CFPA Is Indefensible; The Carve Out Intolerable
Consumer protections are crucial. No one wants their dear old grandmother getting taken to the cleaners with some unscrupulous reverse mortgage. At the same time, for the good of all, consumer protections cannot take away from safety and soundness, or there won't be any financial institutions to protect consumers from.
As of press time, credit union trades were following debate in the House Financial Services Committee on the CFPA. Two members of Congress introduced an amendment to the bill to exempt credit unions with less than $1.5 billion in assets and banks with less than $10 million from the purview of the CFPA. This is very bad.
This provision, if approved, would separate consumer protections from safety and soundness regulation at the institutions that pose the largest threats vis-?-vis insured deposits. However, it also serves to drive an even larger wedge between the large and small institutions; particularly in the cooperative credit union industry. This cannot be tolerated.
Additionally, consumers will ask themselves, this $150 million credit union is not regulated by the CFPA-does that mean it's less consumer protection oriented? It could be a competitive advantage for the larger institutions.
At the same time, setting minimum standards encourages more consumer-friendly institutions to work toward this arbitrary lowest common denominator. Just look at banks' CRA ratings. Just four out of 48 banks in Maryland received an "outstanding" CRA rating at their last exams; 43 others were "satisfactory" and one received "needs to improve," according to FDIC.gov. If it costs more money, time and resources when all are tight right now, why bother being outstanding if you can skate by on satisfactory. Credit unions would work to meet regulatory standards rather than century-old business philosophy.
Congressman Brad Miller, one of the co-sponsors of the amendment, stated that most community banks and credit unions did not take advantage of consumers as others did. So then a rational person has to ask, why would you regulate potentially 15,000 institutions when the problems were caused by just a few outliers.
This statement isn't entirely true either. I would bet nearly all financial institutions indirectly contributed to the mess. Even credit unions, through the corporates, gobbled up returns on the backs of MBS based on subprime and alt-A mortgages. Buying these items only encouraged the lenders directly involved to continue building their houses of cards.
The credit union trades should be jumping up and down, opposing this split or any CFPA. If they're merely hoping for a seat at the table, the main course is passing them by.
Another proposed amendment seeks to exempt federally chartered institutions from additional state regulation. Consumer groups are upset with the proposed amendment, stating that it negates state and local authority to fight abusive practices.
While consumers definitely need to be looked after to prevent abusive practices, all of the layers of regulation can bury an institution. All regulated institutions should be exempt; creating a consumer protection division within each of the federal financial services regulatory agencies, as the NCUA has proposed, is a much preferred alternative. The Federal Financial Institutions Examination Council was established to help create uniformity across the various financial regulators and could handle the issue of consumer protection as well. The FFIEC just needs to be used more effectively.
Consumers and advocates that are touting the CFPA feel they have the moral high ground. However, there won't be a soapbox left to stand on if the CFPA comes to fruition. It will be those same proponents shouting about the shrinking availability of credit, particularly for those of modest means, and higher fees and lower returns due to the cost of funding and complying with the CFPA.
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