Monday, May 16, 2016

Federal Reserve is too ‘White and Male’ say Democrats

Federal Reserve Chair Janet Yellen
Democratic lawmakers recently forwarded a letter to Federal Reserve chair Janet Yellen indicating that the level of diversity currently represented at the Fed is unacceptable.  The letter stated:  “When the voices of women, African-Americans, Latinos, Asian Pacific Americans, and representatives of consumers and labor are excluded from key discussions, their interests are too often neglected. . . .  By fostering genuine full employment, the Federal Reserve can help combat discrimination and dramatically reduce the disproportionate unemployment faced by minority populations.”  The letter, signed by 11 U.S. Senators and more than 100 members of Congress, called upon chairperson Yellen to aggressively seek to increase minority and female representation at the Federal Reserve bank.  To wit: "[W]e remain deeply concerned that the Federal Reserve has not yet fulfilled its statutory and moral obligation to ensure that its leadership reflects the composition of our diverse nation in terms of gender, race and ethnicity, economic background, and occupation, and we call on you to take steps to promptly begin to remedy this issue."

The letter noted that the Federal Reserve bank leadership is "overwhelmingly and disproportionately white and male."  The Financial Times noted that "[e]leven of the 12 regional Federal Reserve Bank presidents are white and 10 of the 12 are men. All of the 10 current voting members of the Federal Open Market Committee, which sets monetary policy, are white, while four of them are women. Members of the Fed’s Board of Governors, who rank among the top rate-setters, are selected by the president and confirmed by the Senate, but the Board of Governors has a key role in selecting the Fed’s regional bank presidents."

Of course, this story begs the question, does diversity in the boardroom and diversity at the heights of fiscal policymaking make a difference?  Would the Fed set different policies if board members were women or persons of color?  Certainly 11 Senators and 116 Congresspersons believe so.

hat tip:  T.J. Williams, Indiana Tech Law School

Tuesday, May 3, 2016

Predatory lending in the context of home ownership continues in 2016 under another name

   Almost five years ago I wrote an essay about predatory lending practices that targeted African Americans and other communities of color.  Mortgage originators relaxed their standards to offer subprime mortgages, and in some instances, engaged in fraud so that they could make more loans at high rates of interest and therefore make more money.  Many consumers of color who qualified for prime or low-interest mortgages were offered only subprime, high-interest loans.  People of color who did not qualify for low-interest mortgages were offered subprime loans even though they had no or low incomes and no assets.  Lenders told these consumers that they would be able to pay off their mortgages as housing prices climbed.  But the housing bubble burst and housing prices plummeted.  Predictably, many borrowers could not repay these predatory loans.  The mortgages, however, had been pooled together to create securities that were sold to investors.  Banks and lenders were able to transfer foreseeable risks that borrowers would default on the underlying mortgages to investors who purchased the securities.  These are risks that should have been anticipated by lenders and the experts who advised them.  These risks were understandably unforeseen by borrowers with no economic expertise.

     Billions of dollars in wealth were drained from African American and Latino families when banks foreclosed on the homes of consumers who were victims of this predatory lending.  Communities were infested with unsightly, abandoned homes. Investors who purchased mortgage-backed securities lost billions.  Predatory lending harmed local, national, and global economies and helped to precipitate the economic downturn of 2008.

     In that article I described how banks and other financial institutions targeted people of color, and African Americans in particular, for high-interest predatory mortgages.  For example, a former Wells Fargo credit officer revealed in a sworn statement that the bank targeted African American borrowers for high-interest loans they could not afford because of the pervasive perception at the bank that African American customers were not savvy enough to figure out that the loans offered them were predatory.  Another loan officer admitted that African Americans who qualified for prime loans were targeted for subprime loans.  Yet another Wells Fargo loan officer revealed that African Americans were called “mud people” and the predatory loans offered them were labeled “ghetto loans.”  Loan officers targeted black churches also.  And, when loan officers referred borrowers who qualified for low-interest loans to the subprime division, they earned bonuses and higher fees. 

     In the aftermath of the predatory mortgage lending that targeted African Americans and Latinos, and even after the passage of the Dodd-Frank Act enacted, in part, to address this misconduct, the predatory practices used in the mortgage context werereplicated by the auto industry.  Auto dealers often connect auto buyers to lenders.  The dealers are allowed to engage in discretionary pricing when setting interest rates and there is evidence that dealers charge consumers of color more for their auto loans than they charge similarly situated white consumers.  As was true in the mortgage context, these predatory loans are assigned to other institutions.  When it was created, The Consumer Financial Protection Bureau covered auto lenders but only if they do not assign the loan.  The creation of the CFPB under Dodd-Frank left unprotected those consumers whose auto loans were assigned.

     The stunning audacity of this type of economic discrimination in the auto industry becomes even more outrageous when we consider the Bush administration’s decision to bail out Chrysler and General Motors along with the banks and other financial institutions near the end of the twenty-first century’s first decade.  The justifications for bailing out car companies were identical to the pro-bailout arguments made for the banks.  The argument was that like the banks, Chrysler and GM were too big to fail.  If they failed, massive layoffs at the two companies and the firms that supply them with goods and services would exacerbate the economy’s demise.

     Even more disturbing is the fact that predatory conduct in the context of home ownership continues in 2016 under another name.  On April 18, 2016, the New York Times reported on a relatively new practice that targets low-income homebuyers who are now unable to get mortgages because they lost homes in the recent downturn, and because banks now adhere to lending standards.  The deals allow home sellers to provide consumers with high-interest, long-term loans that are known as contracts for deed.  If the consumer can repay the loan in installments on time, he or she will own the home.  But two things make it unlikely for borrowers to be able to pay on time.  First, the interest rates are exorbitantly high.  Once again we see the terribly familiar practice of imposing interest rates that make repayment difficult if not impossible.  Second, many of the homes are in a state of disrepair and consumers need to spend money to make the home inhabitable.  When a would-be homebuyer defaults on the contract for deed, the lender may convert the contract to a month-to-month tenancy.  Even worse, the laws that protect homeowners who default on mortgages from eviction do not apply in this context.

Monday, May 2, 2016

United Airlines CEO Gets $36.8 Million Severance Package After Resignation Triggered By Federal Probe

I find myself posting yet again about another bizarre CEO golden parachute package.  This time, Jeff Smisek, the former CEO of United Airlines, is set to receive $36.8 million in severance pay and other benefits following a federal corruption probe into United's relationship with the Port Authority of New York and New Jersey.  Smisek resigned as United's CEO, President, and Chairman of the Board in September 2015. 

Smisek's pay package includes a $4.9 million severance component, $1.7 million as part of United's annual incentive program, and $29.4 million in equity-based awards.  Additionally, Smisek is set to receive the following perks from United:

  • Smisek will receive lifetime flight privileges and parking benefits at United's hub airports in Houston and Chicago;
  • Smisek will continue to get life insurance coverage and he and his dependents will continue to receive health insurance coverage until he qualifies for Medicare; and
  • Smisek will get to keep his company car which he received while serving as CEO.

Ultimately, United's board could force a clawback of up to $10,1 million of Smisek's severance payment.  Upon Smisek's resignation from United, Oscar Munoz took over as CEO.  Should corporations still continue to reward questionable executive behavior with such lavish severance package awards?