Make Small-Business Lending Fair(er)
The Consumer Financial Protection Bureau wants to enforce fair lending laws and ensure women- or minority-owned small businesses have access to the opportunities they deserve. Senate Republicans, joined by a few Democrats, want to stop them.
Section 1071 of the Dodd-Frank Act, passed in the wake of the 2008 financial crisis, required financial institutions to compile and maintain small business lending data for submission to the CFPB. In September 2021, the agency proposed a rule to implement this provision. Officials would use this information to ensure the Equal Credit Opportunity Act was upheld within communities, and to identify the needs of small businesses owned by women and minorities. Various bank lobby groups railed against the provisions. The Texas Bankers Association sued the CFPB, and the District Court for the Southern District of Texas issued an injunction against the agency until the Supreme Court decides the case on CFPB funding.
Sen. Kennedy (R-LA) introduced a resolution of disapproval which invoked the Congressional Review Act, later calling the rule “intrusive” to echo the bank lobby’s arguments. This week it passed 53-44. The White House threatened to veto the bill, saying it would “harm all those that stand to benefit from this expanded transparency and accountability.”
Americans for Financial Reform, the National Community Reinvestment Coalition, and the Center for Responsible Lending criticized the members of Congress who supported this bill. The rules, the three groups write, would make it easier to identify and combat discrimination in lending.
Says AFR’s Lisa Donner:
“We are deeply disappointed in all those who voted against implementing Section 1071. This is a missed opportunity to reduce ongoing disparities in access to small business credit. Section 1071 shares data with small businesses, regulators, and the public in order to understand and address historical patterns of discrimination and exclusion, which can help address the racial wealth gap. Those who voted against the rule turned their backs on the economic mobility of communities around the country."
FINANCIAL STABILITY: Capital Requirements – Goldman Sachs Astroturfing – Big Bank Outlook – Fed Leaks? – AI and Financial Stability – Community Reinvestment Act – Further to the Banking Crisis
CONSUMER: Abortion Access – Grand Theft Auto – Swipe Fees – Student Loans – Immigration Status and Credit Applications – Junk Fees – CFPB Enforcement Actions
CAPITAL MARKETS: Asset Manager Capitalism – Exchange Pricing – Database Funding
PRIVATE MARKETS: Private Equity’s Green Façade – Rolls-ups Heating Up…And Cooling Down – Systemic Risk
CRYPTO: Disclosing Crypto Exposures – Grayscale – FTX and SBF
HOUSING: Homeownership – Credit Score requirements – Home Appraisal Racial Bias – Florida’s High Home Insurance – Other Housing News
CLIMATE AND FINANCE: Cash for Carbon
POLITICS AND MONEY: Billionaire Spending in Elections
Feedback? Reach us at afrnews@ourfinancialsecurity.org
FINANCIAL STABILITY
Capital Requirements.
Crucial bank capital requirements, the Basel III “endgame,” loom, much to the chagrin of the banks with their well-financed campaigns railing against them. Regulators, such as Fed Vice Chair Barr, have noted that the rules would strike at the largest, most complex banks most, leaving smaller community banks mostly untouched. But The American Prospect describes how those big banks have conscripted community bankers to man the front of their fight to weaken the rules.
Goldman Sachs Astroturfing
If you hear from 10,000 small businesses that the new bank capital requirements will harm their access to credit, be wary of who is behind them. It’s Goldman Sachs astroturfing themselves an argument against rules that would make the financial system more stable, but less lucrative for Goldman executives.
Big Bank Outlook.
Big banks recorded better-than-expected earnings last week. Much of Q3’s profits were driven by interest income; Q4’s net interest income levels might be lower, according to forecasts. Loan growth is fairly weak, and deposit competition may step up. Bankers anticipate consumer credit will weaken from the high levels observed during the pandemic. Big banks are less optimistic about the next year, and they’re prepping for an economic slowdown, reports Politico. That said, economists’ recession probability estimates, in a quarterly WSJ survey, have fallen to 48%, meaning they feel the country is more likely than not to avoid recession.
Related: Bank of America’s unrealized losses on held-to-maturity debt securities top out at over $130bn. Those are the types of assets that helped sink SVB.
And: Bank Director predicts a looming “credit storm,” since the high-rate environment has “curtailed demand and promises to have a lagging effect on credit quality.” Of particular concern: commercial real estate. Delinquencies at banks have risen among lodging, office and retail loans.
Fed Leaks?
A group of House Republicans headed by House Financial’s Andy Barr sent a letter to Fed Chair Powell questioning whether the Fed leaked “supervisory and regulatory plans and actions,” referring to Bloomberg stories about post-SVB warnings to regional banks and then-unreleased plans for capital rules.
AI and Financial Stability.
While WSJ posts articles about how “humans are in the way” of an AI-driven economic boom, the SEC’s Gensler advises caution. Without intervention, he says, a financial crisis in the next decade will be “nearly unavoidable.” Artificial intelligence, from the kitschy chatbots to the most complex systems, rely on models sourced from existing data. Gensler warns that reliance by financial institutions on a limited set of “the same underlying base model[s] or underlying data aggregator[s]” created and managed by external tech companies, without the same guardrails as Wall Street actors, may cause runaway issues.
Community Reinvestment Act.
Next week, the Fed board will meet to finalize a Community Reinvestment Act overhaul, which will end “a six year drama to modernize low-income lending requirements to capture activities away from physical branches, as more banking happens online,” notes WSJ.
Further to the Banking Crisis.
JPMorgan has a “master plan” to muscle into Silicon Valley after its purchase of SVB rival First Republic. It’s looking to “fill the void that both banks left behind” with a “hiring spree and other investments,” according to Bloomberg.
Earlier this month, PNC Bank, the seventh largest in the U.S. as of writing, completed its $16.6bn acquisition of Signature Bridge Bank, the bridge institution set up after Signature went into FDIC receivership.
CONSUMER
Abortion Access.
A study headed by UC San Francisco’s Dr. Diana Green Foster, called the Turnaway Study, finds that women who are denied abortions suffer significant long-term socioeconomic harms. Across eight thousand interviews and a longitudinal study following 1,000 women over five years, researchers found that women who are forced to carry an unwanted pregnancy to term due to the denial of an abortion are four times more likely to live below the federal poverty line. These women additionally saw lower credit scores, greater amounts of debt and an increase in the volume of negative public financial records (like bankruptcies or evictions). The study examined other aspects of their lives, as well. The research team’s conclusion: “Women who receive a wanted abortion are more financially stable, set more ambitious goals, raise children under more stable conditions, and are more likely to have a wanted child later.”
Grand Theft Auto.
A paper in the American Bankruptcy Law Journal examines how several bankruptcy courts – like the Eleventh Circuit Court of Appeals – tend to allow auto title lenders to seize ownership of their debtors’ cars while keeping all equity after a sale, despite a reasonable interpretation of bankruptcy statute allowing debtors to keep their cars as “property of the estate.” Normally, a title lender would be considered a secured creditor, but they can shield themselves with state-level pawnshop laws when their consumers sign documents that call the title loan a “pawn,” essentially making the lenders “pawnbrokers” who can claim ownership of the debtor’s car. The paper’s authors recommend Congress incorporate amendments that would allow customers to repay their loans while hanging onto their cars, “the second largest consumer investment” after homes.
Swipe Fees.
The Fed plans to reduce debit card swipe fees by lowering the cap, WSJ reports. They’re the fees that merchants kick up to banks whenever a consumer pays with a debit card, also known as interchange fees. The banks, over $10bn in assets, that would be subject to the cap made $16.6bn off the swipe fees in 2022 alone. The Fed says the costs associated with operating debit cards has gone down.
Student Loans.
This month, 28 million borrowers resumed payments on their student loans. Miscalculations caused 400,000 of them to be assessed higher-than-expected monthly payments. The Missouri Higher Education Loan Authority (MOHELA), a loan servicer, used 2022’s poverty guidelines instead of 2023’s, resulting in some payers on the new income-driven SAVE plan receiving the wrong information. Separately, discrepancies gleaned during a Department of Education review revealed more borrowers charged the wrong payments.
Immigration Status and Credit Applications.
The CFPB and Department of Justice issued a joint statement reminding financial institutions that “all credit applicants are protected from discrimination on the basis of their national origin, race, and other characteristics covered by the Equal Credit Opportunity Act, regardless of their immigration status.” That means banks and other companies won’t be able to use immigration status to “illegally discriminate” against credit applicants. The agencies note that the ECOA allows creditors to consider immigration status when necessary, but “unnecessary or overbroad reliance” violates the statute.
Junk Fees.
Last week, the CFPB and Biden administration took major action on junk fees. Accountable.US blasts the “anti-CFPB MAGA lawmakers” Reps. Barr and Luetkemeyer who have previously claimed that junk fees just don’t exist, yet have been given $401,500 by the very trade groups railing against the administration’s junk fee campaign.
CFPB Enforcement Actions.
The CFPB’s been around for 12 years. If you’ve been wondering how much they’ve gotten done in that time, they’ve got a new “Enforcement by the numbers” section on their website. Spoiler: It’s a lot. At a glance, they’ve secured $19bn in relief (almost $2.5bn in 2022 alone!), $4.1bn in civil penalties, and they estimate that 195mn people and accounts are eligible for relief.
Some recent cases:
Sendwave, an app operated by fintech company Chime: The CFPB has ordered the company to pay $1.5mn in penalties and refund $1.5mn to consumers who the agency says were deceived “about the speed and cost of remittance transfers.” Director Chopra says that “illegal fine print…tricked people who were sending money to their family overseas.”
TransUnion, a credit reporting giant with a rental screening subsidiary: The CFPB joined the FTC in a lawsuit against TransUnion over inaccurate rental background checks. The company’s rental screening arm “failed to ensure eviction records in its background check reports, including by failing to disclose that an eviction had been dismissed.” TransUnion faces a $15mn suit, as well as an $8bn penalty for “lying to tens of thousands of consumers about the status of requests to remove security freezes and locks” on their reports.
CAPITAL MARKETS
Asset Manager Capitalism.
A paper by the University of British Columbia’s Albina Gibadullina dissects the rise of “asset manager capitalism,” in which U.S. firms wield trillions of dollars of investments and have become the “largest shareholders” of U.S. corporations.” Gibadullina finds that these investors own about 60% of all U.S.-listed companies and represent 28% of the equity of all globally listed companies. Much of that figure comes from the activity of mutual funds, which “aggregate savings from millions of households.” The Big Three asset managers – BlackRock, Vanguard and State Street – are invested in 81% of U.S.-listed companies. This creates a condition whereby ownership is “being increasingly concentrated in the hands of a small number of increasingly powerful funds,” and that cadre of funds can “exert control over thousands of companies simultaneously.”
Exchange Pricing.
The Healthy Markets Association warns that an SEC proposal meant to address “discriminatory practices in exchange pricing” will “likely create significant new complexities and profound negative impacts on investors and other market participants.” The new rule, they write, too narrowly focuses on just one tactic used in discriminatory pricing – “aggregate volume-weighted pricing tiers” – and only on a slim slice of orders and market participants. They suggest this approach would make discriminatory pricing worse and lead to information leakage and “dark trading by large, institutional investors,” as well as anticompetitively create “greater consolidation” toward large-volume traders.
Database Funding.
Citadel Securities and the broker group American Securities Association don’t want to help pay the bill for a real-time trading database (the Consolidated Audit Trail, effectively a Hubble Telescope for the market), as an SEC rule would require them and other brokers to do. Now, they’re suing the agency, alleging it “overstepped its statutory authority and failed to address investor and industry concerns.”
PRIVATE MARKETS
Private Equity’s Green Façade.
Though private equity firms tout decarbonization and other initiatives to capitalize on efforts to combat climate change, they continue to pump billions of dollars into fossil fuel investments. Their “Green Façade” is being financed by public pension money. And the lack of transparency makes it extremely difficult to parse their gargantuan flows of capital. According to a study by Fossil Free California, CalPERS and CalSTRS, two California pensions, have chronically overstated the costs associated with divesting from fossil fuels. It would cost $115mn for the two funds to pull out. Had they done so a decade ago, they would have saved $9.6bn, per a report published by the University of Waterloo. Another example: Goldman Sachs has a Clean Energy Income Fund, one of numerous American “ESG funds with substantial exposure to fossil fuels.”
Roll-ups Heating Up…And Cooling Down.
Quick reminder: A “roll-up” happens when, like in the Texan anaesthesiology space, private equity acquires many, if not all, of the smaller companies in a certain market to consolidate them into one larger, dominant company. Now, roll-ups are intensifying among HVAC servicers. A paper by the American Economic Liberties Project “finds that consolidation, rising prices, and surging investor compensation in the heat pump market could blunt the effectiveness of federal spending,” as it’s one of the key technologies targeted by the Inflation Reduction Act.
Systemic Risk.
PE investor J Christopher Flowers, who tried to rescue the insurer AIG during the financial crisis, warns of systemic risk as “insurers binge on private credit investments,” in the words of FT. In the past decade, more PE firms have partnered with life insurers, leading these insurers to make riskier investments.
CRYPTO
Disclosing Crypto Exposures.
The Basel Committee on Banking Supervision (yes, as in Basel III) has proposed guidance to require banks to “disclose quantitative and qualitative information on their crypto activities,” according to Coindesk. The rules would take effect in 2025, at which time these institutions would have to make disclosures to “support the exercise of market discipline and help to reduce information asymmetry between banks and market participants.”
Grayscale.
Earlier this year, a federal court ruled in favor of Grayscale Investments, a group which manages the world’s largest crypto fund, in their lawsuit against the SEC. The original suit was in response to the Commission rejecting the firm’s application to transform its Bitcoin fund into an ETF. After the loss, the SEC plans not to appeal.
FTX and SBF.
Some reporting about the collapsed crypto exchange FTX and its founder, Sam Bankman-Fried, currently on trial for charges stemming from wire fraud, money laundering, and misrepresentations to investors, among others. A company insider indicates that the exchange’s political donations came from “stolen customer funds,” per WSJ.
HOUSING
Homeownership.
The Biden administration will undertake new actions to promote access to homeownership. Among them: a proposed $16bn for the Neighborhood Homes Tax Credit to build or renovate 400,000 houses, a proposed $10bn downpayment assistance program targeting first-time homebuyers whose parents don’t own a home, and a $100mn down payment program for first-gen and low-wealth first-time buyers. Some other measures, at a glance:
Allowing homebuyers to use income from accessory dwellings to underwrite mortgages.
Awarding $9mn in loans to nine Native American Community Development Institutions
Updating the 203(k) Rehabilitation Mortgage Insurance Program, to help finance home repairs.
A Veteran Affairs program to help veterans who are behind on their mortgages.
Credit Score Requirements.
The Federal Housing Finance Agency will overhaul credit score requirements for loans sold to Fannie Mae and Freddie Mac, with a proposal to reduce the number of credit models used from three to two. Mortgage lenders would have to evaluate borrowers based on the FICO 10T and VantageScore 4.0 models. Republican senators urged the agency’s director Thompson to reconsider, but it’s “full steam ahead” for the FHFA.
Home Appraisal Racial Bias.
This week, the Federal Housing Finance Agency released the nation’s “first publicly available appraisal-level dataset of appraisal records.” The dataset draws from five percent of records obtained by Freddie Mac and Fannie Mae to create a representative sample of the appraisal environment. The National Community Reinvestment Coalition welcomes the numbers, which they say will help in understanding appraisal bias. Previous research has found that homes in majority-Black neighborhoods are valued about 21-23% lower than they would be elsewhere, and a 2021 study by Freddie Mac discovered Black and Latino applicants often received lower-than-contract-price values than white applicants. The NCRC suggests that the data release doesn’t go far enough, however, as it “takes a more cautious approach to privacy concerns than is necessary, and loses some statistical precision as a result.”
Florida’s High Home Insurance.
In Flamingo Park, Florida, one family’s insurance rate shot up to $121,000 for the year. They, and other residents across the state, are packing up as they experience a home insurance cost crisis. According to WSJ, rates are “rising especially fast” in Florida, some premiums having increased by as much as nine times higher than last year – on average, they’ve tripled. “A combination of extreme weather events, higher costs to rebuild and a rise in litigation has put the state’s insurance industry into crisis. Multiple insurers have pulled out of the state altogether,” writes WSJ.
Houses within Houses within…
A new FHFA policy will allow lenders to count incomes from small units “built inside, attached to or on the same property as a primary residence” when underwriting a mortgage. HUD Secretary Fudge says this action, which will make it easier to finance an accessory unit like those, will increase the supply of affordable housing.
Other Housing News.
Multifamily Housing Rents. For the first time since September 2009, multifamily housing rents decreased. On average, they dropped by a mere $6 since August, and $3 from Q2 to Q3.
Apartments. RealPage analytics suggests the higher the supply of housing in any asset class, the more likely rents will fall in all asset classes. Recently, Class B properties (middle-quality buildings that are “generally older, tend to have lower income tenants, and may or may not be professionally managed) have experienced the greatest impact, where rents fell 3.7% vs. falling 1.5% in Class A and 0.8% in Class B.
House Sales. Constrained by mortgage rates and low supply, home sales are on track to hit their “lowest levels since the subprime crisis period.”
CLIMATE and FINANCE
Cash for Carbon.
Rather than take action to combat climate change themselves, a company can purchase carbon offsets, certificates that fund specific climate-related projects, such as sequestration and renewable energy development. But the offset market’s largest firm, the Swiss-based South Pole company, dealt in what one now-resigned founder called “just paper credits.” The Atlantic reports that it sold millions of credits for “carbon reductions that weren’t real.”
POLITICS and MONEY
Billionaire Spending in Elections.
In a piece for Take On Wall Street, AFR’s William Pierre-Louis, Jr. discusses how billionaire spending on elections threatens democracy. Their massive wealth allows them to “undermine the principles of fairness, equality, and the people’s will” through limitless campaign contributions. Individual billionaires spent a billion dollars in 2022, according to a report by Americans for Tax Fairness, and dark money flows make it easier to conceal the origins of more funds.