"We need to move from screening processes designed to make banks safe from consumers to ones designed to make them safe for consumers," Consumer Financial Protection Bureau director Richard Cordray informed the industry in an early October speech. The topic at hand was the process by which banks approve applications for checking accounts a relatively new focus for the agency.
Cordray's comments, along with the CFPB's forum on consumer access to checking accounts, suggest that banks should prepare for increased scrutiny in this area. It is important to note that regulators do not have to shift away from making banks safe to ensure that consumers are safe too.
The regulatory framework for U.S. financial institutions is supported by two primary pillars: safety and soundness and compliance with consumer protection laws. Safety and soundness regulation provides a structured process to ensure that institutions have appropriate capital levels, management oversight, lending practices and risk management controls. Compliance regulation monitors banking practices to make sure that institutions treat customers fairly.
Prudent regulation resides in the balance between the two poles. Oversight that is overly driven by safety and soundness can result in practices that push the interpretative boundaries of consumer protection regulations. Oversight that is disproportionately propelled by compliance can force a bank to take on risks for which it is unprepared. We need not look too far in the past to see what happens when lending standards are lowered and capital ratios are set too low.
Only when the two philosophies are applied carefully can regulators serve the best interests of both consumers and financial institutions. When screening is done well, the process protects all parties.
However, bankers today must concentrate on the realities of the current regulatory climate, which focuses heavily on consumer protection. Bankers can prepare for heightened scrutiny of their screening processes by taking several steps.
First, banks may want to conduct a self-examination of the customer acquisition programs used to find and screen new customers especially programs that use credit bureaus or other consumer reports, as the role that reporting agencies play has been singled out by the CFPB.
Banks should also execute a fair lending self-test. The Equal Credit Opportunity Act defines a process that allows lenders to self-identify and remedy any problems before they become an issue with regulators.
Lastly, banks should review their compliance management systems. The CFPB's Supervision and Examination Manual highlights the requirements for these programs.
Banks should assume that the regulatory pendulum will remain on the compliance side for the foreseeable future. Therefore it's in their best interests to make sure their practices comply with regulations to the letter and that documentation of those practices is ready for review.
Rich Walker is a managing director with Winterberry Group, where he leads the financial service practice. Prior to joining Winterberry, he served in various marketing roles at Capital One and led many compliance projects to ensure alignment with the 1996 amendments to the Fair Credit Reporting Act, Fair and Accurate Credit Transactions Act and Card Act.