23 01, 2023

Karen Petrou: How the CFPB Plans to Rule by Registry

2023-01-23T11:09:36-05:00January 23rd, 2023|The Vault|

Last week, we provided clients with an in-depth analysis of the CFPB’s latest nonbank registry as well as a hard look at its impact on mortgage securitization.  Any nonbank subject to the CFPB will find its legal arsenal much depleted by the registry’s requirements, a point already well understood by opponents.  Far less noticed but of still greater consequence to all consumer-finance companies is another implication of the Bureaus actions here and in another recent registry proposal:  even where the CFPB has little to no regulatory authority, it will deploy its formidable ability to gain public attention to make unbearable the reputational risk of any practice it abhors.

Justice Brandeis is often quoted as saying that sunshine is the most powerful disinfectant and Director Chopra clearly plans to cast companies under a scorching sun.  That is works was demonstrated by his decision to detail the ways in which he believes overdraft fees support predatory earnings at considerable cost to vulnerable consumers.  That most banks charged overdraft fees in strict compliance with current rules made enforcement action at best a challenging route to reform.  Rewriting the rules would have gotten the Bureau where it wanted to go, but only over at least a year of wrangling.  Set out in the merciless sun by Mr. Chopra and Congressional Democrats, many banks decided that the political and reputational risk of continuing overdraft fees was just too high.

Overdraft reform thus proved easy to say and then to do.  So it is …

31 10, 2022

Karen Petrou: The Moral Dilemma of CFPB Dictate

2022-11-01T16:56:49-04:00October 31st, 2022|The Vault|

There is little question that electoral politics powered the President’s launch last week of a new Administration “junk-fee” campaign. How most of these fees matter to the majority of households fuming as they can’t handle prices at the food store and fuel pump is yet to be seen, but politics is only part of the reason for the CFPB’s high-priority blitz against “surprise” fees. Politics is easily understood, if not practiced to maximum advantage. Regulatory actions founded on moral philosophy are not only a compliance conundrum, but also an intellectual quandary.

Question for today’s class: is it right for Rohit Chopra to set rules regardless of the niceties of the rulemaking process when he believes certain acts or practices violate the natural rights of the U.S. citizenry? This may seem a hyperbolic description of the CFPB’s spate of enforceable pronouncements, but it’s the way I read many of them.

Take for example the latest edict on overdraft fees. As FedFin’s in-depth analysis will detail later today, the CFPB’s circular details a raft of laws and rules governing overdraft fees, going on to say how nice they all were but how little they matter anymore.

Because technological delivery can, the CFPB says, obscure fund availability, the Bureau concludes that fees which comply with every provision of each applicable law and rule are still unfair, deceptive, and/or abusive. Disclosures that comply with every provision in each law and rule also no longer suffice, the Bureau believes, and thus depository institutions have an …

27 06, 2022

Karen Petrou: Consumer-Finance Regulation Under the New Paradigm

2023-01-25T15:16:00-05:00June 27th, 2022|The Vault|

My interview late last week with NPR’s Marketplace on the CFPB’s assault on credit-card fees sparked considerable comment mostly about how much people hate their credit-card fees.  What’s at stake here, though, is not one fee – it’s the impact of a paradigm shift in the construct of U.S. consumer-finance regulation.  If Rohit Chopra has his way – and he may well – consumer financial-protection standards will be transformed from reliance almost exclusively on disclosures into a federal construct of price-setting and product prohibitions.  Political ideology may dictate a preference between these paradigms, but a choice that enhances effective consumer protection isn’t that simple – disclosures have largely failed consumers, but nationalized consumer finance could crush consumer banks.

Historically, U.S. consumer-financial protection law depends on disclosure.  Indeed, transformational law were called the “truth-in” acts because Congress believed that making financial providers tell the truth would set consumers free from predatory practice.  Congress also understood that some practices were ill-governed by pages of ex ante paperwork or seemingly-comparable terms and thus set standards – when payments must be in hand – or provided express protections – $50 maximum charges for transactions that go astray.  However, with few exceptions mostly instituted in 2010 after the crash, Congress did not allow regulators to set prices or prohibit even egregiously predatory products.  Look for example at the Home Ownership Equity Protection Act, which principally required disclosures and did nothing to staunch high-risk mortgage finance and the crisis it fostered.

It’s thus understandable that Rohit …

22 06, 2022

FedFin: Fed Comes Under Heightened Political Pressure

2023-01-25T15:58:37-05:00June 22nd, 2022|The Vault|

As we expected, today’s Senate Banking session with Chairman Powell is a preview of broader national debate ahead of the midterm election.  Democrats generally sought to emphasize their understanding of inflation’s costs without lambasting the Fed and, indirectly, the Biden Administration.   Still, Sens. Ossoff (D-GA) and Warnock (D-GA) pressed Mr. Powell on the Fed’s failure to begin to tighten last summer.  Republicans were strongly united in lambasting….

The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.…

1 02, 2022

FedFin: “Fair-Fee” Policy

2023-04-05T14:22:57-04:00February 1st, 2022|The Vault|

Taking action to advance President Biden’s competition order, 1 the CFPB is seeking views on fees which it believes exploit consumers by virtue of unfair competition. Although many of the fees it cites are covered by statutory
disclosure regimes designed to ensure both front- and back-end fee transparency, the Bureau believes that many of these fees are unfair due to large-bank market power.

The full report is available to retainer clients. To find out how you can sign up for the service, click here.…

18 01, 2022

Karen Petrou: Inflation’s High Cost to Competition and Comity

2023-04-24T15:18:29-04:00January 18th, 2022|The Vault|

It’s not news that the latest inflation data are disastrous.  Even if they won’t last, as Mr. Powell again assured Congress, it sure is hard to see how the combination of pressures detailed in the inflation data lead to ta rate even close to the FOMC’s median projection for 2022 of 2.6 percent.  This means that real rates will remain negative throughout 2022 and well into 2023.  Indeed, given that the FOMC’s median projection for the near-term fed funds rate never gets above 2.1 percent, even the Fed has tacitly conceded that negative real rates may well be  prolonged absent either divine intervention or another devilishly-deep recession.  In June of last year, I predicted that U.S. inflation would not prove transitory and forecast the political impact finally understood at the highest levels of the Biden White House.  Much is also now being written about the inequality impact I described last year, but little is said about the sum total impact of these sorry facts of life on the financial system.  These may also prove anything but transitory.

The first financial-system impact of high inflation and slow growth for anything but the S&P is both political and structural.  With his back increasingly pushed to the wall by inflation’s toxic equality impact, Mr. Biden defended himself against the latest CPI numbers by arguing that many of them are due to monopolistic price controls best cured by rapid antitrust initiatives such as the one already launched against the meat industry.

Other …

6 12, 2021

Karen Petrou: Why Pro-Competition Consumer Finance May Not be Pro-Consumer Consumer Finance

2023-05-23T13:26:47-04:00December 6th, 2021|The Vault|

Under Rohit Chopra, consumer protection has taken an important, widely-overlooked turn with potent consequences for all retail financial-product providers.  Media coverage of the CFPB’s bigtech order, mortgage-discrimination action, and last week’s anti-overdraft campaign highlighted traditional issues such as fair lending and predatory pricing. These are indeed in the CFPB’s sights, but so also is a much bigger target: the extent to which a few large companies are said to be able to set consumer interest rates and otherwise dictate the shape of U.S. retail finance. This might cut big banks down to the puny size their critics seek, but it’s more likely to accelerate the transformation of retail finance into a wild west of unregulated providers outside the reach of safety-and-soundness standards and, in many cases, even of the CFPB. If this pro-competition campaign is mis-calibrated, the CFPB will put consumers at still greater risk.

Mr. Chopra’s interest in market competition doubtless derives from his stint as a lone, strong voice at the Federal Trade Commission who lost pretty much every battle he waged against giant corporate combos.  It surely stems also from President Biden’s executive order demanding that federal agencies take express pro-competitive action. And, indeed, there’s a lot to do in sectors such as tech-platform companies that already seem to have skipped over just being monopolies to become potent oligopolies with powerful impact over each aspect of everyday life, not to mention pricing and economic inequality.

However, neither traditional nor neo-Brandeisian antitrust theory applies well …

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