CFPB v. CFSA: Catastrophic Consequences?
Fewer than two weeks remain before oral arguments for CFPB v. CFSA, the case that threatens the foundation of a critical financial system watchdog.
A threat to the CFPB’s funding necessarily implicates its many years of crucial rulemaking. A sour Supreme Court ruling in favor of the CFSA, the predatory payday lending lobby, would call it all into question and ignite “catastrophic consequences” in the mortgage and real estate markets, per an amicus brief filed by the Mortgage Bankers Association, the National Association of Home Builders and the National Association of Realtors. Newsweek calls the prospect “economic fallout.”
Experts agree the aftershock would be significant. At a media event hosted by Americans for Financial Reform, the Center for Responsible Lending and the Constitutional Accountability Center, authoritative voices in constitutional law, consumer protection and market stability attested to the dangerous ramifications of the case and called for SCOTUS to overturn the Fifth Circuit’s decision. Said the American Fintech Council’s Armen Meyer:
“The mortgage markets would be decimated if CFPB mortgage regulations were struck down, perhaps as bad as what we saw with the global financial crisis 15 years ago…Beyond mortgages, to the entire lending market, without CFPB issuances we’d go back several years in time to not fully knowing if artificial intelligence, for example, algorithms are covered by laws that prevent discrimination in lending…And worst of all, going way back in time … Let’s remember that Dodd Frank caused the CFPB to reissue many consumer regulations ... [T]hese rules are now in jeopardy too.”
A long list of other agencies funded outside of annual appropriations would be in trouble as well, the University of Chicago’s Aziz Huq explains:
“There are a multiplicity of important federal agencies, particularly in the financial domain…all of which have funding streams that are uncapped…
The Fifth Circuit’s ruling, were it to be affirmed by the Supreme Court, particularly in the context of a looming government shutdown, would first create an immense amount of uncertainty about the basic architecture of our financial system, and second, create potentially worse a vacuum at the core of that financial system that would have debilitating consequences for the national economy and for the US’ global position.
The countdown to the case has already stopped some enforcement in its tracks. Industry heads have tried to block efforts by the CFPB to enforce Section 1071 of Dodd-Frank and collect data on small business lending, a measure that would ensure compliance with fair lending laws. Recently, a federal judge in Kentucky expanded an injunction blocking the CFPB from enforcing data collection deadlines until the SCOTUS case is heard. Meanwhile, the bank lobby and debt collection lobby have tried to suggest that the CFPB doesn’t have the authority to make rules regarding medical credit – even though payment cards are clearly in the CFPB wheelhouse.
It will fall to Supreme Court justices to uphold the constitutionality of CFPB funding during its fall term.
Accountable.US finds that one of those justices, Samuel Alito, received undisclosed gifts from a billionaire with $90 million in companies overseen by CFPB . Advocates are calling for his recusal, as the news comes amid much reporting about ethics scandals at the high court. Are a luxury Alaskan fishing trip and private jet rides worth the threat to financial stability? Surely not.
FINANCIAL STABILITY: Capital Rules – Treasury Markets – SAFE Banking – Executive Compensation – Wells Fargo
CONSUMER: Credit Cards – AI-Assisted Lending – Underfunded Land-Grant HBCUs – Buy Now, Pay Later – IRS Discrimination – Student Loans
CAPITAL MARKETS: Fund Names and Greenwashing
PRIVATE MARKETS: Antitrust Scrutiny – Can Private Equity be Nice?
CRYPTO: Better Private Law
HOUSING: Leaving Buyers Behind – Landlords and Fraudulent Activity – Who Owns Your Houses? – Housing Stats
CLIMATE AND FINANCE: Climate Action – Climate and Debt Sustainability – Treasury Net Zero
POLITICS AND MONEY: Dark Money Redistricting – TikTok
Feedback? Reach us at afrnews@ourfinancialsecurity.org
FINANCIAL STABILITY
Capital Rules.
A subcommittee of the House Financial Services Committee held a hearing entitled “A Holistic Review of Regulators: Regulatory Overreach and Economic Consequences.” Chairman Andy Barr’s remarks here, where he rails against the upcoming slate of Basel III capital rules that would shore up the largest banks’ reserves to shield the system from instability. Just last week, AFR’s Alexa Philo testified before the same Committee to emphasize the urgent need for the new rules: “The set of capital reforms in these proposals are essential to prevent further large bank failures and financial system instability, as a result of undercapitalized banks pursuing outsized risk-taking…[which] hurt all Americans and businesses and disproportionately reduced wealth and access to credit for communities of color, rural, and other underserved communities and small businesses.”
Witness testimonies here, including one from Mayra Rodríguez Valladares defending the work of financial regulators. She notes, despite their most vocal opponents, regulations do not adversely affect GDP growth or bank lending. On the topic of capital: “Banks are not at historically high levels of capital. And the current measures of capital do not include all risks…By updating changes to Basel III and Dodd-Frank, U.S. bank regulators are fulfilling their mission of ensuring the safety and soundness of the American banking system.”
Treasury Markets.
Recent Fed research found hedge funds were overly exposed to Treasuries, which could cause financial stability concerns. This week, the Bank of International Settlements warned these funds could spark serious turmoil in the market with a potential $600bn short. If the firms are “suddenly forced to put up more collateral,” the sell-off would be similar to what “markets faced during the onset of the pandemic in 2020.”
SAFE Banking.
Earlier this month, a bipartisan agreement was on the horizon for the SAFE Banking Act, which would extend protection to banks that wished to serve cannabis-related businesses in legal states. Politico reports lawmakers agreed on a version of the bill that “largely resembles the original text introduced earlier this Congress.” Most notable: the inclusion of Section 10, a portion of the bill that would make it difficult for regulators to mandate banks stop doing business with certain customers. One of the side effects, says the National Consumer Law Center: making it harder to address payment fraud.
Executive Compensation.
The United Auto Workers’ strike, which kicked off last Friday, has drawn attention to executive compensation. UAW negotiators initially demanded a 40% increase spread out across four years, to reflect the same increase in CEO pay across the same amount of time at Detroit’s three automakers: Ford, General Motors and Stellantis. Since then, the demand has been lowered to 36%. The pay gap is severe: it would take centuries for the average worker at these companies’ factories to make what their CEOs do in a year. Reminder: The Institute for Policy Studies last month released their Executive Excess report, which scrutinized the wide rift between executive compensation and worker compensation at the S&P 500 companies with the lowest median wages.
Wells Fargo.
Seven years have passed since it came to light that the megabank Wells Fargo had opened millions of accounts for customers who never asked for them. WSJ says they’re still in “fix-it” mode. It’s no wonder: since then, they’ve been behind numerous other scandals and abuses against their own consumers. AFR has a useful resource to catch up on Wells Fargo’s other abuses here, with 43 entries and an interactive timeline.
CONSUMER
Credit Cards.
AFR and 14 other organizations supported the Credit Card Competition Act of 2023 in a letter to House Financial and Senate Banking, noting that it would introduce “much-needed” competition in a market cornered by Visa and Mastercard and ultimately benefit consumers. Previously, Small Business Rising sent a letter urging the bill’s passage, and the Institute for Local Self-Reliance found Visa has cornered 60% of credit/debit transactions, with Mastercard rounding out another 25%. Reads the letter:
“The Credit Card Competition Act addresses a market failure in the credit card payment network, which has long been dominated by the Visa-Mastercard duopoly. Today, because of this duopoly, American consumers pay the highest credit card swipe fees in the industrialized world. Due to their unchecked market power in the U.S., Visa and Mastercard charge ten times the swipe fees they charge in Europe.”
Related: banks and card processors are now in league with the racist Breitbart publication, whom they are paying to run articles that repeat their misleading claims. (Here is an image. Not gonna do them the courtesy of a link.)
On the topic of credit cards: Sean Vanatta, of University of Glasgow and Wharton, writes that caps on credit card interest rates “are the answer to the U.S. debt crisis,” as they would “discourage banks” from keeping consumers in long-term debt. Vanatta references a bill from Republican Sen. Hawley, which proposed an 18% rate cap.
AI-Assisted Lending.
The CFPB has issued guidance requiring lenders to use “specific and accurate reasons when taking adverse actions against consumers” when they use artificial intelligence and other, similar models. As these algorithms become more prominent in underwriting, the CFPB believes clear explanations can improve consumers’ chances at securing future credit. It may also protect them from illegal discrimination, as in some cases, a consumer might “be denied credit for reasons they may not consider particularly relevant to their finances.” Take, as an example, this research paper that cautions against the use of machine-learning models without human oversight in the mortgage lending space. Using Home Mortgage Disclosure Act data, the researchers found that Black applicants were more likely to be denied a mortgage.
Underfunded Land-Grant HBCUs.
A “land-grant” university is one funded by the federal government’s sale of “unclaimed” public land, though these were generally parcels that became vacant because of the systematic removal of Indigenous tribes. Some of these colleges were HBCUs, or Historically-Black Colleges and Universities. An analysis shows that these land-grant HBCUs have “collectively received some $12.6bn less than they should have,” creating an inequity in available resources and shortcomings in student service. This week, the Secretaries of Education and Agriculture sent letters to the governors of 16 states, “urging them to rectify decades of underfunding.”
Buy Now, Pay Later.
A paper from the Philly Fed questions how Buy Now, Pay Later services – like Afterpay or Klarna – affect customers’ credit. Turns out, perhaps not too significantly: “Overall, it appears that among users with established credit, BNPL use does not significantly affect consumers’ credit profile in the short term.” (It’s important to note, however, that the study doesn’t evaluate the long-term). People with superprime credit scores (720+) are 20 percentage points less likely to use a BNPL service than those with the lowest credit scores.
IRS Discrimination.
The IRS is “overhauling” its framework for evaluating the tax returns of low-income persons that resulted in Black taxpayers much more likely to face audits. Currently, returns that claim the earned-income tax credit, a tax refund intended to provide assistance to low-income workers, have “historically been more likely to be selected for audits, even if those investigations tend to yield little in taxes that are owed.”
Student Loans.
The CFPB has launched an investigation into whether the Pennsylvania Higher Education Assistance Agency “illegally tried to collect on private loans that were already discharged by bankruptcy courts,” reports Politico.
CAPITAL MARKETS
Fund Names and Greenwashing.
AFR called the decision by the SEC to update its “Names Rule” an “important step toward addressing rampant greenwashing and other deceptive and misleading practices by investment funds.” (Greenwashing refers to when an entity makes an unsubstantiated claim about what it’s doing to promote sustainability and other green practices.) Says AFR’s Natalia Renta:
“Retail investors – including workers saving for retirement – shouldn’t have to worry about putting their money in funds that don’t walk the walk. Fund managers should honor investors’ choices and goals, not use deceptive or misleading fund names to fleece them.”
AFR also calls on the SEC to finalize a strong, complementary disclosure framework for ESG-branded funds to better protect investors and equip them with information to make investment decisions.
PRIVATE MARKETS
Antitrust Scrutiny.
Americans for Financial Reform Education Fund commended the Federal Trade Commission and Department of Justice for their pursuit of robust merger guidelines with the most recent draft on the docket. AFR-EF now urges the agencies to adopt the guidelines with additions that would address the unique threats posed by private equity buyouts. Often, “roll-ups” of small companies into larger competitors cause considerable consolidation; even private equity minority stakes and monopsony power. Reads the letter:
“The increased economic consolidation and concentrated market power from mergers over the past decades has raised prices and lowered quality for consumers, suppressed wages and benefits for workers, undermined the ability to form and sustain small businesses, and sapped vitality from our communities…
Private equity firms’ leveraged buyouts represent the majority of reportable merger transactions over the Hart-Scott-Rodino threshold of $111 million, so it is necessary and appropriate for the antitrust agencies to consider the specific impacts of private equity takeovers have on competition and the potentially impermissible exercise of market power under the Clayton Act.”
Says AFR’s Patrick Woodall: “The Biden administration’s proposed guidelines reject decades of acquiescence to merger mania and can tackle private equity practices that have supercharged decades of corporate consolidation. Modernized guidelines would also send a strong signal that some transactions should not make it out of the boardroom.”
Can Private Equity be Nice?
As this newsletter has reported, the private equity megafirm KKR agreed to purchase book publisher Simon & Schuster in August. Now, Slate asks if private equity might be “nice,” given a clause in the acquisition deal that stated employees would receive an “ownership stake in the company.” They interview KKR’s co-head of global private equity, Pete Stavros, who pitches it as a way to improve S&S’ low salaries without a couple-dollar an hour raise. To say the least, the jury is still out.
CRYPTO
Better Private Law.
A blog from the University of Iowa’s Christopher Odinet and Josephine Witte argues the need for “more (and better) private law in digital asset markets.” When large platforms and exchanges go bankrupt, adjudicators encounter uncertainty when it comes to redistributing assets that ignite questions about the “fundamental determinations” of the rights and priorities of the parties involved. A couple of the critical issues: Are crypto assets personal property? If they are, what kind? And is keeping crypto in a user’s account a personal or a proprietary claim against the “intermediary maintaining it”? Finding the answers to these questions is in the public interest, write Odinet and Witte, would provide a foundation of legal clarity and would guide lawmakers and regulators in oversight.
HOUSING
Leaving Buyers Behind.
The Federal Home Loan Banks (FHLB) system is meant to support affordable housing by supplying lenders with funds so they can address local needs. But instead of community banks, large banks disproportionately see the benefit of FHLB dollars – and they create fewer housing opportunities per dollar than they borrow, reports Bloomberg. Every year from 2018 to 2022, community banks “devoted more of their home lending to low- and moderate-income” areas than their larger counterparts. It’s largely because large institutions are considered by the FHLB to be more financially sound. This month, however, the Federal Housing Finance Agency will issue a report with regulatory and legislative proposals to better fall in line with its charter to “promote economical housing finance.”
Landlords and Fraudulent Activity.
AFREF and the National Housing Law Project support the Federal Housing Finance Agency’s proposed revisions to the “Suspended Counterparty Program,” a regulation that allows Fannie Mae, Freddie Mac and the Federal Home Loan Banks to stop doing business with an individual/entity with a history of fraud or financial misconduct. The changes would expand the program to include property management-related fraudulent activities and would include civil and criminal sanctions for landlords.
Who Owns Your Houses?
NYT examines Charlotte, N.C. – where this writer’s from – and the proliferation of private institutionally owned single-family houses turned into rentals. By and large, these investors scoop up homes in predominantly low-income and majority-POC neighborhoods.
Housing Stats.
Recent findings from a RedFin report:
August saw the highest rate of canceled home purchases in almost a year: about 15.7% of homes under contract, up from 14.3% YoY.
Home prices, meanwhile, saw their highest price increase in almost a year: 3% YoY.
Demand is “no longer in freefall,” and supply remains at a record low.
Meanwhile, a piece in FT argues that “building any new homes reduces housing costs for all.” Indiana University’s Fran Quigley has argued in the past, however, that it isn’t supply that’s the issue; it’s the affordability gap.
CLIMATE and FINANCE
Climate Action.
Thousands of protestors took to Wall Street on Monday with urgent demands that big banks stop bankrolling fossil fuels, blocking the entrance to the NY Fed as they chanted, “No oil, no gas! Fossil fuels can kiss my a**!” The Stop the Money Pipeline explains why it happened in an X thread. Despite a climate clock that continues to tick down and ever-strengthening natural catastrophes, the Fed “has failed to protect the financial stability” and has instead “been supporting and expanding fossil fuel development,” as the NY Fed chief has denied that regulators have a role in preventing systemic climate risks.
This week, Rep. Pressley and Sen. Markey led a letter urging Fed Chair Powell to take climate-related financial risks seriously and push their member institutions to do the same. Reads the letter:
“The Federal Reserve has acknowledged that climate change poses an emerging risk to the safety and soundness of financial institutions and the financial stability of the United States…That is why we urge the Federal Reserve to use its existing authority to oversee bank safety and mitigate risks to financial stability, and require financial institutions to submit and execute plans to align their activities with science-based climate targets, including reducing financed emissions.”
Climate and Debt Sustainability.
A paper in Oxford Open Economics examines the relationship between climate and debt sustainability by “focusing on how climate mitigation and adaptation are paid for, and who pays for it,” centering on green bonds, carbon offsets, grants and debt relief. There’s no one plug-and-play solution that will benefit all countries equally, but the authors outline a few policy recommendations: the development of frameworks and verification mechanisms that will make green bonds more credible and enforceable, the creation of an monitoring system to support the creation of “sustainability-linked sovereign bonds,” an institutional framework for a carbon credit market to mandate emission reduction requirements, the integration of “cap and trade” markets with the voluntary carbon market,” committing to annual targets for financial support, improving “debt-for-nature” swaps and including “climate conditionality” in debt restructuring to address “unsustainable debt.”
Treasury Net Zero.
While the Treasury’s guidelines outlining the best practices for financial institutions to pursue their net-zero practices are strong, writes Public Citizen, there’s a gaping loophole. “Offsets are a loophole large enough to drive most carbon pollution through,” says PC’s David Arkush, highlighting that offset markets are “riddled with fraud and integrity issues” as disclosure frameworks are highly deficient. AFR-EF cowrote a letter with PC and the Sierra Club advising the Treasury “address fundamental problems with the widespread and controversial use of carbon offsets.” Additionally, the Treasury’s guidance fails to underline the importance of transition plans as “a critical tool for mitigating climate-related financial risk.”
Says AFR’s Alex Martin:
“[The] Treasury must address major gaps within the guidance including the inadequate attention paid to voluntary carbon offsets which cannot offset emissions reliably at present, and use its leadership role to bring more financial firms into the funnel to develop and implement actually credible plans to align the finance sector with Treasury's climate goals. Other regulators like the Federal Reserve should take note and use this as an initial blueprint to scrutinize the big banks that are using 'net zero' commitments as little more than a PR tool."
In March, AFR endorsed a letter sent by Sen. Warren urging the Treasury to pursue a “bold agenda to address the climate crisis, address the risks posed to the financial system, and guide the transition to a clean energy economy.”
POLITICS and MONEY
Dark Money Redistricting.
Ever seen those absurd redistricting maps that less resemble their constituencies and more resemble a cubist’s impression of a salamander? Partisan gerrymanders help politicians that want to stay on top “pack and crack” voting blocs in their favor. And an Alabama Political Reporter investigation finds that its state’s redrawing process has deep ties to a “powerful national dark money network.” (Dark money refers to political contributions whose origins are undisclosed.) Reporting exposes ties between Alabama officials heading up redistricting to Leonard Leo, a “far-right power broker” with a “billion-dollar force” dark money network associated with Federalist Society.
TikTok.
Billionaire financier Jeff Yass is working to halt lawmakers’ efforts to ban TikTok, which has drawn scrutiny for the national security implications of its Chinese ownership. The Yass investment company, Susquehanna International Group, “bet big” on it in 2012 with a stake that amounts to about 15% – 7% of that’s a personal stake for Yass. He has funneled money toward Club for Growth, a conservative group that “rallied Republican opposition to a TikTok ban,” having donated $61mn since 2010.