The CFPB’s Day in Court
According to a recently released calendar, it’ll be October 3. That’s 78 days until oral arguments for CFPB v. CFSA, upon which the fate of the agency hinges, will be heard before the Supreme Court.
The crux of the case: Whether the Consumer Financial Protection Bureau’s funding mechanism is unconstitutional. In what AFR calls an “outrageous undermining of consumers’ rights,” the Fifth Circuit Court of Appeals said its structure is unconstitutional in a decision that would prove catastrophic if SCOTUS allows it to stand. Under Dodd-Frank, the CFPB draws its funds from a pre-set percentage off the top of the Federal Reserve’s operating expenses, subject to adjustment every year. But the CFPB’s opponents would see it go through to congressional appropriations instead, which calls into question other government bodies with funding structures outside of the appropriations process: the Federal Reserve, FDIC, U.S. Postal Service and the U.S. Mint among them, and mandatory government programs such as Medicaid and Social Security that are also not subject to annual appropriations.
AFR issued a press release rebutting the bank lobby’s attempts to mislead the Supreme Court regarding the dangers of the CFSA’s challenge to the CFPB’s funding structure. The U.S. Chamber of Commerce and financial services lobby groups argued in a recently filed brief that it would be possible to limit the damage and market destabilization if the Fifth Circuit decision, which ruled the Bureau’s funding mechanism unconstitutional, stands. In response, AFR’s Elyse Hicks says:
“Upholding a ruling that the CFPB is funded unconstitutionally necessarily calls into question every rule and enforcement action the CFPB has conducted in the past 12 years and would be a radical and unprecedented step for the judiciary…The industry lobby can contrive whatever attempted fixes it wants. But in fact it wants the Supreme Court to risk financial stability for the purpose of destroying an agency that predatory lenders and abusive financial industry players of all kinds oppose precisely because it makes it harder for them to rip people off, discriminate, or treat customers unfairly.”
Earlier this spring, a bulk of pro-CFPB amicus briefs hit the Court in a wave of support for the embattled agency. They came from 144 current and former members of Congress, 23 states and D.C., a group of 90 state and local nonprofits, several consumer advocacy and civil rights organizations and more.
More recently, a number of anti-CFPB documents have been filed with the Court. Briefs from John Eastman, the lawyer who helped Trump try to overturn the 2020 election, and the payday lending lobby helped highlight what a weak case proponents of the CFSA’s case have. Accountable.US has a roundup of groups in support of predatory payday lenders’ argument against the CFPB.
FINANCIAL STABILITY: Bank Mergers – Capital Requirements – Fed Stress Tests – Gensler on AI – Rates and Recession – Fed Appointments – Further to the Banking Crisis
CONSUMER: Prehired Practices – Student Loans – Pandemic Credit Scores
CAPITAL MARKETS: Capital Formation Bills – Money Market Funds
PRIVATE MARKETS: PE Antitrust
CRYPTO: Celsius Heat – Regulatory Ripples – The Stablecoin Bill – Crypto Money Laundering
CLIMATE AND FINANCE: ESG Hearing Part 1
POLITICS AND MONEY: The Supreme Court – $20 Gift Cards to Donors
Feedback? Reach us at afrnews@ourfinancialsecurity.org
FINANCIAL STABILITY
Bank Mergers.
On Wednesday, Senate Banking held a hearing to examine the state of bank mergers and the “economic impacts of consolidation.” Warren struck at Treasury’s Yellen and OCC’s Hsu, calling them “stunningly wrongheaded” when they expressed an openness to larger banks’ mergers. Said the senator:
“Regulators are courting disaster by continuing to encourage giant banks to grow even bigger. Treating mergers as a solution to financial instability increases financial instability.”
AFR’s Alexa Philo testified at the hearing and expressed concern about excess concentration in the sector and the need for stronger bank merger review frameworks, criticized regulators for allowing mergers to proceed with no rejections in over 15 years, and highlighted the harmful impact of bank mergers. Said Philo:
“We strongly urge the banking agencies to act swiftly to strengthen the Bank Merger Guidelines and be full-throated and clear that robust regulation and competition, not consolidation, will lead to a healthier, safer, and more vibrant financial system. Those opposed would have us believe that we need deregulation to check concentration, pointing to failures to effectively supervise SVB. We disagree. A supervisory failure does not, as some would have us believe, indict all supervision as being ineffective. It argues for stronger regulation and effective supervision.”
Capital Requirements.
A band of bank lobby groups – the American Bankers Association, Bank Policy Institute, SIFMA, Financial Services Forum and Institute of International Bankers – sent a letter to Fed Chair Powell in response to Vice Chair of Supervision Barr’s speech on shoring up capital requirements, at a Bipartisan Policy Center panel where AFR’s Alexa Philo also participated. The five organizations say the proposal would be burdensome and that banks are “well capitalized.” Again, AFR urges people to ignore the bank lobby misdirection when it comes to strengthening capital requirements.
Fed Stress Tests.
Last week, the Fed subjected some of the nation’s largest banks to a stress test examining how they’d weather a severe global recession, stress in corporate debt and plunging commercial and residential real estate markets. Former FDIC Chair Sheila Bair believes they’re not assessing the right dangers. A more likely scenario, she says: “a prolonged period of high and rising interest rates.” Those conditions, after all, are what brought down SVB. Bair notes that while the Fed does perform nonpublic “liquidity tests,” tests of liquidity risk shouldn’t be separate from tests of capital strength.
Gensler on AI.
During a speech on Monday, SEC Chair Gensler warned about the risk that artificial intelligence poses to financial stability. He notes that AI may threaten stability depending on how it steers entities to act. Politico reports that an AI-generated photo of an explosion at the Pentagon briefly brought down stock values, and a different AI-generated article suggested to crypto traders that Gensler was resigning.
Rates and Recession.
The Fed released its Beige Book report for the month of June last week, noting a slight increase in overall economic activity across the board. Employment and wages experienced moderate growth, with wage increases coming closer to pre-pandemic levels. Prices, likewise, modestly increased. Demand for residential real estate held out, but construction for both residential and commercial units read slightly lower (reminder: commercial and residential real estate were part of the Fed’s stress test). One humorous tidbit: the Philly Fed attributed a notable tourism surge, with hotel revenues having reached a post-pandemic high in May, to Taylor Swift’s concert in the area. The NY Fed released its Underlying Inflation Gauge: it’s at 3.2%, 0.4 percentage points down from last month’s estimate.
WSJ suggests that a “soft landing,” escaping a period of high inflation without a recession, may be somewhat more likely given the results of the recent CPI report showing lower inflation climbs. But while Harvard University Prof. (and former Chair of the Council of Economic Advisers) has brought down his year-end inflation estimate down to 3.5% from 4%, he’s “nervous about the euphoria” and says a “full-on soft landing” would take a dose of luck.
The Bureau of Labor Statistics published its Producer Price Index report for the month of June on Thursday. Reuters calls the minor uptick in producer prices and three-year low in annual producer inflation increases “evidence that the economy had entered a period of disinflation.”
Fed Appointments.
Senate Banking approved Biden’s nominations to fill three positions on the Fed’s Board of Governors on Wednesday. A series of unanimous votes elevated Fed Governor Philip Jefferson to vice chair, placed Adriana Kugler – momentously the first Latina economist to serve on the Fed board – in his vacancy, and appointed Lisa Cook to another open position.
Further to the Banking Crisis.
The WSJ expects to see whether the banking crisis has passed when institutions begin releasing their financial reports. Some factors to keep an eye on: deposit cost, as many banks have resorted to paying out more interest to retain their deposits; unrealized losses on bonds; rainy-day funds stashed away to weather stress; and stock values. So far, JPMorgan, Wells Fargo and Citi have released their results, and NYT reports they’re doing better than expected. But those three are among the outsized, too-big-to-fail class of banks; most of the shock from the banking crisis rippled through midsize lenders, which will put out their financial reports over the next week. Bank of America and Morgan Stanley joined them on Tuesday, with an increase and a decrease in profits respectively YoY. Regional lender PNC put out results as well: flat profits, year-on-year.
Bloomberg reports Silicon Valley Bank has to come up with a bankruptcy exit plan by the end of the year or it would put at risk $11bn in “tax attributes and rights,” called net operating losses (NOLs), per SVB Financial’s lawyers. Columbia University Prof. Todd Baker notes that NOLs can be carried across a deal to put up against future profit and lower tax bill. They’d sweeten the pot for anyone looking to acquire the financial group, potentially some of SVB Financial’s own bondholders. Reminder: the bank’s former parent company and its bondholders are fighting over the fate of billions in seized deposits too.
CONSUMER
Prehired Practices.
The CFPB, a state-level regulator and a group of state attorneys general filed suit against Prehired, an entity that operated a 12-week online training program that pushed applicants to sign an “income share” loan while promising “six-figure salaries'' with a “job guarantee,” for its deceptive marketing and debt collection practices. Said Director Chopra:
“Prehired falsely pitched its purported training program as a risk-free investment, but instead often saddled its students with debt…The CFPB is joining with the states to void these loans obtained through illegal student lending practices.”
Student Loans.
On Friday, the Department of Education began to notify over 800,000 borrowers that $39bn of their loans would be automatically forgiven due to tweaks in the income-driven repayment program. In April 2022, the Biden administration announced a payment count adjustment, which fixes “historical inaccuracies in the count of payments that qualify toward forgiveness.” Under the Higher Education Act, borrowers should have qualified for forgiveness after making 240 or 300 monthly payments, the equivalent of 20 or 25 years on an income-driven or standard repayment plan, with some variance. But inaccurate payment counts, which the adjustment addresses, kept forgiveness out of the hands of borrowers who deserved it.
The CFPB’s Office of Research released a review of its Fresh Start program, which helped about 7.5mn borrowers with student loans “avoid the negative effects of default and gain access to benefits, such as additional federal student aid, eligibility for new government loans, and a temporary end ot involuntary collection activity.” The program was more likely to aid borrowers that lived in high-poverty areas, had other accounts in collection and had lower credit scores. After the Fresh Start program, the affected borrowers experienced a median 50-point increase in their credit scores.
Pandemic Credit Scores.
During the pandemic, many people’s credit scores rose thanks to the arrival of stimulus checks and the deferral of loans. Now, in what WSJ calls a “mismatch between credit scores and real-life financial situations,” borrowers are falling behind. An analysis by TransUnion indicates that delinquency rates for credit cards and mid-2021 loans better reflect those of borrowers with 25-point-lower credit scores.
CAPITAL MARKETS
Capital Formation Bills.
AFR sent a letter to the House of Representatives expressing opposition to a bundle of capital formation bills that would amend federal securities laws in ways that would harm investors. Some proposals weaken regulatory oversight and undermine investor protections outrights, while others make subtler or more incremental adjustments to policy. The letter scrutinizes 18 bills, which have either passed in the full House or just in House Financial, but the lowlights include: five proposals that would expand the “accredited investor” designation, in turn strengthening a private marketplace that routinely strips investors of basic information and protections; and, a handful of bills that would make it easier for companies to become and stay so-called “Emerging Growth Companies,” a designation that faces weaker regulatory oversight.
Money Market Funds.
SEC officials voted 3-2 to finalize a set of rules that would bolster the resilience and transparency of money market funds. The reforms would increase minimum liquidity requirements to better pad reserves against periods of stress, remove funds’ ability to suspend redemptions, and empower the SEC to keep an eye on data by enhancing reporting requirements, among other amendments. The changes come after the banking crisis earlier this year drove depositor cash away from banks and to retail money market funds. Politico reports Gensler also had an eye toward 2020’s “dash for cash,” worsened by funds temporarily halting investor redemptions.
PRIVATE MARKETS
PE Antitrust.
Axios reports the Department of Justice is approaching a decision on whether to call into question Thoma Bravo’s proposed $2.3bn purchase of ForgeRock. While regulators usually stay out of private equity transactions of this size, the Department of Justice believes that Thoma Bravo may want to merge the bought-out firm with a second company in their portfolio, and possibly a third.
CRYPTO
Celsius Heat.
On Thursday, Alex Mashinsky, former CEO of the failed crypto platform Celsius, was arrested on charges including securities fraud and wire fraud, as well as the company’s former CRO Roni Cohen-Pavon, who was charged with four counts. Prosecutors allege Mashinsky “orchestrated a scheme to defraud customers,” in part by misleading customers to purchase its token, CEL, and deposit money into a program that promised returns as high as 17%, as well as misrepresenting the company’s financial health. They also “fraudulently manipulated the price” of CEL. The SEC, CFTC and FTC also filed suit against the CEO and the company, which failed a little over a year ago after posting a $1.19bn deficit. Not long after the FTC filed its suit, the agency announced a $4.7bn settlement, permanently banning the company from handling consumer assets and charging three executives with “tricking consumers into transferring cryptocurrency onto the platform by falsely promising that deposits would be safe and always available.” The FTC called it a case of “cryptocurrency deposits with no returns.”
Regulatory Ripples.
In another crypto case, a federal judge ruled on Thursday that crypto platform Ripple Labs’ token XRP “is a security when sold to institutional investors but not in most other cases,” per Politico. The decision ruled that $728mn worth of sales violated securities laws, but about another $1.4bn didn’t qualify as an asset by the SEC’s definition. Politico puts it simply: “Wall Street and Silicon Valley are afforded all the investor protections that come with a registered investment product. Day traders are not.” And they say that it “scrambles” Gensler’s argument that most crypto activity falls under SEC jurisdiction, at a time when Republicans want to strip the SEC of that very power and hand some to the CFTC.
The Stablecoin Bill.
House Financial met informally to discuss crypto last Tuesday. One “sticking point,” reports Politico, falls on how the bill would treat anonymous trades. Democratic Rep. Foster noted a desire to reach a better understanding about whether to allow anonymous trading and self-custody, an issue that has the potential to garner support for the bill among Democrats. Next Wednesday, July 26, House Financial plans to markup the bill, pushing the anticipated date back a week.
Crypto Money Laundering.
Politico reports members of Senate Banking are working to create a bill that zeroes in on crypto-centered money laundering. The legislation would attempt to put crypto money laundering monitoring and reporting standards on par with those already in place among traditional lenders.
CLIMATE and FINANCE
ESG Hearing Part 1.
On Wednesday, House Financial held the first in a series of ESG-related hearings over the month of July. Take On Wall Street highlights the important points with a live-tweet thread. Politico sums up some takeaways: Chair McHenry took aim at the “proxy process,” trying to tamp down on “activism” in shareholder votes; several Democrats framed the anti-ESG effort as “an attack on diversity and investor choice”; some Dems, like Reps. Scott and Tester, worried about the impact of climate disclosures on companies and farmers; and, Republicans generally shied away from attacking large asset managers like BlackRock and Vanguard, but did call out some proxy advisory firms.
And on Friday, another hearing was held to examine how ESG might “distort markets” in housing and insurance. AFR’s Caroline Nagy testified that “ESG is not the main driver of insurance affordability. Behind rising insurance prices, she says: climate change, increasing reinsurance rates and unsustainable land use practices. And behind increasing housing prices: an affordable housing shortage, unsustainable land use practices, corporate profits, private equity involvement and federal lending practices.
Related: Sen. Vance introduced a bill that would prevent regulators from “acting on the basis of reputation risk,” according to Politico, by reducing pressure on banks to “cut off customers like crypto firms, gun manufacturers and oil and gas companies.”
POLITICS and MONEY
The Supreme Court.
The Associated Press reports that visits to college campuses often provide an opportunity for university donors to schmooze SCOTUS justices. On several occasions, school officials packed guest lists so major donors could get facetime with the justice – like when one University of Colorado law school staff suggested a “larger donor to staff ratio” for a dinner with Justice Kagan, or when a Clemson official invited donors that had given $1mn or more to a luncheon with Justice Sotomayor. The behavior, AP notes, would be unacceptable for most federal judges. But SCOTUS’ fundraising definition is narrow enough to exclude these activities.
$20 Gift Cards to Donors.
North Dakota’s Republican Governor Doug Burgum has put in for the 2024 presidential election but needs 40,000 donors to meet the requirements to take the stage at the RNC primary in August. A billionaire, NYT reports, Burgum could fund his own campaign. But to pump up his numbers, he’s taken to wooing potential voters by offering $20 gift cards to the first 50,000 people to donate at least a dollar to his campaign.