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OpenMarket: Banking and Finance

  • UK Banks End Reward Programs in Anticipation of Interchange Fee Caps

    April 13, 2015 4:17 PM

    File this one under “we told you so.” The Independent reports a scale-back in credit card reward programs in the United Kingdom:

    The UK’s largest credit card provider has announced that it will no longer offer cashback rewards, labelling them “unsustainable”, after a new EU law was passed last month.

    It is thought that other companies may follow Capital One’s decision, significantly curtailing customers’ air miles and cash bonuses in response to legislation from Brussels.

    The European ruling will cap so-called ‘interchange fees,’ charged by card issuers to retailers when a debit or credit card is used as payment.

    Money reaped by the companies – such as Capital One – under this system allow them to offer customers savings or discounts.

    This is exactly what the International Alliance for Electronic Payments , a coalition that includes CEI, warned about in our letter to EU officials in December:

    Capping interchange fees has been tried in some countries around the world.  Despite claims that these efforts were for the benefit of consumers, the real world results have shown the opposite to be true. In every instance, consumers faced higher fees for banking services, a reduction in benefits and services and saw no return in the form of lower prices from merchants despite promises by merchants and policy makers to pass savings to consumers.

  • Operation Choke Point: The CFPB Is Now in Charge

    April 9, 2015 3:41 PM

    I suggested at TheBlaze some weeks ago that even as the Federal Deposit Insurance Corporation was stepping back from its involvement in Operation Choke Point, the Consumer Financial Protection Bureau was entering the fray. This now appears to be confirmed, as American Banker reports:

    The Consumer Financial Protection Bureau has filed a massive lawsuit against more than a dozen debt collectors, payment processors and related entities that the agency said failed to stop fraudulent collection tactics…

    But the potentially groundbreaking part of the case is that the CFPB also sued several payment processors, including worldwide processor Global Payments and its contracted parties, because the agency said they "should have known" about the alleged violations.

    The case is one of the CFPB's largest to date that pursues multiple different entities, some of which were not directly involved in the harassment of consumers. In that way, it resembles the Justice Department's controversial "Operation Choke Point," observers said.

    Operation Choke Point operates under the purported principle that if increase regulatory pressure, up to and including subpoenas, on the financial firms that work with suspected fraudsters, then those guilty parties will find their financial oxygen choked off. What happened, of course, was that banks and financial firms that dealt with any industries at supposed “high risk” of fraud were scared off from dealing with those industries as a class. The FDIC wisely saw the error of that approach and made it clear that this was an inappropriate approach by its regulators.

    Now, however, the CFPB is treading down the same road, telling firms that they “should know” about potential fraud from the same broad sweep indicators that Choke Point depended on. Once again, whole classes of industries will be cut off from financial services. Brian Wise of the US Consumers’ Coalition pointed out the problems in a statement:

    “Once [Operation Choke Point] was made public, and victims began coming forward, the Administration had to find a way to protect the program and its ability to prevent lawful industries from operating. Due to the lack of congressional oversight, and the unique funding and leadership structure of the CFPB, the Administration knows that it will make the perfect agency to carry on the legacy of Operation Choke Point. The Administration will continue to remove any obstacles in their way.

    “The U.S. Consumer Coalition has been warning lawmakers and industry leaders about the plan for the CFPB to take over Operation Choke Point since the FDIC took down their list of ‘high-risk’ merchants in 2014. Now everyone can begin to see that the CFPB is the nation’s most dangerous, unaccountable, and out of control agency in the federal government.”

    Brian is right. Choke Point is not over, and the CFPB is less accountable than FDIC. Two things need to happen: Congress needs to act against Choke Point and its new incarnation specifically, and it also needs to move to make the CFPB accountable to Congress, the Executive branch, and the Courts, as CEI recommended in Free to Prosper this year.

  • International Panel Outlines Problems with EU Interchange Fee Regulation

    March 30, 2015 3:49 PM

    On March 17, an international panel of experts gathered in Brussels to discuss the proposed EU interchange fee regulations that are set to be approved by the Council of Ministers in the next few months. Hosted by the International Alliance for Electronic Payments, experts from France, Austria, Lithuania, the UK, and the USA each outlined different objections to the regulations based on the own countries’ experience and situations.

    Interchange fees are the fees levied by banks and payments card networks from merchants and vendors when a consumer uses a payment card to purchase a good or service. The proposed EU regulation will cap these fees at the rate of 0.2 percent of the transaction value for consumer debit cards and at 0.3 percent for consumer credit cards. For consumer debit cards, the regulation also gives flexibility to Member States to define lower percentage caps and impose maximum fee amounts. Payment card networks will also have to separate their operations and infrastructure businesses.

    The panel, chaired by Daniel Hannan MEP (European Conservatives and Reformists) consisted of:

    • Pierre Garello, Professor of Economics at Aix-Marseille University
    • Barbara Kolm, President of the Austrian Economic Center
    • Zilvinas Silenas, President of the Lithuanian Free Market Institute
    • Matthew Sinclair, Senior Consultant, Europe Economics, and
    • Iain Murray, Vice President of the Competitive Enterprise Institute (USA)
  • Least Transparent Administration Closes Records on Fannie and Freddie

    March 19, 2015 10:30 AM

    This Sunshine Week, the administration that swept into office promising to be the “most transparent” in history was just judged by a major news service as least transparent of modern presidencies.

    An analysis by the Associated Pres found that “the Obama administration set a record again for censoring government files or outright denying access to them last year under the U.S. Freedom of Information Act.” The AP adds that the administration “also acknowledged in nearly 1 in 3 cases that its initial decisions to withhold or censor records were improper under the law - but only when it was challenged.”

    But FOIA requests are just the tip of the iceberg for this administration’s secrecy, much of which has nothing to do with the legitimate exception of national security. In Dodd-Frank, the administration set up the Consumer Financial Protection Bureau and the Financial Stability Oversight Council—the constitutionality of both of which are now subject to a lawsuit from the Competitive Enterprise Institute and other parties—to be exempt from many open meetings and (especially with FSOC) open records requests.

    But probably the most egregious example of this administration’s practicing of secrecy concerns its management of the government-sponsored housing enterprises (GSEs) Fannie Mae and Freddie Mac. In August 2012, then–Treasury Secretary Tim Geithner issued the “Third Amendment” to the GSE conservatorship. The Third Amendment would require all of the GSEs’ profits to be siphoned off to the U.S. Treasury Department in perpetuity—even after the GSEs paid back what they owed to taxpayers.

    This arbitrary action has spawned more than 20 lawsuits from Fannie and Freddie’s private shareholders. The suits charge the administration with everything from violating the Administrative Procedure Act to unconstitutionally taking property without just compensation.

    The Third Amendment has also raised concerns that the profit sweep is leaving Fannie and Freddie with very little capital reserves, furthering the chance for more taxpayer bailouts should something go awry with the housing market again. See this excellent paper by Cato Institute Director of Financial Regulation Studies Mark Calabria and former FDIC General Counsel Michael Krimminger on this point.

  • How Department of Labor's "Fiduciary" Rule Could Cripple IRA Choices

    March 3, 2015 12:38 PM

    Last week, President Obama called on the Department of Labor to “update the rules and requirements that retirement advisors put the best interests of their clients above their own financial interests.” At a speech at the American Association of Retired Persons, the president proclaimed, “You want to give financial advice, you’ve got to put your client’s interests first. “

    Yet, if the regulation the DOL is set to introduce at the president’s behest is anything like the “fiduciary” rule it proposed in 2010—and withdrew upon a groundswell of protest the next year—the government’s definition of “best interest” will likely not be in the best interest of individuals who wish to pursue alternative assets from gold to peer-to-peer loans to crowdfunding in their IRAs.

    The last time around, the DOL tried to reclassify a broad swath of financial professionals and business as “fiduciaries” even if they did not provide regular investment advice. Not only were broker-dealers covered, but so were directed custodians of IRAs, even self-directed IRAs in which investors don’t rely on any “fiduciary” advice. Once again, the freedom of self-directed IRA holders to invest in assets of their choosing, including crowdfunding ventures, may be at risk.

    Self-directed IRAs can invest in a wide range of assets. As worries about monetary policy have been on the rise, gold and silver have found popularity as IRA holdings. Real estate has long been a staple as well. The growth of peer-to-peer lending has stemmed in part from the ability to put the loans created by Prosper and Lending Club into IRAs.

    And as CrowdFund Beat and others have reported, self-directed IRAs serving accredited investors now have access to crowdfunded startups available through SEC Rule 506(c), which legalized general advertising of investment of non-public companies in 2013 pursuant to the Jumpstart Our Business Startups (JOBS) Act. When Title III of the JOBS Act or new congressional legislation legalizing equity crowdfunding for ordinary investors is finally implemented—and hopefully that will be soon—there should be no barriers to self-directed IRAs serving the masses providing access to these exciting new investments.

    Yet, much of this progress in lifting barriers to crowdfunding could be short-circuited if a broad, restrictive “fiduciary” rule comes to fruition. Last time, the proposal specifically included “appraisers” in its definition of fiduciaries, a category that included directed custodians of IRAs.

    Tom Anderson, board manager of Pensco Trust, a San Francisco-based IRA custodian that is now one of the leaders in offering crowdfunding options, wrote in comments to the DOL in 2011 that imposing a fiduciary standard “would result in higher costs and potentially fewer service providers to self-directed IRAs,” which “in turn, could result in fewer investment choices.” Anderson’s comments were written on behalf the Retirement Industry Trust Association, a trade group for custodians of self-directed IRAs, who helped successfully shelve the first DOL rule.

  • Harvard Study Confirms Dodd-Frank's Harm to Main Street

    February 10, 2015 7:31 AM

    Literally since the day the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law by President Obama, my Competitive Enterprise Institute colleagues and I have predicted its harshest effects would fall on community banks. “While the bill claims to crack down on excesses on Wall Street, its harshest impact will likely be on Main Street businesses that had nothing to do with the crisis,” I wrote on FoxNews.com on July 15, 2010, the day President Obama signed the bill.

    Since then, numerous studies, as well as testimonials from community bank officials, have proven this prediction correct. Yet much of the media and politicians still peddle the myth that Dodd-Frank only hurts Wall Street, and thus, repealing or easing sections of Dodd-Frank would benefit “big banks” at the expense of Main Street.

    But maybe a new confirmation of Dodd-Frank’s harm to community banks will get attention because of its unlikely source: the John F. Kennedy School of Government at Harvard University. Two researchers at the Kennedy School’s Mossavar-Rahmani Center for Business and Government have just produced a study concluding that Dodd-Frank accelerated the decline of America’s community banks.

    While acknowledging that community banks’ share of financial assets has been falling since 1994, authors Marshall Lux and Robert Greene find that “since the second quarter of 2010—around the time of the passage of the Dodd-Frank Act—their share of U.S. commercial banking assets has declined at a rate almost double that between the second quarters of 2006 and 2010.”

  • Obama Administration Learned Nothing from 2008 Financial Crisis, Mortgage Expert Says

    February 3, 2015 2:26 PM

    Ed Pinto had a depressing and revealing op-ed in The Wall Street Journal Friday about how the Obama administration is artificially creating markets for risky mortgages, using the Federal Housing Finance Agency and the government-controlled mortgage giants, Fannie Mae and Freddie Mac. Not only will this put taxpayers at risk, but it will burden prudent homebuyers through “cross-subsidies” for risky borrowers “subsidized by less-risky loans.”

    Long ago, Pinto worked as an executive and credit manager at Fannie Mae before it began buying up massive amounts of risky mortgages to pursue short-run profits and meet federal affordable-housing mandates.

    As Pinto notes in “Building Toward Another Mortgage Meltdown,” Federal Housing Finance Agency Director Mel Watt has pushed for a resurgence in risky mortgage loans, and hinted at more mischief to come in his January 27 testimony to the House Financial Services Committee, in which he “told the committee” that he expects to release by “March new guidance on the ‘guarantee fee’ charged by Fannie Mae and Freddie Mac to cover the credit risk” on the loans they acquire. 

    As Pinto points out,

    In the Obama administration, new guidance on housing policy invariably means lowering standards to get mortgages into the hands of people who may not be able to afford them. Earlier this month, President Obama announced that the Federal Housing Administration (FHA) will begin lowering annual mortgage-insurance premiums ‘to make mortgages more affordable and accessible.’

    Government programs to make mortgages more widely available to low- and moderate-income families have consistently offered overleveraged, high-risk loans that set up too many homeowners to fail. In the long run-up to the 2008 financial crisis, for example, federal mortgage agencies and their regulators cajoled and wheedled private lenders to loosen credit standards. They have been doing so again. When the next housing crash arrives . . . homeowners and taxpayers will once again pay dearly.

    Even progressive media like the Village Voice have reported on how the Department of Housing & Urban Development—especially Clinton’s HUD Secretary Andrew Cuomo—spawned the mortgage crisis by pressuring lenders and the mortgage giants to promote affordable housing, helping “plunge Fannie and Freddie into the subprime markets without putting in place the means to monitor their increasingly risky investments.” A 2011 book by The New York Times’ Gretchen Morgenson also chronicles how “it was Fannie Mae and the government housing policies it supported, pursued, and exploited that brought the financial system to a halt in 2008.”

    But the Obama administration learned nothing from this, and has expanded this risky, “affordable-housing” push. Pinto notes, lowering mortgage-insurance premiums for risky borrowers is the centerpiece of a “new affordable-lending effort by the Obama administration,” which led to the “the latest salvo in a price war between two government mortgage giants to meet government mandates”:

    Fannie Mae fired the first shot in December when it relaunched the 30-year, 97% loan-to-value, or LTV, mortgage (a type of loan that was suspended in 2013). Fannie revived these 3% down-payment mortgages at the behest of its federal regulator, the Federal Housing Finance Agency (FHFA)—which has run Fannie Mae and Freddie Mac since 2008, when both government-sponsored enterprises (GSEs) went belly up and were put into conservatorship. . . .

    As Pinto notes,

    Mortgage price wars between government agencies are particularly dangerous, since access to low-cost capital and minimal capital requirements gives them the ability to continue for many years—all at great risk to the taxpayers. Government agencies also charge low-risk consumers more than necessary to cover the risk of default, using the overage to lower fees on loans to high-risk consumers. Starting in 2009 the FHFA released annual studies documenting the widespread nature of these cross-subsidies. The reports showed that low down payment, 30-year loans to individuals with low FICO scores were consistently subsidized by less-risky loans.“

    But HUD consistently prodded the government-sponsored mortgage giants Fannie Mae and Freddie Mac to loosen safeguards against risky loans:

    In 1997, for example, HUD commissioned the Urban Institute to study Fannie and Freddie’s single-family underwriting standards. The Urban Institute’s 1999 report found that “the GSEs’ guidelines, designed to identify creditworthy applicants, are more likely to disqualify borrowers with low incomes, limited wealth, and poor credit histories; applicants with these characteristics are disproportionately minorities.” By 2000 Fannie and Freddie did away with down payments and raised debt-to-income ratios. HUD encouraged them to more aggressively enter the subprime market, and the GSEs decided to re-enter the “liar loan” (low doc or no doc) market, partly in a desire to meet higher HUD low- and moderate-income lending mandates.

  • Main Street Fights Dodd-Frank's Chipping Away at the Constitution

    January 30, 2015 3:31 PM

    “Wall Street Chips Away at Dodd-Frank,” blared a recent front-page headline in The New York Times about bipartisan measures that have passed the U.S. House of Representatives and/or been signed into law that ever-so-slightly lighten the burden of the so-called financial reform rammed through Congress in 2010. “GOP Pushes More Perks For Wall Street...” reads the home page of The Huffington Post under the picture of establishment pillar, Jamie Dimon, CEO of JP Morgan Chase.

    Yet, what these articles don’t say is that the firms putting their resources on the line to challenge Dodd-Frank in court are the furthest thing from Wall Street high rollers. They are decades-old firms selling stable, time-tested financial products to everyday consumers.

    At first glance, the national insurance firm MetLife and the Texas community bank State National Bank of Big Spring might seem to have little in common. But they both are solid financial firms that never took a bailout and never had their hand in the toxic mortgages—spurred on by the government-sponsored enterprises Fannie Mae and Freddie Mac and mandates of the Community Reinvestment Act—that caused the financial crisis.

    And now, the firms are both doing their customers and all Americans a favor by bringing suit against Dodd-Frank’s Financial Stability Oversight Council (FSOC), one of the many opaque entities in Dodd-Frank that lack accountability to Congress and the public.

    In its lawsuit brought this month, MetLife raised many of the same constitutional issues as did State National Bank in its pending legal challenge brought in 2012 in collaboration with the Competitive Enterprise Institute, at which I work. CEI and the conservative seniors group 60 Plus Association are co-plaintiffs with the bank, and CEI attorneys are working with the esteemed C. Boyden Gray—the former White House Counsel—in providing representation to the parties.

    In an open letter to its customers that ran in full-page ads in The New York TimesWashington Post, and Wall Street Journal, MetLife CEO Steven Kandarian explained his objections to the firm being designated as a “systemically important financial institution,” or SIFI, by FSOC. “We do not believe MetLife poses systemic risk, and we are concerned that our designation will harm competition among life insurers and lead to higher prices and less choice for consumers.” In that sense, a court victory for MetLife would greatly benefit the public as well.

    To its credit, MetLife is rejecting  not only the burdens of being designated a SIFI but also the benefits—benefits that seem to eagerly embraced by both MetLife’s competitors (such as the infamous AIG) as well as the biggest banks. Being designated a SIFI means the federal government considers MetLife to be “too big to fail,” making it subject to the same Dodd-Frank bailout regime set up for big Wall Street banks like Goldman Sachs and JPMorgan Chase.

    As CEI, 60 Plus Association, and the State National Bank argue in our legal challenge to the Dodd-Frank Act, the SIFI designation confers on a firm a strong competitive advantage, as investors and creditors know the government won’t let it fail.

    We argue that the tiny State National Bank “is injured by the FSOC’s official designation of systemically important  nonbank financial companies, because each additional designation will require the Bank to compete with yet another financial company—i.e., a newly designated nonbank financial company—that is able to attract scarce, fungible investment capital at artificially low cost.”

  • FDIC Retreats from Operation Choke Point

    January 28, 2015 3:34 PM

    In a partial victory for all those campaigning against the abuse of power known as Operation Choke Point (see our comprehensive study here), the Federal Deposit Insurance Corporation (FDIC) has issued guidance to its supervisory staff that restricts some of the methods used to advance Choke Point.

    Operation Choke Point is a Department of Justice initiative aimed at “choking off” the financial oxygen of businesses the administration disapproves of, with a special focus on payday lending. It threatens banks that do business with these industries with burdensome investigations and subpoenas, which has led to banks closing accounts with legal businesses that have had a perfect banking record.

    One of the ways Choke Point has proceeded has been via supervisors issuing veiled threats or direct but unwritten comments that suggest a banking institution should stop doing business with a client. As a result, there has been no paper trail within the administration directly linking the closure of bank accounts with Operation Choke Point.

    This new memorandum purports to put a stop to that. It tells its staff that recommendations for closure of bank accounts should not be made through informal comments, and that banks should not be informally criticized for their relationships. All such recommendations now need to be put in writing.

    Furthermore, “reputational risk” alone is no longer to be considered grounds for recommending the termination of a banking relationship. Previous FDIC guidance on “reputational risk” was the source of the much-talked about list of industries targeted by Operation Choke Point. The withdrawal of the list by FDIC several months ago may have led to an even broader interpretation of “reputational risk,” with suggestions that even coal mines have been the target in some areas.

    That these two guidelines had to be put in writing is an implicit admission by FDIC that its staff has been guilty of these practices. The instruction to cease such arbitrary behavior is a victory for campaigners against executive abuse, and in particular for Rep. Blaine Luetkemeyer (R-Mo.), a former banking examiner who took his complaints directly to the head of the FDIC.

    FDIC, however, is only half the battle. The investigating attorneys at the Department of Justice who began the Operation still retain the power to issue subpoenas that can cause havoc to any bank that receives one. That threat remains, and banks will still be wary of doing business with companies that might possibly attract one. Until the DOJ is brought in line, Operation Choke Point will likely continue.

  • Supreme Court Refuses to Make Dodd-Frank More Draconian

    January 20, 2015 5:16 PM

    Today, the Supreme Court lifted a cloud of uncertainty that had been hanging over consumers, community banks, and credit unions by refusing to take a case that threatened to make the stifling Dodd-Frank pseudo-financial reform legislation even more draconian than it already is.

    The Court let stand a unanimous ruling from a three-judge D.C. Circuit Court of Appeals panel that overturned district Judge Richard Leon’s 2013 ruling that the Federal Reserve had not made the price controls stemming from Dodd-Frank’s Durbin Amendment were not stringent enough. Today’s decision, authored by Clinton-appointed Judge David Tatel, found that the Federal Reserve “reasonably construct[ed]” the law in considering costs in setting the price caps.

    In the wake of cybersecurity attacks on credit and debit cards, this ruling may have come in the nick of time. In a show of incredible chutzpah, the trade associations for some of the nation’s largest retailers argued in federal court—even after the Target breach—that retailers should pay even less for fraud prevention and cleanup after fraud losses than they currently are under a federally imposed limit.

    That would mean that innovation would continue to lag behind and even more of the costs of payment processing would be shifted to consumers—as they have since the passage of this amendment, which was inserted into the 2010 Dodd-Frank financial overhaul by Senate Majority Whip Dick Durbin (D-Ill.).

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