Article 1

FINANCIAL REGULATION

Wishful Thinking

The president bumped up his proposed budgets for the agencies charged with implementing the 2010 Dodd-Frank financial-reform law. It’s wishful thinking on his part. History indicates that the agency budgets are unlikely to make it through Congress without significant cuts. Since Dodd-Frank’s passage, the Securities and Exchange Commission, Commodity Futures Trading Commission, and Consumer Financial Protection Bureau have been targets for Republican criticism—and budget cuts.

On Monday, Obama proposed an 11 percent increase in funding for the SEC to $1.57 billion, up from $1.41 billion last year. He requested the same level of funding for the CFTC. Both the SEC and CFTC saw their budgets slashed by Congress last year, with the SEC receiving $1.3 billion and the CFTC $205 million, down from Obama’s requested $308 million.

Obama estimated that the Consumer Financial Protection Bureau would require $448 million in 2013, an increase of $118 million from the previous year. The bureau is not subject to the congressional appropriations process; but a new bill would subject the bureau to the regular Treasury Department appropriations process—and thus congressional approval.

Article 2

New York Times

Financial Literacy: ‘Pretty Dismal’

By Motoko Rich

February 13, 2012, 3:29 pm

“Let’s say you have $200 in a savings account. The account earns 10 percent interest per year. How much would you have in the account at the end of two years?”

I assume that most Economix readers can handle that calculation of compound interest, but when a group of 51-to-56-year-olds (a k a Early Baby Boomers) were asked that question, less than one in five could arrive at the correct answer.

This is one of the findings of financial illiteracy in a working paper by Annamaria Lusardi, an economist at Dartmouth College. The paper examines just how well Americans and citizens of other countries understand the basic financial concepts that underpin decisions about mortgages, saving for retirement, credit card borrowing and other economic needs.

Reviewing several surveys, Ms. Lusardi finds that while those 23 to 28 years old are generally more financially literate than other age groups, the general level of numeracy is “pretty dismal …considering the complexities of the calculations involved in many financial decisions.”

Numeracy appears to decline with age, although Ms. Lusardi writes that it is not clear whether that happens because of a general decline in cognitive ability or because older people have a lower level of financial knowledge. And underscoring Suze Orman’s messages, women are more likely to give wrong answers or say they don’t know the answer to questions testing their financial literacy.

Not surprisingly, people with a low level of education tend to have low numeracy skills. The strongest correlation between financial literacy and background came from a person’s parents’ education, particularly that of the mother.

Internationally, a survey of people over 50 in 11 European countries found that the highest levels of financial literacy were in Germany, the Netherlands, Sweden and Switzerland, while older residents in Italy and Spain performed particularly poorly on such questions. In a wider survey, Germany, the Netherlands and New Zealand outperformed most other countries, including the United States, while Japanese respondents were able to answer questions at about the same rate as Americans.

(And in case you were wondering about the question at the outset: With interest compounded annually, the account would have $242 after two years.)

Article 3

Committee to Examine CFPB’s Spending

Press Release For Immediate Release | Contact: Jeff Emerson (202-226-1490), Marisol Garibay (202-226-2467)

February 14, 2012

WASHINGTON-A Financial Services subcommittee hearing on Wednesday will mark the first time Congress examines spending by the Consumer Financial Protection Bureau (CFPB).

The CFPB, which was created by the Dodd-Frank Act, is specifically designed to evade congressional oversight. The congressional appropriations process is the most time-tested method for monitoring the effectiveness of government agencies and holding them accountable to the American taxpayer. Yet the CFPB receives its funding outside the appropriations process through a mandatory transfer of funds from the Federal Reserve.

By law, the Federal Reserve must transfer to the CFPB whatever funds its director requests up to a certain percentage of the Fed’s yearly operating expenses. For fiscal year 2013, that amount equals $597 million. If the CFPB director deems this amount to be insufficient, the director can ask Congress for an additional $200 million. In the last 18 months, the CFPB has requested more than $338 million from the Federal Reserve.

The Dodd-Frank Act also prohibits the House and Senate appropriations committees from reviewing how the CFPB spends its money.

“No one in government should be allowed to spend hundreds of millions of dollars with no questions asked,” said Chairman Spencer Bachus. “This hearing will allow us to focus a little bit of sunshine on CFPB spending, but until there are structural reforms to the bureau there can be no real oversight of it.”

Rep. Randy Neugebauer, the Chairman of the Oversight and Investigations Subcommittee, said, “The decision to fund the CFPB outside of the appropriations process deprived Congress of a major tool for overseeing its operations. Despite the obstacles created by Dodd Frank, the Committee is still hoping to get some idea of how CFPB programs are being run and at what cost. This hearing is important to preserve some semblance of checks and balances on the CFPB until we can subject it to annual appropriations.”

Rep. Neugebauer has introduced a bill to subject the CFPB to the congressional authorization, budget and appropriations process. The legislation, H.R. 1355, was reviewed by the Financial Institutions and Consumer Credit Subcommittee during a hearing on February 8 along with other proposals to make the CFPB more accountable.

The Oversight and Investigations Subcommittee hearing on CFPB spending will take place on Wednesday, February 15 at 10 a.m. in room 2128 Rayburn. The Subcommittee will receive testimony from Richard Cordray of the CFPB.

Article 4

Attached document

This is the introduced version of the Johnson/Shelby bill insulating the CFPB from pressure to share information given to the agency for regulatory purposes, as are other banking regulators. Senate activity is anticipated following House consideration of their legislation. It is likely that this measure will not be marked up by the SBC, but will, instead, either be attached to another bill, or passed by UC.

Article 5

Roll Call

Ethics Probe Spurs Fresh Look at Spencer Bachus Race

By Joshua Miller
Roll Call Staff
Feb. 14, 2012, Midnight

Even before last week, there had been murmurs that Rep. Spencer Bachus (R-Ala.) might face a serious primary challenge.

But on Friday, a front-page story in the Washington Post broke the news that the House Financial Services chairman is under investigation by the Office of Congressional Ethics for possible violations of insider-trading laws. Now, Bachus’ race against state Sen. Scott Beason is getting a fresh look, and Republicans in the state said this could be a real contest.

“The race is getting more interesting by the day,” said an unaffiliated Alabama Republican operative with knowledge of the race.

“It’s your fundamental establishment Republicans versus grass-roots Republicans,” the source said, noting that Beason has a lot of tea party support.

If Beason can hold Bachus to less than 50 percent in the March 13 primary, a runoff would be held April 24. The other races on the ballot — in particular, the presidential primary and a race for state chief justice — may influence turnout, but a month out, it remains unclear in whose favor.

Beason said the Post story reinforced his message and left people in the district asking him why Members of Congress get to play by a different set of rules.

“It’s really time for our Congressman to come on back home and for new people to be sent to Washington,” he said.

Beason admitted that his political views were similar to Bachus’, but he painted a contrast in what they’ve done.

“The difference is I have the proven record of actually making things happen, getting things done,” he said. “Going along and getting along has gotten us where we are, and I’m for turning the country around.”

A big test for Beason will be fundraising. Bachus had more than a million dollars in cash on hand at the end of December and has been airing TV ads in the district.

One ad that appeared to begin airing Friday in Birmingham had Bachus discussing the Patient Protection and Affordable Care Act.

“Obamacare is just the government managing and controlling health care, making choices that doctors and patients ought to make,” he said in the 30-second spot. “It’s a socialist policy, plain and simple,” he added, before calling for its repeal. In the ad, there’s no mention of the ethics investigation or his primary opponent.

Beason said he would begin airing ads after he had sufficient resources, and he claimed his fundraising is proceeding at a good pace. He did not file with the Federal Election Commission until this year and therefore has not yet filed a fundraising report.

“We’re going to be [on TV] as soon as we can,” he said. “When we report [our money], I think people will be surprised at how well we’ve done.”

In a statement to Roll Call, Bachus said his campaign was going well and that he was heartened by his supporters. “Sometimes, political races may seem scripted and impersonal, but for me it’s all about reaching out to contact my friends and people who know my record,” he said. “There are ads on TV, but there are also ads in the small town newspapers, bumper stickers, yard signs and door-to-door volunteers. Some people think that’s old fashioned, but I believe that direct contact is what the voters in my district expect, and it is what I enjoy.”

In an earlier statement on the OCE investigation from his Congressional office, Bachus denied any wrongdoing and said he looked forward to “the full exoneration this process will provide.”

However the ethics investigation plays out, Republicans are now taking a much closer look at this race.

“Conventional wisdom is: Spencer’s going to sail right on to re-election,” said an Alabama Republican activist from the Birmingham area. “But I don’t know if you can count on conventional wisdom this year.”

Article 6

New York Times

Collection and Credit Firms Facing Broad New Oversight

By Ben Protess
February 16, 2012, 11:00 am

Debt collectors and credit reporting companies are bracing for intense scrutiny after the government’s consumer finance watchdog unveiled a broad plan to regulate financial firms that have largely evaded federal oversight.

On Thursday, the Consumer Financial Protection Bureau proposed regulations that would allow the agency to supervise those two controversial corners of the finance industry, which have drawn complaints of aggressive tactics and unfair practices.

The draft rule is the most significant proposal yet to emerge from the consumer agency — a symbol of the government’s new regulatory powers and a favorite target of Congressional Republicans — and the first of several efforts to police financial companies that are not banks.

“Debt collectors and credit reporting agencies have gone unsupervised by the federal government for too long,” Richard Cordray, the bureau’s director, told reporters on Thursday. “It is time to provide the kind of oversight of these markets that will help ensure that federal laws protecting consumers in these financial markets are being followed.”

The proposal now enters a 60-day comment period. The bureau expects to complete the rule by July, the two-year anniversary of its creation. The rule, like many of the bureau’s actions, could become bogged down in a larger political battle that has bedeviled many regulators in the Obama administration. Republicans have threatened to rein in the consumer agency’s budget and authority.

The bureau, a product of the Dodd-Frank regulatory overhaul, has a broad mandate to police Wall Street banks as well as the more shadowy corners of the financial industry. Such firms are unmarked territory for the federal government. Until now, state authorities largely have licensed and supervised these companies.

But the agency was hamstrung without a leader at the helm, the result of a bitter battle in Congress over the appointment of Mr. Cordray. Republicans refused to bless his nomination unless Democrats agreed to subject the bureau to stricter Congressional oversight.

In a sharp challenge to Republican lawmakers in January, President Obama circumvented Congress and opted for a recess appointment of Mr. Cordray. The move empowered the bureau to take on the lightly regulated world of payday lenders, mortgage firms and student lenders. The bureau can also oversee the “larger participants” in industries like debt collection, credit reporting and check cashing.

The bureau began its new effort on Thursday with the proposal to define the largest debt collectors and credit reporting companies. The bureau can also sanction smaller firms that run afoul of federal rules.

Some financial firms, on and off Wall Street, are squirming at the thought of an emboldened regulator. New oversight means rising compliance costs and the likelihood of additional penalties.

“I expect increased diligence and increased costs in light of the pronouncement from Mr. Cordray,” said Donald N. Lamson, a former regulator who now works at the law firm Shearman & Sterling. “It would be incumbent on them to beef up those areas that deal with consumer complaints.”

Under the debt collector proposal, the consumer bureau would keep watch over companies that make more than $10 million a year from their consumer business, limiting the scope to about 175 firms. These companies account for about two-thirds of the business in the debt collection market.

The oversight comes after a prolonged upheaval for the industry, which for years has been ensnared in lawsuits and regulatory actions for questionable collection practices. Debt collectors habitually rank as the most common topic of nonfraud consumer complaints at the Federal Trade Commission.

The F.T.C. recently cracked down on debt collectors for harassing consumers, sometimes for money that is not even legally owed. The agency last month levied a $2.5 million fine on Asset Acceptance, one of the nation’s largest debt collectors, to settle accusations that the company deceived consumers.

But the F.T.C.’s powers are limited. While it can sanction a debt collector for violating consumer protection laws, the Consumer Financial Protection Bureau has authority to root out wrongdoing and keep a closer eye on the industry to try and prevent bad acts.

Consumer advocates cheered the bureau’s proposal on Thursday, saying it was taking a proactive approach to regulation.

“You’re looking at problems on the front end rather than going in after the fact,” said Travis Plunkett, legislative director for the Consumer Federation of America, a nonprofit advocacy group. “You can actually prevent problems.”

The bureau’s plan also takes aim at the largest consumer reporting agencies, defined as companies that make more than $7 million annually from their consumer business. The proposal would capture 30 companies, firms like Experian, TransUnion and Equifax, that account for more than 90 percent of the industry’s business, according to the bureau.

Credit agencies, which produce on-demand reports featuring a borrower’s credit score and history, are inextricably linked to the consumer finance industry. Consumers clamor for favorable reports, a prerequisite for obtaining credit cards, a home mortgage or even a cellphone. But the credit reporting companies have also faced criticism for being overly deferential to creditors at the expense of consumers.

Later this year, the bureau could roll out plans to oversee check cashing companies and other nonbank firms. The bureau saw debt collectors and credit reporting companies as a logical starting point, Mr. Cordray said, because consumers lack the power to shop around for alternative providers. Banks and creditors, not customers, typically select debt collectors and credit reporting firms.

The bureau’s oversight of these industries will largely mirror its supervision of Wall Street. The agency will examine these firms individually and may also order the companies to turn over detailed snapshots of their businesses.

“This oversight would help restore confidence that the federal government is standing beside the American consumer,” Mr. Cordray said.

Article 7

Consumer agency wants oversight of debt collectors, credit bureaus

By Ylan Q. Mui, Published: February 16
The Consumer Financial Protection Bureau on Thursday sought to bring debt collectors and credit bureaus under its purview, marking the first time the often controversial industries would be subject to federal supervision.

Under its proposed rule, the CFPB would oversee the nation’s largest debt collectors, the primary credit reporting agencies such as Experian, Equifax and TransUnion, and other lesser-known consumer reporting agencies. It is the first attempt by the watchdog agency to define which businesses in the vast swath of nontraditional financial institutions will be subject to the same examination process as banks.

“This oversight would help restore confidence that the federal government is standing beside the American consumer,” CFPB Director Richard Cordray said in a statement.

Cordray said a reason why they are targeting these firms is because they have expanded their reach into consumers’ lives during the recession. More people are now being pursued by debt collectors and have watched their credit scores slip.

Those scores have become crucial in the aftermath of the financial crisis. Some employers are even looking at credit scores as criteria for jobs. A car, a home, a college education are all financed by lenders that rely on the score to determine who gets credit and how much they pay for it.

For most consumers, those scores are based on records of loans they have taken out in the past and how well they have paid them off. This information is housed in the Big Three national credit bureaus — Experian, Equifax and TransUnion. Lenders use formulas developed by companies such as FICO and VantageScore to analyze the data and determine how likely each person is to repay.

Government regulators, financial firms and consumer advocates have launched extensive education campaigns in recent years to make sure that consumers understand what goes into their Big Three credit reports and how that affects the cost of a loan.

But little attention has been paid to the so-called “Fourth Bureau” firms that target the 30 million consumers outside the mainstream financial system. Often they are students, immigrants or low-income consumers who do not qualify for traditional loans or choose not to use them. Instead, they rely on a makeshift system of payday lenders, check cashers and prepaid cards — none of which show up in the Big Three. Without a paper trail of credit, these consumers are virtually shut out of the traditional banking system.

As a result, fourth bureau firms are increasingly using non-traditional and, at times, unreliable data, including auto warranties, cellphone bills and magazine subscriptions to come up with credit scores.

Yet federal regulations do not always require these companies to disclose when they share your financial history or with whom, and there is no way to opt out when they do. No one is even tracking the accuracy of these reports. That has left the most vulnerable consumers with little insight into the forces determining their financial futures.

The CFPB agency became the first federal agency to oversee so-called “nonbanks” after President Obama appointed Cordray as director late last year. But before it can use its power, the CFPB must set standards for which companies make the cut.

The proposed rule sets the bar for debt collection agencies at $10 million in annual receipts. The CFPB estimated that would encompass about 175 firms that account for about 63 percent of the debt collected from consumers each year.

For consumer reporting agencies, the CFPB proposed a standard of $7 million in annual receipts. That includes not only the three major credit bureaus but also roughly 30 smaller firms in the Fourth Bureau. The rule would give the CFPB authority over about 94 percent of the industry by receipts.

The power to oversee such firms and other nonbanks was a key component of the new agency’s design, and the CFPB has quickly flexed its muscle. It has already convened hearings on payday lending and plans to propose new rules for mortgage servicers.

The agency said it will continue to roll out guidelines employing a variety of criteria to define businesses that will be subject to supervision.

“This is going to be a very important way for us to interact with industry participants to know exactly what they’re doing,” Cordray said. He added that the power could be more efficient than using the “blunt instrument of lawsuits.”

Article 8

[Federal Register Volume 77, Number 33 (Friday, February 17, 2012)]

[Proposed Rules]

[Pages 9592-9608]

From the Federal Register Online via the Government Printing Office [www.gpo.gov]

[FR Doc No: 2012-3775]

=======================================================================

———————————————————————–

BUREAU OF CONSUMER FINANCIAL PROTECTION

12 CFR Part 1090

[Docket No. CFPB-2012-0005]

RIN 3170-AA00

Defining Larger Participants in Certain Consumer Financial

Product and Service Markets

AGENCY: Bureau of Consumer Financial Protection.

ACTION: Proposed rule; request for public comment.

———————————————————————–

SUMMARY: The Bureau of Consumer Financial Protection (Bureau) is

proposing a new regulation pursuant to

[[Page 9593]]

section 1024 of the Consumer Financial Protection Act of 2010. That

provision grants the Bureau authority to supervise certain nonbank

covered persons for compliance with Federal consumer financial laws and

for other purposes. The Bureau has the authority to supervise nonbank

covered persons of all sizes in the residential mortgage, private

education lending, and payday lending markets. In addition, the Bureau

has the authority to supervise nonbank “larger participant[s]” in

markets for other consumer financial products or services. The Bureau

must define such “larger participants” by rule, and such an initial

rule must be issued by July 21, 2012.

In this proposal, the Bureau proposes to define larger participants

in the markets for consumer debt collection and consumer reporting. The

Bureau intends that this proposal and subsequent initial rule will be

followed by a series of rulemakings covering additional markets for

consumer financial products and services. The Bureau also proposes to

include provisions in this proposal that will facilitate the

supervision of nonbank covered persons.

DATES: Comments must be received on or before April 17, 2012.

ADDRESSES: Interested parties are invited to submit written comments

electronically or in paper form. Because paper mail in the Washington,

DC area and at the Bureau is subject to delay, commenters are

encouraged to submit comments electronically. You may submit comments,

identified by Docket No. CFPB-2012-0005 or RIN 3170-AA00 by any of the

following methods:

Electronic: http://www.regulations.gov. Follow the

instructions for submitting comments. In general, all comments received

will be posted without change to their content.

Mail: Monica Jackson, Office of the Executive Secretary,

Bureau of Consumer Financial Protection, 1700 G Street NW., Washington

DC 20006.

Hand Delivery/Courier: Monica Jackson, Office of the

Executive Secretary, Bureau of Consumer Financial Protection, 1700 G

Street NW., Washington DC 20006.

In addition, comments will be available for public inspection and

copying at 1700 G Street NW., Washington, DC 20006 on official business

days between the hours of 10 a.m. and 5 p.m. Eastern Time. You can make

an appointment to inspect the documents by telephoning (202) 435-7275.

All comments, including attachments and other supporting materials,

will become part of the public record and will be subject to public

disclosure. Submit only information that you wish to make available

publicly. Do not include sensitive personal information, such as

account numbers or Social Security numbers. Comments will not be edited

to remove any identifying or contact information, such as name and

address information, email addresses, or telephone numbers.

FOR FURTHER INFORMATION CONTACT: Christopher Young, Senior Counsel,

(202) 435-7408, or Nicholas Krafft, Consumer Financial Protection

Analyst, (202) 435-7252, Office of Nonbank Supervision, Bureau of

Consumer Financial Protection, 1700 G Street NW., Washington, DC 20006.

SUPPLEMENTARY INFORMATION:

I. Background

The Consumer Financial Protection Act of 2010 (Act) \1\ established

the Bureau of Consumer Financial Protection (Bureau) on July 21, 2010.

One of the Bureau’s key responsibilities under the Act is the

supervision of very large banks, thrifts, and credit unions, and their

affiliates,\2\ and certain nonbank covered persons.\3\

—————————————————————————

\1\ The Act is Title X of the Dodd-Frank Wall Street Reform and

Consumer Protection Act of 2010, Public Law 111-203 (12 U.S.C.

5301).

\2\ See Act section 1025(a). The Bureau also has certain

authorities relating to the supervision of other banks, thrifts, and

credit unions. See Act section 1026 (c)(1), (e).

\3\ Section 1024 of the Act applies to nondepository (nonbank)

covered persons and expressly excludes from coverage persons

described in sections 1025(a) or 1026(a) of the Act. Under section

1002(6) of the Act, a “covered person” means “(A) any person that

engages in offering or providing a consumer financial product or

service; and (B) any affiliate of a person described [in (A)] if

such affiliate acts as a service provider to such person.” Act

section 1002(6); see also Act section 1002(5) (defining “consumer

financial product or service.”) Section 1024(d) of the Act provides

that, subject to certain exceptions, “to the extent that Federal

law authorizes the Bureau and another Federal agency to * * *

conduct examinations, or require reports from a [nonbank covered

person] under such law for purposes of assuring compliance with

Federal consumer financial law and any regulations thereunder, the

Bureau shall have exclusive authority to * * * conduct examinations

[and] require reports * * * with regard to a [nonbank covered

person], subject to those provisions of law.”

—————————————————————————

This proposal (Proposed Rule or proposal) would establish, in part,

the scope of coverage of the Bureau’s supervision authority for nonbank

covered persons pursuant to section 1024 of the Act.\4\ That authority

varies by consumer financial product or service market. Specifically,

section 1024 grants the Bureau authority to supervise, regardless of

size, nonbank covered persons that offer or provide to consumers: (1)

Origination, brokerage, or servicing of residential mortgage loans

secured by real estate, and related mortgage loan modification or

foreclosure relief services; (2) private education loans; and (3)

payday loans.\5\ In addition, the Bureau has the authority to supervise

any “larger participant of a market for other consumer financial

products or services,” as defined by rule by the Bureau.\6\ The Act

requires the initial larger participant rule to be issued by July 21,

2012. This Proposed Rule would establish the initial larger participant

rule for two markets: consumer debt collection and consumer reporting.

The Bureau anticipates subsequent rulemakings to define larger

participants in additional markets.

—————————————————————————

\4\ The Bureau’s supervision authority also extends to service

providers of these entities. See Act section 1024(e) (establishing

the Bureau’s supervisory authority relating to service providers);

see also, Act section 1002(26) (defining “service provider”).

Service providers to consumer debt collectors and consumer reporting

agencies may include firms such as data aggregators, law firms, data

and record suppliers, account maintenance services, call centers,

software providers, and developers of credit scoring algorithms.

\5\ Act section 1024(a)(1)(A), (D), and (E).

\6\ Act section 1024(a)(1)(B), (a)(2). The Bureau also has the

authority to supervise any nonbank covered person that it “has

reasonable cause to determine, by order, after notice and a

reasonable opportunity * * * to respond” that such covered person

“is engaging, or has engaged, in conduct that poses risks to

consumers with regard to the offering or provision of consumer

financial products or services.” Act section 1024(a)(1)(C).

—————————————————————————

The Bureau is authorized to supervise nonbank entities subject to

section 1024 of the Act by requiring the submission of reports and

conducting examinations to: (1) Assess compliance with Federal consumer

financial law; (2) obtain information about such persons’ activities

and compliance systems or procedures; and (3) detect and assess risks

to consumers and to the consumer financial markets.\7\

—————————————————————————

\7\ Act section 1024(b)(1).

—————————————————————————

The Proposed Rule only pertains to defining larger participants in

certain markets for purposes of the Bureau’s nonbank supervision

authority and would not impose new substantive consumer protection

requirements on any nonbank entity. Moreover, nonbank entities are

subject to the Bureau’s regulatory and enforcement authority and any

applicable Federal consumer financial law, regardless of whether they

are subject to the Bureau’s supervisory authority.

II. Overview of Comments Received

The Bureau solicited public comment on developing an initial

proposed larger participant rule by publishing in the Federal Register

a Notice and Request

[[Page 9594]]

for Comment (Notice) on June 29, 2011,\8\ and holding a series of

roundtable discussions with i

…

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