Bankers are almost uniformly opposed to the president's plan to create a new agency to regulate consumer financial products. But with so much political momentum behind the idea, it appears likely that bankers will eventually have to answer to the Consumer Financial Protection Agency. Which brings forward a new question: Will the agency be as bad for the industry as bankers say it will?
Joshua Rosner, managing director for investment research firm Graham Fisher & Co. in New York, is among those in the financial arena who thinks that banks would benefit from a CFPA. "This is something that can be touted against non-bank financials," says Rosner, an advisor to institutional investors and regulators and a proponent of establishing the new agency. "This is actually a Good Housekeeping seal of approval."
Under a CFPA, banks and non-banks that market consumer products, including risky ones like option adjustable-rate mortgages and high-interest credit cards, would have to play by the same rules. And if non-banks can no longer beat banks on price, they lose any advantage they might have over banks, Rosner argues. "You're going to be creating a basic framework that has to be met by everyone," he says. "I'm not sure how anyone can have an issue with that."
Fran Grossman, executive vice president with ShoreBank, a Chicago-based community development financial institution, said bankers generally welcome the effort to rein in the non-banks because they know "that so much that has gone on in the past few years with manipulation, and downright deceit and abuse of consumers." But while Grossman supports creating the CFPA, most of her banker counterparts think the plan goes too far. Specifically, they worry that the CFPA would contravene existing safety and soundness oversight. As American Bankers Association president and CEO Edward Yingling pointed out in Congressional testimony, conflicts will "inevitably" ensue - such as a consumer protection examiner ordering shorter hold periods on check deposits, without considering the anti-fraud concerns that might raise with compliance examiners.
CFPA proponents, including former Office of Thrift Supervision chief Ellen Seidman, concede the concerns about the relationship to soundness. Still, she pointed out that the current system is structured so that one regulator, the Federal Reserve, can write the consumer protection rules that other regulators enforce. "If that's [bankers'] criticism, then they ought to be going after the Fed," says Seidman, now a financial services policy director with the New America Foundation, a progressive think tank.
Rosner thinks banks would see a convergence of their interests with customers under an independent consumer protection agency. Non-bank lenders would have to provide the same "plain vanilla" products with full disclosure. Credit-card issuers couldn't undersell the market with deceptive teaser rates. "You would have cost-of-fund advantage being retained by the bank," said Rosner.
With history as a guide, there are also unforeseen efficiencies that smart banks will discover with new regulation. Sarbanes-Oxley, for example, required auditable system logs to track user access to internal bank systems. Some banks met the standard with advanced identity management programs that gave them a leg up in new automated compliance functions and electronic document adoption.
Bankers, who at heart are reflexively anti-regulation, will not likely change their tune. But such thinking has pervaded much of the past 25 years, and has "really hurt a lot of consumers and in the end really hurt our economy," says Seidman. "I think a change is really appropriate and necessary."