Do Safety and Soundness and Consumer Protection Really Conflict?

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WASHINGTON — A key banking industry argument against the creation of a consumer protection agency — that the new division would write rules that conflict with safety and soundness standards — is shaky.

Current and former regulators, industry observers and academics said in interviews that such conflicts have rarely arisen in the past; few expected major problems in the future even if consumer issues are handled by a separate agency.

"In 14 years, 10 at the OCC, I cannot recall a meeting I sat in where we worried about consumer protection and looked at safety and soundness and said the two are in conflict so how do we solve this," said Kevin Jacques, the Boynton D. Murch chairman in finance at Baldwin-Wallace College and a former Treasury official. "I don't buy the reasoning at all. I would love to see one regulator provide a concrete example where safety and soundness and consumer protection are in conflict and it caused some difficulty. I can't think of one."

Brad Sabel, a partner at Shearman & Sterling LLP and a former New York Federal Reserve Bank official, agreed.

"In my experience I do not recall seeing a case where a consumer protection regulation was found to pose a threat to safe and sound operations of the banks," he said.

Several other former regulators echoed this line, and even Comptroller of the Currency John Dugan, who has raised concerns with the creation of a consumer agency, acknowledged that such a conflict would be rare.

"In a lot of cases, we will not have this dispute," he said in a recent speech to the American Bankers Association.

The argument has been made by bankers almost since the regulatory reform debate began, with many saying it would be a mistake to give control of consumer issues to anyone but banking regulators.

The argument has also been made by leading Republicans who fear the consumer agency would write rules that could make banks riskier and ignore concerns raised by the agencies. Opponents of the consumer agency argue that it would have sweeping, unchecked powers that could result in more lending to uncreditworthy borrowers.

"One area that stands out is loan underwriting," Dugan said in an e-mail. "For example, a consumer agency might think that down payments on house purchases should be limited to 5% to promote homeownership, while a safety and soundness regulator might believe a higher minimum could be needed to ensure lenders don't make loans that won't be repaid. Given the significant role that loose underwriting played in the financial crisis, I think it makes sense to provide an exemption from the consumer agency's jurisdiction for credit standards."

Ray Natter, a partner in Barnett Sivon & Natter PC and a former official of the Office of the Comptroller of the Currency, said a consumer agency would "disregard the impact" new rules could have on the financial system.

"For example, from a consumer protection standpoint, you would want to give borrowers every opportunity to cure a default, and might mandate repeated 'second chances' to bring a loan up to date before repossessing the car or canceling a credit card," he said. "That's great for the consumer, but the bank is losing money, and these costs will be passed on to the entire economy through higher interest rates and fees."

But the argument relies on the idea that the new agency would proactively seek to extend consumer credit, for example, or otherwise push for policy goals like broader homeownership.

The regulatory reform bills in both the House and Senate, however, do not give the consumer agency that kind of mandate. Instead, it is largely designed to curb abusive business practices. Its purview does not include the Community Reinvestment Act, a law designed to ensure banks are lending in their own communities. (CRA rule-writing and enforcement are left to the banking agencies under both bills.)

"I think leaving CRA with the regulators is actually a recognition of this issue," said Ellen Seidman, director of the Financial Services and Education Project at the New America Foundation and a former director of the Office of Thrift Supervision. "CRA is an affirmative obligation where consumer protection is not."

Consumer groups agreed they do not see a broad mandate for the new agency. "Having them go out into neighborhoods with new products is not a part of the bill," said John Taylor, president of the National Community Reinvestment Coalition. "That very point goes to the consumer protection agency … is not doing this as a way to stifle innovation. They are doing it to stifle abuse."

To be sure, some see conflicts even within a narrower mandate. Bankers and their trade groups cite potential problems with check funds availability, as an example. A new consumer agency may decide that allowing banks to take several days to clear a check before making funds available to a customer is no longer appropriate, and mandate a 24-hour turnaround time.

"From a customer's view, you want funds all available the moment your check is deposited," said Jeffrey Szyperski, chief executive officer of Chesapeake Bank in Kilmarnock, Va. "With the level of the fraud in the world, the bank wants to wait to see if it clears or not."

But observers said even in those situations the pending reform legislation directs the agency to consult with the primary bank supervisors before writing a rule and to follow the Administrative Procedures Act that allows significant time for notice-and-comment on a rule's potential effects before it is adopted.

The House and Senate bills also give the banking regulators an additional tool. Under both bills, if a prudential regulator sees a safety and soundness conflict in a consumer protection rule, it can raise the dispute with the proposed systemic risk council. The Senate bill requires a two-thirds vote of the council to override a rule, but the House would require a simple majority. (As proposed, the council would have nine members, including the banking regulators and the consumer agency's director.)

Most observers said such votes would probably never be needed. A consumer agency is likely to take the regulators' views into account early on, and regulators may be reluctant to oppose a consumer protection rule unless it is egregious for fear of criticism by Congress and the public.

"Those kinds of issues can be bridged because you can simply require that the consumer financial protection agency consults with the primary regulator when it takes an action that is consequential," said William Longbrake, an executive in residence at the University of Maryland and a former vice chairman at Washington Mutual. "Those things are not done lightly because people in the press are ready to put that in the spotlight so what you do is build checks and balances."

The Obama administration has argued since last year that no disparity between safety and soundness and consumer protection exists. "There is no genuine conflict between consumer protection and safety and soundness," Deputy Treasury Secretary Neal Wolin said in an e-mail. "I reject entirely the notion that demanding responsibility, fairness and transparency in consumer financial markets somehow puts financial firms at risk."

Raj Date, chairman and executive director of the Cambridge Winter Center for Financial Institutions Policy in New York, said the entire debate is missing the point. Good consumer protection and safety and soundness, he said, go hand in hand.

"This is one of the most persistent nonsensical arguments on this debate," said Date, a former senior vice president for corporate strategy and development at Capital One Financial. "It creates a false dichotomy where you can either have safe and sound banks or you can have consumer protection, but you can't have both. That is nonsense."

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