Do We Need a Gov't Run Credit Bureau?

CBDCs & MC Hammer, Robinhood's Record Fine, Overdrafts (again)

Hey all, Jason here.

Happy 4th of July! I celebrated with friends yesterday, hosting my 2nd annual Independence Day celebration since moving to the Netherlands.

Though the US fell a bit short of President Biden’s July 4th vaccination goal, that doesn’t seem to be slowing the country’s reopening, with travel rebounding to levels not seen since before the pandemic. However you’re celebrating this weekend, be safe and enjoy!

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Overdrafts Remain a Hot Topic

Banks' overdraft policies remained in the headlines last week, with Democratic Congresswoman Carolyn Maloney reintroducing a bill to rein in the practice. The “Overdraft Protection Act” would prohibit banks from assessing more than one overdraft fee per month and cap the maximum number of charges per year at six; the bill would also require that the size of an overdraft fee be “reasonable and proportional” to the amount of the overdraft.

Unsurprisingly, bankers aren’t fans of the proposal. According to American Banker, Richard Hunt, CEO of industry trade group Consumer Bankers Association, argued the legislation would cause consumers harm, saying:

“Restricting access to overdraft, as this legislation calls for, would only drive consumers to predatory payday lenders or pawn shops — neither of which provide the same safety and soundness as well-regulated and well-supervised banks,” he said.

The bill, if passed, could have unintended consequences. While it obviously would reduce the amount consumers pay in overdraft fees, it could also lead to a reduction in overdraft availability.

Many consumers use overdraft as a form of small-dollar, short term credit. Reducing access to overdraft doesn’t do anything to reduce demand for credit; as such, legislators and regulators should continue to improve guidance on the types and structure of small-dollar credit banks can offer to their customers.

TD Bank Latest to Launch No Overdraft Account

TD is the latest establishment bank to announce an account that disallows overdrafts. The move comes on the heels of TD’s recent $41.5m settlement of a class action suit and $122m in restitution the CFPB ordered the bank to repay its customers related to its overdraft practices.

The TD Essential Banking account carries no minimum balance requirement and doesn’t allow customers to overdraft; it does come with a $4.95 monthly maintenance fee.

If the goal is to appease regulators, this account fits the bill; if the goal is to compete with the burgeoning crop of neobanks, most of which have no fees (including for overdraft), this is the latest “too little, too late” move from an establishment bank.

Fed Official Compares CBDCs to Hammer Pants

In a speech last week to the Utah Bankers Association Convention, Fed Vice Chair for Supervision Randal Quarles compared current excitement about central bank digital currencies (CBDCs) to the ultimate ‘80s fad, parachute pants (aka “hammer pants”).

Currently, the Federal Reserve issues physical currency (eg, the dollars in your wallet) and digital bank reserves. The “money” you spend when you swipe a credit card or Venmo a friend is known as a commercial bank deposit (aka “demand deposit”).

A CBDC would be the digital equivalent of that paper dollar — currency issued by and a direct claim on the Federal Reserve rather than a commercial bank.

Quarles questioned the need for a CBDC, pointing out that the US payments system is already highly digitized, and that some of the supposed benefits of a CDBC can be achieved through other means, like faster/instant payment networks (FedNow, Clearing House’s RTP), or even USD-linked stablecoins.

He doesn’t view other central banks’ deployment of CBDCs as a threat to the US dollar’s international dominance; according to the New York Times:

He said it “seems unlikely” that the dollar’s status as a dominant global currency will be threatened by a foreign central bank digital currency, since its power is grounded in trade linkages, deep financial markets, the rule of law in the United States and credible monetary policy from the Fed itself.

(if you’re wondering, he referred to parachute pants as “puzzling” and “embarrassing”)

Do We Need a Government-Run Credit Bureau?

Last week, the House Financial Services Committee debated the current state of the credit reporting system, including President Biden’s campaign proposal to create a public credit reporting agency housed within the CFPB.

Details of how a government-run bureau would operate in practice remain vague, and discussion seems to be grounded in a set of policy proposals released during Biden’s campaign, which state (emphasis added):

“Create the Public Credit Reporting Agency within the Consumer Financial Protection Bureau to provide consumers with a government option that seeks to minimize racial disparities. All federal lending will accept this credit agency and require that this agency be used. This includes, but would not be limited to federal home lending, PLUS loans (parent loans backed by the U.S. government), other loans that are guaranteed by the U.S. government, as well as any employment through federal agencies or for federal contracts.

• The private agencies will also be required to provide their data to the federal credit agency.

• The federal credit agency will also ensure the algorithms used for credit scoring don’t have discriminatory impacts, including accepting non-traditional sources of data like rental history and utility bills to ensure credit.”

The credit reporting agencies certainly make an easy target to beat up on, but I’m skeptical that creating a government-run bureau to compete with them will yield better outcomes for consumers — particularly if the public bureau is using the same underlying tradeline data, as described in the proposal above. Apart from where legally required, what reason or incentive would a lender have to use the government’s bureau instead of TransUnion, Equifax, or Experian?

Further, lenders already have legal obligations to ensure their underwriting doesn’t have prohibited discriminatory impacts. Credit bureaus and fintechs are feverishly working to incorporate alternative data, like rental and utility payments, to provide a better picture of “thin file” and “credit invisible” consumers. Part of the challenge, particularly with rental payment data, is the highly fragmented rental market and the complexity and compliance risk associated with furnishing credit data.

Perhaps, instead of focusing on developing a public credit bureau, legislators’ and regulators’ time would be better spent reforming and modernizing the Fair Credit Report Act (FCRA) and developing standards encouraging customer access and portability of bank account and payroll data, which can improve access and inclusion for underserved consumers.

Robinhood’s Record $70m Fine, S-1

There’s plenty of great analysis on Robinhood’s S-1 filing, so I’ll keep this brief.

Robinhood dominated the headlines last week, as it paid a record-breaking $70m fine to FINRA for service outages and misleading its customers, settled a wrongful death suit from the family of a customer who committed suicide after seeing a negative account balance of $730,000, and filed its S-1 in advance of its planned IPO.

But the hot trading and crypto app’s troubles aren’t all behind it; it still faces a class action lawsuit stemming from halting trading in certain memestocks earlier this year and an ongoing lawsuit with Massachusetts securities regulators, among other legal challenges.

Robinhood’s IPO seems well-timed to cash in on a hot fundraising market and the app’s torrid growth during the pandemic. Time will tell if that growth is sustainable as some of the trends that powered it — “stimmy” checks, memestocks, Dogecoin — are behind us or may wane in the coming days.

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Other Good Reads This Week

Robinhood and iAddiction (No Mercy / No Malice)

Binance crackdown: regulators tussle with ‘wild west’ of crypto (FT)

The Long Slow Short (Net Interest)

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