Real Bank Reform

A blog by Americans for Financial Reform

Pope Francis Says “No to a Financial System Which Rules Rather Than Serves”

“As long as the problems of the poor are not radically resolved by rejecting the absolute autonomy of markets and financial speculation and by attacking the structural causes of inequality, no solution will be found for the world’s problems or, for that matter, to any problems.” – Pope Francis, paragraph 202, the Apostolic Exhortation Evangelii Gaudium of November 26, 2013

“One cause of this situation is found in our relationship with money, since we calmly accept its dominion over ourselves and our societies. The current financial crisis can make us overlook the fact that it originated in a profound human crisis: the denial of the primacy of the human person! We have created new idols. The worship of the ancient golden calf (cf. Ex 32:1-35) has returned in a new and ruthless guise in the idolatry of money and the dictatorship of an impersonal economy lacking a truly human purpose. The worldwide crisis affecting finance and the economy lays bare their imbalances and, above all, their lack of real concern for human beings; man is reduced to one of his needs alone: consumption.” – paragraph 55

“While the earnings of a minority are growing exponentially, so too is the gap separating the majority from the prosperity enjoyed by those happy few. This imbalance is the result of ideologies which defend the absolute autonomy of the marketplace and financial speculation. Consequently, they reject the right of states, charged with vigilance for the common good, to exercise any form of control. A new tyranny is thus born, invisible and often virtual, which unilaterally and relentlessly imposes its own laws and rules. Debt and the accumulation of interest also make it difficult for countries to realize the potential of their own economies and keep citizens from enjoying their real purchasing power…” – paragraph 56

“A financial reform open to such ethical considerations would require a vigorous change of approach on the part of political leaders. I urge them to face this challenge with determination and an eye to the future, while not ignoring, of course, the specifics of each case. Money must serve, not rule! The Pope loves everyone, rich and poor alike, but he is obliged in the name of Christ to remind all that the rich must help, respect and promote the poor. I exhort you to generous solidarity and a return of economics and finance to an ethical approach which favours human beings.” – paragraph 58


Municipal Securities Watchdog Relents on the Meaning of Independence

In a quiet victory for reform, the Municipal Securities Rulemaking Board (MSRB) has dropped its proposal to let big-bank employees serve as independent ”public” members of the Board. The MSRB cited “unexpected opposition” to its idea – opposition that came in significant part from Americans for Financial Reform and our member organizations.

Had the MSRB’s proposal gone forward, employees of bank holding companies would have been allowed to dominate this little-known agency, reversing a move towards greater public accountability mandated by the Dodd-Frank Act. The MSRB is supposed to be a first line of defense against the kind of abusive practices that, in the runup to the financial crisis, trapped hundreds of cities and towns in swaps deals and other forms of risky financing that required taxpayers to pay exorbitant fees to Wall Street. Prior to the financial crisis, the MSRB clearly failed to protect municipalities from these abusive practices or even to clearly warn public entities of the dangers of the exotic new financing structures being sold by Wall Street.

To bolster the MSRB’s integrity and effectiveness, the Dodd-Frank Act of 2010 called for a majority of board members to be “independent of any municipal securities broker, municipal securities dealer, or municipal advisor.” In July 2013, however, the board appealed to the Securities and Exchange Commission for permission to loosen the new rule so that it would no longer exclude employees of big banks and major dealers who were not directly involved in municipal securities work.

AFR and our allies opposed this change as fatally undermining the independence that the law called for. As we pointed out in an August letter to the SEC, “this proposal would permit a so-called independent Member to be a current employee or director of a corporate entity that includes a municipal securities broker, dealer, or advisor as a subsidiary or affiliate, so long as the individual was not a current or recent employee of the specific subsidiary active in the municipal markets. For example, a current employee of JP Morgan Chase Bank NA could qualify as a Public Member of the MSRB, simply because they were not currently employed by JP Morgan’s municipal securities broker affiliate.”

Organizations weighing in opposition included AFR members the Consumer Federation of America and AFSCME along with the National Association of Independent Public Financial Advisors and the Government Finance Officers Association.

Now that the MSRB has withdrawn its proposal to weaken the standards of independence, the next step is to make sure that members who genuinely represent the public interest, not the dealer interest in selling risky deals to public entities, are in fact appointed to the Board.

Financial Deregulation Locomotive Slows in the House

Good news: two terrible bills were approved by the House of Representatives last week.

Three-and-a-half years after the Dodd-Frank financial reform law was signed, the “Swaps Regulatory Improvement Act” (HR 992) and “Retail Investor Protection Act” (HR 2374) remind us that the financial industry is still far from reconciled to reforms that threaten its cherished revenue channels. Nor has the industry lost its power to generate political support for measures that benefit Wall Street at the rest of the country’s expense.

The two bills prevailed by margins of 292-122 and 254-166, respectively. But while neither vote was close, they represent progress. In both cases, financial reformers (including members of Congress) spoke up forcefully, got the press to pay closer than normal attention and eventually mobilized enough resistance to make it unlikely that these proposals will advance further.

The first bill, HR 992, takes aim at a section of Dodd-Frank intended to keep banks from using publicly insured deposits to finance their dealings in exotic derivatives. Under the so-called “swaps pushout” provision, derivatives activity will be largely quarantined in company units that, lacking access to the public safety net, will have to come up with their own risk capital.

HR 992 would exempt almost all derivatives from the push-out rule. By doing so, it would once again allow the largest Wall Street banks to make huge sums of money betting with government-backed funds and low-interest Federal Reserve credit, potentially leaving taxpayers to pay for the bets that go wrong.

In the Financial Services Committee, 22 Democrats joined 31 Republicans in voting for the bill, while only six members voted against. One of those six, however, was the ranking member, Maxine Waters of California. And when the bill came before the Agriculture Committee, Collin Peterson of Minnesota, the senior Democrat, declared his opposition in unusual terms, recalling two of “the worst votes I ever made in this place,” which were for deregulation bills that, he now believes, helped bring about the 2008 financial crisis. “I didn’t know any better,” Peterson said, warning his colleagues that a vote for HR 992 would “could come back and haunt you.”

The origins as well as substance of HR 992 came in for scrutiny in the media. TheNew York Times unearthed evidence that most of the bill – 70 of its 85 lines – had been written by a lobbyist for Citibank. In addition, the Times and others reported on the findings of a nonprofit group, Maplight, that House backers of a package of Wall Street-friendly measures including HR 992 “received twice as much in contributions from financial institutions compared with those who opposed them.”

By the time it reached the House floor, the bill had lost much of its bipartisan luster. Eighty percent of the Democrats on the Financial Services Committee had supported it; in the full House, only 20 percent of Democrats voted that way.

The other bill, HR 2374, aims to prevent the Department of Labor from taking action to require retirement fund advisors and trustees to look out for their customers’ best interests (as opposed to their own interests). Wall Street lobbyists had worked hard to build momentum for this proposal. In August, 10 Democratic Senators signed their names to a letter that, echoing the industry line, warned that the DOL’s proposed rule would “limit investor access to education and increase costs for investors, most notably Main Street investors.”

Once again, public-interest advocates responded energetically. In petitions, organizational letters, and briefing sessions for both the House and Senate, opponents emphasized the steep costs of a system that leaves professional dispensers of financial advice free to recommend investments that produce more revenue for them, and less for those they advise. Out of a current total of $10 trillion in retirement assets, according to one recent study, roughly a third is invested in underperforming funds linked to plan trustees. Over a lifetime, American workers can easily lose hundreds of thousands of dollars as a result of such conflicts of interest.

Here, too, what started out as a quiet deal between lobbyists and lawmakers developed into a real debate, thanks to the dogged efforts of the AARP, the Consumer Federation of America, AFSCME, Public Citizen, the AFL-CIO and Americans for Financial Reform, among other reform groups. Significantly, the White House weighed in with a strong letter criticizing the bill and invoking the “v” word (for veto).

In another parallel with HR 992, some of HR 2374’s House supporters turned out to have lifted language as well as arguments from industry lobbyists. By following the trail of hidden email metadata, a reporter for Mother Jones showed that a Dear Colleague letter signed by 28 members of the Congressional Black Caucus had originally been drafted by a paid representative of the financial advisers who stood to benefit from the bill.

One thing led to another. At the outset, at least 60 House Democrats had been expected to vote for HR 2374; with that kind of support, the bill might have made a powerful claim on the Senate’s attention. But in the end, while all the House Republicans voted in favor, only 30 Democrats did. It was a “shockingly bad vote for Wall Street,” one House staffer commented.

Shockingly bad for Wall Street. Yet somewhat reassuring for the political process and the country.

Thanks to the House defections (and the work of the various groups that rallied against these bills), there is little prospect of action in the Senate. Now it’s up to regulators to forge ahead, using the political space they have been given to complete the process of turning two crucial reforms into enforceable rules.

— Jim Lardner

Originally published on


Mortgage Lender Agrees to Pay Over $13 Million in Groundbreaking CFPB Action

In good news for future homeowners and the safety of the mortgage markets, the CFPB yesterday announced a complaint and consent decree against Castle & Cook Mortgage, LLC, for allegedly paying bonuses to loan officers who had steered consumers into costlier mortgages. The consent order requires the company to pay more than $9 million in compensation to consumers and $4 million in penalties, in addition to ending its illegal practices. This action is the first enforcing new prohibitions against the payment arrangements that reward loan officers and brokers for putting borrowers into more expensive loans. Such payments helped fuel predatory lending and the pipeline of abusive mortgages that wreaked havoc on both individual homeowners and the whole economy.

Payment schemes like the one Castle & Cook has been ordered to stop were a very common feature of the pre-crisis mortgage market. In fact, such practices led to the mushrooming of subprime loans over the last decade-plus; studies have shown that at times over 50 percent of borrowers with credit scores high enough to qualify for conventional loans were instead steered toward expensive subprime loans. It is perhaps an indication of how normal this abusive practice had become that Castle & Cook apparently sought to maintain it, despite the new prohibitions, by disguising its bonus payments. Regulation Z was amended to “[prohibit] any person from compensating a loan originator based on a term or condition of a mortgage loan”; according to the CFPB complaint, however, the company tried to get around this rule by paying loan officers quarterly bonuses based on the terms and conditions of the loans they were able to close. These bonuses provided an incentive to steer consumers into suboptimal mortgages.

Homeowners continue to pay a high price for abusive mortgages: the Center for Responsible Lending has found  that higher-cost loans – including loans originated by brokers, hybrid adjustable-rate mortgages, option ARMs, loans with prepayment penalties, and loans with high interest rates – lead to higher rates of foreclosure. So the CFPB truly deserves our thanks for making sure this new law of the land is followed, even by companies that would rather not..


— Rebecca Thiess

The Dangers of Online Lending

Payday lenders have long dotted the landscape of lower-income communities across the country. Their loans, which offer short-term credit at exorbitant interest with little consideration of a borrower’s ability to repay, are often accompanied by difficult repayment terms and aggressive collection practices.

For years, policymakers and consumer advocates have worked to prevent borrowers from getting trapped in a long-term cycle of debt. But a recent development, online payday lending, raises new policy challenges and poses a particular threat to consumer protection efforts at the state level.

Fourteen states and the District of Columbia have effectively banned payday lending. Other states have taken steps to counter the worst abuses by, for example, limiting the number of back-to-back loans. Meanwhile, a growing number of lenders have set up shop on the Internet; and many now assert the right to market their products wherever they please, ignoring state consumer protections entirely.

As policymakers and consumer advocates continue their efforts to cap interest rates and counter the worst abuses, it is crucially important to stop the online players from circumventing state laws, and to make sure that banks cannot facilitate their efforts to do so.

Applying for a payday loan is simple – dangerously so. The borrower provides his or her name, social security number, employment history, monthly income and other basic information. The lender also obtains the borrower’s bank account and routing numbers. The loan proceeds are then deposited into that account, and the payments are withdrawn on or around the borrower’s payday.

Whether we’re talking about a storefront or an online loan, the lender relies on direct access to a bank account to collect payments. Unlike storefront payday loans, though, online loans are usually repaid in installments; and instead of leaving a post-dated check on file with the lender, borrowers authorize lenders to make electronic withdrawals directly from their bank accounts.

This authorization can result in serious problems later in the life of the loan. When borrowers agree to let a lender directly debit payments from their checking account, the permission is often difficult to revoke. Consumers have complained about being harassed at work. Lenders often make repeated attempts to debit the same payment, triggering multiple overdraft fees, which can make a borrower’s already tenuous financial condition worse. Unlike credit cards or car loans where a borrower has some control over when to pay the bill, these payments are automatically withdrawn. Borrowers can be left with no money to pay their mortgage or rent bills or to buy groceries or other necessities. This can have a knock-on effect for those who are looking to rent a house or apartment as a tenant credit check will need to be conducted, and if this shows up with non-repayments then that could mean them missing out on getting new accommodation.

In the event of default, some loan contracts even allow lenders to collect the entire amount owed, often through the little-known practice of remotely created checks. Remotely created checks, unlike the paper checks used to secure storefront payday loans, are generated by the lenders themselves and not signed by the borrower.

These payments are largely unmonitored, and lack the strong fraud prevention mechanisms necessary to protect consumers from telemarketing scams and other ripoffs. In part because of these fraud prevention limitations, remotely created checks have been widely replaced by better regulated forms of electronic payment, and some advocates have called for a ban on their use in consumer transactions.

Problems with payment and collection tactics aside, more and more payday lenders are violating state consumer protection laws outright. Currently, at least 16 tribes and numerous offshore lenders have launched online operations. These tribal and offshore lenders routinely market and originate loans all over the country, including the states in which payday lending is effectively prohibited. In states that permit payday lending, they claim to be exempt from basic licensing and consumer protection requirements. Even in situations where loan companies are owned and operated by tribes, these lenders are still required to follow state as well as federal laws when making loans.

As long as these consumer protection challenges go unaddressed, borrowers with online payday loans will continue to face abusive practices and limited options for redress if they run into trouble. Ensuring that all lenders play by the same set of rules and that consumers can make informed choices about their credit options means both addressing payment and collection abuses and cracking down on lenders who seek to evade much-needed and hard-fought state consumer protection laws.

Federal banking and consumer protection agencies play an important role in protecting consumers from abusive or illegal online payday lending and have begun to take notice. Recently, the Consumer Financial Protection Bureau announced that it had begun researching the online lending industry. The bureau has also initiated a separate inquiry into practices at a number of online lenders claiming tribal sovereign immunity from state laws.

Other regulators have stepped in as well. Last month, the Federal Deposit Insurance Corporation issued a letter advising the banks it supervises that processing payments for online payday lenders and other high-risk merchants could expose them to legal and reputational risk. While heightened scrutiny of the enabling role of banks is consistent with longstanding supervisory expectations from federal banking regulators, this announcement comes at an important time. State regulators in California, New York, Maryland and other states have recently turned their attention not only to lenders who are violating state consumer protection laws, but also to the banks that make unlawful loans possible. The Department of Justice, the Federal Trade Commission, and the Office of the Comptroller of the Currency have also taken steps to prevent online payday lending abuses.

There is still more to be done. The online lending market is changing rapidly, and new consumer protection tools are necessary to keep consumers safe. Allowing the continuation of abusive practices or the outright evasion of current law will lead to the erosion of over a decade of successful state efforts to protect consumers from the problems associated with high-cost lending. To eliminate the worst abuses in online lending, we need strong regulations both for the lenders and for the banks that abet them. And Washington needs to play a role.

Last spring, Democratic Sen. Jeff Merkley of Oregon introduced the Stopping Abuse and Fraud in Electronic Lending Act of 2013. Merkley’s proposal, and a similar House bill sponsored by Oregon Democratic Rep. Suzanne Bonamici, would require all lenders, both online and storefront, to comply with state consumer protections. It would also restrict the use of remotely created checks and prohibit the use of so-called lead generators – brokers who collect employment and bank account information from consumers and sell it to the online lenders. These protections, and continued vigilance on the part of banking and consumer protection agencies, are critical to ensuring that consumers are protected regardless of whether they take out a payday loan at a storefront or online.

— Tom Feltner

Tom Feltner is director of financial services at Consumer Federation of America, a member of Americans for Financial Reform.

Originally published on