Private Equity, RealPage, and Housing Costs

For years, corporate landlords have used an algorithm to raise rents in tandem and price-gouge millions of tenants across the country. Last week, after some good journalism, some complaints, and much class action litigation, the Department of Justice and eight states’ attorneys general brought the hammer down on RealPage, the company whose Yieldstar software facilitated the collusion. This cartel was born not in a smoke-filled room but via an online platform.

In its complaint, the Justice Department alleged that property technology company RealPage engaged in an illegal scheme to decrease competition in rental prices by price-fixing and monopolizing the market for the pricing software landlords use. Certain member landlords – a group of at least fourteen that includes the likes of Greystar, Bozzuto, Equity Residential, and others – were able to access private information RealPage gathered from clients, including the landlords’ own competitors. The software then spat out recommended rents. Ninety percent of those increasingly high recommendations were implemented.  RealPage executives have gushed about how their algorithms have helped rents go through the roof. 

As for the rotten cherry on the monopolists’ ice cream sundae: RealPage is owned by private equity firm Thoma Bravo, which it purchased using two of its investment funds: Fund XIII and XIV. Numerous U.S. pension firms have committed cash to one or both, including the country’s largest, California’s CalPERS. Worth noting that Californian tenants levied a handful of major lawsuits against RealPage. In a nutshell: normal people’s pensions funneled their money toward a private equity-backed company that harmed those very same normal people’s neighbors. 

Americans for Financial Reform’s Caroline Nagy calls the Justice Department’s move a “first step toward accountability for predatory landlords.” Nagy writes:

The Biden administration’s focus on price-fixing comes at a critical moment in the burgeoning U.S. tenant movement.

Today, renters are experiencing unprecedented housing costs that are rising faster than their ability to pay them: half of all tenants spend over 30 percent of their income on rent, with 27 percent spending over 70 percent of their income on housing costs alone. With growing unaffordability, renters are less able to save money for a downpayment, reducing opportunities for housing stability and wealth-building. At worst, they may cut back on food and medical care, move back in with an abusive family member, double up in unsafe, substandard housing, or join the record numbers of people experiencing homelessness in this country…

Federal regulators must do more to take on price-gouging landlords, and that includes ensuring our federal housing finance policy doesn’t encourage the exploitative practices enabled by RealPage. The Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac, currently guarantees over $150 billion in annual financing to landlords, which amounts to a quarter of the entire U.S. multifamily housing stock — apartment buildings and townhome developments. And plenty of those landlords use RealPage.”

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BANKING AND FINANCIAL STABILITY: Capital Rules – A Fintech and a Rural Bank – Auditing the Auditors – Domestically Important Banks – Commercial Real Estate
CONSUMER: Junk Fees Discriminatory Practices – Disney’s Arbitration Disaster – Another CFPB Funding Fracas – Small Business Data – Open Banking – Cash-Back Fees – Medical and Rental Debt – Workplace Payday Loans Are (Wait for It) Loans
CAPITAL MARKETS: Executive Excess – Amazon Warehouses – A Gamble on Government
PRIVATE MARKETS: Debt on Debt on Deck – Hedge Fund Fees – Getting Out
CRYPTO: The Digital Commodities Act – Kraken – Blowing the Lid on Crypto – Shaquille O’Neal’s NFTs Might Be Securities – Who’s Moving Your Money?
HOUSING: Real Estate and Illicit Finance – Housing Banks Won’t Help with Housing – Junk Fees – Rent as Credit
CLIMATE AND FINANCE: Climate Disclosures – Public Insurance – BlackRock and ESG – ESG

Feedback? Reach us at afrnews@ourfinancialsecurity.org

BANKING AND FINANCIAL STABILITY

Capital Rules.

Wall Street has effectively secured a delay in the implementation of the Basel III Endgame – the critical slate of rules that would have directed the largest banks to fund their operations with more equity capital and less debt as a cushion against systemic shock – ahead of a presidential election that could “jeopardize the entire project,” Politico reports. After intense lobbying against the rules by the bank lobby, regulators are at an impasse on how to proceed. Last month, Fed Chair Powell attended a closed-door meeting with big-bank CEOs in an effort to arrive at weak enough capital standards to preempt any possible legal challenges over the rules – setting a new standard for deference to Wall Street.

A Fintech and a Rural Bank.

Regulators have warned one rural bank in Kentucky, First & Peoples, three times about its precarious financial condition, potentially due to its relationship with a fintech company. If it fails, after over a century of service, it would be the first community bank in the U.S. to collapse because of its ties to a shadow bank. The fintech firm, a company called US Credit, promised exciting possibilities for the bank but has instead loaded it with tens of millions in bad loans, threatening its $200 million depositor base. Between 2015 and 2024, community banks have increased the amounts they’re lending to shadow banks.

Auditing the Auditors.

Auditors, like Deloitte or Ernst & Young, audit banks and other companies; the Public Company Accounting Oversight Board (PCAOB) audits the auditors. At the major U.S. audit firms, the PCAOB said, there are still an “unacceptable” number of flaws, despite stabilizing quality in 2023. Deficiencies climbed at mid-tier firms BDO and Grant Thornton especially. At BDO in particular, 86 percent of audits had failed to collect enough evidence to support conclusions. 

Related: The SEC approved a new standard from the PCAOB that clarifies the “General Responsibilities” of an auditor in conducting a public company audit, ensuring that information is presented appropriately and accurately, and relevant transactions or events are recognized, measured, and disclosed in financial statements. Said AFREF’s Natalia Renta: “When companies try to paint a rosier, misleading financial picture while in technical compliance with GAAP rules, it’s the job of the auditor to step in and require reporting that matches reality.”

Domestically Important Banks.

OCC Acting Comptroller Hsu suggested that regulators should have a process to designate banks as systemically important to the domestic financial system in order to get ahead of potential shortcomings in supervision and regulation. Currently, regulators can identify Global Systemically Important Banks (GSIBs), but similar mechanisms are largely absent for their slightly smaller, but nonetheless important domestic competitors. 

Commercial Real Estate.

Regulators and legislators are concerned about the commercial real estate sector, with one New York representative calling it a “ticking time bomb.” Under pressure by high interest rates, rising vacancies and declining property values, property owners are having difficulty repaying or refinancing debts, as nearly $1 trillon of CRE loans come due this year. About 70 percent of the commercial real estate mortgages among banks are on the balance sheets of regional and smaller banks, which could be vulnerable to instability or insolvency. 

CONSUMER 

Junk Fees.

AFR and 34 other community, civil rights, consumer and advocacy organizations called on presidential candidates to confront junk fees as a part of any future economic agenda, noting that they should promise to protect people from the tens of billions they would otherwise spend every year on unfair fees. Said AFR’s Amanda Jackson:

“Financial institutions should not be allowed to harm families by hiding their costs in junk fees that often only appear after a purchase is made. Exploitative junk fees drain money and resources from households. Lower-wage workers, people of color, and consumers across the country pay fees that further strain their budgets, exacerbating financial instability and economic precarity.”

Discriminatory Practices.

AFR joined several consumer protection organizations in an amicus brief in Chamber of Commerce v. CFPB, in support of the CFPB’s 2022 clarification in its Supervision and Examination Manual that “discriminatory acts or practices” in the provision of financial services may be “unfair” under the Dodd-Frank Act. 

Disney’s Arbitration Disaster.

Last month, a doctor died due to an allergic reaction after eating at a Disney World restaurant, even after repeatedly flagging her allergies with staff. Disney claimed that her husband couldn’t sue for wrongful death – all because he agreed to forced arbitration in the terms and conditions of a free Disney+ trial subscription five years ago. AFREF’s Christine Chen Zinner writes that “forced arbitration enables egregious corporate misconduct,” and urges support of the FAIR Act, which seeks to end forced arbitration. Said Zinner:

“The Disney case helped remind us how we can surrender our rights with the click of a mouse. Disney finally backed down, but one example of corporate damage control is not a true victory until we’ve ended forced arbitration not just in one instance, but everywhere.”

Another CFPB Funding Fracas.

Even after the CFPB beat the existential challenge to its funding in CFPB v. CFSA, four companies are relying on yet another fringe legal theory to push back against the agency’s pro-consumer enforcement. Last month, four companies, including predatory payday lenders, filed suits against enforcement actions levied by the agency. They claimed that the CFPB is unconstitutionally funded through the Fed system because the Fed has been unprofitable since 2022, an ultimately “meritless” claim because the statute that provides for its funding doesn’t mention the “combined earnings” of the Fed. 

Small Business Data.

A federal judge in Texas blocked an industry challenge against the CFPB’s small business data collection rule, after the case had previously stalled in anticipation of a decision in CFPB v. CFSA. Under the provisions of the rule, adopted in 2023, the agency would collect data from lenders pertaining to access to small business credit including and especially for Black, Latine, women, and other socially disadvantaged small business loan applicants. 

Open Banking.

Bankers want more clarity about whether the CFPB’s open banking rule, which provides consumers the right to decide who can use their personal financial data and how, would mean their institutions or third-party service providers would be responsible for data breaches or fraudulent transactions. 

Speaking of data breaches: How about that massive National Public Data breach? The one that exposed as many as 2.9 billion pieces of personal information potentially impacting every person in America – and maybe yours. The National Consumer Law Center says the data breach proves there’s an urgent need to have the CFPB regulate data brokers. 

Cash-Back Fees.

The CFPB found that some retail chains are charging Americans $90 million a year in fees when they request cash back at point of sale to get their own money in physical form. The fees, which can be levied on low withdrawal amounts, disproportionately burden low-income customers or those with limited banking options, amid a time of bank consolidation and branch closures. 

Medical and Rental Debt.

The CFPB has found a host of aggressive and illegal practices in the collection of medical and rental debt. A new report addresses how real estate companies’ “revenue management software” can improperly inflate rental debt amounts, as well as how debt collectors occasionally try to collect medical bills already satisfied by nonprofit hospitals’ financial assistance programs. 

Workplace Payday Loans Are (Wait for It) Loans.

Companies that offer workplace payday loans on people’s paychecks (that call themselves “earned wage access [EWA] providers”) represented by the American Fintech Council, may soon sue the CFPB over a proposed rule that would treat their products like loans – mainly because they resemble… loans. Fintechs that offer standalone workplace payday loan services often charge workers, who want to access part of their paycheck early, high fees that cut into their take-home pay. With enough frequency, the piled-on fees can be likened to sky-high APRs, not unlike the predatory payday loans that industry claims they’re not. 

AFR and over 160 other groups supported the CFPB’s interpretive rule ensuring legal protections for consumers who use these products, calling for clearer cost and fee disclosures for  what effectively amount to workplace payday loans. 

CAPITAL MARKETS

Executive Excess.

The CEOs at the Low-Wage 100 – the one hundred S&P 500 companies with the lowest median wages for workers – were paid, on average, 538 times more than their typical employees last year, according to a report by the Institute for Policy Studies. Importantly, nearly half of the Low-Wage 100 spent nine times as much on stock buybacks – repurchasing their own stock to artificially raise share price in the short term – as on employee retirement plan contributions. The extreme pay disparity, notes the IPS, exacerbates gender and racial disparities, since women and people of color compose a disproportionate share of low-wage workers. The report offers recommendations: taxing and restricting stock buybacks, subjecting corporations with excessive CEO pay to higher tax levies, and using the leverage of federal contracts and subsidies to curb pay gulfs. 

Amazon Warehouses.

Recently, it became public that BlackRock and Vanguard, the world’s two largest asset managers, voted repeatedly against shareholder proposals that requested an independent audit of Amazon’s notoriously dangerous warehouse working conditions for the third year in a row. Said AFREF’s Natalia Renta: 

“BlackRock and Vanguard’s votes against the Amazon warehouse worker safety proposal are a glaring reminder of how these behemoth asset managers consistently reinforce management’s short-term greed instead of prioritizing the long-term financial security of workers whose retirement funds they manage.”

And AFREF’s Meron Lemmi: “As these misguided votes come to light, it’s crucial for policymakers and asset manager clients alike to push for changes that would safeguard the savings of the millions of workers whose money BlackRock and Vanguard manage.”

A Gamble on Government.

Sometimes, you may hear the word “bet” when it comes to trading commodity futures contracts – legal agreements to buy or sell a certain amount of a given commodity on a specific date, be it oil or corn or gold – since investors may try to anticipate futures prices based on global events. Earlier this year, the CFTC proposed a rule that would prohibit making bets on event contracts – these are like futures contracts, except they’re staked on the outcomes of events themselves –  based on election results, such as the withdrawal of a candidate. The CFTC fears the potential of “gaming” and price manipulation. 

PRIVATE MARKETS

Debt on Debt on Deck.

The Bloomberg editorial board asks, “Is private equity a threat?” With $9 trillion under management, including investments from some from public pensions, PE firms have crossed into risky territory, per the authors, combining increasing leverage with opaque modus operandi. They point to the industry’s penchant for financial engineering (subscription finance, net-asset value loans, dividend recapitalizations and payment-in-kind loans, and so on) in the face of poor returns and difficulty flipping assets. The editorial board wonders whether possible contagion might escape the private markets and destabilize the broader financial system. 

Speaking of dividend recapitalizations: PE firms have been aching for cash, and they’re piling more and more junk debt onto their portfolio companies to squeeze blood from stone. And payment-in-kind (PIK): The rise of PIK, Bloomberg reports, may hint at “trouble to come” in private markets. They’re a way for firms to take on more debt to push off having to make interest payments.

Hedge Fund Fees.

The SEC has ended a legal battle to preserve its private fund disclosure rule, which would have pushed hedge funds and private equity firms to provide more transparency for their investors. 

Getting Out.

Secondary funds, which offer to buy private stakes in hard-to-sell assets at steep discounts, have been helping investors get out of floundering commercial real estate assets they can’t otherwise exit. Private fund managers expect transaction volume to increase because of the sector’s ongoing distress, citing financial injury leading to massive debt and eventual bankruptcies, deteriorating care quality, mass layoffs and increasing violations. 

CRYPTO

The Digital Commodities Act.

Earlier this year, Sen. Stabenow proposed the Digital Commodities Act, an alternative to House Republicans’ crypto-friendly digital market regulation restructuring bill that still “fails to establish the meaningful safeguards necessary to rein in the crypto industry’s widespread abuses,” AFR’s Mark Hays writes. 

Any new legislation reining in the crypto sector, he suggests, must: give the SEC the primary role in regulating crypto sector; provide the same investor protections to retail crypto investors as they would would get in the stock market; and prevent regulatory arbitrage by closing loopholes that could lead to systemic risk. Stabenow’s bill likely falls short on all fronts. 

Kraken.

Previously, the SEC sued the cryptocurrency exchange Kraken over its alleged operation of an unregistered securities exchange, the latest legal action in an effort to rein in crypto exchanges’ disregard for securities’ law. Recently, a federal judge in California said that the SEC “plausibly alleged” that at least some of the transactions facilitated by Kraken are “investment contracts, and therefore securities,” meaning the SEC’s case against Kraken can proceed. 

Blowing the Lid on Crypto.

A whistleblower under the pseudonym Jake Donoghue released a tell-all book, Crypto Confidential, about the crypto industry’s “hyperactive, hyper-speculative, hyper-addictive, nearly unregulated, completely insane world.” Donoghue spoke out about the industry’s rampant fraud and failure to live up to impossible promises, laid out in techy white papers and public messaging. He’s working with advocacy groups like AFR and some members of Congress to expose the truth about crypto. 

Shaquille O’Neal’s NFTs Might Be Securities.

Former basketballer Shaquille O’Neal was identified as one of the sellers of the “Shaq Signature Pass,” a non-fungible token (NFT) sold by the Astrals Project as a “consumable NFT.” In 2023, a federal court in Florida gave a class of plaintiffs the standing to sue Shaq, and did not dismiss their allegations that the NFTs were securities. One investor suggested they were “unregistered crypto securities.” 

Who’s Moving Your Money?

A paper from the Basel Committee on Banking Supervision warns that banks that perform transactions on permissionless blockchains and other distributed ledger systems – the technology that underpins ostensibly decentralized finance operations –  can expose themselves to risks ranging from security and compliance concerns to money laundering and financing of terrorism. “Certain risks stem from the blockchains’ reliance on unknown third parties, which makes it difficult for banks to conduct due diligence and oversight,” the BIS writes. 

HOUSING

Real Estate and Illicit Finance.

The Financial Crimes Enforcement Network (FinCEN) issued two final rules to “help safeguard the residential real estate” from illicit finance. The former will require certain members of industry to report to FinCEN about non-financed transfers of residential real estate to a legal entity or trust, aiming to tamp down on criminal actors’ ability to launder money through the housing market. A related rule applies anti-money laundering and anti-terrorism financing requirements to certain investment advisers. AFR supports the release of both rules. 

Housing Banks Won’t Help with Housing.

The Federal Home Loan Banks were created to help boost affordable housing. But just last week, FHLB executives rebuffed a request by Treasury Deputy Secretary Wally Adeyemo for them to allocate 20% of their profits for affordable housing, rather than the current 10%. American Banker reports that the chairs of the Home Loan Banks “oppose any efforts to divert profits from its members,” as the banks’ profits exploded last year to $6.7bn at year’s end. The refusal comes at a time when housing has reached new highs of unaffordability. 

The Consumer Federation of America criticized the bank network for its refusal to use more of its money to help fund affordable housing programs, even as the institution receives $7.3bn in indirect government subsidies every year.  

Junk Fees. 

A new report from the National Consumer Law Center highlights how states and nonprofits can help fight junk housing fees, especially fees that disproportionately affect people of color. Federal regulations have several holes, which if closed by the FTC or CFPB, would reduce the cost of renting. Said AFR’s Caroline Nagy in a blog: 

“Enforcement priorities should include improperly disclosed junk fees, junk fees for legally required services (like trash collection), junk fees that charge more than the service actually costs, or junk fees that prevent competition by requiring tenants to choose a particular internet or other service provider.”

Rent as Credit.

Last month, the National Consumer Law Center urged the CFPB to urge the creation of a rule that would treat rent as “credit” and landlords as “creditors.” The NCLC suggests that the inclusion of rental leases is a “reasonable interpretation” of the Equal Credit Opportunity Act. 

CLIMATE and FINANCE

Climate Disclosures.

AFREF and other public interest organizations filed an amicus brief in State of Iowa v. Securities and Exchange Commission in support of an SEC rule that would require public companies to disclose climate-related risks to their businesses and plans to manage or mitigate them. The SEC rule aligns with the growing consensus among investors and financial regulators in the U.S. and around the world that climate change poses significant risks to financial systems and to their investments. Said AFREF’s Alex Martin: “Making this data standardized and freely accessible for all investors—especially working people saving for retirement who often lack access to high quality information—will help level the playing field and create more fair and efficient markets.”

Related: The California legislature rejected an attempt by Governor Newsom’s office to delay the implementation of strong climate disclosure rules by two years. AFR joined a letter to the California Assembly Natural Resources Committee supporting both SB 219 and SB 261, which support the climate disclosures sought by California law with only a short six month delay. 

Public Insurance. 

Developers and landlords are growing concerned over losing money with the expensive cost of housing and the rising cost of insurance alongside it. Small non-profits committed to affordable housing, unable to afford the insurance, are selling to landlords uncommitted to affordable housing. A report from the Climate and Community project proposes reforming public insurance to bridge the gap, such as the National Flood Insurance Program and state-run FAIR plans.

BlackRock and ESG. 

BlackRock’s support for shareholder proposals on ESG have plummeted, with the firm approving only 20 of the 493 proposals at its recent annual meetings. This represents a 40 percent drop from its peak. Some of the votes, however, were also rejections of conservative proposals.

ESG.

Harvard’s Center for Labor & A Just Economy highlights how state and local organizations can protect ESG and other modes of responsible investing from an onslaught of conservative attacks, often backed by fossil fuel and anti-labor advocates. The Center spotlights a model bill created by AFR’s Natalia Renta and attorney Beth Young to support sustainable investment policies.