Reality Check: CFPB is Constitutional
Long story short: The CFPB and all its good works are constitutional. The agency’s opponents are desperate for arguments otherwise, but desperation is not a viable strategy.
Short story long: Just a few weeks ago, the Supreme Court handed down a 7-2 decision which affirmed the constitutionality of the CFPB’s funding mechanism, as the consumer watchdog stared down an existential court case levied by the payday lending industry. Pretty straightforward, as it happens: The Appropriations Clause says money needs to be divvied out to programs via appropriations. The CFPB’s funding is an “appropriation” – just one that happens via the Federal Reserve.
But Wall Street’s shills have marshaled a new, nonsensical legal claim over how the agency gets its money. As many actual, credentialed experts have pointed out, however, the arguments are patently wrong. Harvard’s Hal Scott, a longtime industry mouthpiece, argued in The Wall Street Journal op-ed that the CFPB can only legally be funded when the Fed turns a profit – “earnings” – and that the Fed doesn’t technically have earnings at all. Georgetown’s Adam Levitin hit back, saying that the actual remittance of money back to the Treasury isn’t what makes an appropriation; it’s enough that the funds exist to be remitted.
AFR’s Christine Zinner provided the bigger picture, in The Hill:
“Wall Street and predatory lenders will never give up trying to stop the CFPB. An agency devoted to fighting such powerful interests will never be home free. But with these sorts of legal arguments, the financial services industry is really scraping the bottom of the barrel.”
As if to prove the point, Republican Sens. Scott and Hagerty – both stalwart Wall Street allies – unveiled a new bill which tries to subject CFPB to the annual Congressional appropriations process.
No legal nonsense can change the fact that the CFPB continues to draw these attacks because it does its job of protecting consumers. But a very powerful industry lobby wants to tear it down. Still, the CFPB presses on: Now that the thorny CFPB v. CFSA has been resolved, the agency’s rule offering protections against predatory payday and installment loans is on track to take effect next year.
BANKING AND FINANCIAL STABILITY: Capital Rules – Bank Mergers – Banker Pay
CONSUMER: Medical Debt – Junk Fees – Read the Fine Print – Auto Lending
CAPITAL MARKETS: Artificial Intelligence – Buyback Pay Back
PRIVATE MARKETS: Private Equity and Healthcare – The Industry’s Favorite Court – Private Equity and Tax Avoidance – Pensions and PE – Private Equity and Your Kid’s Attention – Other Private Markets News
CRYPTO: Crypto Scams – Stablecoins – Terraform Labs
HOUSING: The Climate Crisis Hidden in Insurance – Corporate Landlord Profiting… – …And Harming Health – Home Sales
CLIMATE AND FINANCE: Anti-ESG – Private Equity and Fossil Fuels
POLITICS AND MONEY: Wall Street for Trump – Crypto Cash
Feedback? Reach us at afrnews@ourfinancialsecurity.org
BANKING AND FINANCIAL STABILITY
Capital Rules.
With the system-strengthening Basel III Endgame capital rules on the horizon, George Washington University emeritus Art Wilmarth warns regulators not to bend to the bank lobby’s arguments against strong requirements. Wilmarth highlights the eight U.S. megabanks designated global systemically important banks (G-SIBs), which have nearly $15trn in assets but only $1.06trn in equity capital. Despite the industry’s doomsaying, the Basel III Endgame would only require them to shore up this leverage ratio to less than what it was in mid-2018. He writes: “Stronger equity capital requirements would protect the public from the enormous harms caused by systemic financial crises, including the costs of bailing out troubled megabanks.”
This appeal to regulators comes at a time when Fed Chair Powell shows many signs of weakening the original proposal, intended to direct these biggest banks to beef up their capital cushions. Sen. Warren called on Powell to keep the rule strong, concerned he may be “advocating for slashing [them] in half.” She also chided Powell for backtracking on a commitment he made to defer to the vice chair for supervision on regulation, saying he is treating the Fed like his “personal fiefdom.”
Bank Mergers.
Sen. Brown urged the FDIC and OCC to protect consumers and communities when reviewing mergers and called for the updating of decades-old merger guidelines. In a letter, Brown wrote: “Last year’s bank failures coupled with an increasing trend towards concentration in the banking industry demonstrate the immediate need for the OCC, the other banking regulators, and the Department of Justice (DOJ), to collectively complete a comprehensive update of the bank merger review framework to ensure consumers, and not just Wall Street, benefit from these transactions.”
Banker Pay.
SEC Commissioner Lizárraga headlined an AFR-EF webinar on an important but long-dormant executive pay rule last Monday: “Section 956 is about ensuring sound compensation practices that ensure there is sensitivity to downside risks. It will benefit investors and contribute to the financial stability of our very interconnected system.” The event featured speakers from Public Citizen, AFL-CIO, AFSCME, Institute for Policy Studies, and Committee for Better Banks.
Capital Account highlighted Lizárraga’s argument about the documented need for the rule:
“One of the criticisms we sometimes hear is that our rulemakings represent a solution in search of a problem. That is anything but the case with this rule. It has been well documented that in the lead up to the financial crisis, pay structures often encouraged big bets that maximized short-term profits but ignored bigger longer-term risks that threatened to take down our entire financial system.”
CONSUMER
Medical Debt.
The CFPB proposed a rule to ban medical debt from credit reports, a move that could slash $49bn in debts from the credit scores of 15mn Americans. AFR celebrated the proposal, noting that the burden of this debt still disproportionately impacts lower-income individuals and those living in Southern states. Said AFR’s Christine Zinner:
“Medical debts are not a good predictor of general credit worthiness, they are often inaccurate, and their inclusion on credit reports effectively punishes people for health problems and lack of wealth and adequate insurance. Years of systemic inequities baked into the credit reporting system have disproportionately limited access to capital for individuals of color and today’s proposal would help level the playing field for them as well.”
Junk Fees.
At the CFPB’s semi-annual report hearing last week, Director Chopra highlighted his agency’s work to chip away at the tens of billions of dollars worth of junk fees slamming buyers, and Sen. Warren called out her Republican counterparts who “are in bed with big business to rip off families and to protect corporate bottom lines.”
However, an industry lawsuit against the CFPB’s $8 late fee cap got a boost when the Fifth Circuit blocked, again, a transfer of the case to the DC Circuit. That said, two banks showed how unnecessary the fees are: PNC Bank has adopted the $8 fee as its benchmark, and Wells Fargo has begun offering a credit card without late fees at all.
The CFPB also highlighted how recent Department of Labor guidance shields workers’ unemployment benefits from junk fees. When benefits are loaded onto prepaid cards, recipients can incur fees and run into other challenges when trying to access their money. The DoL reiterates states’ obligations to protect consumers over card issuers, and lays out a roadmap to improve prepaid card offerings.
Read the Fine Print.
Have you ever accepted the terms and conditions without reading them? You may have been asked, unlawfully, to sign away some of your consumer protections. A blog from AFR and the National Association of Consumer Advocates calls attention to recent CFPB guidance against companies hiding unlawful clauses in the fine print: “We should expect that financial services providers don’t write contracts that have illegal provisions. Most consumers are not aware of, and do not understand much of the content in the fine print, so financial firms get away with adding illegal terms knowing that unsuspecting consumers will accept the order to comply with them.”
Auto Lending.
The CFPB has released the findings from its Auto Finance Data Pilot. “Americans owed more than $1.6 trillion on auto loans through the fourth quarter of 2023, with more than 100 million active auto finance accounts.” The report specifically investigates “negative equity,” where a consumer trades in their vehicle for a value less than that of an outstanding loan balance, which can put consumers underwater on the loan.
CAPITAL MARKETS
Artificial Intelligence.
Lawmakers are worried about whether the SEC and CFTC are prepared to deal with the growing presence of AI on Wall Street. A report from the Senate Homeland Security Committee stated that the use of AI beyond its current use for predictions could grow to a point where “herding” becomes an issue, where AI-driven actors set off market runs as they act similarly due to reliance on the same data sets to train AI models. The report calls on agencies to create guidelines for the use of AI.
Related: A report from the Institute for Agriculture and Trade Policy highlights ways that the government can take steps to minimize risks. For example, the CFTC appointed its first “Chief Data and Artificial Intelligence Officer” in May. The report notes that the CFTC had previously passed on regulating “automated trading systems,” which have led to competition concerns. AI has the ability to help corporations monopolize an industry, and have also ignored copyright and patent information.
Buyback Pay Back.
AFREF and 23 allies called on the Treasury and IRS to finalize a rule implementing a 1% excise tax on stock buybacks with strong anti-avoidance provisions. Due to industry pressure, the two agencies scaled back an earlier version of a “funding rule,” which makes the tax more difficult to avoid by designating the buyback or acquisition of a foreign company stock funded by a domestic affiliate as taxable if the principal purpose of the funding was to avoid the tax. The organizations on AFR-EF’s letter called for the funding rule’s preservation.
PRIVATE MARKETS
Private Equity and Healthcare.
A bill from Sens. Warren and Markey, the Corporate Crimes Against Health Care Act, proposes strict penalties, including clawbacks, a quintuple civil penalty, and up to six years’ jail time for private equity and hospital executives whose “aggressive deal-making” results in the death of a patient. The lawmakers point to Cerberus’ former ownership of Steward Health Care hospitals in Massachusetts as an unfortunate example. Steward, the formerly PE-backed hospital system stumbling through bankruptcy under a mountain of debt and possible facility closures, recently received an additional $225mn in debtor-in-possession financing from some of its existing lenders.
The Industry’s Favorite Court.
The National Association of Private Fund Managers (NAPFM) loves to sue the SEC. Earlier this month, a judge vacated the agency’s private fund rule, which would have provided important information to investors. In its legal crusade, NAPFM enjoys the benefit of its geography: its HQ is in Texas. When it files suit, the eventual appeal lands in the Fifth Circuit Court of Appeals – stacked with conservatives and prone to siding with big business.
Speaking of: The U.S. District Court for the Northern District of Texas, which feeds into the Fifth Circuit, approved a rule that would prevent cases from being transferred to other jurisdictions until 21 days after an order to do so. The decision comes after the bank industry’s lawsuit against the CFPB’s credit card late fee cap bounced between Texas and D.C. multiple times; that case will be stuck in Texas in the meantime.
Private Equity and Tax Avoidance.
A study from Oxford finds that private capital groups, like PE firms and venture capital, have dodged U.S. and European taxes on more than a trillion dollars’ worth of income since 2000 through so-called carried interest loopholes. A study on this subject comes from scholar Ludovic Phalippou, who famously called private equity a “billionaire factory” and said this:
On aggregate, carry exceeds one trillion dollars (over the last 25 years). Three quarter[s] of the overall carry goes to firms based in the U.S. … There are nearly 100 recognized private equity related billionaires, with a total wealth of $450 billion, versus none at the start of the century. The fourteen wealthiest individuals capture about half of that amount and are all American.
Related: The IRS has announced plans to tackle the abusive use of partnerships that help the wealthy avoid paying taxes, as the agency doubles down on closing loopholes costing tens of billions.
Pensions and PE.
Pensions pushed public money into PE, giving in to promises of high returns. But now, as private funds are increasingly dipping into debt to make payments, the money managers of workers across the country are having trouble getting out. The nation’s largest worker pension, California’s CalPERS, will be paying more money into its PE portfolio than it has received from that portfolio for eight years in a row. And yet, in a Monday meeting, CalPERS upped its PE allocation from 13 to 17 percent. That said, the pension board recently supported a California bill that would require PE and hedge funds to get consent from the state AG to acquire or otherwise change control of a healthcare facility or group.
Related: a study from the Center for Retirement Research finds that pension funds have done “much worse” than a “simple index strategy” since the ‘09 financial crisis.
Private Equity and Your Kid’s Attention.
Created by a couple with a passion for animating, Cocomelon has become perhaps the most popular entertainment source for young children, with one YouTube video nearing seven billion views. That couple sold Cocomelon to Moonbug, a company owned by Candle Media, for $3bn. Candle Media, however, is owned by the private equity megafirm Blackstone. With Cocomelon generating literally billions of views, mainly through children, there is growing concern over the intentions of firms who own such companies. While Cocomelon may be educational, Blackstone is incentivized to fund videos that capture children’s attention. Health professionals have raised concerns over hooking kids on screen time. However, for Blackstone, more time equals more money.
Other Private Markets News.
Your Financial Future. PE firms are snapping up businesses in the wealth advisor industry, combining them into big companies and, in some cases, nudging financial advisors to steer clients into certain investments.
KKR to S&P. Later this month, KKR will appear on the S&P 500, Reuters reports.
CRYPTO
Crypto Scams.
A recent bill passed by the House of Representatives, while facing big hurdles in the Senate, should serve as a warning for those trying to prevent the crypto industry’s scams. The Financial Innovation and Technology for the 21st Century Act would leave gaping holes in the SEC’s regulatory powers to protect crypto and non-crypto investors alike. Writes AFR’s Brian Carss:
“The outside money involved in getting this legislation passed underscores the ability of a well-heeled industry to corrupt the process. Crypto has spent a shockingly large amount of money lobbying and pushing candidates to embrace their policy goals in exchange for support. Crypto Super PACs have spent over $100 million this cycle.”
Stablecoins.
Georgia State University’s Todd Phillips suggests that community banks are a little too quiet about the stablecoin proposals cropping up in Congress. Recent bills would create a framework for stablecoins – digital assets pegged to fiat currency or to real assets – that “effectively treat stablecoins as deposits in narrow banks.” Phillips argues that such legislation threatens to siphon deposits away from insured community banks to institutions that aren’t backed by the FDIC.
Terraform Labs.
Terraform Labs, the crypto company behind the collapsed TerraUSD and Luna tokens, agreed to pay the SEC $4.5bn, one of the largest penalties ever to settle a civil securities-fraud suit, according to the WSJ. The crash of its coins wiped out $40bn in value from digital currency markets. Do Kwon, Terraform’s founder, was arrested last year and agreed to pay $204mn as part of this deal.
HOUSING
The Climate Crisis Hidden in Insurance.
Recent climate scenario analysis by the Fed and some of the largest banks in the United States identified a lack of adequate data on insurance coverage and climate risks when it came to planning for climate catastrophe. This year, the National Association of Insurance Commissions (NAIC) and the US Treasury Department’s Federal Insurance Office (FIO) launched a joint data collection effort meant to help close that data gap, but some states opted out of participating. Given the worsening climate and the related rapidly deteriorating property insurance market, consumer advocates, banks, and financial regulators need this data to be public. Said AFR’s Jessica Garcia:
“The insurance industry may have been aware this was coming, but the rest of us are trying to catch up, including the government. Even banking institutions are being caught unaware…”
Corporate Landlords Profiting ...
An analysis from Accountable.US of the latest Consumer Price Index found that corporate landlords are still hiking prices amidst record profits. The six biggest publicly traded apartment companies have all faced lawsuits regarding their abusive practices.
…And Harming Health.
A study from Human Impact Partners scrutinizes how corporate landlords’ profiteering harms tenant health. Researchers connect landlords’ neglecting upkeep, filing mass evictions, charging high rents and fees, evading taxes, dodging accountability and disproportionately influencing policy, to tenants’ anxiety and depression, poor birth outcomes, chronic health illnesses, lead poisoning, violence, houselessness, and premature death.
Home Sales.
According to Redfin, U.S. home sales have fallen to a historically low level, with only two other months in the last ten years recording fewer sales. One issue that has been impacting the market: zombie mortgages. Many homebuyers have had to take out a second mortgage to cover the costs, with promises of relief, or had simply forgotten it was a term of the deal. When a secondary lender suddenly chooses to “reappear,” it can put consumers in a tough situation. A recent NPR investigation has found a “second wave” of zombie mortgages, which were a cause of the 2008 crisis.
CLIMATE and FINANCE
Anti-ESG.
During last week’s congressional hearing on Environmental, Social and Governance (ESG) investing, some Republican lawmakers targeted witnesses with unfounded, culture-war-laden antitrust claims. The witnesses, from sustainability nonprofit Ceres, the country’s largest retirement fund, and impact investor Arjuna Capital, as well as House minority leaders, defended responsible ESG investing, AFR’s Meron Lemmi reports, and highlighted its importance for financial stability, risk management and climate resilience.
Private Equity and Fossil Fuels.
As part of the Private Equity Climate Risks project, AFREF, Global Energy Monitor and the Private Equity Stakeholder Project have updated a running database of the fossil fuel holdings that belong to 21 of the largest private equity firms in the world. The portal, the Private Equity Energy Tracker, allows investors and the public to investigate the role the private equity industry continues to play in the production and distribution of fossil fuels. Said AFREF’s Dustin Duong:
“[This data] punctures their claim that they understand the urgency of the energy transition and the need to pivot to investments that can help solve the climate crisis. Until they stop supporting polluting industries, their claim of protecting communities, especially communities of color and low-income neighborhoods, will always ring hollow.”
POLITICS and MONEY
Wall Street for Trump.
Wall Street’s top dogs, lured by the promise of more tax cuts and deregulation, are flocking back to Trump after many distanced themselves from him after the January 6 insurrection. Even after Trump’s trial, financiers such as Stephen Schwarzman, Blackstone’s co-founder, said they are supporting the convicted felon.
Crypto Cash.
The Stand With Crypto PAC has backed 18 more House and Senate candidates, an even split between Democrats and Republicans that includes Sen. Gillibrand (who recently unveiled a bill that purports to address stablecoin risk), Sen. Rick Scott and Rep. Young Kim, among others. Most are incumbents, but the roster includes challengers like Arizona’s Blake Masters and Delaware’s Sarah McBride.