7 Ways Congress Could Give More Leverage to Consumers and Small Businesses in the Financial Marketplace
The financial environment remains challenging for American consumers and small businesses. In addition to questions about the future direction and independence of the Consumer Financial Protection Bureau (CFPB), the 143 million victims of the Equifax data breach still seek to know that their identities will be protected. The Wells Fargo scandal, in which the company created millions of fake bank and credit card accounts, has further dampened public trust in financial institutions. Meanwhile, many small businesses struggle to obtain financing or often end up obtaining high-cost loans at predatory rates.
Meanwhile, Congress has appeared to look the other way. Despite these scandals, Vice President Mike Pence broke a tie in the Senate to overturn the CFPB’s arbitration rule and once again allow financial companies to block customers from taking them to court, eliminating a way for consumers to get relief and deter future wrongdoing. The House of Representatives passed the Financial CHOICE Act in June, a massive deregulatory bill that eliminates many safeguards and encourages financial recklessness. The Senate Banking Committee is about to consider its own deregulatory bill that mostly encourages reckless practices across the financial sector—including risky sales practices in manufactured housing, a vital market for rural communities—while delivering few benefits to consumers.
Many of these measures are solutions in search of problems. Meanwhile, American families’ actual needs go unaddressed. Banks are as profitable as ever, and the cost and availability of consumer credit is the same as or better than a decade ago, before the crisis. While Congress and the administration have largely focused on financial deregulation, there are a number of relatively modest policies—some that have already been proposed as legislation—that would give consumers and small businesses more leverage.
Restore consumers’ ability to hold financial companies accountable
- Make it easy for customers to switch banks once per year. Americans are increasingly frustrated with their banks, but reliance on direct deposit and automated transactions often holds them captive even as they change jobs or move—or even if they might prefer a local community bank or credit union. Making it easy for customers to leave their bank and have their personal financial data, including automated transactions, simply carry over to the new account would create a more competitive market in which institutions are more accountable to their customers. The Dodd-Frank Wall Street Reform and Consumer Protection Act gives the CFPB the authority to set standards for digital exchange of personal financial records, and it recently released principles on customers’ right to access and use their own financial records. Facilitating bank account switching would create a more competitive market, bringing costs down and forcing banks and credit unions to be held accountable when their practices alienate customers.
- Limit the use of forced consumer arbitration in contracts. Mandatory arbitration clauses, sometimes called rip-off clauses, have become ubiquitous in consumer products, leaving victims unable to seek relief in court. Congress ultimately chose to reverse the CFPB’s arbitration rule, siding with Equifax over victims, but senators ranging from Lindsey Graham (R-SC) to Elizabeth Warren (D-MA) have expressed concerns about the practice. By updating the 1925 Federal Arbitration Act, Congress could limit its abuse through legislation such as the Arbitration Fairness Act. If members are unwilling to do so, they should at least consider giving states the right to determine the proper role of arbitration, as proposed in the Restoring Statutory Rights and Interests of the States Act. Attorneys general in 19 states and the District of Columbia have noted the harms of requiring that customers settle all disputes in arbitration, yet federal courts have largely overturned state laws against mandatory predispute arbitration.
Support responsible credit practices
- Extend Military Lending Act protections to everyone. Following a 2006 Pentagon report indicating that high-cost predatory loans, such as payday loans, were a threat to military readiness, Congress passed a bipartisan measure known as the Military Lending Act to cap the annual interest rate on loans made to service members at 36 percent. Fifteen states have effective interest rate caps on the books that similarly protect all residents from predatory loans they likely will be unable to pay back, including, most recently, South Dakota, where in 2016, 76 percent of voters supported a ballot initiative to cap rates. Congress should make sure that all Americans are protected from predatory lending by extending these service member protections to everyone. The Protecting Consumers From Unreasonable Credit Rates Act, sponsored by Sens. Dick Durbin (D-IL) and Jeff Merkley (D-OR) and Reps. Steve Cohen (D-TN) and Matt Cartwright (D-PA), would take this step.
- Stop the barrage of unwanted credit and insurance offers by expanding consumer consent requirements. Consumer reporting agencies, such as the three main credit bureaus, are permitted to share customers’ data with credit and insurance companies marketing products that consumers may not want or need—and customers only have limited rights to opt out of receiving these offers. Credit reporting agencies should be required to get customer consent before sharing customers’ information for marketing purposes, instead of requiring consumers to affirmatively opt out. This would provide greater privacy protections to consumers and prevent future identity theft.
- End credit discrimination in employment. According to the Society for Human Resource Management, nearly half of all employers use credit checks as part of the background screening process for at least some jobs. These credit checks violate job applicants’ privacy and may result in them being turned down for work based on extenuating circumstances in their lives, such as a job loss or divorce. In 2015, New York City joined 11 states that limit credit checks as an employment screening tool, with the strongest protections in the country. Credit reports should not be used for nonfinancial decisions such as employment, outside of positions that require a security clearance or other heightened levels of sensitivity. This policy has been proposed by Sen. Warren’s Equal Employment for All Act, among others.
Protect small-business borrowers
- Extend credit card protections to small-business cards. While the Credit Card Accountability, Responsibility, and Disclosure Act of 2009 contained a number of protections for individual consumers—saving families $16 billion in interest and fees between 2011 and 2014—these protections do not exist for small-business credit cards, which have not seen the same cost declines. This leaves owners inadequately protected even though many of the individual credit card protections also make sense for small businesses, including prohibiting rapid interest rate hikes and providing sufficient repayment periods. In the last Congress, Rep. Nita Lowey (D-NY) introduced a bill, the Small Business Credit Card Act, toward expanded protections.
- Empower the CFPB to address small-business financial complaints. The CFPB has proposed a new process to collect data about small-business loans, similar to existing Home Mortgage Disclosure Act requirements for mortgages, but it can do more. An expanded CFPB public complaint database should include small-business complaints against financial companies from any small business not otherwise engaged in the financial services industry. This would give businesses the opportunity to engage with the CFPB directly when they face difficulties with a bank, credit card company, credit reporting agency, payment processor, debt collector, or other financial company. Processing these complaints would improve accountability and enable the bureau to better understand small-business challenges. And some complaints could ultimately lead to future enforcement actions to help small businesses get their money back.
The vast majority of Democratic and Republican voters alike support tough rules and enforcement on Wall Street. Instead of more rollbacks of financial regulations that are designed to protect consumers and prevent another financial crisis, Congress should work to expand protections in the marketplace.
Joe Valenti is the director of Consumer Finance at the Center for American Progress.
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Director, Consumer Finance