The Villains Behind the CFPB SCOTUS Case: Payday Lenders
In one corner, an indispensable financial system watchdog that forms the bedrock of consumer regulation backed by a coalition of advocates, scholars and experts: the Consumer Financial Protection Bureau. In the other, the predatory payday lending industry, as represented by the Community Financial Services Association of America.
Accountable.US exposes the bad actors behind CFPB v. CFSA. The CFSA board hosts some of the “worst payday offenders.” Among them: Enova International, which has violated the Military Lending Act protecting servicemembers; Purpose Financial/Advance America, which charges APRs as high as 664% and whose parent company has paid millions of dollars in fines to both American and Mexican regulators; PROG Holdings, which violated state laws to abuse low-income consumers; and eight other lenders.
CFSA-affiliated entities have paid over $200mn in fines levied by regulators while shelling out tens of thousands to Republicans on the House Financial Service Committee, who wrote an amicus brief in support of the organization in this case. The association has retained Jones Day, a law firm with close ties to Trump, as the Revolving Door Project has documented. And the lobby has support from numerous “revolving door” Republicans – former lawmakers with industry gigs, or vice versa – who filed a brief with baseless claims that the CFPB’s independent funding mechanism violates the Appropriations Clause. It doesn't.
The CFPB’s role as “consumers’ top watchdog” – the Center for American Progress is tracking its efficacy in individual states – is difficult to understate. Should the Supreme Court rule the agency’s funding mechanism unconstitutional, it could jeopardize all of the CFPB’s work on behalf of consumers and honest businesses. The Fifth Circuit decision is already hampering enforcement work against subprime auto lender Credit Acceptance and other lawbreakers. Says AFR’s Elyse Hicks:
“The courts halting CFPB enforcement while they await the outcome of CFPB v CFSA is a preview of the damaging domino effect on rules that govern our mortgage market and more, that will result from a bad SCOTUS ruling.”
Vox, in a comprehensive piece warning of serious financial instability, calls the Fifth Circuit decision against the CFPB a piece of “deeply delusional thinking.”
“The plaintiffs’ arguments in Consumer Financial have no basis in law, in constitutional text, in precedent, or in rational thought. And they risk the sort of economic catastrophe that the United States hasn’t experienced for nearly a century. And yet a federal appeals court bought these arguments. So now it’s up to the Supreme Court to save the United States from calamity.”
Ahead of oral arguments on Tuesday, some advocates have called for Justice Samuel Alito to recuse, a result of his concerning relationship with a billionaire with a $90mn stake in the case. Now, Clarence Thomas is also on the block: After a ProPublica investigation revealed his covert, undisclosed participation in donor events hosted by the Koch Network, which has “spent billions trying to make it easier for corporate predators to rip off everyday Americans and face zero accountability,” there have been calls for his recusal. In AFPF v. Bonta, Clarence Thomas concurred with the opinion that mandating a Koch dark money group to disclose its donors violated those donors’ First Amendment rights, Clearing the Fog highlights.
The CFPB, to its credit, marches on. It recently announced planned rulemaking to remove all medical debt from credit reports, where previously only debt under $500 would be eliminated. AFR and the National Consumer Law Center lauded the “groundbreaking plan,” based on research that medical billing isn’t predictive of consumers’ likelihood to repay loans – which is the whole point of a credit score. The CFPB has also outlined a proposal to protect consumers from malicious data collection by requiring any company that collects and sells user data to be covered by the Fair Credit Reporting Act.
The CFPB does good work. Let’s help keep it that way.
FINANCIAL STABILITY: SAFE(R) Banking – Nonbank Risks – Capital Rules – ESG DOL – JPMorgan FERC’d Up – Further to the Banking Crisis
CONSUMER: Airlines – Mastercard Data Collection
CAPITAL MARKETS: SEC Enforcement
PRIVATE MARKETS: “Cha-Ching”? – Debt and More Debt – Fewer Buyouts – A PE-LBO Review – Other PE News
CRYPTO: Republicans Against CBDCs – Kalshi Election Betting
HOUSING: A Race-Based Remedy for Housing Discrimination
CLIMATE AND FINANCE: California’s Climate Bill – Sustainable Buildings Prone to Flood
POLITICS AND MONEY: Bridgewater Runs – Private Equity Money
Feedback? Reach us at afrnews@ourfinancialsecurity.org
FINANCIAL STABILITY
SAFE(R) Banking.
Sen. Schumer unveiled a new version of the SAFE Banking Act, now called the Secure and Fair Enforcement Regulation (SAFER) Banking Act, the bill that would allow lenders to transact with legal cannabis-industry entities. Senate Banking will mark it up on Wednesday. Politico reports there were changes related to Section 10, the provision that would have made it more difficult for regulators to mandate banks stop doing business with certain customers but consequentially impede their ability to detect illegal activity, such as payment fraud. The new version of the bill includes provisions that would vest more power in regulators, such as clarity on when and how a business’ bank account can be terminated and guidance for federal banking agencies to create rules to “increase access to deposit accounts for businesses and consumers.” Senate Banking’s Brown is confident in the bill’s appeal, but some Republican supporters fear it won’t make it through the House
Nonbank Risks.
By the end of the year, FSOC officials hope to more easily designate nonbanks as SIFIs – systemically important financial institutions, the ones that send shockwaves through the system when they go belly-up, and are brought under the Fed’s oversight. A closed-door meeting of the Council last Friday may have raised the potential “prospect of a reduced timeline,” which would grant regulators “more discretion,” reports Bloomberg, to tag a firm a SIFI. Unsurprisingly, trade groups like the Managed Funds Association and the Mortgage Bankers Association and nonbank behemoths like BlackRock and Vanguard oppose greater oversight.
The FDIC’s Gruenberg, an FSOC member himself, flagged the risks nonbanks pose to financial stability in a speech to the Exchequer Club last week. Estimates from the Financial Stability Board suggest assets held by nonbank financial institutions climbed to $20.5trn in 2021, just shy of the $23.7trn in U.S. banks. The growing interconnectedness of nonbanks and the wider financial system, their exposure to “excessive leverage and volatile funding sources,” and an opacity born of underregulation, creates a positive feedback loop that can exacerbate instability when it happens. Says Gruenberg:
When market shocks combine with these vulnerabilities, nonbank financial institutions can transmit risk into other parts of the financial system and seriously hamper the credit and financial intermediation needed to support the economy. This includes banking organizations, which often interact directly with nonbanks by providing funding to support nonbank activity. The resulting interconnections may amplify market stresses through feedback between the two sectors.
Semi-related: The Japanese conglomerate Rakuten has withdrawn from its fourth attempt to secure a charter from the National Credit Union Administration in an effort to become an industrial loan company (ILC) earlier this year. That’s a type of company charter that AFR and other consumer advocates have warned provides a “loophole” that allows shadow banks and nonbanks to control depository institutions without being subject to the rules that keep the system safe.
Capital Rules.
Opponents to incoming Basel III “endgame” capital requirements bring tantrums and thinly veiled attempts to protect their bottom line to the table. Mayra Rodriguez Valladares, a proponent of the rules, brings data. Her bottom line: No, stronger capital rules wouldn’t reduce lending. Studies demonstrate that capital rules are beneficial; an analysis by the Basel Committee on Banking Supervision found that banks that were more heavily impacted by reforms saw greater improvements, and the World Bank discovered in 2020 that larger reserves of capital could help “smooth the supply of credit during crises years” since they’re “protected in cuts from lending.” Economies didn’t slow, funding costs were lower and lending volumes were greater. Valladares notes that that banks aren’t even at “historically high levels of capital” and raises that “banks’ assets and profit have grown significantly during periods of additional capital, liquidity, and leverage requirements.” Since the implementation of Basel III and Dodd-Frank in 2010, their net income has skyrocketed 225%.
ESG DOL.
In January, the attorneys general in twenty-six Republican-controlled states filed suit against the Department of Labor to fight a rule that would safeguard workers’ retirement security by, in part, making it less onerous for fiduciaries to consider all financially relevant risks and opportunities (that includes environmental, social and governance, ESG, factors). On Friday, a Trump-appointed federal judge in Texas ruled in favor of the Department of Labor, “clarifying that retirement plan managers can consider [ESG] in selecting investments,” reports Politico, since the rule itself doesn’t mandate that fiduciaries must always do so.
JPMorgan FERC’d Up.
JPMorgan had been under investigation by the Federal Energy Regulatory Commission (FERC) to suss out whether it secretly controls the Infrastructure Investment Fund (IIF), a private equity firm that controls a number of energy assets, including a nuclear power plant and several fossil fuel plants. Last week, the FERC ruled “there is liable to be an absence of arm’s-length bargaining between IIF US Holding 2 and J.P. Morgan Investment” and that JPMorgan is considered to control IIF. Public Citizen points out that the Bank Holding Company Act and the Volker Rule do not allow this type of dealing by the bank.
Further to the Banking Crisis.
The Yale Program on Financial Stability’s Susan McLaughlin offers lessons to ramp up the efficacy of the discount window, meant to provide stability by addressing short-term liquidity issues, gleaned from this year’s banking crisis. Despite having access to the tool, banks were “utterly unprepared to use the discount window as a source of backstop liquidity” and instead turned primarily toward the Federal Home Loan Banks during the crisis.
CONSUMER
Airlines.
Some may think they make most of their money in the sky, but Ganesh Sitaraman explains how “Airlines Are Just Banks Now,” thanks to their rewards points programs. Companies can create points out of thin air and sell them to partnered banks for cash. Then, banks can award these points to customers who use co-branded credit cards for spending, which nets the banks and the card companies swipe fees. One percent of the U.S. GDP is charged to Delta’s AmEx cards alone, and a 2020 FT analysis found that “Wall Street lenders valued the major airlines’ mileage program more highly than the airlines themselves.” While United had a market cap of $10.6bn, their MileagePlus program was worth $22bn. Sitaraman suggests this evolution of airlines into “quasi-banks reflects how badly deregulation has gone.”
Mastercard Data Collection.
U.S. PIRG Education Fund explains how Mastercard, part of the Visa/Mastercard duopoly that has cornered 85% of the market, extracts users’ data and sells it online on third-party marketplaces. With a dedicated “Data & Services” division, the credit card company scrapes information about, for example, transaction frequency, date and time to profile what customers might be “high spenders” or “frequent buyers” of certain products. Then, the data is lumped together in anonymized bundles, which are sold to third parties that may use them for consumer predictions, targeted advertising, cybersecurity, and much more. Despite the anonymization of these huge buckets of data, a 2015 study from MIT found that researchers “could identify an individual 90% of the time using the transaction information of just 4 purchases.”
CAPITAL MARKETS
SEC Enforcement.
Goldman Sachs. The investment bank will pay $6mn in penalties for “failing to provide complete and accurate securities trading information, known as blue sheet data, to the SEC.” Over a decade, Goldman Sachs provided inadequate information on more than 22,000 blue sheet submissions across 163mn transactions.
Citadel. The broker-dealer agreed to pay a $7mn penalty to settle charges that it incorrectly marked short sales and long sales and vice versa over a five-year period, violating regulatory framework used to prevent abusive short-selling practices.
American Infrastructure Funds. The private equity fund adviser will pay a $1.6mn penalty “to settle charges resulting from its acceleration of portfolio company monitoring fees, for transferring a private fund asset from funds nearing the end of their term to a new fund, and for loaning money from one private fund to another private fund advised by an affiliate” and breaching fiduciary duty.
PRIVATE MARKETS
“Cha-Ching”?
The FTC’s Lina Khan will take on the private equity firms increasingly encroaching on the healthcare industry, beginning with a lawsuit filed against U.S. Anesthesia Partners (USAP) and its PE backer Welsh, Carson, Anderson & Stowe. The suit claims they “executed a multi-year anticompetitive scheme to consolidate anesthesiology practices in Texas, drive up the price of anesthesia services provided to Texas patients, and boost their own profits.” Specifically, the FTC notes the firm’s use of a “roll-up scheme,” in which they systematically purchased “nearly every large anesthesia practice in Texas.” AFR has written about roll-ups recently, urging the DoJ and FTC to take action against dangerous anti-competitive private equity buyouts. After one deal, a USAP executive used “Cha-ching!” to describe the profit they’d rake in.
Related: Some hedge funds, like Pentwater Capital, bet on merger deals. Betting against the FTC, by predicting that big mergers and acquisitions would go through despite regulator intervention, has made them a fortune.
Debt and More Debt.
Bloomberg dives into how private equity is embracing some byzantine financial engineering in order to borrow money, “Piling Debt on Itself Like Never Before,” to use its headline. “The loans — backed by assets including the promise of future income — carry interest of as much as 19%, a rate that's more akin to the charges faced by consumers rather than corporate borrowing,” Bloomberg reports.
Fewer Buyouts.
FT reports the world’s largest PE megafirms are moving away from buyouts and into spaces like private credit and investments in infrastructure. One of the causes of the change: rising interest rates, as central banks try to rein in inflation.
A PE-LBO Review.
A paper from Johns Hopkins’ Jeffrey Hooke, Yefan Zong and Dee Velazquez scrutinizes the Leonard Green private equity fund family, calling it “emblematic of the curiosities surrounding the PE industry.” They ask, “If the fund’s underlying investments are so valuable, how come no one wants to buy them?” Through the study of 19 of the 25 top US PE-LBO families (that’s Private Equity-Leveraged BuyOut), they find that the industry can deploy money for investments quickly but needs “at least a dozen years to sell them.”
Other PE News.
Goldman Sachs. They’re going to raise $15bn to purchase stakes in private equity funds and invest in deals from buyout groups. Also: They plan to sell off the specialty lender GreenSky for much less than it initially paid in a “consumer retreat” – some prospective buyers: Sixth Street, Pimco, and KKR.
Tiger King. Tiger 21, an “exclusive club” of investors that manage about $150bn in assets, suggests “private equity is now king” for the ultra-wealthy.
Zombies. There may be more of them in the private equity sector now, as “a historical shakeup is threatening to snare many small, struggling or fading money managers unable to raise fresh funds,” per Bloomberg.
What’s Private Equity? No time to fully explain it here. Instead, have an approachable, 20-minute investigation by the Good Work channel on YouTube.
CRYPTO
Republicans Against CBDCs.
By a 27-20 vote, House Financial advanced Sen. Emmer’s bill that would “restrict the Federal Reserve’s ability to issue digital currency,” reports Politico. The text of the bill calls it the “CBDC Anti-Surveillance State Act.” (CBDC: central bank digital currency.) It comes at a time when central banks across the world, including the Fed, are exploring CBDCs as a means to provide access to an electronic version of central bank cash.
Kalshi Election Betting.
In a 3-1 vote, the CFTC shot down Kalshi Inc.’s proposal to let them give investors, including hedge funds, a way to legally bet on which party wins U.S. elections. The Commission has also been fighting PredictIt, another “political prediction market.”
HOUSING
A Race-Based Remedy for Housing Discrimination.
Through the new Covenant Homeownership Act, Washington state – where two-thirds of white persons but only one-third of Black persons own a home – will eventually provide up to $50,000 in downpayment and closing cost assistance to thousands of “non-white households” a year, according to Leah Rothstein. The law will apply a $100 fee to every real estate transaction, to fund the program. Volunteers previously identified 50,000 house deeds that included “racially restrictive covenants” which precluded persons of color from occupying them.
CLIMATE and FINANCE
California’s Climate Bill.
Gensler indicated that California’s latest climate disclosure bill, which would apply important Scope 3 requirements to both public and private companies, may serve as a model for the SEC’s own rulemaking, “because it may change some of the economic baseline.” AFR-EF, Public Citizen and the Sierra Club have called for strong disclosure rules that include Scope 3.
Speaking of California: According to AP, the state will “let insurance companies consider climate change when setting their prices,” in an attempt to stem a possible exodus of insurers from the climate disaster-stricken region. (Remember, earlier this year, State Farm pulled out of CA). Related: Homeowners are facing higher premiums as climate change makes their homes more prone to disaster.
Sustainable Buildings Prone to Floods.
Yes, the U.S. subsidizes ostensibly sustainable buildings, as far as the U.S. Green Building Council’s LEED rating system is concerned. But hundreds of these buildings are just as prone to climate-related risks. More than 800 of them in the past decade are “at extreme risk of flooding,” meaning there’s a 50% chance that these environmentally friendly buildings will experience flood waters reaching their lowest points.
POLITICS and MONEY
Bridgewater Runs.
The former CEO of the hedge fund Bridgewater, David McCormick, announced his campaign for the U.S. Senate in Pennsylvania last week, a Republican challenge to the Democratic incumbent Bob Casey. Lots of Wall Street money behind him.
Private Equity Money.
According to WSJ, Republican campaigners are attracting more money from private equity employees than their Democratic counterparts for the first time since 2016, ahead of the 2024 elections. Some experts suggest the industry leans toward Republicans as a result of recent deregulation.