August 28, 2021

August 2021 Month in Review Newsletter

Dear Friends,

Thank you for checking in with us this month to see what we have been up to. One often hears talk about the summer doldrums during August in Washington. Not so much this summer!

The Senate and the House are working through about half of their traditional recess. And we at Better Markets have had a busy month culminating in this week’s release of our report: “Should Federal Reserve Chairman Jay Powell Be Reappointed?”

Most people have never heard of it, but the Federal Reserve is the Supreme Court for financial and economic policymaking. Its policies and activities impact the standard of living, the quality of life, and economic opportunities for virtually every single American. The Fed Chair is arguably more powerful than the Chief Justice, controlling the priorities, agenda and staff of the Fed. The current Fed Chair was nominated by President Trump and his 4-year term expires in months. Deciding on reappointing or replacing him will be one of President Biden’s most consequential decisions and it should get the same amount of attention and scrutiny as a Supreme Court Chief Justice nomination.

However, far too many commentators are taking the short-sighted view that the status quo, stability and continuity, or keeping the markets calm and happy should be the key criteria. We disagree. Any candidate considered for Fed chair must be carefully evaluated on their actions and views regarding not just monetary policy and the dual mandate, but also financial regulation, the climate change crisis, racial justice issues, bank merger and acquisition approvals, transparency and accountability, and the extraordinary policies enacted in response to the pandemic-caused financial crash in 2020.

That’s what the Report does: it thoroughly and comprehensively reviews Chair Powell’s record on all the key issues. You can read a short, one-page summary of the report or the Reuters story about it here. Additionally, we will be updating our dedicated webpage on everything you need to know about the next Fed Chair.

The regulators have continued to be busy as well. In addition to engaging at the SEC, CFTC and elsewhere, Better Markets commented on two Fed proposals since our last update. One promotes lower fees for card-not-present debit card transactions at a time when the volume of online usage of debit cards is increasing due to the pandemic. The other urged the Fed to rethink a banking payment systems proposal that would allow increased lending access to undercapitalized and poorly run banks.

There’s a lot going on and much more coming up in the next month so look out for future Newsletters for more exciting developments. In the meantime, be sure to follow us on our social channels: Twitter, Facebook and LinkedIn. Please feel free to send comments or questions to Maryan Abdelmesih at mabdelmesih@bettermarkets.com.

Thank you again for your interest in and support of Better Markets!

Best, Dennis

Dennis Kelleher
Co-founder, President, and CEO, Better Markets

Activities at the Regulatory Agencies

Better Markets Supports the Fed’s Proposed Rulemaking on Debit Card Transactions to Promote Lower Fees

Better Markets filed a comment letter to the Federal Reserve Board supporting its proposed clarifications to its Regulation II that would help to ensure competition for card-not-present debit card transactions, such as online purchases. Recent years have seen substantial growth in such transactions, particularly over the COVID-19 pandemic, and the proposed clarifications would promote lower associated fees for merchants and consumers.

Better Markets fully supported the Federal Reserve’s proposal to clarify its debit card transaction regulation (Regulation II) that will help to ensure a minimum level of competition within the debit card payment market for “card not present” transactions, such as online purchases.

Why it matters. Online purchases of goods and services have been increasing since the finalization in 2011 of the Fed’s regulation, especially over the course of the COVID-19 pandemic. The regulation implemented the requirements of the so-called Durbin Amendment of the Dodd-Frank Act. It limits the fees banks can charge on debit card transactions (interchange fees) and requires card-issuing banks to ensure businesses have a choice of payment networks to route debit card transactions. However, banks have not been meeting the requirement of ensuring payment card network choice for card-not-present transactions, thereby preventing the competition among networks that promotes lower fees and industry innovation.

What we said. “Better Markets fully supports the proposed clarifications as they would ensure that issuers and payment card networks are unquestionably aware that the prohibitions on network exclusivity and on effective or imposed limitations to network routing both apply to card-not-present debit card transactions.” Also, although not part of the proposal, Better Markets also urged the Fed to analyze and assess any potential unintended market issues caused by the $10 billion thresholds on debit transaction interchange fee limits and to release a report for consumption by the public and lawmakers.

Bottom line. The proposed clarifications are necessary and sensible and will help businesses and consumers, especially for online debit card transactions.

Read the comment letter here.

Better Markets Urges the Fed to Rethink Payment Systems Proposal that Dangerously Expands Fed Lending Access to Undercapitalized and Poorly Run Banks

Better Markets issued a comment letter to the Federal Reserve Board highlighting the risks that would be created by the proposed changes to their Payment System Risk (PSR) policy. The most dangerous of these changes would be effectively allowing banks with poor supervisory ratings and/or undercapitalized banks to have access to collateralized overdrafts.

Better Markets urged the Fed to rethink its proposed modifications to its Payment Systems Risk (PSR) policy that would dangerously expand the availability of intraday credit through the Reserve Banks to undercapitalized and poorly run banks.

Why it matters. The Fed facilitates large payments between banks through accounts held by banks with the Fed. Through its PSR policy, the Fed provides intraday credit to banks that are in overdraft status with their Fed accounts (“daylight overdrafts”), which is most often due to a difference in timing between debits and credits. Because these daylight overdrafts are extensions of credit by the Fed to banks, they are a source of credit risk to the Fed if a bank is unable to pay off the overdraft in a timely manner. Therefore, historically the Fed generally excluded banks that were undercapitalized or had a poor supervisory record from participating in the daylight overdraft program, but the proposal seeks to expand the program to such banks.

What we said. “While encouraging collateralization of daylight overdrafts is an important risk management effort, the proposal seeks to do so without sufficient consideration of the risks created by the proposed changes . . .”

Bottom line. We feel strongly that the misguided proposed changes to the PSR policy will make the system less safe, and that the Board failed to provide the necessary compelling justification for these changes.

Read our comment letter here.

Action in the Federal Courts

Better Markets continues to watch for decisions in several important pending cases as well as track key issues in the courts. These are the important cases involving financial regulation:

A lawsuit (Thomas v. SEC) challenging the SEC’s flawed whistleblower rule changes adopted by the Trump administration, which threaten to reduce incentives for whistleblowers to come forward with critical evidence of securities law violations.

Why it matters? The Dodd-Frank Act required the SEC to establish a strong whistleblower program to encourage people, particularly insiders at financial firms, to come forward with often difficult to obtain evidence of illegal conduct. The program entitles whistleblowers to an award of between 10% and 30% of the monetary sanctions collected in actions brought by the SEC and related actions brought by certain other regulatory and law enforcement authorities.

This program has proven to be an enormous success, enabling the SEC to recover billions of dollars in penalties and hundreds of millions of dollars in disgorgement for the benefit of injured investors. In fact, we called it “A $2 Billion Success Story” in a White Paper. Unfortunately, last year, the SEC weakened the program by issuing a rule that gave the agency broad discretion to limit the size of awards. It also created new hurdles for whistleblowers seeking awards where their evidence helped another agency bring a successful enforcement action, in violation of the law.

That’s why we applauded a whistleblower advocate’s lawsuit to overturn the deeply flawed and legally baseless rule.

Status. Fortunately, the SEC recently announced that it plans to fix the rule. It also issued a policy statement explaining that until the rule is amended, it would rely on its discretion and its exemptive authority not to apply or enforce the offending provisions. On that basis, and at the joint request of Thomas and the SEC, the court stayed the case pending issuance of a final remedial rule.

A lawsuit (The Doris Behr Irrevocable Trust v. Johnson & Johnson) attempting to force public company shareholders into mandatory arbitration, a biased, secretive, and anti-consumer forum.

Why it matters? Mandatory or forced arbitration takes away the rights of consumers and investors to seek relief in open court before unbiased judges when they are ripped off by banks and corporations. Mandatory arbitration takes all that away and forces defrauded investors and other victims into secret, unfair, and biased arbitrations. Those proceedings are generally run by an industry self-regulatory organization (SRO) which, no surprise, is often biased and consistently favors the industry. Investors and consumers are typically forced to take their complaints to those forced arbitrations, but they rarely obtain meaningful recovery.

A court will decide if a public company can be forced to impose mandatory arbitration not just on its customers but also on any shareholders with claims against the company for fraud, mismanagement, or other breaches of duty. If the court gets this wrong and allows this dramatic—and dramatically bad—legal development, then the toxic effects of mandatory arbitration will be further broadened, incentivizing lawbreaking by limiting the legal rights of investors to stop it.

Given that shareholders are the owners of public companies and they rely on legal actions as one important way to protect their investments and police management, such a decision could have a significant and adverse impact on capital formation and allocation.

Status. In a positive development on June 30, 2021, the court granted defendant Johnson & Johnson’s motion to dismiss. However, it also granted the plaintiff “one final opportunity to file an amended complaint.” The amended complaint and Johnson & Johnson’s motion to dismiss it are now before the court, which is expected to address the matter in September and issue a decision finally disposing of the case.

A lawsuit (National Association for Latino Community Builders v. CFPB) challenging the CFPB’s harmful rule that rescinded the underwriting requirements for payday lenders, a commonsense provision that required those lenders to determine whether borrowers could afford to repay their short-term loans. That’s right: the rule merely required lenders to determine at the time a loan was issued that the borrower could afford to repay it. It’s a basic, commonsense, and relatively simple process—unless, of course, the predatory financial firm doesn’t want to make loans that are repaid but instead seeks the legal right to trap desperate borrowers in a never-ending cycle of debt with more and bigger fees and higher interest rates, what we call a “debtor’s prison without walls.” Dennis wrote an op-ed on this issue for The Hill.

Why it matters? Under the Obama administration, after years of substantive and robust analysis, the CFPB crafted important protections for consumers who need short-term or “payday” loans. Among them was the requirement that payday lenders determine a borrower’s ability to repay a loan before extending credit. The purpose was to prevent those lenders from deliberately trapping desperate borrowers in endless cycles of unaffordable debt that saddle them with huge interest payments and fees.

Under the Trump administration, the CFPB nullified those underwriting requirements in a deplorable example of baseless rulemaking plainly designed to accommodate the payday lending industry and in response to relentless industry lobbying (and, reportedly, campaign contributions). Now a court will have the opportunity to nullify the Trump rule and restore the underwriting requirements for the benefit of millions of vulnerable borrowers living on the economic edge.

Status. Earlier this year, the CFPB moved to dismiss the action based on the claim that the plaintiff, a nonprofit membership association of organizations that serve Latino communities, has no “standing.” The agency is arguing that neither the plaintiff nor its member organizations face the type of concrete injury from the rule that would entitle them to bring their case in federal court. The doctrine of standing once again figures prominently in an important case, potentially preventing the plaintiff’s claims from being heard on the merits. Briefing is complete and we await the court’s decision on the threshold standing issue.

Hill Update

While the Senate and House spent part of their August recess working on President Biden’s infrastructure package and taking the first step toward a budget reconciliation bill, the Hill was quieter than in most months. Better Markets continued to monitor Congressional activity anticipated for consideration after Labor Day:

While both the House and the Senate were in recess for much of August, the Senate didn’t leave town until after finishing up work on a bipartisan infrastructure package that is the centerpiece of President Biden’s Build Back Better agenda. Senate Democrats also passed a budget measure without any Republican support, which will form the basis of their budget reconciliation bill to be taken up in both the House and the Senate in September. Meanwhile, the House came back early in late August to continue working on those items and other key legislation.
The annual Defense Authorization bill is a must-pass piece of legislation that has traditionally won bipartisan support in both chambers, and Congress is on track to take up the legislation this fall and send it to the President for his signature.
Congress has yet to pass any of the annual appropriations bills that fund the government, so we expect some fast action on that before the end of the federal fiscal year on September 30. Democrats are also pressing for voting rights legislation to be enacted before the end of the year, which is particularly timely as state legislatures are using the recently released Census data to begin the once-every-ten-years Congressional redistricting process.