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Scary shape of things to come under proposed consumer agency

Agency could overrule other examiners on consumer issues Updated links!

Scary shape of things to come under proposed consumer agency

Calling the Obama Administration’s proposed Consumer Financial Protection Agency the “worst, most intrusive legislative proposal that I have ever seen, and I’ve been working on these issues since 1978,” veteran Washington analyst Wayne Abernathy recently painted a picture of banking life under the proposed agency that borders on the nightmarish.    “It would harm both consumers and banks,” said Abernathy, ABA’s executive vice-president for financial institutions policy and regulatory affairs. Of all of the Obama financial regulatory reform proposals, he said, this proposal would most likely have the greatest effect on everyday banking business. Abernathy made his remarks as the lead-off speaker for an ABA telephone briefing on July 8, “Regulatory Update for the Board,” sponsored by ABA’s America’s Community Bankers Council and organized by ABA Bank Directors Briefing newsletter. (To order the 90-minute presentation on CD, click here.)    “Our challenge as a banking industry is to get everyone to read the fine print, because this proposal as advertised, is not how the proposal is actually written up,” warned Abernathy. “People need to read the fine print. Our challenge is to make sure people pay attention to what’s really there, how this new agency will actually operate.”  Risks posed by proposed agency Abernathy ticked off the damage the agency would do, if approved as proposed in June by the Administration as part of its overall revamp of the financial regulatory system. (Read the full proposal.)
 
• Risk management impact. “It compromises risk management by separating consumer responsibilities from prudential regulation.”
 
• Questionable reorganization of consumer financial duties. “It centralizes banking consumer responsibilities and those of the Federal Trade Commission; but it excludes the consumer responsibilities of the Securities and Exchange Commission and the state insurance regulators.”
 
• Reduction of consumer choice. “It greatly reduces consumer choice, by calling for design of plain vanilla products that must be offered by every bank that offers an alternative product to its customers. … That plain-vanilla product will be designed by a group of five people here in Washington, the people who would be running this [proposed] agency.” [As proposed, the agency would be run by a director and a board, the board to include at least one prudential director.]
 
• Dictation of product terms and more. “The new agency could control the terms and conditions of your products and services. It could decide whether you can have fees; how much those fees would be allowed to be; and what lengths of time you might be able to offer … in your product.”
 
• Marketing impact. “In addition, this agency could regulate how you present your products to your customers and how you offer them to your customers. Does it have to be done face-to-face? If it’s done on the internet, does it also have to require voice communication at some point? Does there have to be a paper trail or not?”
 
Abernathy warned that, “all of these are decisions that Congress won’t make. This group of five people in this regulatory agency, they’re the ones who will make those decisions.”

Consumer banking nightmare?
Noting that what he’d enumerated represented only highlights, Abernathy said that when he’s told bankers what the proposed agency could do, they react with disbelief.
 
“They feel that this just can’t be true,” said Abernathy. “They feel I must be exaggerating somehow. There are so many bad things in this proposal that people are overwhelmed and become somewhere between catatonic and amazed. But these points are in there.”
 
To illustrate what the proposed agency would mean in practice, Abernathy noted that there would be two examiners from two different agencies visiting the bank, in an expansion on the dichotomy of views that bankers already sometimes see between existing safety-and-soundness and compliance examiners from the same agency.
 
“You’ll have your safety-and-soundness and/or compliance exam, but that will be divorced from any consumer element in that exam,” said Abernathy. “So when you’re done with your safety-and-soundness exam and whatever other compliance issues might be involved with that, they’ll go out one door. Your ‘consumer examiner’ who will then examine your consumer practices.”
 
“Under the current proposal,” Abernathy continued, “those two teams don’t have to agree.”
 
He gave an example of the conflicting views that could result. The traditional bank examiners may decide the bank holds too high a percentage of 30-year fixed-rate mortgages. The bank may be told to diversify.
 
However, said Abernathy, “the consumer examiner will come in and tell you, ‘The only mortgage that we think is a good, plain-vanilla, trustworthy, safe mortgage is the 30-year fixed-rate mortgage. We don’t like all these five-year ARMs that you’re offering to try to manage your interest-rate risk.”
 
Abernathy pointed out that there is no requirement that the two teams agree.
 
“In fact,” Abernathy warned, “the way the legislation is written, the consumer agency guy trumps whatever is said by the other regulator.”

Significant lobbying challenge
While he concentrated on the proposed agency in his comments, Abernathy told the directors that this was just one major concern that ABA has among many issues taken with the Obama regulatory revamp proposal.
 
He said that ABA analysts, poring over the initial Administration proposal, and the implementing legislation sent to Capitol Hill at the end of June, had identified literally hundreds of issues the industry has with the proposal.
 
“We here at ABA will be working on all of them,” said Abernathy. “We’ll be communicating with member banks, their boards of directors, and evaluating their views and concerns—and enlisting their participation where that can be particularly crucial in representing the banking industry’s interest.”
 
Abernathy warned that the current atmosphere in Washington is anything but business as usual. Many traditional regulatory concerns have been pushed to the side in the wake of the reform proposal and related matters.
 
“The great temptation in Washington with every financial panic is to play around with the regulatory boxes,” said Abernathy, who has served both in senior congressional staff positions as well as a two-year role as Treasury Department Assistant Secretary for Financial Institutions during the Administration of George W. Bush.
 
Historically, panics have produced significant shifts in the banking regulatory apparatus, Abernathy noted. The Civil War, for instance, led to creation of the Office of the Comptroller of the Currency, and the Panic of 1907 led to creation of the Federal Reserve System.
 
This underscores the importance of the current debate that is shaping up.
 
“With the proposals that are before us today, we are involved in a full board fight for the future of the banking industry,” said Abernathy. “Decisions made over the course of the next few months will determine what you offer to your customers, how you communicate with your customers, what your charter options are, which will in turn of course effect your business model. The decisions made in the next few months will determine how banks will compete with non-banks. And whether too big to fail is killed or reinforced.”

Timing in Congress
Abernathy said that the consumer agency legislation was expected to be voted on by the end of July in the House Financial Services Committee. (To read Committee Chairman Barney Frank’s statement on introducing the Administration’s proposed language on the proposed agency, click here.)
 
On the Senate side, a hearing was held on July 14, including statements by Michael Barr, Assistant Secretary of the Treasury for Financial Institutions and ABA. For the full hearing roster, and related links, click here
 
Links to ABA testimony at both hearings appears below.
 
To read Senate Banking Committee Chairman Chris Dodd’s statement on the legislation, click here.
 
To read an earlier statement by Dodd on his hopes and goals regarding a consumer financial regulatory agency, click here.

ABA testimony on regulatory restructuring
On June 24 ABA president and CEO Edward L. Yingling presented extensive testimony regarding the proposed consumer agency in the House Committee on Financial Services. To read Yingling’s written statement, click here.
 
On July 14 Edward Yingling again testified on the proposed agency before the Senate Banking Committee. To read that version of Yingling's written statement, click here.
 
To view Yingling's Senate testimony, click here.
 
ABA stated in the July 14 edition of ABA Newsbytes:
 
"REGULATORY RESTRUCTURING: ABA Continues to Lead Charge Against CFPA
"ABA will again be the only banking industry witness at a hearing today on the proposal to create a Consumer Financial Protection Agency. ABA President and CEO Ed Yingling will tell members of the Senate Banking Committee about the dangers of separating the regulation of a company from the regulation of its products. He also will argue that the agency will create a huge regulatory burden, particularly for community banks, while non-banks, which are primarily responsible for the crisis, will have ineffective enforcement.

"ABA also will participate today in a House Financial Services Committee briefing on all aspects of the administration’s regulatory restructuring plan, and Yingling will testify tomorrow at the panel’s hearing on the entire proposal."
 
Communicating with Congress
Bankers who want to write Congress regarding this new proposal can take advantage of ABA's electronic comment letter site. Click here to send Congress a message.
 
ABA's "Newsbytes" for July 10 reports that "ABA members and their state bankers association allies since June 30 have deluged members of Congress with 42,867 customized letters -- about 6,000 per work day -- expressing strong opposition to both the creation of a Consumer Financial Protection Agency, and the elimination of the thrift charter."
 
To use the electronic site for a message about the thrift charter, click here.
 
To use the electronic site for a message about both the consumer agency and the thrift charter, click here.
 
Communicating with the public
ABA has posted communications tools dealing with regulatory reform on its website, for members only. This includes a tool dealing with the Consumer Financial Protection Agency specifically. To visit the master page for these tools, ABA members can click here. 

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