WASHINGTON — Though the Obama administration has attempted to assure lawmakers that its proposed new consumer protection agency would focus equally on banks and nonbank lenders, there are growing doubts about whether that will really happen.
With approximately 8,000 banks already examined once a year by their regulators, observers unanimously say it would be impossible for a new agency to oversee tens of thousands of nonbank lenders to the same degree.
But Michael Barr, the Treasury assistant secretary of financial institutions, said in an interview last week that consumer protection exams would be risk-based — potentially giving smaller banks a break, while ensuring larger banks and nonbanks receive the same treatment.
"I do think that community banks could use less supervision and examination than very large financial firms offering a wide range of complex products," he said. "I think there are probably some community banks that have supervision and examination more in a shorter time period than is required. There may be some community banks that have more intrusive forms of supervision than is required to assess the risk they pose to consumers."
Despite those assurances, community bankers remain skeptical. Industry representatives said that if a new agency is staffed by examiners and senior officials picked off from current bank regulators — who would lose the right to enforce consumer protection under the Obama plan — banks will continue to face far stricter supervision.
They argue that examiners' years of experience analyzing bank records will make them more inclined to continue studying banks than companies whose business models and procedures are foreign to them.
"Banks have regulators who examine them every year," said Floyd Stoner, the American Bankers Association's chief lobbyist. "Who will examine nonbanks in any comparable fashion and how will any such examination of nonbanks be funded?"
During the past week, Treasury officials have attempted to reassure the community bank lobby. On conference calls with bankers, Barr has made the case for risk-based supervision. Last week, Treasury officials also added more details about how the new agency would be funded, emphasizing that banks with assets of more than $10 billion would pay more in examination fees than smaller institutions.
While Treasury made it clear last month that it was creating a two-tiered fee structure for supervision by a new national bank supervisor, it was not clear until Friday that it would also use that structure to fund a new agency. The exact details on how much banks would have to pay, or even what the assessment would be based on, were left unclear. Though community bankers were pleased with charging larger institutions more, most still fear the creation of a new consumer protection agency. They point to enforcement of the Bank Secrecy Act and other anti-money-laundering laws as proof that bankers usually receive tougher oversight than other financial firms — even when the requirements are meant to be substantially similar.
Although the USA Patriot Act of 2001 extended the scope of BSA to cover money services businesses, broker-dealers, casinos and others at risk of money laundering, few receive regular examinations. Indeed, while banks are examined each year for money laundering issues, many MSBs are not even registered. Approximately 37,000 of the estimated 200,000 MSBs in the country are registered with the Federal Crimes Enforcement Network, even though registration has been mandatory for 10 years. Though BSA enforcement for those firms falls to the Internal Revenue Service, only a fraction have been examined even once.
A similar situation appears likely — at least on paper — if the administration succeeds in creating a consumer protection agency. There are roughly 75,000 nonbank mortgage lenders in the country, and tens of thousands of other type lenders.
"There are around 8,000 banks in our country today," said John Funk, a partner at the Concord, N.H.-based Gallagher, Callahan & Gartrell PC, who represents the New Hampshire Bankers Association. "There are — I would venture a guess — hundreds of thousands of nonbank financial companies in our country. How is the consumer protection agency alone going to examine all of these?"
Funk said it would take a massive exam force to even attempt oversight of all these firms.
"We're just looking at it from a practical standpoint — how is this going to work?" he said. "The problem is that the banks feel they are easy targets."
Some analysts note that compared to banks, nonbank lenders may also be harder to oversee.
"The nonbank financial firms are so diverse and so numerous," said Jaret Seiberg, an analyst with Concept Capital's Washington Research Group. "A lot of these companies don't have regular safety and soundness exams. There isn't this regular government oversight of their activities to the same extent that banks have, so it is going to be a bigger challenge for a new agency to get a handle on a large universe of firms that the government doesn't look at nearly as closely now."
But Ellen Seidman, a former director of the Office of Thrift Supervision, argued that the administration is taking the right tack by focusing on banks and nonbanks on a risk-based basis.
"Do I think it is more important that regulators spend their time looking at the consumer behavior of the Big Four than 7,000 of the 7,200 smaller banks? Yes," she said. "In part, they're doing more; in part they're cleverer, and if they're out there doing something not so great, they're doing it in larger volumes."
This logic could apply to nonbanks as well, Seidman said.
"Would I want them to be looking at the big payday lending chains and so on first and leaving my local bodega for later? Yeah," said Seidman, who is now director of the Financial Services and Education Project at the New America Foundation. "The beauty of focusing on consumer protection is they will hopefully prioritize their resources under at least two dimensions, namely what kinds of products and potential abuses do we have here and what kinds of volume is it being done in."
That is exactly what the administration wants to do, Barr said.
"One of the things that this agency can do, looking across the financial system, is that this big institution over here, it's offering pay option arms to millions of people, I'm really worried about that, I'm going to put a lot of resources into that," he said. "This little community bank over here, it's doing a bunch of really basic 30-year mortgage loans, I'm really not that worried. I don't need to spend that much time there. I don't need to visit that often."
But others counter that while the new agency might intend to take such an approach, it could quickly be overwhelmed and default to just closely supervising banks. "I can't get my arms around the universe of players that would need to be regulated from a consumer protection point of view and how wide and deep that is," said Tom Vartanian, partner at Fried Frank Harris Shriver & Jacobson LLP. "If it gets down to pawnbrokers, that's really pretty broad and pretty deep."