The banking industry has helped water down consumer financial protection by arguing that consumer protection is a job best done by bank regulators, since the banks already have them captured.
Oh wait, that’s the real, unspoken reason. The spoken one is that having a consumer-focused regulator would be at cross purposes with ones whose focus is the safety of the banking system. The logic there is that banks’ health is more important than consumers, but let’s look at a couple of important pieces today that fight back at the banks’ spin.
Elizabeth Warren, the TARP overseer, middle-class advocate, and my fellow Oklahoma native, last seen saying “dang gummit” in a New York Times profile (I’d guess she actually said “dadgummit,” but I digress), just embarrasses the banking lobby by pointing out in a Politico op-ed today that its line is directly opposite what it was arguing just four years ago. Well, “embarrasses” assumes the bank lobby has any shame… (emphasis mine):
ABA lobbyists now aggressively insist that separating consumer protection and safety and soundness functions would unravel bank stability. Yet just a few years ago, they heatedly argued the opposite — that the functions should be distinct.
In 2006, the ABA claimed to act on principle as it railed against an interagency guidance designed to exercise some modest control over subprime mortgages. It criticized the proposal for “combin[ing] safety and soundness guidance with consumer protection guidance, creating confusion that is best addressed by separating them.”
The ABA went on to argue that the “marriage of inconvenience between supervision and consumer protection appears to blur long-established jurisdictional lines.” And then: “ABA recommends that the safety and soundness provisions relating to underwriting and portfolio management be separated from the consumer protection provisions.”
I believe that’s what you call getting owned (pwned for the youngsters). And it goes on from there:
In the memo, the ABA also argued that: 1) the proposed guidance “overstates the risk” of so-called nontraditional mortgages; 2) the nontraditional mortgages were not “inherently riskier” than traditional mortgages; and 3) the nontraditional mortgages “simply present different types of risks that may be well-managed by prudent lenders.”
So much for the ABA’s expertise on what increases the riskiness of banks.
Do we have a clearer, more forceful advocate for all us non-bankers of the country? Warren also hits back on banks raising the specter of a new gubmint bureaucracy, something I haven’t seen the press do:
If saying down is up and up is down — or, for that matter, that the CFPA’s consolidation of seven bloated, ineffective bureaucracies into one streamlined agency will create more bureaucracy — then the ABA lobbyists are willing to say it.
And back to that unspoken logic I mentioned up top, Warren puts it better than I did, of course:
The ABA’s premise that the country can’t have both meaningful consumer protection and safety and soundness is wrong. In fact, its defense against an independent consumer agency boils down to this: If banks can’t trick and trap people with fine print and legalese, they won’t be able to turn a profit.
Warren isn’t the only Sooner taking on the banks on this issue today. My friend Cheyenne Hopkins of the American Banker calls BS on the banks’ argument. Here’s the lede:
A key banking industry argument against the creation of a consumer protection agency — that the new division would write rules that conflict with safety and soundness standards — is shaky.
Current and former regulators, industry observers and academics said in interviews that such conflicts have rarely arisen in the past; few expected major problems in the future even if consumer issues are handled by a separate agency.
Felix Salmon, not an Okie, alas, picks up on a silly quote Comptroller of the Currency John Dugan, who was gutted in a fantastic New York Times piece on Sunday, gives the Banker:
“One area that stands out is loan underwriting,” Dugan said in an e-mail. “For example, a consumer agency might think that down payments on house purchases should be limited to 5% to promote homeownership, while a safety and soundness regulator might believe a higher minimum could be needed to ensure lenders don’t make loans that won’t be repaid.
Salmon on that straw man:
The fact is of course that loose underwriting is as bad if not worse for consumers as it is for banks, and no consumer financial protection agency is going to condone it. After all, if banks lose money on bad underwriting, that’s because their consumers can’t pay back their loans — and if they can’t pay back their loans, that means they’re in bad financial shape. You don’t protect consumers by encouraging them to get into bad financial shape. This is not rocket science.
No it isn’t. Hopkins also takes the torch to it (emphasis mine):
But the argument relies on the idea that the new agency would proactively seek to extend consumer credit, for example, or otherwise push for policy goals like broader homeownership.
The regulatory reform bills in both the House and Senate, however, do not give the consumer agency that kind of mandate. Instead, it is largely designed to curb abusive business practices. Its purview does not include the Community Reinvestment Act, a law designed to ensure banks are lending in their own communities. (CRA rule-writing and enforcement are left to the banking agencies under both bills.)
Too often journalists let that kind of spin go unchecked in a he-said/she-said manner that ultimately does nothing more than help those who push falsehoods and distortions like the banks are doing here. The Banker doesn’t let the bankers get away with that here. That’s how it’s done.
Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR’s business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.