Collection and Credit Firms Facing Broad New Oversight
Richard Cordray, director of the Consumer Financial Protection Bureau, before a Senate panel in January. Andrew Harrer/Bloomberg News
By BEN PROTESS February 16, 2012, 11:00 am
8:56 p.m. | Updated
Debt collectors and credit reporting companies are bracing for intense scrutiny after the government’s consumer finance watchdog unveiled a broad plan to regulate financial firms that have largely evaded federal oversight.
The draft rule is the most significant proposal yet to emerge from the consumer agency — a symbol of the government’s new regulatory powers and a favorite target of Congressional Republicans — and the first of several efforts to police financial companies that are not banks.
“Debt collectors and credit reporting agencies have gone unsupervised by the federal government for too long,” Richard Cordray, the bureau’s director, told reporters on Thursday. “It is time to provide the kind of oversight of these markets that will help ensure that federal laws protecting consumers in these financial markets are being followed.”
The proposal now enters a 60-day comment period. The bureau expects to complete the rule by July, the two-year anniversary of its creation. The rule, like many of the bureau’s actions, could become bogged down in a larger political battle that has bedeviled many regulators in the Obama administration. Republicans have threatened to rein in the consumer agency’s budget and authority.
The bureau, a product of the Dodd-Frank regulatory overhaul, has a broad mandate to police Wall Street banks as well as the more shadowy corners of the financial industry. Such firms are unmarked territory for the federal government. Until now, state authorities largely have licensed and supervised these companies.
But the agency was hamstrung without a leader at the helm, the result of a bitter battle in Congress over the appointment of Mr. Cordray. Republicans refused to bless his nomination unless Democrats agreed to subject the bureau to stricter Congressional oversight.
In a sharp challenge to Republican lawmakers in January, President Obama circumvented Congress and opted for a recess appointment of Mr. Cordray. The move empowered the bureau to take on the lightly regulated world of payday lenders, mortgage firms and student lenders. The bureau can also oversee the “larger participants” in industries like debt collection, credit reporting and check cashing.
The bureau began its new effort on Thursday with the proposal to define the largest debt collectors and credit reporting companies. The bureau can also sanction smaller firms that run afoul of federal rules.
Some financial firms, on and off Wall Street, are squirming at the thought of an emboldened regulator. New oversight means rising compliance costs and the likelihood of additional penalties.
“I expect increased diligence and increased costs in light of the pronouncement from Mr. Cordray,” said Donald N. Lamson, a former regulator who now works at the law firm Shearman & Sterling. “It would be incumbent on them to beef up those areas that deal with consumer complaints.”
Under the debt collector proposal, the consumer bureau would keep watch over companies that make more than $10 million a year from their consumer business, limiting the scope to about 175 firms. These companies account for about two-thirds of the business in the debt collection market.
The oversight comes after a prolonged upheaval for the industry, which for years has been ensnared in lawsuits and regulatory actions for questionable collection practices. Debt collectors habitually rank as the most common topic of nonfraud consumer complaints at the Federal Trade Commission.
The F.T.C. recently cracked down on debt collectors for harassing consumers, sometimes for money that is not even legally owed. The agency last month levied a $2.5 million fine on Asset Acceptance, one of the nation’s largest debt collectors, to settle accusations that the company deceived consumers.
But the F.T.C.’s powers are limited. While it can sanction a debt collector for violating consumer protection laws, the Consumer Financial Protection Bureau has authority to root out wrongdoing and keep a closer eye on the industry to try and prevent bad acts.
Consumer advocates cheered the bureau’s proposal on Thursday, saying it was taking a proactive approach to regulation.
“You’re looking at problems on the front end rather than going in after the fact,” said Travis Plunkett, legislative director for the Consumer Federation of America, a nonprofit advocacy group. “You can actually prevent problems.”
The bureau’s plan also takes aim at the largest consumer reporting agencies, defined as companies that make more than $7 million annually from their consumer business. The proposal would capture 30 companies, firms like Experian, TransUnion and Equifax [ http://dealbook.on.nytimes.com/public/overview?symbol=EFX ], that account for more than 90 percent of the industry’s business, according to the bureau.
Credit agencies, which produce on-demand reports featuring a borrower’s credit score and history, are inextricably linked to the consumer finance industry. Consumers clamor for favorable reports, a prerequisite for obtaining credit cards, a home mortgage or even a cellphone. But the credit reporting companies have also faced criticism for being overly deferential to creditors at the expense of consumers.
Later this year, the bureau could roll out plans to oversee check cashing companies and other nonbank firms. The bureau saw debt collectors and credit reporting companies as a logical starting point, Mr. Cordray said, because consumers lack the power to shop around for alternative providers. Banks and creditors, not customers, typically select debt collectors and credit reporting firms.
The bureau’s oversight of these industries will largely mirror its supervision of Wall Street. The agency will examine these firms individually and may also order the companies to turn over detailed snapshots of their businesses.
“This oversight would help restore confidence that the federal government is standing beside the American consumer,” Mr. Cordray said.
Republicans criticize spending by new consumer bureau
Consumer Financial Protection Bureau Director Richard Cordray testifies during a Senate hearing in January. (J. Scott Applewhite / Associated Press)
By Jim Puzzanghera February 15, 2012, 11:16 a.m.
Reporting from Washington—
House Republicans on Wednesday criticized spending by the Consumer Financial Protection Bureau, whose budget will increase by 26% in 2013 to $448 million, saying lawmakers have no say over how the agency doles out the money.
“If they spend $100 million on paper clips, we can’t even say, 'Wait a minute, you can’t do that.' Next year we’re going to cut their budget,” said House Financial Services Committee Chairman Spencer Bachus (R-Ala.). “We have absolutely no control.”
The committee summoned the agency’s newly installed director, Richard Cordray, to a hearing on the agency's spending plans for 2013 and criticized some of the salaries it has been paying and, more broadly, what they said was a lack of detail on its budget.
Under the 2010 financial reform law, the agency doesn’t get its money through the congressional appropriations process. Instead, the money comes from a separate, dedicated funding stream from the Federal Reserve’s coffers.
The Obama administration and congressional Democrats pushed for the unusual funding mechanism to prevent lawmakers from starving it of funds, as happened with the former regulator for Fannie Mae and Freddie Mac.
"The appropriations process oftentimes can become very political," said Rep. Carolyn Maloney (D-N.Y.). "It could be it would result in significant cuts in your ability to help people."
Cordray and supporters of the agency noted that other banking regulators, including the Office of the Comptroller of the Currency, also are not funded through the appropriations process. Cordray said that unlike the other banking agencies, the consumer bureau's budget is capped under law and that its spending hasn't come close to that cap.
Cordray estimated that the bureau would spend $356 million this year, well below its legal cap of $548 million, and will spend $447 million in 2013, below a $598-million cap.
"Our budget is smaller than other banking agencies," Cordray said.
Republicans have targeted the consumer bureau's funding to highlight its power and have proposed legislation to remove the independent funding stream. Rep. Randy Neugebauer (R-Texas) criticized the agency for providing just 12 pages of details on its 2012 budget, much less than other agencies that come before Congress.
Cordray said that the budget documents [ http://financialservices.house.gov/UploadedFiles/HHRG-112-BA-WState-RCordray-20120215.pdf ] were doubled to 25 pages for the agency's proposed 2013 spending and promised there would be more details in coming years. Rep. Brad Miller (D-N.C.) noted that the Office of the Comptroller of the Currency provided 23 pages of budget documents for more than $1 billion in 2013 spending.
Cordray said that Congress sets the salary levels for the agency and that they are comparable to other banking agencies, which must compete to get people skilled enough to oversee the complex financial industry. The consumer bureau's average salary is 4% below the average salary at the Federal Reserve, he said.
New Consumer Finance Protection Bureau Promises Agile IT
While other federal agencies struggle with outdated legacy systems, the new Consumer Finance Protection Bureau aims to keep lean with agile processes, cloud computing, and open source.
By J. Nicholas Hoover InformationWeek February 14, 2012 09:00 AM
Outdated information technology systems and processes bog down many federal agencies, contributing to what federal officials say is a productivity gap between the public and private sectors and causing many agencies to over-spend on IT maintenance. The brand-new Consumer Financial Protection Bureau, luckily, has none of those problems.
The new agency, which began operation as a result of the Dodd-Frank Wall Street reform law passed in 2010, aims to make the financial marketplace work better for consumers by promoting fairness and transparency in mortgages, credit cards, and other financial products. Tech will play a big role in that mission, CFPB CIO Chris Willey said in an interview with InformationWeek this week, his first since taking on the CIO job in September.
The CFPB serves as an interesting case study in what federal agencies might be able to do if they were able to start from scratch. Technologies and methodologies such as cloud computing, open source, agile development, and standardized data dominate the CFPB's tech strategy, which aims to keep the agency's tech lean and future-ready and the agency itself engaged directly with stakeholders such as financial institutions and the general public.
Because its mission involves getting the financial world to work better for the public, the CFPB's website has played a major role in the bureau's initial efforts, with numerous tools to help the public understand more about loans, work with the bureau to simplify mortgages, improve the way schools communicate student loan offers, and even complain about the behavior of their financial institutions.
Design is a key part of the strategy, and Willey wants to make sure that citizens and financial institutions are able to quickly find what they're looking for on the site and easily use the tools that the CFPB offers. "We believe that user-centric design and development are core competencies," he said, adding that this applies both to the agency's website and its internally-facing technology. "A lot of agencies outsource those functions, but we feel like we need to bake it in."
One tool on the bureau's website, Know Before You Owe, helps people understand what they are getting into with mortgages, student loans, and credit cards before they sign up. For credit cards, for example, the site provides a model form that defines key terms such as "APR" and "grace period" for users, describes how these terms work, and allows users to compare the model forms with credit card forms from more than 300 card issuers. A deeper dive into student loans is due this fall.
"The whole concept is to say that, part of the problem when you buy things is that there's a lot of fine print and the documents are just too hard to understand," Willey said. "What if we had a better, simpler form or document that actually describes the instrument?"
The CFPB's site also allows users to file credit card complaints, describing what happened and how they want to see their situation resolved. After users enter their information and information on their credit card company into the site, banks then use a separate portal where they can see all the complaints and show how they have resolved the complaints. Throughout that process, consumers can track their complaint and the bank's response or lack thereof.
Also on the docket for the bureau are a website redesign and a push toward open data. A redesign of the website's look and feel is due by late February or early March, Willey said. Open-source search eventually will be part of the package.
Willey said he expects the bureau to provide open data online soon, including, for example, data about where around the country the most troubled mortgages and student loans are. In all, Willey said the agency already has tens of terabytes of data, and expects that number to rise into the hundreds of terabytes in the near future, though much of that won't be public.
Standardized data will be a big piece of this puzzle, but Willey said that in some circumstances, the CFPB might even have to develop data standards of its own or use emerging standards, as some of the data types the CFPB will be working with don't yet exist elsewhere or aren't widely adopted. For example, the CFPB is adopting the use of Legal Entity Identifiers, a standard being developed that will identify all corporate entities by reference to a unique ID.
Behind the scenes at the CFPB, open source, cloud computing, agile development, and the imperative of good design are the keys to IT operations, said Willey. For instance, instead of continuing to rely on what the bureau considered to be a bulky Treasury Department process for enrollment in employee transportation subsidies, the CFPB developed a new transportation reimbursement application that automatically routes employee requests to the appropriate manager and does away with paper processes. The redesign took one developer all of two weeks.
"We think that there are hundreds of those types of opportunities within any agency, ours included, and because we are just now standing up some of those processes, now is the time," he said. "Otherwise, you just end up like every other agency or large organization, having legacy processes that aren't automated."
The transportation app also dovetails with the CFPB's open-source strategy. The bureau plans to release the code so that other agencies, many of which have transportation reimbursement policies, can use the same app.
"We sort of have an open source ethos here," Willey said. "In general, we believe that open source provides opportunities, not only initially to save money, but also to make things more easily integrated down the road." The CFPB plans to release a source code policy that will talk about the bureau's use of open source and how it plans to open source software that it develops.
Cloud computing plays a huge part in CFPB's IT world, said Willey. As he characterizes it, the agency is "almost all in the public cloud," with many of its IT services running in Terremark's Enterprise Cloud and Amazon Web Services. Among the apps running in the cloud is SAS analytics software, which is running at Terremark.
Willey admits that this isn't something that any agency could do. The oldest system the bureau uses, a case management system for bank examiners, is from 2004, and so the CFPB doesn't have any of the mainframe headaches that other agencies have that make it hard to move services to the cloud or in some circumstances even develop web-based front ends.
Willey said that the bureau plans to rely heavily on high-volume data links to mitigate any problems with latency caused by having so much of its infrastructure running in the cloud. "That's going to continue to be a challenge, but we can't ever let the network be a bottleneck for the things we want to do," he said.
Though it uses the Department of the Treasury's infrastructure for email, the phone system, and a few other apps, the bureau is thinking about moving some of those services, particularly email, to the cloud as well. The CFPB is using the Treasury's Microsoft Exchange environment for email now, but will soon put out a procurement for cloud-based email, Willey said.
As an example of how traditional IT could hold the agency back, and how the cloud could provide increased flexibility and scalability, Willey recounts that several weeks ago the CFPB had to migrate a group of users from one storage group within Exchange to another because it was running out of disk space. "It's 2012, we need to be doing this in a different way," he said. "That's the goal, not to worry about those things ever again, and to have our services in the cloud."
Instead of the big monolithic app development process still rampant elsewhere in government, the CFPB focuses on agile development. There's typically a two-week sprint cycle for most projects at the bureau, according to Willey, which means that the bureau is able to get functionality out to users early and incrementally.
Just outside the office is a Post-It-plastered wall keeping track of the various agile development projects underway at the bureau. It's a system that Willey said one day soon will be digitized. He envisions Web-based access to a digital version of the Post-Its and touchscreens set up where the notes are posted today, all powered by agile project management software such as Atlassian's GreenHopper project tracking product.
The majority of the CFPB's small tech team, meanwhile--currently about 30 federal employees and 15 contractors--works in an open floor plan devoid of cubicles and offices in order to encourage collaboration. As the new bureau grows, Willey will need to work to ensure that the culture of openness continues in the CPFB's relationship with the public, too.
Government Charges Vocal Critic in Insider Trading Case
John Kinnucan was accused of swapping corporate secrets with hedge funds for cash. Multnomah County Sheriff, via A.P.
By AZAM AHMED and BEN PROTESS February 17, 2012, 8:48 pm
8:48 p.m. | Updated
Federal authorities on Friday charged one of the most vocal and vehement critics of their campaign to root out insider trading on Wall Street, accusing John Kinnucan, an Oregon-based research analyst, of swapping corporate secrets with hedge funds for cash.
The analyst, who drew attention last year for openly challenging the investigation, was arrested at his home on Thursday on allegations that he collected insider tips gleaned from executives at technology companies, including SanDisk [ http://dealbook.on.nytimes.com/public/overview?symbol=SNDK ]. To gather the information, the government claimed, Mr. Kinnucan lavished his sources with gifts that included ski trips, fancy meals and cash.
Mr. Kinnucan was paid about $30,000 a quarter by two hedge funds that traded on portions of the insider information, according to the government’s complaints. But unlike other cases that have implicated the hedge funds themselves, the complaints say that Mr. Kinnucan masked his efforts as legitimate research, assuring his clients that the information did not include illegally obtained insights.
It is the latest twist in one of the more bizarre chapters of the government’s yearslong investigation. Mr. Kinnucan is the most recent individual charged in the government’s inquiry, which has resulted in more than 60 arrests and convictions. The case stems from an inquiry into expert networks, organizations that connect business executives with investors interested in their companies and fields.
The criminal complaint contends that Mr. Kinnucan repeatedly tapped an inside source at the technology company F5 Networks [ http://dealbook.on.nytimes.com/public/overview?symbol=FFIV ]. Mr. Kinnucan also shared his beach house with the F5 source, according to the government.
On July 2, 2010, the source tipped Mr. Kinnucan about the company’s coming quarterly earnings, the government says. He promptly shared the information with his roster of hedge fund clients. The unnamed hedge funds located in California and Texas later bought shares in the company ahead of its public earnings announcement.
“Obtaining important and unreported financial results from company insiders and selling that information to hedge funds is not legitimate expert networking services — it’s old-fashioned insider trading,” Robert Khuzami, the director of the S.E.C.’s division of enforcement, said in a statement.
Mr. Kinnucan’s lawyer, Gary Villanueva, declined to comment.
Bolstering the government’s case against Mr. Kinnucan are wiretaps, phone records, instant message conversations and cooperating witnesses.
One of those witnesses, Donald Barnetson, pleaded guilty Friday in the Federal District Court in Lower Manhattan. Mr. Barnetson, a senior director at SanDisk, is accused of passing to Mr. Kinnucan nonpublic information about the company’s negotiations with Apple. Mr. Kinnucan, the government has contended, invested in a start-up venture of Mr. Barnetson.
Another company embroiled in Mr. Kinnucan’s web is Flextronics, the government said. A senior employee at the firm admitted in a guilty plea last year to passing tips about the company to Mr. Kinnucan. Additionally, the government said Mr. Kinnucan received tips about OmniVision Technologies [ http://dealbook.on.nytimes.com/public/overview?symbol=OVTI ] from an inside source.
Federal agents first approached Mr. Kinnucan at his Portland, Ore., home in late 2010, asking him to cooperate with an investigation into several hedge fund clients. Mr. Kinnucan balked, then fired off an e-mail to warn his clients.
“Today two fresh-faced eager beavers from the F.B.I. showed up unannounced (obviously) on my doorstep thoroughly convinced that my clients have been trading on copious inside information,” the e-mail said. “We obviously beg to differ, so have therefore declined the young gentleman’s gracious offer to wear a wire and therefore ensnare you in their devious web.”
In the months after the e-mail surfaced, Mr. Kinnucan granted dozens of interviews to the media, lambasting the government’s efforts while defending himself. As the case dragged on, his communications grew stranger. He fired off rants against the federal prosecutors investigating the matter — notes that included expletives and racial epithets. In a voicemail to a United States attorney, Mr. Kinnucan said, “Too bad Hitler’s not here. He’d know what to do with you,” according to a government motion to deny bail in the case. He also dared the government to arrest him.
In a commentary written for DealBook [ http://dealbook.nytimes.com/2010/11/29/why-i-chose-not-to-wear-a-wire/ (below)], Mr. Kinnucan described why he refused to cooperate with the authorities. He said that he was offended that the agents arrived at his home just before his wife and children were expected home from school. But he also said that cooperating would have violated his principles.
“I had to decide between committing a wrong — agreeing to try to entrap someone whom, based on our mutual dealings, I believe to be innocent — or standing up to fight for what I believe is right,” he said. “I chose the latter.”
As for his research, Mr. Kinnucan said there was nothing illegal about it.
“The type of research I provide to clients is pervasive in the financial community, the same kind of analysis provided not only by all investment banks, large and small, but by an ever-expanding group of research boutiques, virtually all larger than mine,” he wrote.
John Kinnucan is a principal at Broadband Research in Portland, Ore.
Many people seem truly astonished by my decision not to comply [ http://dealbook.nytimes.com/2010/11/23/analyst-explains-why-he-rebuffed-f-b-i/ ] with the Federal Bureau of Investigation’s request to wear a wiretap to record conversations with a client. I have even been asked, “Why not just agree to wear the wire to show that no wrongdoing had occurred?”
Unfortunately, that requires assuming that I was asked nicely to cooperate. That was not the nature of the proposal I was offered. (And had I agreed, I have no doubt I would have been asked to record conversations with others as well.)
A surprise visit by the F.B.I. to your home — especially when your wife and two young children are due to arrive from school at any moment — is a shocking, terrifying experience. It makes me wonder whether they deliberately chose this time of maximum vulnerability.
F.B.I. agents are backed by the full force of the federal government, and the ones who arrived at my home made it abundantly clear that they believe I am guilty, and therefore so are all of my clients, and they threatened to arrest me on the spot.
The notion that I could have quietly resolved this “little misunderstanding” by going along with their program is not quite realistic. And in many people’s eyes, by agreeing to this request I would have been implicitly admitting to wrongdoing.
I had to decide between committing a wrong — agreeing to try to entrap someone whom, based on our mutual dealings, I believe to be innocent — or standing up to fight for what I believe is right. I chose the latter.
The type of research I provide to clients is pervasive in the financial community, the same kind of analysis provided not only by all investment banks, large and small, but by an ever-expanding group of research boutiques, virtually all larger than mine. It is an insanely competitive business, and grows more so every day.
Research providers are constantly struggling with the question of what constitutes appropriate information for our clients. Most of the picture here is gray, with a thin margin of black and white on either side.
In deciding the propriety of our inputs, we look for cues in the marketplace. If major banks, whose compliance departments are presumably staffed with former Securities and Exchange Commission lawyers, regularly publish industry data like iPhone build and Dell motherboard production changes, the rest of us can reasonably conclude that this must have regulators’ blessing. Otherwise, why would it have been allowed to proceed unchecked for years?
The evident intent of the Justice Department to retroactively criminalize what has been common practice for years — done by investment banks, research providers and mutual and hedge funds alike — seems like a profound miscarriage of justice.
The S.E.C.’s proper role is to provide guidance and rules to the investment community on what is considered appropriate behavior. If the agency is doing its job, it will take note of untoward activities and issue a cease-and-desist order. But here, the rule-making appears to be decided by the Justice Department.
My personal belief is that much of this activity is politically motivated, and will ultimately only delay the return of the confidence of Main Street and Wall Street in our country. Our economy won’t fully heal and return to solid growth so long as the political class maintains its vendetta against business interests in our country.
This, along with my firm belief that my clients and I have done nothing wrong, is why I have chosen to take a stand. It’s about fighting for what I believe should be fair dealings between individual citizens and their government.
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