CFPB Wins with Voters, and Maybe at SCOTUS Too
The fallout this week from Tuesday’s Supreme Court oral arguments in CFPB v. CFSA. resembled, for the most part, the initial impressions and interpretations that emerged that same day.
Their challenge to the CFPB’s funding mechanism went pretty badly for the payday lenders and the Wall Street lobbies that supported them. Subsequent commentary has dwelled on the sympathy that even conservative justices appeared to show for arguments made by Solicitor General Elizabeth Prelogar, with Justice Brett Kavanaugh even asking what the big deal is, since Congress could change the CFPB’s funding if it wanted.
Rep. Maxine Waters, the top Democrat on the House Financial Services Committee, issued a statement reveling in the apparent divergence between Trump-appointed Supreme Court justices and the MAGA crowd: “Even for conservative justices, the only sensible choice is for the Court to side with our nation’s consumers, centuries of precedent, and the rule of law over extreme MAGA Republicans and their predatory lender allies.”
Rep. Andy Barr, the Kentucky Republican who has harvested millions from Wall Street and plenty from payday lenders “said the quiet part out loud,” in the words of Accountable.US. Politico wrote it:
Rep. Andy Barr (R-Ky.) — who has introduced a bill to bring the CFPB under congressional appropriations and attended the arguments — quibbled with Kavanaugh’s point that Congress could change the CFPB’s funding “tomorrow.”
“Well, actually, that’s not true, because we’ve been trying to change it for 11 years, and the political conditions have not existed,” Barr told POLITICO.
Which is a bit like saying: We can’t gut CFPB by making an argument to voters, so we need the majority created by Trump’s lifetime appointees to do it for us.
And it is true: Those voters do not agree with Andy Barr. The agency’s mission is a popular one, a poll commissioned by the Center for Responsible Lending and Americans for Financial Reform found. Conducted by a bipartisan polling team, the research finds that four in five voters across party lines support the CFPB. And wide majorities support their action on things like overdraft and hidden fees, their payday lender rule, small business data collection, the regulation of new financial products, medical debt and discrimination.
It’s not all good news. The Fifth Circuit invalidated CFPB plans to supervise for discrimination in the provision of financial services, not merely lending. Leave it to some industry attorneys to write an artlessly avaricious take: End To CFPB's Discrimination Rule Is A Boon To Industry.
And the CFPB marches on. American Banker reports the CFPB plans to hire 50% more enforcement attorneys and support staff, coinciding with a push to finalize rules related to credit card late fees and other abuses, and intent to subject more large payment firms, like Apple, to oversight. And this week, the odds rose that those new hires will get paid on time.
FINANCIAL STABILITY: Corporate Governance and Risk Management – The Fed’s Trading Scandal – Wells Fargo Labor Practices – SPV – Further to the Banking Crisis – Rates and Recession
CONSUMER: Credit Unions Profiting from Overdraft Fees – Student Loans – Save the Post Office
PRIVATE MARKETS: Shadow Lending and Life Insurance – PE Vets – Sports and Private Equity – Other Private Markets News
CRYPTO: Sam Bankman-Fried – Book on SBF
HOUSING: Housing News
Feedback? Reach us at afrnews@ourfinancialsecurity.org
FINANCIAL STABILITY
Corporate Governance and Risk Management.
The FDIC board voted 3-2, on party lines with Republicans voting against, to approve proposed rulemaking related to corporate governance and risk for banks with $10bn in assets or more. The guidelines would allow the FDIC to take formal action against banks that fail to implement compliance plans established by the board which would identify, monitor and manage risk. Full memo here. One important provision, highlighted by UMich’s Jeremy Kress: an expectation that “a majority of bank’s directors be unaffiliated with its parent holding company.”
The Fed’s Trading Scandal.
It’s been two years since the Fed was embroiled in a stock-trading scandal, when it surfaced that former Boston Fed President Rosengren and former Dallas Fed President Kaplan had traded in real estate securities and in millions of dollars of stock, respectively, in 2020. Fed Chair Powell dispatched Inspector General Bialek to investigate in October 2021. Two years later, the two presidents have since resigned but Bialek has yet to produce the result of his probe – though, the IG did clear Powell and former Vice Chair Clarida of wrongdoing. Sens. Warren and Scott have suggested Bialek has a conflict of interest and previously proposed legislation that would make his position president-appointed and Senate-confirmed.
Wells Fargo Labor Practices.
Senate Banking Chair Brown expressed concern about Wells Fargo’s “unfair labor practices” in a letter to Fed Vice Chair Barr and OCC’s Hsu. The senator cites charges filed with the National Labor Relations Board and employees who say they have faced retaliation from the company for attempting to report labor violations. AFR has a useful resource to catch up on this and Wells Fargo’s other abuses here, with 43 entries and an interactive timeline. Said Brown:
“Existing monetary penalties and growth restrictions have not been sufficient to prevent Wells Fargo from repeated consumer abuses, compliance failures, and gross mismanagement. Regulators should take stronger actions to change Wells Fargo’s culture of noncompliance and account for the troubling unfair labor practice allegations that could be the bellwether for broader safety and soundness and consumer compliance risks.”
SPV.
The Yale School of Management explains why the Fed has used special-purpose vehicles (SPVs) since the global financial crisis to provide “emergency liquidity.” While a common belief suggests that the Fed sets up an SPV to purchase assets it couldn’t otherwise under its normal authority, YSM indicates that they’ve been used for programs “that only do lending” as well. “The Fed has viewed use of the SPV structure as providing management, accounting, and legal advantages to an intervention…The SPV structure simplifies the reporting of income and the management of any sales of assets discounted by the facility,” they write. “This funding enables the Fed to do more liquidity provision than it could do in the absence of such support.”
Further to the Banking Crisis.
Fed Gov Bowman called for a third-party review of the Fed and this year’s bank failures in a speech at the CEO/Executive Management Conference:
One way to effectively identify and address these issues is to engage an independent third party to conduct a review. As I have said since shortly after the bank failures occurred, a third-party review should review and analyze a broader time period than the limited time periods covered to-date, including a broader range of topics and issues that are likely to identify further areas in need of reform. While this type of review would be an unusual step, it is appropriate where, as here, the existing limited reviews are driving the regulatory reform agenda, and where these bank failures have caused significant losses …This would be a logical next step in holding ourselves accountable.
Rates and Recession.
There’s a bond selloff as Treasury yields hit a 16-year high, but many investors and Fed officials tend to be more optimistic than not about economic growth. “Yellen says US debt servicing costs are manageable for now,” reports Bloomberg.
The U.S. added 336,000 jobs in September, “far above expectations.” It could mean the Fed will keep rates high through next year, Politico suggests.
CONSUMER
Credit Unions Profiting from Overdraft Fees.
The Brookings Institution’s Aaron Klein scrutinizes the extent to which credit unions profit from the junk fees harvested from consumers who withdraw more money than their account contains. 80% of overdraft revenue comes from only 9% of people, which Klein notes are those “living paycheck to paycheck” who only run out of money for very brief periods. But credit unions, who are exempt from reporting requirements on overdraft fees, profit significantly. Of California’s 114 state-chartered credit unions, thirty earned half or more of their net profits in 2022 from these fees alone – one, Frontwave Credit Union, was able to cover 140% of their net profit.
Student Loans.
The Student Borrower Protection Center and a coalition of advocates detail a roadmap of legal actions to be undertaken against “unjust and unlawful collection efforts by the nation’s largest student loan companies.” The full paper dives into issues afflicting various groups: low-income and low-balance borrowers, public service workers, borrowers approved for debt relief, borrowers defrauded by predatory schools, borrowers in default and borrowers with joint consolidation loans.
The Biden administration canceled $9bn worth of student loan debt belonging to a quarter of a million people who “qualify under existing programs, including for public-service workers such as teachers and firefighters and for people on permanent disability.” Reminder: payments resumed this month after a three-year pause, and some economists worry spending will fall as a result.
Save the Post Office.
AFR’s Save the Post Office campaign urges people to demand Congress to repeal a law that forbids the Postal Service from selling products or providing services they weren’t already offering in 2006. The removal of such restrictions would be a boon to a struggling Post Office, which could start up postal banking initiatives, or sell transit passes and offer verification for social security and EBT cards, to give some examples.
PRIVATE MARKETS
Shadow Lending and Life Insurance.
Life insurers are the new shadow banks. That’s what a paper from the Fed, first published in 2020, said. Following Apollo’s lead, private equity megafirms have muscled into annuities in order to drum up “permanent capital, which minimizes the need to raise funds from big investors every few years,” NYT reports. By Q2 2023, these firms owned $774bn of the life insurance industry’s assets – 9%, up from 1% about a decade ago. Private lending clocks in at about $1.75trn. A professor at Yale notes that within a few days of PE acquisition, insurers will “tilt their bond portfolios to riskier assets,” drifting away from safe investments like Treasuries toward asset-backed securities, for example. And the Fed paper found that insurers who undergo this private equity-driven shift “become exponentially more vulnerable to an aggregate corporate sector shock.”
Speaking of private lending: Since FDIC’s Gruenberg flagged the risks to financial stability posed by nonbanks, the Managed Funds Association has launched a new ad campaign in defense of private credit.
PE Vets.
Anytime you take your kitty or puppy to the vet, you may encounter private equity. Veterinary practices are “attractive targets” for PE firms, thanks in part to what they call “humanization” – people are willing to pay more for pet healthcare because they consider them part of the family. Otherwise, pets are also living longer and, as a result, become more susceptible to chronic conditions. Around a quarter of vet practices are owned by “big groups” in the U.S., a figure that pales against the 55% in the U.K. Roll-up schemes have increased consolidation and have potentially increased costs for consumers.
Sports and Private Equity
How lucrative are the big leagues? “If you had invested in a North American sports franchise between 1991- 2022, you would have earned at least a seven-fold return on your investment, bettering the return from the S&P 500 over that period of time by a two-to-one ratio,” per a new report. Maybe that’s why private equity pros are boning up on how league rules affect how much money they can make.
Other Private Markets News.
Fundraising by large private equity funds increased more than 4% year-to-date, coming to $233.5bn. “Buyout fund closings were $32 billion higher than the year-earlier period, and secondary funds were $32.5 billion vs. $7.5 billion,” reports P&I.
CRYPTO
Sam Bankman-Fried.
The trial of Sam Bankman-Fried, the disgraced founder of collapsed crypto exchange FTX who stole billions from customers, started this week with opening statements from prosecutors and the defense. Prosecutors described Bankman-Fried as a calculated criminal whose wealth, power and influence were “built on lies.” The defense said the prosecution depicted their client as a “cartoon” villain, and attempted instead to frame the scheme as a haphazard startup where “some things were overlooked.” On day two, FTX co-founder Gary Wang testified against Bankman-Fried. Reportedly, the failed exchange allowed trading firm Alameda Research to “withdraw unlimited funds from FTX and lied about it,” as well as an essentially limitless line of credit. Alameda Research used customer deposits to pay off loans to creditors.
Book on SBF.
There’s a new book out on Bankman-Fried and FTX, too: Going Infinite, by Michael Lewis. Ben McKenzie, author of a book that dives into crypto’s “golden age of fraud,” says “it’s like watching the formation of a serial killer over 250 pages.” In the later part of the book, Lewis relies heavily on Bankman-Fried’s recollection of events, and spends the last 50 pages describing how things could have gone so wrong without BF’s knowledge. But McKenzie says, in one of his own meetings with the crypto head: “The myth of Sam Bankman-Fried evaporated within moments of meeting the real deal. He was no genius, no mogul in any way that could last.”
Related: The VC firms and investment funds who pumped $2bn into FTX are facing scrutiny too, “for enabling [Mr. Bankman-Fried] with so little oversight.” One, an arm of the Ontario Teachers’ Pension Plan, put $95mn into FTX.
HOUSING
Housing News.
A handful of housing news hits:
Richmond Fed President Barkin says demand is down, supply is short and, while prices haven’t come down, they’ve stabilized. If what they’ve recently observed is a “secular shift” toward higher demand, prices might come down. Interest rates and their impact are a “blunt tool,” he says. NYT explains what high rates will do to housing here – borrowing, including on mortgages, will be tougher.
Mortgages rates climbed to 7.49%, their highest in 23 years. Some lenders are offering 7% mortgages; others are well above 8%. Freddie Mac research indicates that shopping around may help people get a better deal. Prospective homeowners who got at least five quotes could have saved about $6,000 over the duration of the loan last year.
Applications for “home-purchase loans” have “slowed to the lowest level of activity since 1995,” per WSJ’s Nick Timiraos.