How the CFPB Came to Be

Financial JusticeMost people told us it couldn’t be done. Despite the well-documented evidence that unregulated Wall Street and other lender practices triggered the spectacular 2008 world-wide economic collapse, pundits and observers in Washington predicted that Wall Street’s powerful lobby would swat back any proposed reforms. In July 2010, however, President Barack Obama signed the comprehensive Dodd-Frank Wall Street Reform and Consumer Protection Act. A centerpiece of the new law was its establishment of the nation’s first agency with one job, protecting financial consumers.  The Consumer Financial Protection Bureau (CFPB) was and is vehemently opposed by the nation’s bankers, mortgage companies and others, including the payday and other predatory non-bank lenders over which it was granted tools to rein in.

And while unrepentant opponents of reform continue to seek rollbacks and revisions to the Dodd-Frank Act — including outright repeal of the CFPB —  what they said couldn’t be done was accomplished. The CFPB was created. Further, it was built tough, and given powerful tools we asked for to protect America’s consumers.

How did that happen? How did public interest groups beat Wall Street, the most powerful lobby around?

Two academics, Professor Robert Mayer and Larry Kirsch, now explain the story in their new book “Financial Justice: The People’s Campaign To Stop Lender Abuse.” It is available at Amazonand Barnes and Noble, but check local independent bookstores first. The book chronicles the  beginnings of and then the challenges faced by the PIRG-backed coalition Americans for Financial Reform, which stood its ground alongside Professor Elizabeth Warren, Rep. Barney Frank (MA), Sen. Chris Dodd (CT), Illinois Attorney General Lisa Madigan and other reform champions to win not only the creation of the CFPB but a variety of other tough reforms over the financial industry.

The book digs deeply into some of the dramatic turning points in the fight for the CFPB and also has a chapter devoted to Elizabth Warren’s role as a “policy entrepreneur.” After all, Warren not only developed the idea for the CFPB in a small policy journal, but as the book points out, she then did something that isn’t too common: she helped make it into a law just three short years later. The meticulously footnoted book also has a forward by Barney Frank and its afterward is based on an interview between the oral historian, professor Norm Silber, and Elizabeth Warren.

“Financial Justice” explains the strategic decisions and policy choices that AFR had to make to preserve and pass the strongest reforms possible. It has lessons for all activists seeking to fight city hall or evil empires. In full disclosure, the book includes interviews with numerous AFR members and leaders, including me and my then-U.S. PIRG colleague Gary Kalman, who is now with our AFR allies at the Center for Responsible Lending.

When U.S. PIRG worked with SEIU, the AFL-CIO and others to urge the need for a broad coalition, I often borrowed Ben Franklin’s line during the Declaration of Independence drafting session negotiations that “We must indeed all hang together or, most assuredly, we will all hang separately.”

As Mayer and Kirsch correctly describe, AFR — a unique coalition of consumer, civil rights, labor, senior and other organizations —  indeed did “hang” together to defeat the American Bankers Association, the U.S. Chamber of Commerce and a host of other pro-industry lobbies to enact the new law.

Of course, AFR continues to lead the fight against all rollbacks of the Dodd-Frank Act. We are working to protect all of Dodd-Frank, from its provisions to prevent bank bailouts and rein in risky derivatives practices in the securities markets to its requirements to disclose grotesquely excessive executive compensation to shareholders. Yet, the battle for the very existence of the CFPB remains an intense focus. In July, we expect a Senate floor vote on the confirmation of CFPB director Richard Cordray to a full term. Opponents? They demand that the agency be gutted as a condition of his approval, while begrudgingly admitting he is extremely well-qualified.

We’re hanging together against those powerful special interests. The fight for financial justice demands eternal vigilance.

–          Ed Mierzwinski

Cross-posted from US PIRG.




Comeback of the Kickback

Five years after the bubble burst, subprime-mortgage-style avarice is making a comeback. Consider HR. 1077 and S. 949, a pair of industry-backed bills to re-legitimize one of the slimiest practices of the bubble years – the lender kickbacks that sent armies of brokers out across the land promoting dangerous and deceptive loans, especially in low-income areas and communities of color.

Subprime lenders often charged high up-front fees, and they rarely held onto a loan long enough to care whether it got repaid. They were also fond of a form of broker commission known as a yield spread premium, or YSP, which was basically a reward for sticking a borrower with a needlessly expensive or risky loan.

interest-rate-houseYSPs were a major driver of abusive lending. More than 85 percent of subprime mortgages included them, with brokers typically collecting $1,000 dollars or more for getting people to accept tricky loans that would cost them extra money and erode their equity (the best-case scenario) or push them into default and foreclosure (the all-too-common worst case).

It was a system built to exploit the credulousness of borrowers, including many homeowners who had no idea that brokers weren’t looking out for their best interests. It was also a recipe for discrimination. Regardless of their credit-worthiness, borrowers of color were much more likely to receive high-interest loans or loans with prepayment penalties, teaser rates, and other tricky features. Among borrowers with better-than-average credit scores, African-Americans and Latinos wound up with high-interest loans more than three times as frequently as whites did.

YSPs led to bad mortgages, which frequently led to disaster: according to a late 2011 report by the Center for Responsible Lending, predatory lending practices were a strong predictor of foreclosure. Unsurprisingly, the same report found that an estimated one-quarter of all Latino and African-American borrowers had either been foreclosed on or fallen into serious delinquency, compared to just under 12 percent of white borrowers.

In the Dodd-Frank financial reform law of 2010, Congress set out to end this perverse system of compensation. Dodd-Frank called for the creation of a new class of safer loans, known as Qualified Mortgages, which would get preferential legal treatment. A qualified mortgage could not include any broker payment pegged to the cost (as opposed to the amount) of a loan. Moreover, the total of up-front “points and fees,” including broker payments from either borrower or lender, could not exceed 3 percent of the loan. Borrowers are looking for security in their mortgage choices, so to now have this become a new law can help them immensely with getting the right outcomes for their loans. It is important that a proper wholesale mortgage banking system is also set up to ensure that payments are handled correctly and efficiently.

To their credit, the Federal Reserve Board and the Consumer Financial Protection Bureau have moved ahead with rules to put these key reforms into effect. Under their rules, brokers can no longer pocket huge up-front commissions for making loans that are likely to self-destruct a year or two down the road.

But now, at the eleventh hour, brokers and lenders are trying to undermine the new rules with the grotesquely misnamed Consumer Mortgage Choice Act, which would exempt broker kickbacks from the 3 percent cap. This is a proposal that, in both its House and Senate versions, is very obviously designed to benefit brokers, not consumers. It would open the door to a resurgence of the aggressive and indiscriminate mortgage lending that left a trail of devastation when the market collapsed.

Although the Dodd-Frank law prohibits variable compensation based on interest rates, lenders who specialize in high-interest loans are still at liberty to pay premium commissions. The House and Senate bills would actually encourage that by excluding such commissions from the fee cap. Brokers would then inevitably gravitate toward the most irresponsible lenders, and we could expect a fresh wave of the unscrupulous lending that got us where we are today.

To make things worse, fees paid to lender-affiliated title insurance companies would also not count toward the cap under these bills. Title insurance charges, like YSPs, are associated with a long history of price-gouging.

It should come as no surprise that many lenders and brokers long to bring back a payment mechanism that produced windfall profits as soon as a loan was issued – money that did not have to be returned if the loan went bad a little while later. Barely five years after the mortgage meltdown, however, it is both extraordinary and appalling to see House members and senators – Democrats and Republicans alike – eagerly attaching their names to these foolhardy proposals.

This country is still paying the tab for the last big wave of deceptive mortgage lending. Not since the Great Depression have we experienced such a sharp increase in unemployment or such a dramatic erosion of wealth.

American have not forgotten. It shouldn’t be too much to ask that our elected officials remember, too – and summon the courage to say no when the financial industry seeks to roll back sensible rules written to prevent predictable rip-offs.

— Jim Lardner

Originally published on (6/19/13)


Wall Street's Derivatives Gambit

This week marks an important step forward in the implementation of financial reform. On Monday, the U.S. became the first country in the world to require mandatory clearing of many derivatives contracts, a crucial protection in these previously unregulated markets.

But even as this crucial protection takes effect, Wall Street is mobilizing to create a back door escape route. Its goal is to prevent U.S. regulation of derivatives transactions by U.S. companies that are conducted overseas.

This loophole could strike at the foundations of financial reform. Almost every major financial scandal involving derivatives – from the collapse of Long Term Capital Management’s Cayman Island operations in the 1990s, to the bailout of AIG’s London-based trades in 2008, to JP Morgan’s recent “London Whale” trading losses – has involved derivatives transactions conducted through a foreign entity. Wall Street banks routinely transact more than half their derivatives through foreign subsidiaries. Through numerous avenues, including an important Congressional vote today, Wall Street is trying to create an “extraterritorial” loophole in derivatives regulation.

Derivatives are essentially bets on future financial moves. Prior to the crisis, the massive markets in derivatives (over $300 trillion in notional value in the U.S. alone) were essentially unregulated, and conducted as simple contracts between any two financial firms. There was almost no public transparency or regulatory oversight of firms’ derivatives books, and no assurances that firms could deliver on the bets they made. This was a major contributor to the financial collapse.

The Dodd-Frank financial reform law of 2010 brought these markets under regulatory oversight for the first time. Although implementation of the rules has been greatly delayed by heavy industry opposition, we are finally beginning to see some progress. As of Monday, the Commodity Futures Trading Commission requires most U.S. derivatives transactions to be conducted through centralized clearinghouses. Clearinghouses specialize in risk management and guarantee performance of the contract. Future regulatory actions should bring close to 90 percent of the market under mandatory clearing.

Wall Street lobbyists are pushing hard to undermine this progress by exempting foreign transactions. If they succeed, entities nominally based in foreign countries but active in U.S. derivatives markets will not have to comply with U.S. derivatives rules. This could potentially include foreign subsidiaries of U.S. banks, the numerous U.S. hedge funds incorporated in places like the Cayman Islands and subsidiaries of major foreign banks that are major dealers in the U.S. markets. Because derivatives markets are global and conducted electronically, a click on a computer keyboard is all it takes for a major bank to route any transaction through a non-U.S. subsidiary. But the risk can still return to impact the U.S. economy.

Industry opponents claim that the rules of foreign countries will protect us in these cases. But no country in the world is as advanced as the U.S. in regulating its derivatives markets. While the U.S. is actively bringing derivatives regulations on line, key elements of oversight are still at least a year away in Europe and elsewhere. And permitting foreign regulation to govern U.S. derivatives transactions would be dangerous in any case. It would create an incentive for global banks to transact their business through whatever jurisdiction has the weakest regulations – a “regulatory haven” to match the tax havens that international corporations already use.

Multiple efforts are underway to undermine international derivatives rules. In Congress, the House will vote today on HR 1256, a bill that would sharply limit the jurisdiction of U.S. derivatives regulators over transactions conducted in foreign markets. This bill is likely to pass the House, having gained the support of a large majority of the Financial Services Committee – but it’s still important for pro-reform forces to register opposition. There should be more resistance in the Senate, where six Senators led by Sen. Sherrod Brown, D-Ohio, recently sent a strong letter to regulators supporting effective international regulation of derivatives markets.

At the same time, both Wall Street and foreign regulators are pressing the Commodity Futures Trading Commission to step back from enforcing its rules overseas. The CFTC is scheduled to begin enforcement next month, on July 12, but industry is pushing for additional and perhaps indefinite further delays. While current CFTC chairman Gary Gensler is a strong supporter of effective regulation, other commissioners, led by Scott O’Malia, favor more delay.

Finally, industry and (astoundingly) some members of Congress are seeking to renegotiate U.S. financial regulations through secretive international trade negotiations, which could allow numerous new international exemptions to be added without any public accountability or oversight.

It’s crucial that these efforts do not succeed. After years of work to implement basic safeguards in the massive shadow markets that crashed the global economy, we can’t let Wall Street sidestep these protections simply by taking its business overseas.

— Marcus Stanley

Originally published on

Monitoring the Mortgage Agreement

In February of 2012, the five biggest mortgage servicers signed on to a legal settlement with 49 states and the federal government. The servicers committed themselves to doing more and better mortgage modifications and using principal reduction as a tool. They also agreed to abide by a set of new rules designed to better protect homeowners.

In recent months, New York has threatened to sue Bank of America and Wells Fargo, while the attorneys general of Illinois and Florida have voiced concern that servicers are still not consistently following the new rules. Now the National Housing Resource Center (NHRC) has released a report documenting evidence of widespread noncompliance. The NHRC based its report on feedback from 212 housing counselors working with clients across 28 states.  An earlier survey by the California Reinvestment Coalition of counselors in California alone found similar results.

Here are some of the NHRC report’s most striking findings:

  • Mortgage servicers frequently take far beyond the mandated maximum of thirty days to respond to completed loan modification applications. Citibank’s review process, according to one counselor, “takes an average of 8 months to more than a year.”
  • Servicers routinely lose important documents and demand they be sent in again. Unexplained delays by the bank mean that borrowers must repeatedly update time-sensitive documents. Counselors complained of inefficient collection procedures, with one commenting (about GMAC/Ally Bank) that “Not all documents are scanned together at intake and often times they are lost and no one knows where the client is in the process ….”
  • Dual tracking – the servicer practice of moving forward with a foreclosure while the homeowner is actively seeking a loan modification – is unfortunately alive and well. “62% of respondents said that the mortgage servicers continued to dual-track at least ‘sometimes.’”
  • Qualified SPOCs (Single Points of Contact) are few and far between. The national settlement mandates that a borrower have consistent access to someone who is familiar with his or her case. In fact, servicers don’t always provide such a contact, and when they do, the SPOC often fails to return phone calls or isn’t knowledgeable about the borrower’s case. Speaking of Bank of America, one counselor said: “The voicemail machine is the only answer you get and there is never a call back within those 48 hours as they stated on their voicemail.”
  • Borrowers who don’t speak English face an uphill battle. According to the report, “Nearly half [46%] of counselors said their LEP clients ‘never’ received translated foreclosure-related documents and 76% of respondents said their LEP clients were ‘never’ or only ‘sometimes’ able to speak to a servicer in their native language or through a translator provided by the servicer.” Those with hearing and other disabilities are often literally ignored. “Servicers will typically hang up when they are ‘picked’ up by a relay call center for deaf/hearing impaired.
  • 29% of respondents believed that people of color must jump through extra hoops when trying to modify their loans. “Banks seem to take more time in doing work-outs with our white borrowers,” one respondent said. White borrowers “are sometimes offered services never offered to others.
  • Servicers often refuse to negotiate loan modifications with widows and surviving children when the deceased is the only name on the mortgage.  The Catch-22 in some of these situations is the servicer’s insistence that the mortgage be current before the inheritor can take it over and seek an affordable modification.

— Mitchell Margolis

Complete report is available at

Raiders of the Lost Retirement Account

There are many ways you can save your money for retirement. Some people like to put money in a retirement plan from the moment they start working, others like to start savings later on, and a few invest their money, hoping it will become profitable in time for their retirement. One person might go to the banks and look for the retirement plan with the best interest rate. Another might look into “CoinMiningCentral scam or not” then invest in mining crypto to make a profit from it in the long run. If mining crypto is something that they would feel intimidated by, they could look at various websites which might give them an idea about the latest trends and stock prices of various digital currencies such as Bitcoin and Ethereum. Upon thorough investigation and if they deem fit, they could also try and find at the cheapest way to buy bitcoin, or invest in the same. Hpwever, if the domain of crypto does not quite sit well with them, they might look at options to sell their property in order to fund their retirement. There are lots of options — so many that it might feel overwhelming.

Worried about your ability to set money aside for retirement? Many of us are, especially if we’re also planning on taking out the best burial insurance for seniors. There are a lot of people out there who think it best to just primarily focus on a retirement product such as a savings account or 401(k) plan, as that is surely the best place to put their money. However with the publication of a certain report, maybe you should worry about what happens to the money you put away.

According to a report from Demos, the typical two-earner family with an employer-sponsored account will end up paying some 30 percent of its retirement nest egg – a total of $155,000 – to Wall Street money managers in 401(k) fees and charges.

How can this be? The financial services industry, in addition to its talent for developing different kinds of fees, has been adept at coming up with ways of concealing them. To start with, many of the fees and costs that Wall Street collects for trading securities are typically omitted from the top-line “expense ratio” reported to savers. That’s a pretty huge omission, since trading fees account for half the fees charged to an average investor, according to Demos.

The industry also makes its fees look small by typically reporting them as a percentage of total savings, avoiding any mention of the far higher proportion they make up of your total investment return. For example, a total fee that adds up to 2 percent of managed assets may seem small – but if your typical return is 7 percent, the fee represents almost 30 percent of total returns.

One of the biggest advantages enjoyed by industry lies in the nature of the professional advice available to investors seeking to understand such questions. Astoundingly, the broker who sells you a retirement product often has no obligation to serve your best interests, or even to provide you with reliable counsel. Instead, the law often gives brokers a green light to promote products that generate higher fees for them, regardless of the impact on you.

The non-partisan Government Accountability Office has documented numerous instances of such conflicts of interest. The GAO not only found investment managers cross-selling products to 401(k) clients that enriched the manager at the investor’s expense, but also brokers being rewarded for steering investors into high-fee products. One report found that almost a quarter of telephone representatives and half of web sites incorrectly informed investors that no fees would be levied for managing their retirement money if they transferred it into an individual retirement account. In fact, fees are charged on these products, but are usually buried deep in the fine print of the IRA documents.

The good news is that these problems have found a place on the agenda of Washington regulators meaning they could be remedied in our lifetime. The bad news is that the necessary remedies face tremendous opposition. In fact, the way things are going, it will take a mighty effort to keep industry lobbyists from winning the fight to keep investors in the dark.

In light of this news, many people have become soured to the idea of a retirement plan and have looked for different ways to save. This includes investing in stocks or the likes of charleston real estate to sell at a later date. While there are still fees associated with this method, it has the potential to earn as much as if not more than a retirement account. Until retirement account fees are remedied, ideas like this may become more prevalent in the future.

The Department of Labor has taken up the task of updating the legal protections covering 401(k)s and other employment-based retirement accounts. Certain forms of retirement savings (especially those managed directly by your employer) are already protected by a strong fiduciary duty – that is, a legal requirement for the investment manager to put your best interests first. But the fiduciary-duty rules are outmoded, and exclude much of the current retirement-fund market.

These fiduciary rules were last updated in 1975 – a time when over 90 percent of retirement plans were controlled directly by employers. That’s very different from today’s individualized accounts like 401(k)s and IRAs. As a result, employees have no legal protection when engaged in many transactions, including the critical one of “rolling over” a 401-K into an IRA. In order for the new rules to be effective, the Department of Labor will have to impose a clear ban on inappropriate steering of clients, including strict limitations on broker-payment arrangements that create conflicts of interest, along with much better disclosure.

And it will have to do so in the face of fierce resistance from the financial industry. The Department of Labor recently had to retreat on one proposal to improve fiduciary rules in a debate dominated by insider interests such as brokers and investment managers who benefit from the current high fees and lack of obligations to clients. Now the department is preparing to propose reforms again, and the same interests will try to defeat them again. The public needs regulators and legislators to stand up for better protections for our savings, and prevent the process from being dominated by financial insiders.

The Dodd-Frank financial reform law also handed an important responsibility to the Securities and Exchange Commission – the task of developing new rules to increase fiduciary protections for advice given by securities brokers. Right now, while investment advisors have a duty to put your best interests first, securities brokers don’t. In practice, the distinction between the two types of investment professionals is blurred and unclear to most investors. The Dodd-Frank law called for securities-broker fiduciary duties to be made stronger, clearer and more like those of true investment advisors.

Unfortunately, this is another area where heavy industry lobbying has greatly delayed and weakened action. Preliminary indications suggest that the SEC’s approach could end up being far weaker than is needed to protect investors.

The issues in retirement savings are broad, and new fiduciary rules won’t take care of all of them. But a strong legal obligation for all investment advisors to avoid deceptive and abusive practices would be a common-sense start. And that can only happen if investors and employees stand up for the principle that when financial professionals give advice, they must put the best interests of their clients first.

— Marcus Stanley
(Originally published on

When Is Data Collection Burdensome? When It’s About CEO Pay

There is one good thing to be said for Michigan Representative Bill Huizenga’s bill to spare U.S. companies from disclosing how their CEO pay compares with their median-employee pay. It reminds us that companies were supposed to be doing that.

Crazed compensation tied to short-term profits and stock gains had a lot to do with the cycle of reckless lending, opaque securitizing and systematic offloading of responsibility that gave us the financial meltdown of 2008. In one modest response, the Dodd-Frank Act requires companies to reveal more about their pay practices.

Investors need to know more, both to guard their own pocketbooks against risky bets by self-seeking executives and to evaluate a company’s long-term soundness in light of evidence – backed by common sense – that runaway pay at the top breeds cynicism and opportunism up and down the line. (The law also calls for nonbinding “say on pay” votes by shareholders, and bars compensation arrangements that would reward bankers for excessive risk-taking.)

But it has been easy to forget the pay-disclosure provision, because the Securities and Exchange Commission, charged with writing rules to implement it, has yet to act three years later. That failure, in turn, can probably be attributed to the hue and cry of CEOs and corporate spokespeople.

Not that they have anything to hide, they assure us; their stated concern is with the enormous difficulty, to quote one financial-lobby policy brief, of sorting through “the data from many countries and multiple payroll systems” and adjusting for “account currency fluctuations and the laws of each country with respect to benefits and even confidentiality of employees’ compensation information” – you know, that sort of thing.

Last week, the House Financial Services Committee heard testimony on Huizenga’s bill – the duly named “Burdensome Data Collection Relief Act” – as part of a hearing on “Legislative Proposals to Relieve the Red Tape Burden on Investors and Job Creators.” The committee is expected to approve the measure and forward it to the full chamber in a matter of weeks.

Inconveniently for Huizenga and his proposal, however, it comes at a time of surging executive pay, which stands in “startling contrast” to the state of the overall economy, as USA Today noted recently. CEO compensation at a sample of S&P 500 companies grew by 8 percent between 2011 and 2012, swelling the typical package to nearly $10 million a year. And though we still don’t have the company-specific numbers mandated by the law, the top-to-median ratio has plainly been rising for decades. S&P 500 CEOs, on average, made 354 times as much as rank-and-file workers last year, according to an AFL-CIO analysis of corporate filings and Bureau of Labor Statistics data. In 1982, the multiple was 42 to 1.

We know more about corporate compensation and more about the process of calculating it thanks to Bloomberg News, which decided to do its own company-by-company tally last month, using publicly available executive pay figures and the BLS’s industry-by-industry median pay figures. This exercise produced a CEO-to-typical-worker multiple of 204-to-1 for the 250 biggest companies in the S&P 500, and 495 to 1 for the companies with the 100 highest-paid executives.

But the corporate reaction was every bit as revealing as the data. As a pre-publication courtesy, Bloomberg invited each company to respond, which a number of them turned out to be eager to do. For example, the Ohio-based Fifth Third Bancorp, with 21,000 employees, wasted no time in informing Bloomberg that CEO Kevin Kabat’s pay, including every possible dollar and perk, was only 176 times, not 186 times, that of the company’s median worker.

So it turns out not to be such a daunting task for banks and other companies to come up with figures for CEO and median-employee pay. (Fifth Third’s press people, as Sam Pizzigati noted in his weekly inequality newsletter, had evidently failed to “read the memo” on the onerousness of the task.)

In recent decades, the pay of CEOs and top executives has shot up relative to just about every measure of business or national prosperity. Twenty years ago, roughly five percent of the profits of the biggest companies went into executive compensation; now it’s ten percent. While the companies with the most extreme ratios tend to be in retail or fast food, which depend on vast numbers of minimum-wage workers, the Bloomberg tally nevertheless showed financial firms with the highest overall ratio – above 300 to 1 – of any major industry.

Huizenga’s bill will likely pass in the House and be ignored in the Senate. Then again, enactment was not the point of this proposal. It is best understood as just another volley in the barrage of corporate efforts to intimidate the rule-makers at the SEC – efforts that, helped along by far too many members of Congress, appear to have had an effect.

“I’m shell-shocked,” Vanguard mutual fund founder John Bogle said in reaction to last year’s CEO pay gains. “I can’t believe this can go on. I can’t believe owners of these companies can’t take a bigger stand.”

Maybe they will if the SEC can finally manage to act on a requirement that still is and, let us hope, will remain the law of the land.

— Jim Lardner

(Originally published on