Fifth Circuit Really Wants that Late Fees Case

Developments in the industry lawsuit against the CFPB’s new rule capping credit card late fees are coming thick and fast, but not all of them are judicial in nature. 

The Fifth Circuit Court of Appeals really wants the case, and, for now, they have it. And an injunction stopping the rule from taking effect this month is probably on the way. But it’s been messy. 

First, research, spearheaded by Accountable.US, revealed serious conflicts of interest of the first judge who heard the case. After that judge’s recusal, a Trump-appointed district judge sent the case to the DC Circuit because the litigants (mainly the U.S. Chamber of Commerce) barely have a connection to the Fifth Circuit. But the Fifth Circuit Court of Appeals forced him to recall the case, which he did, begrudgingly. The DC Circuit then accepted the recall. The industry wants a stay of the rule, which seeks to cap late fees at $8 and save consumers $10 billion per year.

But there’s a problem with another judge in the Fifth Circuit. Judge Don Willett, a Trump appointee, owns stock in Citigroup, which is the nation’s second-largest credit card issuer – and could lose quite a bit of money from the rule. So now the Fifth Circuit has invited briefs on whether that judge’s share ownership would be “substantially affected by the outcome of this litigation,” a rather high bar.

This case – and many others – have forced into the spotlight the issue of “judge shopping,” the practice of filing a lawsuit in just the right place to get a friendly hearing, as the Wall Street lobby has repeatedly done. As of last week, there’s dueling legislation in the Senate, with Democrats eyeing curbs on judge shopping and Senate Minority Leader Mitch McConnell supporting the practice.

Not content to let the courts work, Senate Banking Ranking Member Scott introduced a measure that would roll back the rule under the Congressional Review Act. The CRA has the support of the Bank Policy Institute and American Bankers Association. Senate Majority Leader Chuck Schumer, with barely disguised glee, promised to fight back:

“If you can believe it, Senate Republicans are actually trying to increase credit card fees for Americans. Democrats will not allow this bill to become law.”

Related: Bloomberg reports fewer enforcement cases from the CFPB in Q1 2024, noting that some courts have paused enforcement actions and efforts to investigate civil investigatory demands, and some smaller defendants have refused to cooperate with agency probes, pending a decision in the Supreme Court case brought against the Bureau by the payday lenders. 

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BANKING AND FINANCIAL STABILITY: Capital One/Discover – Regionals – Fed Losses, Megabank Gains – Resolving Big Banks
CONSUMER: How Accurate are Credit Reports? – Student Loan Debt – Consumer Cases
CAPITAL MARKETS: Buybacks
PRIVATE MARKETS: Private Credit – Private Equity Influence – Private Equity and Prison Profiteering – Private Equity and Healthcare – Private equity and Health Insurance – Blackstone’s Housing Bid – Other Private Equity News
CRYPTO: Guns ‘n’ Crypto – Uniswap – Terraform
HOUSING: High Rents Can Kill – Commissions, Consumers and Home Buying – Title Insurance
CLIMATE AND FINANCE: A Scientific Revolt – Anti-ESG – Big Banks’ Big Climate Commitments

Feedback? Reach us at afrnews@ourfinancialsecurity.org

BANKING AND FINANCIAL STABILITY

Capital One/Discover.

Last week, Senate Majority Leader Schumer demanded information from Capital One and Discover about their proposed $35bn merger, an anticompetitive transaction that would create the largest credit card issuer in the country. Said the senator, on the floor: “If history has taught us anything, it’s that when big financial institutions get even bigger, it could have serious consequences for consumers and small businesses alike. Higher interest rates, bigger fees, diminished competition – these could all be at stake.”

Regionals.

Bank deposits have returned to their pre-SVB-collapse levels, Yahoo Finance reports, but regionals are still facing steep deposit funding costs, sluggish lending growth, and tremors from New York Community Bancorp’s turmoil related to commercial real estate exposure. 

Fed Losses, Megabank Gains.

For the first time ever, the Fed is reporting billions of dollars in “real cash losses” weekly. Since the Fed doesn’t have excess earnings to kick up to the Treasury to offset how much in Treasury debt securities the government must issue, Wall Street on Parade explains, the government may have to go deeper into debt. Meanwhile, the central bank is still offering the country’s largest banks high interest payments through its reverse repo program.

Resolving Big Banks.

Last week, the FDIC released a report detailing how the agency would resolve a Global Systemically Important Bank (GSIB) – any of the handful of too-big-to-fail banks in the financial ecosystem – in the event of its failure. Chair Gruenberg says that an orderly resolution is possible, and preferable to bailing out investors and creditors or relying on taxpayers to hold up the institution. 

CONSUMER 

How Accurate are Credit Reports?

Not very, according to the CFPB. The agency found that consumer reporting companies “failed to ensure the accuracy of credit reports,” including failure to adhere to a June 2022 rule allowing survivors of human trafficking to block information related to their ordeals. Separately, reporting companies have accepted information from unreliable sources that, in some cases, turned out to be false, and did not block information associated with identity theft. Information furnishers also sometimes failed to follow requirements related to dispute investigations and identity theft. 

Student Loan Debt. 

The U.S. Court of Appeals for the 5th Circuit struck down a Biden administration rule that would help students who could have their debt canceled if they were deceived by their college. The decision comes after a suit involving three for-profit colleges in Texas challenged the rule, which had replaced a Trump rule making such cancellation after rip-off impossible.

Consumer Cases.

The FTC, which usually hands off civil penalties in consumer protection cases to the Department of Justice, made a request to Congress for authority to take the cases itself. The current practice of kicking cases over to the DOJ, the agency writes, offers no benefit to consumers and has been slow to produce results in certain settlement cases.  

CAPITAL MARKETS

Buybacks.

The Treasury and the IRS have proposed rules to implement a tax that targets stock buybacks – when a company uses excess cash to buy its own stock to enrich shareholders at the expense of workers and investment – by levying a one percent fair-market-value excise tax on these repurchases. The tax would apply during a standard buyback by a corporation or certain affiliates, or in “economically similar transactions,” such as buybacks that occur during M&A transactions. 

PRIVATE MARKETS

Private Credit. 

The migration of long-term corporate financing to private credit has created some concern amongst analysts at the IMF, as lending moves from regulated banks and public markets to hidden, riskier private credit. Although less volatile than bank lending, there is worry about systemic risk. IMF analysts call for a more active approach from authorities. Another study found that private credit offers no extra gains for investors after fees and risks are taken into account.

Private Equity Influence. 

Research from the Private Equity Stakeholder Project took a deeper look at four areas PE has influenced: health care, housing, jobs and pensions. A report details PE’s role in each area in all 50 states, highlighting where influence is strongest. Georgia and the Atlanta metro rank high for the number of PE backed landlords buying up real estate, more than any other area of the country. West Virginia ranks high in healthcare for the number of practices backed by PE, whereas Michigan ranks high in the pensions category.

Private Equity and Prison Profiteering.

Private equity-backed Securus is one of two companies that dominates the prison telecom industry, a sector that preys on the incarcerated and their loved ones by overcharging for calls and pursuing other predatory practices. Now, it’s burdened by $1.3bn of debt and on the verge of bankruptcy. Since its formation in 2004, it has changed owners several times before landing in the hands of Platinum Equity in 2017. Under pressure from advocates and financial distress, the firm planned to sell Securus to a SPAC, but the deal failed after investors learned they’d be buying what The Appeal calls “an ethically bankrupt and financially unstable prison profiteer.” 

Private Equity and Healthcare.

Last week, Sen. Markey introduced the Health over Wealth Act, a bill intended to strike at private equity’s influence on healthcare by increasing transparency in healthcare ownership, creating safeguards to protect health workers, and maintaining access to care. Healthcare practices owned by PE and certain non-PE-owned for-profit entities would have more reporting requirements and be required to take steps to mitigate the risks associated with for-profit ownership. The bill would also create a task force to examine private equity’s ownership and consolidation of the healthcare space.  Said AFR’s Aliya Sabharwal:

“The draft Health Over Wealth Act is a needed step to address the private equity industry's attempts to plunder healthcare. The private equity industry's single-minded focus on outsize financial returns is fundamentally incompatible with the healthcare system’s essential function to care for our communities.”

Private Equity and Health Insurance. 

The New York Times uncovered a scheme that helps health insurancers boost profits at the expense of patients. A PE-owned firm called MultiPlan claims to help consumers keep costs down, but both they and insurers have a financial incentive to saddle patients with bills, along with charging employers fees so they have less incentive to cover more of their workers' bills. MultiPlan is backed by private equity that also buys physician practices and hospitals, creating a cycle of profits where they win either way. UnitedHealthcare saw over a billion dollars in profits, while MultiPlan cost consumers billions due to its payment recommendations.

Blackstone’s Housing Bid. 

Private equity mega firm Blackstone has agreed to buy AIR communities for $10 billion. AIR owns multifamily rental communities in several major metros, including Atlanta. The transaction comes in spite of total multifamily sales volume falling 61 percent from 2022 to 2023. Blackstone’s acquisition may signal an upward swing in the market. 

Other Private Equity News.

Getting Out. The prospect of private equity exits, recently slowed due to high interest rates, improved in Q1 2024, as investors increasingly seek to get their money back. 

Sandwiches. Private equity megafirm Blackstone might acquire the sandwich franchise Jersey Mike’s in an $8bn transaction. If the PE playbook is any indication, it could mean “mandates to cut costs and implement aggressive expansion plans,” Inc.com suggests.

Paramount. An investor group that includes the private equity megafirm KKR is interested in a stake in entertainment empire Paramount Global, in a possible transaction that would keep the company public.  

CRYPTO

Guns ‘n’ Crypto.

The WSJ reported on a Russian black-market arms trade that evaded U.S. sanctions to acquire drone parts and other high-tech gear. Their currency of choice: the stablecoin Tether, the “most-traded cryptocurrency,” which trades at volumes double that of Bitcoin. Unlike traditional bank transfers, Tether offers anonymity and rarely ever freezes customers’ digital wallets, even as “dirty money” flows between users. 

Uniswap.

The SEC is preparing to sue Uniswap Labs, a publicly traded decentralized finance company that uses smart contracts to operate a crypto marketplace. While it’s unclear what the specific charges are, Reuters suggests the regulator’s warning stems from its effort to apply securities law to digital assets. 

Terraform.

Terraform Labs, the firm that developed the blockchain Terra, stablecoin of the same name, and cryptocurrency Luna, and founder Do Kown have been found liable for defrauding its investors,. The ruling backs the SEC’s findings that Kown arranged a third party purchase of Terra to prop up the currency and then falsely attributed it to his algorithms.

HOUSING

High Rents Can Kill. 

The housing crisis is also a mental health crisis. While the environment inside your home has an affect on your health, so can the stress of the high cost of housing, according to a study in the journal Social Science and Medicine. Higher levels of rent burden were associated with higher levels of death, especially when it led to eviction. This trend has worsened over time.

Commissions, Consumers and Home Buying.

Recently, the National Association of Realtors – the nation’s largest trade association representing real estate agents – settled a set of class-action lawsuits over alleged antitrust collusion with agents to inflate commissions. Apart from a $418mn penalty, the NAR agreed to require buyer agency contracts and get rid of seller offers of agent compensation from certain types of property listings. The Consumer Federation of America suggests that this “commission uncoupling” will, in the long-term, save consumers $20 to $30bn annually, promote market fairness and competition, and improve service quality. 

Title Insurance.

The CFPB is considering a ban on lender title insurance, one of the extras piled onto a homeowner-to-be’s closing costs. A proposal, if it happens, isn’t expected until 2025. 

CLIMATE and FINANCE

A Scientific Revolt.

A mutiny at a climate target group exposes the divide between science and finance when it comes to how companies calculate greenhouse gas emissions and meet carbon goals. The Science Based Targets initiative (SBTi) is an international organization that sets the standard for setting emissions targets for companies. A plan floated by SBti leadership would have allowed companies to use carbon credits to offset Scope 3 greenhouse gas emissions, but staffers accused management of acting without scientific basis and have called for the plan’s reversal.

Anti-ESG.

Despite the clear benefits of responsible ESG investing (see here), the conservative attack on money managers making environmental, social and governance considerations continues apace. Bloomberg reports that BMO Bank quietly dropped its policy against lending to the coal industry to avoid being labeled an energy “boycotter” in West Virginia. 

Big Banks’ Big Climate Commitments.

Over two years ago at the UN climate summit, hundreds of banks, insurers, asset managers, and their leaders voluntarily attended and committed their sector to assisting in the fight against climate change by investing in reducing carbon emissions and financing energy transition. But a study from the European Central Bank cast doubts on their engagement with those commitments.  Researchers noted little tangible change in behavior, as net-zero banks reduced lending to oil and gas at the same rate as non-net-zero banks, failed to adjust rates on loans to high-emissions companies, and failed to meaningfully divest from high emitters, increase investment to green activities or cut their own emissions.