CFPB should have a say in bank mergers

The Consumer Financial Protection Bureau oversees some of the largest financial institutions in the United States, yet it has no say when those banks expand via merger.

The CFPB’s inability to stop banks with poor compliance records from growing exposes consumers to potential harm.

Look no further than TCF National Bank, which recently merged with Chemical Bank and thereby nearly doubled in size. Consumers have lodged more complaints about TCF than any other U.S. bank over the past several years, according to one report. Customers alleged, among other things, that TCF regularly charged improper overdraft fees—misconduct for which TCF paid $30 million in penalties last year.

The CFPB might have blocked this merger — had lawmakers given it a say. But by law, the safety-and-soundness regulators — the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. — decide whether to approve or deny bank merger applications.

Until the 1990s, the prudential bank regulators occasionally denied a merger when an applicant had a lackluster consumer compliance record. More recently, however, the agencies have generally ignored consumer protection issues in bank merger applications.

In fact, the banking agencies’ neglect of consumer compliance issues led to the CFPB’s creation in the first place. Many critics blamed the agencies’ lax consumer protection policies for triggering the 2008 financial crisis.

In response, Congress created the CFPB in 2010 and gave the new consumer bureau exclusive jurisdiction to supervise banks with more than $10 billion in assets, like TCF, for compliance with most consumer protection laws.

Despite this significant regulatory revamp, Congress did not create a formal role for the CFPB in bank merger applications. Instead, the banking regulators — which lack direct oversight of big banks’ consumer compliance since the Dodd-Frank Act — retain responsibility for assessing merger applicants’ consumer compliance records as part of the application process.

To be sure, the banking agencies informally consult with the CFPB about bank merger applications. And the CFPB may share consumer compliance examination reports with the banking agencies. But the agencies are not required to accept the CFPB’s recommendations on a merger application, and the CFPB has no power to stop a merger it believes will harm consumers.

Excluding the CFPB from the application process minimizes the importance of consumer compliance and could imperil consumers, as I have recently contended.

The prudential regulators have a well-documented history of downplaying banks’ consumer compliance problems. Vesting those agencies with final authority to assess merger applicants’ consumer compliance records increases the risk that firms with deficient compliance systems will be permitted to expand. And prospective merger applicants, knowing that the banking agencies de-emphasize consumer protection, will have little incentive to maintain strong compliance systems.

Confidential consultations between the banking agencies and the CFPB as part of the application process are insufficient. If the CFPB expresses concerns about a merger proposal, the banking agencies can simply override the bureau by virtue of their final decision-making authority.

Moreover, relegating the CFPB to a consultative role reduces its incentive to evaluate merger proposals carefully. The CFPB likely won’t devote resources to bank merger reviews, knowing that it is not accountable for rendering final decisions and that, in any event, the banking agencies might ignore its input.

For these reasons, Congress should establish a formal role for the CFPB in the bank merger application process. The CFPB’s participation should mirror the Department of Justice Antitrust Division’s authority to block bank mergers.

The DOJ retains an independent role in bank merger reviews because of its unique expertise in antitrust analysis. Similarly, the CFPB has unique insight into banks’ consumer compliance. Thus, it is sensible for the CFPB also to have an official say in merger applications.

The CFPB’s role could be structured in several different ways.

For example, Congress could authorize the CFPB to challenge a bank merger in court if a banking agency approves a proposal without the CFPB’s concurrence, similar to the DOJ’s authority.

Alternatively, Congress could require bank merger applicants to file a separate application with the CFPB, thereby giving the bureau independent authority to approve or deny a merger.

Regardless of how the CFPB’s authority is structured, it is essential that Congress give the CFPB a formal role in bank merger oversight and thereby correct a significant omission from the bureau’s original statutory duties.

Of course, granting the CFPB authority to oversee bank mergers is unlikely to have a significant effect as long as the bureau’s current leadership continues to focus on protecting financial companies, instead of consumers. But under an appropriately vigilant director, the CFPB could reinvigorate consumer protection as a central consideration in bank merger applications in the future.

Effective bank merger regulation has never been more important. Bank merger activity is spiking, as many observers predicted after Congress loosened regulatory safeguards last spring. Meanwhile, the prudential banking agencies are rubber-stamping mergers at record speed.

Moreover, SunTrust and BB&T are now awaiting regulatory approval to complete biggest bank merger since the financial crisis. Those banks ranked third and 12th, respectively, in most consumer complaints last year, according to the aforementioned study.

It makes little sense for the banking agencies, which have been largely stripped of their consumer compliance authority, to evaluate SunTrust’s and BB&T’s consumer compliance records while the CFPB is relegated to an informal advisory role.

Lawmakers need to empower the CFPB to protect consumers by giving the bureau an independent voice in bank mergers.