Freedom of Speech Shouldn’t Protect Racist Lending Practices
Doesn’t need to be said, right? Be sure to pass along the memo to judges and to mortgage lenders in Chicago.
CFPB v. Townstone Financial, Inc. and Barry Sturner has been called a case that “could roll back decades of progress in fighting discrimination” by giving “lenders the license to discriminate,” in violation of fair lending laws. Put another way, the outcome of the case could determine whether “whites only” advertising is against the law.
Arguments will be heard tomorrow in the Seventh Circuit Court of Appeals.
There’s a weekly radio show in Chicago called the Townstone Financial Show, run by mortgage broker Townstone Financial, during which people could call in and talk about mortgage-related topics. In it, the Townstone’s CEO Barry Sturner would describe local majority-Black neighborhoods and nearby majority-Black towns in blatantly racist terms. We won’t go into detail, but Sturner telegraphed contempt for prospective Black mortgage applicants.
In 2020, the CFPB filed a redlining complaint against the non-bank mortgage lender – Townstone – and deemed the remarks discriminatory, arguing that they discouraged Black consumers from applying for credit. Despite Black households making up about 30% of Chicago’s population and about 10% of its mortgage applicants, only 1.4% of Townstone’s applicants were Black. Only 2% of their applicants came from majority-Black census tracts. And none of their seventeen mortgage loan officers were Black.
The U.S. District Court for the Northern District of Illinois dismissed the suit at Townstone’s request. AFR’s Caroline Nagy joined other consumer groups this week in calling on the appeals court to reverse this Trump-appointed judge’s attempt to gut the Equal Credit Opportunity Act. Said Nagy:
“We cannot allow the Seventh Circuit to gut our right to equal credit under the law. If the ruling was allowed to stand, it would make it easier for lenders to get away with discouraging, dissuading, and steering potential applicants on the basis of their race, sex, or other protected groups. To truly provide the equal credit opportunities promised under the Equal Credit Opportunity Act, federal enforcement agencies must have the power to examine a lender’s steering and marketing behaviors.”
FINANCIAL STABILITY: Big Banks on the Hill – Synthetic Risk Transfers – Big Risks – AI-Washing – Federal Funds – Tim Sloan – Wells Fargo Union
CONSUMER: Section 1071 – Pandemic Wealth Building – Discover – Buy Now, Pay Later – Junk Fees
CAPITAL MARKETS: Buyback Attack
PRIVATE MARKETS: Brookfield’s Climate Paradox – PE and Healthcare – Private Credit – Blackstone Shorted – Other Private Markets News
CRYPTO: Binance Penalty Sneak Peek – Warren’s Crypto Crackdown
CLIMATE AND FINANCE: Cash for Carbon
Feedback? Reach us at afrnews@ourfinancialsecurity.org
FINANCIAL STABILITY
Big Banks on the Hill.
Sometimes, when you invite the CEOs of the largest, too-big-to-fail megabanks in the United States up to Capitol Hill, you get a laugh from their suggestions. Like when JPMorgan’s Dimon suggested privatizing the FDIC.
During the course of Senate Banking’s “Annual Oversight of Wall Street Firms” hearing, the biggest elephant in the room was regulators’ Basel III “endgame” plan for shoring up capital requirements among the largest, systemically important banks – mostly, the ones on the testifying block yesterday. Unsurprisingly, the CEOs continued their campaign against better financial system guardrails, suggesting the rules could harm the economy. Though they would have no problems themselves meeting their requirements, they said, they warned of trouble for consumers and businesses.
A reality check came in The Washington Post from Alexa Philo, a former Federal Reserve Bank examiner and now AFR’s senior policy analyst:
“When banks have to raise more equity capital, it can depress the share prices that are linked to banker bonuses,” she said in an email. “That’s why the bank lobby fights greater capital requirements with everything it has. The rest, particularly about alleged harms to economic growth, is largely nonsense.”
We’ve heard it all before. So much so, in fact, that AFR debunks the oft-repeated myths here. And AFR also reminds everyone that big banks predict catastrophe every time regulators raise capital requirements. But the world continues to turn.
Synthetic Risk Transfers.
A synthetic risk transfer happens when traditional financial institutions sell off “complex debt instruments” to under-regulated private asset managers to “de-risk” their loan portfolios, reduce their capital requirements and dodge capital charges on lending. Senate Banking’s Jack Reed has urged federal regulators to scrutinize the risks associated with the practice.
“I am concerned that synthetic risk transfers may not be conducted in a safe and sound manner by the banks under your supervision and that they may increase risk across the financial system,” he wrote in a letter to the Fed, FDIC and OCC, noting the danger of allowing risk to trickle into opaque private markets while encouraging banks to take riskier behaviors. Earlier this month, Reed questioned the regulators about their agency’s oversight during a hearing. FDIC’s Gruenberg and OCC’s Hsu agreed with the need for caution, and the Fed’s Barr noted an imbalance in visibility into the banks’ side of the transaction versus the private funds’ side.
Big Risks.
The OCC’s Semiannual Risk Perspective for Fall 2023 report outlines a number of risks that the federal banking system faces ahead, namely:
Credit Risk, thanks to rising interest rates, high inflation and growing risk in commercial real estate. Remember: a historic volume of CRE loans will come due in the coming years, at a time when offices are losing value.
Net Interest Margins, as deposit rates rise, market liquidity is squeezed and there’s greater reliance on wholesale funding.
Operational Risk, especially from cyber-threats. One emerging risk they highlight: artificial intelligence.
Compliance Risk, when it comes to how equitably resources are distributed, how fintechs interact with banks, and how banks form partnerships with third parties.
AI-Washing.
Like greenwashing, but with artificial intelligence. The SEC’s Gensler cautioned against it, saying companies shouldn’t mislead the public of what their systems and models are capable. “When new trends come along, when new technologies catch the attention of the investing public, one does see that issuers may start to use words around those trends and those technologies. We saw this in the late '90s with the internet bubble,” he said.
Federal Funds.
AFR-EF and partners recommended that the Office of Management and Budget (OMB) revise sections of its Guidance for Grants and Agreements in order to explicitly indicate that local and state officials can take responsible action to consider stock buyback expenditures, exorbitant CEO pay, and private equity-driven leveraged buyouts and cost-cutting when they award federal funds to corporations. Reads the letter:
“Because of these important connections between underinvestments in the workforce, community benefits, and environmental sustainability on the one hand and stock buybacks, exorbitant CEO pay, and private equity-driven leveraged buyouts and cost-cutting on the other, the OMB should make it explicit in guidance accompanying the final rule that states and localities receiving federal funds are allowed to take into account these practices in their procurement process.”
Tim Sloan.
Ex-Wells Fargo CEO Tim Sloan has sued his former employer for withheld compensation, “seeking to force Wells Fargo to honor multiple canceled stock awards and a bonus he says he was promised,” according to Fortune. Seems the $18.4 million salary (in 2018, after a 5% pay bump) he received wasn’t enough. Sloan made headlines in early 2019 when he suddenly and unexpectedly resigned from his position after spending a couple of years doing damage control for the scandal-ridden bank. If you need a refresher on why Wells Fargo’s reputation needed the Sloan treatment – and how little impact he made – AFR has just the resource for you: a Wells Fargo scandal tracker.
Wells Fargo Union.
Speaking of Wells Fargo, a third branch has plans to hold union elections, joining two branches in New Mexico and Alaska which announced the same in the past weeks. “We don’t have enough employees to do our job properly…We don’t even have time sometimes to take lunch breaks, or…go to the bathroom,” said one non-management employee.
CONSUMER
Section 1071.
In a move that would harm consumers, the House of Representatives on Friday voted on legislation to repeal the CFPB’s Section 1071. The provision, provided for in Dodd-Frank, allows the agency to collect demographic data from financial institutions that lend to small businesses in the interest of identifying the needs of women- and minority-owned businesses. It’s been under attack recently by the business lobby in federal courts, and previously on Capitol Hill as well; in October, the Senate voted to repeal it too. AFR has recognized the importance of the CFPB rule in unraveling discriminatory lending practices. Biden is expected to veto the bill.
Pandemic Wealth Building.
WSJ reports that the growth of household wealth during the pandemic happened unequally across racial, ethnic and income lines. While people across all racial groups recorded a general rise in net worth, one in four Black households and one in seven Hispanic households still had zero wealth by the end of 2021. Wealth gaps were most prominent among lower-income households; low-income white households had 21 times the wealth of low-income Black households.
Discover.
Discover Financial Services will pull out of its student loan operations after multiple run-ins with regulators over the course of a decade. The American Banker article here refers to them as “regulatory headaches,” but it’s more apt to call them numerous consent orders stemming from unfair acts, misconduct and violations of consumer protection law. Like this 2020 consent order handed down for failing to comply with a different 2015 consent order. It’ll sell its $10bn loan portfolio and stop accepting student loan applications in February.
Buy Now, Pay Later.
The OCC issued guidance to help banks manage the risks associated with buy now, pay later (BNPL) lending – in the fintech space, you may recognize BNPL as the services like Afterpay, Klarna and PayPal’s Pay in 4 that you might be using to get your Christmas gifts this time of year. The agency identifies some of the risks associated when banks make these zero-financing loans, such as: underwriting issues when applicants have limited credit history, the lack of clear disclosures, third-party relationships increasing exposure to risk when they contract out to merchants to perform the loans, and an increased “first payment default risk from fraud or borrower oversight,” among other issues. The OCC recommends a risk management system that clearly captures the “unique characteristics and risks” of BNPL, and the establishment of clear terms and safeguards.
Related: A report from TransUnion about debt collection finds that Buy Now, Pay Later (BNPL) debts have begun to appear on collection company lists. Fintech debts, which they also call “unsecured consumer lending,” is a high area of interest for a portion of collections firms. About 12% of collections came from BNPL in the past year, and 26% of such companies with at least 20+ full-time employees plan to break into the fintech debt business.
Junk Fees.
A survey commissioned by Accountable.US finds that Americans “overwhelmingly believe the Biden administration’s efforts to restrict corporate price-gouging and industry junk fees will lower their costs,” at a time when regulators like the CFPB and FTC work to lower or eliminate overdraft fees, credit card late fees, hidden fees, resort fees, and more. Four-fifths of Americans believe that scams and junk fees have become more common, with 60% believing that a crackdown on hidden junk fees would help to lower costs.
CAPITAL MARKETS
Buyback Attack.
This Halloween, the radical Fifth Circuit once again did the ghoulish thing in its efforts to undermine critical financial system regulators. (That’s aside from deeming the CFPB’s funding unconstitutional or striking at agencies’ use of administrative law judges.) On Oct. 31, the court ruled the SEC violated the Administrative Procedure Act with its May release of a rule intended to improve stock buybacks disclosures, a much-needed provision to promote market transparency and protect investors. The appeals court asserted the SEC did not document the fact that improper buybacks are a problem. Justices gave the agency 30 days to redraw the plans. After a rejected request for an extension, that window has now passed.
AFR called on the SEC to stand up to these industry attacks and re-propose its buyback rule. Last year, corporations in the S&P 500 initiated nearly a trillion dollars in buybacks. And without effective regulations, investors couldn’t know whether they were market-manipulating insider trades by execs. Said AFR’s Natalia Renta:
“Without timely and robust disclosure, investors cannot assess whether money spent on stock buybacks would be better spent on investments needed for long-term growth and viability of the company, like research and development, worker safety, wages, and consumer protection. Requiring transparency about what corporate insiders do with their shares during buybacks is key to ensuring that companies generate long-term value that supports investors, workers, and communities—not short-term stock-price bumps.”
PRIVATE MARKETS
Brookfield’s Climate Paradox.
The private equity giant Brookfield claims it’s a climate-friendly investor, but a new report from AFR-EF, GEM and PESP as part of the Private Equity Climate Risks Project exposes the rift between its climate pledges and its fossil fuel-driven reality. With $850bn assets under management, the firm has declared an ambitious goal to achieve net-zero by 2050 or sooner. But its fossil fuel investments emit nearly 159 million metric tons of carbon dioxide equivalent (CO2e) a year, a figure 14 times higher than it discloses in its most recent sustainability report. That’s more CO2 than you get from burning 178 billion pounds of coal, an amount that scientists would call a “carbon bomb” over the lifespan of a Brookfield fund.
A sizable portion of its fossil fuel investments are obfuscated by its ownership of Oaktree Capital Management (OPM), a smaller private equity firm with $183bn AUM. In 2019, Brookfield snapped up 61% of OPM’s business. Oaktree’s assets emit 82 million metric tons of CO2e per year, a little over half of Brookfield’s total, but the parent firm conveniently excluded OPM from its 2021 and 2022 sustainability reports.
Almost all of Oaktree’s emissions come from its upstream commitments, and most of Brookfield’s come from midstream. (The -stream here refers to the fossil fuel value chain. Upstream includes things like exploration, extraction and production. Midstream includes storage and transport, like via sprawling pipeline networks. Downstream, which represents a significantly smaller slice of the Brookfield/OPM emissions pie, includes manufacturing, refinement and processing before it reaches consumers.)
Says AFR’s Oscar Valdés Viera:
“Brookfield follows a trend among major private equity firms of undercounting their planet-warming emissions and placing polluting assets behind a labyrinth of corporate structures and shell companies. Without strong regulatory oversight and real transparency, Brookfield and its private equity peers will continue pumping greenhouse gasses to the atmosphere while promoting themselves as green transition leaders.”
PE and Healthcare.
Sens. Whitehouse and Grassley have launched an inquiry into private equity’s “growing role in U.S. health care,” NBC reports. Over the past decade, PE firms have spent $1trn to purchase healthcare businesses, burdening practices with debt and gutting their capacity in order to lower expenses. The senators sent letters to several companies backed by these firms, noting that PE ownership “may result in negative outcomes for both frontline medical providers and patients ranging from staffing reductions to wholesale facility closures to substandard medical care.” They requested documents that detail the financial arrangements that allow the firms to extract wealth from their purchases.
Related: A survey of one thousand doctors commissioned by the Physicians Advocacy Institute (PAI) finds that “corporate healthcare ownership” (Note: In many cases, it’s increasingly by private equity!) diminishes care quality. Seventy percent of respondents employed by corporate interests said that their employer used incentives or penalties to force them to see more patients in a day, and around half reported that new protocols have led to them adjusting patients’ treatment options to reduce costs.
And: Steward Health Care, a for-profit healthcare company that was owned by Cerberus until 2020 and is currently the largest “private physician-led hospital operator” in the country, has announced it will close a 182-bed hospital.
Private Credit.
Private creditor Highbridge Principal Strategies (HPS), originally formed as part of the megabank JPMorgan’s hedge fund arm, secretly filed for an initial public offering last week, as the pace of private credit accelerates. HPS’ entry comes as it sees a market opening created by a reduction in bank lending that allows private credit to fill the void, wider credit spreads and higher base rates in the short-term, and an incoming “maturity wall” (in the words of Transacted) that’ll make refinancing trickier. A Bloomberg piece profiles HPS’ rise; in it, it warns that the “nascent industry is untested in a serious recession.” A Moody’s analyst explains that private lending’s strategy is to use leverage, which has resulted in increasing fragility as interest rates rise.
AFR’s Andrew Park has written before about the invisible dangers of private credit, or nonbank direct lending. It’s an estimated $1.5trn market that’s highly opaque and lacking in safeguards, mostly untouched by regulators. Said Park: “Since much of private credit is floating rate, businesses, struggling with repaying their debt as interest rates rise further, could see pressure to lay off employees and reduce investing in their business, leading to additional negative effects. But without better surveillance of this market, it will be hard to even see trouble coming.”
Blackstone Shorted
The hedge fund Muddy Waters revealed a bet against the Blackstone Mortgage Trust, causing its value to fall more than 8% during Wednesday trading. Muddy Waters’ chief investment officer says that there was “a lot of rot in its book” and that the trust was “at real risk of a liquidity crisis.”
Other Private Markets News.
Doggies. Blackstone will acquire Rover, an app used to find and book dogsitters, -walkers and -boarders, with a $2.3bn all-cash transaction. Who knew poop-scooping could be so lucrative?
CRYPTO
Binance Penalty Sneak Peek.
At a lavish dinner in Singapore, an elite club of Binance’s biggest traders were allowed to glimpse the record-setting $4bn penalty U.S. regulators would hand down against the exchange… two months early. Party-going traders mingled with company officials over angus beef and truffles. “After conversations with company representatives present at the dinner, some VIP guests were left convinced that the firm would pay that sum — an amount Binance could easily afford,” reports Bloomberg.
Warren’s Crypto Crackdown.
Politico reports that Sen. Warren used the opportunity to suss out the level of industry support she has for her “bipartisan push to impose stricter anti-money laundering requirements on crypto firms.” Dimon’s response? That he’s “always been deeply opposed to crypto, bitcoin, etc” and that he believes the “true use case” is criminal activity.
CLIMATE and FINANCE
Cash for Carbon.
The CFTC proposed guidance related to trading voluntary carbon credit derivative contracts on Monday. That’s a salable contract whose value depends on its underlying asset, in this case a “credit” that when purchased by a company allows it to pump out a certain amount of carbon dioxide or other greenhouse gas emissions. The money the company forks over in purchasing that credit might then go toward a separate project that offsets that much carbon or more.
The agency’s guidance offers factors that carbon credit derivative exchanges should consider to improve “transparency and liquidity, accurate pricing, and market integrity,” including whether information about the credits is publicly available, whether programs can show how emissions reductions are calculated, and how they address the chance that the credit’s impact be reversed, among other recommendations.