CFPB wants to define non-bank large participants

The Consumer Financial Protection Bureau wants us to comment on the definition of large non-bank participants in the consumer financial markets. The CFPB has authority to regulate large banks, thrifts, credit unions, non-bank loan originators, payday lenders, and larger participants in other consumer financial product markets.

The CFPB wants to start off defining who the large non-bank participants are in the consumer debt collection and consumer reporting markets. CFPB is recommending using annual receipts as a threshold for each market. For the consumer debt collection market, the threshold would be annual receipts of $10 million. In the consumer reporting market, the proposed threshold is $7 million in annual receipts.

By now you’ve figured out I’m not into too much regulation, but it would seem that out of fairness that any sized debt collector or consumer reporter should be subject to CFPB supervision to determine if they have violated any consumer protection laws. A debt collector pulling in a million dollars a year can be just as liable for breaking consumer protection laws as a larger firm pulling in $10 million.

So how does this proposed rule increase a consumer’s welfare? The argument might be that by ensuring large non-bank participants follow consumer law, consumers may benefit from transparency; knowing for sure what type of services they are receiving and understanding the terms and conditions of a financial product.

You could also make the argument that consumers shouldn’t worry about large participants. These aren’t the fly-by-nights that you might find in the industry. Larger providers are not just going to compete on price, but on customer service.

Is it really fair to single out large debt collectors and large consumer reporters?

I thought CFPB was about staving off another financial crisis

I’m working on an article about the Consumer Financial Protection Bureau’s promulgation of Regulation E, a rule that implements Section 1073 of the Dodd Frank Act.  The rule defines a remittance transfer provider; creates safe harbors for entities that do not usually provide transfers in their normal course of business; and proscribes pre-transfer and post-transfer disclosure requirements for remittance transfer providers.  The proposed rule can be found here.

What I find interesting is that this proposed rule, which in its current format was once enforced by the Federal Reserve Board of Governors, has nothing to do with putting a mechanism in place that would have helped the financial system avoid the meltdown it experienced in 2007 and 2008.  At its base, the meltdown had to do with poor capitalization on the part of financial firms.  Not only were some firms under capitalized, but they were holding some serious junk in their portfolios, namely mortgages that consumers could not sustain.

I can appreciate reducing information asymmetries in order to maintain an equitable exchange of money in return for financial services, but the market for wire transfers was not at the root cause of the financial meltdown.

Is the transfer of enforcement of this rule to CFPB just fodder for more criticism?  I think so, and legitimate criticism at that.

So where are your facts?

I am listening to New York Attorney General Eric Schneiderman discuss on Up with Chris President Barack Obama’s new mortgage fraud investigative group.   Mr. Schneiderman is investigating what allegedly blew up the market and the economy.  With 50 attorneys general in the U.S. conducting their own investigations, you have to wonder why we need a federal unit conducting its own investigation.

According to Mr. Schneiderman, the idea behind the new group is that the states are taking care of the aftermath (preventing foreclosures), but no one is looking at the bigger picture; what actually blew up the economy.

While Mr. Schneiderman gave a concise description of how investors got screwed by the failure of mortgage backed securities, he hasn’t explained how the failure of mortgaged backed securities to perform i.e. maintain their value and provide investors with returns, resulted in unemployment for consumers.  That‘s the nexus he failed to make.  In the end, is this all about redemption for investors only?

Cordray doesn’t make the case

I just finished viewing an interview of Richard Cordray, the director of the Consumer Financial Protection Bureau.  The interview was conducted by David Gregory of NBC’s Meet the Press.

Mr. Cordray was asked to make the case for why we need a consumer financial protection bureau intervening in the financial markets on behalf of consumers.  According to Mr. Cordray, market intervention is necessary in order to aid the consumer with making better choices.  In addition, the bureau is needed in order to help businesses understand their impact on consumers.

I can’t buy off on Mr. Cordray’s sales pitch.  I can see where an organization like the CFPB can help with financial literacy and I would applaud efforts to provide technical support for financial literacy programs in our grade schools.  Helping grown adults who were more than willing to go into debt because they had to keep up with the Joneses and get the big house or fancy car they couldn’t afford is another story.

If a consumer walks into the market to buy money and cannot appreciate what their budget can absorb in terms of interest and principal repayment, should the federal government spend resources trying to “protect” them after the deed is done?  Beyond offering and ensuring acceptance of the terms and conditions of a financial agreement; servicing an account to ensure repayment of a loan; and collecting and transmitting revenue to the underwriters and investors, what other impacts on consumers should a financial institution be held liable for?

Just as important is properly determining the federal government’s role in the consumer credit market.  Mr. Cordray raised the point in the interview that it is not his or the CFPB’s place to advise consumers on whether or not they should borrow money.  Kudos to him for saying that.

What Mr. Cordray and the Obama Administration appear to not realize that given the dampening effect CFPB and Dodd Frank may have on the credit markets, government may be abandoning its primary role which is to least regulate commerce such that the flow of capital (in this case credit) is optimized.

Should tax equity be based on how the income being taxed was derived?

Mitt Romney reported that he made close to $45 million over the past two years and paid an effective tax rate of 14%.  Private inventory investment was down in the 4^th quarter of 2011, with GDP propped up by an increase in consumer spending

An increase in private sector investment is a precursor to growth in GDP and eventually hiring.  Can we achieve an increase in private sector investment without a lower effective tax rate for the taxpayers that are expected to fund private sector investment?  If no, what would?

Nothing wrong with a 15% effective tax rate

I’m watching Up with Chris on MSNBC. Today’s topic is whether the tax rates paid by the likes of a Mitt Romney are not fair. So far, approximately fifteen minutes into the conversation, and no one has discussed whether we should dampen the incentive to invest capital into productive activity

Is there something wrong with investors paying a lower tax rate if it leads to more capital coming from off of the sidelines?

CFTC releases proprietary trading rules while Treasury slaps down critics

The Commodities Futures and Trade Commission has released its “Volcker Rules” on proprietary trading.  Specifically, the rules implement Section 619 of the Dodd Frank Act.  That section prohibits two trading activities of banks that receive federally guaranteed deposits.

First, banks are prohibited from short term proprietary trading in securities, derivatives, or other types of financial instruments, subject to certain exemptions, for a bank’s own account.

Second, Section 619 prohibits owning, sponsoring, or having other certain types of relationships with hedge funds and private equity firms, subject to certain exemptions.

Section 619 also codifies away some risks to trading.  Banks cannot engage in activities that involve a material conflict of interest.  Banks must avoid exposure to high-risk assets or high risk strategies.   If an activity threatens the soundness of the banking entity or threatens the financial stability of the United States, the activity should also be avoided.

The rules would require banking entities to create an internal compliance mechanism for the purpose of monitoring how well that bank is complying with Section 691.  It’s not all bad when it comes to trading.  Banks can still trade U.S. government obligations (treasury notes, bonds, bills).  They can still trade the obligations of government sponsored entities as well as state and local government bonds.

Banks, according to the CFTC, could still offer private equity and hedge funds under certain conditions, make risk mitigating hedging investments, and trade in certain non-U.S. funds.

On the heal of the CFTC release, the U.S. Department of the Treasury issued a statement in essence saying that it had enough of the whining about uncertainty.  It flipped the script on banks saying that it was the claims of uncertainty that was creating uncertainty.  According to a CNBC report by Steve Leisman, Treasury issued a statement saying that, “Current calls to repeal Wall Street reform are a significant cause of the uncertainty that responsible business leaders are seeking to avoid.  Once it is fully implemented, Wall Street reform will improve market certainty, strengthen the financial system, help boost the economy, and provide better protections for taxpayers.”

I don’t buy it.  Granted the first phase of damage (passage into law) of the Act is done, but for investor seeking various paths to higher returns, Dodd Frank has essentially closed one road to greater wealth for investors and may have left the door open to banks to seek higher fees from their deposit customers to make up for the loss of returns.

Will we ever see a repeal of Dodd Frank?  What would have to happen to bring that about?

Fed governor wants to see more emphasis on enforcement

Federal Reserve Governor Sarah Bloom Raskin gave a speech last week at the Association of American Law Schools annual meeting last week in Washington, DC.  The gist of her speech was that law schools should also include a discussion on enforcing law when teaching their students about the rule of law.

“If the law is worth having, the law is worth enforcing”, said Governor Raskin.  Specifically, Governor Raskin was addressing the enforcement of law against mortgage service and processing companies and how proper enforcement could help rein in bad behavior by processors.  If not, we run the risk of these companies framing the intensity at which regulatory agencies go after them.

Governor Raskin also quipped that, “[A] failure by regulators to enforce the laws and regulations as strong antidotes to financial misconduct and unsafe and unsound practices by the institutions they regulate establishes de facto acquiescence to the dominant norms of the financial marketplace. At that point, our laws become the resting place for unfair practices and broad disrespect for the law generally.”

What concerned me were her observations at the end of her speech.  “What’s more, financial institutions need to understand that they are responsible for assessing the effects their actions will have on consumers and the country as a whole, and factor those considerations into their business decisions.”

Talk about a dampening effect on business decision making.  You may as well ask financial institutions to factor in the weight of the world when determining their pricing.  Consideration equals delay.  Delays equal higher costs of doing business, costs that may not be captured fully in interest rates and fees assessed on consumers.

The premise of this thinking obviously stems from the argument that at the heart of the recession and its slow recovery is bad behavior on the part of mortgage processors, servicers, and big banks, as well as the foreclosures resulting from their bad behavior.  I can buy-off on the argument that decreased home values left little in the kitty for consumers to use to fund small business ideas, but I don’t give shrinking equity that much credit for the slow-down in private sector investment  that lies at the heart of any economic downturn.

Ass-backwards bankruptcy

The Wall Street Journal posted an article about an alternative method of debt collection. Debt collection companies are issuing credit cards to consumers whose debts have expired under state debt collection laws. As a condition for getting a fresh start on being a good credit citizen, recipients of the cards agree to pay a portion of the expired debt.

Sounds like a low cost alternative to the consumer filing for bankruptcy, assuming they can endure the calls and letters from debt collectors during the three to ten year period between the last debt payment and the statutory limit for collecting the debt. Yes, the card issuer should make it clear that part of the terms and conditions of getting the card is that part of the old debt must be repaid. If that transparency requirement is met, then the government should stay out of this market.

What do you think? Should government get involved in this trending market?

CFPB seeking comments on interim rules for Truth in Savings

The Consumer Financial Protection Bureau seeks comments on interim final rules that it is proposing for Truth in Savings.  Regulation DD implements disclosure requirements for interest rates and fees as required by the Truth in Lending Act.  The new rules reflect a transfer of authority to enforce current truth-in-lending rules to the CFPB from seven other federal agencies.

According to the CFPB, the new Regulation DD does not contain any substantive changes from the original rules.