RSSJo Ann Barefoot is co-chair of Treliant Risk Advisors and a former Deputy Comptroller of the Currency. She recently took a few moments to answer these questions for CFPB Journal.
CFPB Journal: There’s a general level of nervousness among community bankers about the potential effect of the Consumer Financial Protection Bureau. Is the alarm warranted? If so, what influences will be felt the most?
Barefoot: The Bureau’s leaders are clearly making an effort to limit the burdens on community banks. I think they want to minimize political opposition focused on the over-burdening of small banks, plus they don’t think community institutions caused the major problems of recent year. The administration’s nominee for director, Richard Cordray, has spoken of exploring two-tiered regulation. However, community banks should not therefore conclude that their risks won’t rise. There are many community bank practices the Bureau will be targeting through new regulations and enforcement. Overdraft protection products and non-transparent fees are the biggest likely areas.
CFPB Journal: What elements of this forming body do you find to be a positive direction for both business and consumers?
Barefoot: The Bureau’s leaders are definitely seeking ways to simplify regulations. They agree with many bankers that some of the existing regulations are too complicated to help consumers, over and above the costs they impose. The Bureau is not “pro-industry,” but it’s trying to be “pro-market,” making markets work better by giving consumers clearer choices. Also, the agency will be trying to level the regulatory playing field between banks and less-regulated non-banks, which may lead to a better competitive environment for banks.
CFPB Journal: In your view, are there any protections under development that, while well intentioned, might have unintended negative consequences?
Barefoot: This is a huge risk with the new Bureau. Probably the top risk would be UDAAP – Unfair, Deceptive, and Abusive Acts and Practices. The agency will try to write regulations and take enforcement steps that only impact really unfair activities, but doing that involves subjective judgment. It could certainly produce unintended consequences as well as intentionally tighter regulation.
CFPB Journal: What do you think is the best way for a bank to stay on top of this wave? While there is a great deal of uncertainty at the moment, what are some of the smartest things a bank can do to avoid being overwhelmed?
Barefoot: The key is to organize to prepare for UDAAP as a top compliance priority. Since it’s a fairly new area of regulatory focus, most banks have barely begun to organize their approach. Traditionally they have focused on check-the-box “compliance,” not subjective fairness. Many issues that are already raising UDAAP problems are not even looked at by traditional compliance programs. The key strategic step is to become proactive, not reactive, checking the whole bank for potential “fairness” red flags and thinking through how to mitigate risks while making a profit. The concrete step is to centralize and analyze complaints. If customers are saying a practice or product that is technically legal is nevertheless “unfair,” or that they didn’t understand it, this is a UDAAP issue. The banking regulators are actively enforcing these, often starting with customer complaints.
CFPB Journal: Do you have a sense for whether the developers of the Bureau are taking heed to the call to avoid tilting the banking business playing field one way or another?
Barefoot: The Bureau is clearly intending to try to regulate non-banks and level the competitive ground. That’s a bigger challenge than bank regulation since it’s mostly new, and also the agency doesn’t have full power to regulate the non-banks until it gets a Senate-confirmed director. As a result, this will lag behind the bank regulation, but it will be coming on stream.
