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BANKTHINK

Let's Keep the CFPB Leaderless

Recent articles assert that banks will benefit if a director is confirmed for the Consumer Financial Protection Bureau. That's wrong.

The argument is that until the director is confirmed, the CFPB will not be able to regulate nonbanks. Hence, supposedly, banks will benefit from confirmation because it will "level the playing field" between banks and nonbanks.

Who's kidding whom? When has there ever been or will there ever be a level playing field between banks and nonbanks?

For at least 200 years, banks have benefited from a playing field tilted sharply in our favor. Only banks can take deposits. Banks can pre-empt many state restrictions, including usury limits and a lot of other state legislation allegedly intended to help consumers. Banks are exempted from some of the regulatory authority of the SEC.

That's why nonbanks want to own banks: because banks have the advantage. Wal-Mart and Green Dot want to own banks — and other nonbanks, such as Nordstrom's and GE, have actually succeeded in acquiring bank charters.

You don't see banks wanting to become nonbanks. When a large bank holding company started up a nonbank finance company subsidiary, I thought they were crazy. Now they are shutting it down.

It is further argued that if a director is confirmed and the CFPB is given the opportunity to distract itself with nonbanks, then it will do less harm to banks. That assumes the CFPB has limited resources, which is also wrong. By law it has virtually unlimited resources.

A banker told me "an OCC examiner embedded here is now transforming into a CFPB examiner." Does someone think that after a director is confirmed for the CFPB, this gentleman will go regulate pawn shops or auto dealers — instead of the bank where he now sits? I don't think so. There's no way banks can benefit from confirmation of a director.

Even with the CFPB now pursuing only banks, using existing regulatory powers, we will still retain most of our advantages over nonbanks.

However, once a director is confirmed banks will suffer severely. The CFPB will then have the power, under Dodd-Frank, to prohibit "unfair" practices by banks. (Until the CFPB has a director, no regulator has that power.)

So, what is "unfair?" I suppose seven or ten years from now, the Supreme Court might deign to take on some cases questioning the CFPB's judgment of what is or is not "unfair." At least until then, the CFPB's word will be law. There will be as much chance of any bank's getting relief as there was of TCF Bank's getting a court to overturn Durbin. No chance.

What's at stake here? Example: Banks charge check overdraft fees of $39. Yet, the cost of these overdrafts to the banks is often less than 10% of that. So, is the $39 overdraft fee "fair"? If not, banks stand to lose many billions of dollars.

We can send another 11,500 letters, as was done for Durbin. But the CFPB isn't the Fed. Letters are most unlikely to change the CFPB's result.

Second example: Payment protection or credit protection products generally incur a loss rate of 20%-25%. Yet when insurance companies sell protection products, state regulators often hold them to a minimum loss rate such as 80%. (Yes, another example of a very unlevel playing field, enormously favorable to banks vs. non-banks.)

So, is the pricing of credit protection "unfair?" It is if the CFPB says it is. Are we really hell-bent to hear what the CFPB is going to say is "unfair?" Let the bad times roll! And watch their lips: they can do all this and still "not prohibit any product," as Ms. Warren astutely puts it.

Bank safety and soundness are a major concern right now, over which a ton of ink is spilled. Is this the time to activate additional elements of regulation that can only render banks less profitable — and perhaps more inclined to take greater risks in order to achieve adequate return?

Well, let's say the Republicans control both houses of Congress after the 2012 elections. We might then hope for some kind of rollback of CFPB authority. Even if there's only one chance in four of that, banks should prefer to avoid promulgation of very costly regulations and enforcement actions based on the CFPB's new powers at least until that election.

So whatever we think of Mr. Cordray, banks should use all the influence we possess to keep the director job from being filled.

Andrew Kahr is a principal in Credit Builders LLC, a financial product development company, and was the founding chief executive of Providian Financial Corp. He can be reached at akahr@creditbuilders.us.com.

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