It is my strong contention that consumer financial protection should be the "public option" of financial regulatory reform: Everyone can understand it, more or less, and it is a direct help to average Americans who don't want to think about derivatives and Credit Default Swaps (I don't like to, either). Hence, here is a wonky post about how to make the Consumer Financial Protection Agency legislation, now en route to the House floor, better. Last week, the House Financial Services Committee, under the direction of Chairman Barney Frank, passed a bill to create the CFPA, which is designed to keep banks honest when providing credit to consumers -- car and home loans, student loans, credit cards, checking accounts, etc. While the legislation is, on the whole, a step in the right direction, and we've talked about some of the changes before, more concerns remain:
The Small Bank Exemption. In order to assuage the concerns of community and regional banks, the final version of the bill exempts banks that have less than $10 billion in assets from being examined by or paying fees to the CFPA, although they will still be covered by its rules. Prudential regulators, like the FDIC, the Fed or the proposed "National Bank Supervisor" will be in charge of examining these banks. There are good reasons to do this; politically, it relieves pressure from local bankers against the CFPA, and it also provides an advantage for them over the larger banks, which tend to act more perniciously. Although the cap may be a little too high -- it would only result in about 80 banks being regulated by the CFPA.
The problem is that the prudential regulators proved abysmal at watching out for consumer abuses -- hence the need for the CFPA in the first place -- and, in general, bad practices tend to migrate to wherever the least scrutiny is. The CFPA can regain jurisdiction over these banks as a result of consumer complaints or failure of the prudential regulator to do their job, and the CFPA can send examiners to join the prudential regulators if it so chooses, but without the ability to assess fees on these banks, the agency might not be able to afford to scrutinize them for bad behavior.
Another problem is that large banks might decide to set up smaller subsidiaries to handle certain aspects of consumer credit, like the mortgage lending subsidiaries maintained by many large banks, in order to evade supervision by the CFPA. While Committee members, including Rep. Brad Miller, who introduced the exemption amendment, think that's an unlikely problem, and would be frankly happy to see the banks take action to shrink themselves, the problem of enforcement persists. Miller told me earlier this week that he would support a modification to the compromise that would allow the CFPA to assess fees from smaller financial institutions that, whether through a failure to obey regulations or a laxity on behalf of prudential regulators, end up requiring CFPA examination.
More issues after the jump ...
-- Tim Fernholz