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Love Triangle or Bermuda Triangle?
By L. Jean Noonan

It is now over three years ago that Lehman Brothers filed for bankruptcy. The failure of Lehman led to the largest bankruptcy filing in our history. Its collapse was among the most dramatic events of the financial crisis. And Lehman Brothers was only the leading edge of the collapse or near-collapse of a number of other financial institutions, many of them very highly respected. It was a dangerous time for our country.

In the wake of the financial meltdown, it was clear that Congress would feel compelled to respond. A friend of mine is fond of saying that we knew Congress would do one of two things – either do too little or over-react.

We have a triangle of: 1) our financial institutions; 2) our customers; and (3) a massive new law – the Dodd-Frank Wall Street Reform and Consumer Protection Act – and the new agency it created, the Consumer Financial Protection Bureau. Is this triangle a Love Triangle – or a Bermuda Triangle?

Let’s take a look at Dodd-Frank. To start with, this law is 849 pages long. It requires 243 rulemakings. It requires 67 new studies and reports. It requires government agencies to issue 22 new periodic reports. It created a new federal agency with an annual budget of about $330 million and 1,200 full-time employees.

This new agency is now about six months old. Its temporary headquarters are just a block from our offices in downtown Washington, DC. Many of our good friends and former colleagues at the Federal Trade Commission, the Federal Reserve Board, and consumer advocacy groups have assumed top leadership positions.

What are my impressions of the CFPB? First, the people they have hired in key positions are very smart. They know their subject matter well. They have a passion for consumer protection and are devoted to their mission. That is not always a good thing, especially for financial institutions.

Some things about the design of the CFPB made sense. It was supposed to be a bringing together under one umbrella of the consumer financial protection missions of a slew of federal agencies. It was also intended to separate the consumer protection mission of bank regulators from the job of insuring that financial institutions are “safe and sound.” And it was supposed to create a level playing field, so that banks, which are highly regulated, would not be at a disadvantage by having competitors that were more lightly regulated, and the protections afforded consumers would not depend on the charter of the lender.

So, how did that turn out?

Let’s look at the consolidation benefit. There is a real advantage to having all rulemaking located in a single agency, especially if you like the rules the agency produces. On the other hand, if you find yourself critical of the rules, we might long for the days when that power was more diffused.

Do we have the federal government’s consumer financial protection mission consolidated in one agency? No, far from it. In several political compromises, the old bank regulators kept responsibility for enforcing consumer protection laws for all except the largest banks. The FTC has kept its enforcement authority for all nonbanks. The CFPB has simply been added to the mix.

Next, what about the separation of functions between safety and soundness regulation and consumer protection? Some people argue that these are incompatible missions. A regulator cannot ensure a bank is both well run, with sufficient capital and good management and earnings, and also in compliance with consumer protection laws – or so the argument goes. I admit this argument has always puzzled me. I was the chief lawyer at a bank regulator for 10 years, and I watched examiners examining for compliance of every sort. There were definite advantages to having the agency examine for safety and soundness and for consumer compliance. The exam teams knew the bank’s management; they knew if the board of directors was active and engaged or overly deferential to management; they knew whether the bank operations were generally sound or if corners were cut. Knowing how the bank was run from a financial soundness perspective could inform examiners regarding how the bank approached its consumer protection mission. In short, combining these functions in the same agency for a bank ensured how well the agency knew the bank. I think both the bank and its customers benefited from this more in-depth knowledge.

If concern for a bank’s safety and soundness ever tempered a regulator’s response when it found a consumer protection issue, can we say that would be altogether bad?

Finally, let’s look at what the new regulatory scheme does to level the playing field. Banks have had tremendous regulatory scrutiny through the regular examination process. In contrast, nonbanks, which were under the FTC’s jurisdiction, were never examined at the federal level and typically saw the FTC only in response to complaints. Now both banks and nonbanks potentially have two regulators. Smaller banks remain with their safety and soundness regulator, but the CFPB has the power to step in where it chooses. For nonbanks, both the FTC and the CFPB have enforcement powers. We have doubled the number of cops on the beat, but nothing fundamental has changed. Banks will still be regularly examined for both safety and soundness and for consumer protection compliance. Few nonbanks, only the largest market participants, will ever see a federal examiner. Of course, nonbanks will continue to be subject to state regulation. But states vary widely in the resources they devote to audits of nonbanks, and, at least as viewed by banks, state oversight has never been equivalent to the scrutiny banks received from the feds.

Here is another consequence of dividing bank consumer protection responsibilities among regulators, and I am guessing it is one the consumer advocates did not anticipate: The CFPB must hire compliance examiners for the nation’s biggest banks. Guess what? The most experienced compliance examiners – who are now employed by the Office of the Comptroller of the Currency, the Federal Reserve Board, and the Federal Deposit Insurance Corporation – are not lining up to apply for those positions. My clients are calling me in dismay when they learn that their new consumer compliance exam team is inexperienced, and the team members will have to learn their jobs as they go. I think our biggest banks should have the most seasoned and most qualified consumer compliance examiners, and I bet consumer advocates agree with me. But, by and large, this is not what’s happening.

The next concern with the CFPB, and one that certainly wasn’t expected when the legislation was being drafted and debated, is the problem with confirming a director. If you have followed the news, you know the Republicans are not happy with so much power being invested in a single director. They would prefer a 5-member bipartisan board. Democrats are refusing to re-open the issue of structure, and some see such a change as “watering down” the new agency. That’s a hard argument to accept, however. After all, the concept of a multi-member bipartisan commission running an agency was born out of the progressive movement 100 years ago. It was given even more momentum in the New Deal years that followed the Great Depression. That’s the structure of the FTC, the Securities and Exchange Commission, the Consumer Product Safety Commission, and scores of other federal agencies. Indeed, in the first draft of the CFPB, written by the Democrat-controlled House of Representatives, the head of the new agency was – you guessed it – a 5-member bipartisan commission! And I’m pretty sure the Democrats who voted for it did not think they were creating a watered-down agency.

But what is better for our country – financial institutions and consumers – an agency headed by a single director or one headed by a multimember, bipartisan board? In my 24 years of government service, I worked for two agencies run by bipartisan boards, and I can tell you there is a lot to say for them.

Every now and then, a top governmental official has a screwy idea. But it is rare, even in Washington, for three or five top officials at an agency to have the same screwy idea at the same time.

Positions adopted by bipartisan commissions are generally more moderate. The process reflects the views of members from both political parties. The commission members generally strive for collegiality. There have been some exceptions, but they usually listen to one another’s views, and the ultimate decision is commonly enriched by debate. And the vast majority of votes I witnessed at both agencies were unanimous, which means they ultimately came together for a common purpose, without partisan wrangling. I think our government could use more of that.

Finally, bipartisan agency boards generally meant that agency positions changed only gradually. There were not stark policy reversals with a change in administration. Many consumer advocates were excited about an agency headed by Elizabeth Warren. But I’m betting that they wouldn’t have been as happy with a director appointed by a President Newt Gingrich or a President Ron Paul.

Financial institutions need predictability of the rules of the road. My clients are willing to follow any rules, even those they dislike. They must be able to understand them and to plan their businesses around them. Rapid reversals of policy are costly and seldom beneficial for either financial institutions or their customers.

But we have a law that calls for a single director, and there is no chance of that changing in the near term. Republicans have vowed not to confirm a director, no matter how well qualified, until the CFPB leadership structure is changed. President Obama has nominated former Attorney General Richard Cordray from Ohio to the position. His Senate hearing was a pleasant affair. There were few tough questions because most Republicans asked no questions. His answers didn’t matter. They were not going to vote for anyone to be the CFPB director. Cordray has now assumed the director position through the president’s recess appointment. He is operating under a cloud of uncertainty regarding the legality of the appointment. This uncertainty is sure to be a major distraction for the indefinite future.

As I noted, even without a Senate-confirmed director, the Bureau has begun work. Here are the areas it says are its top priorities:

  • Mortgages: Enforce provisions of the Truth in Lending and Real Estate Settlement Procedures Acts to reform servicer business practices and mortgage disclosures.
  • Overdraft and Bank Fees: Monitor and investigate banking institutions’ compliance with the Electronic Funds Transfer Act, Truth in Savings Act, and TILA to ensure that overdraft fees, overdraft coverage, and other bank fees comply with federal law.
  • Internet and Bank Payday Loans: Launch investigations of online payday lenders under the EFTA.
  • Prepaid Cards: Utilize relevant provisions of the EFTA and TISA to protect prepaid debit card users from identity theft, bank errors, and undisclosed fees.
  • Credit Cards: Audit credit card company business practices to determine compliance with the Credit Card Accountability Responsibility and Disclosure Act and TILA and begin the process of enhancing credit card disclosures.
  • Credit Reports: Investigate credit reporting agencies to ensure the accuracy of consumer credit reports under the Fair Credit Reporting Act.
  • Student Loans: Utilize TILA to enhance student loan disclosures.
  • Debt Collectors and Debt Buyers: Enforce the Fair Debt Collection Practices Act to protect debtors against enforcement of expired debts or inaccurate debt collections.
  • Money Transfers: Enforce the EFTA to require enhanced fee disclosures for money transfers and remittances.

That’s an ambitious agenda. And it doesn’t even count the 200+ required rulemakings!

What do we conclude about the new agency and its relationship with our financial institutions and our customers? Well, I’m pretty certain it is not a Love Triangle. And it might not even be a Bermuda Triangle, where paranormal forces cause our companies to disappear. But one thing is certain: When traveling in these uncharted waters, exercise caution!

L. Jean Noonan is a partner in the Washington, D.C., office of Hudson Cook, LLP. Jean can be reached at 202-327-9700 or by email at jnoonan@hudco.com.

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