The financial industry has found an attractive investment in the North Carolina Senate race.
Whether it’s federal regulation of the nation’s biggest banks or state laws governing consumer loans, U.S. Sen. Kay Hagan and state House Speaker Thom Tillis have lent receptive ears to the people running financial companies large and small.
In February and March of 2013, 22 Citibank executives, lobbyists and the bank’s PAC gave $36,500 to Hagan’s political campaign. In the midst of this giving, Hagan, a Democrat, introduced a bill allowing federally insured banks to trade extensively in the $700 trillion market for swaps, which played a central role in the 2008 financial crisis.
In June 2013, the state House passed a bill allowing finance companies to make bigger personal loans at higher interest rates. House speakers seldom cast votes, but Tillis, a Republican, voted yes. Two weeks later, the principal advocate for this bill, his wife and his mother – all principals in North Carolina’s largest consumer finance company – gave $7,700 to Tillis’ Senate campaign, $100 below the legal maximum contribution.
The consumer-loan industry has given Tillis’ campaign nearly $70,000.
As Election Day nears, this much is clear: In one of the nation’s most closely watched races, North Carolina voters will choose a U.S. senator from two pro-business candidates with strong backing from the people running financial companies regulated by the government.
Still, the candidates do split paths on some financial issues. Hagan voted for the 2010 Dodd-Frank Act, a post-crash attempt to regulate Wall Street that also created a new agency to protect consumers.
“Thom would move to repeal that measure,” Tillis spokesman Jordan Shaw said. Shaw could not provide details on what Tillis wants in the law’s place.
Hagan and Tillis declined to be interviewed. Staffers for both said that campaign contributions had nothing to do with their work on legislation.
Increasing the risk?
On March 6, 2013, Hagan introduced a bill to allow the nation’s biggest federally insured banks to stay in the lucrative swaps market.
Swaps were at the center of the 2008 financial crisis. Banks use swaps to insure themselves against swings in interest and exchange rates. Bank also can use swaps to bet on virtually any commodity or financial instrument. Those bets can pay billions or, in their worst cases, help crash the economy.
They were virtually unregulated until 2010, when Congress passed financial regulatory changes known as the Dodd-Frank Act.
Wall Street has opposed parts of that law, including the “push-out” provision, which forces federally insured banks to “push out” speculative swaps to subsidiaries.
Banks can still own those swap-making entities, but those entities will not be insured by the Federal Deposit Insurance Corp. or get loans from the Federal Reserve’s discount window. Five banks control 90 percent of the swap market: Citibank, Bank of America, Wells Fargo, JPMorgan Chase and Goldman Sachs. Executives, lobbyists and PACs from those banks have contributed at least $174,000 to Hagan’s campaign in the past 20 months.
Hagan’s bill would repeal the “push-out” provision of Dodd-Frank. According to 2013 accounts in the New York Times and Mother Jones magazine, Citibank wrote virtually all the language for a 2012 bill that was identical to the bill Hagan sponsored in 2013.
The bill has passed the House and but has not moved in the Senate.
Hagan’s staff pointed out that Hagan voted for the Dodd-Frank Act and the Consumer Financial Protection Bureau, and that former Federal Reserve Chairman Ben Bernanke and Paul Volcker supported her bill to remove push-outs.
“As with every bill she introduces, Senator Hagan puts North Carolina first, and campaign contributions have nothing to do with this bill, which has the support of the North Carolina Bankers Association,” said Amber Moon, a spokeswoman for Hagan’s Senate office.
But consumer groups such as Americans for Financial Reform and public pension plans say the bill is a bad idea.
“The Swaps Regulatory Improvement Act would directly increase the risk of another financial markets bailout (catastrophe) at the expense of American taxpayers,” wrote Anne Simpson, a director of the California state pension fund, the nation’s largest.
Hagan’s support for banks is not surprising. Before entering politics, she worked for 10 years at North Carolina National Bank, a predecessor of Bank of America. She was a vice president in the estates and trust division and the private banking division.
Banks don’t like the push-out provision for a simple reason.
“If you push swaps out to a non-bank entity, it’s more expensive to do business,” said Saule Omarova, a Cornell University law professor. “This bill would make it cheaper for banks to conduct a risky business.”
Placing their bets
The theory behind the push-out provision is simple. The FDIC and Federal Reserve should protect traditional banking activities such as deposits and loans. But taxpayers would not be on the hook when banks speculate on the price of grain or the solvency of a company.
Swaps are members of the derivative family, financial instruments whose value is based on other financial instruments.
Omarova, an expert on swaps and derivatives, said it’s helpful to divide swaps into two categories: peace of mind and profits.
Peace-of-mind swaps are an intrinsic part of a bank’s business, insurance that lessens a bank’s exposure to fluctuating interest rates or foreign currencies.
The “push-out” law didn’t affect these swaps.
The law changes the market for speculative swaps, whose sole goal is to turn a profit. Banks use swaps to bet on changes in the price of oil or the value of the Indian rupee, even when the bank doesn’t own any oil or rupees. It’s like a person buying insurance policies on buildings he doesn’t own, betting that one will burn down and pay off.
“Banks can use swaps to hedge their own legitimate risks like an insurance policy,” Omarova said. “Or banks can use the same contract to place bets on the movements of the value of the underlying assets.”
These speculative swaps played a central role in the financial crash.
“The swaps market may not have caused the financial crisis, but it certainly magnified and accelerated the crash,” said Thomas Hazen, a professor of securities law at the University of North Carolina law school.
30 percent interest
The installment loan bill backed by Tillis affected the other end of the economic scale, people who need a few thousand dollars for a car or rent or Christmas presents.
Under the previous law, consumer installment loans were small loans, typically a few hundred dollars up to $10,000. For collateral, the consumer finance companies use cars or personal property such as electronics or furniture.
They charged interest rates on a sliding scale: 30 percent on a balance up to $1,000, 18 percent for the next $6,500, and 18 percent for the entire loan when the balance exceeded $7,500. According to the N.C. Commissioner of Banks there are about 500,000 consumer loans made a year in the state, about two-thirds for $5,000 or less.
In 2011, the consumer finance industry had tried to change that law to increase rates and amounts. The law passed in the House but stalled in the Senate after the military took aim at the bill. Defense Secretary Robert Gates and top brass from Fort Bragg, Camp Lejeune and Seymour Johnson Air Force base took the unusual step of campaigning against a proposal to change state law because they thought it would hurt service members and their families.
The industry had better luck in 2013. Royce Everette led the fight to make consumer loans more profitable for lenders by raising loan limits and interest rates. Everette is the chief lobbyist for the Resident Lenders of North Carolina and the president of Time Investment Corp. of Greenville, which has 20 consumer finance offices across the state.
The new bill raised interest rates: 30 percent on the first $4,000 and 24 percent on the next $4,000, instead of 30 percent on the first $1,000 and 18 percent on the next $6,500. The bill also raised the maximum loan from $10,000 to $15,000.
Not a single consumer group supported the bill. The AARP opposed it, as did Attorney General Roy Cooper. Statistics collected by the state banking commissioner showed that two-thirds of the loans are refinances, evidence that borrowers get stuck in cycles of debt.
Chris Kukla of the Center for Responsible Lending, a nonpartisan group that promotes homeownership and opposes predatory lending, said the higher interest rates and new fees will bring in an extra $40 million to $60 million a year for the finance companies from the pockets of the state’s least sophisticated borrowers.
The bill was approved by the House on June 5, 2013 on a 69-44 vote. Tillis voted yes. Gov. Pat McCrory signed it into law two weeks later.
Twelve days after the House vote, Everette, his wife and his mother gave a total of $7,700 to Tillis’ Senate campaign. They also co-hosted a Tillis fundraiser in Greenville a week later. State law forbids legislators from soliciting contributions while a legislative session is underway. The prohibition does not apply to a state legislator running for federal office.
Since then, Everette, other executives in the consumer loan industry and their PACs have given at least $69,000 to the Tillis Senate campaign.
Everette did not return multiple phone calls for comment. But in June 2013, he told The Associated Press that his contributions were not a payback for the bill, just support for a candidate he admired.
“If you have a person who you think is a good person, you try to support him,” Everette said. “That’s the way it goes. Thom Tillis is a good person. Did he help us? Yes. So I support him.”
Tillis’ spokesman said the law was an attempt to modernize consumer finance laws.
“There’s a population of people who don’t have access to capital, who don’t have savings or credit cards,” Shaw said. “We were trying to bring North Carolina law to a modernized place.”