The Wonk Room

Shelby: Consumer Protection Agency ‘Folly And Dangerous,’ ‘Would Make The System Less Safe’

Sens. Chris Dodd (D-CT) and Richard Shelby (R-AL)

And then there’s Sen. Richard Shelby (R-AL), the ranking member of the Senate Banking Committee. Back in October, Politico called Shelby “a deal maker,” and said that “he’s looking more and more like he’s ready to compromise [on reg. reform] — regardless of whether his party leaders want to slow walk a Democratic priority.” Politico even reported that Shelby “hasn’t shut the door” on the creation of a Consumer Financial Protection Agency (CFPA). However, now that Banking Committee chairman Chris Dodd (D-CT) is gearing up to release his bill, Shelby’s door seems to be shut pretty tight:

Shelby backs stronger consumer protections “where appropriate, but believes the creation of a stand-alone agency is neither necessary nor wise,” said Jonathan Graffeo, spokesman for the Republican lawmaker. As drafted, the proposed consumer agency in Shelby’s judgment “would make the system less safe,” Graffeo said.

This comes just a few days after Shelby called the very notion of a CFPA “folly and dangerous.” As Reuters put it, “the latest assessment of Shelby’s views shows that he and [Dodd] have a long way to go.”

It seems then, that Senate Republicans are going to reprise the House Republicans’ argument that consumer protection responsibilities should not be removed and placed within a new agency, but should instead remain with the same regulators who had them — and failed to use them — in the buildup to the economic crisis. As McClatchy’s Kevin Hall wrote, “that’s the back story to the U.S. financial crisis. At every turn where regulation was missing in action, the actors did the wrong thing, all along the long, interconnected trail of transactions that make up mortgage finance.” That seems to be the system that Shelby is arguing to preserve.

One intriguing aspect of the Senate dynamic, though, will be how the Republicans approach Dodd’s plan to consolidate all of the existing federal bank regulators into one super-regulator. House Financial Services Committee Chairman Barney Frank (D-MA) and the administration oppose such a move. With Democrats on either side, where will Shelby and co. come down?

GOP Warns Of 1970s Style ‘Gas Lines’ For Financial Products If CFPA Can Regulate Fees

Can't find a checking account?

After yesterday’s attempt to give all of the federal bank regulators complete veto power over the CFPA, the GOP today offered an amendment that would prevent regulators at the CFPA from imposing restrictions on bank fees or rates.

The justification was that such restrictions amount to “price controls,” which Rep. Jeb Hensarling (R-TX) said would result in rationing and lead to 1970s style gas lines for financial products. Instead, the GOP wants to leave responsibilities for regulating fees with the same banking regulators that didn’t (and still haven’t) reined them in. Watch it:

First, to think that fee restrictions would result in people lining up because they can’t find financial products strikes me as silly, since they’re not something with a finite supply. How would capping overdraft fees cut down on the number of checking accounts that exist, or could potentially exist in the future?

And it’s precisely because banks abuse things like overdraft fees that the CFPA needs to have power to impose and enforce restrictions. Banks are set to make $38.5 billion in overdraft fees this year, and as USA Today pointed out, overdraft fees are fine in theory, but banks have taken them to an extreme:

Bank of America, which announced changes in its program last week, has been charging up to 10 fees of $35 each in a single day. A majority of large banks — 54%, according to a government survey — reserve the right to process large transactions first, which empties accounts faster, squeezing more overdraft fees from customers.

Americans actually spend more on overdraft fees annually than they do on fresh vegetables. But it’s not just overdraft fees that the banks have abused. According to BankRate.com, this year “ATM fees and monthly service charges on interest-bearing checking accounts climbed to new highs, while bounced-check fees hovered near a high after adjusting for inflation.”

Some banks have even decided that they will charge customers fees for paying off their credit card on time or for not using their credit card enough. “You heard that right: You could be spanked for staying out of debt,” wrote Sandra Block. There are innumerable little ways in which the banks can unfairly take advantage of consumers, which makes it imperative that the banks be able to enforce restrictions. The committee will vote on the amendment when markup resumes tomorrow.

Rep. Hensarling: Banks ‘Ought To Trump’ Consumers

Today, during markup of legislation before the House Financial Services Committee that would create a Consumer Financial Protection Agency (CFPA), Republicans proposed an amendment that would give all of the other federal bank regulators — including the Federal Reserve or the Comptroller of the Currency — the ability to veto CFPA rules that threatened the “safety and soundness” of financial institutions.

Rep. Jeb Hensarling (R-TX) explained that he supported the amendment because the health of a financial institution “ought to trump” concerns regarding consumers, all of the time:

The safety and soundness of the system, taxpayer protection, ought to trump the ability to ban financial products. And let’s face it, I understand the chairman said that this new CFPA would not have the ability to set goals, but if you control the product mix, if you can ban products, if you can modify their terms, of what some have estimated could be as much as 10 to 15 percent of our economy, then yes, I conclude you can adversely impact the safety and soundness of these institutions.

Watch it:

So if it can’t outright prevent the CFPA from being created, the GOP would like to ensure that it’s a toothless agency that can’t stand up to the bank regulators. (Hensarling presents this as “taxpayer protection,” ostensibly suggesting that, if the banks can make money however they see fit, they’ll never need another taxpayer funded bailout.) But the CFPA will only work if it is on equal footing with the bank regulators, with adequate abilities to write and enforce regulations.

This is because many of the products that led to the economic crisis were premised on obfuscation and taking advantage of consumers — credit cards with retroactive rate hikes, mortgages with payments that exploded after a set number of years, or overdraft fees to which consumers are automatically subjected. As Adam Levitan pointed out at Credit Slips, “the market drives the introduction of bad consumer credit products.” “Some of this obfuscation is through fine-print. Some is through product design, as complexity and exploitation of consumers’ cognitive biases can mask pricing,” he wrote.

And these actions are often very profitable, which is why the bank regulators didn’t want to stop the banks from using them. Overdraft fees, for instance, could rake in $38.5 billion for the banks this year. Those billions render the banks incredibly safe and sound, but they come at the expense of consumers. And under the Republican proposal — which will come up for a vote tomorrow — the same exact practices would be allowed to continue, and regulators at the CFPA could do nothing but scream from the sidelines.

Republicans Love To Bash The Fed, But Still Trust It To Protect Consumers

At The American Prospect, Tim Fernholz noted that Sen. Chuck Grassley (R-IA) has engaged in a bit of confusing rhetoric regarding regulatory reform. Grassley seems to simultaneously believe that the Federal Reserve should do nothing but monetary policy, but shouldn’t have its consumer protection responsibilities removed and placed within a new Consumer Financial Protection Agency (CFPA).

As Fernholz wrote, “thank goodness Grassley is not on the relevant committee” (the Senate Banking Committee). However, Grassley is not the only one with this contradiction running through his head. Sen. Jim Bunning (R-KY) is struggling with the same thing, and has a seat on the Banking Committee, from which he announced today that he sees “very little chance of getting a consumer protection agency past this committee.” And his reasoning is that the Fed already has consumer protection duties that it simply didn’t use:

In 1994, we handed the Federal Reserve the power to regulate all banks and mortgage brokers on the loans that they make. That’s all of them! In 1994 they didn’t do a thing…Now, why would we write a new protection agency, if they’re not using the power we have to the Federal Reserve to start with?…They didn’t do their job, and now you want to create a new institution because the Federal Reserve didn’t do their job. I say you’re wrong to create a new institution. We should insist that the Federal Reserve does their job.

Watch it:

But just a few months ago, Bunning declared that the Fed should not be designated as a systemic risk regulator for the financial system because “the Fed has proven they can not be trusted with the power they have. They get it wrong, do not use it, or stretch it further than it was ever supposed to go.” In fact, he “promised to do everything in his power to stop the Fed.”

So the Fed has proven that it can’t be trusted, but it should still be trusted to protect consumers? There’s an odd dynamic at work here, because Bunning’s diagnosis is spot-on — he just comes to the wrong conclusion. The Fed undeniably failed to police the consumer market, even though it clearly had such powers. It received regulatory authority over mortgage lending in 1994, but didn’t release its “Guidance on Nontraditional Mortgage Product Risks” until 2006. This lackadaisical approach to consumer occurred not just within the Fed, but with all of the federal bank regulators.

Therefore, we should take consumer protection duties away from all of them and place them within a new agency, which will have no mission other than watching out for consumers. But Republicans — who love to hate the Fed the rest of the time, because it plays well politically — are willing to give the Fed another swing of the bat when it comes to protecting consumers.

Federal Regulatory Preemption Stopped In The House, Bank Lobbyists Turn To The Senate

Rep. Melissa Bean (D-IL)

In a piece of political theater, Bean now plans to introduce the amendment and then to withdraw it, according to people familiar with the matter. She then plans to engage in a scripted conversation with [Committee Chairman Barney] Frank, in which both are to affirm the importance of further discussions about the issue. Bean can then reintroduce the amendment once the bill comes before the full House, but lobbyists on both sides say they regard the battle as over.

But is anything really “over” when it has yet to come before the Senate? Indeed, while the bill without federal preemption for national banks is “likely to pass the House,” the Washington Post reported that “it faces an uncertain future in the Senate, where financial lobbyists regard some moderate Democrats as more sympathetic to their concerns.”

There is also a second preemption amendment that is alive and well in the Financial Services committee, which would allow federal preemption “when a state law has a ‘discriminatory effect’ on national banks.” The amendment would also “allow the Office of the Comptroller of the Currency (OCC) to determine if a state law prevents or interferes with a national bank’s business.”

This is a terrible idea, as the OCC has repeatedly issued specific exemptions for national banks. In 1999, the OCC “said national banks did not need to comply with a California law limiting the fees banks could charge for ATM withdrawals.” And then, in 2000, “it lifted a Rhode Island law limiting changes in the interest rates on credit cards.” Finally, in 2002, the OCC “overrode a Texas law that barred banks from charging check-cashing fees.” Meanwhile, the current OCC head, John Dugan, has a very dim view of states that want to rein in national banks, saying that “we have a system that works fine in terms of examination and enforcement of consumer protection.”

And while Bean has shelved her amendment for the time being, I wouldn’t be as quick as the Post to declare that the big banks are “losing power on Capitol Hill.” After all, mortgage cram-downs — which the banks bitterly opposed — passed the House, only to be ultimately defeated by a furious lobbying campaign in the Senate. Bean backing down is a good thing, but it’s by no means the end of the preemption debate.

GOP Warns That CFPA Creates A ‘Czar For Financial Services Product Approval’

Today, the House Financial Services Committee began to debate the legislation that would create a new Consumer Financial Protection Agency (CFPA). Predictably, Republicans — who are staunchly opposed to the agency — broke out their false arguments about the agency restricting credit and eliminating jobs, but they also decided to tap into some of the GOP-generated “czar” hysteria by claiming that the CFPA’s director will be a “financial product approval czar”:

Rep. Jeb Hensarling (R-TX): [Consumers] have to go on bended-knee to this new federal czar for financial services product approval and beg that they can have a credit card or a mortgage.

Rep. Spencer Bachus (R-AL): The legislation gives this new agency and it’s czar-like chairman power to impose both fees and taxes on all financial products, which they broadly design.

Watch it:

First, like so many of the “czars,” the CFPA’s Director would be appointed by the President, but then confirmed by the Senate. Here’s the pertinent text in the bill (Section 112, page 20):

But more importantly, the point of the agency is not to approve mortgages or credit cards for individuals. The CFPA Director will not pull up John Smith’s credit report and decide whether or not he can have a Visa. Much like the Credit Cardholder’s Bill of Rights that was signed into law earlier this year (which placed outright bans on certain unfair practices), the CFPA will be able to ban products deemed deceptive or predatory.

For instance, as Federal Reserve Chairman Ben Bernanke advocated, no-doc loans (in which mortgages are given to consumers without any documentation supporting incomes or assets) should be done away with. Ditto for pay-day loans that have interest rates that climb to 400 percent or signing up consumers for exorbitant overdraft protection without actually telling them.

And of course, a lot of the subprime lending that led to the housing bubble — essentially the kind of lending that “occurs when the lender’s business model is based on making profits based on fees and defaults, not on the normal performance of a loan” — should be banned, as they have no legitimate purpose other than driving profits for mortgage lenders at the expense of borrowers. I’m willing to bet that their aren’t many homeowners who will be saddened to find that they can no longer access loans which result in them owing more on their house five years into their mortgage, despite making monthly payments. But that’s exactly what the GOP is advocating for.

Will The New Democrats Cripple Consumer Protection Before It Even Begins?

Rep. Melissa Bean (D-IL)

As it moves through Congress, the proposal to create a new agency has come under assault from the financial services industry, Republicans in Congress, and existing bank regulators trying to protect their turf. The proposal has already been scaled back in the House, and will no longer mandate that financial firms offer customers a “plain vanilla” version of a product, before moving on to more complicated and expensive ones.

But a second troubling development is underway — led by the so-called New Democrats — which would continue the practice of allowing nationally chartered banks (like Bank of America or Wells Fargo) to ignore state regulations that are stronger than federal regulations:

Democrats are split over whether the proposal should allow states to trump federal regulations and enforce their own, often tougher consumer rules against national banks, such as Bank of America Corp., J.P. Morgan Chase & Co. and Wells Fargo & Co. This would permit states to bar certain fees and late charges otherwise allowed by federal regulators…Rep. Melissa Bean (D., Ill.) is preparing an amendment that would prevent states from enforcing tougher standards against national banks than the federal entity’s.

This is a monumentally misguided effort on the part of the New Dems. “The system that is being proposed by the New Dems is the system we have now. That’s the system that failed,” said Ed Mierzwinski, consumer program director for U.S. PIRG.

Indeed, we’ve already seen the wreckage that preempting state law can cause. Under the Bush administration, bank regulators repeatedly exempted national banks from state laws aimed at reeling in subprime lending. And according to a new study from the University of North Carolina’s Center for Community Capital, those preempted anti-predatory lending laws (APLs) could have made a huge difference in mitigating the subprime crisis:

[W]e observe a lower default rate for neighborhoods in APL states, in states requiring verification of borrowers’ repayment ability, in states with broader coverage of subprime loans with high points and fees, and in states with more restrictive regulation on prepayment penalties. We believe that these findings are remarkable, since they suggest an important and yet unexplored link between APLs and foreclosures.

The New Dems’ proposition would bake-in an exemption for the national banks, meaning that those banks could focus all of their effort on weakening regulation in Washington, and the states would be powerless to do anything about it. In a briefing with bloggers today, Austan Goolsbee of the Council of Economic Advisers emphasized that the Obama administration “did not call for national preemption,” and said that states with “a particular reason” for providing additional protections for their consumers should be allowed to do so.

Read more about the case for a consumer protection agency in today’s Progress Report.

Bankers Association Claims Customers Are ‘Glad’ To Pay Exorbitant Overdraft Fees

One of the nastier bank practices that has arisen in recent years is banks automatically enrolling consumers in accounts with expensive overdraft protection, and then charging exorbitant overdraft fees without ever letting people know that their account is overdrawn.

In theory, overdraft protection is meant to prevent a small check from bouncing — as the bank would cover the amount of the check and collect from the consumer later — but with the rise of debit cards, overdraft fees have become an easy way for banks to raise lots of cash from unwitting consumers. The standard overdraft fee now stands at $34, and banks re-order purchases — “debiting large transactions before small ones” — in order to charge multiple fees.

This is an awful mess, and according to a report released today by the Center for Responsible Lending, at least 50 million Americans overdraw their accounts over the course of a twelve month period, 27 million of which incur five or more fees. Banks and credit unions collected $24 billion in overdraft fees in 2008, a whopping 69 percent of total bank fees. Shockingly, the Center noted that Americans spend more on overdraft fees annually than they do on fresh vegetables.

You’d think these numbers might give the banks at least a moment’s pause. But the American Bankers Association (ABA) — the banking industry’s largest trade group — shrugged them off, saying that consumers are actually “glad” about being hit with overdraft fees, because they are then saved the embarrassment of having their debit card rejected:

“Clearly, consumers who pay overdraft fees are the minority, and that number is shrinking,” Nessa Feddis, ABA senior federal counsel, said in a statement in response to the study. “More importantly, most consumers want banks to pay their overdrafts so they can avoid the inconvenience, embarrassment and potential costs of having a payment or transaction rejected.”

So in the ABA’s world, consumers are actually thrilled about paying a bunch of $34 fees, because it saves them some face at the checkout counter. Not only is that a sorry justification, but it isn’t even true. 80 percent of consumers actually say that they would rather have their debit card rejected for a $5 purchase than be charged an overdraft fee, which only falls to 77 percent when the price of the purchase is increased to $40.

Data from the research company Moebs Service shows that banks are expected to collect $38.5 billion in overdraft fees in 2009, but as Mike Lillis noted at the Washington Independent, the banks’ behavior has “caught the eye of some powerful lawmakers.” Rep. Carolyn Maloney (D-NY) has crafted a bill that would “prohibit banks from charging the fees unless consumers sign up for the overdraft protection service,” and would also “prevent banks from reordering purchases” in order to maximize fees.

Sen. Chris Dodd (D-CT) is reportedly working on similar legislation, while Rep. Barney Frank (D-MA) has said that the Consumer Financial Protection Agency (CFPA) that has been proposed will be responsible for policing overdraft fees.

Hensarling, Chamber Of Commerce Claim CFPA Will Cause Credit Squeeze — But It Didn’t In Canada

This was a busy week for discussion regarding the Consumer Financial Protection Agency (CFPA) that has been proposed as a key part of Congress’ regulatory reform effort. On Wednesday, consumer advocates, the banking industry, and the U.S. Chamber of Commerce presented their perspectives on the new agency before the House Financial Services Committee, and Thursday Federal Reserve Chairman Ben Bernanke followed suit.

When it hasn’t been trying to rewrite history regarding its position on global warming, the Chamber has been one of the organizations leading the charge against the CFPA. To that end, it released a report claiming that a serious (though unquantifiable) amount of job loss would result if the CFPA were to come into existence:

The CFPA would likely reduce an important source of credit to small businesses. This induced credit squeeze comes at a time when it is likely that small business credit will be already highly restricted as the lending industry digs out of the current financial crisis. The CFPA credit squeeze would likely result in business closures, fewer startups, and slower growth. Overall, this would cost a significant number of jobs that would either be lost or not created.

Rep. Jeb Hensarling (R-TX), who has been one of the top crusaders against the CFPA, cited the Chamber’s work, in an attempt to get Bernanke to agree with the notion that the CFPA would cause a credit squeeze, and thus job loss. Watch it:

This all sounds terrible, doesn’t it? A lack of credit causing businesses to downsize, resulting in hoards of job loss, all because of stifling regulation! There’s just one problem with the theory. In 2001, Canada created a consumer protection agency, the Financial Consumer Agency of Canada (FCAC) and, well, none of that happened. As McClatchy reported:

Republicans, backed by the U.S. Chamber of Commerce and bank lobbyists, warn that such an agency would bring punishing costs to consumers and small businesses and could regulate all forms of credit, even tabs at the bar or butcher shop. Canada’s experience suggests otherwise. “I certainly have not seen anything that shows that we are vastly different from the United States in terms of access to credit,” said John Rossi, who heads compliance and enforcement efforts for the Financial Consumer Agency of Canada.

The vice-president of policy at the Canadian Bankers Association did gripe to McClatchy about the fees that the consumer agency imposes on banks, but he “didn’t say these costs were onerous…nor did he suggest that the FCAC has hurt lending, questions that were put to him directly.” And as for job loss, when the agency was created in 2001, the Canadian unemployment rate was 6.9 percent. It was the same rate in 2005, on its way to a low of 5.8 percent before the global economic crisis hit. Not exactly a terrifying jobs record.

Financial Services Lobbyists Banking On Moderate Dems To Push For Federal Preemption

Last week, House Financial Services Chairman Barney Frank released a scaled-back proposal for creating a new Consumer Financial Protection Agency (CFPA), which was reportedly meant to address the concerns of some Democrats on the committee. Among other changes, the bill will no longer mandate that financial firms offer consumer “plain vanilla” products before moving on to more complex products.

While the changes may have been necessary to win support on the committee, the financial services industry now sees an opening, and is “turning up the pressure on moderate Democrats on the panel to push for more concessions.” And as The Hill reported today, “lobbyists are tailoring their efforts to rewrite specific provisions in the bill,” particularly that giving states the right to impose regulations that are stricter than the national standard set by the CFPA:

The financial industry believes that will create a patchwork quilt of different state regulations that increases the cost to firms. Those costs might then be passed on to consumers. “What’s going to happen to a customer who moves from one part of the metro area of D.C. to another? Will they have different rules just depending on geography?” said Tracey Mills, spokeswoman for the Consumer Bankers Association.

Roll Call reported that “industry groups are largely relying on the 15 members of the New Democrat Coalition to carry their water to ensure that federal pre-emption remains part of the package.” Rep. Melissa Bean (D-IL) is reportedly working on a preemption amendment that could be offered in committee.

As I’ve pointed out before, preemption is a failed policy choice that contributed to the housing bubble by preventing states from going after national banks engaged in predatory subprime lending. That this lesson has been forgotten so quickly is a testament to the financial services industry’s influence over the regulatory reform debate.

As for the Consumer Bankers Association’s (CBA) specific question regarding whether rules will differ “depending on geography,” the short answer is “yes, they will.” But that’s not the huge worry that CBA makes it out to be. After all, differing state regulations in terms of health insurance requirements have not eviscerated the health insurance industry. And a consumer moving within the Metro DC area (from Virginia to Maryland, maybe?) will presumably not bring his mortgage with him, rendering this concern over different terms overblown.

In the past, Democrats have viewed preemption as a “compromise” to be made with the industry, and the classic example of this is the Employee Retirement Income Security Act of 1974 (ERISA). After a media exposé revealed that many Americans’ pension funds were disasterously mismanaged, Congress enacted ERISA to protect employee health and retirement benefits. But thanks to a preemption provision and a Supreme Court decision gutting the federal remedy that Congress intended to replace state law, ERISA became a boon for corporations looking to avoid state regulations. As the late Justice Byron White put it, ERISA resulted in the “perverse anomaly of leaving those Congress set out to protect with less protection than they enjoyed before ERISA was enacted.”

“Preemption doctrine often serves business interests at the expense of taxpayers…and also should offend lovers of local democracy,” wrote Tim Fernholz. “Why should the feds limit your ability to make rules?” And as long as the CFPA sets a strong minimum level of regulation, there will be no worries about a race to the bottom, in terms of states trying to coax business to their state by eliminating regulations. So hopefully, Frank will stand tall against the push to include preemption in the final regulatory reform package.

JP Morgan CEO Jamie Dimon Uses CGI Stage To Hit Regulatory Reform

Editor’s note: The Wonk Room is reporting from the Clinton Global Initiative conference this week. This is our fifth post.

In the wake of an economic crash caused in large part by financial wizards passing paper back and forth without creating anything, panelists at the Clinton Global Initiative today discussed how to make banking more socially useful. The discussion inevitably wound its way to the regulatory reform package currently before Congress, at which point JP Morgan Chase CEO Jamie Dimon seized the opportunity to attack the idea of creating a Consumer Financial Protection Agency (CFPA):

We need to simplify and strengthen our system, not add. We’re trying to just add multiple layers of regulation. I tell people, if our legal department didn’t do a good job, we would fix our legal department. The government would create another legal department. [laughter] And all you’re doing is replicating the same thing in a different form.

Listen here:

However, the CFPA is not meant to replicate existing agencies, but to fill a void that currently exists, as no agency is solely responsible for consumer protection. It will also remove the consumer financial protection responsibilities from the other regulators, such as the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Trade Commission, in a sense providing some of the simplification that Dimon says is necessary.

“I think clearly you have had a lot of abuses, and whatever was on the books wasn’t being enforced,” said Morris Goldstein, a former top official at the International Monetary Fund and a researcher for the Peterson Institute of International Economics. “I think it makes sense to try to wrap it together and give someone the responsibility to deal with the great bulk of it.”

With his choice of language disparaging the CFPA, Dimon is channeling the Chamber of Commerce, which is circulating ads warning against the CFPA proposal that read “maybe instead of making government bigger, we should focus on making government better.” Plus, as CAP’s Andrew Jakabovics and Jeff Chapman found, JP Morgan was no angel during the subprime boom:

JP Morgan Chase, like other major banks in 2006, was much more likely to charge higher prices to African-American and Hispanic borrowers than whites and Asians, even among high-income borrowers. Over two-thirds of JP Morgan Chase’s higher-priced lending was done through a subprime arm—Chase Manhattan Bank.

As David Lazarus put it in the Los Angeles Times, “if banks play fair and keep their noses clean, they’ll have nothing to fear. So why are they so fiercely opposed to having a new cop patrolling the neighborhood?” Indeed, the banks look like they are using the spectre of big government to defend their right to rip-off and deceive consumers.

The Fed Tries To Defend Its Turf By Promising To Regulate Subprime Lenders

Yesterday, the Federal Reserve announced that, henceforth, it is going to extend its consumer protection oversight to the non-bank subsidiaries of banks, which as the Washington Post noted, is “a group of lenders that includes several major originators of subprime loans.” The Fed intends for the announcement to indicate its newfound seriousness regarding consumer protection:

The policy, which will take effect immediately, also provides for the investigation of consumer complaints against these nonbank entities…The policy announced today builds upon the groundwork of the pilot program and responds to a need for more effective supervision and consumer protection.

But this move seems to be aimed more at fending off the drive to take away the Fed’s consumer protection responsibilities (via creation of a Consumer Financial Protection Agency or CFPA) than any meaningful change of heart on the Fed’s part. “Is this trying to make up for the vulnerable position they’re in?” asked Cornelius Hurley, a professor at the Boston University School of Law and a former Fed lawyer. “It certainly sounds that way.” Federal Reserve Chairman Ben Bernanke has been vociferously opposed to the CFPA proposal. “I understand why some would want to see a new agency that would be fully committed to this area. And, I’m not criticizing that,’’ Bernanke has said. “I’m simply saying that…we believe we can continue to do good work in this area.’’

The Fed’s new policy announcement actually fits in perfectly with the Fed’s tendency to announce consumer protection initiatives long after the horse has already left the barn. For instance, the Fed was warned about the spread in subprime and predatory lending by the Greenlining Institute in 2004, and by Edward Gramlich, a member of the Reserve Board itself, in 2005. However, it didn’t get around to issuing its “Guidance on Nontraditional Mortgages” until September, 2006, at which point subprime loans constituted 20 percent of mortgage originations, totaling $600 billion. Even then, the guidance was a list of best practices, not a ban on predatory products.

Jim Carr, of the National Consumer Reinvestment Coalition, said that, “even if the Fed were proposing a regime that was as comprehensive as the law, it wouldn’t take away the inherent conflicts between the Fed’s support for the banks versus its protection of consumers.” Indeed, it’s fine if the Fed wants to take a stab at policing predatory lending, but it has shown no competency in that area in the past, so the drive to create the CFPA shouldn’t get hung up by the Fed’s promises.

Huge Racial Disparities Found In Lending Practices At TARP Banks

As the wreckage of the subprime bubble has settled, details have slowly leaked out about the pernicious lending practices that some of the biggest banks employed, particularly when it came to taking advantage of minority borrowers. The highest-profile example of this was Wells Fargo’s “ghetto loans,” in which the bank allegedly pushed minority borrowers who qualified for prime loans into subprime, which can add more than $100,000 in interest payments to a mortgage.

But according to a new report by CAP’s Andrew Jakabovics and Jeff Chapman, Wells Fargo was far from the only bank with obvious racial disparities in its lending. Jakabovics and Chapman looked at the lending data for 14 systemically important banks in 2006 — a year in which these 14 originated more than one out of every three higher-priced mortgages in the country — and the results are fairly appalling:

Overall, 17.8 percent of white borrowers were given higher-priced mortgages when borrowing from large banks in 2006, yet 30.9 percent of Hispanics and a staggering 41.5 percent of African Americans got higher-priced mortgages…Among high-income borrowers in 2006, African Americans were three times as likely as whites to pay higher prices for mortgages—32.1 percent compared to 10.5 percent. Hispanics were nearly as likely as African Americans to pay higher prices for their mortgages at 29.1 percent.

So not only were the banks handing out subprime loans to minorities on a much greater scale, but they were issuing them to lots of low-risk borrowers — households earning more than twice their area’s median income, most of which reported six-figure incomes — at a dizzying rate (which was, again, significantly higher for minorities). I would be interested to hear how the banks explain away that one.

To be fair, many of the banks that have the most egregious stats actually bought their racial disparities, as some of the biggest subprime lenders collapsed and were acquired by the big banks. Bank of America, for instance, acquired LaSalle and Countrywide, both of which were far more likely to offer higher-priced loans to minorities than Bank of America itself. JP Morgan bought Washington Mutual, which was the worst of the banks analyzed, “with fully 56.9 percent of African Americans and 42.3 percent of Hispanics paying higher prices, compared to 16.9 percent of whites.”

The banks examined in the report were the recipients of 43 percent of the funds dispersed under the Troubled Asset Relief Program (TARP), and Jakabovics and Chapman advocate not allowing any of the banks that still owe TARP funds to pay them back without receiving a passing grade on fair lending practices from the TARP’s Inspector General.

These numbers also make the case for the creation of a Consumer Financial Protection Agency (CFPA) with strong enforcement abilities over fair lending practices. Discriminatory lending is illegal, but these numbers show that not very much was done about it. This was presumably a profitable form of lending for these institutions, which regulators charged with ensuring the safety and soundness of banks would have been loath to pull back.

By removing consumer protection responsibilities from the traditional bank regulators, and placing it with a new agency, consumers will have an advocate within the regulatory system, and discriminatory lending of the sort Jakabovics and Chapman found will hopefully be met with the sort of penalties that it deserves.

Bailed Out Banks Get Into The Payday Lending Business

Payday lending — in which a customer is given a cash advance on his/her next paycheck — has traditionally been confined to largely unregulated non-bank lenders. However, the Minneapolis-St. Paul Star Tribune reported yesterday that payday lenders “have a powerful new ally in their quest for respectability: big banks”:

A few of the nation’s largest banks — including Minneapolis-based U.S. Bancorp, Wells Fargo & Co. of San Francisco, and Fifth Third Bancorp of Cincinnati — are now marketing payday loan-type products, with triple-digit interest rates, to their checking account customers.

These banks are making a strong case for creating a Consumer Financial Protection Agency (CFPA) in a couple of ways. The first is that loans of this sort should come under some sort of regulation, even if they remain largely in the non-bank sector. Typical payday loans have interest rates of 400 percent or more. While not quite that high, the big banks are charging $10 per $100 borrowed, which translates into a 120 percent annual interest rate.

These exorbitant rates are what makes payday lending profitable — and ensures that the borrowers who use them have to keep coming back for more. As the Center for Responsible Lending found, 76 percent of payday loan volume (and $3.5 billion in annual fees) is due to “churning,” which is repeat borrowing by customers who paid off their loan, but because of the interest, require another loan before their next paycheck. Sky-high interest rates and the way in which loans of this sort are marketed and sold would come under the purview of the CFPA.

Second, as the Consumer Federation of America pointed out, the banks in question are “using their national bank charters to avoid state usury laws,” which in many states cap the amount of interest that can be charged for a payday loan. But as envisioned by the Obama administration, the CFPA would set a floor for regulation that would not preempt state law. The CFPA would ensure a minimum level of protection, but wouldn’t prevent states from rightly applying their own usury laws to national banks.

Legislation creating the CFPA, along with the rest of the administration’s regulatory reform agenda, is currently sitting in Congress, waiting to be acted upon. But while it sits, the banks are getting right bank to business, taking on record amounts of risk and finding creative ways to subvert interest rate restrictions. Incidentally, all three of the banks using these payday-type loans received TARP money, though U.S. Bancorp has since repaid the government. Wells Fargo still has $25 billion in TARP funds outstanding.

With Congress Back, Chamber Readies $2 Million Ad Campaign Against CFPA

Congress returns to Washington today after its summer recess, and one of the items on the agenda — though likely dwarfed by health care reform and cap-and-trade — is regulatory reform. House Financial Services Chairman Barney Frank (D-MA) is planning to start moving legislation through his committee this month, but as Reuters noted, the reforms have “no clear path forward in the Senate.”

However, the business community is taking no chances, particularly with its opposition to the proposal for a new Consumer Financial Protection Agency (CFPA). To that end, the Chamber of Commerce is launching a $2 million ad campaign aimed at quashing support for the CFPA:

The first ads running in Washington-area newspapers feature a picture of a butcher with the line: “Virtually every business that extends credit to American consumers would be affected — even the local butcher and the credit he extends to his customers“…The Chamber’s goal is twofold: move the spotlight off the unpopular commercial banks and mortgage lenders that are the target of the legislation and muster a roster of more sympathetic opponents.

The business lobby also “intends to expand its campaign to include nationwide TV and radio ads later this month. Its lobbying push could feature other small-business owners, such as accountants, landlords and event planners.” The Chamber is currently engaged in a $100 million campaign “to defend and advance economic freedom” and this ad buy fits right in with that effort.

The Chamber admits that the whole point of the ads is to draw attention away from the banks and mortgage lenders at which the CFPA legislation takes aim. But this is simply misdirection, resorting to the right-wing tactic of claiming that legislative changes will decimate small businesses. As Steve Adamske, a spokesman for Frank, said, the campaign amounts to “scare tactics from the likes of big business.”

As proposed now, the CFPA would be able to ban some of the most egregious practices in the consumer lending market (particularly those pertaining to mortgages and credit cards). It’s hard to imagine how the credit that a local butcher extends to his customers would fall into the category of products that the CFPA would be concerned with, but if there is some sort of widespread butcher credit scam going on that threatens the stability of the financial system, then it should be stopped. However, simple business credit is not likely to warrant this kind of attention, unlike the new, risky financial products that banks are dabbling in.

“We believe only a watered-down version of this legislation can pass,” said Jaret Seiberg, policy analyst at investment research firm Concept Capital. If the business lobby has its way, that is exactly what is going to happen, to the detriment of consumers and the strength of the financial system.

Bailed Out Banks Already Coming Up With New Risky Financial Products

One of the problems with delaying implementation of the various regulatory reforms that are being proposed is that financial services companies are given ample time to get back to their old tricks. For instance, as executive compensation reforms stall in the Senate, Wall Street pay is heading back to pre-crisis levels.

And the same holds true in terms of consumer protection. House Financial Services Committee Chairman Barney Frank (D-MA) has had to push back work on legislation creating a new Consumer Financial Protection Agency (CFPA), thanks to Republican and industry intransigence. And as BusinessWeek reported, “already some of the world’s biggest banks are peddling a new generation of dicey products to corporations, consumers, and investors”:

In recent months such big banks as Bank of America (BAC), Citigroup (C), and JPMorgan Chase (JPM) have rolled out newfangled corporate credit lines tied to complicated and volatile derivatives. Others, including Wells Fargo (WFC) and Fifth Third (FITB), are offering payday-loan programs aimed at cash-strapped consumers. Still others are marketing new, potentially risky “structured notes” to small investors…[I]t’s another scenario that worries regulators, lawmakers, and consumer advocates: that banks once again are making dangerous loans to borrowers who can’t repay them and selling toxic investments to investors who don’t understand the risks — all of which could cause blowups in the banking sector and weigh on the economy.

All of these banks, incidentally, received TARP money. For Wells Fargo, this is especially pernicious, as it is already being investigated for intentionally pushing minorities who qualified for prime loans into subprime.

The CFPA proposal is currently under siege on multiple fronts. Republicans are teaming up with the financial services industry to coordinate anti-CFPA messaging and events over the August recess, while regulators from already existing agencies are engaged in a turf battle with Treasury Secretary Tim Geithner over the new agency’s creation. Comptroller of the Currency John Dugan — “who faces the loss of some of his powers if the plan is implemented” — has been deriding the CFPA because it “would make it more difficult and costly for large lenders to operate across the country.”

As we’ve seen, the current regulatory framework simply doesn’t provide adequate protection to consumers. And while Congress dithers, the banks are getting back to business as usual.

Financial Services Industry Working With GOP To Plan August Lobbying Offensive

Rep. Spencer Bachus (R-AL)

According to Stone, one of the key industry players — the American Financial Services Association (AFSA) — has been working with Rep. Spencer Bachus’ (R-AL) staff to coordinate anti-CFPA messaging:

The AFSA did commission outside polling to test the most-effective messages to use against the legislation and in mid-July presented the results at a Hill meeting that drew about a dozen lobbyists as well as aides to Rep. Spencer Bachus, R-Ala., the ranking member on the Financial Services Committee. Many of the same lobbyists held a follow-up meeting with Bachus’s aides on July 27, according to a lobbyist involved in the fight, who adds that Republicans are “helping to coordinate stakeholder opposition to the more onerous parts of the legislation.”

Much like lobbyist-run groups Americans for Prosperity and FreedomWorks are “pursuing an aggressive strategy to create an image of mass public opposition to health care and clean energy reform,” the financial services industry is trying to whip up public dissent against the CFPA.

Super-lobbyist Kurt Pfotenhauer, the former top lobbyist for right-wing corporate polluter Koch Industries and the current CEO and top lobbyist of the American Land Title Association, said that “a lot of groups are planning grassroots activities during the recess because you often win or lose big legislative issues in August.” AFSA is reportedly “hitting up many trade groups for donations of $15,000 apiece for the coordinated lobbying effort.”

And just like in the health care debate, the lobbyists are being cheered on by the GOP. Bachus, for his part, has raised almost $4 million in his career from the finance, insurance, and real estate sector, far outstripping what he’s raised from any other industry.

The financial services lobby is counting on the public buying the argument that the new agency will provide only an onerous new layer of regulation or that banking regulation and consumer protection are in a holy alliance that should not be broken apart. Neither of these arguments hold much water though, and pale in comparison to the necessity of giving consumers some voice in a regulatory regime that focuses almost exclusively on whether banks are viable, even if that viability is due to ripping off consumers.

Comptroller Of The Currency: Our Consumer Protection System ‘Works Fine’

There’s a bit of a turf war brewing between the various federal regulators regarding the Obama administration’s plan for reworking the nation’s regulatory structure. In particular, the administration’s proposal for creating a new Consumer Financial Protection Agency (CFPA) has drawn the ire of the existing regulators, including Federal Reserve Chairman Ben Bernanke. Yesterday, Bernanke joined Comptroller of the Currency John Dugan before the House Financial Services committee, where both made their opposition to the new agency known.

In his testimony before the committee, Dugan explained that doesn’t approve of the CFPA because it will not restrict states from providing additional consumer protection (on top of federal regulation), and because he wants enforcement mechanisms to remain with existing bank regulators. Shortly after the hearing, he appeared on CNBC, where he said that the current system of consumer protection “works fine”:

In terms of the agencies’ authority, we have a system that works fine in terms of examination and enforcement of consumer protection for banks.

Watch it:

In one sentence, Dugan managed to sum up the entire problem with our current regulatory regime and the attitude of the regulators who run it. Sure, maybe the system “works fine” for banks, since no regulator stops them from highly-profitable predatory lending. But the system surely does not work for consumers.

Right now, consumer protection responsibilities are scattered amongst the various regulators, and is the primary concern for none. The Fed, for instance, didn’t rein in predatory lending in the mortgage industry, even though it was granted such authority in 1994. Yesterday, the Fed proposed new consumer protection guidelines, but is there any reason to think it will be any more diligent in enforcing them?

The Obama administration has proposed taking all consumer protection responsibilities from the existing regulators and consolidating them in one new agency, so that consumers are not consistently an afterthought. But the existing regulators are not pleased with losing some authorities. As Treasury Secretary Tim Geithner said, the regulators are trying to “defend the traditional prerogatives of their agencies.” “I think, frankly, all arguments should be viewed through that prism,” he added.

As the New York Times pointed out, these squabbles between Geithner and the regulators “left some lawmakers baffled, and played into the hands of industry lobbyists who are attempting to defeat major provisions of the plan and are skilled in playing regulators and lawmakers against each other.” House Financial Services Chairman Barney Frank (D-MA) has already pushed back work on the CFPA until after Congress’ August recess, and these regulatory food fights are only going to slow the process further.