Even after the subprime debacle ignited the greatest economic crisis since the Great Depression, financial industry lobbyists — still among the most influential in Washington — are pulling out the stops to keep the various segments of the financial services industry united in opposing any meaningful regulatory reform.
These lobbyists and the large banking and Wall Street interests behind them oppose the establishment of a sound and uniform approach to the basic regulation of mortgage markets, where the established regulatory infrastructure's failure was most glaring.
The world of financial industry lobbying is one in which lobbyists representing different subsectors of the financial industry twist arms and logroll to "encourage" the cooperation of other subsectors.
The community and small-bank lobbies are feeling such pressure now, being pushed by the large-bank lobbyists, such as the American Bankers Association, Wall Street players and the trade groups representing the very sorts of large financial companies that led the way during the high-risk-lending boom.
For community banks the fundamental ability to compete in all sorts of lending and financial services markets is at stake. In the past 30 years, an ever-increasing share of mortgage and banking markets has become dominated by the top 25 banking organizations, leaving the small banks and thrifts with the scraps.
As more small banks fail each week as a result of falling property values and financial contagion stemming from the subprime and mortgage mess, it has become painfully obvious that, though small banks were generally not the source of irresponsible and reckless lending practices, they are bearing a disproportionate share of the resulting costs.
Small banks were generally not among the principal actors in pushing up loan-to-income ratios to the point where borrowers were buying homes priced at more than five or six times their incomes.
Most small banks used tried-and-true income and asset verification and avoided the riskiest lending terms and practices.
Some lobbyists have argued that, because community banks did not cause the crisis, they should not bear any new regulatory burden. There are two major problems with this argument. First, a uniform, consistent federal regulator will be able to rationalize regulation and make the regulatory process less bureaucratic and more predictable. A Consumer Financial Protection Agency will be able to increase the scrutiny given to the largest lenders and those most likely to engage in overly risky and irresponsible practices.
Moreover, most regulations that are promulgated have input from at least four or five federal regulatory agencies, slowing the regulatory process and making it less predictable. The skepticism with which Congress and the public now view the federal regulatory agencies and their actions effectively undermines the certainty and stability of any new regulations. Congress is likely to second-guess the existing regulatory agencies and their rulemaking for a very long time.
Second, it is precisely because community banks have borne a disproportionate share of the costs of regulatory failure — through falling property values, through the stresses and strains of their small-business customers and through the deteriorating employment and credit of consumers in their communities — that they should support a new, uniform federal regulator.
A sound regulatory system and a level playing field applied to all sorts of financial firms is necessary for community banks to compete effectively and to prevent unregulated firms from once again laying waste to the hard work that small banks and their partners have invested in their local communities.
Because federal regulators were ineffective at curbing irresponsible lending and sometimes even promoted such behavior by preempting state regulations, local communities around the country and their community banks are suffering from the aftermath — foreclosures, vacant homes and lots, failed businesses and now unemployment. The mortgage and financial crisis was fueled principally with the financing provided by underregulated, high-risk lenders. The CFPA will level the playing field for small banks in competing against nonbank lenders, which have been largely unregulated, as well as against large financial conglomerates that have shopped around for the kindest and gentlest regulators. By doing so, the new agency will also protect entire communities, including their local small banks and businesses, from the wreckage created by irresponsible, underregulated lending and finance.