An independent consumer financial regulator might be less sensitive to the safety and soundness implications of potential new rules than one housed inside the Federal Reserve. However, an agency inside the Federal Reserve might pick up some of the Fed's habits on consumer enforcement.
The competing models for the regulator-the House-passed bill mandates an independent entity, while the bill pending in the Senate calls for it to be housed inside the Fed and headed by a presidentially appointed director-each offer advantages and challenges for credit unions and other financial service providers.
"It's more worrisome if it's an independent entity," said Alex Pollock, a regulatory specialist at the American Enterprise Institute, a conservative Washington think tank.
"The inevitable logic of bureaucratic behavior will turn it into a credit encouraging agency. You are likely to create standards that will encourage more credit, and this will hurt consumers who can't afford more credit. And it will cause financial institutions to have to take additional risks," added Pollock, a former president/CEO of the Federal Home Loan Bank Board of Chicago.
CU executives, whose balance sheets are already hurting from the impact of the recession, fear the additional risk would place them in peril the next time the economy slows down and even during prosperous times if consumers are given access to credit they can't handle.
According to the NCUA, last year the ratio of delinquent loans to total loans grew from 1.37% to 1.82%. The ratio of net charge-offs to average loans grew from 0.85% 1.21%.
Under both the House and Senate bills, most credit unions-all but the three with more than $10 billion assets-would be exempt from examination by the new regulator but would have to comply with any regulations promulgated by the agency. The NCUA would be empowered to do the enforcement.
CUNA Senior Vice President and Deputy General Counsel Mary Mitchell Dunn said that "because the Fed has a banker's perspective, with an independent regulator credit unions and banks would start from the same place in terms of how the regulations are developed."
Critics on Capitol Hill and elsewhere have complained that the Fed has not been aggressive enough on many consumer issues.?"We saw over the last number of years when they [the Fed] took on consumer protection responsibilities and the regulation of bank holding companies, it was an abysmal failure," Senate Banking Committee Chairman Christopher Dodd (D-Conn.) said last November, when he unveiled his first regulatory reform bill, which would have created an independent consumer regulator and stripped the Fed of almost all of its bank regulating abilities.
By contrast, the bill passed last month by Dodd's committee-along party lines-gives the Fed considerable regulatory power over some large banks and houses the consumer agency in the Fed.
Dodd, who made the change on the consumer regulator to accommodate concerns raised by Republicans, said the agency would have independent funding sources and powers and where the agency is housed won't diminish its clout.
NAFCU Senior Counsel and Director of Regulatory Affairs Carrie Hunt said having the agency in the Fed could result in "more of a synergy between safety and soundness, operational and consumer issues."
However, she said she is concerned that some of the Fed's consumer regulations have missed the mark in terms of understanding how consumer regulations impact the operation of credit unions.
During a recent speech, Treasury Secretary Timothy Geithner said the new consumer regulator would focus on rooting out "abject predation and abuse." He said that one of its primary tasks, wherever it is housed, will be to ensure that providers of financial services disclose enough information so consumers can make informed decisions.
AEI's Pollock said that is a worthy goal, but he fears that the agency won't do a good job of limiting its reach.
"Mandating additional information is a worthy goal and can easily be done without jeopardizing safety and soundness," he said. "But the more pressure it [the new regulator] places on financial institutions to increase access to credit, that's where there is greater potential for damage."