Three Reasons Why With Friends Like the CFPB, We Don’t Need Enemies.

September 17, 2012 at 6:19 am 2 comments

Last week, Richard Cordray testified before the Senate Banking Committee in conjunction with a report summarizing the CFPB’s activities to date.  “I have acknowledged and very much believe that small providers did not create the problems that led to the financial crisis.  We should not solve the financial crisis by heaping unnecessary burdens upon them.  Of course, the devil is in the details and we are working hard on those details. .  .”  Unfortunately the devil is in the details and the very approach of the CFPB means that credit unions are going to be collateral damage in its crusade on behalf of the American consumer against financial institutions.

The CFPB is animated by three flawed premises:  (1) that the American consumer was a victim as opposed to a willing co-conspirator in the financial excesses that led to the Great Recession; (2) that with the right disclosures, enough people can be nudged in the right direction when it comes to making financial decisions; and (3) that consumers but not financial institutions are in need of regulatory relief.

In his speech accepting the Democratic nomination for President, Obama asserted that Democrats believe that the American people should not be tricked into buying a mortgage they can’t afford.  No one would disagree with this, but when a government agency is premised on the assumption that Americans are, in the aggregate, too busy, dumb or lazy to understand the implications of financial transactions they are entering, then there is really no limit to how far it will go to tinker with terms or mandate additional procedures to help the American public make the “right” decision.

The best example of these misplaced priorities is in the mortgage industry where  the CFPB, empowered by the Dodd-Frank Act, is on the verge of imposing regulations, legal requirements and consequences on lenders so severe that it simply will not be in the interest of credit unions or the relative handful of true community banks to offer mortgages anymore.  In his testimony, the Director pointed out that its proposed servicing regulations only apply to institutions that service 1,000 or more mortgages.  But the reality is that many credit unions rely on servicers that reached this threshold.  They may not be subject to these regulations directly, but they will feel their impact indirectly if only in the form of increased costs.  In addition, large institutions are going to be better positioned to ensure that staff is trained on changes to regulations such as those that would change the calculation of APRs for mortgages.  And larger institutions are going to be better positioned to handle logistics involved in scheduling closings which can only go forward provided members have received closing documents three days prior.

I have no doubt that if the CFPB could be given a scalpel it would try to exempt small institutions from as many onerous regulations as possible.  The problem is that regulations are more analogous to shotguns than scalpels.

But isn’t all this worth it to protect the American consumer?  That assumes that the American consumer needs protecting.  The last four years have seen a dramatic tightening of credit and better lending practices.  This trend was well in place before the CFPB came into existence and with lenders using all the deceptive, inadequate regulations that allegedly got us into this mess in the first place.  Has the American consumer just learn to read better or have they responded to a downturn in the economy as intelligent, responsible people would?

To be clear there are fundamental problems that need fixing in our financial system, but these problems go well beyond the regulations being instituted by the CFPB.  Assessing the damage done by large financial institutions to our financial system and deciding that the answer is greater disclosure is tantamount to investigating the Titanic disaster and doing nothing more than mandating that boats have more life jackets. This will undoubtedly help some people but it will do nothing to prevent another disaster.

Entry filed under: Compliance, General, Regulatory. Tags: , , , , .

No one is ever going to accuse Federal Reserve Chairman Ben Bernanke of not trying; the question is: are his efforts doing any good? There’s An App For That, But Is It Safe?

2 Comments Add your own

  • 1. Ed Kovalefsky  |  September 17, 2012 at 8:11 am

    Your analogy of the Titanic disaster and mandating that boats have more life jackets is spot on.

  • 2. Vicky Burdick  |  September 17, 2012 at 2:30 pm

    You take the regulations coming down on us as well as NCUA mandating reduced risk to the share insurance funds our hands are tied and we can no longer do our mission of serving and helping the members who need it the most. All we hear is our loan policies are to risky change them. To much risk. Really!!!!!!! Then we get this regulation that will put us out of the mortgage business. When will it end??????????????


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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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