CFPB Turns Two with a Bang – What Now?

The Consumer Financial Protection Bureau (CFPB or the Bureau) hit its second birthday this week in grand style. Has it really been just two years? I don’t believe I would be in minority in feeling CFPB has been around much longer given all the Dodd-Frank rules it has cranked out and all the press it has received over the controversial recess appointment of Rich Cordray in January 2012. But, who’s counting, right?

Speaking of Rich Cordray, his recent formal Senate confirmation was perhaps the biggest birthday present of all to the Bureau. Majority Leader Harry Reid (D-NV) had to threaten the Senate with the “nuclear option” (a change of Senate rules to allow “majority” rule) over several stalled Obama nominees to key administration positions.  The Senate was close to DEFCON 1 before a handful of Republicans told Harry to take his finger off the button because they would allow votes on the nominees. Cordray was the first nominee to get confirmed. House and Senate republicans have been pressing for structural changes to CFPB pretty much after the ink was dry on the Dodd-Frank Act. Senate Republicans were united in 2012 and 2013 that no CFPB Director nominee would be confirmed unless the CFPB became a commission (like the FTC or FCC) and received its appropriations from Congress and not the Federal Reserve. Two federal courts even called into the question the “recess” appointment of Cordray as they ruled that President Obama’s recess appointments to the National Labor Relations Board were unconstitutional. The Supreme Court even agreed to hear the case in October. All this legal uncertainty is fairly moot given the Senate’s confirmation (and the Supreme Court’s recent proclivity to threading the needle on touchy constitutional issues).

But, enough about history. What does the future hold for the Bureau? I don’t buy quite into the hype by some that the Bureau is coming out swinging against banks now that Cordray has lost his “recess” tag. I expect the Bureau will be sensitive and responsive to the concerns from Capitol Hill. It will certainly be responsive to the Government Accountability Office (GAO) as it begins to examine its data collection practices. As requested by Sen. Mike Crapo (R-ID), ranking Republican on the Senate Banking Committee, GAO will review identity, account and transaction data the Bureau collects during its supervision of banks or through other direct request. The Bureau claims that the transaction data is de-linked with any personally-identifiable information. We’ll see what GAO comes up with (presumably in 2014).

The Bureau also released its updated regulatory agenda through the end of the year. Expect to see a notice of proposed rule-making on extending Reg E protections to general-reloadable prepaid cards in addition to new proposed rules on debt collection and payday loans. I suspect CFPB will continue to tinker with the Dodd-Frank mortgage rules to take effect in January 2014. It certainly doesn’t want to be tagged with tanking the housing market if no one can get a loan. If you really want to peer into CFPB’s future, follow its consumer complaint portal progress reports. CFPB has stated that the trends it sees through the complaint portals will drive its enforcement and regulatory agenda.

Industry and CFPB need to work together more than ever to ensure balance is struck between consumer protection and a healthy financial services industry. Consumers are hurt if the pendulum swings too hard one way. Keep checking with this blog for progress reports. 

The “Preemption Problem” – How TANF Blocking Could Get Out of Hand

It’s been about 15 months since Congress passed a bill that included a requirement that welfare cash assistance (TANF) be blocked at ATMs and point-of-sale devices located in liquor stores, casinos and adult entertainment establishments. The law specified that states submit TANF blocking plans to the federal government by 2014 or be subject to reductions in the program’s block grant assistance.

Last April, the U.S. Department of Health and Human Services sought public to understand the challenges states and vendors may have implementing these plans. EFTA wrote DHHS and the Office of Family Assistance in June. HHS has yet to publish any final rule.

Congress did not invent the TANF blocking idea. As in most cases of federal law making, Congress adopted the approach taken in some states (California notably here). Congress must decide during the legislative process whether to preempt the states from passing stronger (and in many cases different) laws than the federal standard. It’s not the chicken and egg debate, but more of a the ceiling and floor debate. With apologies to Bard William Shakespeare, to preempt or not to preempt, that is the question. In the case of TANF blocking, Congress opted to preempt current and future states laws on TANF blocking. Thus, we have a floor and not a ceiling.

Many state legislatures were already well into their respective sessions when the TANF blocking law was enacted last year. So, state legislative action on TANF blocking was light in 2012 at best. However, 2013 has been a different story. State legislatures have had time to prepare for the issue and may have viewed enacted legislation as an important step in certifying to HHS that a TANF blocking plan indeed does exist. That’s all well and good. But, Houston, we are beginning to see a problem.

Certain states have proposed to expand the scope of the current federal law. This makes compliance and operational execution more and difficult and costly for companies who contract with states to deliver Electronic Benefit Transfer (EBT) cards services. Let’s take the case of Indiana. Last year, Indiana passed a law merely requiring signage at ATMs and POS terminals that cash assistance could be not be drawn at the following locations: liquor stores, race tracks, off-track betting sites, casinos, gun stores, nightclubs, bars and bingo halls.

 Just recently, Gov. Mike Pence signed into law a bill requiring ATM and POS owners, vendors and third party processors to disable access to EBT benefits at these venues or suffer stiffen penalties (possibly even criminal penalties). To make matters more difficult, the Indiana law is giving a very short (and impossible) timeframe to comply with the law (July 1, 2013). One state greatly expanded the scope the banned locales, imposed harsher penalties and gave an impossible compliance timeframe. One state down and 49 more to go.

I’m not predicting Armageddon here. I’m not suggesting that limiting access to public assistance funds at certain locations isn’t a worthy debate. Legislators and businesses providing EBT services to states serving needy individuals need to be active dialogue on what works best and is most cost-effective. Complying with a patch-quilt of state laws is never easy. There’s a solution out there and it’s not in arbitrary deadlines and stiff penalties.

A Landmark Day in Payments-No, not the Sequester

Mandatory budget cuts, known as the sequester, are scheduled to go into effect later today.  While this is dominating the news, another issue of importance to EFTA members also goes into effect.  Beginning today ALL federal benefit payments will be made electronically, as the government will cease to make benefit payments by check.

In December 2010, Treasury adopted a final rule to gradually end the practice of issuing paper checks for federal benefit payments. In May 2011, all people newly applying for benefits had to opt for either direct deposit or Treasury’s recommended prepaid card (DirectExpress®).  Benefit programs at issue here are: Social Security, Supplemental Security Income, Veterans Affairs, Railroad Retirement, Office of Personnel Management and Department of Labor (Black Lung).

Other important federal benefit programs are not affected directly by the Treasury mandate but have already made great strides in eliminating the issuance of paper checks. These are Supplemental Nutrition Assistance Program (SNAP), formerly known as food stamps (Agriculture Department), Temporary Assistance for Needy Families (TANF) (Health and Human Services) and Unemployment Insurance (Labor).

Treasury has established a website that includes more information on the March 1 deadline.

Returning the issue of sequestration, its impact on the financial services industry and EFTA members ought to be minimal. The Federal Reserve, FDIC and OCC are all exempt from budget cuts. Thus, bank examinations and most rule-making should not be impeded.  

Although the Consumer Financial Protection Bureau (CFPB) receives its funding from the Federal Reserve, according to a February 22 article in The Hill newspaper, the CFPB will face cuts of $34M from its $448M budget. On the program front, SNAP and TANF are exempted from automatic cuts but not the Women, Infant & Children (WIC) program.

Sequestration issues could be addressed in March when Congress addresses the continuing resolution to fund the government through the end of the fiscal year (September 30, 2013). Never a dull moment in our nation’s Capitol.

Handicapping the CFPB in 2013

2013 began with a bang for the Consumer Financial Protection Bureau. In January, the Bureau released several mortgage-related final rules as mandated by the Dodd-Frank Act. The mortgage industry has been in a mad rush to put together webinars to detail ability-to-repay, appraisal reform and high-cost mortgage requirements. It is not an exaggeration to note these mortgage rules consumed much of the Bureau’s bandwidth in its brief existence.

So, just as the Bureau comes up for air, it gets rocked by an somewhat related court case concerning another federal agency, the National Labor Relations Board. How are the two agencies connected by this court case? Let’s hit the rewind button.

It’s no deep Washington secret that current presidents are having a more difficult time getting various federal nominees through the US Senate. It’s also no secret that modern presidents have utilized “recess” appointments more and more (as permitted by the U.S. Constitution). Enter the controversial CFPB and the quest to have the Senate confirm a Director as required by Dodd-Frank. The Bureau existed for almost 18 months without a confirmed Director. Elizabeth Warren ran the CFPB during its incubation period as a special advisor to the President. Having a director in place was important to the Bureau because it would assume certain authority (such as the authority to supervise non-bank entities like debt collectors and credit bureaus) only with a confirmed Director.

It became very apparent to President Obama and others the Senate would not have 60 votes necessary to bring the nomination of Elizabeth Warren to the Floor for a vote. In 2011, President Obama nominated former Ohio Attorney General Rich Cordray to be the CFPB Director. The Senate Banking Committee approved Cordray’s nomination out of committee, but many Republican senators wanted to consider structural changes to the CFPB before moving on Cordray’s nomination. For example, altering the Bureau from control by a single Director to a five-member commission. And making the Bureau subject to annual Congressional appropriations versus receiving its funding from the Federal Reserve. Senate Democrats believe the Bureau is just fine as Dodd-Frank created it, so Cordray’s nomination was at a stalemate in the late stages of 2011.

On January 4, 2012, President Obama rolled the dice. Believing the Senate was in “recess,” the President appointed Cordray as the director of the CFPB. At the same time he made recess appointments of three nominees to the NLRB. The legal community hit an uproar shortly thereafter on both sides of the issue. In April 2012, a Washington state-based company, Noel Canning, was the lead plaintiff in the case against the Administration’s NLRB recess appointments. In January of this year the U.S. Circuit Court of Appeals (DC) unanimously ruled against President’s Obama recess appointments to the NLRB.

The three-judge panel declared the Senate remained in “pro forma” sessions when the appointments occurred and was not technically in recess. The Obama Administration announced its intention to appeal the ruling to the U.S. Supreme Court. The NLRB decision called into question the validity of Richard Cordray’s recess appointment to be the CFPB Director. The Cordray question is being addressed in a separate lawsuit still pending before another court. On January 24, 2013, President Obama announced his decision to re-nominate Cordray as CFPB Director subject to Senate confirmation. Congress will consider legislation again in 2013 to alter the Bureau’s structure (five-member commission as opposed to a single director) and subject the Bureau to annual Congressional appropriations.

So, where does this leave the CFPB in 2013? I doubt the Bureau will be affected much at all in the short term. It will continue on with its examination of banks and non-banks. It will take some high-profile enforcement actions. It will put forth some challenging proposed rules on overdraft protection and general purpose prepaid cards. Even if the district court decides Cordray’s appointment was unconstitutional sometime in 2013, the appeals process could take years. Will the court strike down all the Bureau actions and rules taken while Cordray served as Director? And, what of the fate of Cordray? This is the biggest unknown. Will the Senate confirm him without any changes to the Bureau itself? Does he leave at the end of 2013 as his recess appointment expires and Obama puts forth another nominee?

If you have answers to these questions, go buy a lottery ticket quickly.

Yet another state is moving to block the access and use of TANF benefits. Oklahoma State Sen. Rob Standridge has introduced a bill that mirrors the 2010 federal law that restricts were TANF EBT benefits can be accessed or used. Commonly called welfare or public assistance, TANF is the federal program that provides cash subsidies to eligible families. The bill would also limit where a range of other state cash programs also delivered on the state EBT card could be accessed.

Like the federal legislation the Oklahoma bill would prohibit TANF EBT benefits in liquor stores, casinos and "[a]ny retail establishment which provides adult-oriented entertainment in which performers disrobe or perform in an unclothed state for entertainment." 

Welfare Fraud: Let's Get the Story Right

By now you’ve probably heard or read the news stories about the use of state Electronic Benefits cards in vice locations like liquor stores, gaming halls, and strip clubs. Bill O’Reilly of Fox News, the New York Post the National Review and influential blogger Michelle Malkin have all weighed in on this misuse of taxpayers’ dollars this week.

Let me say from the start, I think it’s reprehensible that an adult would take money intended to help poor children—to provide clothing, shelter and the necessities of life—and use that cash for their own gratification-booze, broads and bingo.

But to read or see the stories this week you would think that 435 Congressmen, not to mention countless staff in multiple executive agencies, the White House, states, contractors and program regulators neither knew nor cared about what was going on. Nothing could be further from the truth.

The Electronic Funds Transfer Association and its eGovernment Payments Council have worked diligently with various government agencies over an extended period of time to solve this problem. Here’s the backstory you didn’t hear from the media this week:

In December 2011 EFTA and eGPC representatives met with the General Accountability Office to define the problem of misuse of welfare funds and talk about what solutions would be practical in solving it.

In January 2012 eGPC launched a survey of the 50 states to determine the extent of the problem and steps that states had taken to resolve it, since states are empowered by law to administer the electronic benefits programs.

In February 2012 eGPC began work on a white paper, Restricting Access to Tanf Funds at Specific Merchant Locations. Tanf is the acronym for the program that distributes cash subsidies to poverty-stricken families.

Also, in February Congress passed, and the president signed, the Middle Class Tax Relief and Job Creation Act.  Section 4004 of that bill specifically made accessing or using Tanf benefits in liquor stores, casinos or strip clubs illegal.

On April 17 of last year EFTA met with regulators from the Department of Health and Human Services, the federal agency in charge of the Tanf program to discuss how DHHS would work with states to enforce the law. Chairing the meeting was Mark Greenburg, Deputy Assistant Secretary for Policy, Administration for Children and Families. ACF is the branch of DHHS responsible for Tanf.

A week later, EFTA hosted a webinar on the issue to explain to explain the new law and what states could do to comply with it. Mr. Greenburg, who would be in charge of regulating states’ compliance with the law, participated in the webinar, a sign that DHHS considered this a serious regulatory matter.

On April 25, 2011 DHHS published a request for public comment on the new law and how states should go about enforcing it.

Two days later eGPC released Restricting Access to TANF Funds at Specific Merchant Locations.

In May, the eGPC conducted another survey of states, this time to gauge exactly the extent of the problem on a state level.

On June 4, 2012 EFTA, on behalf of itself and its eGovernment Payments Council, responded to DHHS’ request for public comment with a 12-page reply. The comment letter included the results of the May survey of states, technical information, and recommendations on how to best enable compliance with Section 4004.

In addition, scores of interested groups, companies and individuals submitted commentary to DHHS on compliance with Section 4004.

Finally, in July of last year the GAO issued its long-awaited report, Tanf Electronic Benefit Cards: Some States Are Restricting Certain TANF Transactions, but Challenges Remain.

Since then DHHS regulators have been engaged in the federal regulatory process: drafting regulations to ensure compliance with the law, reviewing them, putting them out for public comment one last time, and issuing the final regulations. This isn’t bureaucracy. It is part of our system of getting laws enacted and enforced in a fair, transparent and democratic way. I’m sure enactment of laws is faster and easier in Cuba or China.

So images of pole dancing, cheap liquor and slot machine tendonitis  may make for good copy, but they do very little to inform the debate on welfare fraud. And while most sane people want these tax dollars spent the way Congress intended them, stories of Tanf-financed strip trips do nothing to advance that cause.

Next time one of these stories comes up let’s hope the media takes 20 minutes to dig in and find the real backstory.