A Bundle of Bad Bills
Ever seen “How a Bill Becomes a Law” by Schoolhouse Rock? The bad news: not all bills are nearly as whimsical as the one that sang to kids. A handful of bills that recently made it out of Committee are proof.
Last week, H.R. 4763, the digital asset market structure bill, and H.R. 4766, the stablecoin bill, advanced out of their respective House committees.
AFR issued a news release signaling these bills cleared despite major objections from advocacy groups and highlighting the dangers they pose to the financial system. The bills fail to adequately protect consumers, expose stablecoin issuers and financial markets to major risks, and make it easier for Big Tech to issue their own “private money,” leaving users prone to privacy breaches and financial abuses. Says AFR’s Mark Hays:
“Despite what the bills’ proponents claim, these bills were largely written by and for the crypto industry, and it shows. Rather than raise the bar and ensure crypto investors and consumers have the same protections as other investors and consumers, these bills fail to meet those standards, could expose people to more risk, and would allow many crypto firms to continue with risky business as usual.”
Also out of Committee: a number of harmful anti-ESG bills, including H.R. 4790, H.R. 4767, H.R. 4655 and H.R. 4823. All of these bills undermine regulations that would arm investors with more information to make better investments, insulate management of public companies from accountability and hamstring regulators’ ability to respond to prudential risks. Says AFR’s Natalia Renta:
“These bills target the shareholder proposal process, proxy advisory firms, and asset managers to rig our corporate governance system in favor of management and against shareholders — many of whom are workers saving for retirement — who are pushing the companies they’re invested in to be accountable to their interests as long-term investors.”
FINANCIAL STABILITY: Capital Requirements – Lending Conditions – Regionals – Further to the Banking Crisis – “Seeing Through Money” – FedNow Friction
CONSUMER: Section 1071 – Auto-Lending Lawsuit – Who Understands Arbitration Clauses? – Using Bankruptcy to Silence – Student Loan Repayment – Small-Dollar Credit
PRIVATE MARKETS: Credit Tightening – SEC Overhaul – Private Credit – Yellow
CRYPTO: Curve Finance – Regulatory Ripples – IRS and Crypto
HOUSING: Rent Caps – Rent-to-Own
CLIMATE AND FINANCE: Insurance
Feedback? Reach us at afrnews@ourfinancialsecurity.org
FINANCIAL STABILITY
Capital Requirements.
Does the 1,087-page plan from regulators for boosting capital requirements address the problem that ultimately sank SVB? The bank invested in long-term, held-to-maturity assets – riskless, writes WSJ, if they’re held to maturity rather than sold off rapidly after high interest rates diminished their value like in SVB’s case. Bloomberg Law reports the proposal doesn’t touch how banks account for gains/losses on these assets, or how much money they can spend on them, which is the domain of accounting standards-setters.
AFR issued a news release reviewing the Basel III endgame proposal. The measures are expected to improve the resiliency of the U.S. banking system, and AFR urges regulators to restore or strengthen stress testing, living will, liquidity coverage, and net stable funding ratio requirements. Says AFR’s Alexa Philo:
“Many executives and the bank lobby will oppose these capital proposals. What they won’t say is that bankers profit from weak capital rules. This proposal represents a significant stride toward safeguarding the American public from subsidizing undercapitalized banks. Loose capital standards make it too easy for executives to take on excessive risk to try to increase short term gains – and their own compensation along with them – and rely on the public and the government to bail them out when things go wrong.”
Lending Conditions.
The Fed released the results of its July 2023 Senior Loan Officer Opinion Survey (SLOOS) on Bank Lending Practices on Monday. In summary: lenders have seen tighter standards and lower demand for commercial/industrial loans to business and commercial real estate loans, loans to households and residential real estate loans, and loans to consumers – except for credit card loans, where demand stayed level. Banks anticipate further tightening across the board for the second half of the year.
Regionals.
The FDIC has taken control of Heartland Tri-State Bank, a Kansas-based community lender with about $139mn in assets, $130mn in deposits and four branches, after state regulators shuttered it Friday evening. Dream First Bank has entered a purchase and assumption agreement with the FDIC and will take up the failed bank’s assets, including deposits. There’ll be an estimated $54.2mn hit to the Deposit Insurance Fund. American Banker reports it “did not raise alarms for the industry” because of the bank’s size, with some industry observers noting community bank failures can usually be attributed to company-specific issues.
Further to the Banking Crisis.
The Fed, FDIC, OCC and National Credit Union Administration (NCUA) issued updated guidance to financial institutions directing them to include the discount window, the Fed’s inbuilt backstop, into their “contingency funding plans.” This addendum to an earlier interagency policy statement urges institutions to be ready to use the discount window (or the Central Liquidity Facility in the case of credit unions) in case other sources dry up during periods of stress.
WSJ reports smaller banks have grown more reliant on expensive brokered deposits, “hot” money that’s prone to flight in periods of stress. Some regulators say brokered deposits, which can be used to strengthen balance sheets, can encourage excessive risk-taking in order to make up for the cost. The Treasury’s Assistant for Financial Institutions Graham Steele raised the issue of brokered deposits at an AFR event last week, saying they “may warrant greater attention now that they are playing an increasingly important role in bank funding structures.”
“Seeing Through Money.”
A new paper by Columbia Law School’s Raúl Carrillo and published in the Georgia Law Review explores the intersection of data privacy and the creation of a “Digital Dollar,” which lives on government rather than private computers. A web of private banks and fintechs and public agencies already scrape data off the top of transactions as virtual cash flows from public entities to consumers. While the data-driven ties between the private and public are widely thought to be “democratizing finance,” its operation still “exacerbates identity fraud, civil and criminal punishment of poor people (especially impoverished people of color, and mass surveillance of the general public.” Carrillo also calls for the U.S. Postal Service to provide public bank accounts. AFR also champions the rollout of basic financial services at post offices to reach the unbanked.
FedNow Friction.
FT interprets a note from Barclays about FedNow, the Fed’s new instant payments system, and discusses how it minimizes “natural friction” and introduces “artificial friction.” The 24/7 transactions the system enables will “change how investors think about cash and precautionary liquidity.” A Barclays analyst suggests it may mean lower demand for bank transaction deposits, and that banks may not need to park as much money at the Fed. Fearing greater potential for bank runs, the note predicts regulators may need to create payment limits “to prevent instantaneous bank runs.”
CONSUMER
Section 1071.
A federal judge in Texas blocked the Consumer Financial Protection Bureau from enforcing Section 1071 of the Dodd-Frank Act, which allowed the agency to collect demographic and other data about lending to small businesses for the purpose of upholding fair lending laws and identifying the needs of women- and minority-owned small businesses across the country. In April, the Texas Bankers Association and Rio Bank sued the CFPB, suggesting that the Bureau should not have been allowed to complete the rule proposal since the constitutionality of its funding mechanism was in question (CFSA v. CFPB, which will be heard before SCOTUS this fall).
House Republicans also voted last week to repeal the rule. AFR issued a news release railing against the outcome, flagging it as an overt attempt to undermine the agency’s work to combat discrimination and increase transparency among small business lenders. Statements from nine other organizations here. Said AFR’s Elyse Hicks:
“Republicans forced through a vote that would prevent the CFPB from collecting data on patterns to women-owned, minority-owned, and small businesses. Implementing Section 1071 is a great opportunity to reduce ongoing disparities in access to small business credit. Addressing these disparities will make urban and rural economies more vibrant, and bring substantial benefits to all stakeholders, including lenders.”
Auto-Lending Lawsuit.
The CFPB filed a lawsuit against auto-loan servicer USASF Servicing this week, claiming illegal and harmful practices against consumers. The agency alleges USASF: incorrectly and illegally disabled cars with remote “kill switches,” failed to refund premiums to entitled Guaranteed Asset Protection consumers, double-billed customers and misapplied payments, and wrongfully repossessed vehicles.
Who Understands Arbitration Clauses?
Not many consumers. A research paper from University of Michigan Law’s Roseanna Summers discovers that most consumers don’t think about or understand arbitration clauses despite their overwhelming prevalence. Almost all (97%) of the over 1,000 people surveyed have opened an account with a company that requires disputes go through arbitration. Many misunderstand the consequences of agreeing to arbitration clauses, believing they can still go to court, join a class action or appeal a decision made based on legal errors. They can’t. The National Association of Consumer Advocates notes that the consumer must waive their right to sue and that the arbitrator’s decision is binding and secret. AFR has written on how banks weaponize forced arbitration against their own consumers, and has supported efforts to curb it.
Using Bankruptcy to Silence.
An upcoming paper from Yeshiva University Law and University of Iowa Law scrutinizes the way companies can use bankruptcy reorganization to silence survivors of wrongful conduct. When multiple plaintiffs sue a defendant for a charge related to same misconduct (“onslaught litigation”), the offending company can “draw together those who allege harm and pressure them into a swift, universal settlement” by exploiting bankruptcy law, causing “harm to survivors, to public trust in the justice system, and the corporate economy.” The paper also proposes solutions, such as requiring companies who take this route to admit liability, barring injunctions for related third parties, the appointment of presumptive examiners, including the possibility for signees to opt out, and more.
Student Loan Repayment.
The Biden administration unveiled its Saving on a Valuable Education (SAVE) plan, a new income-driven student loan repayment plan. The new plan significantly decreases monthly payment amounts, extending greater accessibility to borrowers who make payments based on their discretionary income. The exemption threshold rose to 225% of the poverty line, and interest on subsidized and unsubsidized loans alike will be eliminated after a scheduled payment is made under SAVE. Explore the beta website here.
Small-Dollar Credit.
The latest edition of the Fed’s “Consumer & Community Context” publication dives into small-dollar credit, loans typically under $1,000 taken out to help manage day-to-day expenses. The new report makes mention of a newcomer to the small-dollar credit market: fintechs. It notes concern about the type of “alternative data” they collect to qualify borrowers, often undisclosed to the consumer and “highly correlated with classes protected by fair lending laws.”
PRIVATE MARKETS
Credit Tightening.
Over the last decade, the availability of cheap debt empowered private equity. Politico reports that floating rate debt has grown more expensive with the Fed’s rate-hiking. And over two-thirds of the leveraged loan (loans made to debt-laden or poor-credit borrowers) market wasn’t hedged to protect from losses from high interest. Now, there are signs of trouble as “the share of loans that are trading at distressed levels has climbed.”
SEC Overhaul.
The SEC will have a parcel of rules as soon as this month meant to increase transparency and promote competition in the private fund industry. That proposal wouldn’t have necessitated these disclosures be made public, but still require them to have them to show regulators. Private funds’ gross assets have climbed to over $25tn, up from $9tn less than a decade ago in 2012, per SEC data. That’s more than the $22tn commercial banks held by the end of 2022. Lawmakers, such as Sen. Warren, are pushing for a strong rule.
It’s now clearer than ever that the industry’s main opposition to the rules will come in court, via the business-friendly Fifth Circuit that also kicked off a challenge to CFPB:
Shortly after the proposal was unveiled, a group of hedge funds including Millennium Management and HBK Capital Management formed a nonprofit in Texas called the National Association of Private Fund Managers, said Bryan Corbett of the trade group Managed Funds Association. The former group has no website and listed no individual’s name or contact information in a comment letter it filed to the SEC calling the private-funds rule “arbitrary and capricious.” The group’s location in Texas would place it under the jurisdiction of a federal appeals court whose predominantly Republican-appointed judges have shown a penchant for reining in regulatory authority.
Private Credit.
AFR’s Andrew Park published a blog explaining the exponential growth and the inherent risk in the private credit market. Since the 2008 financial crisis, private credit has grown considerably and has become the fastest area of growth in corporate lending, most of it carried out by private equity firms. Now a $1.5trn market, “the sector remains opaque, and it is difficult to assess the default risk in private credit portfolio,” wrote the Fed. Says Park:
“Even if we don’t see a systemic crisis owing to private credit bubbles, we know the system has fragilities that policymakers have ignored for too long. The impact on the real economy could be great indeed ... But without better surveillance of this market, it will be hard to even see trouble coming.”
Yellow.
Yellow, the trucking company AFR criticized for securing a gratuitous pandemic-era bailout with help from the private equity giant Apollo, announced it would be shutting down. Now, its failure might cost taxpayers money. Part of the bailout saw the Treasury take a 30% stake in the company, which may need to be recouped if sales of the company’s assets don’t raise enough. But a spokesperson for Yellow said the company will likely be able to pay back the Treasury’s loan in full.
CRYPTO
Curve Finance.
Over $1.5bn in crypto is gone – some stolen, some moved out “for safekeeping” – after a major decentralized exchange, Curve Finance, was hacked. A vulnerability in Vyper, a programming language widely used in decentralized finance (DeFi), allowed the hacker to get into “four main liquidity pools.” The hack raises questions about the safety of the DeFi landscape at large. The backdrop: lawmakers passing a bill that would make light-touch regulations for crypto tokens and firms, in part premised on the notion of decentralization, only days before a major incident.
Regulatory Ripples.
A federal judge struck down the basis of the Ripple ruling in the course of allowing a separate SEC case against Terraform Labs to proceed. Earlier, a different federal judge had suggested Ripple’s token XRP was a security when sold to institutional investors but not if sold on an exchange. But, per Politico:
Judge Jed Rakoff of the Southern District of New York dismissed the so-called Ripple ruling on the basis that however a crypto token is sold — whether directly to institutional investors or through an exchange — has "no impact" on a reasonable investor's objective view of the issuers' "actions and statements as evincing a promise of profits based on their efforts."
IRS and Crypto.
Politico reports the IRS issued crypto guidance during a court battle in the Sixth Circuit: if one receives crypto as a reward for “staking” (that’s when you earn rewards for holding onto tokens), one will owe tax on it when received. The plaintiffs, a Tennessee couple, think they should be taxable when sold.
Related: Sens. Warren, Sanders, Casey and Blumenthal sent a letter to Treasury’s Yellen and IRS’ Werfel requesting information on when the public can expect the tax regulations related to crypto allowed by law two years ago. The deadline for implementation is January 1, 2024.
AFR also sent a letter to Yellen and IRS’ Werfel requesting the two agencies publish their guidance pertaining to reporting digital asset transactions to the IRS. The requirements would make it easier for taxpayers to comply with obligations, provide more accurate reporting of digital asset-related tax obligations and help prevent digital asset-related tax evasion.
HOUSING
Rent Caps.
A group of Senate Democrats, led by Senate Banking’s Brown, sent a letter to the Federal Housing Finance Agency to support efforts to limit rent increases at a wide swath of apartments with government-backed mortgages. Housing industry lobbyists, such as the National Association of Realtors and National Multifamily Housing Council, have met the request for regulation with pushback. Indiana University McKinney Law’s Fran Quigley rebuts many of the industry’s talking points here.
Rent-to-Own.
A startup called Divvy Homes, backed six years ago by the likes of Andreessen Horowitz and Tiger Global Management, purports to make rent-to-own schemes easy. For many, they haven’t. NYT describes the “unregulated” business model as scooping up foreclosed or dilapidated homes and reselling to tenants with “shaky credit histories.” Then, Divvy requires customers to allocate a portion of each rent check toward the downpayment atop an upfront fee of a few thousand dollars. But compared to other rent-to-own firms, Divvy’s practice means a “far higher monthly outlay.” The company has filed 190 eviction actions this year in Atlanta alone.
CLIMATE and FINANCE
Insurance.
Treasury’s Yellen says there’s a “protection gap” appearing across the U.S. related to extreme weather. Even as natural events intensified by climate change buffer American homes, only 60% of the $165bn in economic losses reported in 2020 were covered by insurance. Said Yellen:
“American households are already seeing the impacts even if their own homes have not been damaged…As a result, more households are turning to residual markets for coverage or are foregoing insurance entirely.”