Tag Archives: Consumer Financial Protection Bureau

CFPB Accountability

Before you fall for the line being promoted by Senator Dean Heller (R-NV) and other GOP cohorts about the Consumer Financial Protection Bureau being “unaccountable,” READ THIS from the Department of the Treasury.

Here’s a teaser: “First, the Financial Stability Oversight Council can review, and even reject, the CFPB’s regulations.  No other federal banking regulator is subject to this limitation.  Congress may also overturn any CFPB regulation through legislation if it disagrees with the CFPB’s judgment.” (emphasis added)

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Filed under financial regulation, Heller

Housing And Heller: The Good Old Days

** From the department of No Surprises:  Flippers Played A Big Role In The Collapse of the Las Vegas (Nevada) Housing Market. [LVSun] The study from the New York FED, released on December 5, 2011, ends with a remarkable note:  “Effective regulation of speculative borrowing, like what is being attempted in China today, may be needed to prevent this kind of crisis from recurring.”  Also consider for a moment that a person with a 20% down, 30 year, fixed rate mortgage (who hasn’t “refi’ed” the property) realistically isn’t as affected by declines in home value assessments — so those “creative” adjustable rate “pick a payment” or whatever home mortgage originators thought were such a wonderful “consumer product” turned out to be the little ticking time bombs several Cassandras said they were.

**  Meanwhile back in Senator Heller’s (R-NV) office there’s a rationale for refusing to bring the confirmation of Richard Cordray to head the Consumer Financial Protection Bureau up for a vote in the Senate:

“I support strong and effective consumer protection. As the only member of the Nevada delegation to vote against the Wall Street bailout, I believe that the banking industry must be held accountable for their actions. However, this agency, which was created by Dodd-Frank, does not have the measure of accountability or transparency necessary to make it responsive to Congress or the American people. Instead, it empowers a new Washington czar and bureaucrats with unprecedented power and control over our nation’s entrepreneurs and small businesses, the same people we need to hire more workers. […]

In November, Senator Heller joined forty-four other Senators in a letter to President Obama outlining improvements that should be made in the structure of the Consumer Financial Protection Bureau.

The Senators cited concerns that the CFPB in its current form could affect what financial products Americans buy and how much they will pay for them, including securing financing for a car, a mortgage or household goods.”

Where to begin?  First, the Dodd Frank Act deals with banks and investment housesnot start up entrepreneurs and small businesses — unless, of course the small business happens to be a boutique hedge fund, dealers in credit default swaps, or specialty investment firms.

Secondly, Senator Heller says he would like for banks to be accountable — but he apparently doesn’t want anyone or any independent agency to actually be in charge of holding them accountable.   Nice touch, by the way, tossing the infamous “czar” word into the mix.

Third, about those so-called small businesses — no one should be fooled any longer about who creates jobs.  The people who create jobs are predominantly people who own small businesses, a category which generally doesn’t include Wells Fargo, Bank of America, JPMorganChase, USBank, RegionsBank, and Goldman Sachs.

Fourth, the “structural change” the Republicans want is to have a committee of bankers overseeing — (you guessed it) — the banks.  It’s the old self-regulation argument from the heady days of deregulation and the demise of Glass-Steagall dusted off and presented as a legitimate suggestion for holding the banks accountable.  We should probably remind ourselves that we’ve tried bank deregulation and the result was the collapse of Bear Sterns, the end of Lehman Brothers, the bankruptcy of IndyMac, the collapse of money market behemoth Reserve Primary, and the disaster that was Washington Mutual.

Fifth, Yes Senator Heller, the new CFPB will have an impact on home mortgages (oversight of those fancy-dancy-dodgy products that originators churned out to be sucked into the Wall Street  securitization machines), and on automobile loans (also sucked into the securitization money machinery), and consumer credit, as in predatory lending practices, will now get more scrutiny.

Unfortunately, for all the throw-away phrases like, “I support strong and effective consumer protection,” and “I believe that the banking industry must be held accountable for their actions,” coming from Senator Heller, the bottom line is that he seems to very much want to pretend the collapse of our financial sector in 2007 and 2008 didn’t really happen — it’s all good now — we can go back to “business as usual.”

Finally, Senator Heller often reminds us that he was the only member of the Nevada delegation to vote against the TARP program, as if this were something of which he’s proud.

With this vote, Senator Heller joined the “Let’em Go Bankrupt” crowd of financial naive, politically oriented, and radical deregulation-ists, who believed that it would be better for the U.S. banking system to collapse in a heap rather than guarantee the solvency of American investment institutions.

In case Senator Heller has forgotten what was going on in the Fall of 2008,  (1) credit started freezing up as mortgage holders began to default at a rate unforeseen by the equities modeling, (2) the default rates threatened to increase such that the “Supers” or upper portions of CDOs were jeopardized, (3) no one could determine the value of the asset based securities, (4) because no one could tell how much the securities were worth investors began to unload them (more politely termed ‘reducing their exposure,’), (5) rating agencies (which had slathered AAA ratings on CDOs  like jam on toast) reduced their ratings, (6) with the reduction in ratings came other sell offs from institutional investors, and the ratings reductions triggered increases in collateral demands on AIG.  But, wait…we aren’t finished yet.

(7) Bankers began demanding more collateral to lend to one another. (8) As collateral went out the door banks found they didn’t have enough assets to cover “their positions,” (or other portions of their corporate anatomies). (9) Overnight funds, on which investment banks depend, dried up. (10) AIG, which had insured various and sundry deals, faced collateral demands it could not meet, and at one point had to get the New York Insurance Commissioner to agree to allow the insurance giant to tap customer policies as collateral.   And, we’re still not finished…

(11) The run that began with hedge funds at Bear Sterns, started infecting other institutions — Fannie and Freddie were all but ‘nationalized’ in the Fall of 2008, Lehman Brothers was the next domino to fall, to avoid Lehman’s fate  Merrill Lynch went into full tilt Marriage Mode and found itself wedded to Bank of America.  (12) Eventually, investment giants, such as Goldman Sachs, needed more “liquidity,” (read: cash) and transformed into bank holding companies.  It, and others, needed to get to the Fed’s Discount window.  (13) People really got nervous when Reserve Primary “Broke The Buck,” meaning its share price dropped below a dollar.  This last item on this slightly jumbled list is important.

Reserve Primary’s problems on September 17, 2008, [USAT] meant that The Problem wasn’t just on Wall Street, the tsunami was headed straight down Main Street.  People were beginning to talk about investing solely in Treasury based funds.  What began as a run on two hedge funds at Bear Sterns, became an investment bank run, threatened to wipe out one of the largest insurance companies in the process, and had now turned into a run on the money market funds.  What’s next after money markets?

Little wonder Secretary of the Treasury Henry Paulson was on one knee before then House Speaker Nancy Pelosi (D-CA) begging her to convince her otherwise skeptical fellow Democrats to PLEASE enact the TARP bill after the first attempt failed on September 29, 2008.  On October 3, 2008 H.R. 1424 passed the House on a 263-171 vote.   Then Representative Dean Heller (R-NV2) voted against the Bush Administration’s TARP program.    We might ask those 171 now — What was next after the money market funds collapsed?

Troubled as the Troubled Assets Relief Plan was, it was far better than learning the hard way what the obvious answer to Who’s Next? would be.  [DB March 22, 2011]

In short, Senator Heller appears to be proudly touting his Vote In Favor Of Allowing Commercial And Retail Banking To Collapse; had we experienced a repetition of 1929, because that was what the Bush Administration, the Federal Reserve, the FSLIC, the FDIC, and the bankers thought we were looking at, would Senator Heller be announcing, “I was proud to vote in favor of a full bore 100% Great Depression Style collapse of the United States’ financial sector?”

Is he really telling us now that “It’s All Good Now,” we can revert to those Good Old Days in which the banks were perfectly free from “onerous regulations” to provide funds for mortgages, mortgages that only needed a flipper with a pen to qualify, mortgages sold by originators who were more interested in selling the mortgages into the secondary markets than they were in securing a stable real estate environment, and mortgages which Creative people on Wall Street could convert into chips in the Wall Street Casino?  After all — deregulation worked so well …

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Filed under Heller, housing, Nevada economy

Sharks in the Financial Waters: The Big Banks Play With Predatory Lending Practices?

Nothing will send the Beacon’s beam flashing faster than predatory lending practices.  NRS Chapter 604A is supposed to protect Nevadans from predatory lending in the state.  However, the statutes don’t prevent the issuance of high interest loans, defined by the state as a loan which has an annual interest rate above 40%.  Failing the outright proscription of these loans, the state (and the federal government for that matter) ought to be taking a harder look at predatory lending practices.

One reason for additional scrutiny of PayDay lending is that customers can get “churned” into the system.  Churning happens when the borrower can pay off the principal, but the interest charges are such that the individual needs yet another loan to make it to the next payday.  Such “churning” has drawn attention when practiced by Street Corner operations, but now we find some of the major banking institutions engaging in the process.

The Center for Responsible Lending, bete noir of the American Bankers Association, reports (pdf) that at least four major banking institutions are now engaging in making payday loans directly to their customers.  The bank lends to the customer by depositing the amount directly into the customer’s checking account — and then makes withdrawals just as directly from the account — even if this causes a negative balance.  The full CRL report (pdf) explains:

“This “debt treadmill” is created by the structure of the loan itself. Repayment in full from a single paycheck or benefits check is a tall order for a household already living close to the financial edge. Borrowers routinely find themselves unable to repay the loan in full and the fee plus meet their monthly expenses; so shortly after repaying the previous loan, they require another loan. Ultimately, this series of so-called “emergency, short-term” loans is essentially long-term debt carrying annual interest rates averaging 417 percent and leading to a host of negative financial outcomes for borrowers.”

And the treadmill continues when a customer approaches on of the major banks which offer “deposit advance programs”:

“The bank deposits the loan amount directly into the customer’s account and then repays itself the loan amount, plus the fee, directly from the customer’s next incoming direct deposit. If direct deposits are not sufficient to repay the loan within 35 days, the bank repays itself anyway, even if the repayment overdraws the consumer’s account, triggering more fees. These loans are structured just like loans from payday shops, where borrowers typically are stuck in multiple payday loans per year—usually in quick succession and with a new fee each time, because they cannot afford to repay the loan in full, plus the fee, and meet ongoing expenses. So shortly after repaying the previous loan, they require another loan.”

The process described above is a perfect example of “churning.”  The Chicago Sun Times notes that the bankers are attempting to put some daylight between themselves and the street corner payday lending operations, but that the result for the consumer can be essentially the same. The Sun Times reports that Wells Fargo, US Bank, and the Fifth Third Bank are all “offering” payday lending in some form.  MSN Money adds that Regions Financial has entered the lists as well.

When the Office of the Comptroller of the Currency issued guidance for “Deposit Related Consumer Credit Products” in June 2011, [Treas. pdf]  the ABA pushed back. Its August 4, 2011 letter to the OCC complained that the proposed regulations were “onerous,” one of the standard complaints in the bankers’ lexicon of laments, and that they would cause “confusion,” another common complaint in that well thumbed catalog.  The bankers wrote: “In reality, direct deposit advance programs enable customers to live within their means by permitting them to manage the timing of the receipt of those means.”   Managing the timing is one thing, managing the process is another, because in the next statement the bankers admit that what they are really doing is the same thing as the Street Corner payday lenders:

Customers understand that deposit advance programs are the functional equivalent of receiving an advance on income or other regular deposit. Thus, when the recurring deposit actually occurs, the balance not previously advanced is credited to the account. In other words, the normal, recurring payment is bifurcated into an accelerated portion (the advance), and the remaining balance received on schedule less the fee for taking the advance. When a person goes to his or her employer for an advance on their salary or commission payout, the obliging employer naturally pays only the balance (regular periodic earnings less the advance) on the scheduled pay day. The bank that offers a deposit advance program is behaving similarly, but as a third party, the bank charges a fee for the accommodation.” [ABA pdf] (emphasis added)

In short, the bank will “accommodate” the customer for a fee, just like the boys on the corner at the strip mall.

The Center for Responsible Lending has some pertinent recommendations which might serve to prevent this latest rapacious foray from the banks:

(1) Let the regulators regulate.  If the Federal Regulators were once willing to prevent banks from combining with the Street Corner Payday lending shops as they once were, then the regulators should go to the next logical step and prevent the banks from entering the payday lending business, or as they are wont to call it the “deposit advance” business.

(2) If the aforementioned step isn’t in the offing, then at least have a moratorium on bank “advance deposit” programs until information from the banks is (a) made public and (b) collated into manageable data for the purpose of analyzing the ramifications of these programs.

(3) Allow customers to repay the loans (deposit advances) in installments, and improve the underwriting standards such that a customer can reasonably expect to repay the loan without having to take out yet another deposit advance.

The Consumer Financial Protection Bureau, which the bankers and their allies in Congress would very much like to (a) repeal, (b) leave unfunded, and (c) emasculate in any way possible, will be the agency charged with supervising payday lending.  Thus:

(4) The Consumer Financial Protection Bureau should move as quickly as possible to collect data on the extent and the impact of payday lending (both by the Street Corner operations AND the major banks), and to restrict as much as possible the negative impact these practices have on working families.

Lest the Bankers believe that only organizations like the Center for Responsible Lending are posing questions about the impact of their Deposit Advance “products,” the Pew Center has weighed in as well, calling on the OCC to require the disclosure of “the costs of deposit advance accurately, by expressing the finance charge as an annual percentage rate calculated under the Truth in Lending Act, and warning borrowers about the likelihood of renewal.”  [Pew pdf]*

Banks may also want to remind themselves of what the FDIC told them back in 2005:

“Most payday loans have well-defined weaknesses that jeopardize the liquidation of the debt. Weaknesses include limited or no analysis of repayment capacity and the unsecured nature of the credit. In addition, payday loan portfolios are characterized by a marked proportion of obligors whose paying capacity is questionable. As a result of these weaknesses, payday loan portfolios should be classified Substandard.”

We, each and every one of us, may also want to remind ourselves what happens when soaring levels of household indebtedness are combined with the creativity in the financial markets and the capacity of banks to slather risk — subprime, substandard, or whatever we wish to call it — in order to secure rosy earnings reports.    If a category is “substandard” for a third party, it is “substandard” if kept on the banks books as well.

It really is time to stop this loop.

*Notes: OCC commentary CRL, CFA, NCLC on 26 Federal Register 33409 (June 8, 2011) pdf.  Pew Charitable Trusts, OCC 2011-0012 “Guidance on Deposit Related Consumer Credit Products,” pdf.  FDIC (2005) “Guidance for Pay Day Lending.”

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