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Banks Should Beat the CFPB to the Punch

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It’s time to accept reality. 

The Consumer Financial Protection Bureau is here to stay.  With yesterday’s recess appointment of Richard Cordray, it now has an official director. Despite new threats of legal challenges or hopes for structural changes, this agency cannot be wished away.

But banks can still influence the size and nature of the role the CFPB will play. 

Any grammar school kid can tell you the best way to blunt imminent taunting:  point out your own flaw first – be in on the critique – then make a show of fixing it.

This playground survival skill would serve banks well in their approach to the CFPB.  

After fighting the creation of the agency (and losing), banks are taking a more muted, wait and grumble approach.  They acknowledge the CFPB will have some benefits, but still worry aloud about power-hungry bureaucrats, needless regulations and higher compliance costs.

The irony is, more than anyone, banks can determine the fate of the CFPB.  They can remain begrudging partners – trailing behind on consumer protection – and hand the new agency a great deal of power.  Or, they can get out front on these issues, drive change themselves, and make the CFPB far less significant. 

The latter strategy ultimately benefits everyone, but banks first need to stop pretending the status quo is remotely adequate.  Start pointing out those flaws.

For instance, consumers are desperate for relief from financial legalese.  This may seem like a small issue relative to other recent offenses, but when the CFPB asked for public comment on proposed new mortgage disclosures, more than 13,000 people wrote in.  Normally, these things get a few hundred replies.  The agency’s recent proposal for revised credit card disclosures will likely elicit a similar response. 

And it’s no wonder.  In the 2011 JD Power Credit Card Satisfaction Survey, only 35% of respondents said they understood their credit card terms.  And that is actually an increase from the previous year, likely due to government-mandated changes.  Banks cite legal liability concerns as the culprit for the long, dense language, though ill-informed customers also often wind up paying more.  Hmm.

In private, bank executives concede they know that many customers remain confused.  Where, then, is the forthright CEO willing to stand up and acknowledge the obvious:  “You know what? Our credit card disclosures are totally ineffective if they baffle two thirds of customers.  We can do better.”  Really, this is pretty low-hanging fruit. 

Once a bank admits to a problem, it then establishes the credibility to act on it – but this must be meaningful change.  No window-dressing to distract consumers. That will backfire and prompt even more oversight.

Knowing disclosure is high on the CFPB agenda, why wouldn’t a bank (or industry group) start revising its own credit card disclosure forms right now?  And in the process, solicit input from its own customers about what they would like to see?  Clearly people are eager to share opinions on these issues.  Even if the CFPB implements a universal standard later, banks would be helping to frame the conversation, perhaps even becoming a resource to the agency.  Not to mention building good will among consumers as a sincere early mover. 

The same sequence will hold true for the scope of consumer protection issues.  Get there first, call out the problem, and propose real reforms.  Put the CFPB complaint hotline out of business.  Keep it up, and eventually the playground will become a much more welcoming place.

Susan Ochs, a consultant in New York, served as a senior advisor at the Department of the Treasury in the Obama Administration.

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Comments (4)
I am involved in finance, but really do not think bureaucrate are power-hungry. After eight years of dismantling regulations, it's about time we replaced some. Do you remember when it was "illegal" to charge extra-high rates? We HAVE to return to those days. Bankers will still make a good profit, but we have to have someone watching. Lending at usurious rates was usually dealt with very harshly, even going back thousands of years. Let's get with it!
Posted by daple56 | Thursday, January 05 2012 at 4:02PM ET
Does anyone jnow if the CFBP has authority to regulate auto dealers; and are they planning on it regardless of statute??
Posted by countrybanker | Thursday, January 05 2012 at 4:24PM ET
Kevin Wack, Capitol Hill reporter, American Banker: Sam, to answer your question, CFPB generally does not have authority to regulate auto dealers. There was a big fight in Congress over this issue in 2009-2010, and the dealers were largely successful in evading oversight by CFPB. There is one exception that I know of: auto dealers who keep loans in their own portfolio are subject to CFPB authority. The FTC and the Fed still have pieces of regulatory oversight over auto dealers. Dodd-Frank also allows the FTC to establish rules for auto dealers more quickly than it could in the past.
Posted by kevinwack | Friday, January 06 2012 at 12:59PM ET
Andy Peters, community banking reporter, American Banker: If the opponents of CFPB keep making legal threats against the recess appointment of Cordray, then they can buy time. If they can stall until January 2013, then perhaps Mitt Romney or Ron Santorum will be the next president and dismantle the CFPB.
Posted by Andy Peters | Friday, January 06 2012 at 3:42PM ET
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