BPInsights: Jun 22, 2024

The CFPB’s Data Cherry-Picking Undermines Its Mission

The skewed and misrepresented data underpinning the CFPB’s policy actions ultimately undermine its mission to protect consumers, a BPI blog post observed. The Bureau’s crusade against “junk fees” is a key example, as well as misleading assertions about competition and pricing in the credit card market. Such examples include:

  1. The skewed, error-plagued analysis supporting the CFPB’s credit card late fee rule. The agency downplayed evidence from some published studies and ignored other relevant studies.
  2. The CFPB’s paper characterizing large credit card issuers as charging noncompetitive interest rates. The superficial, misleading analysis suffered from key shortcomings, such as failing to separate out credit unions and specialty card programs.
  3. A press release accompanying the release of a recent paper, which mischaracterized the study’s conclusions as supporting the “junk fee” narrative.

Bottom line: Political rhetoric has no place in sound policymaking. Terms like “junk fees” advance a misleading narrative, and policies on financial services fees should be based on fulsome analysis and data. Rather than distorting data to support politically driven outcomes, the CFPB should back its policies with robust research and focus on its core mission of protecting consumers.

Five Key Things

1. EU Confirms One-Year Delay of Basel Trading Rules

Recent proposals by the FDIC and OCC would effectively block healthy and legally authorized bank consolidation by adding to ongoing uncertainty a series of newly created and extra-legal presumptions against approval, BPI said in two separate comment letters. Rather than increasing clarity, the two agencies’ proposed changes to the merger guidelines would intensify uncertainty by rejecting longstanding legal standards. Both proposals should be withdrawn. 

Context: The FDIC proposal starts with a presumption of disapproval for many mergers, effectively precluding many banks from pursuing healthy deals. Similarly, the OCC proposal would set an unjustifiably high bar for merger approval – its list of “positive indicators” and “negative indicators” suggests a prescriptive, rigid approach. These presumptions against approval would drive banks to avoid deals: mergers and acquisitions entail a high-cost, high-risk process that would not be worthwhile if the outcome is likely to fail. Entirely missing from either proposal is any clear timeline for merger review sufficient to provide firms comfort that they will not be left in purgatory as unexplained delays in processing degrade the value of both the acquiring and target firms.

“Instead of following the law and evaluating each merger on its merits before reaching a conclusion, the agencies under these proposals would start with ‘no’ and work backwards. These proposals contradict sound policy and statute. Neither acquiring banks nor targets would begin the complicated process of announcing a deal and applying for regulatory approval if their regulator has indicated they will likely disapprove. Furthermore, even for the unusual deal that jumps through all these newly created, extra-legal hoops, there is no assurance of a prompt review. The costs of technology, cyber defense, marketing and compliance have made economies of scale vital in banking; this proposal ignores that fact completely. The FDIC and OCC should withdraw these harmful proposals.” – Greg Baer, BPI President and CEO

2. FDIC, OCC M&A Proposals Reject a Transparent Merger Process and the Law

The Supreme Court recently ruled that the CFPB’s funding structure is constitutional, but for some lawmakers at this week’s regular CFPB oversight hearing, the ruling only ignited their concerns. In addition to discussing the impact of AI in financial services and a recent proposal to remove medical debt from credit reports, Chopra expressed concern about the use of financial data in targeted advertising. At the House hearing, he said he is aiming to finalize the Section 1033 rule on financial data sharing by October. Here are some notable exchanges from CFPB Director Rohit Chopra’s appearance on Capitol Hill this week.

  • ‘The bill … always comes due’: Senate Banking Committee Ranking Member Tim Scott (R-SC) emphasized the need to examine unintended consequences – and costs – of the CFPB’s policies, such as its credit card late fee rule. “With every action taken, there are tradeoffs, and those tradeoffs have consequences,” Scott said. “In this case, the administration is trading a punchy headline proclaiming they are saving families money today while actually building higher costs down the road.” He named the late fee rule as a key example: “While the rule may save some folks around $20 each time they make a late payment, how much will it cost these same consumers when they no longer qualify for a credit card because they haven’t paid their balances on time? How much will it cost them when their credit score drops as a result of these late payments?” he said. “You can’t just keep erasing the bad facts to fit your political narrative. The bill always, and unfortunately, always, comes due.”
  • Electronic fund transfers: Sen. Mike Rounds (R-SD) asked Chopra to clarify if the CFPB believes scam transactions – those authorized by the consumer but under false pretenses, rather than fraud – are considered unauthorized electronic fund transfers under the Electronic Fund Transfer Act and the rule related to that statute, Regulation E. Chopra gave a vague response: “the general sense is that with respect to fraud and scams, the line is a little bit blurry,” and later said “there are some places where Regulation E would certainly apply.”
  • Nonbank oversight: Sen. Chris Van Hollen (D-MD) emphasized the need for the CFPB to oversee nonbank financial firms such as fintechs, which are increasingly dominating the financial services market.
  • Flawed analysis: Rep. Andy Barr (R-KY) expressed concern about the economic analysis underpinning the CFPB’s proposals. “CFPB analytical work under your tenure has lost credibility and increasingly amounts to junk economics,” Barr said to Chopra.
  • Funding case: Some Republican lawmakers remained skeptical about the CFPB’s funding mechanism despite the Supreme Court’s recent ruling in its favor. “You’ve been operating illegally,” Sen. John Kennedy (R-LA) told Chopra. Kennedy was parsing the notion that the CFPB is funded by Federal Reserve “earnings” and said the Fed is no longer transferring money to the Treasury’s General Fund. Sen. Mark Warner (D-VA) noted that the Fed operates under distinct rules regarding generating earnings. In the House, Financial Services Committee Chair Patrick McHenry (R-NC) called for lawmakers to enact a “legislative solution” to change the CFPB’s funding structure.
  • Buy now, pay later: Sen. Jack Reed (D-RI) expressed support for the CFPB’s recent interpretive rule saying that buy now, pay later loans qualify as credit card loans. “The CFPB should bring the biggest BNPL lenders under federal supervision in order to spot violations,” Reed said.

3. FDIC Finalizes IDI Planning Rule

The FDIC approved a rule overhauling bank-level resolution planning requirements for banks with assets of $50B or more. The rule expands the information banks will need to provide to the FDIC as part of their so-called “living wills.” The rule included a few meaningful changes in response to comments on the proposal—including, importantly, adopting a triennial rather than biennial filing cycle for filers other than IDI affiliates of US GSIBs. Nevertheless, as finalized, the rule significantly expands information requirements for all banks with over $50B in assets. It also retains several subjective new standards from the proposal, including a subjective new credibility standard against which the FDIC plans to evaluate firms’ submissions.

  • Broader uncertainty. The IDI rule was proposed simultaneously with related interagency proposals on Dodd-Frank Act Title 1 resolution plans and long-term debt requirements for regional banks. At the FDIC Board meeting, Chair Gruenberg noted work on those two proposals continues even while the FDIC forged ahead unilaterally with the IDI rule.
  • Noteworthy dissents. In a statement accompanying his “no” vote, Vice Chair Hill questioned whether the detailed content requirements justify the costs. Vice Chair Hill also noted “the credibility determinations under the new framework are too subjective, and transform what should be a less formal, iterative process into a crude and binary assessment of…resolution readiness.” Meanwhile, Director Jonathan McKernan reiterated the concerns he had voiced when the rule was first proposed, specifically that the FDIC may not have the authorities necessary to prescribe and enforce the new requirements.     

4. Incentive Compensation Document Invalid, Even More Prescriptive Than Prior Version

A recent issuance from the OCC, FDIC, NCUA and FHFA attempting to resuscitate a long-stalled proposal on incentive compensation practices under Section 956 of the Dodd-Frank Act does not include the full set of financial regulatory agencies required to propose such a rule and therefore has no legal effect, the Bank Policy Institute, American Bankers Association, Financial Services Forum and SIFMA wrote in a joint letter

Moreover, the document largely mirrors the 2016 proposal and, like that proposal, exceeds the agencies’ limited legal authority under Section 956.  Section 956 permits the agencies to prohibit incentive-based compensation arrangements that encourage two types of “inappropriate” risks, but the 2016 proposal is largely styled as a rule that would affirmatively require all covered financial institutions to incorporate specific, universal requirements into their compensation arrangements.

Doubling down: The recent issuance ignores industry comments on the 2016 proposal that highlighted the agencies’ limited authority under Section 956, and describes compensation restrictions under consideration that would be even more prescriptive than those in the 2016 proposal.

Lack of research: While compensation practices in the financial services industry have evolved considerably over the past eight years, the proposal contains no analysis of that experience. 

Inflexible: Moreover, this document, like the 2016 proposal, would establish a rigid approach to compensation that deprives banks of the flexibility needed to ensure compensation practices are sensitive to the institution’s particular risk profile.

5. We Need to Rely on Facts When We Measure Banks’ Climate Risk

Climate change poses risks to society, but not to the resilience of banking the system, BPI Senior Fellow Greg Hopper wrote in an op-ed response to a recent American Banker column. That article asserted that bank CEOs and the Federal Reserve chair “get to live in an ivory tower far from the danger and despair” associated with climate change. However, banks and regulators closely track the available evidence on climate science in order to understand potential risks, Hopper noted in response. “Climate change poses great risks to our civilization, and those risks should be studied and reduced through responsible legislation and voluntary private sector efforts,” he wrote. “Those risks, however, at this point do not appear to include significantly worsening weather events that are causing losses to banks. Direct regulation of the cause of climate change is appropriate; identifying false risks to the banking system is not.”

  • Learn more: BPI has published several analyses and research notes about climate risk and banking, including on the Fed’s pilot climate scenarios, climate physical risk and the effects of climate change on banks’ operational risk.

In Case You Missed It

Broad Stakeholder Coalition Expresses Concern About CFPB Late Fee Rule

A diverse coalition of community groups expressed concerns for the CFPB’s late fee rule in a letter recently submitted to Director Chopra. The letter argues that while the CFPB’s late fee cap may appear “seemingly innocent,” it could increase the cost of credit and exacerbate challenges already facing minority communities and the unbanked. The groups cautioned that the rule would lead to “dire consequences for the very people it aims to help” and urged the CFPB to “reverse course on this rule and go back to the drawing board to figure out how to open more doors for all minority communities.”

Reframing the Fed’s Discount Window

Policymakers’ current focus on the Fed’s discount window offers an opportune moment to consider how to motivate banks to borrow from it, BPI Chief Economist Bill Nelson wrote in a recent Risk op-ed. “US banks could overcome their reluctance to be seen at the window if the Fed offers them renewed incentives to borrow, including fresh use of collateralized credit lines,” Nelson wrote.

  • Unprepared: Silicon Valley Bank’s lack of preparedness to borrow from the window illustrates a “problem of the Fed’s own making,” Nelson explained. “The massive oversupply of liquidity caused by its balance sheet expansion – in turn, a product of quantitative easing – has contributed to the stigmatisation of the discount window by making borrowing a rare event.” Such sparing use of the discount window has other knock-on costs to the economy: as banks hold more reserve balances at the Fed to avoid having to borrow, they divert more of their balance sheets toward lending to the central bank rather than to businesses and households.
  • Stopping the stigma: The Fed could revive the discount window from its stigma-plagued state in two ways: reopening its term auction facility, or providing banks with collateralized committed lines of credit for a fee. It could also do both.

Apple Pay Never? Apple Shuts Down Its Buy Now, Pay Later Business

Apple is ending its buy now, pay later service after just over a year since its launch, according to the Wall Street Journal. The Apple Pay Later service enabled customers to split purchases between $50-1,000 into four payments spread over six weeks, reportedly with no interest or fees. The company has said it plans to offer ways for people to apply for such loans from other firms when they use Apple Pay. It’s not clear if regulatory scrutiny was a motivation for the move, but the announcement comes shortly after the CFPB said it will apply certain credit card rules to BNPL loans.

Collaboration Between Banks and Supervisors Benefits the Whole Financial System

When examiners work collaboratively with banks during economic downturns, this collaboration benefits consumers, including low- and moderate-income communities, according to a recent op-ed. Rather than engaging in unnecessary escalations and overemphasis on process box-checking, examiners need to trust bank management to make prudent decisions. A collaborative approach to supervision – the direct, in-house oversight of banks by prudential examiners – can minimize unnecessary losses in downturns without sacrificing safety and soundness. “It’s a question of discretion and restraint in cases where examiners view management as capable of resolving transient problems on their own,” former OCC chief Eugene Ludwig wrote in a recent American Banker op-ed. “A supervisory approach without such discretion and restraint will perpetuate what has too often happened: banks write down loans and sell the loans and/or the underlying collateral, only to see buyers make a fortune on the ‘distressed’ assets just a few years later.”

  • A collaborative approach: When bank management and examiners work together collaboratively, consumers ultimately benefit, Ludwig suggested. “Knowledgeable bankers with a history of sound management and willingness to collaborate with regulators should be given leeway to address problem loans and preserve value (for customers and themselves) notwithstanding temporary risk increases,” he said. “Ideally, banker-regulator collaboration would determine a reasonable timeframe (such as maximum recovery period) to avoid unnecessary harm to families and businesses.” Such collaborative approaches can include empowering banks to give forbearance on certain loans and avoiding unnecessary micromanaging and escalation of minor issues. For example, Ludwig said, “Supervisors should not issue “matters requiring attention” (MRA) and “matters requiring immediate attention” (MRIA) orders at every turn where the bank is productively fixing problems the examiners believe are critical.”
  • Hair trigger: Ludwig emphasized the importance of examiners avoiding unnecessary confrontation with bank management. “[T]oday, there is a hair trigger concerning MRAs, MRIAs and even supervisory orders,” he wrote. “It should not be necessary to take such confrontational steps where management is vigorously taking steps to deal with safety and soundness or compliance matters.”
  • Key quote: Focusing on core issues is necessary in bank supervision, Ludwig said. “Ideally, a collaborative approach would address not just critical safety, soundness and compliance concerns but also tail risk matters — less-common threats that can, if not identified and resolved, give rise to severe problems or bank failure. Too often today, banks and supervisors spend so much time on processes and procedures they lose focus on the most dangerous issues.”

The Crypto Ledger

Here’s what’s new in crypto.

  • Riddled with scams: Scams are running rampant in the crypto market, with misinformation exacerbated by AI and social media, according to Bloomberg. Tactics include making misrepresentations about investments from big-name VC firms and misleading website designed to entice people to connect their wallets and then steal from them.
  • Decentralized – and bankrupt: Crypto “collective” Hector DAO filed for bankruptcy protection in the U.S. after holders of its tokens accused the firm of breaching its duties to customers. One goal of the so-called decentralized autonomous organization’s bankruptcy filing is to stave off a lawsuit filed by those token holders in February.

‘Backbone of the Economy’: Big Banks Fuel Midsize Business Lending

Large banks including JPMorgan and Bank of America are increasingly making loans to midsize companies, fueling the “backbone of the economy,” as one JPMorgan executive put it. This growing sector of lending helps banks compete against less regulated private equity firms. Read more from the Wall Street Journal here.

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The views expressed do not necessarily reflect those of the Bank Policy Institute’s member banks, and are not intended to be, and should not be construed as, legal advice of any kind.