Causing a furor before it exists

Original Reporting | By James Lardner |

Remapping Debate asked a number of elected officials and bankers for illustrations of consumer-protection policies that would be bad for safety-and-soundness. Few responded (see box). One who did, Joe Witt, president of the Minnesota Bankers Association, offered the example of a rule ensuring quick customer access to deposited funds, before banks could properly determine “if there are funds in the underlying account to cover [a deposited] check.”

“Regulators around the world have struggled” to find the right balance between consumer protection and financial safety and soundness, said Travis Plunkett. “But what we’re hearing in Congress now is not an intellectually serious argument.”

Ed Mierzwinski, a Washington-based consumer advocate, pointed out that Dodd-Frank assigns such questions to the shared jurisdiction of the CFPB and the Federal Reserve, thus putting some check on the new agency’s power. Mierzwinski added that modern electronic-clearance practices allow banks to tap most funds overnight, while account-holders typically have to wait two or more days. Despite a 1988 law that gives consumers the right to withdraw $100 immediately (a figure raised to $200 by Dodd-Frank), Mierzwinski argued that banks still get the better of the situation. “Banks have gotten rapid access to our money,” he said, “but they still haven’t given us [the same] rapid access.”

“It’s not like the history of bank regulation or consumer product regulation in the United States suggests that the overwhelming problem is that the public voice is heard too loudly and special interests are silenced,” Lisa Donner said. “The truth is, the resources at the disposal of industry to influence the regulatory process are, and continue to be, overwhelming as compared to the resources of the public.”


A charm offensive?

Elizabeth Warren, the Harvard law professor who conceived the idea for the CFPB and has been tapped by President Obama to oversee its implementation, has sought to calm bankers’ fears. In an interview with National Journal last week, Camden Fine, president of the Independent Community Bankers of America, suggested that Warren was making headway in that department: the small banks he represents might do well to consider supporting Warren as the bureau’s permanent director, Fine said; better Warren, he explained, than “some fang-tooth zealot who is going to lump us into the same box as Wall Street and just say ‘I don’t give a rat’s ass how big you are; I am going to hammer your butt!’”

Fine seemed to be expressing a minority viewpoint, however. Joe Witt, of the Minnesota Bank Association, acknowledged that Warren has been saying “all the right things.” Nevertheless, he said many in the industry were unconvinced by what they viewed as essentially a “charm offensive.”

It’s wrong to “demonize” certain types of loans or loan features, said Joe Witt, “when what you’re really talking about is probably a series of ten steps that were bad or maybe even fraudulent… The loan term isn’t the bad thing, it’s the bad actor; let’s go after the bad actors instead of making judgments about particular loan terms.”

As part of that effort, CFPB officials met with Witt’s group last week. They pointed out that — thanks to the bureau’s creation — check cashers, mortgage brokers, and other “nonbank” entities will now have to observe some of the same financial rules that govern banks. In theory, this could be a step forward, Witt told Remapping Debate. But he said he had challenged the CFPB representatives about their ability to monitor between 70,000 and 100,000 nonbanks with anything like the same vigilance given to the regulation of the nation’s 7,000 banks.

“They said no, realistically, we can’t do it,” Witt recalled. We can’t come up with enough examiners to really do the job to the extent that it’s done in the banking industry. So I said, ‘Then you don’t have a level playing field… Until there is equal enforcement, it is not a level playing field.’”


Code language

What accounts for the intensity of the distrust? Why all the talk about consumer protection overriding safety-and-soundness? The issue is a legitimate one in some situations, said Travis Plunkett, legislative director of the Consumer Federation of America. “Regulators around the world have struggled” to find the right balance, Plunkett told Remapping Debate. “But what we’re hearing in Congress now is not an intellectually serious argument,” he added. Instead, safety-and-soundness is being used as “code for fears that the consumer bureau will be too vigorous in restricting abusive, deceptive, or unfair practices.”

Talk of safety-and-soundness allows elected officials to avoid coming across as tools of an unpopular, but politically generous, industry, according to Plunkett. For bankers, he said, it’s preferable to expressing their concern that the CFPB represents the beginning of something new: independent oversight.

“Banks and other financial firms were exceedingly comfortable with the status quo where they had enormous influence with an alphabet soup of regulators,” Plunkett said. Under the old arrangement, he added, banks had often been able to fend off consumer-protection rules. Plunkett recalled that the former head of the Office of Comptroller of the Currency, John Dugan, had challenged an effort to bar OCC banks from raising interest rates on existing credit-card balances because of a change in a customer’s “risk profile” (typically triggered by a late payment to another creditor). Dugan defended this practice, known as “repricing,” as vital to safety-and-soundness. (Dugan turned out to be mistaken on that score, according to Plunkett. The banks wound up losing money as a result of an unprecedented wave of credit-card defaults.)

Talk to us about safety-and-soundness

Congressional Republicans are pushing several proposals to change the governance structure of the new Consumer Finance Protection Bureau. The aim, the backers all insist, is not to undermine the bureau, but to make sure that in its efforts to protect consumers, it does not do anything to compromise the “safety and soundness” of financial institutions.

Seeking examples of such missteps, Remapping Debate contacted the offices of half a dozen House members who have raised the issue. Repeated emails and phone messages failed to elicit a response from five of the six legislators. They were:

Sean Duffy (R-WI), who, interviewed on Fox TV last week, said that the CFPB was on the way to becoming “so powerful that one of our concerns is that consumer protection can actually trump safety-and-soundness in the banking industry.”

Shelley Moore Capito (R-WV), who, in a recent press release, said that “consumer protection and safety and soundness go hand in hand.” Congress, Capito went on to say, has “a responsibility to ensure that [consumers’] personal financial decisions are left up to them and not unduly influenced by unelected bureaucrats who seek to limit consumer choice.”

Blaine Luetkemeyer (R-MO), who, during a March hearing, pressed Elizabeth Warren to say exactly how much money the CFPB would be willing to have banks spend meeting any particular regulation. When Warren declined to give a dollar amount, Luetkemeyer chastised her for what he said was indifference to cost-benefit analysis.

Edward Royce (R-CA), who unsuccessfully sought to impose a safety-and-soundness mandate on the CFPB as part of the original Dodd-Frank law.

Spencer Bachus (R-AL), chairman of the Financial Services Committee, who, in a February speech, described the creation of the CFPB as “problematic,” citing, among other concerns, reservations about the decision to separate consumer protection from safety-and-soundness.

The only substantive response came from the office of Rep. Scott Garrett (R-NJ), who had quizzed Warren on this issue in March: “Your agency doesn’t have a safety and soundness mission to it, does it?” Garrett asked her at the time. Last week, Garrett’s press secretary, Ben Veghte, emailed Remapping Debate with an example of something the CFPB might do that would jeopardize safety-and-soundness: require mortgage modifications entailing principal writedowns as well as interest reductions. “This could cause some banks to go belly up in order to ‘protect consumers,’” Veghte said.

Consumer groups have long advocated for writedowns of mortgage principal, arguing that foreclosure often turns out to be a more costly alternative for banks. But the CFPB is not in a position to decide this question, according to Travis Plunkett of the Consumer Federation of America. “They have to follow the law,” he said, “and there’s no federal law that would allow them or require them to mandate a principal write-down.”

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