Short Memories at the House Financial Services Committee

How quickly a disturbing number of our elected representatives in Washington seem to forget.

The leaders of the House Financial Services Committee, to be more specific, will devote Tuesday morning to a hearing they have entitled “Who’s in Your Wallet? Examining How Washington Red Tape Impairs Economic Freedom.” Representatives of five major financial watchdog agencies will be quizzed on the cost of regulation – the cost, the Committee says, not only to banks and lenders, but to the country. It’s the latest in a series of similar sessions conducted over the past few years by the Financial Services Committee and the Government Oversight and Reform Committee.

Judging by the enormous amount of time they have set aside for these inquiries, you would never know we were living in a country that had recently experienced a cataclysmic loss of jobs, homes, household wealth, and economic output as a result of an era of financial deregulation, which left us with an out-of-control banking and lending industry.

Here are a few pieces of cost data that appear to have slipped off the Committee’s radar screen. First, on the impact of the financial and economic meltdown of 2008-09:

  • $13 trillion or more – projected loss of U.S. economic output, according to a January 2013 report by the Government Accountability Office.
  • 8.8 million Americans – number who lost full-time jobs, according to the Associated Press, between December 2007 and June 2009, when the country was officially in recession.
  • 42 percent – median amount of home equity lost by Americans between 2007 and 2010, according to the Federal Reserve.
  • $49,100 – average per-family loss of household wealth during those years, again according to Federal Reserve data.

The Financial Services Committee is expressing particular concern about the work of the Consumer Financial Protection Bureau, and its impact on consumer choice.

The Consumer Bureau has been a frequent Financial Services Committee target ever since it opened its doors in 2011. Unlike the Committee leadership, however, consumers overwhelmingly support the CFPB’s efforts to write and enforce rules against lending-industry tricks and traps. That agency, moreover, has actually been putting money back in the wallets of mistreated consumers. Its enforcement actions against credit card companies, debt collectors, and payday lenders have thus far delivered about $1.1 billion to nearly 10 million consumers. A recently announced CFPB mortgage servicing settlement promises another $2 billion in relief.

And there is plenty of work left to do. Abusive financial products continue to transfer billions of dollars a year from families and communities to the very worst players in the financial services world.

A few more numbers for the Committee to factor into its calculations:

  • $3.4 billion – estimated annual fees collected by triple-digit-interest payday lenders, according to a September 2013 report by the Center for Responsible Lending.
  • $3.5 billion – approximate total interest collected each year by auto-title lenders on loans of $1.6 billion, according to a study conducted by the Consumer Federation of America the Center for Responsible Lending.
  • $25.8 billion – estimated amount, according to another Center for Responsible Lending report, that consumers who bought cars in one year (2009) will ultimately pay because of kickbacks from third-party lenders to auto dealers for steering buyers into loans with higher interest rates than they could have qualified for.


The More We Know About High-Frequency Trading, the Stronger the Case for a Wall Street Speculation Tax

High-frequency trading, or HFT, is suddenly the focus of investigations by the New York State Attorney General’s office, the FBI, the Commodity Futures Trading Commission and the Securities and Exchange Commission. It’s also the subject of a best-selling book, Michael Lewis’s “The Flash Boys,” which has catapulted the issue onto 60 Minutes and The Daily Show, among other prominent media places.

High-frequency traders use privileged computer placement to gain access to exchange data milliseconds ahead of the pack; then they insert themselves between buyers and sellers in order to turn tiny price differences into high-volume profits.

Since the Flash Crash of May 2010, there has been much talk about HFT’s potential to destabilize the securities markets. The world has been slower to wake up to the more basic point that, even in the stablest of times, high-frequency trading is electronic highway robbery – a raid on the pocketbooks of investors and the credibility of financial markets.

Now, at last, the immoral and predatory nature of this activity is beginning to attract the notice of lawmakers as well as regulators, journalists, and talk-show hosts. Here’s something – one thing – Washington could do about it: enact a Wall Street speculation tax.

Because of the tremendous volume on which algorithmic traders depend, a very small tax on individual transactions – too small to make a noticeable difference to ordinary investors – would be enough to make high-frequency trading unprofitable. In addition, a speculation tax, or financial transaction tax, would raise significant revenue – hundreds of billions of dollars over 10 years, according to the Congressional Budget Office. It would collect that money from other high-volume Wall Street players, even as it incentivized them to slow down a bit, thus nudging the financial markets away from churning and short term gamesmanship toward more useful private and public investment.

That combination of benefits explains why a wide range of economists and other experts – including many notable figures from inside the financial industry itself – have come out in favor of the idea.

Eleven EU nations are moving towards the enactment of such a tax. In our country, speculation-tax bills have been introduced in both chambers of the 113th Congress. Iowa Senator Tom Harkin and Oregon Representative Peter DeFazio have joined forces to propose a .03 percent tax (that’s just 30 cents per $1000). Minnesota Representative Keith Ellison has introduced a bill calling for a significantly higher, but still modest, tax of 0.5 percent. Their efforts deserve wide and serious support.

Why We Need Serious Payday Loan Reform

After two years of study, the Consumer Financial Protection Bureau is moving closer to writing new rules for payday and small-dollar loans. At the Country Music Hall of Fame in in Nashville, Tennessee, last week, bureau leaders heard from a roundtable of authorities and a packed house of citizens – people with strong opinions and, in many cases, personal stories to tell. A day later, on Capitol Hill, a panel of experts answered senators’ questions about some of the same loan categories and concerns.

Witnesses at both events cited a new bureau analysis of data from more than 12 million storefront payday loans issued over a 12-month period. The report confirms the two major findings of earlier research. First, these triple-digit interest loans, promoted by lenders as a way of dealing with a short-term crisis, consistently lead borrowers into a cycle of unmanageable debt. And second, as Consumer Protection Bureau Director Richard Cordray noted, “The business model of the payday loan industry depends on people becoming stuck in these loans for the long term.” Most of the industry’s revenue, in other words, comes from keeping borrowers on the hook and getting them to pay fees that very often dwarf the amount of the original loan.

The latest data should bolster the bureau’s resolve to act. But, as the evidence makes increasingly clear, the bureau will have to resist the temptation to focus exclusively on the traditional two-to-four week loan with a lump-sum repayment. To keep pace with a fast-moving market, rulemaking must also address the payday-like problems of an array of longer-term loan products developed by an industry that is playing all the angles to get around the rules – the anticipated as well as existing ones.

Payday lending took root in the early 1990s, after the big banks and their credit-card divisions laid waste to state usury laws that had been the norm across the country. Twenty-five years later, payday lending is a huge and highly profitable industry, but a badly failed experiment when it comes to its supposed purpose of helping people in a jam.

In the Consumer Protection Bureau’s tracking, four out of five payday loans were rolled over or renewed within two weeks, and more than one in five initial loans led to a sequence of at least seven loans altogether. Among borrowers with monthly paychecks (a group that includes recipients of Social Security retirement and disability benefits), one out of five took out a loan in every month of the year!

Molly Fleming-Pierre came to Nashville from Kansas City, where she works on economic justice issues for a faith-based partnership of more than 200 Missouri congregations. Fleming-Pierre told the story of a disabled Vietnam veteran who had borrowed to help with mortgage payments and his wife’s medical expenses after she broke her ankle. The vet wound up, she testified, with “five payday loans that he spiraled in for three years,” eventually costing him $30,000 in payments and contributing to the loss of his home.

In Nashville and in Washington, the witness lists included industry representatives pleading the cause of individual liberty and professing to speak for their customers as well as themselves. But when the Pew Charitable Trusts conducted a national survey of payday borrowers, the great majority, according to Pew’s Nick Bourke, supported stronger regulation of payday lenders, with eight in 10 favoring a rule to limit payments to a small fraction of any one paycheck.

One reason for that attitude, Bourke and others suggested, is that borrowers frequently go into these loans with only a vague understanding of the costs. Stephen Reeves of the Cooperative Baptist Fellowship in Decatur, Ga., has been working on payday and small-dollar lending issues for five years. In that time, Reeves said, he has heard “again and again” from borrowers who say they have been making steady payments for months with “no idea … that they were not reducing what they owed.”

At the state level, voters and elected officials are wising up to these realities. Twenty-two states have passed laws establishing interest-rate caps or other restrictions on payday lending. But while some of these efforts have made a positive difference, the results show that the states can’t do it alone.

In response to the new regulations, the industry has been moving toward installment loans, auto-title loans and other products that often turn out to have the same key problems: high fees or rates, often camouflaged and hard to figure out, and automatic repayment mechanisms that allow lenders to extract money from borrowers’ bank accounts even if that means leaving them unable to pay rent, utilities and other basic living expenses.

The typical storefront payday loan has an effective annual interest rate of nearly 400 percent, according to Nathalie Martin of the University of New Mexico law school, who testified at Wednesday’s Senate hearing. Auto-title loan interest tends to be a little lower – in the 300-percent range, she said. But Martin added that the interest rates on installment loans, especially the types that payday lenders have developed to get around state regulation, can be far higher. “One consumer I know borrowed $100 and paid back a thousand dollars in 12 months’ time,” Martin said. “That’s 1100 percent interest.”

In some of the states most in need of new laws, moreover, legislators have had trouble summoning the will to act. Rev. Robert Bushey Jr., a pastor in Kankakee, Ill., came to Washington late last year to plead for a national response. Like other members of a delegation organized by National People’s Action, Bushey had participated in unsuccessful campaigns for legislation at the state level. “The payday lobby is very strong in the states where payday exists,” was how he summed up the obstacles.

State regulators now face the fresh challenge of responding to the rapid growth of online lending. Many of the online players operate across international as well as state borders, and some claim legal immunity on the basis of tribal relationships they have forged expressly for that purpose.

Effective regulation, then, must come from Washington. And the Consumer Protection Bureau will need to act broadly as well as decisively. An overly narrow rule would only set the stage for another era of innovation in abuse and exploitation (rather than in serving the real needs of consumers).

The industry is hoping for rules that focus on short-term loans and the “rollover” issue. But the weight of accumulating evidence points to two key problematic features that can be found in a far wider class of loans. One is the reliance on postdated checks and other mechanisms that allow the lender to take control of a borrower’s bank account. The other is the practice of issuing loans without seriously assessing a borrower’s ability to repay – to repay out of income, that is, rather than out of money needed for food, rent, fuel and other urgent priorities.

That fatal combination of loan features frames the challenge that faces Consumer Protection Bureau leaders. As they have already done in the mortgage market, to their great credit, they must now require consumer lenders to verify borrowers’ real ability to repay, and not just the lenders’ own ability to collect. Just as important, they must make it possible for borrowers to retake control of their bank accounts. Without the second requirement, lenders will never take the first one seriously.


Originally published on US

NY Fed Confirms Big-Bank Funding Advantage – and Link to Risky Behavior

New research from the Federal Reserve Bank of New York finds that the largest global banks – those perceived as being ”too big to fail” – enjoy a funding advantage that allows them to get loans more cheaply than their smaller competitors. Even more disturbing, this advantage seems to lead them to engage in more risky behavior, as measured by impaired and charged off loans.

In “Evidence From The Bond Markets On Banks Too Big to Fail Subsidy,” economist Joao Santos confirms that at least through 2009, the largest banks were able to borrow in the bond market at rates up to 80 basis points (eight-tenths of a percentage point) lower than smaller competitors. As analysts at Bloomberg View pointed out, this could translate to over $80 billion a year in lowered costs for the biggest banks.

Some have challenged these findings, by claiming that large non-financial firms also have lower borrowing costs than smaller firms; in other words, the argument goes, the funding advantage is not due to the ”too big to fail” perception of potential government support. But Santos’ research finds that large banks have a borrowing-cost advantage significantly greater than any advantage of large firms in other industries. As he states, his results “suggest that the cost advantage that the largest banks enjoy in the bond market relative to their smaller peers is unique to banks.”

In further research, Santos and coauthors Garo Afonso and James Traina find that the perception of ”too big to fail” status and an accompanying potential for government support appears to lead banks to engage in more risky behavior. Banks classified by ratings agencies as likely to receive government support have greater loan losses and a higher percentage of impaired loans, the paper finds, than do institutions that are not so classified. This suggests that banks take advantage of the implicit expectation of taxpayer support in the event of losses by pursuing higher profits through riskier lending. The possibility that losses from these loans could be transferred to the public leads to riskier bank behavior.


The Debt Collection World Needs a Cleanup

Debt collection practices have been getting a lot of attention lately. They deserve it. Millions of Americans have experienced harassing phone calls, demands for payment of money not truly owed or illegal threats of dire consequences, up to and including imprisonment. These abuses are disturbingly common – in fact, they’re built into the way a great many debt collectors do business.

Fortunately, two federal agencies – the Consumer Financial Protection Bureau and the Federal Trade Commission – have the authority to address such problems. And both agencies have been gathering evidence on this market.

Debt collection, the bureau says, has quickly become its number one source of complaints. It ranks third at the FTC, where such complaints have increased more than 1,400 percent since 2000 — from 13,950 complants to last year’s total of 204,644.

Abusive debt collection practices can take a terrible toll, emotionally and practically. Beyond the fear, stress and embarrassment they cause, families can have their bank accounts frozen, making it impossible to pay for food, housing, utilities and other basic expenses. Debt collectors frequently place incorrect information on people’s credit reports, impairing their ability to secure credit, housing and even employment in some cases.

Almost all of the millions of collection suits filed against consumers each year are uncontested and result in default judgments against the consumer. And while the industry would say that’s because consumers really owe the money, studies point to an array of other factors, including illness, injury, inability to take time off from work, lack of notice, misunderstanding of the requirements for filing a legally proper response, and confusion stemming from the obscure and complicated language of summonses. In short, under current rules and procedures, the courts are not a fair playing field once a debt collector decides to go after you.

Consumer bureau complaint data, according to a report released this week, indicates that the most common grievances are mistaken information, which comes up more than half of the time, and what the bureau calls “aggressive communication tactics and threats” – the theme of nearly a quarter of its complaints.

Appalling anecdotes abound. In Missouri, an employed woman who had simply forgotten about a $425 loan was arrested and spent three nights in jail, until her mother finally borrowed $1,250 to pay her bond. In Illinois, an elderly woman was repeatedly called and harassed over a debt allegedly owed by her ex-husband, from whom she had been divorced for more than 30 years. In another Illinois case, a woman who was caring for four profoundly disabled foster children nearly had her bank account frozen (despite the fact that it contained nothing but public-benefit funds designated for the children’s care) as a result of a judgment that had been vacated years earlier. Another woman, suffering from early-onset dementia, was harassed over a loan that belonged to her ex-husband; the frequent calls contributed to her need to move into a nursing home.

While debt-collection problems have a long history, the recent combination of aggressive lending and widespread economic distress has made them considerably worse. Household debt nearly doubled in the half-decade before the financial crisis of 2008; the reckless lending and deceptive loans of those years contributed to a sharp rise in payment delinquency, which was accompanied by an explosion of new debt buyers and a deterioration of industry practices.

Having paid pennies on the dollar for the right to go after a portfolio of supposedly delinquent debtors, many debt buyers fail to ascertain the validity of the information passed along to them. Often, years have passed and misinformation about the debt or the debtor has become embedded into the collection process. Rather than sort through such issues, collectors often adopt a shotgun approach, hoping to frighten a few people into paying, whether they owe the money or not.

A third factor may also have been at work: Although Congress had passed a Fair Debt Collection Practices law in 1977, and the FTC has ramped up its enforcement efforts in the last few years, no agency had been given the power to issue specific rules for debt collectors until the enactment of the Dodd-Frank financial reform law of 2010.

Under Dodd-Frank, the Consumer Financial Protection Bureau has rule-making as well as enforcement power; it has the authority not only to impose new and substantively stronger obligations on debt collectors, but also to create incentives for all industry players to improve the accuracy of their collection efforts and steer clear of harassment and abuse. With those powers, the bureau is in a position to improve things significantly.

The National Consumer Law Center, the National Association of Consumer Advocates, Americans for Financial Reform and other consumer groups have called on the consumer bureau  to take a number of steps to improve the world of debt collection. Some of the major recommendations include: strengthening consumer remedies against ongoing abusive practices; requiring debt collectors to verify information before they act on it; curtailing telephone harassment by limiting calls to a more reasonable number; creating an effective mechanism to help consumers enforce their right to request that collectors stop communicating with them; and making sure the relevant rules cover payday lenders, credit card companies and other creditors as well third-party debt collectors.

– Rebecca Thiess and Ellen M. Taverna

Rebecca Thiess is a policy analyst at Americans for Financial Reform. Ellen M. Taverna is the Legislative Director at the National Association of Consumer Advocates. Originally published on

Members of Congress Speak Out To Protect Derivatives Reforms

Four years ago, with the passage of the Dodd-Frank financial reform law, Congress established basic standards of safety and transparency for the massive and previously unregulated derivatives markets that played a central role in crashing the world economy. Now nineteen current and former legislators involved in drafting that legislation, led by former Representative Barney Frank, are speaking out to oppose Wall Street’s efforts to do an end-run around the law.

 The question at issue is whether U.S. derivatives rules will govern transactions conducted through nominally overseas entities, like foreign subsidiaries of U.S. banks, or foreign banks who are key players in the U.S. derivatives markets. This is a critical question because the largest global banks can shift derivatives risks and funding between thousands of international subsidiaries at the touch of a computer keyboard. Nominally, a transaction may be booked in a foreign subsidiary, incorporated in the Cayman Islands or Hong Kong, but the risk and economic impact remain with the U.S. economy. It’s impossible to effectively regulate derivatives markets without applying rules to transactions conducted through foreign subsidiaries.

In fact, if you’ve read about a major scandal involving derivatives, chances are foreign subsidiary transactions were at the center of the affair. In the 1990s, Long Term Capital Management almost brought down Wall Street with trillions in derivatives traded through Cayman Islands subsidiaries, and in Britain the 230 year-old Barings Bank failed thanks to the actions of a single rogue derivatives trader. During the financial crisis, AIG’s London subsidiary, AIG Financial Products, experienced massive derivatives losses that resulted in a U.S. taxpayer bailout. And even more recently, the London Whale created billions of dollars in losses for JP Morgan through London derivatives trades.

No one understands all this better than the major Wall Street banks, who routinely conduct over half of their derivatives transactions through foreign subsidiaries. That’s why as the Commodity Futures Trading Commission (CFTC) finally begins to implement Dodd-Frank derivatives rules, the major Wall Street derivatives dealers are trying a last minute end run around derivatives enforcement. Their vehicle is a major lawsuit that seeks to stop the derivatives regulation in its tracks by banning any cross-border enforcement of any Dodd-Frank derivatives oversight. Arguing that the CFTC has failed to comply with technical procedural requirements for economic analysis, a few global mega-banks are asking the court to forbid the agency from enforcing any of the Dodd-Frank derivatives and commodity market reforms at foreign subsidiaries of U.S. banks, or foreign banks operating in the U.S. If they get everything they’re asking for, dozens of rules that took years to complete will be rendered almost impossible to enforce, until elaborate new rulemaking procedures are completed for each and every rule. That would add fresh years of delay to the three and a half years we’ve already waited for real derivatives oversight.

But there’s at least one major problem with their argument: Congress also understood the danger of cross-border evasion of derivatives rules, and ensured that the CFTC has clear jurisdiction to address it. Specifically, Section 722(d) of the Dodd-Frank Act states clearly and unambiguously that any CFTC derivatives rule governs not just transactions conducted on U.S. soil, but also any nominally foreign transaction that has a ‘direct and significant’ connection with U.S. commerce. 

Now Congress is speaking up against Wall Street’s attempt to use procedural technicalities to dodge this clear statutory rule. Today, nineteen current and former Representatives and Senators, led by former representative Barney Frank, a lead drafter of the Dodd-Frank Act, filed an amicus brief opposing the big banks’ case. Their brief makes a conclusive case for Congress’ intent to properly regulate all derivatives that impact the U.S. economy – even those that take an end run through a foreign country. Let’s hope that this strong statement by Congress leads the court to push back the bank’s attempt to get out of the rules.

Wall Street Needs to Pay Its Fair Share in Taxes. Here’s How.

There are many inequities in our tax system, but here’s one that should really command the attention of a country still reeling from the aftershocks of the financial crisis and bank bailouts: the “financial services industry,” as it has come to be known, is badly undertaxed compared to other industries. While banks and financial companies reap more than 30 percent of the nation’s corporate profits, they pay only about 18 percent of corporate taxes and contribute less than 2 percent of total tax revenues, according to the Bureau of Economic Analysis and the International Monetary Fund.

As part of its broader budget plan, the Congressional Progressive Caucus is advancing a set of good ideas for leveling the playing field. In its “Better-Off Budget” blueprint, released today, the Progressive Caucus proposes:

  • A Wall Street speculation tax, also known as a financial transaction tax — a very small levy on the trading of stocks, derivatives and complex financial instruments;
  • A big-bank excise tax applied to the ten or so banks with assets of $500 billion of more; and
  • The sharp reduction of a subsidy arrangement in which banks receive so-called “dividends” (totaling more than $1.6 billion last year) from the Federal Reserve.

In addition to these ideas, which explicitly relate to the financial sector, the Progressive Caucus budget includes broader provisions that would have significant effects on Wall Street. Two that stand out are an end to the preferential tax treatment of capital gains and an enforceable $1 million-a-year limit on the tax deductibility of corporate executives’ paychecks.

The net effect would be to make the tax system fairer overall and make sure that Wall Street does more to help the country recover from an economic calamity that was largely its doing. Several of the Progressive Caucus’ proposals would also set better incentives for the financial sector itself.

A tax on the very largest banks could, along with other policies, help address the “too big to fail” problem and the unhealthy trend of increased concentration – and reduced competition – in the banking industry. A small transaction tax could help nudge the industry away from high-frequency trading and ultra-short-term speculation toward a longer-term investment outlook and practices with a clearer value to the society at large. (A new report released today by Public Citizen refutes one of the key arguments used by the financial industry to keep that idea off the table: the claim that ordinary investors would be hurt.)

These ideas, of course, comprise just a small part of the Progressive Caucus budget, which contains many proposals to improve tax fairness, address income inequality and spur investment in infrastructure and clean energy. But their inclusion is one sign of growing, and widening, support for the basic concept of getting Wall Street to assume more of the tax burden. The big bank tax, for example, is similar to one advocated by the Obama administration, and not so different from one embraced by House Ways and Means chairman Dave Camp, R-Mich. Camp’s tax-reform plan also includes a more limited version of the proposal to cap the deductibility of corporate pay. (On this count, Camp and the Progressive Caucus are both, in a sense, just trying to put teeth into a law that supposedly established a $1 million cap – 20 years ago!)

Several of the Progressive Caucus’ ideas are also the subject of stand-alone bills in the House, the Senate or both. Those bills include two different transaction tax bills – one co-authored by Rep. Peter DeFazio, D-Ore., and Sen. Tom Harkin, D-Iowa, and the other introduced by Rep. Keith Ellison, D-Minn. – and companion bills on the deductibility of executive pay introduced by Sens Jack Reed, D-R.I., and Richard Blumenthal, D-Conn., and Rep. Lloyd Doggett, D-Texas. Meanwhile, 11 European countries are moving ahead with their version of a financial transaction tax.

The Progressive Caucus has done the country a service by putting these worthy proposals on the table. They should be taken seriously.

- Jim Lardner

Originally published on,

What to Do About Credit-Card Data Breaches (by Ed Mierzwinski, USPIRG)

This morning, I testify in the Subcommittee on Financial Institutions and Consumer Credit of the House Financial Services Committee in the latest hearing on the Target data breach. The committee should post all the testimony and have a live video feed here at 10am.

As I did in a Senate hearing last month, I will try to shift the debate from the supposed need for a “uniform national data breach notification standard” to much more important issues, such as improving consumer rights when they use unsafe debit cards to ensuring that standards for payment card and card network security are set in an open, fair way that holds banks and card networks accountable for forcing merchants and consumers to rely on inherently unsafe, obsolete magnetic stripe cards.

This is a somewhat long-ish blog where I lay out my main recommendations to Congress:

1) Congress should improve debit/ATM card consumer rights and make all plastic equal:

Credit cards are safe, by law. Debit cards have “zero liability” only by promise. The shared risk fraud standard for debit cards under law – where consumers could be liable for up to $500 or more in losses — appears to be vestigial, or left over from the days when debit cards could only be used with a PIN. Since banks encourage consumers to use debit cards, placing their bank accounts at risk, on the unsafe signature debit platform, this fraud standard should be changed. Compare some of the Truth In Lending Act’s robust credit card protections by law to the Electronic Funds Transfer Act’s weak debit card consumer rights at this FDIC website.

As a first step, Congress should institute the same fraud cap, $50, on debit/ATM cards as exists on credit cards. Congress should also provide debit and prepaid card customers with the stronger billing dispute rights and rights to dispute payment for products that do not arrive or do not work as promised that credit card users enjoy (through the Fair Credit Billing Act, a part of the Truth In Lending Act). For a detailed discussion of these problems and recommended solutions, see “Before the Grand Rethinking: Five Things to Do Today with Payments Law and Ten Principles to Guide New Payments Products and New Payments Law,” by Gail Hillebrand (then with Consumers Union, now at the CFPB).

Debit/ATM card customers already face cash flow and bounced check problems while banks investigate fraud under the Electronic Funds Transfer Act. Reducing their possible liability by law, not simply by promise, won’t solve this particular problem, but it will force banks to work harder to avoid fraud. If they face greater liability to their customers and accountholders, they will be more likely to develop better security.

2) Congress should not endorse a specific technology. If Congress takes steps to encourage use of higher standards, its actions should be technology-neutral and apply equally to all players.

“Chip and PIN” and “Chip and signature” are variants of the EMV technology standard commonly in use in Europe. The current pending U.S. rollout of chip cards will allow use of the less-secure Chip and Signature cards rather than the more-secure Chip and PIN cards. Why not go to the higher Chip and PIN authentication standard immediately and skip past Chip and Signature? Further, Congress should not embrace a specific technology. Instead, it should take steps to encourage all users to use the highest possible existing standard. Current standards are developed in a closed system run by the banks and card networks. New standards should be developed in an open system that encourages innovation and applies equally to banks as well as merchants and others.

Further, as most observers are aware, chip technology will only prevent the use of cloned cards in card-present (Point-of-Sale) transactions. It is an improvement over obsolete magnetic stripe technology in that regard, yet it will have no impact on online transactions, where fraud volume is much greater already than in point-of-sale transactions.

Experiments, such as with “virtual card numbers” for one-time use, are being carried out online. It would be worthwhile for the committee to inquire of the industry and the regulators how well those experiments are proceeding and whether requiring the use of virtual card numbers in all online debit and credit transactions should be considered a best practice.

3) Investigate Card Security Standards Bodies and Ask the Prudential Regulators for Their Views:

To ensure that improvements continue to be made, the committee should also inquire into the governance and oversight of the development of card network security standards. Do regulators sit on or have oversight over the PCI card security standards board? As I understand it, merchants do not; they are only allowed to sit on what may be a meaningless “advisory” board.

4) Congress should not enact any new legislation sought by the banks to impose their costs of replacement cards on the merchants:

Target should pay its share but this breach was not entirely Target’s fault. Disputes over costs of replacement cards should be handled by contracts and agreements between the players. How could you possibly draft a bill to address all the possible shared liabilities?

5) Congress should not enact any federal breach law that preempts state breach laws or, especially, preempts other state data security rights:

In 2003, the Fair and Accurate Credit Transactions Act did not do enough to prevent identity theft. But it did not preempt new state privacy laws. Since 2003, fully 46 states enacted tough security freeze laws (based on a U.S. PIRG/Consumers Union model law) and 49 others enacted breach notification laws. State “laboratories of democracy” flourished.

But industry lobbyists (and this isn’t only the banks, but includes the chemical industry, car makers, airlines, the drug companies and pretty much everyone else) prefer to enact weak federal laws accompanied by strong limits on the states. That is the wrong way to go. Broad preemption will prevent states from acting as first responders to emerging privacy threats. Congress should not preempt the states. In fact, Congress should think twice about whether a federal breach law that is weaker than the best state laws is needed at all.

6) Congress Should Allow For Private Enforcement and Broad State and Local Enforcement of Any Law It Passes:

The marketplace only works when we have strong federal laws and strong enforcement of those laws, buttressed by state and local and private enforcement.

7) Any federal breach law should not include any “harm trigger” before notice is required:

The better state breach laws, starting with California’s, require breach notification if information is presumed to have been “acquired.” The weaker laws allow the company that failed to protect the consumer’s information in the first place to decide whether to tell them, based on its estimate of the likelihood of identity theft or other harm. Only an acquisition standard will serve to force data collectors to protect the financial information of their trusted customers, accountholders or, as Target calls them, “guests,” well enough to avoid the costs, including to reputation, of a breach.

8) Congress should further investigate marketing of overpriced credit monitoring and identity theft subscription products:

In 2005 and then again in 2007 the FTC imposed fines on the credit bureau Experian for deceptive marketing of its various credit monitoring products, which are often sold as add-ons to credit cards and bank accounts. Prices range up to $19.99/month. While it is likely that recent CFPB enforcement orders against several large credit card companies for deceptive sale of the add-on products – resulting in recovery of approximately $800 million to aggrieved consumers — may cause banks to think twice about continuing these relationships with third-party firms, the committee should also consider its own examination of the sale of these credit card add-on products. See my recent post.

Consumers who want credit monitoring can monitor their credit themselves. No one should pay for it. You have the right under federal law to look at each of your 3 credit reports (Equifax, Experian and TransUnion) once a year for free at the federally-mandated central site Don’t like websites? You can also access your federal free report rights by phone or email. You can stagger these requests – 1 every 4 months — for a type of do-it-yourself no-cost monitoring. And, if you suspect you are a victim of identity theft, you can call each bureau directly for an additional free credit report. If you live in Colorado, Georgia, Massachusetts, Maryland, Maine, New Jersey, Puerto Rico or Vermont, you are eligible for yet another free report annually under state law by calling each of the Big 3 credit bureaus.

And kudos to Discover Card for leading the way in disclosing credit scores on account statements. Director Rich Cordray and the Consumer Financial Protection Bureau have recently launched a campaign to encourage this voluntary practice. It should help end the sale of over-priced credit monitoring. Eventually, we hope credit scores will also be made part of credit reports, so anyone, not just credit card holders, can see them.

9) Review Title V of the Gramm-Leach-Bliley Act and its Data Security Requirements:

The 1999 Gramm-Leach-Bliley Act imposed certain data security responsibilities on regulated financial institutions, including banks. The requirements include breach notification in certain circumstances. The committee should ask the regulators for information on their enforcement of its requirements and should determine whether additional legislation is needed.

10) Congress should investigate the over-collection of consumer information for marketing purposes. More information means more information at risk of identity theft. It also means there is a greater potential for unfair secondary marketing uses of information:

In the Big Data world, companies are collecting vast troves of information about consumers. Every day, the collection and use of consumer information in a virtually unregulated marketplace is exploding. New technologies allow a web of interconnected businesses – many of which the consumer has never heard of – to assimilate and share consumer data in real-time for a variety of purposes that the consumer may be unaware of and may cause consumer harm. Increasingly, the information is being collected in the mobile marketplace and includes a new level of localized information.

Although the Fair Credit Reporting Act limits the use of financial information for marketing purposes and gives consumers the right to opt-out of the limited credit marketing uses allowed, these new Big Data uses of information may not be fully regulated by the FCRA. The development of the Internet marketing ecosystem, populated by a variety of data brokers and advertisers buying and selling consumer information without their knowledge and consent, is worthy of Congressional inquiry. See the FTC’s March 2012 report, “Protecting Consumer Privacy in an Era of Rapid Change: Recommendations For Businesses and Policymakers.” Also see my paper with Jeff Chester of the Center for Digital Demcoracy, at the Suffolk University Law Review, “Selling Consumers Not Lists: The New World of Digital Decision-Making and the Role of the Fair Credit Reporting Act.”

- Ed Mierzwinski

Cross-posted from US PIRG.

The Hidden Cost of Car Loans (by Christopher Kukla, CRL)

When a car buyer finances a car through a car dealer, he or she signs a contract with the dealer for the car purchase and loan. In the vast majority of cases, the dealer will quickly get funding for the loan by selling that contract to a third party, such as a bank or finance company. The potential funders also receive the consumer’s financial information to help them determine pricing on the loan. The dealer then collects bids from interested financial institutions, which outline the terms and conditions the funder will accept, including the interest rate.

What most car buyers don’t know is that the bank funding the loan allows the dealer to increase the interest rate for compensation. For example, a bank may be willing to buy the contract as long as the interest rate is at least 4 percent, but will permit the dealer to charge the consumer up to 6.5 percent interest. The dealer is paid some or all the difference, which is the “markup.”

The Center for Responsible Lending estimates that for dealer-financed cars bought in 2009, over the life of their loans buyers will pay $25.8 billion in interest solely attributable to this markup. In 2009, the average markup was nearly 2.5 percent, hiking costs for each loan by hundreds of dollars. While we believe dealers should be compensated for the work they do in financing cars, they shouldn’t have arbitrary discretion to take more in compensation from some buyers than others.

Unfortunately, a long trail of cases shows that the dealer system is patently unfair. Most recently, the Consumer Financial Protection Bureau and the Department of Justice announced a settlement with Ally Financial based on discriminatory markup practices. They found that the average African-American car buyer who received an Ally loan paid more than $300 in additional interest over the course of the loan than white borrowers with similar qualifications. While agreeing to pay $98 million to settle these claims, Ally has also said that it plans to continue granting dealers the discretion to manipulate interest rates for compensation.

The dealers’ stubborn clinging to the markup system persists in spite of a history of legal violations dating back to the late 1990s. Again and again, lawsuits and investigations have found pricing discrimination. Not only do car buyers of color receive interest rate markups more frequently, they also consistently get higher markups than similar white borrowers.

The National Automobile Dealers Association recently proposed a voluntary plan for its dealers. Under this plan, rather than increase the interest rate on a case-by-case basis, dealers would mark up every interest rate. But here’s the catch: Dealers would still be free to lower rates if they so choose. This means that certain groups of consumers could still find themselves paying unjustifiably higher interest rates.

Dealers also try to justify markups by saying that their customers can negotiate the interest rate on their loan just like on the price of the car. The problem is this: Negotiation on interest rate doesn’t result in better pricing.

The Center for Responsible Lending recently released data showing that even though borrowers of color reported negotiating their interest rates at the same rate or more than white borrowers, they still paid higher interest rates. The data also showed that borrowers of color were more likely to be told information leading them to believe that further negotiation would be fruitless. When the dealer tells a consumer that the interest rate is the best that dealer can find, even though that may not be true, the consumer stops negotiating.

Ultimately, the banks that fund these loans have the power to stop abusive markups, but, as with the dealers, they don’t seem to be rushing to change. Recently, Wells Fargo announced that it will continue to allow dealers to mark up interest rates for compensation.

The Center for Responsible Lending and other groups believe that this particular form of compensation, which has a long history of unfairness, should be eliminated. Dealers already get compensated in forms other than marking up the interest rate. For instance, dealers receive a flat fee for every loan made under 0 percent and other low-interest rate promotions that manufacturers may offer. Dealers will still get compensated for their work, but with less incentive to sell consumers on the highest interest rate possible.

We applaud the Consumer Protection Bureau and Justice Department for their vigilance and action on the abuses that dealer interest rate markups cause. We think their recent actions are a step in the right direction, but we know that the only way to effectively eliminate abuse is to end this practice.

– Christopher Kukla

Originally published on

Consumer Agency Files Lawsuit Against ITT for Predatory Lending Practices

The Consumer Financial Protection Bureau has taken its first public enforcement action against a company in the for-profit college industry, filing a lawsuit against ITT Educational Services, Inc. The company, based in Indiana, is a for-profit provider of post-secondary technical education, with tens of thousands of students enrolled online or in the school’s 150 institutions. The agency is accusing the for-profit college chain of engaging in predatory student lending by pushing students into high-cost private student loans that, in Director Rich Cordray words, “were destined to default.” In fact, the company itself projected a default rate of 64 percent, predicting that well over half of students who borrowed would be unable to repay. The CFPB is seeking refunds for victims, a civil penalty, and an injunction against the company, among other forms of relief.

The CFPB asserts that ITT coerced students into taking on high-cost loans with interest rates of more than 16 percent. These loans additionally had opaque terms, with some students not even aware they had a private student loan until they received a collection call. The CFPB alleges that the company knew students would have no way to pay the temporary loans they were encouraged to take out to fund tuition gaps (the amount of tuition owed after federal financial aid resources were exhausted). ITT’s programs cost significantly more than similar programs at public colleges, and because the tuition is higher than the maximum federal student aid limit, many students had to fill that gap with outside financing. To fill this hole ITT offered students no-interest loans that looked appealing, but were due in full at the end of a student’s first academic year. When the end of the year came and students couldn’t repay, the company pushed them into new high-cost private student loans to repay both their temporary loans and their second year of tuition. ITT’s CEO even told investors that the plan all along was for students to end up converting the temporary loans to long-term loans.  In addition to misleading students on loans, the company also misled them on future job prospects, leading students to believe they would earn enough money upon graduation to repay their loans even though past experience showed otherwise.

Four state attorneys general, from Illinois, Iowa, Kentucky, and New Mexico, joined the CFPB in announcing legal actions. New Mexico Attorney General Gary King—who filed a separate suit in New Mexico—explained: “A significant percentage of the New Mexico students that entered the ITT nursing program were unable to complete the program; cannot get a job in their chosen field; because their ITT credits will not transfer, they must start over at another institution; and, these students continue to suffer under their heavy student loan debt.” Kentucky Attorney General Jack Conway, who is heading a group of 32 attorneys general investigating for-profit colleges, added that “some of these schools are more interested in getting their hands on federal and state dollars than educating students.”

The CFPB is using its authority under the Dodd-Frank Act to take action against institutions engaging in “unfair, deceptive, or abusive practices” in this case. Relatedly, the CFPB also recently finalized a rule, which takes effect on March 1, allowing the agency to supervise certain nonbank servicers of private and federal student loans.

– Rebecca Thiess