Fresh Evidence of the Political Power of Money

The proverb says that “money talks,” and it is widely assumed that financial companies make campaign contributions and spend money on lobbying in the expectation of exerting influence. But are their expectations fulfilled?

Building on previous studies of the corrupting power of money, a new research paper by Maria M. Correia, an assistant professor of accounting at the London Business School, finds a strong correlation between a financial company’s political expenditures and the frequency of accounting fraud enforcement actions taken against that company by the Securities and Exchange Commission (SEC).

Correia looked at some 4,000 cases in which companies had to correct their financial statements (an event that often triggers an SEC investigation) between 1996 and 2006. Her study showed that politically connected firms, as reflected by their PAC contributions and lobbying expenditures, were significantly less likely to be singled out for enforcement actions, and, when prosecuted, faced lower penalties.

Companies that made a point of contributing to elected officials with potential influence over the SEC (such as the members or, better still, the chairpersons of congressional oversight committees) were even less likely to face an enforcement action or penalty. An extra $1 million spent in PAC contributions over the previous five years correlated with a sharp reduction in the probability of an enforcement action, from 8.58% to 3.43%.

In one of her most remarkable conclusions, Correa found that a $100,000 increase in PAC contributions over a five-year period was associated with an 11% decrease in monetary penalties imposed by the SEC. The average penalty levied by the SEC during the time studied by Correia was slightly more than $20 million. By spending an additional $100,000 in contributions, then, a company could save a few million dollars – a remarkable return on investment.

Judging by their actions, financial firms appear to think political spending is worthwhile. In all, during the current election cycle, Wall Street banks and financial interests have spent more than $800 million on lobbying and campaign contributions, according to a recent AFR analysis. That works out to about $1.5 million a day.

From Correia’s research, we are increasingly confident that the industry’s money does indeed buy it influence, and that its influence can improve the corporate bottom line. We also know, more surely than ever, that the rest of us have a large stake in continuing to push for limits on the role of money in politics, and in keeping close watch over the triangle of relationships involving Congress, the regulators, and the regulated.

 – Alec Lee

See Big Connection Between Campaign Contributions and Lack of SEC Prosecutions

CFPB Brings Action Against ACE Cash Express for Bullying Borrowers Into Borrowing Again

The CFPB has announced an action against ACE Cash Express for pushing borrowers into cycles of debt, and using harassment and false threats of criminal prosecution to do so. ACE is one of the largest payday lenders in the U.S., marketing loans and related services both online and through 1,500 retail storefronts in 36 states and the District of Columbia. Specifically, the CFPB found that ACE was guilty of:

  • Threatening to sue or prosecute consumers who did not make payments, using legal jargon even though the company did not actually sue for non-payment of debts.
  • Threatening to charge extra fees and report consumers to credit reporting agencies, even though as a matter of corporate policy ACE debt collectors could not do either of those things.
  • Harassing consumers with collection calls in an abusive manner, and calling consumers’ employers and relatives to share details about their debts.

The harassing coercion tactics used by ACE resulted in cash-strapped consumers being bullied into cycles of debt.  A striking graphic uncovered by the CFPB in the investigation, and made public, makes clear that this was deliberate company policy.  The graphic, which was a part of ACE’s training manual, puts application for a new short term loan as the step after collection efforts on the previous loan.

ACE Debt Cycle

With its outrageous conduct (and its training manual), ACE Cash Express provides a fresh reminder of why the CFPB needs to write strong rules to end payday lending abuses.

-  Rebecca Thiess

The CFPB at Three: A Child Prodigy

(By Ed Mierzwinski, USPIRG) The Consumer Financial Protection Bureau (CFPB) turned just three years old Monday, July 21st, but when you look at its massive and compelling body of work, you must wonder: Are watchdog years like plain old dog years? Is the CFPB now a full-sized, 21-year-old adult?

The answer is no, not yet. The CFPB is still growing and developing and adding programs and projects. The CFPB is, however, at three years old, certainly a child prodigy.

The CFPB was established as an integral part of the Wall Street Reform and Consumer Protection Act enacted in 2010 to fix the mess created when banks ran amok, resulting in the Great Recession that began with the September 2008 economic collapse.

It is the nation’s first financial agency with just one job, protecting consumers. It’s also the first federal agency with authority over the full financial marketplace, so consumers are protected whether they shop at a bank, non-bank mortgage company or payday lender, or are harmed by credit bureau mistakes or debt collector abuses. It even has special offices to protect older Americans, servicemembers (and veterans) and students.

In poll after poll (new Lake poll for PIRG-backed Americans for Financial Reform), the American people overwhelmingly support the CFPB and ongoing Wall Street oversight. Nevertheless, the CFPB remains subject to withering attacks from the financial industry whose tricks and traps led our economy into collapse.

After you take a look at some of its successes and some of its work in progress, we think you’ll agree: the idea of the CFPB needs no defense, only more defenders.

The CFPB is protecting credit card customers: It has ordered five of the nation’s six biggest credit card companies — Capital One, Discover, American Express, Bank of America and JP Morgan Chase — to return a total of $1.5 billion dollars directly to the consumers they ripped off with fraudulently-marketed, junky add-on products. And in June, it ordered GE Capital (now Synchrony) to refund more than $225 million for illegal and discriminatory credit card practices (CFPB Enforcement blog page).

The CFPB is helping with complaints: The CFPB has established a Public Consumer Complaint Databasethat is already the nation’s largest collection of financial complaints, with more than 400,000 complaints about banks, credit bureaus, credit cards, debt collectors, private student lenders and mortgage companies received so far. Just last week, the CFPB proposed(and seeks comments for 30 days) an important enhancement to the database: By posting narrative contextual details of consumer stories, it will be easier for bank examiners, researchers, other consumers and even financial firms themselves to determine whether bad practices are isolated or common.

The CFPB is protecting students from unfair practices: Earlier this year, the CFPB filed a lawsuit against the for-profit college ITT Educational Services, arguing that they engaged in predatory student lending practices that push students into high-cost private student loans that inevitably will default. The CFPB has also investigated the growing use of high-fee debit cards to disburse student loans, and issued “Know Before You Owe” tools for student consumers.

The CFPB is helping stop fraud against servicemembers, veterans and their families:The CFPB’s Office of Servicemember Affairs targets financial frauds and scams aimed at military families and veterans. Sadly, it’s a big problem. In November, the CFPB obtained $14 million in servicemember refunds from Cash America, a payday lender that violated the Military Lending Act.

The CFPB is reining in debt collector abuses: As a 21st century, data-driven agency, the CFPB is keenly aware that debt collection complaints have rapidly eclipsed all others in its complaint database. Consequently it is looking very closely at debt collector practices. This month, the CFPB fined payday lender Ace Cash Express $5 million and ordered it to return an additional $5 million to its customers for illegal debt collection tactics. It also filed a lawsuit against a “debt collection lawsuit mill” for using “illegal tactics to intimidate consumers into paying debts they may not owe.”

The CFPB is forcing credit bureaus to do a better job: The often-lethargic credit bureaus are responding to the recommendations in the CFPB’s comprehensive report on the industry. In particular, the so-called Big Three bureaus — Experian, Equifax and Trans Union — have agreed to share full consumer complaint files with creditors during reinvestigations, instead of merely converting the details into a 2-digit code meaning, for example, “Consumer says not my account.” Without the details, how could the creditor determine whether the consumer had a valid dispute?

The CFPB is listening to consumers: In addition to taking consumer complaints, the CFPB is urging consumers to simply tell their financial stories, good or bad (Watch videos of stories or tell your own story here). The CFPB is helping consumers with its “Ask CFPB” tool. It’s been on the road all over the country, to hear from consumers and small bankers in the communities where they live and work, from El Paso and Long Beach to Des Moines, from Boston to Itta Bena, Mississippi.

Over the next six months, the CFPB is expected to take major steps in three important areas where powerful industry forces may challenge it. But already, the House of Representatives has passed appropriations amendments designed to eliminate the CFPB’s independent funding. No other bank regulator is subject to the politicized appropriations process, for good reason. Earlier this year, theHouse passed a broader package designed to cripple the bureau.

The same lobbies that supported rolling back the CFPB’s independence are expected to oppose its pending efforts to protect consumers.

Soon, the CFPB is expected to propose rules regulating the exploding prepaid card market. Credit cards are heavily regulated, with debit cards, payroll cards and gift cards somewhat regulated, but the rapidly-growing general purpose prepaid card market is generally not regulated at all. The CFPB is also expected to propose rules governing high-cost, short-term payday loans that some, but not all, states have regulated. Finally, the CFPB was tasked by Congress to investigate whether small-print binding arbitration clauses in “take-it-or-leave-it” financial contracts encourage companies to ignore the law, because their customers cannot take them to court. If it so finds, the CFPB is authorized to ban or regulate the clauses.

Each of these projects threatens one or more powerful special interests that have long challenged the CFPB’s activities, and they are expected to escalate their attacks if the CFPB’s reforms go forward in a pro-consumer way. Consumers who depend on the CFPB to make markets work fairly, for both consumers and good actors, will need to step up and support the CFPB. After all, the idea of the CFPB needs no defense, only more defenders.

 

Originally published on US PIRG.

SunTrust Systematically Ignored Loan Modification Appeals, TARP Watchdog Finds

“SunTrust so bungled its administration of the program that many homeowners would have been exponentially better off having never applied through the bank in the first place.”

So said the Special Inspector General for TARP (SIGTARP), Christy Romero, regarding SunTrust Mortgage Inc.’s handling of dollars received through the Troubled Asset Relief Program (TARP) to go toward helping struggling homeowners.

Earlier this month, SIGTARP announced—along with the Department of Justice, the Federal Housing Finance Agency’s IG, the U.S. Attorney’s Office for the Western District of Virginia, and the U.S. Postal Inspection Service—a prosecution agreement resolving a criminal investigation into SunTrust’s administration of the Home Affordable Modification Program (HAMP). HAMP was created in 2008 as part of the Troubled Asset Relief Program (TARP), in order to help eligible homeowners with loan modifications on their home mortgage debt.

In documents that were filed along with this case, it was revealed that SunTrust, which received $4.85 billion in federal taxpayer funds through TARP, both misled mortgage servicing customers who sought mortgage relief through HAMP and failed to process HAMP applications. The company was so negligent that they put piles of unopened homeowners’ applications in a room, the floor of which actually buckled under the weight of unopened document packages.  Their practices meant that many homeowners were improperly foreclosed upon, as documents and paperwork were lost and applications were completely ignored.

The company has agreed to pay $320 million to resolve the criminal investigation into its HAMP program. Despite the egregious nature of what they did, it is worth noting that this is less than one half of one percent of its servicing portfolio (as of December 2013).Of the money SunTrust has agreed to pay:

  • $179 million will go toward restitution for borrowers to compensate for damage done by the company’s mismanagement. If more than $179 million is found to be needed, the bank has agreed to guarantee an additional $95 million for restitution on top of that.
  • $16 million will go toward forfeiture, to be available for law enforcement agencies working on waste, fraud, and abuse matters related to TARP.
  • $20 million will go to establish a fund that will be distributed to organizations that provide counseling and other services to distressed homeowners.

SunTrust is also required to implement corrective measures to prevent problems like the ones that led to this investigation, including increasing their loss mitigation staff, monitoring their mortgage modification process, and providing semi-annual reports on their compliance with this agreement.

- – Rebecca Thiess

 

The Outrageous Campaign Against “Operation Choke Point”

The job of government, some people say, is to protect life and property and maintain the rule of law, period. But even that much government may be too much for the opponents of a Justice Department initiative known as Operation Choke Point.

The idea behind Operation Choke Point is simple: stop banks and third-party payment processors from abetting fraud. Financial institutions have long been required to watch out for (and report) evidence of criminal activity. Yet they have long been tempted to look the other way, since criminals can also be highly profitable customers. (The $8.9 billion fine against BNP Paribas this week for transferring money to Sudan and other blacklisted countries is just the latest case in point.)

In recent years, scammers of many sorts have developed ways of systematically extracting money from people’s bank accounts. In doing so, they have benefited from the rise of online commerce and automatic debiting, and also, in too many cases, from the complicity of banks, which have sometimes lent a hand even when the warning signs were staring them in the face.

In April, federal prosecutors announced a settlement with Four Oaks Bank & Trust of North Carolina. Four Oaks and a Texas-based payments company had processed roughly $2.4 billion in transactions benefiting illegal payday lenders, money laundering of Internet gambling operations and, in one case, a thinly disguised online Ponzi scheme.

Four Oaks employees suspected something was amiss. One tipoff: charge reversal rates of 30 percent to 70 percent, compared to what regulators say is a normal rate of 1.5 percent. Despite complaints from attorneys general and other warning signals, however, the bank did nothing except go on taking its cut. “I’m not sure ‘don’t ask, don’t tell’ is going to be a reasonable defense,” one bank manager commented in a cautionary email that colleagues chose to ignore.

Mass-market consumer fraud, in all its forms, is a huge law enforcement problem, costing people tens of billions of dollars a year, by the FBI’s estimate. Older Americans, a prime target, are bilked out of $2.9 billion a year, according to a study by MetLife. A few weeks ago, a payment processor agreed to surrender its claim to $1.1 million in earnings from what the Federal Trade Commission said was the company’s knowing alliance with a bogus credit-card interest rate reduction service that had defrauded tens of thousands of consumers out of more than $10 million in all.

So who would object to a crackdown on this sort of scam? Who, that is, other than the scammers who are being cracked down on?

Well, the objectors turn out to be surprisingly numerous, and surprisingly righteous. Some of them, moreover, hold seats in Congress. Rep. Blaine Luetkemeyer, R-Mo., for one, just last week introducedlegislation to, in his words, “stop these backdoor efforts by government bureaucrats to blackmail and threaten businesses simply because they morally object to entire sectors of our economy.”

That is the theme of the anti-Choke Point crusaders, whose congressional spokespeople also include Sen. David Vitter, R-La., and Rep. Darrell Issa, R-Calif., chairman of the House Oversight and Government Reform Committee. Issa’s committee, in a recent report, claimed that Operation Choke Point had “forced banks to terminate relationships with a wide variety of entirely lawful and legitimate merchants.”

The committee could not, however, point to any real-life example of a bank being told to behave this way. The best evidence it could muster was a 2011 guidance memo in which the Federal Deposit Insurance Corporation (making no reference to Operation Choke Point) identified 30 lines of business, including get-rich products, drug paraphernalia and escort services, with a high potential for fraud. The point of the memo, though, was simply to highlight areas where banks and payment companies should be looking for signs of trouble – for, say, an unusually “high volume of consumer complaints” or “a large number of returns or charge backs.”

How, then, to explain the protest and indignation? One obvious factor is the political power of the financial industry. Many bankers work hard to avoid the legal and reputational problems that come from doing business with lawbreakers. Others, though, seem to angrily reject the notion that they have a responsibility to exercise due diligence; and, as often happens in Washington, the banking establishment has decided to stick up for its worst elements rather than its best. “When you become a banker, no one issues you a badge, nor are you fitted for a judicial robe,” American Bankers Association CEO Frank Keating argued in a recent Wall Street Journal op ed, summing up the “we can’t be bothered” attitude of some of his constituents and allies.

In addition to the banks and payment processers and their respective trade associations, the forces of opposition appear to include online gamblers and payday lenders. The payday lending industry has come under mounting criticism for a business model that depends on getting borrowers stuck in triple-digit-interest debt for months on end. Twenty-two states have banned or sharply limited such loans. Some lenders have responded by moving online or engaging in other subterfuges, and a crackdown on the processing of illegal payments clearly poses a threat to their ability to make loans that violate the law. (And even licensed payday lenders and money transmitters have sometimes been unable to get bank accounts; but that’s an old industry complaint – one that long predates the 2013 launch of Operation Choke Point.)

Undoubtedly, there is money to be made – campaign money – by legislators who decide to join the attack. And if some of them seem to have let their rhetoric get out of control, perhaps that can be attributed to a combination of reflexive government-bashing and the need to find moral cover for a position that would otherwise sound a lot like shilling for an especially smarmy collection of special interests.

Fortunately, this strange cause has not gained traction in the Senate, and the Justice Department appears to be standing behind the program. Two banks, Zions and PNC, have disclosed that they are currently under investigation for facilitating fraud. The Department has announced similar investigations into more than 10 additional (but as yet unnamed) banks and payment processing companies. Last week, Attorney General Eric Holder issued a statement vowing to “enforce the law against both the fraudsters who prey on consumers and the financial institutions who choose to allow these crimes to occur.”

As the Operation continues, and word gets out, most people will probably respond well to the phenomenon of Uncle Sam challenging (rather than enabling) the unlawful conduct of banks. Perhaps, in time, we will hear fewer lawmakers railing against what ought to be viewed as a normal and uncontroversial exercise of law enforcement.

 – Jim Lardner
Originally published on USNews.com

Cleaning Up the Credit Card Industry

This week marks the five-year anniversary of the passage of the CARD Act, a piece of legislation that cleaned up some of the worst tricks and traps harming consumers in the credit card marketplace. The purpose of the CARD Act was two-fold: to prohibit certain unfair and abusive practices and to increase the transparency of rates and fees associated with credit cards. Congress passed the CARD Act — also often referred to as the Credit Cardholders Bill of Rights — in May 2009 with broad bipartisan support in both chambers of Congress, but after a hard fight.

Credit card lending had always been the most profitable form of consumer lending, according to annual reports by the Federal Reserve Board. But in the 10 years leading to the CARD Act, the largest card companies ratcheted the thumbscrews down on consumers, aided by lax regulators and by a series of court decisions preempting stronger state consumer laws.

The card companies did a number of things. First, they increased penalties on late pays. Then they tricked more consumers into paying late by using unfair practices, such as changing due dates randomly, shortening the period between when a bill was mailed and due, and even charging late payments when a bill arrived on a Monday, but its due date was the impossible Sunday before it. They then said that higher late fee penalties weren’t enough; they imposed penalty interest rates as high as 36 percent APR on bills received as little as an hour late. This wasn’t enough. They invented “universal default”: imposing penalty rates on consumers who’d never been late, but whose credit score had dropped.

Basically, the widespread use of penalty interest rates meant that consumers often experienced a gap between the stated interest rate of a credit card at the outset and the actual cost of the card over time. Much of this was due to these “penalty” interest rates — those triggered by late payments or by going over one’s credit limit. And when penalty rates were applied, they could be applied to both new purchases and existing balances, adding significantly to the cost, and meaning that the rate increased retroactively on purchases already made.

In short, pricing was opaque and the fine print that came with cards was difficult to decipher — often leading to costs much higher than those card users anticipated.

Thanks to the CARD Act, tricks like these have significantly declined. Now, interest rates provided at the outset of receiving a credit card more accurately reflect the actual cost of the credit card. The legislation restricted the amount of upfront fees card issuers can charge, limited “back-end” penalty fees when late payments are made or credit limits exceeded, and perhaps most importantly, narrowed circumstances when issuers could raise interest rates, especially on previous balances. The act also prohibited issuers from extending credit to consumers without determining an ability to repay, determined that late fees and other penalties must be “reasonable and proportional” to the violation of the account terms, and imposed new rules to protect young consumers.

Unsurprisingly, and in spite of industry arguments during the fight over the legislation that it would only shift or increase costs for consumers, changes to the credit card marketplace have saved card users money. A lot of money. The Consumer Financial Protection Bureau found in its report on the CARD Act, which reviewed impacts of the legislation, that provisions limiting penalty fees have saved consumers $4 billion annually. Additionally, the report found that the overall cost of credit has fallen by roughly 2 percentage points. An academic study on the CARD Act found that the legislation’s limits on fees reduced borrowing costs to consumers overall by 1.7 percent a year, and had a still more dramatic impact for borrowers with lower credit scores; people with credit scores below 660 saw their borrowing costs go down by 5.5 percent. All in all, this study found an even larger impact than the CFPB report, calculating that fee reductions as a result of the CARD Act have saved consumers a whopping $12.6 billion per year.

Five years after passage of the CARD Act, the CFPB is continuing to take needed action to protect consumers from abuses that continue in this market. First, the agency is doing the important and necessary job of enforcing the CARD Act. In October 2012, the bureau took action against three American Express subsidiaries for multiple violations, including charging late fees that were unlawful under the CARD Act. Second, the agency is using its authority to stop companies from using deceptive tactics when dealing with consumers, in particular from selling abusive add-on products, such as for payment protection, which frequently provide very little, if any, actual benefit.

In April 2014 the agency reached a settlement with Bank of America around its findings that the bank misled customers regarding what they would receive if they purchased payment protection products, as well as charging them for those products without their consent. The CFPB investigation found that some consumers were actually being enrolled in payment protection plans when they were being told they were simply consenting to receive more information about the product. These payment protection products generated hundreds of millions in revenue for the bank, with many customers paying $12.99 per month for services they either thought were more robust than they actually were, or did not know they had signed up for at all. The bureau ordered the bank to pay $727 million to nearly 2 million consumers who had been subject to illegal practices.

In total, the CFPB’s actions — since it fully opened its doors only three years ago — to curb illegal and deceptive credit card practices have resulted in about $1.5 billion in restitution for roughly 10 million consumers, along with around $100 million in civil penalties paid to the CFPB. In addition, the bureau has changed practices in the marketplace. Whereas most big banks used to sell add on products, a number of them have changed their practices, thanks to the CFPB’s enforcement actions. Discover and Capitol One, for instance, were ordered by the bureau to stop their deceptive marketing practices for these products.

The CFPB is doing good work in the wake of the passage of the CARD Act to increase fairness and transparency in the credit card marketplace, but the job is not finished. Even with the CARD Act in place, it remains difficult for consumers to understand the costs of, and risks associated with, specific credit card choices, and to compare cards to each other. As Sen. Elizabeth Warren, D-Mass., has said, “our next challenges will be about further clarifying price and risk and making it easier for consumers to make direct product comparisons.” Along with further improvements in the credit card market, there is important work to be done to make sure prepaid and debit cards develop as safe and convenient products, and are not loaded up with hidden fees or gotcha credit features.

– Rebecca Thiess

Originally published on USNews.com.

A Fresh Chance for Congress to Do Right by the CFTC

As the appropriations process moves forward this month and next, lawmakers again have a chance to properly fund the Commodity Futures Trading Commission. This is an agency whose responsibilities have far outstripped its resources, as detailed in an AFR fact sheet and charts of the agency’s workload versus budget and workload versus workforce.

The CFTC plays a crucial role in financial regulation. In the first place, it oversees the commodity derivatives markets, which help determine the price of everyday items ranging from gasoline to bread. The Dodd-Frank Act also gave the CFTC responsibility for the vast and previously unregulated financial derivatives markets, which helped crash the world economy in 2008. With its expanded mandate, the CFTC has seen an eight-fold increase in the size of the markets it is charged with overseeing. Yet the Commission has yet to receive anything close to the funding proposed by the administration or sufficient to do its job. — Marcus Stanley

 

When Salespeople Call Themselves Advisors

Saving for retirement is extra-hard these days, and not just because wages are low and millions of Americans are still struggling to make up for ground lost after the 2008 financial crisis. All too often, the difficulty is compounded by gaps in the rules for the financial professionals who provide retirement-planning advice.

As things now stand, too many of those professionals can present themselves as (and enjoy the benefits of being perceived as) advisors with your best interests in mind, yet go ahead and recommend investments that will generate more money for themand less for you.

It’s a huge problem, and the Securities and Exchange Commission and the Department of Labor are each in a position to fix important pieces of it. The SEC’s part goes back to a 1940 law which gave registered investment advisors a fiduciary duty to look out for the best interests of those they serve, while treating broker-dealers as salespeople with only a looser obligation to recommend “suitable” investments. The Labor Department entered the picture in 1974, when the Employee Retirement Income Security Act authorized it to regulate employer-sponsored retirement plans and some of the professionals who help people make decisions related to those plans.

But the rules overseen by both agencies are outdated. Over the past several decades, retail investment products have become far more complicated, and with 401(k)’s and Individual Retirement Accounts replacing the defined-benefit pensions of old, responsibility has shifted from employers onto the shoulders of workers and retirees. This combination of trends has greatly increased the power of financial advisors to influence people’s fortunes for good or ill.

Nowadays, brokers frequently act as advisors, providing “investment planning” or “retirement planning” expertise; yet the SEC continues to define and regulate them as salespeople. The Labor Department sets a stricter standard for some forms of advice, but its rules, which have not been updated in 40 years, are narrow, excluding many of the situations that matter most, such as advice given to employees about what to do with their 401(k) money when they retire or change jobs. Far too often, the record shows, financial professionals take advantage of the wiggle room between perception and regulation to promote high-commission investment products over alternatives with lower fees, better returns or fewer risks.

The Dodd-Frank Act of 2010 empowered the SEC to establish a fiduciary standard for all professionals who give investment advice. But the commission has moved slowly, and has yet to indicate when it will act, if it does. The Department of Labor, by contrast, has made the issue a priority, and now appears to be on the brink of using its authority to issue tougher rules for a broader range of circumstances than its current regulations cover.

That prospect, however, has stirred fierce resistance from broker-dealers and other elements of the financial industry seeking to preserve a highly profitable status quo. They are working hard to convince anyone who will listen, including elected officials, that a fiduciary standard would prevent them from being fairly compensated for giving advice. That, they argue, would make it impractical for them to share their expertise with any but high-income clients, leaving middle-income workers and retirees to negotiate these dangerous waters without any guidance.

But the premise is false. The rulemakers have made it clear that a fiduciary standard need not and would not keep brokers from being properly compensated. Moreover, we have a record of experience to show us that it does not have that effect. California, Missouri, South Dakota and South Carolina have already imposed a broad fiduciary-duty standard; in all four states, brokers continue to be paid for their services, and they continue to offer them to clients up and down the income ladder.

What’s at stake, then, is not whether some clients will be able to get advice, but whether some financial professionals will be allowed to profit by giving bad, self-serving advice. And there is abundant evidence of misrepresentation and obfuscation under the current rules.

A 2013 report by the Government Accountability Office cited many examples of financial advisors aggressively encouraging people to roll their 401(k) funds over into IRAs, often with only minimal knowledge of a client’s financial situation. Call-center representatives, the report showed, frequently claimed that 401(k) plans had extra fees, while IRA’s “were free or had no fees,” when, in fact, IRAs are usually the more expensive choice. In many cases, advisors made rollovers more attractive by offering to fill out the paperwork for customers, or by providing a cash bonus for opening an IRA. Some investment firms, according to the GAO report, offered financial or other incentives to advisors who successfully convinced people to accept a rollover.

Brokers can also face intense pressure from their employers to sell in-house products, regardless of whether they serve an investor’s best interests. At JPMorgan Chase, employees who resisted that kind of pressure were “told to change their tactics or be pushed out,” according to a March 2013 article in the New York Times.

In today’s world, workers and retirees face investment decisions that are, at once, deeply confusing and crucially important. In the absence of fiduciary standards, many people will put their trust in salespeople masquerading as trustworthy financial advisors. And many will make huge mistakes as a result – mistakes that can cost tens or even hundreds of thousands of dollars over a lifetime. A disproportionate share of those costs, moreover, will be borne by the middle-income workers whose welfare the brokers and their spokespeople claim to be concerned about.

It should be noted that we are talking, to a large extent, about taxpayer-subsidized retirement accounts. The point of the subsidies is to help people save for a secure retirement and get the maximum value out of the money they set aside, not to produce a windfall for financial professionals. (Employers, according to a recent AARP survey, overwhelming support the concept of a fiduciary duty standard for all those who advise workers on 401(k)-related decisions.)

This one simple step has the potential to deliver large benefits to retirees and investors. It is also, very plainly, the right thing to do. When retail investors seek advice from a financial professional, they generally assume that the professional is acting on their behalf. It makes no sense to insist that some professionals live up to that expectation, while letting others exploit it.

Jim Lardner

Originally published on USNews.com.

Underwater America: Where the Share of Underwater Mortgages is Highest

A new report from UC Berkeley’s Haas Institute challenges the notion of a national housing recovery. While overall rates of foreclosure and mortgage delinquency have fallen since the height of the housing crisis, many areas of the country have yet to see much improvement, according to Underwater America: How the So-Called Housing ‘Recovery’ is Bypassing Many Communities.”

At the end of 2013, the report points out, some 9.8 million Americans – more than a fifth of all homeowners with a mortgage – remained underwater, owing more than their homes were worth. Because homeowners with negative equity are significantly more likely to default than are homeowners with positive equity, these findings make it clear that a great many families still face a high risk of losing their homes.

Ten percent of Americans live in the 100 cities with the most troubled housing markets – cities where, according to the report, between 22 and 56 percent of homeowners are underwater. Those cities include Hartford, Conn. (with a 56% underwater rate); Newark, N.J. (54%); Elizabeth, N.J. (52%); Paterson, N.J. (49%); and Detroit, Mich. (47%).

The report also identifies the 15 metropolitan areas and 395 ZIP codes with the highest incidence of underwater mortgages. The hardest-hit zip codes, many with underwater rates above 60%, can be found in Georgia, Michigan, Texas, Nevada, and Connecticut. (See tables of hardest-hit areas.)

The report concludes that far more needs to be done to prevent foreclosures and mitigate the damage to families and communities. It calls for greatly expanded use of principal reduction, recommending several policy paths to that end.

– Rebecca Thiess

A Rule to Rein in Wall Street Pay Is Too Weak and Way Behind Schedule

Three and a half years have passed since the 2010 passage of the Dodd-Frank financial reform legislation. While some important elements of the law have been implemented (the Consumer Financial Protection Bureau has been hard at work, for example), other provisions simply seem to have been ignored. One crucial reform, targeted at Wall Street’s “heads I win, tails you lose” culture of lavish pay and nonexistent accountability, remains in bureaucratic limbo.

There’s no question that the flawed incentives in Wall Street pay packages played a major role in creating the financial crisis. The Financial Crisis Inquiry Commission, the official body charged with investigating the causes behind the financial and housing market crashes, found that pay systems too often encouraged “big bets” and rewarded short-term gains without proper consideration of long-term consequences. The practice of awarding large bonuses and other forms of immediate compensation creates incentives to ignore long-term risks and “take the money and run.”

Former Securities and Exchange Commission Chair Mary Schapiro described the situation to the commission in this way: “Many major financial institutions created asymmetric compensation packages that paid employees enormous sums for short-term success, even if these same decisions result in significant long-term losses or failure for investors and taxpayers.” To take just one example, top executives of Bear Stearns and Lehman Brothers – the two big investment banks whose failure triggered the crisis – got paid $2.5 billion in the years leading up to the financial collapse. Despite their firms’ disastrous collapse, they got to keep every dime of it.

Risk-taking of this sort wasn’t always how things worked on Wall Street. In the decades after World War II, many of the big investment banks were private partnerships, meaning that senior managers’ funds were constantly at risk and they could only collect their full payouts upon retiring, as opposed to in annual bonuses or stock options. During the decades after the war, in fact, pay inside the financial industry was roughly equal to pay outside of the industry. However, when investment banks went public in the 1980s and 1990s, bets were increasingly made with the money of shareholders, and firm pay structures began to reward the risk-taking that would lead to short-term paydays for companies, at the price of longer-term stability.

The Dodd-Frank financial reform law includes a specific provision to address precisely this problem, but it hasn’t been implemented yet. Section 956(b) of the law requires that financial regulators ban any type of incentive pay arrangements at banks that act to encourage inappropriate risk-taking. The statute tells regulators to write rules to implement the ban within nine months of the signing of the law. Yet today, almost four years after the law was passed, regulators still have not put these required restrictions on Wall Street pay in place.What’s more, not only do the rules remain unfinished, but the initial proposal by the regulators was much too weak to get the job done. The regulators initial proposal to implement Section 956(b) includes general language telling bank boards of directors to design pay packages that don’t encourage excessive risk. But the major specific requirement in the proposal is that large banks set aside at least half of bonus payments to be paid out over three years. To comply with this requirement, a bank could pay their executives half of their bonus at the time it was earned, and then another third of the remaining half the next year, another third the year after that, and a final third three years after the bonus was earned. So as little as one-sixth of the total bonus could be deferred for the full three year period. This new requirement is weak compared to old partnership incentives that held executives’ wealth genuinely at risk based on the long-term consequences of their actions.

Furthermore, the rule doesn’t even ban the practice of “hedging” future compensation – so, for instance, an executive due a future deferred bonus who wanted to receive most of their money immediately could just sell the right to the deferred portion of the bonus in exchange for an up-front payment.

Finally, the specific pay requirements in the proposal cover only “executive officers,” which includes only the CEO and major division heads of the bank, not the traders or other high-level employees below them. This is much too narrow. Individuals who are not covered could include many key decision-makers with the power to incur dangerous risks for the banks.Since the release of this inadequate proposal, there has been no further action on implementing this crucial piece of financial reform. Why has the rule been so delayed and (so far) so weak? One answer is heavy lobbying. As Public Citizen noted in a 2011 report on the pay rule, companies that would be impacted by the new rules have spent hundreds of millions of dollars lobbying against its implementation, along with submitting comments in support of substantially weakening the rule. Another factor is the need for six different regulatory agencies to sign off on the rule, a process built for delay.

Today, the types of pay structures and incentives that contributed to the financial collapse are still in place. The six agencies responsible owe it to the public and the health of the financial system to take action to change them.

– Marcus Stanley and Rebecca Thiess

Originally published on USNews.com.