As the Consumer Financial Protection Bureau gets underway, compiling data and taking complaints, there is still a large amount of uncertainty about the impact on banks. Although technically only supervising banks with more than $10 billion in assets, the ripple effect in this industry is what worries smaller banks. We asked legal experts in the field what they thought the most immediate effect would be for banks. Many lawyers believe the CFPB will impact banks in a big way, and may reduce lending and the availability of credit across the board.
What is the most immediate effect that the Consumer Financial Protection Bureau will have on banks?
The most immediate effect that the CFPB will have for banks over the $10 billion threshold is that their compliance examinations will now be conducted by an agency whose mission is based solely on consumer protection. For banks under the $10-billion asset threshold, the primary potential impact is that the CFPB will promulgate consumer protection regulations for these smaller banks, even though it will not generally examine them. This may create a disconnect in the CFPB’s understanding of smaller institutions and exacerbate the current one-size-fits-all compliance approach about which community banks have expressed concern. In addition, all banks should be prepared to respond to postings on the CFPB’s website, which prominently invites the public to “submit a complaint” about their financial institutions.
—John Geiringer, Barack Ferrazzano Kirschbaum & Nagelberg LLP
Banks and other insured depository institutions with total assets of more than $10 billion and their affiliates are serving as guinea pigs as the CFPB develops its examination staff, standards and procedures. Banks that have gone or are currently going through CFPB compliance examinations have reported that the experience is very challenging. Accordingly, large banks need to double check the effectiveness of their compliance function before the CFPB comes calling.
—Chuck Washburn, Manatt, Phelps & Phillips, LLP
The cost and compliance burden [of the new CFPB] will put a damper on consumer lending, but it will be more pronounced with respect to banks with assets in excess of $10 billion. It is already happening. Almost by necessity, the CFPB is taking or will take a one-size-fits-all approach to regulation, such that the problems associated with the worst and least regulated entities are presumed to be the industry norm, and all participants’ conduct will have to comport with a regulatory reaction that is based on the lowest common denominator. When the CFPB issues rulemaking, the bank regulators, who will police the conduct of the under-$10-billion banks, will not want to be viewed as lax enforcers. The cost and risk of lending will increase for all banks. That will result is less lending.
– John Gorman, Luse Gorman Pomerenk & Schick, PC
With uncertainty over how the Bureau’s approach to supervision and enforcement and its priorities will evolve during the next several years, an important task for banks, regardless of asset size, has been to establish good working relationships with Bureau staff. For larger banks with assets over $10 billion, such relationship building is critical in light of the Bureau’s exclusive examination authority and primary enforcement authority for compliance with federal consumer financial laws. However, smaller banks with assets of less than $10 billion also have an incentive to build a solid reputation with Bureau staff. Although it has no examination and enforcement authority over smaller banks, the Bureau may participate in examinations conducted by the prudential banking regulators (“on a sampling basis”), refer enforcement actions and require reports from these institutions.
—Mark Chorazak, Simpson Thacher & Bartlett LLP
Regardless of whether the Consumer Financial Protection Bureau (“CFPB”) has supervisory authority over a financial institution or not, its presence, seemingly atop the regulatory pantheon, will mean increased costs on financial institutions and reduced availability of credit. It is too early to say how the CFPB will maintain a balance between regulation and cost of compliance, on one hand, and availability of reasonably priced credit, on the other hand. Recent indications do not look good for financial institutions or credit availability. A classic example is the CFPB’s statements regarding unfair, deceptive, abusive acts and practices (UDAAP). The CFPB has indicated that a financial institution needs to evaluate whether a proposed customer, such as an elderly customer, understands all of a product’s terms. The consequences for financial institutions that are out of compliance with issues such as UDAAP are quite severe. Financial institutions will err on the side of not making certain loans, rather than expose themselves to losses.
– Peter Weinstock, Hunton & Williams, LLP
Banks with more than $10 billion in assets also are already undergoing CFPB compliance examinations. Even those banks that believed they were fully prepared have been surprised by the scope and duration of these examinations. The pre-examination information requests alone often exceed in scope what bankers would face in an entire examination cycle that included all aspects of compliance and safety and soundness. Banks with less than $10 billion [in assets] are not subject to the direct compliance examination authority of the CFPB, but will still incur significant costs. First, the CFPB has the primary responsibility for developing and implementing new consumer protection regulations. These costs will come in the future, but banks of all sizes will need to contend with these new regulations.
—John ReVeal, Bryan Cave