By William K. Black
July 11, 2017 Bloomington, MN
Politico has just published a column with a title and analytics that drive white-collar criminologists nuts: “In a major setback for businesses, CFPB opens door to consumer class actions.” Logically, the title should have read: “In an important step forward for consumers, investors, and honest bankers and lenders, CFPB begins to restore the rule of law to banking.”
The CFPB is the acronym for the Consumer Financial Protection Bureau. The problem that led to CFPB to issue its new rule has six parts. First, it is often profitable for lenders to abuse and defraud borrowers. Second, lenders are able to do this because financial understanding is highly asymmetric. Third, even if the borrower eventually spots the fraud or abuse it is rare that the typical borrower could profitably prove the fraud and recover enough funds in a lawsuit to (net of legal expenses) recover effectively and could never recover enough to deter future misconduct. Fourth, the only potential legal remedy for the typical victim to recover and deter is the class action suit.