CFPB v. CFSA’s Lesson in Irony
As the Supreme Court prepares to hear oral arguments on Oct. 3 about CFPB v. CFSA, the case over the constitutionality of the consumer agency’s funding, some stars are aligning that could make for an ironic session.
The case is about CFPB’s secured funding at a time when House Republicans might trigger a government shutdown. The Supreme Court, too, has a measure of secured funding via the fees imposed on filers in federal court. So, in some sense, the Supreme Court will hear arguments about whether the CFPB can be funded the way the Supreme Court is.
Discussion is picking up about the impact that an adverse decision in the CFPB case would have on housing finance markets, something that Director Rohit Chopra addressed in a speech this week:
“[M]oving to a world where the future of housing finance oversight is uncertain and unknown, including the number of years we would be living under such mystery, should raise serious shared trepidations among market participants, financial markets, and consumers alike.”
And this week is the 15th anniversary of the bankruptcy of Lehman Brothers on Sept. 15, 2008 – the signature event of that financial crisis, the occasion for another Chopra speech:
The rules administered by the CFPB, and other financial regulators, are crucial for the stability of the financial markets and of household finances, and questions about those rules and the ability of markets to adapt to future challenges would raise significant concerns for the stability of the nation’s financial system.
So, as AFR has argued, here’s hoping the Supreme Court overturns the erroneous decision of the Fifth Circuit and simply leaves the CFPB’s funding as is. As Rep. Maxine Waters reminded us in an op-ed this week:
The Constitution is clear: Congress can fund the executive branch, including the CFPB, banking regulators and other agencies however it likes, and has done so for nearly 250 years. This attack on the CFPB is another destructive effort by Republicans to undermine all types of essential government programs like Social Security and Medicare.
Looking ahead: On Sept. 28, the American Constitution Society will have a virtual event on the coming term, at which Brianne Gorod of Constitutional Accountability Center will speak about the CFPB case. Alliance for Justice will hold a discussion with Rep. Jamie Raskin and others on the term on Sept. 19. Bet that Deepak Gupta, one of the panelists, will address the CFPB case.
FINANCIAL STABILITY: Capital Rules – Banks as Public Utilities – Greedy Landlords and Inflation – A Nuclear JPMorgan
CONSUMER: Arbitration – Risky Tuition Payment Plans – Student Loans – Rent-a-Tribe – EWAs are Loans
PRIVATE MARKETS: Private Funds Rules – Vulnerabilities – Other PE Hits
CRYPTO: Warren’s Crypto Crime Plan – FedNow – Action on Crypto? – CBDCs, Swiftly
HOUSING: Phoenix’s Corporate-Owned Apartments – Affordability
CLIMATE AND FINANCE: California Climate Disclosure – Labor’s Green Capital – Climate-Related Financial Meltdown
Feedback? Reach us at afrnews@ourfinancialsecurity.org
FINANCIAL STABILITY
Capital Rules.
On Wednesday, all 29 Republicans on House Financial did the bidding of Wall Street by sending a letter to regulators asking them to withdraw the proposal, suggesting it has “fatal problems.” Politico reports some House Financial Democrats are likely to “raise concerns about the plan’s potential to dampen renewable energy investing,” but that most Committee Democrats support the rules. AFR, too, as the rules will improve stability, increase credit availability and better the financial well-being of individuals and their communities.
NYT profiles the Fed’s Barr, calling him the “Man Making Big Banks Tremble.” He’s stood firm on his efforts to strengthen the financial system against instability, despite a barrage of attacks from the bank lobby, conservative lawmakers and both of the Fed’s Trump-appointed governors.
Columbia’s Kate Judge notes that Basel III endgame capital rules are “entirely consistent” with the aim to support small businesses, as she testified before a House subcommittee hearing.
Banks as Public Utilities.
Today is the 15th anniversary of the investment bank Lehman Brothers’ collapse, the bank failure widely thought to be a seminal moment in the subprime mortgage crisis and the eventual financial recession in 2008. To mark the occasion, Vanderbilt’s Morgan Ricks and Columbia’s Lev Menand make a call to start treating depository banks like public utilities, effectively separating them from other financial institutions.
The reason, as Ricks lays out: the original banking laws were conceived “along public utility principles” and banks needed to meet the needs of their communities with minimal risk. Forty years of deregulation caused protective provisions that would prevent bailouts for the “too big to fail” and excessive risk-taking to be watered down or repealed entirely.
Ricks’ and Menand’s plan would pull banks back into the public utility framework of the past. They would reinstate limits on bank power, separate depository institutions from dealing in securities and other derivatives, prohibit nonbanks from bankrolling their operations with cash equivalents and ensure easy access to bank accounts without predatory fees. Read the op-ed here. And a policy brief here, which has a ten-point plan that would see all depository institutions become Fed member banks with full, capless FDIC insurance, limitations on how much money banks could create, the closing of critical loopholes, structural separations, and the prevention of foreign countries from “issuing dollar-denominated money,” among other provisions.
And, on too-big-to-fail: Remember Wells Fargo’s bogus accounts scandal? A former exec won’t face any jail time for her role in it, per WSJ. It’ll be a $100,000 fine and community service instead. AFR has a useful resource to catch up on Wells Fargo’s other abuses here, with 43 entries and an interactive timeline.
Greedy Landlords and Inflation.
This week, the Bureau of Labor Statistics released August’s Consumer Price Index (CPI) report. The short of it: “mild price pressures,” according to WSJ, excluding energy prices, that will likely keep the Fed on track to pause before any further hikes. Accountable.US calls the inflation report “largely positive,” showing slight slowdowns in inflation levels in the core. The biggest blemish, however: greedy, corporate landlords and their contribution to high housing costs. One estimate, they highlight, finds that shelter costs “contributed to roughly half of overall headline inflation” through Q1. And they’ll continue to raise rents to profit.
A Nuclear JPMorgan.
Next week, the Federal Energy Regulatory Commission (FERC) will rule on whether JPMorgan’s relationship with Infrastructure Investment Fund (IIF) would necessitate the two to be considered legal affiliates. The context here: FERC launched an investigation in 2021 to determine if JPMorgan “secretly controls” IIF, which controls a nuclear power plant, fossil fuel power plants, El Paso electric, a natural gas utility and numerous other energy assets according to Public Citizen, which lodged the request for investigation those years ago. PC went on to suggest FERC precedent requires the two to be classed as affiliates.
CONSUMER
Arbitration.
Americans for Financial Reform, Public Citizen, and seven other consumer advocacy groups have petitioned the CFPB for rulemaking surrounding forced arbitration – that’s when a company forces a consumer to enter a private, binding judgment process while waiving their right to sue, participate in class action lawsuits or appeal the decision when an issue arises. The groups’ petition calls for the agency to mandate “meaningful consumer consent” provisions to allow the injured party to “make a meaningful choice on whether to use arbitration after a dispute arises.” Reads the letter:
“Forced arbitration requirements eliminate a consumer’s legal options before a problem even emerges and constitute a grave risk to a consumer’s financial safety and to the wellbeing of the consumer finance market…Consumers’ interests are protected by competitive markets where they can make informed and meaning choices about the products they use and the terms of service they are bound to, but the evidence shows that consumers are not aware of, and therefore not actually consenting, to ubiquitous forced arbitration provisions…”
Some of the evidence to which they refer: A paper out of UMich quantifying the lack of awareness of arbitration clauses.
Risky Tuition Payment Plans.
A new report from the CFPB discovers some interest-free tuition payment plans can actually put borrowers at risk. The agency’s study of 450 colleges finds that “many plans have inconsistent disclosures and confusing repayment terms,” which heightens the risk that a student will miss payments, rack up late fees and fall deeper into debt. Nearly 90% of schools charged an enrollment fee to enter one of these plans, averaging $37 but going as high as $250, and 44% charge late fees. The practice of withholding transcripts until full payment may also be “potentially illegal.” Some other issues the report found: some plans require students to waive their legal protections, some included forced arbitration clauses, and some allowed colleges to convert these no-interest plans into interest-accruing ones if payments are missed. With the burden of these additional fees, the CFPB estimates students can technically face APRs as high as 237%.
Student Loans.
Over four million student borrowers have enrolled in the Biden administration’s SAVE program, a new student loan repayment program that lowers monthly payments and places a limit on interest. Now, it may be coming under fire by Republican lawmakers in the House. House Education voted 23-19 to approve a resolution that would block the new plan, reports Politico. They’re trying to overturn the policy by way of the Congressional Review Act.
And: Retailers fear that October’s restart of student loan repayments could cause a considerable pullback in consumer spending. “Most economists think that while the hit could be substantial, it will not be so big that it would plunge America into a recession,” writes NYT.
Rent-a-Tribe.
Island Mountain Development Group (IMDG), a payday lending enterprise owned by the Fort Belknap Indian Community in Montana, has sued its former attorney, alleging a financial mismanagement scheme. The company, which peddles loans with annual rates as high as 725% through subsidiaries, was licensed under the community’s Tribal Regulatory Authority. The Daily Montanan says the case “exposes [the] legal gray areas of payday lending.” State usury and consumer protection laws generally don’t extend into tribal jurisdiction. Tribal sovereignty prevents lawsuits from being levied against these “tribal and arm-of-the-tribe” lenders unless the tribe consents. In some cases, outside parties set up payday lending businesses with tenuous affiliations with tribes to receive the benefits of tribal sovereignty – called a “rent-a-tribe” scheme. Now, these “nefarious actors” may put tribes’ sovereign immunity in jeopardy. And federal judges must wrestle with how to “balance tribal law with state usury laws.”
EWAs are Loans.
The Connecticut Department of Banking has issued guidance related to Earned Wage Access programs – more about those here (tl;dr: services that allow workers to access their wages early, in some cases at the cost of high fees or high APRs). The short of it: EWAs are loans, even as their industry heads insist they’re something else entirely. The state’s “small loan” definition includes EWAs and will require servicers to secure a state small loan license if they have an APR above 12%. (Some EWA programs work out to APRs as high as some payday loans.)
PRIVATE MARKETS
Private Funds Rules.
FT reports that private equity, venture capital and hedge fund firms are gearing up to spend billions on “compliance and legal advice” since the SEC’s rulemaking requiring greater transparency from a largely opaque, multi-trillion-dollar sector. The SEC estimates that new requirements for audits and quarterly performance reports will cost the industry $961mn annually, with an additional $938mn expense coming from other regulations relating to treating investors equally, hiring new staff and legal costs to meet the bar.
Likely a drop in the bucket for these gargantuan firms. Private equity giant Blackstone, for example, hit $1trn AUM this year, after all. If they want to talk excess charges, maybe they’ll take a look at their high fees and overstated returns from their many years of opacity until now?
Vulnerabilities.
PE firms have begun taking out loans to “backstop overly indebted portfolio companies,” reports FT, as the industry faces high interest rates and a slowdown in M&A activity. They’re using net asset value (NAV) loans, wherein a fund has to put up its assets as collateral, then using the cash to pay down the debt they loaded onto their companies.
Speaking of high interest rates: The International Organization of Securities Commissions (IOSCO) flags that the $13trn private equity/private debt market isn’t taking “hidden risks” seriously enough. Pressure from high interest rates combined with a lack of transparency will expose the sector to considerable vulnerability.
Other PE Hits.
#PirateEquity. With International Talk like a Pirate Day arrrrrround the corner (on Tuesday), Barron’s highlights two upcoming books that both allude to private equity’s “plunder” and negative social impact. They also dip into the debate over whether private equity actually outperforms the stock market.
Sinema, Again. The senator from Arizona is pushing legislation that would enlarge tax loopholes for private equity.
College Sports. At a time when college sports marketing group Learfield has increased its focus on NIL (name, image, and likeness), through which student-athletes can secure lucrative sponsorships, they came under new “debt restructuring” terms by three PE firms.
PE AI. Firms are headhunting for data-science experts to spearhead their foray into using machine learning to make investment decisions, like other financial institutions have been.
CRYPTO
Warren’s Crypto Crime Plan.
Politico reports that Sen. Warren’s bipartisan bill to “crack down on money laundering in the cryptocurrency world” has garnered more support from a new group of moderate and progressive senators. Says Warren: “This is a lot of people who have focused on national security interests, and who are keenly aware of the threat that crypto poses to the safety and security of our country.”
FedNow.
The Richmond Fed details this past July’s launch of FedNow, the central bank’s new, 24/7 instant payments service. In recent years, the volume and value of noncash payments has accelerated, reaching $128trn in 2021. While the Fed already operates a real-time settlement service called Fedwire, and 75% of households and 83% of businesses already use fast payments, it doesn’t operate around the clock like FedNow. The paper notes that two-thirds of Americans live paycheck to paycheck and that the faster transaction times afforded by FedNow will allow them to access their money sooner without turning to a payday loan servicer or check cashing service, or overdrafting their account.
Action on Crypto?
Senate Banking’s Brown requested Treasury’s Yellen, SEC’s Gensler and CFTC’s Benham consider more and stronger disclosure requirements in crypto markets, with an eye toward the $10bn lost to crypto scams and hacks just last year. The lack of accurate, reliable information has allowed rampant manipulation, fraud, and self-dealing to occur, he writes, making the end-investor vulnerable.
“Without consistent, comprehensive, and accurate disclosures in crypto markets, users are left vulnerable. When both legitimate and illegitimate market activities are opaque, consumers and investors cannot readily distinguish fraud and scams from other token projects. The result is the Wild West of investing—an ecosystem that invites and rewards both bad actors and shoddy products. By contrast, mandatory, universal disclosures smoke out bad actors and shoddy products alike.”
CBDCs, Swiftly.
Swift, or the Society for Worldwide Interbank Financial Telecommunication announced that three central banks are beta-testing central bank digital currency (CBDC) interoperability using the organization’s “connector solution.” Basically, they’re trying to make CBDCs work smoothly with other CBDCs and with normal money. They note that while 130 countries are experimenting with these digital currencies, many are focused on domestic usage and may create “fragmentation.” Currently, the Reserve Bank of Australia, Deutsche Bundesbank, the Hong Kong Monetary Authority, Bank of Thailand are also among those in the second “sandbox” of testing.
HOUSING
Phoenix’s Corporate-Owned Apartments.
AZ Central reports private investors, many of them out of state, “spent a record amount of money” scooping up 500 apartment complexes in Phoenix, Arizona, during the pandemic years. During that time, average rent rose by 35%. This year, evictions in the city drew to near-record levels “as more tenants can’t afford the higher rents and too many landlords still aren’t taking housing vouchers.”
Affordability.
Barron’s offers some stats that show homeownership is falling out of reach of younger Americans.
The median first-time homebuying age has hit 36.
Millennials were, from 2014 to 2022, the largest share of homebuyers. But this year, they’ve been beaten out by baby boomers, who have the liquid cash to front for their home purchases.
Fewer people want to sell right now, preferring to lock in their older, lower-rate mortgages. Rates hit their highest level in two decades in August, 7.2% on a 30-year fixed-rate.
The median sales price is high and there’s a “shortage” of 5.5mn homes, according to the National Association of Realtors.
Somewhat related: WSJ profiles a startup that claims to allow hopeful homebuyers-to-be get their hands on 3% mortgages. How? Through “assumable loans,” which allow sellers to transfer their mortgage over to a new buyer when their house is sold. But assumable loans aren’t popular right now, due to disinterest from lenders who would stand to make less money. The company, Roam, seeks to act as a middleman between the buyer, seller and the seller’s mortgage company.
CLIMATE and FINANCE
California Climate Disclosure.
California is getting ahead of the curve when it comes to mandating carbon disclosures, reports Bloomberg. A new bill passed by legislators, now headed to Gov. Newsom’s desk, would require companies to account for their own pollution as well as that of their suppliers and customers use their products (known as “Scope 3” reporting). Unlike the SEC’s climate disclosure rule, it would affect both public and private companies that rake in at least $1bn of annual revenue. In a companion bill, companies with $500mn or more in revenue would be made to publish climate-related risks and would “include vulnerabilities to employees, supply chains, consumer demand, and shareholder value, among other risks.” Public Citizen supports the measures, and calls on the SEC to commit to Scope 3 disclosures.
Labor’s Green Capital.
“Labor’s capital” is the term UMass Amherst’s Lenore Palladino uses to describe public pension funds in a piece that urges pension funds, the wielders of workers’ retirement funds, to invest “towards publicly beneficial ends.” Across the world, investment in solar energy has skyrocketed and will likely balloon under the Biden administration’s Inflation Reduction Act, Palladino writes. Much of that money, however, “remains tied to private asset managers with little obligation to operate in line with the public interest.” Typically, the interest of these private funds lies in the value of assets, rather than “their maintenance for collective use.” And if public funds, she argues, don’t proactively invest in green energy and address the risks of climate change, it’s the workers whose money they manage that will face the greatest burden. Palladino uses the example of Public Solar NYC, a proposed project to “leverage” the $250bn in assets held by NYC’s five public pensions to place 25,000 publicly-owned solar arrays on the city’s rooftops.
Climate-Related Financial Meltdown.
It’s what advocates want to avoid. Public Citizen led a protest at the headquarters of the American International Group (AIG), which 15 years ago nearly failed and forced the government to intervene with a $182bn bailout. The Group still insures and finances fossil fuel projects across the country, including Freeport LNG, which shut down in June 2022 due to an explosion caused by inadequate operating procedures, human error and fatigue. Protestors called on AIG to “quickly end its risky underwriting and investments in fossil fuels.”