Financial Research office promising, CFPB should focus on non-banks, former Comptroller says

Eugene A. Ludwig is founder and CEO of Promontory Financial Group. He was U.S. Comptroller of the Currency from 1993 to 1998. Promontory, based in Washington, D.C., is a global financial services consulting firm, with a focus on risk management and compliance. He was interviewed by CFPB Journal writer Justin Dullum

What do you think is the most beneficial aspect of the Dodd-Frank bill?

The most creative outcome was the Office of Financial Research, which is housed in the Treasury Department. I myself would have preferred for it to be independent. That said, it is positioned to play an important role by gathering and analyzing data about systemic threats to the U.S. financial system. We have not had a government agency focused on these macro-economic imbalances other than the Fed and the issues are sufficiently important that policy decisions should benefit from additional points of view. The lack of careful analysis is one reason, I believe, that the financial crisis was unfairly blamed on banks. In fact, the crisis was largely caused by non-banking institutions and by macro-imbalances that arise from governmental actions and inactions. A failure to spot the housing bubble and deal with it in the mid “aughts” was a serious error by government. If the Office of Financial Research operates correctly, it should be able to identify bubbles and give regulators and policymakers incisive information to shape their decision-making. That’s a very good thing.

What about that body is different than pre-existing bodies?

Each one of the governmental financial agencies that exists has a very different kind of focus. The Federal Reserve is centered on monetary policy and inflation. The Council of Economic Advisers responds to economic matters that by nature tend to be shorter-term and with an inevitable focus on how they affect the presidency. Banking agencies are of course prudentially and institution-by-institution focused, but have done a much better job for the consumer than is commonly believed. The Office of Financial Research has only one responsibility and that’s to address bubbles that can affect the economy and create systemic harm. That is a plus because they will begin to think about systemic issues in ways that the other agencies just have not had the responsibility to do.

Might consumers relate to this Office as just another government agency unlike others?

In terms of data gathering, the Office of Financial Research is not directly focused on the consumer, but I think it will tend to be thoughtful about the consumer. Given that the Office of Financial Research originated amid a financial crisis that had enormous impacts on consumers, I would be surprised if it did not factor consumers heavily into its work. The ordinary consumer doesn’t spend time thinking about bubbles versus historic trends. Having a government agency that says ‘Look, this looks like a bubble to us and we don’t think this pricing can go up forever,’ gives the consumer and everybody else headlights that they didn’t have before.  

New oversight by the CFPB is cut off at banks under $10 billion, yet some community bankers fear “regulation creep.”  Should these banks worry?

Community banks by their nature have a strong orientation toward consumers. They could not exist in the communities in which they operate and be successful if they didn’t offer consumers a value-added relationship. That’s the nature of their business. They don’t need a lot of rigmarole. They don’t need a lot of government regulations and examinations to treat the consumer well. While I believe they have consumer responsibilities, they should not be burdened by the same kind of mechanisms that are in place for the largest institutions. Dodd-Frank was right to draw a line, and it’s everyone’s responsibility to make sure that line doesn’t involve regulation creep. Smaller banks have made mistakes, but bank regulators currently have the tools to deal with the mistakes.

Are there any reasons for smaller banks to be wary?

Community bankers have a right to be concerned. It’s up to those who run the CFPB and the bank regulatory agencies to honor the will of Congress to have a robust community banking sector that is not treated the same way as much larger institutions. Bank trade associations, too, have a role in helping to ensure for their memberships that congressional will is followed here.

Is there a precedent to something like the $10 billion threshold? Do you perceive any consequences to drawing a line like that?

The bank regulatory agencies have worked hard in the past to segment themselves into supervisory teams that fit the size of the institution. For example, the OCC has the large, medium and small bank programs.  The Congressional differentiation between large banks and small banks in respect of the CFPB purview is a wise one. In fact, I would phase things to the $50 billion dollar line, and I would have that line adjusted for inflation. For banks with assets between $10 billion and $50 billion I think there is justification for a regime that is much, much less intrusive than for the largest institutions.

When you were Comptroller, what was your general approach to consumer compliance protection? Was it adequate?

It was more than adequate. I’m proud of our record. We had a very serious consumer orientation. I think we tried to handle things in a thoughtful way. We created an ombudsman, which was new. We created a vastly improved consumer complaint process. We worked with the industry, and we made sure everyone knew that at the end of the day what was important was the consumer. We worked hard to foster fairness in the system in ways that didn’t over-burden the industry, and I think we were successful.

Is there anything that persists today in terms of consumers that wasn’t there before you?

There are many things I could point to. But first, what we did at the OCC was create the ombudsman program. It was both open to the banks to communicate excessive regulatory behavior and to consumers to provide a forum for concerns about financial institutions and practices. The ombudsman at the time did a great job of balancing both responsibilities, and I know banks felt they were treated fairly and so did consumers. And in that regard I might say that the program was so successful that Congress ended up mandating it for the other banking agencies.

The second thing was Community Reinvestment Act reform. At that time, banks were complaining that CRA was a paperwork burden that didn’t accomplish much and consumers were complaining that it was all about paperwork that didn’t accomplish much. I think we came up with system that was more about results and impact, and less about paper and burden. Now, was it perfect? No. Is there more burden there than I’d like to see? Yes. But it was a real accomplishment for the industry and the consumer that I think worked out well.

How has the consumer arena changed since you were Comptroller, and do you think there was a need for the CFPB?

No, I don’t think there is an absolute need for the CFPB among banks. Banks are regulated. There have been mistakes. But treating consumers is the heart of the banking business. Banks have a history of being civic minded. That doesn’t mean they don’t need enforcement. That doesn’t mean you don’t want to go after the outliers. But the industry as a whole tries to treat consumers fairly in my view. Where I think the CFPB is a good and needed change is the extent that it focuses on non-banks that are unregulated. As you see in the last crisis, the lion’s share of problems had to do with mortgage brokers that were essentially unregulated and were not consumer friendly. In that regard the CFPB is a big step forward, but not as much as it relates to banks.

If I were a compliance officer, what friendly advice would you give me as I work to keep up with the changing rules?

Compliance officers at community banks ought to be working with their trade associations to make sure rules are crafted that are appropriately sized for community banks, if needed at all. I was cheered to see that Acting Chairman of the FDIC Marty Gruenberg has begun to focus more and more attention on the need for regulatory reform and right-sizing for community banks. I’d say when rules come out that are inappropriate and unfair compliance officers should work directly with trade associations and regulatory agencies to make sure they are appropriate for community banks. Being constructive and providing examples of how rules impact efficiency and service is a powerful approach. I think the heads of the banking agencies all are in favor of balance, and a compliance officer can play a very useful role in drawing to the attention of the banking agencies and others instances when there are burdens where there needn’t be.

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