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CFPB Structure and Military Lending Focus of Nomination Hearing for CFPB Director

On Sept. 6, the U.S. Senate Banking Committee held a hearing on the nomination of Richard Cordray to be the Director of the Consumer Financial Protection Bureau. Cordray, a former Ohio Attorney General, currently leads the bureau’s Division of Enforcement. AFSA attended the hearing and has been following the progress of the nomination closely.
The majority of the committee’s Democratic members attended the hearing, but only two Republican senators were present to question Cordray. The hearing focused less on the nominee’s background and qualifications than the structure and role of the bureau itself, which remains the subject of continued partisan discord. Forty-four Senate Republicans have pledged not to confirm any director until certain structural reforms are implemented to improve the governance of the agency and impose checks and balances on its regulatory powers and funding. AFSA supports those proposed reforms.
During the hearing, committee Chairman Tim Johnson (D-SD) admonished his colleagues for holding up the confirmation process, asserting that the absence of a director places community banks and credit unions at a disadvantage relative to non-bank financial institutions. Pushing back, committee Ranking Republican Richard Shelby (R-AL) described the unprecedented authority granted by the Dodd-Frank Act to the agency’s director, who will ultimately determine which consumers have access to credit and the range of financial products available to them. Senator Bob Corker (R-TN) emphasized the lack of accountability in the current structure. Responding to these concerns, Cordray pledged to always follow the law, be responsive to congressional oversight and submit the bureau to audits, should he be confirmed as director.
Several committee members expressed anxiety over perceived risks to military personnel and their families. Cordray noted that he was spending time studying these issues and meeting with military officials to identify problem areas, while praising the leadership of Holly Petraeus as head of the bureau’s Office of Servicemember Affairs. AFSA has had the privilege of meeting with Petraeus and looks forward to continuing to work with her to understand the unique circumstances surrounding military consumers of financial services.

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AFSA Working with Other Trades to Keep Vehicle Leasing Affordable

AFSA has signed onto a joint trade association letter urging Congress not to amend or repeal the Graves Law. Enacted in August 2005, this provision uniformly eliminated a state-by-state patchwork of vicarious liability laws impacting the non-negligent owners of the interstate fleet of rented and leased cars and trucks. Repealing the Graves Law would not only hurt these owners, it would increase the cost of commercial transportation and limit consumers’ choices when acquiring a vehicle.
Prior to the enactment of the Graves Law, unfair “liability without fault” laws in some states drove many small companies out of business and exposed countless more to multi-million dollar claims for accidents in which the rental or leasing company or company employees had absolutely no role. The prohibitive cost of insurance forced some companies to avoid leasing vehicles in certain states, robbing businesses and consumers of an affordable alternative to purchasing.
Since enactment of the Graves Law, markets previously closed to leasing have reopened and businesses and consumers alike are benefitting from increased choices in financing their vehicle acquisitions. The letter asks that during the current debate over how to update and reauthorize federal surface transportation laws, Congress consider the positive impacts of the Graves Law and oppose any effort to weaken it.

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Inside the Beltway
CFPB Examines Financial Products for Military Members
HousingWire (09/08/11) Panchuk, Kerri

The Consumer Financial Protection Bureau (CFPB) is now accepting comments from financial institutions, servicemembers and the public about the products currently offered to, and used by, the military and their families. The feedback will be used by the CFPB’s Office of Servicemember Affairs (OSA) to create financial education and outreach programs for the military. The program, which was established by the Dodd-Frank Wall Street Reform and Consumer Protection Act and is headed by Holly Petraeus, aims to help military families choose financial services and products. “Military families face unique challenges especially when it comes to their finances,” Petraeus said. “By identifying the products and services that aim to assist their particular needs, our office will be able to better serve servicemembers and their families,” she added. OSA is seeking input on financial education and specifics on programs constructed for servicemembers that exceed those required by statute, as well as data on the types of programs to assist servicemembers that are already established. In addition, OSA would like feedback on effective marketing strategies that are being used to reach servicemembers. The feedback period will end Sept. 20, 2011. Comments can be submitted online.

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New 'Abusive' Standard Stokes Fear from Bankers
American Banker (09/05/11) Davidson, Kate

More than a year after the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), bank lawyers and bureau officials are still unclear about what is considered “abusive.” While bankers and lawyers are able to refer to several court cases and regulations to help define “unfair and deceptive” acts, “abusive” has only been in a handful of previous regulations, and the Dodd-Frank Act was the first time it was defined. The law provides some guidance, but many are  concerned that CFPB will utilize it to ban any practice or product it wants, although CFPB officials have publicly indicated they do not intend to use it ban a slew of products. If the CFPB approaches “abusive” in a way similar to the Federal Trade Commission, it will likely be defined as “something that materially interferes with the ability of a consumer to understand the terms of the product,” stated Suzanne Garwood, a lawyer with Venable LLP. The law’s definition could also open the door for a suitability requirement, which could create a much higher threshold in relation to duty of care. Other possible ways to define “abusive” include whether the product is appropriate for the consumer, which could mean the development of more consumer-specific products and an increase in the potential for violation of fair lending laws. The CFPB has indicated that it will address these questions through supervision and enforcement action, rather than rule writing. Michael Benoit, a partner with Hudson Cook LLP, says that the industry would rather see rules, as they create some certainty. Banks can also turn to enforcement actions regarding “unfair and deceptive acts” for guidance.

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No Longer on Hot Seat in Congress, Banks Still Likely to Feel Some Heat
American Banker (09/07/11) Wack, Kevin

Several high-profile topics are likely to impact the financial services industry this fall. While Congress returned to session on Tuesday, the biggest event this week will be President Obama's address to Congress on a new job and economic package. The president will likely offer a plan to help revitalize the housing market, including a possible effort to increase refinancing for underwater borrowers whose loans are backed by Fannie Mae and Freddie Mac. The issue may boil down to whether to extend the higher conforming loan limits. Unless Congress acts before Oct. 1, the loan limits currently used by Fannie, Freddie and the Federal Housing Administration will return to pre-financial crisis levels. The work of the debt-reduction "super committee" has the potential to overshadow whatever happens on Capitol Hill between now and January. The Senate Banking Committee will be busy with nominations for multiple financial regulatory posts. Partisan disputes over SEC and CFTC funding are likely to resurface this fall. While Congress has a somewhat marginal role in the Dodd-Frank rule-writing process, members of Congress will hold hearings and use their bully pulpits in an effort to influence outcomes at the agencies.

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Fed Likely to Delay Slew of Critical Dodd-Frank Rules
American Banker (09/01/11) Borak, Donna

Federal Reserve Board officials promised to unveil their package of key Dodd-Frank rules by the end of the summer, but some predict they may not be out until early October. The rules, which implement Section 165 of the Dodd-Frank Act, will explain how the Federal Reserve Board (Fed) plans to regulate large, interconnected financial institutions and non-banks. The rules will cover major issues in financial services, including whether these firms will face an additional capital surcharge and how to deal with systematically important companies that fail. The scope is likely the reason the Fed is taking more time to get these critical rules out, because it sets the tone for how the Fed and other agencies will treat these institutions. This delay does not seem to bother the industry, which wants the agencies to get these critical rules right, instead of producing a rushed product that could lead to unforeseen consequences. However, the industry wants to see the rules soon to get a clearer picture of what areas of weakness or gaps they will need to focus on. One main area of concern about the rules is how the Fed will regulate non-banks deemed systematically important. Most expect that the Fed will tread carefully in showing some flexibility and will not be too prescriptive across the board. The industry certainly does not want rigidity, because it would put certain institutions in a box.

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National and State News
Missouri Ballot Initiative on Payday Loans Hurts All Lenders
The Kansas City Star (09/06/11) Gallagher, Harry and Hudgins, Tom

The proposed Missouri ballot initiative, meant to protect borrowers from payday lenders, will remove vital alternatives to payday loans – such as installment loans – and leave many Missourians without access to credit, according to this opinion piece by Harry Gallagher and Tom Hudgins, who represent Missouri trade associations of traditional consumer installment lenders. Traditional installment loans are acknowledged to be much safer and affordable than payday loans, as they build in consumer protections and safeguard against default. The proposed ballot initiative will make this alternative unsustainable, which will in turn force borrowers to look at black market sources or unregulated internet lender to obtain credit, according to Gallagher and Hudgins. Additionally, traditional installment loans were exempt from the John Warner National Defense Act, which was identified in a recent editorial supporting the ballot initiative as its inspiration. “The ballot initiative is too broad in its scope and will hurt individual Missourians, families and our state economy. It must be stopped,” the authors stated.

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NY Fed Economists Suggest State Aid for Unemployed Homeowners
DSNews.com (09/07/11) Franks, Krista

James Orr and Joseph Tracy, two economists at the Federal Reserve Bank of New York, argue that states may be able to assist in stabilizing the housing market by making bridge loans to temporarily unemployed homeowners who are having problems paying their mortgage payments. The Homeowners’ Emergency Mortgage Assistance Program (HEMAP), a successful Pennsylvania program, is said to be the basis of these recommendations. “While lending to unemployed borrowers is generally risky, HEMAP’s experience suggests that lending by the government to a carefully screened group of unemployed borrowers can be a successful strategy to help distressed homeowners,” the economists wrote. Orr and Tracy believe that this kind of program is ideal for temporarily unemployed homeowners who are likely to regain income. They also point out that the prospect of reemployment is important to the program, and advise states to rely on earning qualifications that they already use in unemployment programs rather than evaluating applicants individually like in HEMAP. To minimize costs, states could coordinate with servicers and make conditions such as requiring servicers to write down some of the principal for the bridge loans. However, because those conditions may slow down the process and reduce the program’s reach, states could instead require broader concessions by larger lenders. Orr and Tracy note that limited state budgets is a major obstacle of implementing such programs; HEMAP had to discontinue bridge loans in July due to restricted state funding.

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Gen Y Views Direct Deposit as Way to Be Environmentally Friendly
American Banker (09/08/11) Stewart, Jackie

According to a recent 2011 PayItGreen survey, 27 percent of Gen Y respondents (those born in 1979 or later) use direct deposit to help the environment, compared to 19 percent for other generations. NACHA, the electronic payments association that released the results, found in a separate survey that 89 percent of Gen Y is likely to switch brands when price and quality are equal if one brand supports a cause. In addition, in the PayItGreen survey, 70 percent of Gen Y employees and 72 percent of other generations cited convenience as their primary motivator for using direct deposit. Another 38 percent of respondents said they use direct deposit because their employers require it. Last year's PayItGreen survey found that 27 percent of employees received paper paychecks, primarily because their employers did not offer direct deposit. Javelin Strategy & Research polled 3,500 adults online in this survey for the NACHA coalition PayItGreen.

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A Waiting Game at Finance Unit
The Wall Street Journal (09/06/11) Sechler, Bob

GE Capital Chief Executive Jeff Immelt has high hopes for the finance unit, which he says is now on a safer and significantly firmer, longer-term footing. GE Capital has been putting its focus on business loans to midsize companies and has reduced its reliance on short-term borrowing. Many industrial companies have set up captive finance units to assist customers in buying its goods and services, but GE Capital has done so for its own sake and has placed the bulk of its effort into consumer finance, aircraft leasing and lending to midsize businesses. Since the financial crisis, GE Capital has downsized and sharpened its focus — stepping back from real estate and selling its consumer finance operations in eastern Europe and Latin America markets. Immelt predicts a key sign of its progress will come next year, and is now on his way to convince investors that the unit should account for 40 percent of GE’s profit. The new regulatory framework and shift of oversight to the Federal Reserve in July is likely to be more demanding on the unit than previously, but Immelt is standing by his predictions for the unit’s success. “We have weathered the storm as well as anybody and we are well positioned to come out the other side,” Immelt stated.

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95th AFSA Annual Meeting

September 8, 2011

Forward To A Colleague

ACS a Xerox Company
ParaData Financial
GoldPoint Systems
Wells Fargo Preferred Capital
Carleton, Inc
Allied Solutions
Balboa Insurance
Counselor Library
Life of the South
AFSA Newsbriefs

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AFSA's mission is to protect and improve the consumer credit business, maintain a positive public image, and create a legislative climate in which reasonable credit regulation can and will be enacted. The association operates in the public interest, encourages and maintains ethical business practices, supports financial education for consumers of all ages, and provides other assistance in related fields on an as-needed basis.

The American Financial Services Association has provided services to its members for over ninety years. The association's officers, board, and staff are dedicated to continuing this impressive legacy of commitment through the addition of new members and programs, and increasing the quality of existing services.