WORD ON THE STREET: The banking industry fully supports effective consumer protection. We believe that Americans are best served by a financially sound banking industry that safeguards customer deposits, lends those deposits responsibly and processes payments efficiently.
My bank's philosophy – shared by banks everywhere – has always been to treat our customers right and do whatever we can to make sure that they understand the terms of the loans they are taking on and their obligations to us.
Traditional Federal Deposit Insurance Corp. (FDIC)-insured banks – more than any other financial institution class – are dedicated to delivering consumer financial services right the first time. Not only do we have the compliance programs and top-down culture to prove it, we are required to have the financial wherewithal – in terms of capital, liquidity and asset quality – to be there when our customers need us.
Fair service to our banking customers is inseparable from sound management of our banking business. Yet despite this axiom, the Dodd-Frank Act erected a bureau that divides consumer-protection regulation from safety-and-soundness supervision. Therefore, it is critical that improvements be made to assure this new bureau is accountable to the fundamentals of safe and sound operation, to the gaps in regulating the non-banks that motivated financial reform, and that the principles of consistent regulatory standards are consistently applied.
There are several features of the bureau that make improved accountability imperative. In addition to the weakening of any connection between the bureau's mission and safety-and-soundness concerns, Dodd-Frank gave the [Consumer Financial Protection Bureau (CFPB)] expansive new quasi-legislative powers and discretion to rewrite the rules of the consumer financial services industry based on its own initiative and conclusions about the needs of consumers.
The prerogative of Congress to decide the direction and parameters of the consumer financial product market has essentially been delegated to the bureau. The resulting practically boundless grant of agency discretion is exacerbated by giving the head of the CFPB sole authority to make decisions that could fundamentally alter the financial choices available to customers.
Furthermore, the proliferation and fragmentation of enforcement authority that Dodd-Frank has distributed among the attorneys general in every state and the prudential regulators unleashes countless competing interpretations and second-guessing of the supposed baseline ‘rules of the market.’ This will result in complicated and conflicting standards.
At risk is the entire body of rules that has governed the development, design, sales, marketing and disclosure of all financial products; they are subject to change under the bureau, and could change dramatically in many instances. When developing and offering products, firms rely on the basic rules of the road, knowing that they are subject to careful changes from time to time.
This uncertainty can cause firms to pull back from developing new products and new delivery systems. It also makes banks think twice about various types of lending if they are uncertain what the rules will be when they try to collect the loan a few years out. This problem should not be underestimated.
For all these reasons and others, it is the American Bankers Association's (ABA) first priority to improve the accountability of the CFPB. Establishing accountability supersedes other important priorities regarding the CFPB, including ensuring appropriate bank-like supervision of non-banks for consumer protection.
During consideration of the legislative proposals that became the Dodd-Frank Act in the last Congress, ABA recommended provisions designed to increase the accountability of the CFPB, because we were greatly concerned about the concentration of authority in a single director of this agency. Our concern was focused on the fact that the bureau has authority over already supervised insured depositories as well as unsupervised or lightly supervised non-banks.
Our concern remains the same. We urge the Congress to pass statutory provisions that ensure such accountability before the CFPB is established with a single director. To restore the necessary accountability of the bureau, the ABA offers several recommendations:
- Strengthen accountability by making meaningful structural changes;
- Reinforce the focus of the bureau's authority on the regulatory gaps; and
- Improve consistency in the application of consumer protection standards.
I think it is very important to dispel a myth that continues to color the debate on the CFPB: that community banks like mine are exempt from the new bureau. Community banks are not exempt. All banks – large and small – will be required to comply with rules and regulations set by the bureau, including rules that identify what the bureau considers to be ‘unfair, deceptive or abusive.’ Moreover, the bureau can require community banks to submit whatever information it decides it ‘needs.’
The CFPB will have direct supervisory authority for consumer compliance of larger banks (with assets greater than $10 billion) – which adds another layer of regulation and supervision – and can join the prudential regulator by doubling up during any small-bank exam at the bureau's sole discretion.
It is also true that bank regulators will examine smaller banks for compliance at least as aggressively as the CFPB would do independently. In fact, the FDIC has created a whole new division to implement the rules promulgated by the new bureau, as well as its own prescriptive supervisory expectations for laws beyond FDIC's rule-making powers. Thus, the new legislation will result in new compliance burdens for community banks and a new regulator looking over our shoulders.
This is no small matter. The CFPB, while significant, is only one change among hundreds that will adversely affect the banking industry and the communities we serve. Already there are 2,762 pages of proposed regulations and 607 pages of final regulations – and this is before the CFPB undertakes any new changes or rulemakings. It is important to understand that our bank or any small business can only bear so much.
Most small banks do not have the resources to easily manage the flood of new rules. The totality of all the changes brought about by Dodd-Frank – including those expected under the bureau, and the excessive regulatory second-guessing by the regulators – has consequences for our communities. Higher costs, restrictions on sources of income, limits on new sources of capital, and excessive regulatory pressure all make it harder to meet the needs of our communities. Jobs and local economic growth will slow as these impediments inevitably reduce the credit that can be provided and the cost of credit that is supplied.
Fewer loans mean fewer jobs. Access to credit will be limited, leaving many promising ideas from entrepreneurs without funding. Capital moves to other industries, further limiting the ability of banks to grow. Since banks and communities grow together, the restrictions that limit one necessarily limit the other.
Albert C. Kelly Jr. is chairman and CEO of SpiritBank, based in Bristow, Okla., and chairman-elect of the American Bankers Association. This article is adapted from testimony delivered before the U.S. Senate Committee on Banking, Housing & Urban Affairs. The original testimony is online.
