Consumer lending, from perspectives of a former regulator and a consumer advocate By William M. Isaac and Reverend DeForest Soaries published by The Hill on February 11, 2016

Consumer lending, from perspectives of a former regulator and a consumer advocate By William M. Isaac and Reverend DeForest Soaries published by The Hill on February 11, 2016

Markets work best when they have strong competition and consumer participation. Our current financial system stands to improve on both fronts.

According to the Federal Deposit Insurance Corporation (FDIC), 92 million Americans are unbanked or underbanked, often without access to credit and the financial know-how to pursue other lending options. At the same time, regulators are throwing up roadblocks for new business models that bring these disenfranchised consumers back into the fold by offering them legal and responsible small-dollar credit access at competitive rates. Shutting these innovative models out of the marketplace both decreases competition and consumer participation – everybody loses.

The reality is, most unexpected credit needs aren’t for tens of thousands of dollars. They’re for a few hundred dollars, to cover unexpected urgent costs like a car breaking down or an emergency root canal. When people who do bank at a traditional institution need a small-dollar loan for situations like these, they’re often surprised to find that banks don’t offer this service.
In 2008 only 31 banks in the entire country offered loans smaller than $2,500, according to the FDIC. Since then, major players like Wells Fargo, U.S. Bank, and Regions have discontinued their small-loan products due to regulatory pressures.

As a result, the situation is becoming ever more dire for the unbanked and under-banked, a group which includes 54 percent of African Americans.

Here is the link to the full article

U.S. Government Must Make a Decision on Freddie, Fannie By William M. Isaac published by TheStreet on February 10, 2016

U.S. Government Must Make a Decision on Freddie, Fannie By William M. Isaac published by TheStreet on February 10, 2016

It’s time for the Federal government to make a decision about Fannie and Freddie — to let them die a gradual death or to help them resurrect.

The government’s disingenuous measures that have kept the lending institutions afloat have been unlawful and dangerous for taxpayers and for the organizations’ investors. Congress should insist that Fannie and Freddie be wound down through receivership or be allowed to recapitalize and resume operations.

The ongoing litigation brought by private shareholders against the government for its alleged looting of Fannie Mae and Freddie Mac has finally started receiving media attention. Respected financial journalists have highlighted the contradiction between the Federal Housing Finance Agency’s (FHFA) decision to give the U.S. Treasury all of Fannie’s and Freddie’s profits in perpetuity with Congress’s mandate under the Housing and Economic Recovery Act of 2008 (HERA) that the FHFA act as conservator to restore the companies to sound condition.

Here is the link to the full article

Dear Fed: Get Out of the Markets’ Way By William M. Isaac and Richard M. Kovacevich published by American Banker on February 2, 2016

Dear Fed: Get Out of the Markets’ Way By William M. Isaac and Richard M. Kovacevich published by American Banker on February 2, 2016

William M. Isaac

William M. Isaac, a former chairman of the FDIC, is senior managing director and global head of financial institutions at FTI Consulting. Richard M. Kovacevich is the retired chairman and CEO of Wells Fargo.

The Federal Reserve acknowledged slow worldwide economic growth and volatile financial markets at last month’s meeting of the Federal Open Market Committee. This is really not news but a continuation, albeit somewhat more pronounced, of what has been the case for over a year. Analysts’ assessments late last year about a strengthening economy are now looking incorrect, as the current trend raises deepening questions about whether the recovery will continue. The recovery has benefited mainly the wealthy while producing slow jobs growth and meager income for middle- and lower-income Americans.

There will always be considerable handwringing and second-guessing with each Fed move or lack thereof. That said the Fed should not delay putting in place a long-term plan that diminishes its outsized influence and allows the financial markets to work without undue interference from the central bank.

Much of the Fed’s problem is tied directly to its obsession with achieving an elusive goal of 2% inflation. That goal is unlikely to be achieved any time soon because the world’s economy is exceptionally sluggish with excess capacity nearly everywhere.

Ironically, low inflation has actually been a good thing for the U.S. economy.
Here is the link to the full article

Banks Have Huge Stake in Outcome of Puerto Rico Crisis by William M. Isaac published by American Banker on November 5, 2015

Banks Have Huge Stake in Outcome of Puerto Rico Crisis by William M. Isaac published by American Banker on November 5, 2015

Puerto Rico’s debt situation has the potential to significantly rattle financial markets and banks need to take notice.

At a recent Senate hearing, Antonio Weiss, a counselor to the Treasury secretary, unveiled a plan to allow Puerto Rico to restructure all of its debts. Puerto Rico’s financial challenges are well-documented, but the plan introduced by Weiss is unprecedented and dangerous, particularly for the banking industry. It would allow sweeping bankruptcy powers that aren’t currently available to any U.S. state by allowing Puerto Rico to restructure debt that must be repaid under the territory’s constitution.

Treasury’s plan, called “Super Chapter 9”, would require congressional approval, which is far from certain. That’s a good thing because allowing Puerto Rico to restructure its constitutional debt would undoubtedly lead to high-spending states like Illinois wanting the same authority. If that happened, debt markets would be chaotic. The entire notion that full faith and credit debt for territories, states and even the federal government are sacrosanct would be called into question. Banks, as major holders of government debt, would be affected severely.

Continue reading →

CFPB Payday Plan Will Hurt Those It Seeks to Help by William M. Isaac published by American Banker on Oct 15, 2015

CFPB Payday Plan Will Hurt Those It Seeks to Help by William M. Isaac published by American Banker on Oct 15, 2015

Reading the Consumer Financial Protection Bureau’s proposed rules for regulating payday loans, I couldn’t help but recall the late Yogi Berra’s line, “It’s like déjà vu all over again,” alongside the Hippocratic Oath (“First, do no harm”).

Two years ago, the Office of the Comptroller of the Currency issued rules governing non-collateralized, “advance deposit” loans – a bank product that bore considerable resemblance to nonbank payday loans. Within days of the OCC’s promulgating its rules, every significant bank that offered the product decided to pull it from the market.

Continue reading →

Risk Sharing Is No Substitute for Capital at Fannie and Freddie by William M. Isaac published by American Banker on Oct 6, 2015

Risk Sharing Is No Substitute for Capital at Fannie and Freddie by William M. Isaac published by American Banker on Oct 6, 2015

In recent weeks, the debate over what to do about the mortgage giants Fannie Mae and Freddie Mac has shifted from wholesale replacement to genuine reform.

Fannie and Freddie, now in the eighth year of a conservatorship that began in the depths of the financial crisis, remain in in limbo even after paying back nearly $238 billion to taxpayers — that’s $50 billion more than they were ever loaned in the first place.

But that’s not to say that we’re any closer to Congress actually acting on GSE reform. Politics has something to do with the government’s inaction, but so does the complexity of redesigning the entire housing finance market. Replacing Fannie and Freddie with an untested model would be impractical, if not destabilizing, for our housing economy. According to Federal Reserve data these two companies support $4.5 trillion of the $9.9 trillion U.S. mortgage market for one- to four-family residences. There simply isn’t enough private capital to fulfill the role they play without raising mortgage rates substantially.

Continue reading →

Shelby’s Bill Is the Right Way Forward on Financial Reform by William M. Isaac published by American Banker on May 19, 2015

Shelby’s Bill Is the Right Way Forward on Financial Reform by William M. Isaac published by American Banker on May 19, 2015

Community and regional banks across the United States are badly in need of regulatory relief. A bill proposed by Sen. Richard Shelby is poised to give it to them—but it is in need of one important change.

The Senate Banking Committee is scheduled to take up Sen. Shelby’s Financial Regulatory Improvement Act of 2015 this week. The bill would fix at least some of the problems that the Dodd-Frank Act has caused for community and regional banks and their customers, without undermining the law’s objectives of protecting consumers and ensuring the safety of the financial system.

Of the “fixes” contained in Sen. Shelby’s bill, most are narrow and unlikely to provoke controversy or alarm. Two provisions stand out among all the rest.

 

Here is the link to the full article

Let Fannie and Freddie Breathe, By William M. Isaac, Published by FTI Journal, May 11, 2015

Let Fannie and Freddie Breathe, By William M. Isaac, Published by FTI Journal, May 11, 2015

The Inspector General for the Federal Housing Finance Agency (“FHFA”) recently reported that, due to a lack of capital reserves, Fannie Mae and Freddie Mac might need more government bailouts if housing markets decline.

This problem is the result of a 2012 decision by the U.S. Department of the Treasury to sweep Fannie’s and Freddie’s profits into the federal government’s coffers. This net worth sweep is illegal and economically dangerous. It needs to end.

It’s not difficult to understand why another bailout of Fannie and Freddie would raise concern. Acting under the Housing and Economic Recovery Act, Treasury rescued the mortgage giants from insolvency in 2008 with $187 billion of taxpayer money. Nobody wanted taxpayers to assume the $5 trillion in liabilities on Fanny’s and Freddie’s balance sheets, and the United States needed to reassure bondholders (mostly foreign) that they weren’t about to be wiped out. And so, after being rescued, the two companies were placed into a conservatorship administered by the FHFA, with a mandate to “conserve and preserve” Fannie and Freddie for their shareholders while the companies rebuilt capital.

Nearly seven years later, Fannie and Freddie remain in conservatorship. As of December 31, 2014, they had repaid the government $227 billion — roughly $40 billion more than they were loaned. Yet instead of allowing the companies to build a reserve like any large financial institution, the administration is stripping both companies of 100 percent of their profits.

Here is the link to the full article

 

Choking Off Native American Economic Development, By William M. Isaac, Published by Law360, New York, April 10, 2015

Choking Off Native American Economic Development, By William M. Isaac, Published by Law360, New York, April 10, 2015

I was intrigued when I first heard of a government program called Operation Choke Point and the concept behind it. According to the federal government, the operation was intended to keep illegal or fraudulent entities out of our banking system —– an important mission that could help protect consumers and businesses alike.

Unfortunately, multiple congressional investigative reports have revealed that Operation Choke Point has not been used primarily for this purpose. Instead, it has been targeting legitimate businesses, which some federal officials find personally objectionable, by pressuring banks to cut off accounts, payment processing abilities, and services to verify customer accounts. Industries like pharmaceuticals, dating services, tobacco sales, firearm dealers, coin dealers, small-dollar lenders, and many more were attacked — in many cases, not because they broke any laws, or were even accused of breaking any laws, but because some bureaucrats don’t like them.

Continue reading →