Friday, December 12, 2014

What I heard at the Consumer Federation of America’s annual Financial Services Conference

Every year, the Consumer Federation of America (CFA for short) hosts a financial services conference, which brings together consumer advocates and financial industry experts for presentations and discussion. This year’s conference focused on emerging issues like Big Data, the CFPB, and overdrafts.

The conference kicked off with remarks from Eric Belsky, the new director of Community Affairs at the Federal Reserve Board. Belsky explained that since the transfer of many of the Fed’s powers to the CFPB, his Community Affairs office has been focusing on supervision of state banks for compliance with consumer protection laws, the Community Reinvestment act, Flood Insurance, and the Servicemembers Civil Relief Act. His office also supervises large banks for Fair Housing Act compliance.

Belsky also noted that the Fed is trying to take a more risk focused approach to supervision, especially on new financial products and bank relationships with 3rd party vendors.

Next was a panel discussion on the CFPB’s enforcement actions, featuring Hunter Wiggins, the CFPB Deputy Enforcement Director for Policy and Strategy. The panel began discussing how financial regulatory agencies in the past had constantly been behind the curve, focusing on cleaning up the last crisis and ignoring the growing one.

Wiggins then explained the Bureau’s approach to enforcement. When determining what cases to pursue, the Bureau’s enforcement teams look at the number of victims, whether consumer harm is temporary or long lasting, the size and composition of vulnerable populations, and if private litigation options have been used or are available. This results in about half of the enforcement teams focusing on the “core work” of mortgage origination/servicing, fair lending, payday, auto, etc. The other half is devoted to “cross product” issues and evaluation of emerging products. So far in 2014, the Bureau has made 36 such enforcement actions, covering a large swath of the financial services marketplace.
The first point of contact that Bureau attorneys have with business is often when delivering Civil Investigative Demands, or CID’s. Mr. Wiggins stated that the Bureau’s CIDs, which can often be very demanding and go into the thousands of pages, have gotten more precise over time.

Big Data panel

The next panel was on the use of “Big Data”, focusing on how credit bureaus, furnishers, and insurance companies use all sorts of new data in their businesses. The consumer advocate in the panel stated that while ECOA and FCRA were good at protecting consumer information in the early days, the rapid development of digital technology and social media presents new opportunities for consumer harm and privacy violations. He also stated that the tendency of new/young firms, especially in Silicon Valley, to move too quickly into these new data mining fields can be a recipe for mistakes and consumer harm.  

One of the more memorable statements came from the “big data” expert on the panel, who revealed that some analytical firms claim to be able to predict credit scores based on how many exclamation points a person uses in their social media posts. Some of these firms can also track and record where a person clicks on a webpage, what they “like” on Facebook, and what they search for on Google. Companies can then use this data to predict credit scores and target their marketing of various financial and insurance products.

The downside is that this sort of data analysis can give inferences and establish correlations between certain behaviors, but it cannot prove social causations. The main takeaway here is that increasing use of big data reduces consumer surplus in the lending/insurance markets. Any benefit of the doubt that consumers may get from service providers is lessened when doubt can be filled with this new information.

The panelists stressed that going forward, more federal regulations may be needed in this data collection field, because the machinery is far too complicated for consumers to understand and make informed decisions upon. A basis for these regulations may be a “right to be forgotten”, where consumers can opt to use social media and software applications without being tracked.

Overdraft panel

The afternoon panel on overdrafts featured CFPB Deposit Markets director Gary Stein, Pew Research’s banking expert Susan Weinstock, consumer advocate Sarah Ludwig, and Bank of America SVP for Check/Debit products Kevin Condon.

The panel began with an analysis of the 2009 overdraft rule from the Federal Reserve. Despite the “opt-in” system established by this rule, the amount of overdrafts and account closures due to overdrafts has increased. The basic conclusion is that the Fed’s opt-in system was too confusing for consumers to understand and thus failed to work. Research from the Woodstock Institute also found enormous variations in how overdraft programs were explained at different banks. Bank employees often made errors in explaining these programs, and one employee was even found pitching overdraft protection as a way to “avoid fees.” According to Ludwig, the difference in opt-in rates across banks is further evidence that the Fed’s form is terrible. And while Ludwig praised credit unions, she also aggressively criticized overdrafts fees in general, focusing on their tendency to hit lower income consumers the hardest.

Stein explained that according to the Bureau’s research, about 25% of all checking accounts overdraft at least once per year, and young people are far more likely to incur overdrafts than old. Ludwig noted that the banking industry made $32 billion in overdraft fees in 2013. Weinstock also noted that in a certain minority neighborhood in Los Angeles that her organization studied, more people were kicked out of the banking system due to overdrafts than from losing a job during the Great Recession.
The panel agreed that generally, overdraft penalty fees are the most expensive form of overdraft, while overdraft protection/courtesy pay is cheaper for consumers.

According to Condon, Bank of America’s “Safe Balance” checking account product is a zero overdraft account. However, it carries a monthly fee and can’t have checks written on it. Codon also explained that Bank of America banned debit card overdrafts after the 2009 Regulation E change, and that BofA markets its “Safe Balance” accounts to customers who frequently overdraft.

Stein also took some time to explain the Bureau’s new prepaid card proposal. The Bureau is proposing to treat overdrafts on prepaid cards as extensions of credit, which will therefore be covered under Reg Z credit protections. Issuers of these cards may also be prohibited from forcibly clearing overdrafts with funds from a related transaction account. However, Weinstock noted that very few prepaid card issuers currently offer overdraft or credit extensions on their cards.