The Obama administration proposes to create a Consumer Financial Protection Agency that would write and enforce regulations governing all providers, both banks and nonbanks, of "any financial product or service to be used by a consumer primarily for personal, family, or household purposes." Note that the CFPA's jurisdiction is not limited to consumer credit, but covers any consumer product or service, including deposits, fund transfers, investment advice, and collecting, analyzing, maintaining and providing consumer report information.
This new agency would duplicate existing consumer examination and enforcement activities of the prudential regulators of depository institutions. And it would charge banks and thrifts for the privilege of doing so.
The administration proposes that prudential bank regulators would transfer to the CFPA the regulators' existing consumer protection rulemaking, examination, and enforcement functions — plus the regulatory staff performing these tasks.
FDIC Chairman Sheila Bair recently told the Senate Banking Committee that while FDIC supported creation of the CFPA, "We strongly, strongly recommend that the examination and enforcement component for banks be left with the bank regulators." Other bank regulators agree to a greater or lesser extent with Ms. Bair.
Whatever happens to the proposed CFPA, prudential regulators will continue to examine for compliance risk. They expect an institution's compliance program to extend to all compliance risk, encompassing both consumer and nonconsumer laws. Assessing the compliance program's effectiveness is an integral part of an examiner's evaluation of the institution's overall risk management. To omit consumer law compliance would require the bank's regulator to ignore a significant component of the institution's legal and reputational risk.
The Fed has been criticized — and rightly so — for its slowness in adopting regulations to address abusive mortgage lending practices. But no one has questioned the effectiveness of the Fed's or any other bank regulator's examination regime in assuring a depository institution's or holding company's adherence to whatever consumer laws were in effect at any given time.
In presenting to the Senate Banking Committee the administration's case in favor of the proposed CFPA, Treasury Assistant Secretary Michael Barr admitted that the compliance regime of the prudential regulators generally "identifies and resolves weaknesses in banks' consumer protection systems before they harm consumers."
Thus, the administration's proposal would simply add an unneeded, duplicative and costly examination force. As Secretary Barr testified: "In large banks, CFPA examiners could reside in the bank just as the consumer compliance examiners often do today, right next door to the safety and soundness examiners."
How will this duplicate examination force be funded? Why, by the banks, of course.
The bill (HR 3126) to enact the administration's consumer proposal directs the CFPA to "recover the amount of funds expended by the agency … through the collection of annual fees or assessments on covered persons."
Secretary Barr told the Senate Banking Committee that transferring consumer examination functions to the CFPA "will not increase the overall level of fees being collected in the [banking] system" because the "new agency will be able to use existing fees that are collected for this purpose by the banking agencies." He went even further by asserting that the consolidation of existing consumer functions into one agency "likely would result in a reduction of fees."
Just one problem with Mr. Barr's testimony: It is incorrect. No prudential bank regulatory agency collects fees for consumer examinations.
The Fed's funding comes not from assessments, but from its earnings on member banks' reserves. Operations of the FDIC and NCUA are funded by deposit insurance premiums. The OCC and OTS assess semiannual fees on their regulated institutions, but neither agency has a separate fee to support its consumer compliance functions.
So, "covered persons" — banks and thrifts — would be subjected to "annual fees or assessments" to pay for the CFPA.
During hearings on the proposed agency, Senate Banking Committee Chairman Christopher Dodd told Secretary Barr that the committee "will not warmly receive" saddling the costs of the new agency on the community bankers and credit unions which played no role in creating the current financial meltdown. Let's hope the views of Chairman Bair and Chairman Dodd prevail.
