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In a Q&A on the eve of the CFPB's first anniversary, Director Richard Cordray explains why consumer complaints should be publicly released, and why the pending qualified mortgage plan needs more time.
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The Consumer Financial Protection Bureau has received mostly positive reviews. But complaints of inexperienced examiners and confrontational exams stem from the fledgling agency's effort to set itself apart from traditional banking regulators.
July 9
Perhaps the crowning achievement of the
The astute reader will notice that the acronym CFPB does not correlate with the agency's statutory title. In fact, even the legislative text is inconsistent. No doubt the "b" word was intentionally played down. Bureaucrats in Washington likely felt uneasy about any negative connotation associated with the word Bureau. On the other hand, the phrase Consumer Financial Protection elicits a positive response. Therefore, in official materials, the Bureau is almost always referred to as the CFPB.
Well, I propose a new definition for the acronym CFPB: Choking Financial Professionals and Businesses.
While the Bureau may have consumers' best interests at heart, it is choking the financial sector. More regulation means increased compliance costs. Increased compliance costs will, inevitably, drive up prices and reduce services.
Predictably, Dodd-Frank and the Bureau are already choking the banking industry. No longer can the average consumer open a free checking account. Due to ever-increasing compliance requirements under Dodd-Frank, most banks elected to pass these costs along to the consumer by eliminating free checking.
Today, most accounts require a substantial direct deposit each month or impose a minimum balance requirement or else a maintenance fee is assessed. In fact, before these new regulations, the typical checking account with a monthly balance of less than $500 already
Already, the banks' new requirements have caused countless consumers to abandon financial institutions altogether and join the unbanked – those who rely on cash, money orders, wire transfers, and reloadable prepaid cards to cover monthly expenses. Unfortunately for this group, reloadable cards are the Bureau's next target.
Seizing an opportunity, enterprising companies have introduced universal prepaid debit cards as checking account alternatives. These cards, known in the industry as general purpose reloadable cards, can be reloaded and used anywhere the card brand – Visa or MasterCard for example – is accepted. Further, unlike most checking accounts, these cards rarely have a minimum balance requirement and usually only charge an activation fee or inactivity fee. On top of that, many general purpose reloadable cards include an ATM network, provide online account access, and accept direct deposit. Compared to the burdens of a traditional checking account, general purpose reloadable cards are a blessing.
Naturally, the Bureau is putting its foot down.
In a May 23
But it is excessive regulation that killed free checking and continues to push more and more consumers into the realm of the unbanked. Financial institutions, reacting to regulatory pressure, continue to withdraw from consumer banking in search of greener (and less regulated) pastures in commercial and investment banking. Innovative businesses, responding to profit motives, entered this vacated market by introducing general purpose reloadable cards. Consumers, acting in their own best interest, are flocking to these new products.
Unfortunately, instead of leaving everything alone, government insists federal consumer protection law for prepaid cards must be adopted. Unlike traditional banks, providers of general purpose reloadable cards are not yet subject to inconsistent federal regulatory requirements and forced into FDIC servitude. The Bureau will fix that.
Like most government agencies, the Bureau is another attempt to close the barn door after the animals have escaped. While their intentions are good, neither Dodd-Frank nor the Bureau will eliminate the unsound banking practices that disrupted the U.S. financial system.
Without wandering too far off topic, only the systemic overhaul or abolishment of dozens of federal agencies and regulations can cleanse this broken system. Not more regulation. Choking companies that provide consumers with alternatives is not the solution.
There are reasons to be optimistic, however. First, we need to convince Washington that additional regulation is unnecessary because a fairly effective system of consumer protection already exists – we just need to enforce it. The U.S. judicial system, with a rich history in contract law, already frowns upon or outright prohibits breach, negligence, misrepresentation, fraud, and intentional tort. Piling more regulations on top of centuries of established law simply confuses the issues by adding layers upon layers of bureaucracy.
Second, the Bureau cannot stop innovation. Government meddling led to the proliferation of general purpose reloadable cards and further intrusions will inevitably lead to new advances. However, this type of bank "progress" is more reactionary than innovative, like an exhausted swimmer fighting the river's relentless current.
Whether we ever see free checking again is still unclear, but I am confident banks will find a way.
Devin Leary-Hanebrink is a regulatory compliance and risk management professional in New Orleans.
