CFPB Update

The 112^th Congress may be winding down, but the Consumer Financial Protection Bureau (CFPB) keeps chugging. Before Congress scurried off home for electioneering in September, CFPB Director Richard Cordray paid a visit to both the Senate Banking Committee and House Financial Services Committee for a biannual update on the Bureau’s activities. House Financial Services Committee Chairman Spencer Bachus (R-AL) even quipped that Director Cordray “made some news” during his appearance on September 20. Yes, it’s news when an Administration official appears before Congress and says something of interest.

The Consumer Financial Protection Bureau is poised to
issue two important proposed rules on overdraft
protection and prepaid cards.

What did Cordray say of interest? At issue is the 2009 CARD Act’s “ability to pay” rule. The Federal Reserve Board had responsibility for the implementing this provision of the CARD Act (the CFPB had not existed at this time). The Board created a uniform standard requiring all consumers to demonstrate “an independent ability to repay.” The Board’s rule took effect October 1, 2011 and almost immediately Congress began asking questions on the rule’s impact on stay-at-home spouses and their ability to obtain credit. Dodd-Frank gave the CFPB rule-making authority over Regulation Z (Truth in Lending). At another House Financial Services Committee hearing during the summer, Gail Hillebrand of the CFPB did not appear very sympathetic to opening up the rule again. But Cordray believe enough evidence had been produced to warrant a new rule that would disadvantage stay-at-home spouses who may ample “household income” to secure credit. CFPB will likely issue the revised rule for public comment later this year or early 2013.

Senate and House leaders also expressed concerns with CFPB’s final rule on international remittance transfers (Sec. 1073 of Dodd-Frank). Several House members wrote Cordray in August asking for a delay in the effective date (February 2013) while the CFPB studies its impact on consumers. The CFPB’s rule on international remittance transfers required several disclosures to be made to consumers including exchange rates and fees charged by other entities and taxes to be charged by foreign governments. The only relief CFPB has given to exempt those financial institutions providing less than 100 remittances annually from the new disclosure rules. I do not expect this will be the last we hear of this issue. How far will consumer choice be limited as institutions exit the business because compliance requirements are not financially viable? Stay tuned.

Looking ahead to 2013, the CFPB is poised to issue two important proposed rules on overdraft protection and prepaid cards. EFTA has provided comment to the Bureau on both subjects in 2012 as part of an Advanced Notice of Proposed Rule-Making. Gov. Mitt Romney also called out the Bureau for slow progress on issuing rules on qualified mortgages. Expect some busy beavers in the hallways and offices of the CFPB in the weeks and months ahead.

A Warning Against Durbin “Fatigue”

We hear it all the time at financial services meetings and conferences these days. “This is a Durbin-free meeting.” Or, “…We are all suffering from Durbin fatigue.” I have invoked these words from time to time.

It is true the financial services sector has been quite topsy-turvy since the debit card interchange amendment (aka The Durbin Amendment) was adopted during the Senate’s consideration of financial reform in 2010. The following is a brief timeline of events:

·       July 2010 – President Obama signed into law Dodd-Frank which included the Durbin interchange amendment

·       December 2010 – The Federal Reserve issued a proposed rule to implement the Durbin Amendment and sets the cap on interchange at 12 cents for issuers at $10 billion in assets or above

·       June 2011 – The Senate defeated an amendment by Sen. Jon Tester (D-MT) which sought to delay implementation of the Durbin Amendment

·       July 2011 – The Fed issued the final rule essentially doubling the interchange cap to 24 cents with an October 1 effective date

·       November 2011 – Merchants sued the Fed to overturn the final rule alleging a disregard of Congressional intent

On April 1, part two the Durbin Amendment took effect. Debit card issuers are required to offer routing across two unaffiliated networks, regardless of the authentication method. Financial institutions will also start shortly reporting first quarter financial results, so we’ll get a better snap shot of lost revenues associated with the Durbin Amendment. Banks have already reported fourth quarter results from 2011 and some estimates are a combined loss of interchange revenue of about $2.2 billion for those with more than $10 billion in assets.

Meantime, reports and press releases are flying around asking merchants where the savings are for consumers. I probably shouldn’t even start a discussion of Bank of America’s plan to charge its customers a $5 monthly fee for debit card usage.

Adding more fuel to the fire, the National Association of Convenience Stores (NACS) issued a report this week detailing how credit card interchange fees are hurting consumers at the gas pump. So, let’s get this straight. The retailers rallied Senate support to pass the Durbin Amendment. The retailers turn around and sue the Fed to overturn the Durbin Amendment. Now, the retailers are using high gas prices to rally support for limiting credit card interchange rates. What does it all mean?

I’m here to say that no one in the financial services industry can afford to suffer Durbin fatigue. The NACS study demonstrates the retail community’s unrelenting desire to end interchange as the industry knows it. And, if you sit around believing Congress will never touch credit card interchange, you do so at your peril.

Evaluating Dodd-Frank

   The financial services industry, like most other industries, devotes a great deal of attention to the regulatory process. Many of us in school learned the phrase "The president proposes; Congress disposes." The nation's chief executive proposes regulation, but it is the job of Congress to see those legislative proposals embodied in law as Congress sees fit.

   However, the second half of the equation might be "Congress directs; the regulatory agency effects." Congress upon the president signing a bill into law will direct the appropriate executive agency to implement and monitor the law. And this occurs through the regulatory process. How regulations are implemented and monitored is something most executives in the industry pay close attention to. Witness Gramm Leach Bliley, Sarbanes Oxley, and Dodd-Frank over the last decade or so.

   If you've been involved in the regulatory process, either from the perspective of a regulatory agency or an industry subject to regulation, you have to come away with a good deal of respect for the process. For regulators the challenge is to develop rules that conform with Congress' intent on a particular law. For industry the challenge is to protect the commercial viability of whatever is being regulated.

   It is a unique system where regulators seek comment from the public, evaluate thousands of pages of commentary and propose rules which in some form eventually make their way into the Code of Federal Regulations. The regulators I've been fortunate to work with take their job seriously, work hard, and want to get it right the first time. Most of the time the process works pretty well.

   However, it seems that this system, which has worked so well for so long, is struggling under the sheer weight of several pieces of sweeping, magisterial legislation. Among these is the Dodd-Frank Wall Street Reform Act.

   An editorial in the Wall Street Journal earlier this week claims that a new study shows that the quality of federal regulation is declining. It points to Dodd-Frank and the Accountable Care Act as examples. The Journal cites a Government Accountability Office report on the implementation of Dodd-Frank, Dodd-Frank Act Regulations: Implementation Could Benefit from Additional Analysis and Coordination.

   The regulatory agencies responsible for monitoring Dodd-Frank have a great deal of discretion and are not required to follow the guidance of the Office of Management and Budget, which states that regulatory agencies should include cost-benefit analyses in their review of existing legislation. Most of the independent regulators involved in overseeing Dodd-Frank told the GAO they try to follow the OMB guidance. But in its review of the agencies' rulemaking procedures the GAO found ten of the 32 rules implemented so far for Dodd-Frank were inconsistent with OMB's guidance on considering the benefits of a rule in light of the cost of implementing it.

      In burying the lead the GAO concluded that Dodd-Frank regulators "may be missing an opportunity to enhance the rigor and improve the transparency of their analyses."

   Perhaps more disconcerting, the GAO goes on to note that while the regulators are required to assess the impact of implementing the financial reform law, "some have not yet developed plans to review their Dodd-Frank rules." Yikes. Here we are, 18 months into Dodd-Frank, and some regulators still don't have a plan for figuring out whether the law is working as Congress intended or if the benefits being realized are worth the enormous costs of the Act. Huh?

   The Journal editorial ascribes political motivation to this decline in regulatory quality, but there may be more to it than that.

   You can blame the regulators for this sad state, but that might be like court-marshaling the troops when the general's battle plan goes awry. The real problem seems to be legislation that is breathtaking in scope, unprecedented in complexity, and  burdened with unrealistic implementation time frames. In fact, the regulators may be the first people who've actually digested and parsed what's in laws like Dodd-Frank or the ACA. It is almost inevitable that the quality of rules making and regulatory oversight would suffer.

   Let's hope that the era of panoramic, three-thousand page legislation is over and that the scope of regulatory oversight returns to its former state.

   That's my opinion. What's yours?

  

  

  

  

Dear Santa, I'd like more regulation for Christmas

   I once heard a a government official make the statement that sooner or later everything in Washington gets regulated. So it only makes sense as we get ready to observe Hanukkah and Christmas that the next thing to fall under the regulator's microscope is holiday shopping. Prepaid cards to be exact. On this past Saturday Sen. Robert Menendez (D, NJ) introduced with great fanfare Senate Bill 2030, titled The  Prepaid Card Consumer Protection Act.

     Let me admit up front: I think prepaid cards are one of the greatest inventions of the modern era. Let's face it, outside of anyone living under your roof, whom do you really feel comfortable buying presents for? Probably not that many people. If you're like most folks you've probably spent too much time agonizing over a present for someone, only to see her stare at an opened gift box with a look somewhere between "Oh, my God," and "What do I do now?" Trust me, when she says, "You shouldn't have," she really means it.

   A network branded prepaid card cuts through all that. At a minimum it says "I at least love you enough to have stopped by the courtesy counter at the Garden State Plaza on my way home from work." Okay, it's not a trip to Paris or diamond earrings. But it can be used at the travel agent, the jewelry story or anywhere that network's cards are accepted, and it's as good as cash. In these times, who can't use a little cash?

   And since they're as good as cash, prepaid cards are valuable as a shopping instrument, especially with kids. Kids learn how to pay with plastic, how to safeguard their cards, and how to meter out their money. I'd rather have my kids wandering that Garden State Plaza with a prepaid card, rather than a Tony Soprano wad of cash.

Sen. Robert Menendez (D, NJ), on
one of the busiest shopping days
of the year,  blocking
the concourse of a busy NJ shopping
mall as he announces his
proposal to regulate prepaid cards.

  Sen Menendez was joined in his announcement by a cohort of "consumer" groups. These are people I feel sorry for. They must be the most depressed, miserable feeling,  anti-consumer people in the country. Because it seems to me that these self-appointed consumer saviors actually have very little faith in the American consumer. They seem to hold consumers in such low regard that unless they step in to help, even when they weren't asked, consumers will be rendered financially destitute by big business.

   So Sen. Menendez and merry band of consumerists seem to think that prepaid cards are just another scam by the financial industry to get rich quick, one fee at a time.  Their answer is a very prescriptive piece of legislation. The bill requires "full disclosure" of fees prior to card purchase. It prohibits a variety of fees being charged, and provides protection of Regulation E of the Electronic Funds Transfer Act.

   Now, I'm all for full disclosure, and it might surprise Sen. Menendez and his buddies who take it upon themselves to speak for all consumers, that so are most people in the financial services industry. In fact JPMorgan Chase even received props this week from Sen. Richard Durbin (D, IL), an industry nemesis, for its policy on consumer-friendly, plainly written disclosures.

   But Sen. Menendez apparently shares none of his colleague's new found rosy optimism towards the financial services industry. His bill would micromanage the fee issue down to specifying the size of the disclosure statement. I say, why stop there? Why not specify the type face, size and font? How about Times Roman 10 in PMS 363?

   Perhaps the most troubling aspect of the bill is placing prepaid cards under the umbrella of Reg E. Debit cards, which are tied to a bank acccount differ from prepaid cards. Congress, in its wisdom in the 1970s, protected debit cards against loss since an unauthorized user of a debit card could potentially clean out the account to which it was tied.

   Prepaid cards are like cash. If Tony Soprano loses his wad of cash, ill-gotten or not, he's out of luck. There's no Reg E for cash. Sen. Menendez and his fellow travelers on the road to irresponsibility would like to extend a banking protection to something that's not a bank function. But I say, why stop there? After all, one of the consumerists at Sen. Menendez' announcement said, echoing the earlier point about regulation, "now that prepaid cards are becoming increasingly popular," it's time to regulate them. Apparently, whether they need to be regulated or not.

   So why not regulate everything that's become popular? Take eating. It's popular. We all do it. When someone steals my son's lunch at school, why not have Reg E protection for that? $5.95 for the turkey sandwich, $1.69 for the Snapple and a quarter for the apple.

   Or Justin Bieber? He's popular. Why not regulate him?

   In the payments world,  how about simply doing away with all cards and just applying Reg E to cash? If Tony Soprano drops that wad, he can just apply to Treasury for a replacement. If I need money, I'll just tell the Treasury I lost it and I need more. Kind of like a universal entitlement program. No cards, no eligibility requirements, no work, just universal Reg E protection. When you need money, go to Uncle, tell him what you "lost" and what you need, and you're on your way.

   The problem with Sen. Menendez' legislation, along with laws like Dodd Frank, the Durbin Amendment and the CARD Act are that they stem from a world view where there are big guys and there are little guys. And the big guys are big guys because they're always taking advantage of the little guys. So the little guys need a bigger guy to take care of the big guys.

   But the problem with that--other than its blissful simplicity--is that most often the big guys know they need the little guys. So they treat the little guys right. But when the bigger guy decides he's going to kick around the big guys anyway, pretty soon a lot of big guys become little guys. And eventually the bigger guy starts picking on the little guys.

   Senator, do yourself a favor and focus on something a little more important this holiday season. Like getting people back to work. Have a little faith in us. We're a nation that put men on the moon. I think we can figure out for ourselves that a five dollar fee is more expensive than a four dollar fee. And if a card issuer charges one of us too much, it risks losing us as a customer. And I think we can keep our cards and cash safe. If we lose them, as my son did this summer, we'll learn from the experience.
  
   That's my view. What's yours?

Vita secundum Barney

   Life after Barney. The financial services industry now faces the uncertainty of dealing with the all-important House Financial Services Committee without Massachusetts' Barney Frank as chairman or ranking member.
   To figure out where we're going without Rep. Frank we need to look at how we got here with him. This is not meant to be a Barney bashing. Truth be told, even most conservatives would give him credit (probably grudgingly so) for being one of the more intelligent, articulate and passionate Members ever to sit on, or chair, the Committee. The Dodd Frank financial overhaul bill, loathed by conservatives, owes its existence to Rep. Frank's legislative and parliamentary skills, which allowed him to skipper the bill through a discordant House of Representatives.
   Barney Frank's quick wit powers a sharp tongue. He is a larger-than-life human sound-bite machine, making him a darling of the media. But his sharpness, unfortunately, also has made him a polarizing figure. And while it's difficult to envision him losing a reelection campaign in 2012, even with redistricting, let's face it: After 32 years in Congress he would have had a lot to answer for.
   And at the head of that list would have been his virtual protectorate over Fannie Mae and Freddie Mac. "I do not want the same kind of focus on safety and soundness," he said flatly in 2003, referring to the regulation of Fan and Fred, "that we have in the office of the Comptroller of the Currency and the Office of Thrift Supervision." Rep. Frank went on to say that he wanted to "roll the dice a little more" in loosening up lending requirements for government-backed loans.
   It was this perception of a willingness to sacrifice the financial well being of Fan and Fred in order to put more people, qualified or not, into houses, that made him a target of conservatives. More than that, say conservatives, it was his unwillingness to admit that this roll of the dice had contributed to a complex web of liar loans, credit default swaps and mortgage backed securities that helped collapse the housing market and with it the greater economy.
     So where do the Committee and Congress go after Barney? One place might be a second look at the Consumer Financial Protection Bureau. Rep. Frank successfully fought attempts by moderate Democrats to make the planned agency less independent. With him gone those Democrats may be more likely to join with Republicans seeking to recast the agency.

      Without Rep. Frank the Democrats will tap one of theirs to be the new ranking member (or Committee chair in the unlikely event they are able to re-take the House in 2012). 

   The heir apparent, based on seniority is Rep. Maxine Waters of California. However, she faces two hurdles within her caucus that could preclude her.

   First, she is currently embroiled in a fierce ethics investigation. Rep. Waters continues to be hounded by allegations that she used her juice as a member of the Committee to direct federal bailout funds to a bank in which her husband owned stock. Ms. Waters maintains her innocence in the matter. The case is currently with the House Ethics Committee, which is waiting on a review by outside counsel. Even if she's exonerated the thought of Maxine Waters with a gavel in her hand may make moderate Democrats duck for cover. 

   Second, standing in the way of Ms. Waters' ascendancy may be her fiery Bonnie-and-Clyde anti-bank rhetoric. Being pro-consumer isn't necessarily to be anti-bank. In fact, bankers may not have liked Barney Frank's bluster, his politics, or his sarcasm; however, those who understood the workings of Congress respected his understanding of their complex line of work.

   Ms. Waters, on the other hand, has equated bankers with gangsters. Her solution to the mortgage crisis? Congress should "tax (banks) out of business" if they won't re-negotiate consumer mortgages. Ms. Waters has already started to campaign for the top Democrat seat on the panel. However, I doubt many Democrats, most of whom would hate to see any more banks fail in their districts, are willing to sign onto her slash-and-burn Chavista banking policy.

  In the end the ranking member of the Committee may not matter much, since there are few things in this world as irrelevant as the minority party in the U.S. House of Representatives.  However, nothing would deepen this irrelevance as much as having an ethics-tainted firebrand as the Democrats' ranking member. The party might do better to look at a Committee member like Carolyn Maloney of New York if it wants to have any chance of being an active partner in financial policy in 2013 and beyond.

   That's my take. What's yours?   

  

Is Dodd Frank a Killer for Small Banks?

Yielding to the Law of Threes, Republican presidential candidates have settled on three convenient products of the current administration to highlight the differences in governing philosophy with the Democrats: the stimulus package of '09, the Affordable Care Act, and the Dodd Frank Wall Street Reform and Consumer Protection Act.  In their debate road show over the last year Dodd Frank has been a convenient target for pointing out how the unintended consequences of legislation can harm consumers. 


One of the charges leveled against Dodd Frank is that small banks are harmed by the bill to the advantage of larger ones. Here's GOP candidate Mitt Romney at the October 11 debate in New Hampshire: 


"Because what [bill sponsors Barney Frank and Chris Dodd] did with this new bill is usher in what will be thousands of pages of new regulations. The big banks, the big money center banks in Wall Street, they can deal with that...For community banks that provide loans to business like yours, they can't possibly deal with a regulatory burden like that...It's a killer for the small banks. And those small banks loaning to small businesses and entrepreneurs are what have typically gotten our economy out of recession."


In last week's Michigan debate  front-runners Herman Cain and Newt Gingrich picket up the ball and ran with it. But is that the case? The Independent Community Bankers of America, a trade group that represents mostly smaller institutions actually had some nice things to say about Dodd Frank, as well as some criticism. 


It's probably to early to pick the Dodd Frank winners and losers. What does seem clear, however, is that this sweeping piece of legislation has the potential to change the competitive environment for financial institutions, large and small. And whether it's banking or horseshoes, changing the rules rarely works out well for the little guys.