Federal regulators recently proposed a new rule that would help end the restrictions and fees that banks use to prevent their customers from shopping around for better deposit interest rates and moving their money to other financial institutions. But the regulation will likely face major pushback from banking interests that have already spent millions this year working to straightjacket and even eliminate the consumer protection agency responsible for the proposal.
The new rule, announced last month by the Consumer Financial Protection Bureau (CFPB), would essentially force banks and financial institutions such as credit unions and credit card companies to give their customers control of their banking data at no cost. The requirement would allow consumers to better determine where they can get the best rates on deposit accounts, loans, mortgages, and other services, as well as make it easier for them to switch banks.
“One of the things we've seen in banking for a while now is innovation on how to trap a consumer, rather than innovation on having better services, or giving more attractive rates,” said CFPB Director Rohit Chopra in an interview with The Lever and the American Prospect. “What we actually wanted to do is disrupt that dynamic and actually have the market work in a meaningful, competitive way.”
The proposed rule change will be among the largest steps forward for consumer protection since 2010, when the Dodd-Frank Wall Street reform law was passed to respond to the global financial crisis. The law established the CFPB to protect consumers from predatory banking and financial practices, such as those that led up to the 2008 crash.
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The potential rule is also the first movement towards an “open banking” system required under Dodd-Frank, which allows an easier flow of financial information between banks, consumers, and competing banks. The slow process can seemingly be blamed on privacy concerns, big banks delaying the process, and a lack of technology for smaller banks.
Chopra hopes the proposed rule will force banks to offer better services and rates without causing too many issues for the average consumer.
But banking and financial services lobbying groups are pulling out all the stops to block the change and many other consumer-protection initiatives the newly-charged CFPB is enacting. The comment period for the proposed rule change ends in late December.
So far this year, the organizations have spent nearly $17 million on federal lobbying efforts, including on consumer protection issues and a GOP bill that would weaken the agency. These same groups have also filed amicus briefs in support of eliminating the CFPB in an upcoming Supreme Court case that could decide the agency’s fate.
Your Data, Your Choice
One significant reason why consumers may want a new bank is to access higher interest rates for their deposit accounts.
The Federal Reserve, the central banking institution tasked with stabilizing the economy, has repeatedly hiked interest rates, which has allowed banks to charge higher rates on loans and mortgages. Banks have not meaningfully raised rates for savings accounts, so depositors aren’t benefiting the same way.
The Federal Deposit Insurance Corporation recently reported that the average interest rate paid on depositors’ savings accounts is just 0.46 percent, a fraction of the 8 percent interest rate many banks charge borrowers for 30-year fixed rate mortgage loans and the 15 to 27 percent they charge customers for credit cards.
The growing spread between what banks pay depositors and what they charge customers for loans generated $64 billion in revenue for the four largest banks last quarter, The Lever reported.
Some banks are offering rates upwards of 5.75 percent to depositors, but the process of switching banks can be a headache for many consumers who may want a new one.
Technology has allowed people to have their paychecks deposited directly into their accounts, so they can instantly pay bills and check balances at all times of the day. But it can be difficult to transfer this information to another institution, making it cumbersome to switch banks.
“Many banks know that it is more difficult to change your direct deposit or to change your automatic payments, and the result is that you have many people who have the same bank account they've had for over a decade, the same credit card they've had since they were in college,” Chopra said. “[They’re] earning rates that are actually way lower on their deposit accounts and are paying higher [rates] on their credit cards.”
The CFPB proposal would allow customers to ask their bank to share their financial data with another bank that may be offering better rates or services, and make switching easier.
“Banks make it very hard for consumers to choose where they want to go if they’re not happy with services,” Elyse Hicks, a lawyer specializing in consumer policy at the nonprofit consumer advocacy group, Americans for Financial Reform, told The Lever and the American Prospect. “So this particular rule is giving consumers that power back… instead of [them] being taken advantage of with overdraft fees, or insufficient funds fees.”
Banks also control mortgage and automobile loans, and the rule change could allow consumers to shop around for better rates on these loans, too. As part of that process, the new rule would allow loan applicants to share their credit history and their full transaction history with financial institutions to present a more holistic picture of their finances.
“When you're applying for a loan, you often either have a FICO [credit] score, or you have a credit report, but the lender often doesn't know your income and expenses,” Chopra explained. “So you'll actually be able to [give] your personal financial ledger to them. And if you are someone who doesn't have a long credit history, you can basically be able to open up your books, and actually get that loan.”
The net result could be better financial options for consumers, Hicks said.
“It would allow them to get better mortgage interest rates, better auto interest rates, better credit card interest rates, all of the interest rates that banks offer,” she added.
Hedge funds and large financial portfolio companies already shop around for the best rates on loans and deposits. However, the average American tends to have the same bank account for 17 years, the CFPB estimates, which can lead to them missing out on better rates at different banks.
The proposed rule offers a two-fold approach to promote competition between large banks and their smaller counterparts that oftentimes offer better interest rates and services. It will also strengthen consumer protection by giving customers more control of their data and limit how banks can use it.
Large banks often sell consumers’ addresses, transaction ledgers, credit ratings, and other personal information to advertisers. The new CFPB proposal would help end this arrangement as well by banning customer data from being used in marketing and targeted ads, and from being used to train artificial intelligence.
The rule would also extend to innovations in the banking and finance world and apply to companies like Facebook, which tried to create its own cryptocurrency back in 2019. (The project failed after facing intense regulatory scrutiny, and was officially terminated in 2022.)
Experts say the rule change could be revolutionary for consumers, but add there is going to be a steep learning curve if it is implemented.
“It’s one thing to give a person rights to something that they didn’t have before,” Hicks said. “And then it’s another for them to actually know what to do and how to use this for their benefit.”
Chopra recognizes this will be an issue, but hopes the rule change will force banks to offer better rates and services without too many headaches for consumers switching banks.
“I hope a lot of the effects will take place without people having to learn much,” Chopra said. “If the industry perceives that it is actually easier, or once people hear that it's not as hard [to switch banks] that will get the providers to start sitting up straight.”
CFPB Fights For Its Future
The CFPB was established in the wake of the 2008 market crash with several aims: protecting consumers from unfair or deceptive practices, increasing transparency in financial markets, and bringing greater stability to the markets to prevent another collapse.
Before the CFPB was established, consumer protection efforts were scattered and managed by a handful of agencies.
Since its formation in 2010, the CFPB has faced continued opposition from Wall Street firms, big banks and payday lenders. The case before the Supreme Court is centered on the CFPB’s funding model, which is not tied to recurring appropriation votes in Congress but from funds collected from member banks of the Federal Reserve.
This funding model is not unique to the CFPB. The Federal Reserve itself, the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, and a handful of other agencies also derive funding from funds collected from the Federal Reserve’s member banks, in order to give the entities independence from the political swings of Congress.
The case before the Supreme Court — Consumer Financial Protection Bureau v. Community Financial Services Association of America, Limited (also known as the payday lender lobby) — centers on a Fifth Circuit Court of Appeals ruling finding that the funding model for the CFPB is unconstitutional.
“The CFPB is under attack because it is good at what it does,” Sen. Elizabeth Warren (D-Mass.), architect of the bureau, said earlier this month. “The Fifth Circuit’s decision is radical because none of the federal banking regulators is funded through appropriations.”
The CFPB appealed the 2022 Fifth Circuit ruling and the Supreme Court heard arguments earlier this month, where even conservative justices seemed hesitant to fully eliminate the agency, the American Prospect reported.
Those fighting against the CFPB include 26 attorneys general in mostly Republican-led states; the billionaire Koch network’s Americans for Prosperity; the Landmark Legal Foundation, which has Fox News host Mark Levin on its board of directors; the Center for Constitutional Jurisprudence, whose founding director is John Eastman, one of the key architects of Donald Trump’s efforts to overturn the 2020 presidential election; and 132 Republican members of Congress.
The CFPB is also facing opposition from banking and finance lobbying groups, such as the American Bankers Association, the Credit Union National Association (CUNA), the American Financial Services Association, and many other entities, amicus briefs filed with the Supreme Court show.
The American Bankers Association, the self-declared “voice of the nation’s $23.7 trillion banking industry,” is a co-signer with the CUNA in favor of the Fifth Circuit’s ruling. The bankers association has spent $6.4 million on lobbying this year, according to federal disclosures.
“The court could sever the offending funding provision and provide Congress with an opportunity to fix an otherwise unchallenged statutory scheme,” the groups argue.
Republican lawmakers already have a bill in the works to overhaul the CFPB.
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The CFPB Transparency and Accountability Reform Act would replace the CFPB director role with a five-person commission led by a chairperson, bring oversight of the CFPB under an inspector general, and end the current funding model.
The American Bankers Association reported lobbying on the bill. So did the Consumer Bankers Association and the National Association of Federally-Insured Credit Unions, which have spent a combined $6 million on lobbying this year.
Precedent for the CFPB’s funding model dates back to the 1860s and overturning it could have sweeping ramifications.
“I think [the justices] understand that [upholding the Fifth Circuit ruling] will cause a lot of chaos in the market,” said Hicks with the Americans for Financial Reform. “If you just give a sweeping remedy to say none of the rules that the CFPB has ever implemented, none of the guidance, none of the supervision is valid because their funding sources are unconstitutional… I don’t think the Supreme Court wants to deal with the fallout.”