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 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

Missing from the Inequality Debate: Wall Street Reform

President Obama was referring to the years since the financial crisis when he pointed out in his State of the Union speech that “average wages have barely budged” while “those at the top have never done better.”

But that would be a fair summary of the past three and a half decades, as well. And with his candor on this sensitive subject, the president seems to have touched a chord. In the pre- and post-SOTU commentary, a remarkably wide range of elected officials and pundits (including some who were briskly dismissive of the policy measures advanced in the speech) readily agreed that, in the president’s words, “inequality has deepened” and “upward mobility has stalled,” and something ought to be done about it.

That recognition is a breakthrough. It could – certainly it should – lead to increased support for steps to raise the federal minimum wage, reduce the burden of student loan debt and invest in early education and infrastructure, as Obama urged. But a meaningful debate over inequality will also have to address the economic structures that reinforce America’s extreme and growing concentration of income, wealth and economic and political power. And that means, for one thing, taking a fresh hard look at the rules of the game for Wall Street and the financial world.

Since the late 1970s, those rules have changed profoundly from what they were in the middle decades of the last century. Through court rulings and legislative as well as regulatory acts, this country lifted many of the restraints against what had been considered usury or loan-sharking; opened the door to a boom in deceptive and often unmanageable loans by disconnecting the issuance of debt from the responsibility to collect it; allowed banks to hide much of their activity from regulators; whittled away at the rules against conflicts of interest and insider dealings; and, by one means and another, encouraged what had been a comparatively stable and boring industry of mostly local and regional banks to transform itself into a world of high-flying, multi-purpose “financial services” giants prone to gambling with taxpayer-backed funds, and leaving others to pay for the bets that go wrong.

The financial crisis of 2008 threw some of these problems into sharp relief. And it provided the impetus for some much-needed regulatory reforms, including the creation of a Consumer Financial Protection Bureau to help end the persistent fleecing of middle-class consumers as well as the devastating debt traps so often set for low-income households. But much remains to be done.

Thanks in part to a wave of consolidations linked to the bailout, the big banks are bigger than ever, and still helped along by too many explicit and implicit public subsidies. Their business model remains ridden with insider advantages, self-dealing and conflicts, permitting practices that make heaps of money for financial high-flyers while draining resources from the real economy and leaving most Americans more vulnerable and insecure. Small wonder that Wall Street, unlike the country at large, has bounced back so decisively from the crisis it created.

In his State of the Union speech, the president emphasized measures that would not require fresh action by Congress. In the same spirit, there is much that financial regulators and the administration have the authority to do – or, under the Dodd-Frank Act and other existing laws, the duty to do – to prod Wall Street away from its destructive habits toward a simpler, safer, less leveraged and more economically useful financial system.

Regulators could, for example, forcefully implement the so-called Volcker Rule against proprietary trading, while making the most of their Dodd-Frank mandate to set higher capital and leverage rules for companies so big that their failure would likely bring on another crisis and pressure for another bailout. They could order financial firms to get out of the business of directly controlling real-world goods, and of swamping commodities markets with excessive speculation. They could say a very firm no to Wall Street’s high-pressure campaign for loopholes to let the big banks escape new derivatives regulations by routing trades through overseas subsidiaries. And they could take serious action to end the corrupt system that encouraged credit rating agencies to validate deception.

With a serious new legal assault on big-bank wrongdoing, federal watchdogs and prosecutors could do a lot more to hold financial institutions and their executives accountable for persistent patterns of misconduct that impoverish families and communities as well as local governments and other public entities.

Congress, of course, could do more still. It could, for example, strike a blow against the overconcentration and built-in corruption of our banking system by enacting the 21st Century Glass-Steagall Act – co-introduced by the bipartisan team of Sens. Elizabeth Warren, D-Mass., John McCain, R-Ariz., Maria Cantwell, D-Wash., and Angus King, I-Maine – to restore the division between traditional commercial banking and the casino world of trading and speculating. This would help limit the scope of the “too big to fail” banks, and help return banking to a focus on lending to homebuyers and “real economy” businesses.

As Washington embarks on a fresh discussion of tax reform, it could confront some of the tax-code features that help financial companies get away with paying only about 18 percent of corporate taxes despite the fact that they currently generate about 30 percent of the nation’s total corporate profits. Closing the “carried-interest” loophole, which allows managers of hedge funds and private equity funds to enjoy lower tax rates than teachers and firefighters, should be a no-brainer. The U.S. could also follow the lead of 11 European countries by embracing a Wall Street speculation tax. Unlike ordinary Americans, who pay sales taxes on all manner of goods and services, Wall Streeters go untaxed on its securities transactions. Even a very small levy of that kind would raise hundreds of billions of dollars over 10 years, while helping nudge the financial world away from excessive speculation and back towards its rightful role as an instrument of private and public investment.

One of the conspicuous drivers of inequality over the past three decades has been the spectacular income gains of the top 1 percent. Financial executives, traders, fund managers and others account for about one-fourth of those gains, and their paychecks, after taking a hit in the immediate wake of the crisis, are once again soaring to levels wildly disconnected from the state of the overall economy. Consider the stunning news that JPMorgan Chase CEO Jamie Dimon will be receiving upwards of $20 million – a 75 percent pay hike – for a year in which his company had to pay billions of dollars in legal settlements for pre-crisis mortgage abuses, energy market manipulation and institutional complicity in Bernard Madoff’s Ponzi scheme, on top of its “London Whale” round of wild betting in the derivatives markets.

The Dodd-Frank Act sought to address the role of pay practices in financial misbehavior by directing the Federal Reserve, along with the Securities and Exchange Commission and other financial regulators, to issue rules against compensation arrangements that reward excessive risk taking. But the deadline for those rules passed more than two and a half years ago, and so far all we have seen is a seriously inadequate draft rule calling for a too-short delay between the awarding and the payout of bonuses for a narrow group of senior executives. That rule could and must be strengthened, finalized and seriously enforced.

Another way for Congress to contribute would be by passing the The Stop Subsidizing Multimillion Dollar Corporate Bonuses Act, introduced by Senators Jack Reed, D-R.I., and Richard Blumenthal, D-Conn., and in the House by Rep. Lloyd Doggett, D-Texas. That bill puts teeth into a law that supposedly capped the tax deductibility of executive pay at $1 million a year – 20 years ago. By closing what has turned out to be a monstrous exemption for “performance-based” pay, the Reed-Blumenthal-Doggett proposal would raise significant revenue even as it stopped subsidizing extravagant pay on Wall Street and elsewhere.

This is a far from comprehensive list of ways to address inequality by advancing the cause of financial reform. The point is, if we are going to set our country on a path toward broadly shared opportunity and prosperity, steps to reshape the financial system and rein in Wall Street recklessness and excess must be high on the to-do list.

- Jim Lardner

Originally published on

Speculation Tax Gains Momentum (and a movie)

Europe is moving ahead with plans for a financial speculation tax – a small levy on securities and other financial trades designed to raise revenue, get the big banks to pay their fair share, and nudge the financial world away from reckless bets toward job-creating private and public investment.

11 EU nations have already agreed to adopt a speculation tax. Just this week, the topic was on the agenda of a meeting between German Chancellor Angela Merkel and French Francois Hollande. Public support is also growing: more than 300 organizations, representing over 70 million European citizens, have signed appeals for the EU nations to press ahead – and for the United Kingdom, the most conspicuous holdout so far, to get on board.

Celebrities have enlisted in the campaign as well. Check out this just-released 3-minute film, directed by David Yates (of the last 4 Harry Potter movies) and starring, among others, Bill Nighy of “The Best Exotic Marigold Hotel,” and Andrew Lincoln of the “Walking Dead” TV series.

Groundbreaking New Mortgage Rules Are Here

At the beginning of 2009, the U.S. economy was in the grip of one of the worst financial crises in our history. Home lending practices, which played a big part in that crisis, naturally assumed a prominent place on the agenda of financial reform. And now, five years later, groundbreaking new mortgage-lending rules have gone into effect, thanks to the diligent work of the Consumer Financial Protection Bureau.

To understand the new rules, it is useful to recall what they were designed to prevent – the kind of abusive loans and loan-marketing tactics that dominated the market in the pre-crisis years, leaving a trail of devastation from which homeowners, communities and the country are still struggling to recover.

Under one of the new regulations, a mortgage lender must verify a borrower’s ability to repay. That might seem to be an unnecessary rule; why would lenders need to be told to worry about getting repaid? And yet, in the run-up to the crisis, mortgage lenders made millions of loans that borrowers could not possibly afford to repay – except, in some cases, by riding an endless wave of increases in housing prices, further inflating a bubble that was bound to burst.

Subprime and other risky lending led to alarming levels of equity-stripping and foreclosures, and then, after the bubble burst, to a massive housing crisis and an economic depression. Since the crisis, both investors and homeowners and communities (especially low-income communities and communities of color) have paid a terrible price. Between 2007 and 2011, an estimated 10.9 million homes went into foreclosure. And the spiral continues, with millions more families enduring the economic challenges of owing more on their mortgages than their homes are worth.

The Bureau’s rules implementing new mortgage laws in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 went into effect on January 10 of this year. The law and rules are intended both to make the housing market safer for homebuyers and to protect communities and the economy from the kind of bubble and burst we just experienced. These ruleshave two ingredients. The first is straightforward — an “Ability to Repay” standard, which requires all lenders to reasonably determine the ability of a borrower to repay their loan. The second ingredient is a Qualified Mortgage standard (often referred to as QM) that will give lenders an incentive to originate safer and more transparent and affordable loans.

To qualify as QM mortgages, loans have to meet a number of affordability criteria, including a borrower debt-to-income ratio of less than 43 percent. For an adjustable-rate mortgage to qualify, it will have to be underwritten to the highest possible payment in the first five years; in other words, a borrower cannot be approved purely on the basis of the ability to handle a low initial payment that has been engineered to increase sharply a few years later. New QM standards will also limit points and fees to no more than 3 percent of the loan amount (for loans above $100,000), while prohibiting negative amortization and interest-only loans, among other abusive practices.

A Qualified Mortgage will be presumed to meet the Ability to Repay requirement. This part of the rules reflects a compromise between differing interests; prime loans that meet QM standards will enjoy legal protections from challenges to their affordability, while higher rate subprime QM loans have a rebuttable presumption of affordability.

The new rules do not ban any particular form of mortgage. Instead, they provide an incentive – in the form of greater legal protections for lenders – for safer, more standardized and lower-fee loans.

In drafting these, the Bureau weighed the views of a wide range of stakeholders, including industry, civil rights and consumer organizations, and its final rules reflect compromises on a number of key issues. When the rules were announced last January, many industry players responded with praise both for the rules themselves and for the care and thoughtfulness of the bureau’s deliberations.

More recently, however, the applause has faded, and segments of the banking and lending world have ramped up a campaign of obstruction. Meanwhile, some in Congress have responded to the pleas of a powerful industry (and a prodigious source of campaign money), by calling for delays and exemptions, based in large part on an old, tired and thoroughly discredited line of argument that the new rules will restrict access to credit. This is, of course, the very same claim that the lending industry used to fend off regulation in the housing-bubble years. In the short run, the conduct that led to the bubble brought enormous profits to the worst elements of the lending industry. But the end result was a much wider disaster, with an epidemic of foreclosures and massive losses of homes, jobs and household wealth.

Access to credit is a legitimate issue, and lending standards are in some regards very tight right now. But while this is a question that needs to be addressed, the QM standards that just went into effect are not the source of the problem. These rules are clear standards designed to save borrowers and the rest of us from another wave of dangerous and unsustainable loans — the types of loans that took advantage of families, stripping them and their communities of much needed equity.

The crisis devastated families and communities, and has cost this country many trillions of dollars in lost wealth. It is critical that new rules and standards inhibit banks, lenders, and other self-interested parties from the ability to return to pre-crisis business as usual. While these protections and standards are important in protecting families, investors, and the economy, work remains to be done. The focus in the months and years ahead should be on making sure we have rules that accomplish the critical goals they are designed to meet, including identifying and closing gaps that could permit abuses to continue.

- Rebecca Thiess

Originally published on