Proposed Federal Banking Rule Would Unleash Predatory Lending In All 50 States
The Office of the Comptroller of the Currency (OCC) has proposed a new rule that would encourage the spread of predatory loans by gutting the “true lender” doctrine that courts use to detect usury evasions, according to experts. In response, CFA joined with numerous other advocacy groups to submit comment letters earlier this month in vigorous opposition to the proposed rule.
The “true lender” doctrine is, as CFA points out in the comment letter, “an anti-evasion doctrine that allows courts to look beyond the fine print to determine which party has the predominant economic interest in the loan.” The letter continues, “by gutting this long-standing doctrine, the OCC’s proposal would eviscerate the power of state governments to independently regulate interest rate limits and would unleash predatory lending in all 50 states with horrible consequences for consumers, small businesses, and especially, communities of color.”
In their letter, CFA Legislative Director and General Counsel Rachel Weintraub and CFA Financial Services and Membership Outreach Manager Rachel Gittleman highlight four main points:
- Interest Rates are Effective Tools to Protect Consumers from Predatory Lending
At least 45 states and the District of Columbia have rate caps on installment loans. Additionally, 16 states and the District—representing about a third of the U.S. population—enforce interest rates of 36% or less that keep all high-cost loans out of their state.
These rate caps have immense public support. As illustrated by recent ballot measures and polling data, a super-majority of Americans, across party lines, support establishing usury laws to curb predatory, high-cost lenders.
- Rent-A-Bank Schemes Evade State Interest Rate Caps
Non-bank lenders evade these state imposed rate caps by laundering their loans through banks, which are generally exempt from usury limits. This “rent-a-bank” scheme allows banks to serve as a conduit by which the non-bank lender can evade state interest rate caps, even though the non-bank lender interfaces with the consumer and has the predominant economic interest in the loan. Loans made through rent-a-bank schemes are some of the most predatory on the market, with interest rates of 100% and higher.
Currently, there are only a few of these rogue, predatory lenders. At least seven online lenders are using five banks to offer high-cost installment loans to consumers and small businesses. However, they primarily operate online, allowing them to offer these predatory loans across the United States.
- States have Protected Their Interest Rate Caps with the “True Lender” Doctrine
Already, state regulators, state attorneys general, and consumers have had success in the courts by using the “true lender” doctrine to argue that the true lender of a loan is the party with the predominant economic interest in the loan. The OCC proposal would eliminate this doctrine, stripping protections away from consumers and prohibiting courts from looking past the fine print of loan paperwork to what is true in these agreements.
Instead, the new proposal would dictate that, by merely putting the bank’s name on the paperwork, the bank becomes the true lender. This would enable the non-bank lender to control all interaction with the borrower, take on virtually all of the risk, reap the vast majority of the profits, and still, the bank would be considered the lender as long as, as of the date of origination, the bank “is named as the lender in the loan agreement.”
- Predatory Lenders Target Communities of Color and Leave Borrowers Worse Off
Some argue that these rent-a-bank relationships increase access to affordable credit and financial inclusion of underserved communities and communities of color; but in fact, this proposal does the opposite.
“The harms of predatory loans have been more thoroughly documented in recent years than ever before, and it has become clear that these loans are structured to create long-term debt traps. They are marketed to borrowers as short-term fixes to cover unexpected emergencies, but the products’ structure and high-cost result in the borrower taking out more loans to pay off the original loan…These loans result in long-lasting financial harm for consumers, especially consumers of color, stripping them of hard-earned wealth, exacerbating the racial wealth gap, and leading to further financial exclusion,” Weintraub and Gittleman write.
“[This] proposed rule would take away a critical enforcement tool against usury evasions, leaving states with no ability to protect their interest rate caps and paving the way for these exploitive and predatory rent-a-bank schemes. Without this significant enforcement tool, rent-a-bank schemes will become far more prevalent, eviscerating state interest rate caps, and drastically limiting states’ authority to protect consumers from predatory lending,” stated Weintraub and Gittleman.
Legislation Needed to Protect Right of Under- or Unbanked to Pay Cash
Senators Kevin Cramer (R-ND) and Bob Menendez (D-NJ) and Rep. Donald M. Payne Jr. (D-NJ) introduced legislation earlier this month, the Payment Choice Act (S. 4145, H.R. 2650), to address the recent problem of brick-and-mortar retailers refusing to accept cash or charging consumers more for paying with cash. The legislation has received widespread support from consumer, privacy, and civil rights groups. Earlier this month, CFA and Consumer Action spearheaded a letter, signed by 51 advocacy groups, to the bills’ sponsors endorsing the legislation.
“The number and diversity of the organizations that support this legislation shows how fundamental the ability to pay with cash is for people in the United States,” said Susan Grant, CFA Director of Consumer Protection and Privacy. “It should be everyone’s right.”
Cashless businesses unfairly disadvantage consumers in many ways. For example, according to a May 2020 report from the Federal Reserve, nearly a quarter (one in four) of U.S. adults were either underbanked (16%) or unbanked (6%) last year. “Unbanked consumers have little access to noncash forms of payment. Without a bank account, they are unable to obtain credit or debit cards or to use other noncash payment methods, with the possible exception of prepaid cards,” the group letter states. Furthermore, when consumers are forced to pay for goods and services in cashless transactions, they (as well as the businesses where they shop) are also often forced to incur added expenses in the form of network and transaction fees.
The letter also highlights another, less discussed area of concern: privacy. “Noncash transactions generate vast amounts of data, recording the time, date, location, amount, and subject of each consumer’s purchase. Those data are available to digital marketers and advertisers who are engaged in developing and refining increasingly sophisticated techniques to identify and target potential customers,” the groups write.
“Paying with cash provides consumers with a lot more privacy than do electronic forms of payment and reduces the amount of personal information at risk of data breaches,” said Grant.
In addition to the concerns about privacy and the needs of the under- and unbanked, the groups also point out that cash is the most common form of payment for purchases and bill paying, according to a recent study from Cardtronics. Consumers overwhelmingly agree with that statement as well. The same study from Cardtronics reported that an overwhelming 82% of consumers felt that it was important for merchants to allow cash payments.
“It’s not about rejecting other forms of payment, it’s about having the choice to use cash when it suits your needs,” said Linda Sherry, Director of National Priorities for Consumer Action.
Groups Petition for Emergency Rule Requiring Masks at Airports and on Planes
A broad coalition of advocacy groups, including CFA, petitioned the Department of Transportation (DOT) earlier this month for an emergency final rule mandating that all air carriers and airport operators require all persons to wear protective face masks or coverings at all times at airports and on airplanes.
The emergency rule, requested by FlyersRights.org, is a simple, commonsense measure for mitigating the spread of the severe acute respiratory syndrome, coronavirus (COVID-19). The rule would also fall in line with Centers for Disease Control and Prevention (CDC) guidance that recommends that everyone wear a mask over their nose and mouth when in public, including during travel.
To date, more than 7 million Americans have been infected with COVID-19, and more than 200,000 have died from the disease.
In the petition, the groups point out that, in addition to the CDC recommendation to wear a mask, the Department of Homeland Security and the Department of Health and Human Services also recommend wearing a mask—with limited exceptions for children under two and certain people with medical conditions or disabilities—at all times in the passenger air transportation system, which includes both at airports and on airplanes.
”We don’t let planes leave the ground if mechanical or weather conditions pose risks to the passengers and crews,” said Susan Grant, CFA Director of Consumer Protection and Privacy. “If we are serious about combatting COVID-19 and ensuring that we can fly safely, the DOT must stop shirking its responsibility and implement a comprehensive masking requirement,” Grant concluded.
Safe Food Coalition Supports Plans to Expand Pathogen Testing In Meat and Poultry
A new proposal from the U.S. Department of Agriculture’s (USDA) Food Safety and Inspection Service (FSIS) that would expand testing for Shiga Toxin-Producing E.coli (STECs) in raw beef products received praise from members of the Safe Food Coalition earlier this month, when members submitted a comment letter calling for the proposal to be implemented no later than December of this year.
In their letter, the groups highlight that this proposal is long overdue as “almost nine years ago, FSIS announced that it had determined that six serogroups of STECs, in addition to E.coli O157:H7, ‘are adulterants of non-intact raw beef products and product components.’” In that announcement, the agency indicated it would implement a routine sampling program for the so-called “non-O157” STECs in some raw ground beef components, but wait to announce plans for testing in other beef products, including ground beef itself. The agency still has yet to set a date for when it will expand non-O157 testing to the full range of beef products that are routinely tested for E. coli O157:H7.
This delay in action has serious consequences. As the groups point out, “CDC estimates that, overall, STECs cause more than 265,000 illnesses each year in the United States, with more than 3,600 hospitalizations and 30 deaths…Given the magnitude of the public health burden, even a small percentage reduction of non-O157 STEC infections could avoid the needless suffering of tens of thousands of people.”
The new policy change is also “cost-effective based on the cost associated with avoided recalls alone…Moreover, by creating an incentive for innovation, expanded testing will likely result in even faster, cheaper and more accurate tests, particularly if FSIS takes additional steps to encourage private testing,” the letter states.
In addition to noting that the proposal is long overdue, advocates urged FSIS to clarify its guidance to industry, and its directives to inspection personnel, to prevent non-O157 STEC contamination.
“Unfortunately, some major meatpacking firms have followed the agency’s lead in treating non-O157 STECs as lesser adulterants. While these firms routinely test raw beef products for E. coli O157, they have declined to test for non-O157 STECs with the same rigor,” the groups stated. “So long as FSIS expects establishments to treat non-O157 STECs as adulterants, it should expect them to test for them, just as it does for E. coli O157:H7. This approach is consistent with the rationale advanced by FSIS for expanding its own testing,” the groups added.
“Ultimately, the companies themselves are in the best position to eliminate food safety risk,” said Thomas Gremillion, CFA Director of Food Policy. “Expanded government testing for non-O157 STECs will help, but USDA must also direct the meatpackers to conduct their own testing, and bring enforcement actions against those that refuse. Otherwise, consumers will continue to be needlessly exposed.”
DOL Hears Opposition to its Proposed Advice Rule from All Sides
Reversing an earlier decision, the Department of Labor (DOL) held a hearing on its proposed advice rule earlier this month at which it heard opposition to its proposed approach from industry and public interest groups alike. While industry groups testifying at the hearing sought an expansion of loopholes exempting their rollover recommendations from the fiduciary standard, investor groups called for extensive changes to ensure the rule adequately protects workers and retirees from retirement investment advice tainted by conflicts of interest.
In her testimony, CFA Director of Investor Protection Barbara Roper rebutted industry arguments that the rule proposal would inappropriately extend a fiduciary standard to rollover recommendations and highlighted the lack of evidence supporting the DOL’s proposed approach, which is based on the Securities and Exchange Commission’s (SEC) recently implemented Regulation Best Interest (Reg. BI).
Roper noted that, although the DOL had made a strong “case for why rollover recommendations should be held to a fiduciary standard – their importance to retirement savers’ financial well-being, the incentives firms have to recommend inappropriate rollovers – the Department only modestly expanded the portion of rollovers that will be covered by the definition, and left many of the most problematic rollovers outside the definition.” The Department’s proposal “would still appear to leave firms plenty of room to come up with a way to avoid those obligations, even in circumstances when the retirement saver will rely on those recommendations as a primary basis for their investment decision,” she said.
Even where the rule does apply, it would not have the effect industry groups claim of causing “simple sales recommendations to be held to a fiduciary standard,” Roper added. “On the contrary, under the Department’s proposed new class exemption, fiduciary investment advice would be held to non-fiduciary sales standards modeled, with only minor differences, on the SEC’s Regulation Best Interest for broker-dealers and the National Association of Insurance Commissioners’ (NAIC) model rule for annuities sales,” standards these same industry groups strongly support when applied to non-retirement accounts.
Finally, Roper noted, “Since the Department issued its proposal one day before the SEC’s Reg. BI was due to take effect, and the comment period closed when that new rule had been in effect for just over a month, there hasn’t been time for us – or the Department – to comprehensively study whether, or to what extent, Reg. BI has caused firms to change the way they do business. In particular, there hasn’t been time to fully assess whether Reg. BI has caused firms to abandon incentive practices that the Department has previously determined, as part of the regulatory record for this proposal, are likely to induce financial professionals to base their recommendations on their own interests, rather than their customers’ best interests.”
Roper noted that her preliminary review of firms’ Reg. BI disclosures indicates that little has changed in how these firms conduct their business since the rule took effect. As a result, “there is simply no evidence to support a finding that Reg. BI or the NAIC model rule will adequately protect retirement savers, and the evidence that does exist leads to the opposite conclusion. The Department therefore cannot reasonably move forward with this rulemaking based on the evidence before it,” she concluded.
Reforming Antitrust Regulation for Big Data: A Fine Line Between Good Business and Bad Behaviors
Having published a paper last month outlining a theory of Pragmatic, Progressive Capitalism, CFA Research Director Mark Cooper and CFA Antitrust Advocacy Associate Amina Abdu have applied their framework to three areas – network neutrality, business data services, and big data platforms – to outline how this approach could be adapted to produce pro-consumer regulation of emerging technologies.
In their follow-up report titled Pragmatic, Progressive Capitalism at Its Best: Network Neutrality, Cooper and Abdu outline the historical, legal, and economic underpinnings of regulation and oversight of communications networks in the United States that made possible the nation’s success and leadership in the development and deployment of the digital communications sector. The report demonstrates that the recent rollbacks of net neutrality protections threaten to undermine a long record of American entrepreneurial success online.
“The past century of nondiscrimination policy has shown us the key ingredients for success are strong, before-the-fact regulation, antitrust, and flexible, ongoing oversight,” said Cooper. “These principles should be restored in the broadband industry and guide policy moving forward in the emerging digital platform market,” he added.
The report identifies the failure of “Free Market Fundamentalism,” which advocates lax antitrust enforcement and little or no oversight of the Big Broadband Network market. In doing so, it demonstrates why abandoning oversight to the Federal Trade Commission (FTC) will be disastrous for consumers.
“After two decades of debate over Title I and Title II authority to ensure nondiscriminatory access to consumers, a debate in which both Democrat and Republican Federal Communications Commission members recognized the need for that oversight, in 2016, the courts upheld a light-handed Title II approach,” Cooper noted. Unfortunately, the Trump FCC did a complete “flip-flop,” seeking to repeal the Communications Act by taking a “Title ‘0’” approach.
By analyzing four decades governed by the principles of net neutrality, however, the report also charts a path forward.
First and foremost, this path forward involves restoring the guarantee of nondiscriminatory access to the communications net before the fact (ex ante), placing the burden of proof on service providers to show that their rates, terms, and conditions are just, reasonable, and nondiscriminatory before they go into effect. Cooper argues that an ex post oversight regime, in which injured parties have to prove they were harmed, will not provide the guarantee of access that experimental entrepreneurship at the edges demands. Preventing the mere threat of the exercise of that market power was the essence of public policy in the first three decades of the Internet’s success and should be re-implemented.
“Part of that solution involves reinvigorated antitrust enforcement, but the government should use all the tools at its disposal, starting with strong ex ante rules, like net neutrality, that stop a few key players from abusing their enormous market power over critical infrastructure in the digital sector,” Abdu noted.
Business Data Services
Cooper and Abdu also published an analysis of Business Data Services (BDS) in which they show that aggressive public policy to constrain the abuse of market power by dominant, incumbent communications network owners (e.g., AT&T, Verizon, and Comcast) is critical to ensuring a dynamic, innovative internet that works for consumers first and foremost.
In their analysis, titled: Business Data Services: Another Failure of Free Market Fundamentalism to Promote Competition or Prevent Abuse of Market Power, Cooper and Abdu ague that, “the inherent economic conditions in communications markets combined with a long period of lax antitrust enforcement and weak regulation to allow the emergence of a ‘Tight Oligopoly on Steroids’ in which BDS plays a central role.”
The paper uses the characteristics of BDS as a long-standing, but increasingly important “chokepoint” in big Broadband networks as a background for the analysis of a “new” chokepoint in the digital communications sector – big data platforms, which are the topic of a separate paper (see below).
The analysis examines the issues in BDS by using three data sets:
- The evidentiary record compiled in the FCC’s decade long Special Access proceeding;
- The FCC’s reading of that data in a Final Rule and FNPRM; and
- A unique data set from New York that sheds light on the BDS market in the largest state served by Verizon that fills gaps in the record.
“The data show that the BDS market is not only one of the most concentrated markets in the entire digital communications sector… but also that it is rife with market power abuse in contracting practices,” Cooper stated.
Big Data Platforms
Finally, Cooper and Abdu published a paper applying their framework to Big Data Platforms in order to analyze a turning point for the digital communications sector—specifically, that these platforms have become a chokepoint in the emerging information age. Cooper and Abdu’s earlier papers laid the groundwork for this analysis, but this paper charts a path forward and concludes by providing specific approaches policymakers should take.
The paper begins by framing the dilemma faced by policymakers, explaining the severe challenges facing both antitrust and regulatory authorities, and discussing the key factors that underlay the immense power and success of digital technologies. It goes on to describe the challenges that Big Data Platforms pose to traditional antitrust and regulation and to discuss why existing antitrust institutions are inadequate to regulate the market power that Big Data Platforms inherently create.
Based on that foundation, the paper begins to chart the path forward by laying out the principles for a response to the dilemma. It argues for reinvigorated and recalibrated antitrust regulation to overcome decades of misguided laxity in enforcement of existing authority and to develop new definitions and authorities to adapt to the new technology.
Finally, the paper concludes with specific do’s and don’ts for policymakers, with the goal of creating flexible oversight that allows consumers to capture the benefits of Big Data Platforms while mitigating the harms of the industry’s market power problem.
The paper urges policy makers:
- To use dual strategies (antitrust and regulation), which have been applied for over century in telecommunications;
- Not to over-rely on antitrust, which was never very effective because of its structure and has been a disaster in the digital age;
- To create a flexible, expert agency to provide oversight with clearer goals and strengthened tools articulated by legislation where necessary;
- Not to adopt utility-like regulation that will stifle innovation in a sector that is far more dynamic than traditional utilities; and
Not to adopt simplistic, extreme antitrust approaches that break up everything to create a “horse and buggy” where units are too small to capture the powerful economies of scale, scope and integration that typify digital platforms.
The difficulty of protecting consumer welfare while promoting efficiency and innovation is a problem with which many governments are grappling,” said Abdu. “The solution will require re-envisioning the status quo and developing new and creative pro-competitive, pro-consumer regulation.”