House Passes Three Bipartisan Financial Services Bills

January 30, 2023 –

Today, the U.S. House of Representatives passed several pieces of bipartisan financial services legislation. Among the bipartisan bills passed are initiatives to combat the financial exploitation of our seniors and other vulnerable adults, streamline federal credit union board meeting requirements, and increase access to capital for rural small businesses.

The financial services bills passed by the House include:

H.R. 500, the Financial Exploitation Prevention Act, sponsored by Capital Markets Subcommittee Chairwoman Ann Wagner (MO-02), will help combat financial exploitation of seniors and vulnerable adults by providing at-risk investors with the protection they need to make sure they can receive the hard-earned savings that they have built up over the years.

“Right now, roughly 1 in 5 senior investors already fall prey to fraudsters, losing an estimated $2.9 billion annually… This bill provides a tool to fight against this type of elder abuse,” said Chairman Patrick McHenry (NC-10).

Watch Chairman McHenry’s remarks in support of H.R. 500 here.

H.R. 582, the Credit Union Board Modernization Act, co-sponsored by Oversight and Investigations Subcommittee Chairman Bill Huizenga (MI-04), will reduce the frequency of required board meetings for federal credit unions with demonstrated strong risk management practices. 

Watch Chairman McHenry’s remarks in support of H.R. 582 here.

As reported by FinancialRegNews.com’s Dave Kovaleski:

The bill, H.R. 582, would update the Federal Credit Union Act to modify current federal requirements for federal credit union board meetings. Specifically, it would alter the requirements for how often boards are supposed to meet – changing it from once per month to once every other month.

“I’m proud that the House passed the Credit Union Board Modernization Act, which I introduced, along with Rep. Bill Huizenga, to change the outdated requirement and allow credit unions and their board members more flexibility,” Rep. Juan Vargas (D-CA) said. “This bipartisan legislation would give credit unions the ability to better dedicate their time and more effectively serve their members and communities.”

The bill would continue to allow credit union boards to meet as frequently as needed. In addition, there is still a requirement for monthly meetings for credit unions that exhibit unsound practices. It has the support of several organizations, including the Credit Union National Association (CUNA).

The legislation now moves to the Senate for consideration.

H.R. 298, the Expanding Access to Capital for Rural Job Creators Act, sponsored by Rep. Alex Mooney (WV-02), will help increase access to capital for rural entrepreneurs and small businesses. 

“In rural areas, every small business and entrepreneur counts. They are the lifeblood of the local economy, and their success is critical to the success of their community,” said Chairman McHenry.

Watch Chairman Patrick McHenry’s (NC-10) remarks in support of H.R. 298 here.

NASCUS invites all members to attend a complimentary webinar covering the latest in litigation in the financial services sector. We will be joined by our friend Fred Burnside (Davis Wright Tremaine LLP) who will survey the latest in overdraft fee litigation, Regulation E cases, Zelle litigation, issues related to ACH fees, and much more.

For NASCUS Members, L&R Committee members

Date/Time: Thursday, February 16, from 3:00 – 4:30 pm EST.
A recording of the presentation will be available following the session.

This free webinar, presented by NASCUS’s L&R Committee and Education Department. A meeting link will be sent out on the day of the webinar with the link details.
Questions? Please contact Isaida Woo at [email protected] 

Registration is required. There is no cost for attending as a NASCUS member benefit.

Speaker

Fred Burnside concentrates his complex civil litigation practice on matters related to class-action defense, consumer financial services, and hydroelectric relicensing. His more than two decades as an attorney is distinguished by significant victories secured on behalf of financial service providers, at trial and on appeal in state and federal courts, particularly in class action lawsuits regarding non-sufficient funds (NSF) fees.

Fred obtained a motion to dismiss in the pioneer class action lawsuit over NSF fee practices and has since successfully defended other major financial services providers facing similar claims. He also has the rare experience of taking a financial services class action through a jury trial—and winning. With an established track record of securing outright victory or favourable settlement, Fred has become the go-to NSF fee attorney for consumer financial service providers facing class action lawsuits.

His leadership at DWT includes serving as the co-chair of the class action defense group, and he previously served as the firm’s deputy litigation department practice group chair, Executive Committee member, and on the firm’s Share (Compensation) Committee. He is a co-chair of the ABA’s Annual National Institute on Class Actions, editor of the ABA Class Action Committee’s Annual Survey of State Class Action Litigation, and a member of the American Law Institute.

Jan. 26, 2023 — To root out racial bias in the U.S. appraisal system, some experts say there’s no point in nibbling at the edges. Instead, they suggest tearing the system down and starting fresh.

“I think not many people understand how this byzantine system works,” Rohit Chopra, the Consumer Financial Protection Bureau (CFPB) director, said Tuesday.

Chopra spoke during the first-ever Federal Financial Institutions Examination Council’s Appraisal Subcommittee (ASC) hearing, which focused on appraisal bias.

The CFPB director borrowed the term byzantine from a report released in January 2022, commissioned by the Appraisal Subcommittee and led by the National Fair Housing Alliance. The report’s main conclusion is that the appraisal industry essentially regulates itself, in contrast to other sectors in housing finance.

Click here to watch a recording of the hearing.

It happens because the Appraisal Foundation, an industry-run private nonprofit, establishes standards and criteria for appraisers, which are then adopted by each state. However, appraisers, lenders, banking institutions and industry trade groups dominate the seats on the Foundation board. There are no consumers or fair housing advocates.

During the hearing, Craig Steinley, president of the Appraisal Institute, said that individual appraisers do not pay fees for the Appraisal Foundation. “It’s not a membership organization of individuals. It’s a membership organization of other organizations. We do [pay fees] by the standard materials from the Foundation.”

In response, Chopra said: “I think it’s something we need to think about whether it is appropriate for this type of fee structure and for there to be payments, including related to governance. I think that raises a lot of questions: for this Subcommittee, for the regulators and potentially for future hearings.”

Increasing accountability to decrease appraisal bias
While Congress tasks the Appraisal Subcommittee with monitoring and reviewing the Appraisal Foundation, it has no enforcement authority.

The Subcommittee is an independent executive branch with seven members on the board, including representatives from the Federal Reserve and the Office of the Comptroller of the Currency. The Subcommittee has authority over the state programs on appraisals.

“We conduct regular compliance reviews of the state programs to determine their level of compliance with the Appraisal Foundation and other federal requirements,” Jim Park, the ASC executive director, said during the hearing. “If a state is found to be out of compliance, the ASC has the enforcement authority to ensure they return to compliance.”

Park added, “However, the ASC oversight authority over the Foundation is limited to monitoring and reviewing their work. The ASC has no enforcement authority as it relates to the Foundation or its boards.”

According to Junia Howell, visiting assistant professor of sociology at the University of Illinois Chicago, there’s a “moral” problem with the current structure.

“As Director Park said at the beginning, there’s not a single other regulatory structure like this in the country, and maybe even in the world,” Howell said. “I would suggest that there needs to be a different structure that possibly increases some accountability.”

The Mortgage Bankers Association (MBA), the trade group representing mortgage lenders in the discussion, agrees with the need for changes.

“The MBA would support reforms which would lead to more independent oversight of appraisers,” Michael Fratantoni, MBA’s senior vice president of research and technology and chief economist, said.

Courtesy of Flávia Furlan Nunes, Housingwire.com

U.S. Treasury Announces Second ECIP Application Round; Applications Due Jan. 31

Jan. 25, 2023 — The U.S. Department of the Treasury’s second application round of Emergency Capital Investment Program funding closes January 31, 2023. Treasury anticipates between $160 million and $340 million will be available for investment in qualified institutions in the second round. Applications are due January 31, 2023, at 11:59 p.m. Eastern.

For more information, click here to visit the U.S. Treasury’s website.

Credit unions participating in the second round of ECIP funding and that meet the eligibility requirements under the NCUA’s Subordinated Debt rule may also apply for regulatory capital treatment under the pre-approval requirements outlined in the rule.

As in the ECIP’s first round, Treasury requires approved, qualified financial institutions to select a maturity of either 15 or 30 years during the closing process. Currently, the NCUA’s Subordinated Debt rule limits the maximum maturity of Subordinated Debt Notes to 20 years.

Last September, the NCUA Board issued a notice of proposed rulemaking to, among other things, provide flexibility on the maximum maturity of Subordinated Debt Notes. The Board is currently reviewing comments received on this rulemaking and will consider a final rule in the first half of 2023.

In the meantime, a credit union applying to the NCUA for regulatory capital treatment should indicate in its application that it would elect either the 15- or 30-year maturity in the event the NCUA Board finalizes the September 2022 proposed rule permitting a longer maturity period. If the Board does not finalize the proposed changes, second-round issuances will be subject to the 20-year maturity limit in the current Subordinated Debt rule.

The NCUA encourages credit unions to submit their Subordinated Debt applications to the appropriate NCUA supervision office by February 28, 2023. Contact your appropriate supervision office with any questions about the application process.

The National Credit Union Administration on Jan. 31 will host a webinar discussing the 2023 Supervisory Priorities Letter to Credit Unions.

Registration for this event is now open. Christel Orusede, from the NCUA’s Office of Examination and Insurance, will moderate a panel of NCUA subject matter experts who will discuss topics outlining NCUA’s supervisory priorities and other aspects of the agency’s examination program for 2023 to help credit unions prepare for their next NCUA examination.

The “2023 Supervisory Priorities” webinar is scheduled to begin at 2 p.m. Eastern and last approximately 60 minutes. There is no charge. There will be a question-and-answer period afterward.

Participants will be able to log into the webinar and view it on their computers or mobile devices using the registration link. They should allow pop-ups from this website. The webinar will be closed captioned and archived approximately one week following the live event.

Participants can submit questions during the presentation or in advance by emailing [email protected]. The email’s subject line should read, “2023 Supervisory Priorities.” Please email technical questions about accessing the webinar to either [email protected] or [email protected].

Join Superintendent Katie Averill and the National Association of State Credit Union Supervisors (NASCUS) on Thursday, April 27th, for the 2023 Superintendent’s Day: Board Chair Forum.

You are invited to join us for an event crafted especially for all Iowa Credit Union Board Chairs. This event will include colleague interaction and professional presentations on topics, such as:

  • Iowa Economic Report
  • Responsibilities and Best Practices for Boards
  • Strategic and Succession Planning
  • National Issues Update, and more

Featuring special guests: 

Debi Durham,
Director, Iowa Economic Development Authority

Tim Harrington,
Author, Consultant, International Speaker, and
President, TEAM Resources

Sponsored by:

Location: Iowa Utilities Board
1375 E Court Ave., Des Moines, IA 50319

Pricing: $200 per person

NCUA’s Letter to Credit Unions (23-CU-01) 

Dear Boards of Directors and Chief Executive Officers:

This letter outlines the NCUA’s supervisory priorities and other updates to the agency’s examination program for 2023. Our focus will be on the areas posing the highest risk to credit union members, the credit union industry, and the National Credit Union Share Insurance Fund (Share Insurance Fund).

The NCUA will conduct examination and supervision activities both onsite and offsite, as appropriate. Examiners will continue to conduct some examination activity offsite when the activity can be completed efficiently and effectively at credit unions that can accommodate offsite work.

The agency’s exam flexibility initiative will continue in 2023, which establishes an extended exam cycle for certain credit unions.1 The NCUA will also continue our Small Credit Union Exam Program in most federal credit unions with assets under $50 million. For all other credit unions, NCUA examiners will use the agency’s risk-focused examination procedures.

Below are the NCUA’s primary areas of supervisory focus in 2023.

Supervisory Priorities for 2023

Interest Rate Risk

Interest rates rose significantly across the yield curve during 2022, elevating interest rate risk (IRR) and the related exposure to earnings and capital. This sharp rise in rates has amplified market risk because a credit union’s assets and liabilities do not reprice equally, potentially impacting net economic values and credit unions’ projected earnings.

In September 2022, the NCUA issued Letter to Credit Unions 22-CU-09, Updates to Interest Rate Risk Supervisory Framework, and Supervisory Letter 22-01, Updates to Interest Rate Risk Supervisory Framework, updating the NCUA supervisory framework for IRR.

With the April 2022 addition of the Sensitivity to Market Risk, or “S,” component to the CAMELS rating system, the agency has formalized the focus on IRR as a specific rating category separate from liquidity risk.

High levels of IRR can increase your credit union’s liquidity risks, contribute to asset quality deterioration and capital erosion, and put pressure on earnings.

Well-managed credit unions are prudent and proactive in managing IRR and the related risks to capital, asset quality, earnings, and liquidity. As such, examiners will review your credit union’s IRR program for the following key risk management and control activities:

  • Key assumptions and related data sets are reasonable and well documented.
  • The credit union’s overall level of IRR exposure is properly measured and controlled.
  • Results are communicated to decision-makers and the board of directors.
  • Proactive action is taken to remain within safe and sound policy limits.

Additional references for IRR are in the Examiner’s Guide under Workpapers and Resources.

Liquidity Risk

Higher interest rates have caused a slowdown in prepayments for some loans and investment holdings, which has resulted in reduced cashflows. Large increases in share balances from 20202022 may result in an increased level of share sensitivity and share roll off as market rates continue to rise.

In evaluating the “L” component of the CAMELS rating to determine the adequacy of your credit union’s liquidity risk management framework, examiners will consider the current and prospective sources of liquidity compared to funding needs. Examiners will review your credit union’s liquidity policies, procedures, and risk limits. Examiners will also evaluate the adequacy of your credit union’s liquidity risk management framework relative to the size, complexity, and risk profile of your credit union.

Examiners will assess liquidity management by evaluating:

  • The potential effects of changing interest rates on the market value of assets and borrowing capacity.
  • Scenario analysis for liquidity risk modeling, including possible member share migrations (for example, shifts from core deposits into more rate-sensitive accounts).
  • Scenario analysis for changes in cash flow projections for an appropriate range of relevant factors (for example, changing prepayment speeds).
  • The appropriateness of contingency funding plans to address any plausible unexpected liquidity shortfalls.

Resources and guidance on liquidity risk can be found in the NCUA’s Examiner’s Guide.

Credit Risk

Credit risk is a supervisory priority for 2023 as high inflation and rising interest rates are putting financial pressure on credit union members. High inflation and the increasing likelihood of an increase in unemployment rates could negatively impact borrowers’ ability to repay outstanding debt. Rising interest rates could also result in higher loan payments for borrowers.

NCUA examiners will review the soundness of existing lending programs, any adjustments your credit union made to loan underwriting standards and portfolio monitoring practices, and loan workout strategies for borrowers facing financial hardships. NCUA examiners will carefully consider all factors in evaluating your credit union’s efforts to provide relief for borrowers, including whether the efforts were reasonable and conducted with proper controls and management oversight.

For more information and additional resources, see the following:

Fraud Prevention and Detection

Fraud risks remain elevated. As such, the NCUA will continue our efforts to review internal controls and separation of duties. In 2023, the agency will also implement a management questionnaire designed to enhance the identification of fraud red flags, material supervisory concerns, or other potential new risks to which your credit union may be exposed.

This questionnaire will help protect credit unions and reduce potential losses to the Share Insurance Fund. The questionnaire will be sent to credit unions in the pre-examination planning stage for all full-scope exams along with the Items Needed List, including on joint exams with State Supervisory Authorities (SSAs). Credit unions only need to complete one questionnaire per examination. If an SSA uses a similar questionnaire, the federal and state examiners will coordinate to decide which questionnaire the credit union will complete to reduce duplication.

Credit unions will typically receive the questionnaire through MERIT’s survey function, and the credit union CEO or another senior executive will complete, sign, and then return the questionnaire through MERIT’s survey function. Examiners will review the credit union’s responses in the pre-examination planning process to refine the scope of the examination, as appropriate.

For more fraud prevention resources, visit the NCUA’s Fraud Prevention Resources page.

Information Security (Cybersecurity)

Cybersecurity risks remain a significant, persistent, and ever-evolving threat to the financial system. Credit union technology-related operating environments are increasing in complexity. Your credit union can protect itself with a cybersecurity program that evolves and adapts to the changing threat environment.

The NCUA will continue to have cybersecurity as an examination priority. Examiners will evaluate whether credit unions have established adequate information security programs to protect members and the credit union. To strengthen the examination process for cybersecurity, the NCUA developed and tested updated Information Security Examination procedures tailored to institutions of varying size and complexity. Examiners will use these new procedures in 2023.

Additionally, credit unions are encouraged to remain very vigilant and continue to adapt their ability to respond to evolving cybersecurity threats. Your credit union may conduct voluntary, cybersecurity self-assessments using the Automated Cybersecurity Evaluation Toolbox. The toolbox works in coordination with and will prepare you for an Information Security Examination.

For more cybersecurity information and resources, including the new examination procedures, visit the NCUA’s Cybersecurity Resources webpage.

Consumer Financial Protection

The NCUA will continue to review compliance with applicable consumer financial protection laws and regulations for federal credit unions that the NCUA has under its consumer financial protection supervision authority. Examiners will continue to review your credit union’s compliance with Flood Disaster Protection Act requirements, including disclosure requirements, as we continue to evolve our understanding of the impact of climate-related financial risk on credit unions, credit union members, and the Share Insurance Fund.

Examiners will also consider trends in violations identified through examinations and member complaints, emerging issues, and any recent changes to regulatory requirements to establish priorities. Accordingly, in 2023 examiners will focus on areas related to:

  • Overdraft programs.
  • Fair lending, including review of residential real estate appraisals for any bias.
  • The Truth in Lending Act.
  • The Fair Credit Reporting Act.

In 2022, examiners requested information about a credit union’s policies and procedures governing its overdraft programs. In 2023, examiners will expand the review of credit unions’ overdraft programs, including website advertising, balance calculation methods, and settlement processes. The NCUA will also evaluate any adjustments credit unions have made to their overdraft programs to address consumer compliance risk and potential consumer harm from unanticipated overdraft fees.

Regarding fair lending, examiners will review policies and practices for steering or loan pricing discrimination risk factors.2 In addition, examiners will assess a credit union’s policies and practices related to residential real estate appraisals and conduct a tailored file review to evaluate the consistency, fairness, and accuracy of the appraisals a credit union obtains.

Examiners will additionally evaluate compliance with Truth in Lending Act requirements and disclosures related to auto lending for certain credit unions that have experienced high auto loan growth over the past year. Examiners will also review credit reporting protections under the Fair Credit Reporting Act related to furnishing, adverse action notices, risk-based pricing, and consumer rights disclosures.

Other Updates

Current Expected Credit Loss Implementation

Credit unions are required to implement the Financial Accounting Standards Board’s Accounting Standards Update No. 2016-13, Topic 326, Financial Instruments – Credit Losses, commonly referred to as Current Expected Credit Loss (CECL) for financial reporting years starting after December 15, 2022. Most credit unions adopted CECL on January 1, 2023.

Under the NCUA’s CECL Transition Rule, federally insured credit unions with assets of less than $10 million are generally not required to implement CECL. For credit unions below this threshold, the rule requires “any reasonable reserve methodology (incurred loss), provided it adequately covers known and probable loan losses.”3 Federally insured, state-chartered credit unions should refer to state law on Generally Accepted Accounting Principles (GAAP) requirements and CECL standard applicability, as those requirements may be more restrictive.

Examiners will evaluate the adequacy of your credit union’s Allowance for Credit Losses (ACL) on loans and leases by reviewing:

  • ACL policies and procedures.
  • Documentation of an ACL reserving methodology, including logic for model selection and related input data, modeling assumptions, and qualitative adjustments.
  • Adherence to GAAP (if applicable).

If your credit union’s ACL is independently reviewed by the Supervisory Committee or an internal or external auditor, examiners will also consider the results of that review as part of their evaluation.

As applicable, examiners may also review your credit union’s adjustment to undivided earnings (retained earnings) in relation to the CECL Transition Rule.

A variety of CECL resources are available for credit unions, including:

Succession Planning

The credit union system continues to experience an ongoing trend of consolidation. The NCUA has found that inadequate succession planning is often a reason for credit union consolidations, especially in smaller credit unions. Succession planning can be critical to the continued operation of credit unions, especially those with senior leaders who may be retiring soon. A credit union’s failure to plan for the transition of its management and board officials could come with high costs. Conversely, good succession planning confers a variety of benefits, including ensuring organizational viability over the long term.

During 2023, examiners will request information about a credit union’s approach to succession planning for senior leaders, including any written succession plan the credit union has established. This information will help the NCUA further understand succession planning activities and needs in the credit union system.

Examiners will not evaluate this information or any formal or informal succession plans developed by credit unions beyond what would normally be considered in assigning the Management component of the CAMELS rating.4 Also, examiners will not issue an Examiner’s Finding or Document of Resolution if the credit union has not conducted succession planning, or the planning is not adequate, unless the credit union is in violation of its own policy for conducting succession planning or administering any such plan(s).

Support for Small Credit Unions and Minority Depository Institutions

In 2023, the NCUA will continue its Small Credit Union and Minority Depository Institutions (MDIs) support program, which the agency implemented in 2022 to support and preserve these credit unions. Credit unions with less than $100 million in assets and MDIs are uniquely positioned to improve the financial well-being of underserved communities by offering their members access to safe, fair, and affordable credit and other financial services and products. The NCUA’s program focuses assistance on identifying available resources, providing training and guidance, and supporting credit union management in their efforts to address operational matters. We expect the additional benefits of the program to include:

  • Greater awareness of the unique needs of small credit unions and MDIs and their role in serving underserved communities.
  • Expanded opportunities for these credit unions to receive support through NCUA grants, training, and other initiatives.
  • Furthering partnerships with organizations and industry mentors that can support small credit unions and MDIs.

Additionally, the agency has developed MDI-specific exam procedures to guide examiners during their supervision of MDIs. Preserving small credit unions and MDIs is fundamental to the NCUA’s mission.

Post-Examination Survey

Credit union feedback helps the NCUA evaluate the effectiveness of our examination processes and improves communication with credit unions. In September 2021, the NCUA initiated a post-examination survey pilot to gather feedback on examinations. In addition to pilot survey responses, the NCUA has conducted focus groups comprised of senior credit union staff and NCUA examination staff to gather input. In 2023, the NCUA will update the post-examination survey to continue obtaining feedback from credit unions on their NCUA examinations. As a reminder, federal credit unions may record their exam exit meetings provided they comply with applicable laws and regulations for recording and provide a copy of the recording to the NCUA. These recordings can be useful to both credit unions and the NCUA. NCUA examiners will agree to the recording of the exam exit meetings, and the NCUA will monitor how often exam exit meetings are recorded.

Conclusion

The NCUA will continue our ongoing enhancements to how the agency supervises and supports your credit union and its members as the agency adopts innovations and incorporates efficiencies in our exam program. The NCUA’s primary mission of protecting the system of cooperative credit and its member-owners through effective chartering, supervision, regulation, and insurance can only be achieved by adapting to technological and economic changes.

Should you have any questions about the NCUA’s supervisory priorities for 2023, please contact your NCUA examiner or regional office.

Sincerely,

Todd M. Harper
Chairman

New circular addresses dark patterns and other tricks used by companies to confuse and deceive consumers enrolled in subscription services.

The Consumer Financial Protection Bureau (CFPB) issued a new circular affirming that companies offering “negative option” subscription services must comply with federal consumer financial protection law. Negative option programs include subscription services that automatically renew unless the consumer affirmatively cancels, and trial marketing programs that charge a reduced fee for an initial period and then automatically begin charging a higher fee. Companies risk violating the law if they do not clearly and conspicuously disclose the terms of their subscription services and obtain consumers’ informed consent, or if they make it unreasonably difficult for consumers to cancel. Drawing from the Federal Trade Commission’s (FTC) recent policy statement and the CFPB’s past enforcement cases, the circular highlights examples of unlawful behavior by companies that have used dark patterns and other manipulative tactics to trick consumers into paying recurring charges for products and services they do not want.

Negative option marketing refers to a term or condition under which a seller may interpret a person’s silence or failure to cancel an agreement as continued acceptance of the offer. The CFPB has received complaints from consumers about being charged for products or services they did not intend to purchase or had sought to cancel, and has brought many enforcement actions involving unlawful negative option marketing practices.

The CFPB took action against Transunion for repeatedly breaking the law by violating a CFPB consent order and for deceptive marketing when selling credit scores, reports, and credit monitoring products. The CFPB sued ACTIVE Network for tricking consumers into enrolling into a costly membership club through the use of digital dark patterns. The CFPB has also entered into consent orders with numerous credit card issuers for deceptively marketing optional “add-on” products that charged recurring fees until consumers affirmatively cancelled.

Today’s circular highlights that negative option programs can be particularly harmful when paired with dark patterns because consumers may be misled into purchasing subscriptions and other services with recurring charges and be unable to cancel the unwanted products and services or avoid their charges. Digital dark patterns are design features used to deceive, steer, or manipulate users into behavior that is profitable for a company, but often harmful to users or contrary to their intent.

Companies offering negative option programs risk violating the Consumer Financial Protection Act’s (CFPA) prohibition on unfair, deceptive, or abusive acts or practices where they:

  • Fail to disclose, clearly and conspicuously, the material terms of the negative option offer to the consumer: Companies likely violate the law if they misrepresent or fail to disclose information likely to inform a consumer’s decision about whether to enroll in a negative option service, including the amount of all charges and the fact that charges will continue unless the consumer takes affirmative steps to cancel.
  • Fail to obtain the consumer’s informed consent: Companies should ensure that consumers genuinely agree to the terms of a negative option program. The CFPB has found or alleged that companies engaged in unfair, deceptive, and abusive acts and practices when companies misrepresented or failed to disclose that they were offering negative option programs, which resulted in consumers not understanding that they were enrolling in services with recurring charges.
  • Mislead or impede consumers wishing to cancel: A common practice of bad actors is requiring consumers to jump through complicated hoops to cancel subscription products or services, such as being forced to talk to customer service agents repeatedly, or for unreasonably long times, before granting a request to cancel.

Today’s circular continues the CFPB’s focus on raising awareness about the growing scourge of dark pattern practices and other harmful tactics that companies are using to trick consumers into paying for products or services they do not want. The CFPB is partnering with the FTC in its effort to combat the rise of digital dark patterns, and both agencies will continue to monitor these practices and bring agency actions where needed.

Read the Consumer Financial Protection Circular, Unlawful negative option marketing practices.

Read the FTC’s October 2021 policy statement on negative option marketing .

Courtesy of Leonard Burman and William G. Gale, Brookings Institute

There is a legal maximum on how much debt the federal government can accumulate—often called the “debt ceiling” or the “debt limit.” According to Treasury Secretary Janet Yellen, the government will hit the current limit in a few days. Using a variety of accounting tricks (like temporarily diverting government pension funds), the government can postpone the day when it cannot pay its bills but only for a few months. Congress and the administration therefore face the following questions: whether to raise the debt limit, by how much, and what, if any, conditions to attach.

Citizens and the media misunderstand the issues surrounding the debt limit. Policymakers often fuel this misunderstanding with misleading statements that distort the debate.

The issue is really quite simple. The debt limit doesn’t cause the debt any more than a thermometer causes a fever. Debt grows when spending exceeds revenues. That’s it.

Congress should abolish the debt limit and replace it with the simple, common- sense rule that automatically authorizes any borrowing necessary to implement any fiscal legislation that affects the federal deficit. This “Gephardt rule” was in place at various times in the past.

Raising the debt limit is not about new spending; it is about paying for previous choices policymakers legislated.

Here are seven things to understand about the debt limit and why it is unnecessary and obstructive.

  1. The debt limit has been raised continually for more than a century.  The first debt limit was established in 1917 to make it easier to finance mobilization efforts in World War I. Before that, Congress generally had to authorize each bond issue. The limit has been raised 78 times since 1960, including 20 times since 2001. Congress usually raises (or suspends) the debt limit before it is reached. Along the way, the party out of power demagogues the debt limit, blaming the other party for its profligacy.
  2. Raising the debt limit is not about new spending; it is about paying for previous choices policymakers legislated. Voters often incorrectly assume—and lawmakers often incorrectly assert—that a vote to raise the debt ceiling is a vote for more red ink. In fact, raising the debt limit is about paying for past choices. Debt limit debates are about whether Congress should authorize the government to borrow to pay for spending that Congress has already authorized. Oddly enough, when Congress authorizes new spending and new taxes, it does not automatically authorize the borrowing needed to make up any differ­ence. Arguing about increasing the debt limit is like having a person charge vacation expenses to his credit card and then debate whether he should pay the credit card company when the bill comes due.
  3. The uselessness of a debt limit is exhibited by the fact that only one other advanced country—Denmark—has a separate debt limit rule like ours. And they don’t use it as a political football.
  4. The limit (inappropriately) applies to gross federal debt. The debt limit applies to gross debt: the sum of net debt plus intragovernmental loans. Net debt is what the government owes the public—including investors, pension funds, and domestic or foreign central banks. It is the measure that economists consider to be important. Intragovernmental debt is what one part of the government owes another part. Because it is akin to your right pocket owing your left pocket money, intragovernmental debt is irrelevant to the nation’s fiscal health. Thus, gross debt is a legal concept with little economic significance. Sadly, the popular discussion—even among many so-called experts—sometimes focuses on gross debt, because the bigger number is more eye-catching (although net debt, at around $24.5 trillion, is still pretty big). At the beginning of 2023, about $6.8 trillion (approximately 22% of debt subject to the limit is intragovernmental debt.
  5. If debt hits the ceiling, the Treasury Department uses several accounting gimmicks to postpone the day of reckoning, but these typically last only a few months. At that point, the government would have to default on interest payments or other obligations—for example, military pay, Social Security and Medicare, tax refunds, or other safety net payments. The law is unclear about which claims are senior. Nor is it clear who has the right to determine seniority. Legislation could set priorities, but any such prioritization would be tested in court. And even if bondholders were paid, not paying all the claims would constitute default, just with a different name, and incur costs for the government.
  6. If the debt limit were not raised, the amount of spending cuts or tax increases that would be required would equal $1.5 trillion this year and $14 trillion over the next 10 years. For perspective, these figures are larger than total defense spending over the same periods of time. And if there were a default, interest rates would rise, increasing deficits and requiring even larger tax and spending changes.
  7. The economic consequences of a large-scale, intentional default are unknown, but predictions range from bad to catastrophic. In 1979, an inadvertent temporary partial debt default occurred because of an administrative error; it raised U.S. borrowing costs by $40 billion (in today’s dollars). This was an accidental default on a small batch of Treasury securities, but it spooked investors enough to raise interest payments significantly. An intentional, large-scale default has never happened because in the past it has been unthinkable. To do so now would be to play with fire and risk the United States’ charmed position as a “risk-free borrower” in global credit markets.

PUBLISHED

CFPB Proposes Rule to Establish Public Registry of Terms and Conditions in Form Contracts That Claim to Waive or Limit Consumer Rights and Protections

Companies can use terms and conditions in non-negotiable form contracts to try to hide consumer harm, to stifle criticism about products and services, and to undermine consumer financial protection law

The CFPB proposed a rule to establish a public registry of supervised nonbanks’ terms and conditions in “take it or leave it” form contracts that claim to waive or limit consumer rights and protections, like bankruptcy rights, liability amounts, or complaint rights. In some cases, terms and conditions in non-negotiable form contracts mislead consumers into believing the terms or conditions are legally enforceable. Under the proposed rule, nonbanks subject to the CFPB’s supervisory jurisdiction would need to submit information on terms and conditions in form contracts they use that seek to waive or limit individuals’ rights and other legal protections. That information would be posted in a registry that will be open to the public, including to other consumer financial protection enforcers.

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CFPB Takes Action to Halt Debt Collection Mill From Bombarding Consumers with Junk Lawsuits

Forster & Garbus illegally sued borrowers on behalf of Citibank and Discover, among others

The CFPB has reached a settlement in its lawsuit against law firm Forster & Garbus, LLP for illegal debt-collection practices. If approved by the court, the proposed settlement would prohibit Forster & Garbus from filing any new lawsuit against a consumer unless it has specific documents supporting the debt and certifies that an attorney reviewed those documents. The order would also require the company to dismiss any pending lawsuit where it cannot satisfy these requirements. Forster & Garbus would also be required to pay a penalty of $100,000, which would be deposited into the CFPB’s victims relief fund.

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Blog: Protecting People’s Access to Their Money

History has made it clear that when companies don’t have to compete for business, there is a risk that they’ll take unfair advantage of the situation. When the COVID-19 pandemic hit in early 2020, Congress and many states and localities provided additional unemployment assistance and other benefits. The Consumer Financial Protection Bureau (CFPB) found that many companies took advantage of the limited choices that people have for accessing public benefits like unemployment assistance. Some banks may have unlawfully seized this money to satisfy negative account balances or pay entirely different debts. And one institution automatically and unlawfully froze people’s accounts with a faulty fraud detection program, and then gave them little recourse when there was, in fact, no fraud. In 2022, the CFPB reported a 673% increase in consumer complaints about government-benefit prepaid cards , in large part due to government programs that distribute funds to consumers through such cards. In fact, of all types of prepaid cards, the CFPB receives the most complaints about government-benefit prepaid cards.

Courtesy of Aaron Klein, Brookings Institute

This paper analyzes economic policy responses to the COVID-19-induced recession, focusing on the American policy response. Despite widespread political distrust between the two parties sharing control of the government and the timing of the upcoming presidential election, America’s political system was able to enact a massive policy response that reduced the severity of the recession.

Download the full report here.

This political response happened faster than any automatic policy response would have, based on the delays in data reporting. The economic policies enacted continued America’s trend toward financialization of fiscal policy. The Federal Reserve and America’s private banking and financial systems were heavily relied upon to deliver general macroeconomic assistance to households and businesses, particularly small businesses.

The immediate result was that households and businesses that have stronger ties to the financial system received greater economic support. Those with less strong ties to the financial system received aid more slowly and, in some instances, not at all. The long-term consequences of relying on the Federal Reserve to distribute recession assistance through the financial system blurs the lines between engaging in monetary and fiscal policy.

This response is a continuation of the trend that began in America from the prior recession and appears likely to continue, potentially impacting the central bank’s independence and raising concerns regarding the role of the Federal Reserve in society.

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