Some Thoughts on Regulatory Reform

The Department of the Treasury’s regulatory reform proposals include creation of a sweeping new Consumer Financial Protection Agency (CFPA). But before creating a brand-new agency, Congress should be mindful of the already-heavy compliance burden borne by banks. This was well documented in a study commissioned by the American Bankers Association in 1982, and the burden is much heavier today. I have been dealing with banking laws and regulations for 40 years in a number of different capacities. Over the years, the tide of laws and regulations has been inexorably rising to the point where banks, particularly community banks, are near drowning.

The Obama administration has stated, “We do not propose a new regulatory agency because we seek more regulation, but because we seek better regulation.” This is a laudable goal but is easier said than done. Before transferring responsibilities of existing agencies to a new one, Congress should step back and consider what its past efforts have wrought. We have a patchwork quilt of laws and regulations that have been enacted piecemeal, beginning with passage of the National Banking Act of 1863. In fairness to the existing federal banking agencies, they have had to respond to the hands that have been dealt them by Congress. There is need for a complete overhaul of our banking laws, taking into consideration the impact on both banks and consumers. Just as consumer rights should be written in plain, understandable language, so, too, should be the responsibilities imposed on banks. It is often difficult for banks to comprehend exactly what their responsibilities are. Take, for example, the rules regarding the sharing of consumer information among affiliated institutions. Here is an area where both consumers and banks can easily get lost in the weeds. The Gramm-Leach-Bliley Act (GLBA) established a minimum federal standard of privacy. It addressed protection of consumers’ nonpublic personal information. The statute was fairly complex and it required the banking agencies to adopt implementing regulations, which they did.

Both the statute and the regulations address, among other things, disclosure of nonpublic personal information to affiliates. The Fair Credit Reporting Act (FCRA), which applies to all creditors, not just banks, also addresses sharing information obtained from an affiliate when it is used to make a solicitation to a consumer for marketing purposes. The banking agencies have adopted regulations implementing these provisions of the FCRA. Consumers must be notified that they have the right to opt out of such information sharing. I could go on to describe how the FCRA, banking agency regulations under the act, the GLBA, and the banking agency regulations issued pursuant to it all treat disclosing, sharing, or using information obtained from affiliates, but this would only cause further confusion. Surely, there must be an easier way to explain consumer rights respecting a bank sharing information about them with affiliates that is comprehensible to both banks and their consumers. Consumer protection laws and regulations are often needlessly complex, making it difficult for the consumer to understand what rights and protections are being bestowed, and for the bank to understand precisely what is being required of it.

There are many snares for the unwary in banking laws and regulations. A case in point is the prohibition against tie-in arrangements. It prohibits banks from making extensions of credit or provisions of services conditional on their obtaining other credit or services. These prohibitions are found in a section of the Bank Holding Company Act (BHCA), even though they apply to all banks, not just those that are part of a holding company structure. Another BHCA section prohibits loans on preferential terms to executive officers and principal shareholders of correspondent banks. Logic would not lead a compliance officer of an independent bank to become familiar with the requirements of the BHCA. Likewise, logic would not lead one to conclude that all banks-national, state member, and state nonmember-must look to the investment securities regulation of the OCC to determine what investments are legally permissible. But, that is true.

Senator Christopher J. Dodd has introduced a bill that would replace the existing federal bank regulators with one entity. This idea has been pushed before, especially during the tenure of Eugene Ludwig, comptroller of the currency during the Clinton administration. When I first started representing banks in the late 1960s, the federal banking agencies often went their separate ways in their opinions on compliance issues. This is no longer the case. For the most part, they are in sync. The oft-quoted “race to the bottom” does not exist insofar as the OCC, Fed, and FDIC are concerned. I deal with all of them, and do not find one to be more lax than another. Thrifts are another story. While they are subject to the same consumer protection laws as commercial banks, they operate under a different legal structure. Their powers are determined under the federal Home Owners’ Loan Act, the same statute under which the savings and loan industry operated, and which is essentially unchanged. There is also a federal Savings and Loan Holding Company Act that is administered by the OTS, the federal thrift regulator. The OTS is part of the Department of the Treasury, so merging it with the OCC would appear to make sense.

Vesting authority for bank supervision and regulation in one federal agency would not be likely to improve the quality of regulation. Under the current regime, three agencies with different roles to play, and thereby having different perspectives on the issues, contribute in the formulation of banking regulations. These perspectives should be taken into account when developing regulations, and they would be lost if we were to have a single federal bank regulator.