Consumer Protection Gets More Emphasis, Separate House at FDIC

WASHINGTON — As the government builds a new regime for writing consumer protection rules, an existing bank regulator has put a twist on enforcing them.

For most of the past decade the Federal Deposit Insurance Corp. had combined safety and soundness oversight in the same division with consumer compliance. But in the wake of the crisis and the creation of the Consumer Financial Protection Bureau to draft rules for all banks, the agency split the functions into two distinct arms, launching the Division of Depositor and Consumer Protection.

With the reorganization, the FDIC embraced a model akin to what it tried after the thrift crisis of the 1980s and '90s. The agency said the new structure strengthens its focus on compliance, as it retains authority to enforce CFPB rules for community banks, while observers said the move furthers the perception the FDIC takes its consumer protection responsibilities more seriously than other agencies.

"Before even the CFPB was a sparkle in Elizabeth Warren's eye," the FDIC was "focusing on consumer concerns that other bank regulators were ignoring, such as overdraft lending and credit compliance … related to subprime issuers that they had jurisdiction over," said Travis Plunkett, a legislative director for the Consumer Federation of America.

The new division does not appear to be about adding more responsibilities, but instead about giving the consumer role, including compliance exams and development of guidance, more emphasis.

"With safety and soundness, there are good times and there are bad times. The bulk of our examination efforts and staffing are on the risk management side," said Mark Pearce, a former state regulator and consumer advocate who directs the new division. "Having its own division structure ensures that we maintain that consistent and dedicated focus on consumer protection."

Richard Riese, director of the American Bankers Association's Center for Regulatory Compliance, said the division's importance is that consumer compliance oversight "is now on a reporting line to the [FDIC] chairman without going through safety and soundness."

That increased stature comes as all the agencies take on a new role under the Dodd-Frank Act: synchronizing their enforcement with the CFPB. The new agency, which will not formally inherit is authorities until July 21 and has yet to have a permanent director, will enforce its rules for companies with assets of more than $10 billion. But the FDIC and Federal Reserve Board will share enforcement for smaller banks with state charters, while the Office of the Comptroller of the Currency will still enforce rules for smaller national banks.

Observers said the new FDIC division will help give the agency more influence when weighing in on moves by the consumer protection bureau, including when the FDIC is concerned about the effect of proposed consumer rules on community banks.

"It was worthwhile doing regardless of CFPB," but "it certainly has significant additional advantages in terms of coordinating with the CFPB," said Michael Calhoun, president of the Center for Responsible Lending.

Pearce, who was Calhoun's predecessor at the center, agreed.

"Having all of the consumer protection efforts within one division hopefully will make it easier for us to work with the bureau in a collaborative and cooperative fashion," Pearce said.

"Dodd-Frank encourages consultation," Pearce added. "We hope that consultation will be real. The FDIC … is the primary federal regulator with the most community banks under supervision. Understanding the perspectives of community banks and their operations … and bringing that perspective to bear in the policy arena with the bureau is something that we intend to do."

In announcing the new structure in August, shortly after Dodd-Frank's enactment, the FDIC said the new division would "provide increased visibility to the FDIC's compliance examination and enforcement program."

It also houses staff specializing in educating customers about deposit insurance. In addition to the new consumer division, the FDIC created an office focusing on the agency's authority under Dodd-Frank to resolve systemically important firms.

Under the reorganization, which took effect in mid-February, the former DSC was renamed the Division of Risk Management Supervision.

After Pearce was hired the new division added two well-known figures from the policy and advocacy worlds. Jonathan Miller, who was a key Democratic aide for the Senate Banking Committee during the drafting of Dodd-Frank, was named a deputy director of the division in charge of policy and research. Keith Ernst, who ran the lending center's research wing, was named associate director.

Plunkett said the hirings will bolster the FDIC's credentials as it works with the new consumer bureau.

"The staff in that division have deep experiences from the public-interest point of view and the regulatory point of view in helping to protect consumers," he said. "They will speak the same language.

"It will be a very good thing for the CFPB to hear from the FDIC, from people they know have a strong commitment to consumer protection — to hear from the point of view of the banks regulated by the FDIC."

This is not the first time such a reorganization has been attempted. In 1994, after the savings and loan crisis, the agency formed the Division of Compliance and Consumer Affairs, separating consumer protection from safety and soundness supervision. Eventually, after the industry had recovered and the FDIC had new leadership, it went back to the previous model. In 2002, the two functions were consolidated in the Division of Supervision and Consumer Protection.

"Obviously, the FDIC has had consumer protection responsibilities for a long time and over that history there have been different ways to organize our efforts," Pearce said. "We've had separate divisions in the past, and merged those divisions together, and we've now taken a look at things and … having a separate division makes sense."

Before coming to the FDIC, Pearce was chief deputy banking commissioner in North Carolina, where the Center for Responsible Lending is based.

The state "was at the forefront on a lot of [consumer] issues," Calhoun said. "They set up one of the first foreclosure diversion programs. … It saved thousands of households. But North Carolina is also rightfully regarded as having a regulatory environment that is friendly to banks as well."

To an extent, the FDIC's decision to split up consumer compliance and safety and soundness regulation corresponds with the broader debate leading up to the CFPB's creation.

The Fed, which for years has had a distinct consumer-oriented arm, lost its rule-writing authority to the new bureau under Dodd-Frank amid criticism the central bank failed in its duties leading up to the crisis.

Supporters of creating a separate agency said consumer protection had languished for years at the banking agencies in the shadows of safety and soundness, while critics said breaking the functions apart would have negative consequences.

"It's a microcosm of the same issues CFPB raised when it was proposed," said Arthur Wilmarth, a law professor at George Washington University. "The notion was: Can you simply include consumer protection within the broader safety and soundness examination function, and will enough attention be given to consumer compliance issues? The concern at least before the crisis was consumer compliance issues were given fairly short shrift in the traditional banking agencies, with the exception of the FDIC after Sheila Bair became chair."

It also reflects the priorities of the chairmen involved. Outgoing FDIC Chairman Sheila Bair was much more consumer-minded than her predecessor, Don Powell, who merged the safety and soundness and consumer compliance divisions in 2002. Vice Chairman Marty Gruenberg, who is expected to be nominated as Bair's successor, also has a long-standing interest in consumer protection.

Plunkett said all the regulators seem to have warmed to a more aggressive consumer role after the crisis.

"I am hopeful that the gaps, which have been very wide in the past, will not exist, because there is an increased focus on protecting consumers and on coordinating to protect consumers," he said.

Cornelius Hurley, a banking law professor at Boston University and a former Fed lawyer, said that, in a sense, the FDIC is following a model similar to that of the central bank with its Division of Consumer and Community Affairs.

"They may say, 'We have a robust presence in the field that nobody else does,' " Hurley said. "Plus, historically the Fed has been the repository of consumer affairs. They are going to have whatever's left, and they may figure that that's the nucleus for what the FDIC is just going about creating."

Meanwhile, although the OCC's management of compliance exams is housed under its broader supervision arm, it employs teams that concentrate on consumer compliance issues in its legal division. Yet the agency also operates a distinct compliance division responsible for developing consumer-focused guidance.

"That division is probably going to double in size in the near future just to keep up with the Dodd-Frank provisions," an OCC spokesman said.