If there ever were a year that even the most hard-core economic libertarian might be convinced of the occasional value of government regulation, this is that year. And how! Had banking regulators done their job in 2005, 2006, and 2007 as the subprime balloon inflated, billions of dollars and thousand of jobs would have been saved, and a massive amount of financial upheaval might have been avoided.
Given what happened instead, you’d think the regulators would lately be bringing a new seriousness to their jobs.
You would be wrong. Wednesday afternoon, officials from the Federal Deposit Insurance Corp. and the Federal Trade Commission hosted what must be one of the oddest press conferences in the annals of financial regulation. At the event, the FDIC and FTC announced they’ve issued enforcement actions against CompuCredit Corp. (CCRT) and a handful of banks and are jointly seeking over $200 million in fines for what the regulators describe as “deceptive marketing practices” related to credit card solicitation.
The actions are the culmination of an investigation by the FDIC (the FTC came in later) that’s gone on for more than two years. In my view, they represent a huge abuse of regulators’ authority.
There are two reasons why. First, what the heck was the FDIC doing, at the moment many of the banks it regulates were blowing themselves up via crazy subprime mortgage lending, spending two years parsing words with CompuCredit’s marketers? And second, as you’ll see in a minute the charges the FDIC came up with are utterly bogus. The government’s case is a sham, and represents, at bottom, regulatory showboating on a sizable scale.
This is a shareholder talking
I’ll get to the details in a minute, but before I do, a disclosure. I have more than a passing interest in one of the companies in the FDIC’s complaint, one that’s supposedly on the hook for $150 million of the $200 million the agency is seeking: CompuCredit. As regular readers know, the portfolio I manage is the company’s eighth-largest shareholder. You’ll be forgiven for thinking, therefore, that what follows is a long-winded instance of a sad-sack of a shareholder crying into his beer.
Forget it. I’ve been following this case closely for awhile, and know what’s gone on in some detail. And I’m pretty aware, too, of what counts as an acceptable practice in card lending and what doesn’t. As you’ll see, the “deceptive practices” the FDIC is complaining about are nowhere close to the line of what’s unacceptable—just the reverse!—a fact that the FDIC itself once acknowledged.
If this case reflects what’s lately top of mind with federal regulators, the poor fools haven’t learned a thing. The agencies aren’t any better equipped to prevent disasters now than they were before the subprime blowup. Heaven help us all.
As I say, this saga started two years ago when the FDIC found itself blindsided by news of a settlement between then-New York Attorney General Eliot Spitzer and CompuCredit and Synovus, one of the banks involved in the complaint Thursday. Soon after being shown up by Spitzer, the FDIC announced it was starting its own investigation into CompuCredit’s marketing practices.
What they've come up with
Now, two long years later, the FDIC and FTC finally think they’ve come up with something. In particular, they claim CompuCredit and the banks named broke the rules on a number of fronts. The agencies cited four specific examples:
- CompuCredit offered a credit card with a $300 credit limit, but inadequately disclosed $185 in related fees.
- CompuCredit offered a credit card (to a different consumer segment) with a credit limit up to $3,250, but didn’t adequately disclose that only half the credit line would be available in the first 90 days.
- CompuCredit marketed a debit-transfer (delinquent borrower) Visa Card but did not actually issue the card until 25% to 50% of the prior debt had been paid off.
- Jefferson Capital, CompuCredit’s debt-collection unit, violated the Fair Debt Collection Practices Act by calling delinquent borrowers too frequently and issuing threats against them;
Put aside for a moment the fact that, in two of the four items above, the FDIC seems to be complaining that CompuCredit and the banks aren’t lending to subprime borrowers aggressively enough. That puts the agency at odds, it’s fair to say, with the thinking of the rest of the federal financial regulatory establishment.
But on the actual facts, the “abuses” the FDIC has highlighted aren’t abuses at all, and instead are--by the FDIC’s own prior admission--accepted practices in subprime credit card lending. CompuCredit made this point in a response it made to the FDIC Wednesday morning.
In particular, the company noted the FDIC's own Consumer Response Center, which was set up at Congress’s behest specifically to monitor lenders’ compliance with consumer protection laws, reviewed the company’s credit card marketing materials repeatedly during the period in question. Throughout that time, the FDIC wrote numerous letters to consumers assuring that CompuCredit’s materials comply with applicable laws and regulations.
It doesn’t stop there. The FDIC hasn’t just approved of CompuCredit’s marketing practices. It’s actually hired CompuCredit for the express purpose of marketing credit cards to customers of a bank it controlled. In particular, in June 2002, the agency, then the receiver for Nextbank, hired CompuCredit to market new credit card accounts and account transfers to qualified Nextbank cardholders. Now suddenly the company is a villain?
The company says (and I believe) the marketing materials the FDIC objects to in this case meet or exceed existing and proposed disclosure regulations. In fact, the Fed's proposed new regulations for card lending practices and disclosure would require the rest of the industry to upgrade its disclosure standards to a level that CompuCredit adopted on its own several years ago. Finally, CompuCredit says its business practices have always been consistent with the "Gold Standard" credit card principles released in August 2007 by Rep.Carolyn Maloney, Chair of the House Subcommittee on Financial Institutions and Consumer Credit.
Our facts so far: Until Thursday, the FDIC told anyone who asked that CompuCredit’s marketing materials were in compliance, and seemed to have so much confidence in the propriety of its business practices that it actually hired the company to go out and solicit companies on its behalf. Not only that, the company’s level of disclosure meets the current requirements of another regulator, the Fed, and the Fed’s proposed stricter standards, as well as Congressional watchdogs.
Are you getting the sense that all this is about something other than consumer protection? My bet is now that the FDIC and FTC have held their little “show” in front of the media (I can’t recall the last time regulators called a press conference to announce an action like this, by the way; even the reporters there seemed baffled), they’ll try to sit down again with CompuCredit and finish negotiating an agreement the two sides have been working on for months. I think the FDIC and FTC are less than eager for this case to actually go to trial, so look for any financial penalty to be nowhere near the $200 million mentioned in the press release headline, and instead something closer to the $7.5 million CompuCredit has already accrued. (In fact the ultimate penalty can’t be anything like $200 million, since any actual consumer losses related to the disputed activity are nowhere near that high.)
The FDIC’s efforts are politically driven and misguided. I’ve looked at solicitation materials from CompuCredit and other, larger, credit card companies side-by-side. The two either contain identical language or, when they’re not identical, CompuCredit’s disclosure is clearer.
But to the regulators that doesn’t matter. CompuCredit is a subprime lending specialist, which means it’s a soft, politically acceptable target.
It’s a shame the way the FDIC is operating under Sheila Bair. The industry deserves better! David Hanna, CompuCredit’s CEO, says he’s not going to cave in to this sort of abuse. Good for Dave; I hope CompuCredit continues to battle, and lets a judge decide, if that’s what it takes.
In the meantime, it would be nice if the regulators got back to reining in activities of banks that really have crossed the line and have created a threat to the Bank Insurance Fund. For some reason, Sheila Bair’s FDIC doesn’t seem interested in doing that, and prefers to grandstand, instead.
Tom Brown is head of BankStocks.com.