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SCOTUS Strikes Down Obama Recess Appointments
PoliticoPRO (06/26/14) Bresnahan, John and Gerstein, Josh

The U.S. Supreme Court on June 26 struck down three of President Obama’s recess appointments to the National Labor Relations Board (NLRB) in a unanimous 9-0 decision. The opinion gives the Senate the power to thwart recess appointments by simply being in session. The case was brought by Noel Canning from Washington State, who addressed the constitutionality of the decision in his role as a Pepsi bottler. In his brief, Canning argued that Obama attempted to avoid the Senate in order to make politically sensitive appointments to the NLRB. During the period, the Senate claimed to be in session even though it was during a break. The chamber was gaveled in briefly every three days apparently in an attempt to stymie recess appointments. In the same set of appointments, President Obama appointed Richard Cordray to be the Director of the Consumer Financial Protection Bureau.

The decision does not upset any current appointments. The ruling’s impact may be lessened now that Senate Democrats exercised the nuclear option, requiring only a simple majority to confirm executive appointees as opposed to the traditional 60-vote threshold. Senate Democrats took no official stance on the case, although several Democratic Senate leaders approved of actions to thwart recess appointments. In addition, Senate Minority Leader Mitch McConnell (R-KY) wrote a friend of the court brief urging the high court to declare the appointments unconstitutional.

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Fair Lending a Hot Topic at AFSA/NADA Executive Forum

For the fifth consecutive year, AFSA and the National Automobile Dealers Association (NADA) co-sponsored an executive forum. The June 25 meeting in Washington, D.C., featured Patrice Ficklin, Assistant Director, Office of Fair Lending & Equal Opportunity, Consumer Financial Protection Bureau, and Steven Rosenbaum, Chief, Housing and Civil Enforcement, Department of Justice, sharing their agencies priorities.

CEOs and other top executives from virtually every major finance company and major bank in the nation engaged in indirect auto financing attended the forum, along with the leaders of the nation’s franchised automobile dealers. Representatives from the American International Automobile Dealers Association and National Association of Minority Automobile Dealers were also in attendance.

Co-chaired by Joy Falotico, chair of AFSA’s Vehicle Finance Division and Executive Vice President, Marketing, Sales & Americas, Ford Motor Credit, and Forrest McConnell, NADA chairman, the meeting focused on fair lending concerns and the challenging legislative and regulatory environment for finance sources and dealers.

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Inside the Beltway
Holder Not Backing Down on DOJís ĎChoke Pointí Probes
The Wall Street Journal (06/23/14) Zibel, Alan

In remarks during his weekly address posted online, Attorney General Eric Holder noted that the Justice Department will not back down on Operation Choke Point, a program that investigates firms that handle payments for illegal lenders and scam artists. Opponents argue that the probe has ensnared legitimate businesses. The Republican-controlled House of Representatives has moved to shut down funding for the program in the latest spending bill. “In the months ahead, we expect to resolve other investigations involving financial institutions that chose to process transactions even though they knew the transactions were fraudulent, or willfully ignored clear evidence of fraud,” Holder said.

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Lenders Are Warned on Risk
The Wall Street Journal (06/25/14) McGraine, Victoria and Tan, Gillian

In a report released on June 25, the Office of the Comptroller of the Currency (OCC) noted that banks took on more risk in an effort to pursue profits, most notably in indirect auto loans and high-yield loans issued to more speculative borrowers. The report also highlighted that banks eased lending standards in commercial loans.

The report noted that banks have taken on other types of risks, including longer loan terms in indirect auto loans. OCC-supervised banks reported the highest share of loosened underwriting standards. Financial institutions are trying to find asset classes that performed better during the last crisis. Unfortunately, analysts point out, the previous crisis may not always be the best indicator of what issues will occur next. The warnings from the OCC come as federal agencies ramp up regulation of many financial services companies.

Banks have expanded their auto loan business exponentially. In the fourth quarter of 2013, auto loans increased by 13 percent from the year before. Several banks have done so by opening loans to borrowers who are classified as near-prime borrowers. With a finite pool of lending opportunities, banks have looked to expand their lending activities. Alternative lenders also are claiming a larger slice of the leveraged-buyout-loan market as larger banks retreat from certain market spaces citing regulatory pressure.

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National and State News
Drop in Short Sales Trims House Inventory
Drop in Short Sales Trims House Inventory (06/20/14) Light, Joe

Short sales have become commonplace in states like Florida, Nevada and Michigan that were hit hard by the financial crisis, but now, due to the expiration of a key tax break, short sales have slowed, meaning a possible slowdown in the housing recovery. In March 2014, just five percent of home purchases were short sales, down from 6.4 percent in February of the same year and far below the 19.7 percent mark in January 2012.

The Mortgage Debt Relief Act (MDRA), passed by Congress in 2007, made the forgiven portion of the mortgage debt tax free to the borrower. Now that the MDRA has expired, taxpayers will have to pay income taxes on the amount of their loan that was forgiven, slowing short sales, which analysts believe could slow the housing recovery significantly. According to Zillow, a real estate information website, rising home prices have also caused short sales to slow. Just 19 percent of homes were worth less than their mortgage in the first quarter, which is down significantly from 31 percent in the same period in 2013.

The tax break stalled in the Senate after Democrats and Republicans were unable to come to an agreement about how to amend the measure. The bill passed the Senate Finance Committee in April, but Congress is not expected to take the issue back up until after the elections.

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Bitcoin Legislation Arrives in Canada and California
Reutzel, Bailey (06/24/14) American Banker

In legislation that was long expected, Canada has moved to regulate digital currencies under standard money movement statutes and the state of California has legalized the use of alternative currencies. Canada will use its Money Services Businesses statutes to regulate the currencies. The rules mean that currencies will need to register with Fintrac (similar to Fincen in the United States) and ensure staff and procedures are maintained on anti-money laundering programs.

California also updated its statutes to permit the use of digital currencies, repealing a restriction that stated citizens could only use US currency. Late in 2013, Calif. attempted to crack down on cryptocurrencies, but failed to succeed. Since, they have attempted to modify regulations to bring the currencies under the control of regulatory agencies in the state, similar to New York.

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Consumers May Have to Wait for More Secure Credit Cards, Says New Report
Boston Globe (06/26/14) Newsham, Jack

Despite the theft of nearly 40 million debt and credit card numbers from Target in December 2013 and a requirement to replace current cards with smart chip technology, a new study estimates that 30 percent of credit and nearly 60 percent of debit cards will not have the new technology by the October 2015 deadline. After the date, any processor that does not adopt the new cards will have to pay for any fraudulent transactions found on a consumer’s bill. Chip cards, which use smart chips to replace the magnetic strip on cards, have been in use since the 1990s across Europe and nearly 80 percent of all cards there carry them.

The study, which was performed by Aite Group, found that fraudulent activity was cut by half in countries that had heavy use of chip cards. The report makes an important point, however; the cards do not protect against fraudulent online purchases, an area that thieves have taken advantage of in recent years. Credit and debit card theft accounts for nearly $11 billion globally each year.

While banks and financial institutions are set to receive about 100 million new smart chip cards this year, it may be extremely difficult to put them into the marketplace. Only one sixth of the 12 million credit card terminals in the United States actually accept chip card technology, and businesses are moving slowly to invest in updated technology.

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Rise in Home Prices Is Slowing, and Thatís a Good Thing
The New York Times (06/24/14) Irwin, Neil

The latest reports of home prices in the country show that the market is slowing down, but still rising, which is good news, according to analysts. In 20 major U.S. cities, the prices of homes rose 0.2 percent in April, down from 1.2 percent in March and well below the 0.8 percent forecast by economists. In the last year, prices have risen 10.8 percent. In short, buying a home just two years ago was a bargain; now it is more of an investment. The numbers do not mean that another bubble has formed, only that more caution is in order, particularly for those in overvalued markets.

Wages are currently flat and inflation remains low, so steep home prices would quickly make buying a home unaffordable. A big difference between now and the early 2000s is that Americans are taking on considerably less risk than they were just a few years ago. The housing numbers tend to be more gradual in nature. The April Case-Shiller index numbers are based on transactions that closed from February through April, which, in turn, went under contract two to three months previous. The healthiest thing for the market is that home prices stay just high enough to allow owners to build equity, but low enough that they do not outpace growth in other sectors.

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June 26, 2014

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AFSA Newsbriefs

AFSA Newsbriefs is a weekly executive summary of AFSA initiatives and consumer credit articles. AFSA Newsbriefs is free for members. Send an email to newsbriefs@afsamail.org to subscribe.

The American Financial Services Association, or AFSA, is the national trade association for the consumer credit industry, protecting access to credit and consumer choice. The association encourages and maintains ethical business practices and supports financial education for consumers of all ages.