withheld data from the public due to privacy and cost controls, (but) with new technology comes new opportunities for openness without significant increases to privacy risk and costs.”[xx] I think it is fair to observe that agencies have withheld data from the public for numerous reasons, though the least of which seem to have been due to “privacy and cost controls.”

Advancement of Open Government Principles: In developing its thesis, the Bureau provides a list of agencies that are seeking to be more open and transparent, such as the Department of Health and Human Services, the Federal Trade Commission, and projects like and These efforts are rooted in the OMB’s call for a “presumption of openness” standard.[xxi]

Wednesday, August 6, 2014

Consumers in Foreclosure: Kick’em when they're Down!

On July 23, 2014, the Consumer Financial Protection Bureau (“Bureau”) and the Federal Trade Commission (“FTC”) jointly issued an announcement, entitled “CFPB, FTC and States Announce Sweep Against Foreclosure Relief Scammers” (“Announcement”).[i]

It seems that the perps (aka “perpetrators”) are out in full force, using deception and false promises to “collect more than $25 million in illegal fees from distressed homeowners.”[ii]

The Bureau and the FTC were joined, as well, by 15 states (collectively, the “agencies”), letting the world know about their collective “sweep against foreclosure relief scammers that used deceptive marketing tactics to rip off distressed homeowners across the country.” The Bureau is filing three lawsuits against the perps, those companies and individuals that allegedly collected more than $25 million in illegal advance fees for services that falsely promised to prevent foreclosures or renegotiate troubled mortgages. The CFPB seeks compensation for victims, civil fines, and injunctions against the scammers. The FTC is filing 6 lawsuits of their own, and the states are taking 32 actions.

The first lawsuit names Clausen & Cobb Management Company and its owners Alfred Clausen and Joshua Cobb, as well as Stephen Siringoringo and his Siringoringo Law Firm. The second lawsuit is against The Mortgage Law Group, LLP, the Consumer First Legal Group, LLC, and attorneys Thomas Macey, Jeffrey Aleman, Jason Searns, and Harold Stafford. The third lawsuit is against the Hoffman Law Group, its operators, Michael Harper, Benn Wilcox, and attorney Marc Hoffman, and its affiliated companies, Nationwide Management Solutions, Legal Intake Solutions, File Intake Solutions, and BM Marketing Group.

Here’s the allegation, in brief: the scammers used deceptive marketing to persuade thousands of consumers to pay millions in illegal, upfront fees for promised mortgage modifications. Each of the scammers was a law firm or was associated with one. It is further alleged that the defendants disguised their “false promises of foreclosure relief for struggling homeowners with claims that they were performing legal work.”[iii] The plaintiffs assert that these tactics are used by foreclosure relief scams to attract victims, add credibility to their schemes, or exploit certain legal exemptions for the practice of law.

The applicable Regulation that is cited is Regulation O, previously known as the Mortgage Assistance Relief Services (MARS) Rule. The FTC actually provides a guide on this rule, called “Mortgage Assistance Relief Services Rule: A Compliance Guide for Business” (“Guide”).[iv] Generally, this Regulation bans mortgage assistance relief service providers from requesting or receiving payment from consumers for mortgage modifications before a consumer has signed a mortgage modification agreement from their lender. The Regulation also prohibits deceptive statements and requires certain disclosures when companies market mortgage assistance relief services.

Some highlights of the Guide are worth noting:
·         It's illegal to charge upfront fees.
The foreclosure relief firm can't collect money from a customer unless it delivers – and the customer agrees to – a written offer of mortgage relief from the customer's lender or servicer.
·      The foreclosure relief firm must clearly and prominently disclose certain information before it signs people up for your services.
It must tell customers upfront key information about its services, including:
o   the total cost,
o   that they can stop using the firm’s services at any time,
o   that the firm is not associated with the government or their lender, and
o   that their lender may not agree to change the terms of their mortgage.
·    If the firm advises someone not to pay his or her mortgage, it must clearly and prominently disclose the negative consequences that could result.
It must warn customers that failure to pay could result in the loss of their home or damage to their credit rating.
·    The firm must not advise customers to stop communicating with their lender or servicer.
Under the Rule, it's illegal to tell people they shouldn't communicate with their lender or servicer.
·    The firm must disclose key information to its customers if it forwards an offer of mortgage relief from a lender or servicer.
It must give the customer a written notice from the lender or servicer describing all material differences between the terms of the offer and the customer's current loan.
The firm must also tell its customers that if the lender or servicer's offer isn't acceptable to them, they don't have to pay the firm’s fee.
·       The firm must not misrepresent its services.
Under the Rule, it's illegal to make claims that are false, misleading, or unsubstantiated.
Pertinently, the Bureau also alleges that some of the defendants violated the Dodd-Frank Wall Street Reform and Consumer Protection Act, which generally prohibits deceptive practices in the consumer financial market.

Now compare the foregoing requirements under the Rule with the illegal practices alleged in the complaints:
·       Collecting fees before obtaining a loan modification: Companies cannot legally accept payment for helping to obtain a mortgage modification for a consumer before the consumer has a modification agreement in place with their lender. All of these companies charged consumers advance fees without having first obtained modifications for them, which was not only illegal but also caused significant harm to consumers who often paid thousands of dollars without ever receiving a modification. The Bureau alleges that, after pocketing illegal fees from one distressed homeowner after another, defendants typically stopped returning consumers’ phone calls and emails.
·       Inflating success rates and likelihood of obtaining a modification: The firms’ marketing materials misrepresented the likelihood that they would help consumers save substantial sums in mortgage payments. Ultimately, many consumers who paid these companies advance fees did not receive a mortgage modification and ended up worse off than they began.
·       Duping consumers into thinking they would receive legal representation: All of these companies engaged in a particularly egregious scam where the perpetrators used their status as attorneys to dupe consumers into thinking they would receive legal representation when many consumers never spoke with an attorney or had their case reviewed by one.
·       Making false promises about loan modifications to consumers: During meetings, some consumers were misled into believing that they were eligible for a loan modification. Other consumers were promised that they would receive relief within a few months. In the end, many consumers learned that the defendants had not contacted their lenders or obtained any meaningful relief for them. Ultimately, homeowners across the country lost thousands of dollars and suffered significant economic injury, including losing their homes.
Just to break this down a little further. Let’s see what each of these defendants are alleged to have done, starting with the same order stated in the agencies’ announcement.

First up is Clausen & Cobb Management Company, Inc. and Siringoringo Law Firm. The Bureau’s complaint is against three individuals, Stephen Siringoringo, Alfred Clausen, Joshua Cobb, and a corporation, Clausen & Cobb Management Company, Inc. (CCMC), for allegedly charging homeowners illegal advance fees for mortgage loan modifications. Their operation charged initial fees ranging from $1,995 to $3,500, in addition to monthly fees of $495, to thousands of California homeowners in distress. The complaint alleges that Clausen, Cobb, and CCMC managed, staffed, and supported the deceptive loan modification operations of Stephen Siringoringo’s southern California law firm. The State Bar of California initially referred the misconduct to the Bureau.[v]