Daniel Sutter: Wells Fargo, fraud and markets
One of the nation’s largest banks, Wells Fargo, recently agreed to a $185 million settlement with the Consumer Financial Protection Bureau (CFPB) and other regulators regarding sales tactics and fraud in the opening of two million customer accounts. As first reported by the Los Angeles Times in 2013, employees desperate to meet monthly quotas created accounts for customers without permission. Bank executives’ claims that they did not intend for employees to use fraud strike me as willful ignorance: they did not want to know how employees attained sales four times the industry average. This instance of fraud, sadly, is hardly unique. Recently we’ve seen Volkswagen cheat on emissions and for-profit colleges falsify job placement records. What do such cases mean for our market economy? For starters, they make many Americans distrustful of business and receptive to government regulation. Free market economists interpret business fraud differently, based on how markets discipline corporate malefactors. But I think we economists are too dismissive of business fraud. Markets generally harness self-interest, like business’ pursuit of profit, to increase prosperity. Market exchange is voluntary, so businesses must provide us with goods or services we want to buy. And competition results in many banks (or supermarkets, or restaurants) vying for our business, providing options if we are unhappy with quality, service or price. But as the Wells Fargo case demonstrates, businesses can cut corners or even cheat. Selling customers extra accounts or services increased the bank’s revenue without providing value to customers. I do not know why bank executives decided to do this. Perhaps they thought customers would not realize that they were paying extra fees, or would not take their business elsewhere if they did. If I wanted to downplay fraud, I could argue that such fraud is rare. Or that it illustrates the challenges of managerial economics and the design of incentives. Or that cheating customers is not profitable for businesses in the long run. All of these arguments, however, ignore the fraud. We should, however, recognize how customers discipline even the largest corporations, through what economists call the power of the market. The Fortune 500 has tracked America’s largest companies for decades. Economist Mark Perry found that 88% of 1955’s Fortune 500 no longer made the list 60 years later, having either fallen out, gone bankrupt, or merged. Consumers discipline firms through our actions. I am not a Wells Fargo customer, and will not be anytime soon. Perhaps some of you closed accounts following the scandal. Indeed, the Times interviewed a customer with a six figure line of credit who closed her accounts after an employee created an unauthorized $8,200 line of credit. Wells Fargo’s reputation and profitability will suffer for years. We often fail to recognize our influence over corporations. In part, this is because customer punishment is collective; the loss of any one customer’s business is not a blow to a major corporation but losing thousands of customers is. Further, the loss of future business appears mild compared to the punishments we experience personally, like being grounded, spanked, fired, or even serving detention. That $185 million fine looks more like a real punishment. Only regulation may fail to work as effectively as we might hope. The CFPB, established by the Dodd-Frank Act, should protect consumers against this type of fraud. And yet a newspaper, not the CFPB, revealed Wells Fargo’s misdeeds. Government regulators often have discretion to rule that misdeeds do not violate rules despite appearances. Today’s regulators may hope to work for banks at higher salaries in a few years, and consequently employ that discretion to overlook acts which should be punished. The freedom indispensable for the innovations by businesses which grow our economy will also allow some businesses to take advantage of customers. Americans have every right to want to see businesses which cheat them punished. We will never be able to eliminate fraud entirely, but the vigorous competition for customers enables consumers to punish miscreants. ••• Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s alone and do not necessarily reflect the views of Troy University.
Daniel Sutter: Let’s answer this question before debating payday lending
The Consumer Financial Protection Bureau (CFPB) has proposed new regulations for payday lenders limiting lending to persons unable to repay a loan when due. Governor Robert Bentley recently formed a task force to review Alabama’s lenders. Opinion on the proposed CFPB regulation is divided. Critics allege that the regulations will put payday lenders out of business. Proponents claim that they will keep borrowers out of recurring debt at high interest rates. But before examining payday lending, I first want you to answer this: If a product, service or activity harms some users, does this justify prohibition for all? Payday lending benefits most borrowers, but some customers cannot repay the loans, roll them over, and consequently pay a decent portion of their modest incomes in interest. Many products and activities present a similar tradeoff across society, making the prohibition question highly relevant. Many Americans take on excessive debt through credit cards, student loans, or other borrowing. The problem arises outside of finance as well. Around 35,000 Americans die every year in auto accidents, with driver error often the main cause. About 40 deaths occur annually on the ski slopes. Millions of Americans enjoy gambling even though some ruin themselves with losses they cannot afford. I would oppose prohibitions, but reasonable people could disagree. Some readers might want to balance the harm and benefit in different cases. They might reasonably want to weigh the proportion of users harmed, the extent of the harm (loss of life or a small financial loss), and the size of the benefits. However one decides, we should know our answer to the prohibition question before addressing specific policies. Turning to payday lending, some might doubt whether any borrowers actually benefit from a 400% annual interest loan. But lenders do not force customers to take out loans, so borrowers must see some value to the loans. To understand why, we could always just ask them. Troy University economics student Christy Bronson surveyed Wiregrass residents who had used payday lending for a research project. Ms. Bronson found that 78% of respondents were very or extremely satisfied with their experience. The majority of respondents reported using payday lending occasionally or very infrequently, and to cover unexpected expenses for which they lacked adequate savings. None of Ms. Bronson’s survey respondents thought that the government should ban payday lending, and would delay paying bills (and incur late fees), sell their belongings, or use credit cards if payday lending were not available. Other surveys report similar results to Ms. Bronson’s. Most payday borrowers are working Americans with modest incomes, limited savings, and no wealthy family members to help them out. They are managing life’s obstacles as best they can, and payday lenders help. My prohibition question might seem to artificially limit options. What about limiting the harm via restrictions? Arguably this is the intent of the CFPB’s proposed regulation. Harm reduction is an important goal, and can be accomplished through either markets or government regulation. For example, members of the Community Financial Services Association of America, an industry group, adhere to a Customer Bill of Rights. Markets also limit harm through competition. There are more than 20 payday lenders just in Troy. Lenders who overcharge or deceive customers will lose out to those who do not. Opening the door to government regulation to limit harm creates an unavoidable risk of prohibition. If states can cap the interest rate lenders can charge, it is virtually impossible to prevent the setting of a cap that makes payday lending totally unprofitable. More than a dozen states have regulated payday lenders out of business without official prohibition. Market regulation is more attractive if we do not want to risk prohibition. This is why I wanted to address the prohibition question first. We can and should try to limit the harm from payday lending or other activities in the economy. But in deciding between markets and regulation for harm reduction, it helps to be clear about whether harm to some ever justifies prohibition for all. ••• Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision
Gary Palmer introduces legislation to hold federal agencies accountable
An Alabama congressman introduced legislation Thursday requiring all fines, fees, penalties, and other unappropriated funds collected by federal agencies to be transferred to the Treasury, and subject to the appropriations process. Citing recent examples where government agencies lacked accountability, 6th District Congressman Gary Palmer pitched the Agency Accountability Act (AAA) as a way to allow Congress to effectively regain the power of the purse over the actions of federal agencies and bring more transparency and accountability to the federal government. “This legislation will bring transparency and oversight back to our government,” Palmer said in a news release. “Throughout the years, Congress has granted federal agencies the authority to collect fines, fees and other revenues outside of their appropriated funds, but Congress has had little or no say in the way a substantial portion of these monies are spent, which in some instances has led to agency abuse.” A sizable portion of the fines, fees and other revenues are used by agencies to self-fund programs or operations outside of the normal appropriations process. Entities such as the Consumer Financial Protection Bureau (CFPB) and Financial Stability Oversight Council (FSOC) receive no appropriated funds from Congress. According to the Office of Management and Budget (OMB), in 2015 the federal government collected $516 billion in user fees alone. Last year U.S. Citizenship and Immigration Services (USCIS) intended to fund President Barack Obama’s unconstitutional executive action on illegal immigration through fines and fees and circumvent the will of Congress. Palmer continued, “Congress must begin reclaiming our Article I authority through the power of the purse and put the money back under congressional oversight where it belongs. I look forward to the support of my colleagues from both sides of the aisle as we work to restore Article I appropriation and oversight authority to Congress.”
Federal payday lending reforms find support in Alabama
An ongoing effort by the federal Consumer Financial Protection Bureau to rein in the excesses of high-interest “payday loan” lenders has so far been generally been well-received in Alabama. “The proposed CFPB rules have bipartisan support and empower consumers to make better financial decisions for themselves,” said Rep. Terri Sewell, a Democrat. “I strongly support the adoption of these proposed regulations and will continue to fight for greater consumer protections in my role as a member of the House Committee on Financial Services.” Sewell repeated an oft-cited figure that there are “four times as many payday lenders in Alabama as there are McDonalds” in supporting the regulatory action. “Borrowers should not be at the mercy of predatory lenders and CFPB’s proposed rules would strengthen consumer protections and make it harder to prey on vulnerable communities,” said Sewell, who also noted minority communities are disproportionately affected by payday lenders’ usurious behavior. Arise Citizens’ Policy Project, a nonpartisan public interest advocacy group, also endorsed the moves by and large, though they said state-level reforms are still needed. A related bill which would have limited interest rates among other reforms circulated in the state Legislature earlier this year, though it ultimately failed to reach the desk of Gov. Robert Bentley. “Today’s CFPB announcement is an important step in the right direction for payday and title loan borrowers in Alabama, but it’s not enough. The new federal rules would strengthen consumer protections by requiring lenders to verify borrowers’ ability to repay for many loans. But the rules contain many exceptions, and they may not go into effect for quite some time,” said policy analyst Stephen Stetson. “The new rules also would not change the extremely high annual interest rates that Alabama allows those loans to carry: up to 456 percent a year for payday loans, and up to 300 percent a year for title loans. Alabama needs to build on these rules at the state level by closing loopholes and encouraging more affordable short-term loans for borrowers,” said Stetson.
Advocates urge support of proposed short-term lending rules
Civil rights advocacy groups and others are praising a federal proposal announced Thursday that seeks to tighten short-term lending regulations and are urging consumers to weigh in during a 90-day public comment period. The Consumer Financial Protection Bureau is looking to require lenders to prove that borrowers are able to repay money without taking out additional loans and give additional warnings before debiting borrowers’ accounts. The federal proposal comes as states including Alabama look to strengthen rules governing payday and auto-title lending. Alabama launched a payday-lending database in 2015 to enforce a law that limits consumers to having no more than $500 in payday loans at once. A bill that would have given borrowers up to six months to repay loans failed in the Legislature this year. The Montgomery-based Southern Poverty Law Center is encouraging consumers to participate in the CFPB’s 90-day public comment period on the proposal. “In Alabama, we have repeatedly seen consumers facing tough economic times turn to these lenders only to discover, after it’s too late, that they intentionally trapped them in a cycle of unaffordable debt,” SPLC senior staff attorney Sara Zampierin said in an emailed statement. Arise Citizen’s Policy Project analyst Stephen Stetson said the proposals are a step in the right direction, but more attention is needed on high interest rates associated with short term loans. Stetson said in a statement that yearly interest rates for payday loans can be as high as 456 percent and 300 percent for auto title loans. “We would like to see rules that address the affordability of the loan directly. We don’t just want to see the lenders making a cursory check, you know?” Stetson said. “We don’t want to just see an additional layer of paperwork applied to the process. And most importantly, we don’t want lenders to be able to tweak their products to get out from under the rule.” Max Wood, president of the lending trade group Borrow Smart Alabama, said the proposals could effectively eliminate much of the short-term lending industry and leave many consumers with virtually no options during a financial emergency. “The bottom line is that if the rules go into effect as proposed … 70 to 80 percent of the industry will no longer exist,” Wood said. “There is a large demand for this service and we don’t want to see it go away for the sake of the consumer,” Wood said. Payday lenders in 2013 filed a lawsuit to try blocking the lending database from being launched, but the Alabama Supreme Court sided with the state. Stetson said he expects similar lawsuits to follow the implementation of any regulatory tweaks. According to Wood, more than 300,000 Alabamians use short-term lending services. Alabama State Banking Department Associate Counsel Anne Gunter, however, said that as of Sunday more than 1.7 million short-term loans had been taken out since the lending database was launched in August. The loans average about $321 each and carry about $55 in interest, she said. “The demand is real and the demand is an important component,” Stetson said. “But just because somebody’s hungry doesn’t mean you should feed them poison.” Republished with permission of The Associated Press.
U.S. House of Representatives: Oct. 5 – Oct. 9
Monday morning Speaker John Boehner postponed the election of majority leader and majority whip until next month, a move many consider a direct blow to Rep. Steve Scalise who announced Sunday night he had the votes necessary to win the race for majority leader. The election was scheduled for Thursday. Instead, on that day, the 247-member Republican caucus will select a speaker to replace Boehner, who announced his resignation last month. The U.S. House of Representatives returns Tuesday to consider several bills under suspension of the rules. A full list of bills can be found here. This week the house will consider: H.R. 538: the Native American Energy Act. The bill provides for the expedited review and consideration of energy projects on Native American lands, and it limits federal fracking regulations on Indian trust lands, vesting Indian tribes with more authority over energy and natural resources activities on their own tribal lands. H.R. 3192: the Homebuyers Assistance Act. The bill provides a temporary safe harbor for lenders from from enforcement of the Consumer Financial Protection Bureau’s integrated disclosure requirements for mortgage loan transactions, prohibiting enforcement of the rules and lawsuits against lenders until then as long as the lender makes a good-faith effort to comply with the rules through Feb. 1, 2016. H.R. 702: a bill to Adapt to Changing Crude Oil Market Conditions. The bill allows the export of crude oil produced in the United States by repealing the outdated ban on crude oil exports imposed by the 1975 Energy Policy and Conservation Act (PL 94-163). Alabama co-sponsor: Rep. Bradley Byrne (AL-01) Next week, the House is in recess.
Alabama House panel debates cap on title loan interest rates
Alabama title loan companies could see a 36 percent cap on the interest rates they’re allowed to charge consumers under legislation under consideration in the House. The House financial services committee heard public arguments Wednesday about tightening regulations of subprime loans that use cars and other assets as collateral. House Bill 400 requires title lending companies to be licensed by the state and adhere to state-level restrictions on the charges, interest, and fees associated with title loans. The Federal Deposit Insurance Corporation estimates that 1.1 million households used auto title loans in 2013. Alabama lenders are allowed to charge 25 percent per month for an auto title loan, translating to as much as 300 percent on a yearly basis. “We’re talking about an industry that doubles its money three times on an annual basis,” bill sponsor Rep. Rod Scott said. “We know that’s not appropriate. From the consumer’s perspective, that’s usury.” Scott said he brought the bill because of concern over what he describs as unfair practices and predatory lending to Alabama’s poorest households. The result, he said, is that people have to ask family, churches or nonprofit groups for help to pay off the loans. “You can’t borrow your way out of debt, especially when the interest rates are so onerous,” Scott said. Osjha Domenicone, head of government affairs for title loan company Select Management Resources, said her company has had only two complaints in five years. “Other states that have passed price restrictions like the ones in this bill have seen an increase in complaints because their citizens are left with nothing but unregulated, unaccountable online lenders,” she said. “I assure you, a 36 percent cap does eliminate the industry and this access to credit … I have a difficult time understanding why my customers and employees should suffer over two complaints in five years.” Stephen Stetson from Alabama ARISE argued that in the 25 states without a title loan presence, consumers can still access credit through traditional banking. Several members expressed concern over imposing regulation at the state level, when the federal Consumer Financial Protection Bureau is expected to take action on payday and title lending this year. “Anything we do is just going to get overturned at the federal level,” Rep. Mike Hill said. The panel declined to vote on House Bill 400 Wednesday. Stetson said that with just seven days left in the regular session, that decision would mean another year of predatory lending for Alabama consumers. “We’re looking at a long off-season where more people are going to get their cars repossessed or get trapped in more loans,” Stetson said. “It’s a shame that 67 bill co-sponsors – which is enough (votes) to get it passed on the House floor – wasn’t enough to get this bill through committee.”
Regions Bank fined $7.5 millon for illegal overdraft fees
The Consumer Financial Protection Bureau has issued an order saying Birmingham-based Regions Bank bank illegally imposed overdraft fees on hundreds of thousands of its customers. Since 2010, CFPB regulations have required that banks give checking customers the option to “opt in” to overdraft protection or instead have their card declined once their account had reached zero. Instead, Regions Bank extracted overdraft fees from customers who had wanted their cards declined at the point of sale. The result, according to CFPB, was a whopping $49 million in illegal fees taken from customer accounts in 16 states. According to the release by CFPB Tuesday, “Regions Bank voluntarily reimbursed approximately 200,000 consumers a total of nearly $35 million in December 2012 for the illegal overdraft fees. After the Bureau alerted the bank to more affected consumers, Regions returned an additional $12.8 million in December 2013. In January 2015, the bank identified even more affected consumers and is now required to provide them with a full refund. Under the terms of the consent order filed today, Regions must hire an independent consultant to identify all remaining consumers who were charged the illegal fees. Regions will return these fees to consumers, if not already refunded. If the consumers have a current account with the bank, they will receive a credit to their account. For closed or inactive accounts, Regions will send a check to the affected consumers.” Regions will required to issue refunds to customers affected by the policy, to pay another $7.5 million in fines to CFPB, and to make sure the negative activity is expunged from their credit histories. As part of this enforcement action, CFPB has issued a warning to consumers about the risks of overdraft protection programs. The agency reports that customers who opt into these protections pay higher banking fees and incur more involuntary account closures.
