Illogical: The Reality of Some Consumer Protection Efforts

 I would like to believe no one wants consumers to be taken advantage of, but that is against the natural order of things. Humans are fallible. Evil exists. 

So, the government steps in or is asked to step in with laws and regulations to ‘help.’ Bumper pads to keep us in line. The concept of law and order provides a sense of certainty and security. We need boundaries. Many laws are necessary and good. 

But there’s some illogical shit coming out of Washington and interest groups recently.

Popping Off on the Cap

First there was a hearing to expand the Durbin Amendment cap on debit card interchange to credit card interchange. It boggles my mind that retailers feel they can credibly support this, and legislators are considering it after the failure the Durbin Amendment has been on achieving its stated purpose.

The Durbin Amendment was supposed to save consumers money because interchange prices would decrease, and retailers would lower their pricing accordingly. That didn’t happen. We humans, we’re fallible. 

So, what’s the next logical step to take? Force price decreases from retailers? Nope. Remove the debit interchange cap? Uh uh. The focus of the hearing was on whether to EXPAND the Durbin Amendment to also include credit cards. 

How’s that for government logic? 

This failed to curb prices at retailers and increased operations and compliance costs for card issuers, therefore increasing the cost of financial services for consumers, so let’s double down on it.

CUNA wrote in its letter – in addition to a joint letter the trade association signed onto – “If the goal of the federal government’s requirement that credit unions and banks enter into contractual relations with many payments networks was to reduce costs to consumers, then it failed. The result of the Durbin Amendment has been additional compliance burdens and related business costs to credit unions and banks, a reduction in interchange revenue from debit transactions, and a massive transfer of money to the largest retailers.”

According to CUNA, just 1% of retailers lowered their prices while 20% increased pricing. The largest credit union trade association did not mince words: Its letter used terms like “insidiously” and called the Durbin Amendment “the purest example of a failed government policy.”

THIS ^^^

And retailers are back in Washington, hat in hand, begging for greater government assistance despite all the benefits they reap from being able to accept credit cards, from fraud protection to speedier transactions to increased consumer consumption capacity.

In addition, the purpose of interchange is to cover the expenses and fraud associated with issuing debt and credit cards. Nilson reported that fraud losses in the United States increased to $10.24 billion in 2020 compared to $9.62 billion in 2019, or 10.89 cents per $100 in 2020 and 10.25 cents in 2019. U.S. card fraud accounted for more than one-third of card fraud worldwide! 50% of all the other countries combined!

Expenses and fraud are up for card issuers, increasing the cost of financial services for consumers. Retail prices are up. Explain to me the thought process that expanding the interchange cap to credit cards is consumer protection. 

Illogical.

The Junk Drawer

Every kitchen in America has a junk drawer. It’s filled to the brim – maybe yours is spilling out like mine – with scissors, a variety of batteries that will never get used, expired coupons and whatever that goo is.

This is exactly how a joint letter from several “consumer advocacy” groups treated all financial services providers and the costs of offering useful services in a letter to the scary powerful Consumer Financial Protection Bureau. (Don’t fool yourself; even if you don’t report directly to the CFPB, you’re indirectly under the bureau’s regulatory thumb.)

According to a Center for Responsible Lending press release about the letter – because I wasn’t going to read the nearly 100-page letter but it’s hyperlinked above so help yourselves – so-called “junk fees” are discriminatory. Specifically, it notes that “practices involving car financing, with profits padded by expensive add-on products, such as service contracts, Guaranteed Asset Protection (GAP) insurance, and window etching. These add-on products significantly increase the cost of the car, and research has shown that Latino consumers are, on average, charged higher mark-ups on auto loan add-ons than non-Latino consumers.”

The release then quotes Nadine Chabrier, senior policy counsel at the Center for Responsible Lending, stating, “Fees that don’t help consumers, and are often hidden or unreasonable, are junk fees that should be tossed out by the CFPB. Junk fees strip wealth from financially vulnerable families and disproportionately harm communities of color.”

Keith Winn, COO of GreenProfit Solutions, explained, “Typically, it’s about who and how GAP and vehicles services contracts are sold. Both products provide valuable protection.” 

Winn has been in the business for four decades, and GreenProfit Solutions’ mission is to “tools to help credit union leaders balance mission and profitability, marrying credit union philosophy with the business of banking for improved member service and sustainability.”

Winn added, “While some dealerships, and buy-here-pay-here dealers are essentially already breaking regs and laws by simply including these products within the financing or deal. This is most definitely not the case at credit unions. I also noticed that the report calls out some of the huge mark-ups, which is basically unregulated. Credit unions keep their mark-ups reasonable.” He did note that when credit unions engage in indirect lending, they often cede the ancillary product sales to dealers, which mark up the products substantially higher. 

“That’s our one major issue with indirect when it pertains to DEI,” Winn said. “I don’t believe new, across-the-board regulations are necessary.”

Yet, based on the letter and CRL’s association with Self-Help Credit Union, throws credit unions and all GAP and vehicle service contracts, which when priced fairly offer financial stability and empowerment to consumers, into that junk-fee drawer. 

Illogical.

Is the CDFI Down With OTP?

NAFCU and Inclusiv recently wrote NCUA Chairman Todd Harper for assistance in removing the certification logjam at the Community Development Financial Institutions Fund. According to the letter, the CDFI fund is discouraging certification applicants from using the Other Targeted Populations standard for CDFI certification. Other Targeted Populations, or OTP, is defined as African American; Hispanic American; Native American; Native Alaskan, residing in Alaska; Native Hawaiian, residing in Hawaii; and Other Pacific Islander, residing in other Pacific Islands; along with ADA-qualifying Americans.

CU Strategic Planning, the credit union community’s largest CDFI certification and funding – to the tune of three-quarters of a billion dollars in awards for clients! – consultancy, applauded NAFCU and Inclusiv for their action. 

The experts noted that while the Investment Areas and Low-Income Target Populations paths to CDFI certification have clearly defined methodologies, the CDFI Fund has provided no such path for its OTP standard. In fact, just 5% of CU Strategic Planning’s clients have been certified using the OTP standard. “NAFCU and Inclusiv have called out this barrier, which is the lack of guidance and transparency for OTP-based certification,” the group wrote.

Congress appropriated $13 billion in funds for CDFI-certified institutions, but those funds – intended to support marginalized communities as included in the OTP standard – cannot provide the progress intended if CDFI applicants can’t get certified via a different method. Certification applications are taking 9 months for the CDFI Fund to review, and even then, the applicant only receives a yes or no. The CDFI Fund is providing zero feedback on how applications could be improved to achieve certification. Those not approved have to guess what they need to do next and get at the back of the nine-month long line.

Because CU Strategic Planning was founded before the shutdown of CDFI communications, it received feedback to help the consultancy move its clients across the finish line.

Credit unions serving minority populations and their members are faced with yet one more systematic barrier quashing systemic financial diversity, equity and inclusion. Their members “will not reap the benefits from CDFI-certified institutions launching and expanding life-changing services and products through CDFI funds,” the consultancy wrote in support of the trade associations.

As I began, our government exists to establish rails for organizations and people to operate within. It’s a good thing when applied in an open and democratic society. However, the messages are muddled with Congress appropriating billions of dollars, a percentage of which were earmarked to expand services to minority depository institutions and other historically disadvantaged communities, yet the bureaucracy is now another barrier minorities and those in underbanked areas must struggle over or around as they seek financial inclusion, the very reason the CDFI Fund was established.

Illogical.