The process by which government regulators get cozy with the businesses they’re supposed to regulate is a time-worn and familiar problem. There’s even a name for it — “regulatory capture.”
But no government agency in our new gilded age seems to be plunging into this dishonorable relationship as gleefully as the Consumer Financial Protection Bureau. The bureau, it should be remembered, began as the brainchild of Sen. Elizabeth Warren (D-Mass.) and was created as part of the financial reforms that followed the crash of 2008 and the recession that followed. The idea was to ride herd on a financial industry that thought nothing of ripping off consumers. That was how the CFPB functioned during the Obama administration.
In the Trump administration the bureau seems more intent on helping financial firms pick consumers’ pockets. The latest case in point emerged Wednesday, when its director, Kathy Kraninger, told a conference of financial executives and lobbyists about a joint study the CFPB has completed with H&R Block, the tax preparation firm, about how to encourage consumers to save more. Kraninger’s remarks were reported by the Wall Street Journal. Block confirms that it “was able to partner with CFPB to study how taxpayers respond to savings encouraging messages,” but didn’t give any further details.
The point of having a financial regulator that protects consumers is to bring these shady behaviors to an end.
According to the Journal, Kraninger said the study focused on use of Block’s prepaid credit card “during tax-return season.” The study “suggests simple timely marketing messages and small incentives help encourage consumers interested in ways to save during the tax time,” she said. The Journal didn’t go into much more detail, but it’s proper to observe that Block encourages its tax preparation customers to park their refunds on this card, which it promotes as an easy way to access your money. More on that in a moment.
Kraninger said the study “showed positive results, which the bureau plans to unveil in the near future,” the Journal wrote. A bureau spokesperson told me Friday that H&R Block sent two types of emails to its prepaid card holders prior to tax filing season -- one “simply encouraging saving,” and a second offering a $5 incentive. A third group of holders didn’t get either message. The CFPB says that “take-up of the offers was low,” but among those who had put money away, 24% still some funds in their account eight months after the test.
Let’s stipulate some ground rules. A consumer protection agency should be very careful about performing a “joint study” with a regulated business, especially one aimed at promoting that business’ product. And double especially when that product falls within the jurisdiction of the agency, as prepaid cards do under the CFPB. Kraninger didn’t say when the study with Block would be released or in what form, but any document that has both participants’ names on it will seem to at least some consumers as though the regulator is giving the regulated its imprimatur.
That concern could only be intensified by Kraninger’s assertion at the meeting that there’s “a fantastic opportunity for co-branding for engaging in the kind of studies” that show how to get people to save more. Co-branding by the CFPB and financial firms? Is that supposed to generate public confidence in the agency’s independence?
It’s proper to note that the study Kraninger mentioned actually began during the Obama administration, under the CFPB’s first director, Richard Cordray. But in that era the bureau was far more circumspect than it is now in its relationships with regulated businesses. Under Trump, the CFPB has offered companies much more latitude to push new products at consumers without prior vetting by its staff.
The bureau’s original announcement of its arrangement with H&R Block in 2014 said it was aimed at using information Block collected when it provided consumers “with informational materials to encourage saving a portion of their tax refund and having tax preparers introduce to consumers the idea of saving once they learn they will receive a refund.” The announcement didn’t mention the prepaid card or about “co-branding” anything. As it happens, Block’s come-on for its prepaid card doesn’t offer consumers any information about saving their refund; it deals chiefly with using the card to spend the refund.
All this reflects a dramatic remaking of the CFPB in the hands of Trump, who in February 2018 installed Mick Mulvaney, his director of the Office of Management and Budget, as the bureau’s acting director. Kraninger, who was a Mulvaney deputy at the OMB, took over in December.
Mulvaney began his tenure with an open display of cocksure philistinism, taking potshots at Warren at a conference of appreciative credit union executives. “I am the acting director of the CFPB,” he said, “something that’s apparently keeping Elizabeth Warren up late at night, which doesn’t bother me at all.”
It wasn’t just rhetoric. Mulvaney suspended a regulation, five years in the making, aimed at preventing payday lenders and other profiteers from low-income borrowers from lending to customers who can’t repay the loans, running up fees on customers, and engaging in other abuses. He abruptly withdrew, without explanation, a federal lawsuit against four allegedly abusive installment lenders. And he closed an investigation into World Acceptance Corp., a payday lender in his home state of South Carolina that had been accused of abusive practices, but had contributed at least $4,500 to Mulvaney’s congressional campaigns.
In an email to CFPB staff, he drew a sharp distinction between his viewpoint and that of Cordray, who took his job as a regulator seriously. In his talk to the financial executives, Mulvaney implied that Cordray had “abused” his authority by taking an overly aggressive stance on regulation.
Kraninger has continued Mulvaney’s policy, as my colleague David Lazarus has assiduously documented. She has done so overtly — by proposing to roll back Obama administration rules governing the practices of payday lenders and other financial firms — and subtly — by placing consumer education in the forefront of the agency’s mission, ahead of regulation and enforcement. Under Cordray, the CFPB’s number-one priority was enforcement, which placed boundaries around its relationships with businesses. The shift in focus disconcerts consumer advocates, who are in favor of better financial education, but not at the expense of oversight.
“Financial education isn’t going to stop a company from misapplying your mortgage payment or the wrongful repossession of a car,” observes Linda Jun, a senior policy counsel at Americans for Financial Reform. “The financial crisis wasn’t about people suddenly forgetting how to save. That was a very minor aspect of what happened. There were these bad actors that preyed on people with deceptive fees and unfair practices and discrimination. The point of having a financial regulator that protects consumers is to bring these shady behaviors to an end.”
That brings us to the question of whether H&R Block is an appropriate partner for the CFPB at any level. The firm, of course, is best known as an operator of storefront tax preparers and for its tax-preparation software. It will be recalled that Block and its chief competitor, Intuit — the maker of TurboTax software — were both sued in May by Los Angeles City Atty. Mike Feuer for allegedly conniving to discourage millions of taxpayers from taking advantage of a free, simple online tax filing system provided by the Internal Revenue Service and steering them to their own (fee-based) services. The case is pending in Los Angeles County Superior Court.
What about Block’s prepaid credit card, a Mastercard dubbed the Emerald Card? Prepaid cards typically are peddled to lower-income customers who can’t obtain conventional credit cards. Conventional cards are unsecured, meaning that holders don’t have to put up collateral. Prepaid cards are linked to a bank account with a balance, which serves as the limit of the holder’s credit. When Block encourages customers to direct-deposit their refunds onto the card, it’s basically offering them credit up to the sum of their refunds plus any other money they have on deposit with Block. (The card is technically issued by Axos Bank, an internet bank headquartered in San Diego.)
What does H&R Block get out of this? On the face of it, fees, and plenty of them. Block tells customers that the card has “no setup fee, no annual fee and no fee for purchases.” Mmm ... that’s not the whole story. According to the card’s fee schedule, holding the Emerald Card can run into money. For example, it will cost you up to $4.95 every time you reload your card balance at a retail store such as Walmart, not including fees the retailer may impose; if you reload by check, it will cost up to 4% of the check amount, with a minimum of $2. (If you deposit a $25 check to reload your card, that fee amounts to 8%. Just saying.)
Using the card to make a withdrawal from an ATM: $3 each time, plus any fee that the ATM owner charges. Withdrawing money from your card at a bank will cost you $35. Notwithstanding what Block says about no annual fee, there’s an “inactivity fee": If you haven’t used your card for 60 days, Block will drain it of $4.95 per month. And if you lose your card or it’s stolen, a replacement will cost you $35, because as everybody knows, it costs the card issuer $35 to punch out a piece of plastic and put it in the mail.
It’s conceivable that these fees are routine for prepaid credit cards. That’s not to excuse Block, but to point out that for many users prepaid cards are a costly convenience. The CFPB should be casting a gimlet eye on this financial product, including whether its fees are fair and fairly applied, not bragging that it’s partnered with a card issue on a study that has found unspecified benefits from a financial instrument bristling with fees that consumers may not all understand. Kraninger’s remarks signal that her agency is fine with the card. If that’s not so and the CFPB doesn’t wish to be associated with it, she needs to say so, now.
As Jun notes, “H&R Block’s goals don’t seem to align with the CFPB’s.” At least, they didn’t used to.