Regulation
CFPB Director To Testify Before House Financial Services Committee
March 11, 2016
CFPB director Richard Cordray will appear before the House Financial Commitee to address reports decrying the bureau’s activities.
The committee issued two reports detailing the bureau’s attempt to regulate auto dealers despite being prohibited to do so. The reports also exposed the CFPB’s flawed distribution of a $80 million settlement without doing a due diligence on the claimants leading in alleged racial discrimination. The documents revealed, some white borrowers received settlement checks over Asians, African-Americans and Hispanics.
“The CFPB undoubtedly remains the single most powerful and least accountable Federal agency in all of Washington,” said Chairman of the committee Jeb Hensarling (R-TX). “When it comes to the credit cards, auto loans and mortgages of hardworking taxpayers, the CFPB has unbridled, discretionary power not only to make those less available and more expensive, but to absolutely take them away.”
Since Cordray’s last appearance before in September 2015, the Bureau has has proposed regulations that compromise on the consumer’s’ right to access small dollar, short-term loans. The Qualified Mortgage rule that addresses few of the actual risks associated with mortgage lending led some community financial institutions to downsize or shut down their mortgage operations.
Big Banks Less Transparent Than Online Lenders Federal Reserve Study Finds
March 4, 2016The results are in. Dissatisfied small business borrowers are more likely to encounter transparency problems with big banks, not online lenders.
The margin of difference on this measure may have been razor thin, but the anti-online lender rhetoric isn’t matching up with borrower feedback. The 2015 Small Business Credit Survey, a comprehensive report released by the Federal Reserve, found that 33% of borrowers that were dissatisfied with a small business loan from a big bank, cited a lack of transparency as a reason. 32% of borrowers that were dissatisfied with an online lender cited a lack transparency. While both statistics show room for improvement, the results shatter the myth that online lenders are uniquely lacking in transparency.
The findings are also consistent with the results of a previous Federal Reserve study in which small business owners gave extremely high marks to online lenders for clarity (even after researchers tried to trick them). This latest report does not put online lenders in a favorable light, but it does show that a dissatisfied borrower is equally or more likely to be confused by a loan from Chase or Bank of America than they are from OnDeck or PayPal Working Capital.
Small banks were less likely than online lenders and big banks to experience dissatisfaction over transparency.
Online lenders were defined by the Fed as “alternative and marketplace lenders, including Lending Club, OnDeck, CAN Capital, and PayPal Working Capital.” Respondents could select multiple options for dissatisfaction, ensuring that a separate issue didn’t merely trump transparency.
Big banks also scored worse on difficulty of the application process. 51% of dissatisfied borrowers that got a loan from a big bank cited difficulty. Only 21% of dissatisfied borrowers that got a loan from an online lender cited difficulty.
A more difficult, lengthier, and more regulated process at big banks has apparently not led to more transparency with borrowers. The findings echo B. Doyle Mitchell Jr.’s testimony presented during a House Committee hearing last fall. Mitchell, who was speaking on behalf of the Independent Community Bankers of America, said that adding more pages to loan agreements do not make them any more clear to borrowers. “In fact it is even more cumbersome for them now,” he said.
The Federal Reserve’s own study has proven to be consistent with that assessment.
CFPB To Begin Accepting Small Business Loan Complaints
February 29, 2016Unhappy with your small business loan? The CFPB wants you to complain to the federal government about it. Small business loans including term loans, credit lines, and business credit cards, among other products, and lenders both small and large banks and non-banks such as online or marketplace lenders will soon all answer to the CFPB.
“Subject to an assessment of feasibility, the Bureau’s consumer response team will build the infrastructure to intake and analyze small business lending complaints,” a new priority report says.
That would add a new category alongside mortgages, student loans, vehicle loans, and payday loans.
Accepting these reports will likely mean that small business lenders would have to respond directly to the CFPB. Companies who receive a lodged complaint typically have 15 days to provide an answer. Both the complaint and the answer are stored in a public database that anyone can view.
In their report, the CFPB states that “existing research suggests that significant discrimination against minorities may exist in the small business lending market.” However, no link to any such research is provided and historically they’ve made such judgments (with stunning inaccuracy) by guessing the racial makeup of last names.
The CFPB accepts a wide range of complaints. Some companies have been reported simply because a company representative came off as rude over the phone. In other cases, company customer service was reportedly too slow or website outages caused undue stress.
Small business lenders can’t be penalized by the CFPB, but receiving a disproportionate number of complaints could certainly place one on a regulatory radar.
Over the next two years, “the Bureau will build a small business lending team and begin market research and outreach for rulemaking on business lending data collection,” the report promised.
SEC Says You Can Crowdfund Startups This Summer
February 23, 2016Now you can own a piece of a startup doing the next-big-thing or invest seed money in an idea that looks promising starting May this year.
Last week, the SEC released an investor bulletin on crowdfunding for retail investors and said that “Starting May 16, 2016, companies can use crowdfunding to offer and sell securities to the investing public.”
In October last year, the regulator adopted rules permitting companies to offer securities and raise a maximum of a million dollars a year through crowdfunding platforms. Individual investors with annual income or net worth less than $100,000 can invest no more than $2,000 but less than 5 percent of their annual income and not more than 10 percent for investors with income and net worth of over $100,000 in a twelve-month period. 
Investors are allowed to invest in these ventures strictly through an online platform including mobile app of a broker-dealer or a funding portal registered with the SEC and a member of FINRA.
This is a major step in recognizing crowdfunding as a legitimate means of raising capital, which thus far has been typically used to solicit charitable donations or raise funds for artistic projects like movies, music and social projects.
The SEC warned investors of the risks involved with such investments like limited disclosure, illiquidity, opacity in valuation and capitalization that is associated with private companies. Investors are also prohibited from reselling their stake for the first year unless it’s a transfer to the company, an accredited investor or a family member.
SEC Committee To Examine Capital Raised By SMEs
February 18, 2016The Advisory Committee on Small and Emerging Companies at the SEC announced they will meet next week (February 25th) to examine the capital raised in “unregistered securities offerings”
The committee provides a mechanism for the regulator to receive recommendations on small enterprises, both public and private with a market cap of less than $250 million. Stephen M. Graham, Managing Partner of Fenwick & West LLP’s Seattle office, and Sara Hanks, CEO of CrowdCheck will serve as co-chairs of the committee.
“Small businesses play a crucial role in our nation’s economy,” said SEC Chair Mary Jo White. “The advisory committee members have a wealth of experience and ideas that will help inform the Commission on the many important issues affecting small and emerging businesses.”
Want to Avoid Another Crisis? Break Up The Banks, Fed Official Says
February 16, 2016
How to avoid another financial catastrophe?
Breaking up the big banks is one solution, according to the newly-appointed Minneapolis Fed chief, Neel Kashkari.
Pushing for a radical shakeout in corporate banking, Kashkari on Tuesday urged Congress to ensure that banks hold enough capital to not fail. The former investment banker with Goldman Sachs said the post-crisis regulation, Dodd-Frank is limited and does not go far enough in safeguarding against the ‘Too Big To Fail’ (TBTF) risk.
“Now is the right time for Congress to consider going further than Dodd-Frank with bold, transformational solutions to solve this problem once and for all,” he said.
As a part of this bold transformation, Kashkari proposed options such as breaking up the big banks into “smaller, less connected, less important entities,” taxing leverage to reduce systemic risks and turning banks into public entities by forcing them to hold large amounts of capital.
Kashkari joined the Treasury in 2006 and headed the Troubled Asset Relief Program and managed banking and auto bailouts during the crisis. He also ran for Governor of California in 2014 as the Republican candidate but lost to the incumbent Jerry Brown.
He took over at the Minneapolis Fed in November last year and plans to develop an actionable plan to end TBTF to be delivered by the end of this year.
“Doing everything we can to address the systemic risks posed by large banks will be an important step to fulfilling that mission,” Kashkari added. “Seven years after the crisis, I believe it is now time to move forward and end TBTF.”
