January 15, 2014

Pro-Consumer Banking 'Fixes' That Are Anti-Consumer

Hester Peirce

Former Senior Research Fellow
Summary

Mr. Cordray told The Daily Show audience that the bureau is now turning its attention to the bank practice of "confusopoly"-subjecting consumers to lots of hefty, complex forms in order to make it tough for them to determine what price they will be paying. A lot of small bankers are suffering from CFPB confusopoly, in which the agency promulgates so many pages of new rules, enforcement actions, and guidance that small banks with thin compliance staffs cannot figure out which rules apply to them, let alone what they require. As one bank in our survey noted, "[a]ll the uncertainty and changing definitions, etc., related to qualified mortgages, mortgage banking requirements and so forth has made the business of serving customers by helping them become homeowners much more difficult, cumbersome, and time-consuming." While well-intentioned, and careful lenders busy themselves with "bringing things up to snuff" under the bureau's fuzzy standards, consumers whose financing needs are not getting met might be wondering which consumers Mr. Cordray's agency is protecting.

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"It should cost some money to bring things up to snuff." That's what Richard Cordray, director of the Bureau of Consumer Financial Protection, told Jon Stewart on The Daily Show last week. Mr. Cordray was defending his agency's new mortgage rules that took effect last week. He suggested that the only banks that need to worry about the new rules are the big financial institutions that caused the financial crisis. However, the mortgage rules affect lenders of all sizes and the consumers the bureau was charged with protecting.

Mr. Cordray explained in a recent op-ed about the mortgage rules that "we are not requiring loads of red tape: lenders will likely ask a potential home buyer for proof of things such as income or assets-the kinds of things responsible lenders like our good community banks and credit unions have been asking for all along." If that's the case, why do community banks that were already doing things right have to spend any money to "bring things up to snuff"?

Under Dodd-Frank, the bureau is not the primary supervisor for small banks, but the regulations the bureau writes apply to banks of all sizes. Mr. Cordray noted the agency's efforts to treat small lenders differently than their large counterparts in its regulations. But even with those efforts, the bureau's hand still falls heavily upon community banks. Sorting through the rules and exemptions is a lot tougher for a small bank with one compliance person than it is for a large bank with a compliance army. Small banks cannot ignore the regulatory and legal risks of making a loan that runs afoul of the rules or does not fit neatly with one of the exceptions.

In response to a survey that I conducted along with colleagues at the Mercatus Center at George Mason University, one bank explained the difficult situation in which many small banks find themselves: "Do we burden our borrower with collecting everything but a blood sample so we can have protection in the Safe Harbor, or do we continue to take the risk that our underwriting standards that have worked and kept us healthy for the last 100 years could get us sued?"

Banks' worries are already becoming consumers' realities. Borrowers are wading through more paperwork, paying higher fees, getting less customer service, and waiting longer for loans. Many survey respondents reported that they had already exited the residential mortgage market. Others are thinking of doing so. Still others highlighted the particular difficulties they will face in serving low-and moderate-income consumers trying to borrow small amounts. Banks will be reluctant to lend to a creditworthy consumer who does not satisfy the ability-to-repay indicia set forth by the bureau. Mr. Cordray is right that making loans that will get repaid is "basic banking 101." But then it follows that, as long as banks are made to face the consequences of their decisions, they should be allowed to use their expertise, well-honed underwriting standards, and granular, localized, borrower-specific information to assess potential borrowers' ability to repay.

Mr. Cordray told The Daily Show audience that the bureau is now turning its attention to the bank practice of "confusopoly"-subjecting consumers to lots of hefty, complex forms in order to make it tough for them to determine what price they will be paying. A lot of small bankers are suffering from CFPB confusopoly, in which the agency promulgates so many pages of new rules, enforcement actions, and guidance that small banks with thin compliance staffs cannot figure out which rules apply to them, let alone what they require. As one bank in our survey noted, "[a]ll the uncertainty and changing definitions, etc., related to qualified mortgages, mortgage banking requirements and so forth has made the business of serving customers by helping them become homeowners much more difficult, cumbersome, and time-consuming." While well-intentioned, and careful lenders busy themselves with "bringing things up to snuff" under the bureau's fuzzy standards, consumers whose financing needs are not getting met might be wondering which consumers Mr. Cordray's agency is protecting.