By Richard Neiman
The Dodd-Frank legislation has made consumer protection a top priority of the reform agenda. This is appropriate and long overdue; tragically, it has taken a financial crisis for some to realize that consumer protection is at the root of a safe and sound financial system. The creation of the new Consumer Financial Protection Bureau (CFPB) is a centerpiece of the legislation in this area that holds great promise, but also creates new regulatory relationships that have yet to be worked out. The CFPB will have its hands full in addressing a wide range of actors in today’s diverse financial services marketplace. The key to success for the CFPB is to effectively partner with other regulators at all levels of government, what I refer to as “cooperative federalism.”
State regulators overlap jurisdiction with the CFPB on multiple levels. The clearest distinction is between banks and non-banks. For smaller banks, those with assets below $10 billion, the Federal Reserve or the FDIC will remain the federal counterpart. The CFPB will participate in exams on a sampling basis. From an operational perspective, the addition of the CFPB as the secondary federal counterpart for smaller banks, although important, represents the smallest change in the state-federal dynamic.
However, for larger banks with assets over $10 billion, the CFPB will be a new federal partner for the states in conducting consumer compliance exams. For those larger banks that are state-chartered, the CFPB is required to “pursue arrangements and agreements with state regulators on joint and coordinated examinations.”
There is an important difference in oversight for larger banks to mention here. Those with a federal charter will experience a bifurcation in their supervision, with separate agencies responsible for prudential oversight and consumer protection. Those that are state-chartered, which account for over a third of larger banks, will retain a holistic approach on the part of their chartering supervisor. This does not mean that consumer protection takes a back seat to safety and soundness at state agencies. On the contrary, it recognizes the many touch points between these two disciplines that contribute to effective oversight, such as underwriting standards. The financial crisis has clearly demonstrated that a loan that is unfair to borrowers is not prudent bank business.
Federal prudential regulators will still need to maintain consumer compliance expertise, however. They will continue to conduct regular exams for smaller banks. And even at larger national banks, where safety and soundness is being separated from consumer protection, I believe strongly that prudential supervisors cannot turn a blind eye to consumer issues or rely passively on the CFPB. For example, a proper assessment of the strength of an institution’s management, the “M” in the CAMELS rating, which is a core element of a prudential review, cannot ignore consumer issues. In fact, it is my hope that the CFPB’s existence will create healthy competition among regulators in setting a high bar with respect to consumer protection.
Regulatory authority over non-banks, however, such as consumer lenders and check cashers, poses different and novel challenges. Unlike with depository institutions, non-banks have typically been supervised exclusively at the state level. Here, the addition of the CFPB as a federal counterpart will be breaking entirely new ground.
In fact, the state-CFPB relationship with respect to non-banks could be the true test for a more cooperative federalism. As states, we are committed to making this relationship work for the benefit of consumers. Our hope and expectation is that this coordination will be a two-way street. There are numerous areas where the CFPB and states will need to be flexible and creative – such as mortgage servicing and payday lending – to ensure we really do work together in implementing our common mission.
Another area that presents a real opportunity to inaugurate a new era of cooperation lies in the enforcement of consumer protection laws. Dodd-Frank codifies the Supreme Court’s recent decision in Cuomo vs. Clearinghouse, re-affirming the right of state attorneys general to bring actions against national banks under non-preempted state laws such as UDAP. It also authorizes state attorneys general to bring actions under federal consumer financial protection laws in state or federal court. By doing so, Dodd-Frank recognizes the crucial role states play in consumer protection. However, the success of this shared enforcement model depends on a new degree of state-federal cooperation. The CFPB and the states must work together, as the states and the Federal Trade Commission have long done, to coordinate enforcement where appropriate to achieve the most effective results.
All regulators need to remain vigilant. Inappropriate or unsuitable products, that cannot be repaid or drive consumers deeper into debt, are destabilizing to institutions as well as to families. While there is no one optimal regulatory structure, the changes that we are undertaking will succeed only if we truly embrace cooperative federalism at all levels of government. The CFPB can’t go it alone.
Richard Neiman, superintendent of the New York State Banking Department, writes on regulatory issues for Banking New York.