At SCOTUS, Payday Lenders Lose, Consumers Win
Last week, the Supreme Court followed the law. And it says something about the state of the judiciary that the outcome was even in question. But it was worth celebrating, and AFR did, on the steps of the nation’s highest court.
In a 7-2 decision, the Court decided Consumer Financial Protection Bureau v. Community Financial Services Association of America (CFPB v. CFSA) in favor of the CFPB, reversing a Fifth Circuit decision and approving the funding mechanism of a watchdog that has spent over 12 years standing up to Wall Street and predatory lenders on behalf of everyday Americans. The agency recently crossed the $20 billion mark in delivering relief to consumers.
Initially, the CFSA, a trade association representing the payday lending industry, sued the CFPB over a rule that prevented lenders from withdrawing funds from consumer accounts after two failed attempts due to lack of funds. The industry challenged the agency’s funding mechanism, in which it draws money from the Fed. The Fifth Circuit Court of Appeals, habitually favorable to corporations, ruled the funding arrangement unconstitutional, effectively threatening the CFPB’s rules and enforcement actions, and the other agencies and programs whose funding occurs outside of annual appropriations.
With Justice Thomas writing, the high court reversed the decision. Only Justices Alito and Gorsuch dissented. From the beginning, the payday lender lobby’s argument was nonsense, as AFR and allies argued in amicus briefs filed ahead of oral arguments. Said AFR’s Lisa Donner:
“The Supreme Court has refused to bless the radical and ungrounded argument from the payday lenders that the CFPB’s funding mechanism is unconstitutional, which is good news for people and communities across the country. This decision removes a major threat to the agency’s work, and reaffirms the independence that allows it to continue standing up for the public interest against abusive financial practices.”
AFR’s Amanda Jackson pointed out that CFPB’s good work in fighting abuses of powerful interests means the fight will continue. Indeed, soon after the ruling, the House Financial Services Committee marked up legislation to hobble CFPB. Said Jackson:
“Precisely because the CFPB stops big banks and predatory financial companies from ripping people off, extracting fees from those who can least afford it, and increasing the racial wealth gap it will continue to draw attacks from the industries it regulates and policy makers who side with them.”
Worth remembering, writes Slate: “These rulings are not really progressive victories, because they involve frivolous cases that should never have existed in the first place. We should not overpraise the Supreme Court for declining to leap into every abyss that the 5th Circuit invites the justices to jump into.”
Brianne Gorod, chief counsel at the Constitutional Accountability Center, had further sober words for the broader problem of corporate and conservative attacks on “the ability of the federal government to function effectively" by issuing sensible regulations. "The full story regarding this court and whether it is willing to enable the conservative attack on the administrative state very much remains to be written," she said.
All said, Director Chopra expects the agency to “be firing on all cylinders” after allaying the existential threat, teeing up its continuing crackdown against predatory lenders.
BANKING AND FINANCIAL STABILITY: Goldman’s Astroturf – Exec Compensation – Bad Bills – Supervision and Regulation – Gruenberg to Depart FDIC – When the FDIC Played TAG
CONSUMER: Judge Shopping – Phantom Debt – Maxing Out Delinquencies – Enforcement Actions
CAPITAL MARKETS: Fiduciary Duty – Anti-Money Laundering
PRIVATE MARKETS: PE’s Anesthesia Monopoly – Destroying Newspapers, Boosting Trump – Leveraging Leverage – Binging Consequences – Other Private Markets News
CRYPTO: Bad Crypto Bill – SEC CRA – Bill Update
HOUSING: Corporate Greed Squeezing Renters – Nonbank Mortgage Servicing – Insurance Sector’s Climate Disaster
CLIMATE AND FINANCE: ESG Funds Disclosure – KKR Fracked Up
POLITICS AND MONEY: Remember the MAGA Court
Feedback? Reach us at afrnews@ourfinancialsecurity.org
BANKING AND FINANCIAL STABILITY
Goldman’s Astroturf
Would you believe that Goldman Sachs is astro-turfing opposition to the Basel Endgame capital rules? Reuters reports that Goldman is spending millions on “grassroots lobbying,” which involves leveraging its philanthropic 10,000 Small Businesses initiative. And it recounts a meeting between Montana small businesses and their lawmakers in which a general conversation about challenges that these firms face, many of which have nothing to do with capital rules, were then fed into Goldman’s anti-Basel narrative.
Exec Compensation.
Last week, Sen. Van Hollen and Rep. Velázquez admonished the Fed, SEC and NCUA for failing to vote with other financial regulators to approve executive compensation rules. At a hearing, Rep. Tlaib said: “This wasn't a suggestion or recommendation, it was required by law,” referring to the provision in Dodd-Frank that provided for an exec comp crackdown thirteen years ago. Sen. Warren also took Fed Vice Chair Michael Barr to task for the Fed’s failings.
Bad Bills.
AFR and partners warned strongly against a set of bills marked up in House Financial last week: “These bills would, based on the text and summaries we have seen thus far, interfere with the banking agencies’ critical prudential and consumer protection supervision and regulatory processes. Several changes, if enacted, would give some banking organizations additional leeway to increase their risk profiles and maintain lower capital cushions, while not addressing root causes of the issues they purportedly seek to address.”
AFR also opposed H.R. 8339, which would restructure the SEC. The bills “intentionally overburden the Securities and Exchange Commission (SEC) with a set of administrative and analytical requirements that will make it difficult and at times impossible to protect the investing public and perform its mandate,” AFR wrote.
Supervision and Regulation.
The Fed released its semiannual Supervision and Regulation Report last week. Said Vice Chair Barr, on changes to incoming, system-stabilizing capital requirements:
“A safe and sound banking system is critical to a healthy economy, and capital is foundational to safety and soundness…Since my last testimony, we have received numerous and meaningful comments on the proposal. We also received additional data from a special data collection. We are closely analyzing this information, and I expect we will have a set of broad, material changes to the proposal that allow us to have a broad consensus in moving the proposal forward.”
Other major points:
Regulatory capital increased in 2023, bank deposits rose slightly in early 2024, and liquidity conditions remained stable, making for a “sound and resilient” banking system. Earnings saw declines, but the central bank attributes it to nonrecurring expenses, like the FDIC’s post-2023-crisis special assessment.
Delinquency rates rose above pre-pandemic levels among some commercial real estate loans and some consumer loans. Expecting worsening asset quality, banks have hiked up their allowances for credit losses.
Somewhat related: A new study finds that new bank resolution policies in the wake of the global financial crisis haven’t changed how investors view too-big-to-fail banks, even if they change how smaller banks’ guarantees are viewed. Wrote the authors: “These findings alert regulators to the potential ineffectiveness of resolution policies in changing investors’ beliefs about TBTF.”
Gruenberg to Depart FDIC.
FDIC Chair Gruenberg will resign once a successor is nominated and confirmed. The decision, an outgrowth of the investigation of the FDIC’s workplace conditions, threads a needle. It will bring in new leadership without leaving the FDIC headless, which would put a Republican-nominated official in charge of the agency.
When The FDIC Played TAG.
During the ‘08 financial crisis, the FDIC deployed the Transaction Account Guarantee (TAG) program, which offered full FDIC insurance on noninterest-bearing transaction accounts until the program’s expiry in 2010. A recent study from the agency’s research division found that targeted deposit protection programs, like TAG, can help stem deposit outflows during system stress. Banks that opted out of TAG saw “strong and persistent declines” in deposits.
CONSUMER
Judge Shopping.
The debate over judge shopping exploded this year when the Northern District of Texas, the court that feeds into the conservative-friendly Fifth Circuit Court of Appeals, declined to implement guidelines that would tamp down on the practice. Recently, the financial industry has taken advantage of this practice, including in its lawsuit against the CFPB’s late fee rule. Now, polling commissioned by Demand Justice and other groups suggests that 88% of Americans believe judges should be randomly assigned to cases in order to prevent plaintiffs from picking their judges. Said Demand Justice Managing Director Maggie Jo Buchanan:
“It is clear that the American people demand a fair court system that works for everyone–not just special interests. Judge shopping is being weaponized by far-right activists to take away some of our most fundamental rights. No one should be allowed to pick their own judge and stack the deck in their own favor.”
Phantom Debt.
Buy Now Pay Later platforms – like Klarna or Afterpay – have created a $700bn “black hole” of “phantom debt” overlooked by credit reporting agencies, even as many economists paint a rosy picture of strong consumer health. These platforms tend not to share their customers’ info with the major bureaus, noting that their buying activity might bring down their score.
Maxing Out Delinquencies.
The NY Fed finds that the rate of delinquency among people who have maxed out their credit balances has increased steadily since Q4 2021, rising more steeply than for borrowers who utilize less of their credit. Younger card users and those living in low-income areas are more likely to be maxed out, and the share of maxed-out cardholders is climbing.
Enforcement Actions.
Think Finance. Victims of Think Finance’s illegal lending practices, which deceived almost 200,000 consumers into repaying loans they did not owe, received $384 million in compensation through the CFPB’s civil relief fund.
SoLo Funds. The CFPB sued online lending platform SoLo Funds for deceiving borrowers about the total cost of their loans. Even though it advertises zero-interest loans, people end up paying a fee, usually in the form of a “tip” or “donation.”
CAPITAL MARKETS
Fiduciary Duty.
Led by Sen. Budd and Rep. Allen, congressional Republicans want to reverse a Labor Department rule (the Retirement Security Rule) that closes gaps so that all financial advisors have to provide advice that is in retirement savers’ best interests.
Anti-Money Laundering.
The SEC and Dept. of Treasury’s Financial Crimes Enforcement Network (FinCEN) announced a joint rule that proposes to require investment advisers to comply with new anti-money laundering standards by using customer identification requirements on SEC registered investment advisers and exempt reporting advisers. The rule aims to reduce bad actors from laundering their ill-gotten proceeds back into the U.S. financial markets.
PRIVATE MARKETS
PE’s Anesthesia Monopoly.
Last year, the FTC took action against private equity firm Welsh, Carson, Anderson & Stowe for its creation of a monopoly by rolling up anesthesiology practices in Texas into a company called U.S. Anesthesia Partners (USAP). Last week, a federal judge allowed the case against USAP to proceed, but dropped Welsh, Carson from the case.
Destroying Newspapers, Boosting Trump.
Professor Dan Kennedy of Northwestern University highlights in a recent blog that Fortress Investment Group is connected both to harming newspapers around the country and to building Donald Trump’s tower in Chicago. Fortress Investment Group has built a media network of local newspapers through its GateHouse subsidiary, bankrupting them twice despite forced acquisitions of many newspapers, which has resulted in their closures. Fortress then funded Trump’s building on the former site of the Chicago Sun-Times. The building is now the focus of an investigation from The New York Times and ProPublica after an IRS audit revealed Trump tried to write off the building on his taxes twice.
Leveraging Leverage.
Lately, private equity firms have been taking out net asset value (NAV) loans, essentially taking debt out on debt. As the name suggests, the loans are backed by the net asset value of a set of businesses which the borrower, a PE firm, has bought. But, often, the PE firms have already taken out a loan to make that purchase in the first place. The danger, writes NYT’s Dealbook, is “leveraging an illiquid asset,” which could mean using a “good business to help prop up a bad one” and piling more leverage onto an already leveraged fund.
Binging Consequences.
Healthcare mega-company Kaiser Permanente began a sell off of its private funds assets on a scale that may make it the largest volume of sales by a single investor. The $3.5 billion sale comes after a $1.5 billion exit transaction by Kaiser in 2022. The sales come as the private equity market slows and Kaiser faces cash constraints. Beginning in 2019, Kaiser had invested heavily in private markets, almost doubling their target allocation.
Other Private Markets News.
Squarespace. The plug-and-play website building platform will go private after a $6.9bn deal with private equity firm Permira, financed with the help of Blue Owl and PE giants Ares and Blackstone.
CRYPTO
Bad Crypto Bill
AFR is opposing the FIT Act, a giveaway to the crypto industry that the House will vote on this week. AFR also briefed congressional staff on the matter.
AFR led a group of labor unions, consumer and investor protection organizations and other groups to raise alarm about the legislation in a letter to Congress. Said AFR’s Mark Hays:
“This bill was largely written by and for the crypto industry, and it shows. This bill fails to create meaningful measures to protect investors and hold crypto firms accountable. Instead, it will legitimize risky and predatory crypto business models, put consumers and investors who engage with crypto at greater risk, and create loopholes that non-crypto Wall Street firms can use to evade oversight, threatening many more investors.”
SEC CRA.
The Senate voted to repeal the SEC’s SAB 121, non-binding guidance that directed custodians to mark crypto holdings as both liabilities and assets on balance sheets. Eleven Democrats sided with the Republican-led effort.
Bill Update.
A Republican bill in the House, which provides for oversight of digital assets split between the SEC and the CFTC, has been amended to add a provision shielding investment contracts from being regulated as securities.
HOUSING
Corporate Greed Squeezing Renters.
Accountable.US puts the Labor Department’s consumer price index report into perspective. The shelter index was the largest factor in the increase in all-around consumer spending; corporate landlords are profiting wildly at the expense of renters. Invitation Homes (previously owned by PE megafirm Blackstone) and Equity Residential, the two largest single-family rental companies, saw massive increases in net income, while over half of renters across the nation are pushing over 30% of their income toward rent.
Nonbank Mortgage Servicing.
An FSOC report examined how vulnerabilities at nonbank mortgage servicers can present risks to financial stability, finding that shocks to the mortgage market can damage these lenders’ income, balance sheets and credit access because of their narrow focus on originating mortgages. The backdrop: the share of nonbanks in the mortgage origination and servicing sector has “increased considerably” since the ‘08 financial crisis, and many lenders rely on financing that can be repriced or canceled during periods of financial stress.
Insurance Sector’s Climate Disaster.
The insurance sector’s reaction to climate change has drawn much attention in areas such as North Carolina and Florida, where rising sea levels and stronger hurricanes pose a threat. However, even areas away from rising sea levels are threatened, such as Iowa, where climate change has brought the threat of more and stronger tornadoes. Insurance companies have begun to pull out of landlocked states too, causing people to lose homeowners insurance. Wildfire danger has also expanded as people continue to move into states where it poses an increasing danger. A chart from The New York Times shows the stark trend:
CLIMATE and FINANCE
ESG Funds Disclosure.
Several Democrats are leading House and Senate colleagues in urging the SEC to finalize stronger ESG fund disclosure rules. They wrote in a letter to Chair Gensler that the SEC should include key points in the final rule, such as only allowing funds for which ESG factors are a significant or main consideration to use ESG language in their names.
KKR Fracked Up.
KKR-owned oil and gas producer Crescent Energy will purchase SilverBow Resources, a $2.1bn move that’ll expand its operations in the Eagle Ford basin in Texas. Reminder: Private equity firm KKR is a major greenwasher, talking up its climate commitments while continuing to invest in dirty assets and failing to disclose their emissions. More on that from AFR and Global Energy Monitor here.
POLITICS and MONEY
Remember the MAGA Court.
A coalition of progressive and labor groups, United for Democracy, is launching a campaign to make voters more aware of the damage right-wing judges are doing to the country. Of focus is the appointments Donald Trump made to the Supreme Court that swung the court to the right.