A Breath of Fresh Air amidst “ESG Month”
House Financial Services is in the tail-end of a Republican-led “ESG Month,” bringing to bear an onslaught against environmental, social and governance considerations in investing. That’s a month of six ESG-related hearings topped off by a vote on 18 bills, all working off of Rep. Huizenga’s ESG working group’s memo. AFR contends this anti-ESG crusade impedes corporate accountability and investor input. And it comes between crucial regulations that uphold investor-facing transparency, especially when it comes to the advisors that manage retirement savings investments. Last week, AFR and a coalition of 57 organizations sent a letter to the HFSC scrutinizing the working group’s agenda. It also reminded everyone that the fossil fuel industry is the one bankrolling this effort that harms workers, the financial system and beyond.
AFR’s Natalia Renta uplifts in a new blog, amid all the anti-ESG chatter, the voices working to defend the critical accountability provisions and investor- and public-friendly regulations that ESG Month seeks to tear down.
“Labor leaders and allies reminded Capitol Hill that workers’ hard-earned money is at the center of this controversy…
Speakers discussed the importance of shareholder engagement for corporate accountability and the need for the Securities and Exchange Commission (SEC) to be allowed to do its job — a critical part of which is equipping investors with more information to make better decisions about their investments. They also discussed how anti-ESG bills being considered in Congress would insulate the management of public companies from investor input and accountability and undermine regulations that would equip investors with more information to make better decisions about their investments.”
Some related news: Rep. Huizenga sent letters to the “Big Three” asset managers – BlackRock, Vanguard and State Street – as well as institutions like JPMorgan, Goldman Sachs and Fidelity interrogating how they handle ESG investing. And asked about their use of proxy advisory firms (AFR believes that these attacks on proxy advisory firms are veiled attempts to make it more costly and risky to advise voting against management’s wishes).
All this to say: July probably doesn’t need a new “_____ Month” designation, certainly not ESG Month. It’s already National Blueberry Month.
FINANCIAL STABILITY: Capital Requirements – Interest Rates, Venture Capital, Stability – Fintech Lending – Further to the Banking Crisis – Election Gambles
CRYPTO: The Stablecoin Bill – Regulatory Ripples – SEC & “Innovation”
CONSUMER: Happy Birthday, CFPB! – Credit Card Fees – Bullying Borrowers – Credit Access
CAPITAL MARKETS: Leveraged Loans – Legislative, Executive Stock-Owning
PRIVATE MARKETS: PElectrified
HOUSING: Biden and Rental Junk Fees – Stop Predatory Investing Act – Barr, AI and Fair Housing – Renters and Inflation – Eviction Diversion – Hurricane Ian
CLIMATE AND FINANCE: Voluntary Carbon Market – Economy Feeling the Heat
Feedback? Reach us at afrnews@ourfinancialsecurity.org
FINANCIAL STABILITY
Capital Requirements.
The Fed will meet this week on July 27 to vote on Basel III endgame capital requirements. The bank lobby’s come up with excuses for regulators not to promulgate stronger rules; BPI put out this errata sheet picking at Vice Chair Barr’s “holistic review” proposal. AFR has explained the need to shore up capital rules before. Also in this piece: a reminder not to be misled by the bank lobby’s smokescreen.
Interest Rates, Venture Capital, Stability.
A new paper from American University Prof. Hilary Allen explores how low interest rates from 2009-2021 and the machinations of the venture capital industry have introduced threats to financial stability. And it argues that heightened monitoring of the VC industry is necessary given its ability to “generate asset bubbles” and calls for enforcement of securities laws to deal with the crypto bubble and a “structural separation between crypto and the traditional financial system.” Writes Allen:
“Because responding to financial crises with prolonged periods of low interest rates will encourage yield seeking behaviors likely to sow the seeds of the next crisis, it is critical that regulators and policymakers take steps ex ante to make financial crises less likely…Although the VC industry is by no means the most pressing threat to financial stability, it would be worthwhile for financial stability regulators to be mindful of the role that the VC industry can play in building bubbles and coordinating panics.”
Fintech Lending.
Politico reports the Senate Small Business Committee challenged a plan laid out by the Biden administration for the Small Business Administration to allow fintechs to “play a bigger role in issuing government-backed small business loans.” The Committee approved a bill by Sens. Cardin and Ernst that would curb the SBA’s changes. Among the provisions: strengthening regulatory requirements, allowing nonbanks to make smaller, expedited loans but only backed by a “smaller government guarantee” and partly undoing restrictions on loans to corporate-affiliated businesses. Fintechs and payments trade association groups want the Senate Committee to reconsider. The Independent Community Bankers of America supports the Committee’s bill.
Further to the Banking Crisis.
Bloomberg reports that larger banks are trying harder and spending more to hold onto their depositor bases. When JPMorgan, Wells Fargo and Citi released their financial reports, they flagged concerns about deposit pricing, echoing earlier warnings from regionals like KeyCorp and Zions. At Wells and Citi, “deposits had slipped…by the end of the second quarter.” This may represent increased stress on smaller regional banks too, atop their exposure to a deteriorating commercial real estate lending market. A handful of regionals, including KeyCorp, Western Alliance and Zions, reported notable profit declines but stable or higher deposits versus the first quarter.
And: Senate Banking won’t rush to implement deposit insurance reform, four months on from the onset of the banking crisis. Related to that: the FDIC says institutions are generally underreporting their amount of uninsured deposits.
Election Gambles.
A few weeks ago, this newsletter wrote about how Kalshi, a platform purporting to let people “trade on the outcomes of events,” wants the CFTC to allow them to let entities like hedge funds gamble on federal election results. Last week, Public Citizen sent a letter to CFTC Chair Benham strongly opposing the idea. Better Markets also sent a letter opposing Kalshi’s efforts to CFTC Secretary Kirkpatrick.
CRYPTO
The Stablecoin Bill.
This week, House Financial will mark up its stablecoin bill. Earlier this week, Committee Democrats wanted Republicans to make some revisions. Politico reported the changes would address state-level crypto regulation and reserve requirements. Chair McHenry said he’s working to address Democrats’ concerns.
And: House Financial and House Agriculture released updated draft text of their digital asset market structure bill; it’ll be called the “Financial Innovation and Technology for the 21st Century Act,” or FIT for the 21st Century. Meanwhile, Politico reports, House Republicans are slated to deal the industry a victory by way of legislation that outlines special rules for digital asset trading.
Regulatory Ripples.
Gensler says he’s “disappointed” with the judge’s ruling that Ripple’s XRP token wasn’t a security when sold to retail investors, but considers the ruling that it is a security when it comes to institutional investors a good sign. The SEC will continue its work to get crypto companies to comply with SEC guidance.
Duke University fellow Lee Reiners sums up just some of the problems with Judge Torres’ ruling: it “flips securities law on its head.” The decision means wealthy investors benefit from protections while individuals and retail investors don’t. The ruling, he writes, also implies that retail investors wouldn’t be able to parse the litany of public statements and records from Ripple about its blockchain and token, even though institutional investors had access to the same information.
SEC & “Innovation.”
American University Prof. Hilary Allen says Republicans’ plans for digital asset regulation are a “terrible blueprint for regulation that would tailor, exempt and repeal existing laws” in service to the crypto industry’s harmful model. The proposal, she writes, would threaten investor protections and undermine the Commission’s rulemaking process. Allen argues a new “innovation mandate…would be a new and potent tool for attacking SEC rules,” as industry interests could argue the regulator’s rules stood in their way of innovation. “How can the SEC meaningfully push back against investor harm if Congress requires it to nurture private sector innovation?” asks Allen.
CONSUMER
Happy Birthday, CFPB!
The Consumer Financial Protection Bureau turned 12 years old on Friday! That’s 12 years of working to defend consumers, securing relief and acting against the financial entities that cause them the most harm. PIRG has a shortlist of the CFPB’s top ten enforcement actions in 2023. Consumer Reports has some highlights here too. But who’s not at the party? Accountable.US reminds us it’s bad industry actors.
Credit Card Fees.
In anticipation of a version of the Credit Card Competition Act (CCCA) appearing as an amendment to FY2024’s National Defense Authorization Act (NDAA), the bank lobby sent a letter to congressional leaders, including cosponsors Sens. Marshall and Durbin, urging them to leave it and similar proposals out. The CCCA, not yet up as an amendment itself, would tackle the “Visa/Mastercard duopoly” by requiring card-issuing institutions to offer retailers at least two networks on which transactions could occur. The Independent Community Bankers of America polling shows voters are opposed to changing credit card transaction tech. The bank lobby and Americans for Tax Reform previously sent oppositional letters of their own.
Bullying Borrowers.
The CFPB announced a lawsuit against Snap Finance alleging that the company offered millions of “lease-purchase” and “rental-purchase” financing agreements in ways that would harm consumers. The suit says Snap Finance locked customers into expensive agreements with deceptive advertising practices, obscured the terms of their agreements, misrepresented customers’ rights in those agreements and used false threats and illegal collection practices against struggling borrowers.
Credit Access.
The NY Fed released the results of its SCE Credit Access Survey, and findings signal consumers facing increasing difficulty accessing credit. Rejection rates for applicants for all types of credit lines increased to 21.8%, their highest level since June 2018. Rejections for auto loans hit a “new series high” with 14.2% of applicants being turned away. And the probability that a loan application would be rejected “increased sharply” – it’s nearly a coin toss (46.1% reject probability) that someone applying for a mortgage would be turned down.
CAPITAL MARKETS
Leveraged Loans.
Leveraged loans, those that are made to borrowers already under a high debt burden or have a low credit rating, are a $1.4tn market and are often crammed into securitized packages called collateralized loan obligations (CLO). Previously, a panel of Court of Appeals judges sought the SEC’s input about whether leveraged loans should be classed as securities. The Commission declined to comment. At the heart of the request: a 2019 lawsuit filed by a bankruptcy trustee of the drug testing company Millennium against JPMorgan alleging securities laws violations. Later, a NY judge said the banks couldn’t have violated securities laws if syndicated loans aren’t securities. Now, the case is on appeal. The Loan Syndications and Trading Association (LSTA) joined JPMorgan and Citibank (both defendants) in lobbying the SEC against declaring these loans securities.
AFR’s Andrew Park says that the current designation of these loans is a loophole that allows financial institutions to circumvent securities laws:
“The International Monetary Fund, the Federal Reserve, and the Bank for International Settlements have been warning of the risk of the growing leveraged loan market for several years. Despite this it has continued to grow…We are urging the court to stop this ‘wild west’ market.”
Earlier this year, AFR also filed an amicus brief to the court, stating:
“The lack of investor protection under securities laws for these weaker, more heavily indebted borrowers is also repeatedly harming investors who are deceived by the asymmetric information between the loan issuer and themselves.”
Legislative, Executive Stock-Owning.
Sens. Gillibrand and Hawley plan to introduce a bill that would prevent members of the legislative and executive branches of government from owning stocks in individual companies, but would still allow them to purchase mutual funds, broad industry funds and index funds. The penalty would amount to 10% of the value of their prohibited investments if they don’t comply.
PRIVATE MARKETS
PElectrified.
By the end of the year, Blackstone will acquire a near-20% stake in energy company NiSource’s NIPSCO unit, described by Reuters as an “integrated electric- and gas-distribution unit” serving 1.3mn customers in Indiana. Public Citizen and Indiana Citizens Action Coalition filed a document with the Federal Energy Regulatory Commission exposing Blackstone for exploiting an electricity monopoly law to abuse consumers.
“The Commission must reject the request for expedited review and set the matter for hearing, as the transaction is designed to exploit Indiana’s just- enacted statute granting NIPSCO and other Indiana utilities a right of first refusal to build transmission lines approved by MISO that will unjustly and unreasonably raise rates for consumers, and therefore violates the public interest.”
HOUSING
Biden and Rental Junk Fees
On Wednesday, the Biden administration announced they’d target junk fees in the rental housing market as part of its campaign against burdensome excess fees. A fact sheet calls out rental application fees before a renter’s gotten into a house and surprise fees after – “convenience” fees in rent payments, fees for trash collection, needless “January fees” and more. The administration has demanded commitments from Zillow, Apartments.com and AffordableHousing.com to provide transparent, upfront cost information, has commissioned research from the Department of Housing and Urban Development to address these junk fees, and has urged legislative action on the state-level to protect consumers. The National Consumer Law Center cheers the administration’s decision, which comes a few months after the release of the Center’s report on junk fees’ contributory effect on skyrocketing rents.
Stop Predatory Investing Act.
The National Low Income Housing Coalition applauds a bill unveiled by Senate Banking’s Brown that takes aim at predatory investment in single-family homes. The proposal would stop private equity and other large investors who own 50+ single-family rentals from being able to benefit from tax breaks, and would incentivize these investors who sell their rental properties back to homeowners or local nonprofits. Since the Great Recession, there’s been a wave of corporate rentals backed by private equity entering the market, buying tens of thousands homes to rent out.
Barr, AI and Fair Housing.
During a speech on “Furthering the Vision of the Fair Housing Act,” Fed Vice Chair for Supervision Michael Barr touched on the role of artificial intelligence and other technological innovation in fair lending. While he cedes that AI can provide a relatively low-cost means to leverage data and expand credit, he says it “also [carries] risks of violating fair lending laws and perpetuating the very disparities that they have the potential to address.” It’s an issue that’s been simmering for years; in 2021, an investigation of mortgage approval algorithms found that these systems were 80% more likely to reject Black applicants. Barr used “digital redlining” as an analogous example, citing a 2019 lawsuit by the National Fair Housing Alliance and three groups against Facebook alleging the social media giant’s advertising platform let landlords exclude “people of color, families with children, women, people with disabilities, and other protected groups” from seeing ads for housing.
Renters and Inflation.
According to the Bank of America Institute, higher housing costs are impacting renters more than they are homeowners. Renters’ spending power beyond living expenses has been constrained by skyrocketed rent inflation. Meanwhile, most homeowners’ monthly payments haven’t gone up. Importantly, even if the average mortgage payment costs more than the average monthly rent payment, “renters’ income tends to be less than homeowners” and a larger share of the latter’s income tends to go to rent.
Eviction Diversion.
In Philadelphia, a pandemic-era eviction diversion program has kept thousands of renters housed since late 2020. If a tenant owes less than $3,000 in back rent, landlords are obligated to pursue “mediation in good faith” before following through with eviction. After 30 days, if there’s no agreement, only then can the landlord take the case to court. A project director at Princeton’s Eviction Lab calls it “one of the best-designed diversion programs in the country,” as Philly has seen fewer than the 20,000 filings it usually had in previous years. But, soon, the $30mn set aside for rental assistance will run dry, and the order for mandatory landlord participation will expire next summer.
But: When evictions do go through, Philly has a system that involves “landlord-tenant officers.” They’re “a court appointed lawyer who enforces eviction orders using private security contractors.” After a string of shootings by their deputies, the city has announced it will be suspending evictions conducted by these officers until they’ve all been retrained in the use of force and deescalation.
Hurricane Ian.
Politico explores how the high cost to rebuild homes decimated by Hurricane Ian has driven working-class workers out of their waterfront neighborhoods. In their absence, wealthy buyers are able to scoop up their homes. The federal flood insurance program has an upper limit on payouts far below market values, and insurance payments after Ian were even lower.
CLIMATE and FINANCE
Voluntary Carbon Market.
The CFTC plans to draft standard-setting policies in the voluntary carbon market. In voluntary carbon, carbon-emitting companies can purchase carbon credits put out by projects trying to remove greenhouse gasses from the atmosphere. Each credit equates to one metric ton offset. The CFTC’s Benham wants to “send a signal through some sort of regulatory action to the underlying market participants that this is what we expect in order for our markets to not be readily susceptible to fraud or manipulation,” reports Politico.
Economy Feeling the Heat.
As the country swelters under oppressive (and rising) temperatures, researchers suggest that heat waves like these can constrain economic growth. A 2018 study found that a one-degree Fahrenheit jump in average summer temperatures “can reduce the annual growth rate of a state’s output by 0.15 to 0.25 percentage point.” Small businesses and individuals are expected to suffer most. In one case presented by the WSJ, a company had to take out a small-business loan to finance a new air-conditioning system while workers sweated in a 118-degree kitchen. And at home, the National Energy Assistance Directors Association thinks home energy bills will rise 11.7% from last year, up to an average of $578 this summer.