Senate Passes Anti-Consumer Flood Insurance Bill

On a vote of 67-32, the Senate passed legislation (S. 1926) last month that would lower rates for flood insurance, but at the expense of the actuarial soundness of the federal flood insurance program.  In a letter to senators on the eve of the vote, CFA Director of Insurance J. Robert Hunter wrote, “Most people would assume that a consumer group such as CFA would seek lower insurance rates for consumers. And, indeed, we do try to achieve that, consistent with reasonable profits for insurers … But we do not support lowering rates for an insurance program below sound prices, unless that is done by a separate program of subsidies, clearly identified and funded by taxpayers.”

Homeowners who buy new homes in areas that they think are safe from floods are harmed when out of date flood maps underestimate risk. Some are misled into believing their homes are safe from floods when they build or buy new homes built to an old map’s 100-year-flood estimates that are, in fact, far below the real 100-year elevation. “These people and their families are at risk of being killed or injured if a storm hits, or of having their homes or treasured possessions destroyed,” Hunter wrote. “Paying a little more and being truly aware of the risk is a blessing, not a curse, for consumers.”

He called on Congress to address the problem of high prices by using targeted subsidies to help low- and moderate-income people in flood-prone areas who cannot afford flood insurance. “It is improper for the government to require the purchase of insurance … and not help those who cannot afford it,” he wrote. “It is also improper to give broad, hidden subsidies to consumers and call it ‘insurance.’” Hunter noted that targeted subsidies for those who are most in need would also cost far less than the current mix of general subsidies which S. 1926 would continue.

The legislation has not yet been taken up in the House of Representatives.  CFA has written a similar letter to members of the House urging them to oppose the bill when it does come up for consideration.

Weak SEC Rule Proposal Maximizes the Risk of Crowdfunding Losses

A weak and inadequate Securities and Exchange Commission (SEC) rule proposal implementing the crowdfunding title of the JOBS Act maximizes the potential for devastating investor losses, according to CFA’s analysis of the proposed rules filed with the agency last week.         “Recognizing the inherent risks in a market that brings together inexperienced issuers with unsophisticated investors, Congress included a number of important investor protections in the legislation,” said CFA Director of Investor Protection Barbara Roper.  “This rule proposal renders the most important of those provisions meaningless through a combination of weak enforcement mechanisms and anti-investor interpretations of the statute.”

The comment letter responds to the SEC rule proposal to create a regulatory framework for a new online marketplace in which early stage start-up companies seeking to raise small amounts of seed capital will be able to sell shares to members of the public.  It was part of a legislative package in the JOBS Act of 2012 that rolled back investor protections in the name of promoting small company capital formation.

The letter, which identifies a host of weaknesses in the rule proposal, identifies four key areas where regulations must be strengthened in order for the rules to be even minimally protective of investor interests:

• Investment limits must be revised downward to reduce the risk of devastating investor losses, and more robust procedures for enforcement of the limits must be developed, with a particular focus on preventing unintentional errors in calculating the limits.
• Meaningful procedures must be put in place to ensure that the crowdfunding portals that serve as intermediaries between issuers and investors play a significant role in preventing fraud and ensuring compliance by issuers.
• The approach to integration of offerings must be revised to prevent issuers from evading regulatory restrictions by conducting side-by-side offerings under different exemptions.
• The definition of electronic delivery must be revised to ensure the disclosures themselves, and not just notices of the availability of disclosures, are delivered to investors.

“As the economic analysis that accompanies the SEC’s proposed rules make clear, there is a strong likelihood that, even with the best of rules, most crowdfunding investors will lose some of all of their money,” Roper said.  “Instead of acting to minimize those risks, the SEC has proposed a set of rules that maximizes the potential for investor harm.  Failure to address these fatal flaws in the proposal will not only put investors at extreme risk,” she added, “it will undermine the already tenuous ability of crowdfunding to serve as a viable means of capital formation for small start-up companies.”

FDA Proposes Rules to Protect Consumers from Contaminated Imported Food

Two rules currently under consideration by the Food and Drug Administration (FDA) will play a key role in preventing human illness from contaminated imported food.  The proposed rules address the establishment of a foreign supplier verification program for food importers and a third-party certification program for auditing of foreign plants.

“Imported foods make up approximately 15 percent of the average American’s diet, and in some categories of FDA-regulated foods, imported products are the majority,” said Chris Waldrop, Director of CFA’s Food Policy Institute.  “It is critical that these imports meet food safety standards set by the FDA.”

The bipartisan Food Safety Modernization Act (FSMA), which was signed into law more than three years ago, seeks to shift FDA’s approach to food safety from reaction to prevention, with the goal of reducing foodborne illness among consumers. One of the key provisions of FSMA is the provision requiring importers to develop foreign supplier verification program (FSVP) to assure the safety of food in their supply chains.

In a comment letter on the FDA’s proposed rule to develop a foreign supplier verification program, CFA expressed support for a proposed approach requiring importers to conduct onsite audits of foreign suppliers for hazards for which there is a reasonable probability of serious adverse health consequence or death to humans or animals.  It also urged FDA not to exempt importers from FSVP requirements even if they import food from a country with an officially recognized food safety system. “Regardless of the source of the food, the importer should have to implement and maintain a FSVP to assure the safety of the supply chain,” Waldrop stated.

The letter called on FDA to require importers to consider hazards that may be intentionally introduced, particularly for foods or regions in which it is generally known that economic adulteration occurs.  And it called on FDA to withdraw its proposed exemptions for small importers and suppliers.

While expressing skepticism over third party certification programs, CFA also submitted a comment letter in general support of the FDA’s proposal in this area.  In its letter, CFA noted that transparency is essential to the credibility of the third party certification program. “Providing the public with robust information about the entities involved in the program as well as posting regulatory audit reports and self-assessment reports will enhance transparency efforts,” Waldrop wrote.

In addition, he noted, that effective oversight will be essential.  Toward that end, he: urged FDA to ensure adequate funding for oversight; expressed support for a requirement that auditors and certification boards immediately notify the FDA if the auditor discovers a condition which ‘could cause or contribute to a serious risk to the public health;’ noted the importance of a strong program of unannounced audits; and expressed strong opposition to efforts to use accredited auditors and certification bodies to conduct domestic food safety audits.

Improving Big Truck Fuel Efficiency Would Benefit Consumers

In his recent State of the Union speech, President Obama called for improved fuel efficiency in the millions of semi-trucks, large vans, buses, and other large trucks – known as “medium and heavy-duty trucks” – that ply America’s highways.  In response, CFA issued a new report last month which finds that new efficiency improvements for big trucks – driven by smart policy – would save the average American household $250 dollars per year in the cost of consumer goods and services.

“We know that the fuel costs associated with shipping goods cross country heavily impact the price of everything from a carton of milk to a pair of shoes. Strong standards that cut fuel use by nearly 50 percent could put $29.5 billion dollars back into the pockets of Americans,” said CFA Director of Research and report author Mark Cooper in a press statement.

The CFA report, Paying the Freight: The Consumer Benefits of Increasing the Fuel Economy of Medium and Heavy-Duty Trucks, concludes that American households pay over $1100 per year due to medium and heavy-duty truck fuel costs and that, without new standards, this amount is expected to grow considerably during the next two decades.  Implementing fuel saving technologies could lower medium and heavy-duty truck fuel consumption by almost 50 percent and yield a net savings to consumers (after the cost of the technologies are recovered) of over $250 per household per year.

As fuel prices rise and transportation services increase, the potential household savings from improved standards could rise to over $400 per year by 2035.  And because the transportation sector is very competitive, the related cost savings in fuel will be passed through to consumers.

In 2011, the federal government adopted a fuel economy standard for the trucking sector for the first time. The new trucking sector rules are due to take effect this year and will be applied through 2019. Adopting more ambitious standards post-2019 would yield the savings outlined in Paying the Freight. “There is no question that reducing ‘big truck’ fuel consumption will save the industry money, reduce our dangerous dependence on foreign oil, improve the environment, and put hundreds of dollars back into consumers pocketbooks each year,” said Jack Gillis, CFA Director of Public Affairs and author of The Car Book, who contributed to the report.

Americans’ Personal Saving Index Declines

Americans’ Personal Savings Index (PSI) scores declined from September 2013 to January 2014 on all three PSI measures – interest in personal saving (-9%), saving effort made (-6%), and perceived effectiveness of saving (-3%), according to the second America Saves PSI survey released last month.

“Both recovery from the post-holiday financial hangover and continued increases in asset values appear to explain much of the changes,” noted CFA Executive Director and America Saves founder Stephen Brobeck in a press statement. “The largest overall declines were experienced by lower-income Americans, who face the greatest challenge paying for holiday-related expenses, while actual increases in saving effectiveness were seen by upper-income Americans, who were the greatest beneficiaries of rising stock and housing prices,” he added.

The PSI is based on a survey of more than 1,000 representative adult Americans who were asked to rate their own savings interest, effort, and effectiveness on a 10-point scale.  Like the previous survey in September 2013, the latest survey shows that there is greater interest in personal savings (65%) than saving effort (58%) and perceived saving effectiveness (56%).  But it also shows a decline in scores, over the past four months, in this interest (71% to 65%), effort (62% to 58%), and effectiveness (58% to 56%).

The survey collected data on a variety of demographic factors, including gender, age, ethnicity, and education, but found that the most influential factor appeared to be income.  Lower-income households – the one-quarter with incomes below $25,000 – reported significant declines in savings interest (65% to 52%), effort (52% to 45%), and effectiveness (46% to 40%) in the past four months.  “We attribute these declines to the challenge, faced by households with little or no discretionary spending, recovering from holiday spending demands,” Brobeck said.  “These families tend to be preoccupied with paying bills and debts, not building savings,” he added.

America Saves seeks to motivate, encourage, and support low- to moderate-income households to save money, reduce debt, and build wealth. The research-based campaign uses the principles of behavioral economics and social marketing to change behavior. It released its second PSI on the eve of America Saves Week (February 24-March 1), in which more than 1,000 national, state, and local organizations nationwide will promote individual saving.

“Our America Saves Week, despite the sobering findings of our latest survey, comes at a time, in the winter during tax time, when Americans are most likely to assess their finances,” said Nancy Register, Director of America Saves and Associate Director of CFA.  “We encourage all Americans to do this assessment, including the adequacy of their savings,” she added.

Dominant Wireless Broadband Providers Overcharge Consumers by Billions

As the Federal Communications Commission (FCC) engages in several proceedings that are vital to broadband policy, CFA released a new report last month that found, among other things, that the dominant wireless broadband providers overcharge U.S. consumers by approximately $15 billion a year.  The report, which was filed as an ex parte supplement to the record in several FCC proceedings, directly challenges the findings of recent analyses of broadband prices and services from the Phoenix Center and the Information Technology and Innovation Foundation (ITIF).

“The FCC prides itself on being a data-driven organization, and in these proceedings seeks an accurate picture of the status of prices and product offerings in broadband Internet access service to inform sound broadband policy,” CFA Research Director and report author Mark Cooper said in a press statement. “However, there is little factual data to be found in the Phoenix Center/ITIF reports. Indeed, by simply correcting their math, we show that the dominant incumbents actually overcharge customers by about $15 billion per year for wireless service.”

“Utilizing data from the New America Foundation (NAF) global survey of rates, terms and conditions of wireline and wireless service, CFA found that U.S. providers charge more, offer slower speeds and, in the case of mobile broadband, have lower caps and more onerous penalties for exceeding those caps than their non-U.S. counterparts,” Cooper added.

The inevitable conclusion is that “the current level of competition does not effectively protect consumers, and much more needs to be done to promote competition,” Cooper said. “Only with true competition in the wireline and wireless marketplace and responsible policies to promote the goals of the Communications Act where competition falls short can we promote the public interest under the Communications Act.”