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February 22, 2019

Likely CFPB Proposal Will Create A Debtors Prison & More in Financial Reform Newsletter

CFPB is looking out for financial predators instead of Main Street
To protect Main Street Americans — consumers, investors, homeowners, students, soldiers, retirees and the elderly — from predatory financial behavior and financial instability that can lead to devastating financial crashes like 2008, the Dodd Frank law created the Consumer Financial Protection Bureau (CFPB).  It was designed to be and has been a powerful, independent and effective consumer cop policing the Wall Street beat.

However, in Director Kathy Kraninger’s first major rulemaking, the CFPB is proposing two indefensible changes to the payday lending rule:

1)            eliminating the “ability to repay” underwriting requirements for extending a payday loan, essentially greenlighting lending to people who do not ability to repay a loan.

2)            eliminating the “reborrowing limits” by any single borrower, allowing the payday lender to keep lending to the borrower who cannot repay so that they can repay the original loan that they can’t repay.

These changes will create a debtor’s prison without bars.  They will put borrowers on an endless cycle of debt that they can never get out of while the payday lender keeps charging and collecting fees, penalties and interest from the loans rolled over and over again.  Rather than being concerned that lenders were making loans to people that they know cannot pay them back, the CFPB is now worried that “roughly three out of four payday store fronts would close and as many as 9 out of 10 vehicle title storefronts would close.”

That’s not a consumer protection agency; it’s a predator protection agency.

Protecting financial consumers was one of the primary reasons for the financial reform law and these abusive lending payday practices are exactly why the CFPB was needed and exists. This proposed rule should be killed and the CFPB should get back in the business of protecting America’s hardworking families who desperately need a cop on the Wall Street beat.

(The preceding piece was excerpted from an op-ed Better Markets’ President and CEO, Dennis Kelleher, wrote for The Hill, “CFPB is looking out for financial predators instead of Main Street.”)

SEC Doesn’t Take Away Ripped Off Shareholders’ Rights …..Yet
There’s some good news to report in the fight to preserve ripped off shareholders’ rights to seek justice in court, rather than being forced into biased, unfair and secret arbitration proceedings.  On Monday, February 11, 2019, SEC Chairman Jay Clayton announced that SEC staff would allow Johnson & Johnson to reject a proposal that would take away the company’s shareholders rights and forced them into arbitration, no matter how grievously they might be harmed by the company’s fraud, negligence, or other misconduct.

The issue arose after a Johnson & Johnson activist shareholder who favors forced arbitration pushed for such a resolution to be included in the proxy materials for the company’s upcoming shareholder meeting this Spring.   Better Markets and its allies engaged in a strong advocacy campaign urging the SEC to follow its long-standing practice and side with tens of millions of shareholders who deserve their day in court if they are victimized.  Whenever investors, consumers, shareholders, or any other Americans harmed by corporate misconduct have their rights taken away and are forced into a biased and secretive process where they receive little or no relief, they lose out.  As important, our capital markets and our capital formation processes losses as well because investors will have less faith, trust and confidence in our markets.

However, it’s too soon to declare outright victory.  Chairman Clayton cautioned that this was a staff decision, not a definitive resolution of the legality of forcing arbitration onto shareholders.  He also heavily relied on the opinion of the New Jersey Attorney General interpreting New Jersey law.  These are troubling and clearly indicate that the issue remains alive and investors remain at risk.  We will continue to oppose any attempts to take away vital shareholder rights.

An Immediate Hack Disclosure “Equifax Rule” is as Necessary as Ever
More than one year has passed since the American people found out about the massive Equifax breach that exposed more than 145 million Americans’ personal information.  What has been done since then to protect Americans from the next hack? Next to nothing.

That can change as the House Financial Services Committee, under new leadership, is bringing in the heads of the three credit rating agencies next week, including Equifax, Experian and Trans Union.

When the original Equifax data breach was revealed, Better Markets called for the creation of an “Equifax Rule,” demanding the SEC require all companies to promptly disclose any significant computer hack to investors and the public.  This is the only way to avoid Americans from being doubly victimized: first by the hack of their personal information and they by the companies’ failure to disclose it, preventing consumers from taking action to protect themselves.

This is indefensible given that the companies as well as the hackers know the information has been stolen.  The only people in the dark are the victims, who are only told months if not years later, by which time thecriminals have already stolen their identities, drained their bank accounts and run up their credit cards.

It’s clear that companies will try to protect their profits rather than their customers by failing to disclose the hack for as long as possible.  Recall that Yahoo took more than three years to tell the public about the more than one billion accounts that had been hacked and had personal information stolen.

Hopefully, the hearing at the House Financial Services Committee will illuminate these issues when the heads of the credit bureaus appear before them next week.

The Latest Round in the Maker-Taker Kickback Battle
With a lucrative stream of money threatened, three large stock exchanges, the NYSE, Nasdaq and CBOE, who collectively own 13 of the 14 US stock exchanges — filed a lawsuit last week against their own regulator, the SEC, to stop it from implementing a study examining the fees and rebates these exchanges use to entice trading and boost their profits.  This is commonly referred to as the “maker-taker” model.  These payments are little more than legalized bribery.

The exchanges, it would appear, seem to fear that the SEC will obtain data and analysis from the test confirming what many already know: rebates and other economic inducements affect order routing decisions of brokers and cost investors money.  Specifically, the exchanges apparently fear that once the regulators and the public learn that their legalized kickbacks are hurting investors—especially the small retail investors– and undermining the integrity of the markets, the SEC will prohibit these kickback schemes.

As we have argued in the past, fundamental solutions to market structure problems, particularly those that aim to upend market incumbents’ business models and deeply rooted conflicts of interest, will not be supported by those who benefit from the status quo.  The SEC deserves credit for supporting the investing public and fighting against these entrenched interests in this litigation and elsewhere.



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