Let the crime-fighters, not banks, fight crime; CFPB sweeps court double-header

Editor's note: Morning Scan will not publish on Monday, Feb. 20 in observance of Presidents' Day. We'll be back on Tuesday, Feb. 21.

Receiving Wide Coverage ...

AML reform urged: The Clearing House, a trade association that represents big banks including JPMorgan Chase, Citigroup and Bank of America, wants to "lessen the burden" on banks to track criminal activity and "put the responsibility to finding the bad guys back on the law-enforcement agencies," in the words of an industry consultant. In a report issued Thursday, the association recommended a stronger role for the U.S. Treasury's Financial Crimes Enforcement Network (Fincen), arguing banks are wasting billions of dollars "complying with outdated rules that don't reflect the current threats to the U.S. financial system," the Wall Street Journal said. Instead, the Clearing House "proposed a system under which banks don't report on every suspicious transaction they see, but only on those that reflect the priorities that law enforcement and investigators relay." Wall Street Journal, Financial Times

Andrew Harrer/Bloomberg

Two for two: The U.S. Court of Appeals in Washington ordered a rehearing of an earlier court ruling that the Consumer Financial Protection Bureau's independent structure was unconstitutional. The decision "increases the likelihood that Richard Cordray, the current director of the CFPB, will remain in his job as the case drags on over the next few months — and possibly until his term expires in July 2018," the Wall Street Journal said. "The order raises new hurdles for President Donald Trump to remove Mr. Cordray, despite calls from the bureau's opponents to do so." Wall Street Journal, American Banker

In a separate case, a federal judge in Detroit upheld the CFPB's authority to issue a subpoena in a housing finance investigation. Judge Nancy G. Edmunds ruled that Harbour Portfolio Advisors, one of the largest providers of seller-financed homes, must comply with the agency's demand for documents and other information. The CFPB has been looking into whether the terms of some of Harbour's sales violated federal truth-in-lending laws. The agency sued the company last November after Harbour refused to comply with the subpoena, arguing the CFPB had no authority to investigate its sale of formerly foreclosed homes to poor people.

Household debt grows: Total U.S. household debt rose $226 billion in the fourth quarter of 2016, lifting the yearend total to just $99 billion short of the all-time peak of $12.7 trillion set in the third quarter of 2008, the Federal Reserve Bank of New York reported. The increase was driven by increases in credit card, auto and student loans. "Debt held by Americans is approaching its previous peak, yet its composition today is vastly different as the growth in balances has been driven by non-housing debt," said Wilbert van der Klaauw, an economist at the New York Fed.

… so do late payments: As non-mortgage debt grows, so do delinquencies. TransUnion said the delinquency rate on car loans rose 13% last year to 1.44%, the highest level since 2009, while the late-payment rate on credit card loans rose by the same 13% to 1.79%, the highest figure since 2011. "The rise in bad loans comes despite persistently low borrowing costs and unemployment levels, suggesting lenders may be letting consumers take on bigger debt burdens than they can handle," the Financial Times commented, noting, "lending to consumers with weak credit scores has been one of the fastest growing parts of the industry."

Wall Street Journal

Different story, same ending: The Heard on the Street column looks at online lenders LendingClub and On Deck Capital, whose stocks have taken turns getting beaten down the past two days by double-digit percentages, although for different reasons. LendingClub's problem seems to be higher expenses as it tries to retain and attract talent even as loan growth remains basically flat. On Deck, meanwhile, is suffering from growing provisions for loan losses. "The issues plaguing the two companies differ, but the emerging picture is clearly one of an industry with prospects less bright than investors had hoped," the Journal said. "While the two companies' challenges are different, they point to a common truth, which is that online finance isn't so different from traditional banking. Securing stable funding, appropriately pricing loans and anticipating risks are still fundamental to the business of lending money."

It hasn't been great for funds that buy the loans that marketplace lenders make, either. Some of the largest investment managers in the sector reported their lowest returns in several years in 2016, while publicly listed funds are trading at deep discounts to their net asset value. "The sluggish returns have been a disappointment for investors who were hoping the online consumer space would offer fatter yields," the Journal said. "Online lenders rely on outside money managers to buy their loans, and diminished returns could prompt some managers to shift into other asset classes."

Quotable ...

"It is a huge development in the fight over the CFPB. Now that the full D.C. Circuit court has decided to hear this question, it would be a huge mistake for the White House to try to fire Mr. Cordray and I think it's unlikely." — Deepak Gupta, a former CFPB senior enforcement counsel