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Should The CFPB Publish More About Complaints?
In its brief history, the Consumer Financial Protection Bureau (CFPB) has become a powerhouse for consumer complaint data on financial services companies. As of July 1, the agency’s database contained more than 250,000 consumer complaints. Currently, the public can view categorized details of these complaints-a billing dispute or closed account, for example-as well as which company is the subject of the dispute and how the issue was resolved. But the CFPB no longer feels that this information is enough to inform and educate consumers, and now proposes to include narrative data as well, basically, the text of the actual complaint. The CFPB wrote a proposed policy statement saying that the consumer complaint database would be more useful with the inclusion of narratives. The agency cites research indicating that word of mouth, including reviews and complaints, is relied upon by consumers when making purchasing decisions, and wants to be the source for consumers when they decide where to bank.

A CFPB spokesperson, via email, says that detailed complaints are published by other federal agencies. The National Highway Traffic Safety Administration publishes complaint data, including narratives, searchable by make, model and year on its website, safercar.gov. The Department of Health & Human Services (HHS) publishes details of Health Insurance Portability and Accountability Act (HIPAA) breaches but, in contrast to the CFPB proposal, only publishes the narrative after HHS’ Office of Civil Rights has investigated the issue.

And that’s a bone of contention for the Financial Services Roundtable and many of the banks it represents. In August, the Washington, D.C.-based lobbying group for the financial services industry went on the offensive, launching a multimedia campaign, which included a social media campaign, advertising in Washington, D.C., subway stations and a website, CFPBRumors.com, to get the public and the CFPB’s attention.

The Financial Services Roundtable says that the current database works for consumers. The CFPB receives the complaint, passes it on to the bank and ensures that the issue is resolved. The majority of complaints are resolved with an explanation or clarification by the bank to the customer of the process or issue that caused the complaint, according to the CFPB.

Publishing complaints that haven’t gone through a review process won’t help consumers, and could threaten the reputation of the banks involved, says Francis Creighton, executive vice president of government affairs at the Financial Services Roundtable. He contends that the CFPB’s complaint database is filled with only that-complaints. That is quite a bit different from business review sites for consumers such as Yelp or Angie’s List.

“What if you went to Yelp, and there were only one-star reviews? Would that be helpful to you?” says Creighton. “If the [CFPB] wants to be Yelp or Angie’s List…at least follow their standards.” Yelp users are legally responsible for the content of their reviews, according to Yelp’s terms of service, and the company actively manages its content through a software program, ensuring that the reviews that factor into a business’s rating are reliable, helpful to consumers and, typically, are written by an active Yelp user.

Another issue lies in the fact that the narrative data published by the CFPB may not be accurate, and this represents a reputational risk to the banks involved. The CFPB admits in the proposal that the narratives may contain factually incorrect information as a result of, for example, a complainant’s misunderstanding or bad memory of what happened.

To mitigate this risk, the CFPB says it will include the company’s response alongside that of the complainant. But Creighton says that this isn’t enough, citing privacy restrictions under the Gramm-Leach-Bliley Act. The bank would need consumer consent to respond in detail to the complaint, and the bank can’t even confirm if the complainant is a customer. At best, the bank in question can release a generic statement, something along the lines of how much the bank values service and an explanation of the bank’s policies on that particular issue.

The Financial Services Roundtable hopes its lobbying efforts cause the CFPB to rethink the proposal. The stakes could be high for the banks involved: The CFPB now receives more than 20,000 complaints per month.

–Emily McCormick

New Capital Rules May Ensnare Some Banks
The international capital rules known as Basel III are bearing down on community and regional banks, with a compliance start date of January 1, 2015. Despite having been exempted from some of the more onerous aspects of the rules that still apply to the largest banks, community and regional banks and thrifts have to comply with increased levels of capital, new definitions of capital and a greater number of categories of assets that must be risk-weighted.

The good news is that most already are compliant. All banks and thrifts above $15 billion in assets met the new minimums, according to SNL Financial. Close to 200 banks and thrifts with less than $15 billion in assets were non-compliant as of mid-September, when the research company performed the analysis. That’s still only 3 percent of the industry that was undercapitalized, even considering the newly required “conservation buffers,” or added capital needed to pay dividends to shareholders or bonuses to executives. The Basel III rules, as implemented by the U.S. banking regulators, go into effect in phases, and the capital conservation buffer doesn’t kick in until January 1, 2016. One of the first concerns for most banks will be opting out of the requirement to count accumulated other comprehensive income (AOCI) as regulatory capital. Only banks above $250 billion in assets must comply, but other banks have to opt out permanently if they want to opt out. Another change is the creation of a new tier of capital called Common Equity Tier 1, which makes equity capital more important than under the old rules. Also, banks will need to deduct more of their mortgage servicing assets and deferred tax assets from their common equity capital.

Boards don’t need to know the ins and outs of Basel III, which is a fairly complex set of new rules. But the board should be asking questions of management about how the bank will be impacted, what are the capital-intensive areas of the business, and whether they are generating a fair return for the capital needed, say Sam Proctor and Greg Lyons, attorneys at Debevoise & Plimpton LLP in New York.

Capital will become more expensive post-Basel III, and raising capital is often a difficult prospect for small banks, Lyons says. For example, under the new rules, banks below $15 billion in assets can grandfather existing trust-preferred securities (TruPS) issued before May 19, 2010, as Tier 1 capital. But once that capital expires, the bank will need a game plan to replace it. Many banks will have no trouble. Others will need additional capital, and it will be more costly for them to replace the old capital with the new. Investors may be looking for higher returns on equity than some banks have been able to deliver. “As it becomes more difficult, as compliance costs increase, then the question comes from investors, if I have $1 to invest, should I invest it in community bank stock, or am I better served going somewhere else?” Lyons says. Banking may be safer under the new rules, but will it make sense for many banks to stay in business under them? That will be a pressing question for many bank boards.

–Naomi Snyder

No More Free Lunch
Banks are getting rid of free checking. The rise of free checking hit a high-water mark in 2009 when 82 percent of all financial institutions offered the product, but that is down to 61 percent today, according a 2014 Moebs Services survey of 2,807 financial institutions.

While an increasing number of banks are getting rid of free checking, credit unions are holding fast to a product that was a financial institution mainstay throughout the 1990s and early 2000s. Only 48 percent of banks offer free checking, defined by the Truth-in-Savings Act as having no minimum balance, no periodic fees and no transaction limitations. Meanwhile, 80 percent of credit unions offer free checking. Credit unions make more money in fee income than banks do, in part because they are less likely than banks to refund fees when customers complain, says Mike Moebs, the chief executive officer of Moebs Services in Lake Bluff, Illinois. He says that about 26 percent of bank fees actually get refunded to customers while about 6 percent of credit union fees are refunded. Banks, meanwhile, are under significant pressure following the loss of fee income from new regulations. The free checking account is much less profitable as regulations have limited overdraft fees. In addition, banks with $10 billion in assets and above that fall under the Durbin Amendment restriction have lost debit fee income. Many banks have reacted to that by moving customers into fee-based or relationship-based accounts, where consumers can avoid fees by doing things such as keeping higher minimum balances, opting for e-statements, and having at least one direct deposit into the account each month.

The survey also found that the types of financial institutions that are getting rid of free checking vary widely. Banks and credit unions in small, rural areas are more likely to offer free checking than banks in large cities. Also, big banks are less likely to offer it than small banks. As of June 2014, only 27 percent of banks above $10 billion in assets offered free checking. But 60 percent of banks with less than $100 million in assets did.

–Naomi Snyder