We received an email from one of our readers, reporting on a recent meeting between CFPB Director Cordray and representatives of the South Dakota banking and credit union industries. We very much appreciate the report and encourage other readers to share their observations with us. Topics addressed in the meeting included the impact of consumer regulation on small banks and the ability to provide financial products and services; competition between community banks and credit unions and large banks; regulatory uncertainty regarding new products; the need for payday loans or payday loan alternatives; and preparations for going after payday lenders (presumably only lenders deemed to be in violation of UDAAP or other laws). For the full report (with identifying information deleted), click below:
Senator Tim Johnson gave some opening comments to the group and then turned it over to three prominent members of the South Dakota banking community to share their high level observations with Director Cordray.
The CEO of one bank talked first. He held up a copy of a mortgage that it was using back in 1979. The document was 2 pages long and contained 8 signatures. He then held up an example of the mortgage disclosures they are providing today. They are about an inch thick and he stopped counting at 92 signatures. He said he was dismayed to read that the CFPB has introduced yet another set of new disclosures for mortgage servicers. He believes consumers have become numb to all the disclosures and the CFPB needs to take a fresh look at all of the requirements and simplify the process for consumers and banks alike. He said the CFPB has tried to calm bankers by saying they are here to reform all these regs and simplify the disclosures, but all the banking industry has seen so far is more disclosures. He’s concerned that community banks are going to be exiting the mortgage business because it’s too expensive and impossible to comply.
The COO of a credit union talked next. He said there have been 18,000 pages of new regulations added in the last three years. This is simply unmanageable for small credit unions. He said South Dakota had 51 credit unions last year and 5 recently merged citing compliance costs as of one of the reasons. Of the 46 that remain, 24 of those have 6 employees or less. He said he’s frustrated because credit unions were not the cause of the economic crisis. In some small towns, the credit unions are the only financial institutions still making loans. He’s worried that the result of this new regime is that consumers in these towns will lose access to banking services. He said the community banks and credit unions are an integral part of their communities, both from a business perspective and on a personal level. We need more of these types of institutions, not less. If these institutions have to shut down, the result is that the big banks that caused all the problems are just going to become more powerful. He wants to know that the CFPB truly has an interest in protecting small community banks and credit unions.
The Regional President of a second bank talked last. He reiterated some of the same sentiments as the first two speakers. He’s concerned that the CFPB will develop all these new best practices and try to impose them on everyone, including small community banks and credit unions. He said every indication he’s received so far from their prudential regulators is that they intend to strictly apply any new regs promulgated by the CFPB. He said they were forced to incur $1 million dollars in implementation costs for new procedures as a result of their last exam. He’s concerned the regulators are overly aggressive and treating small community banks the same as large institutions.
Richard Cordray then gave his standard speech about the purpose of the consumer protection bureau. He said he believes “honest businesses will benefit when those that cheat their customers are held accountable.” He also said they are looking for ways to level the playing field for community banks and credit unions. As an example, he cited the new foreign remittance rules. He said they are currently taking comments on whether these rules should be applied evenly for all institutions or whether certain institutions should be carved out. He said he needs community banks and credit unions to provide input in areas where exemptions or carve outs might be appropriate. He understands that these institutions are heavily relationship-based rather than transaction-based and that could perhaps warrant exemptions from certain rules. He then opened it up for questions and comments. Here are the questions/comments and his responses:
1. One banker encouraged Director Cordray to eliminate the gray and create regulations that are more black and white. Director Cordray responded that he’s instructed his people not to cite institutions in some of these gray areas and they are working on providing more clarity where needed.
2. The same banker also asked whether the CFPB intends to allow institutions to submit new product concepts to the CFPB for review before roll-out. He said he feels like it’s more and more of a gotcha game with regulators these days and this is creating a great deal of uncertainty in what institutions are allowed to do and not allowed to do. Director Corday did not directly respond. Instead, he simply reverted back to his previous comment that he will consider exceptions to certain rules for community banks and credit unions.
3. The President and CEO of another bank expressed concern about how all these new mortgage servicing regs are killing their mortgage servicing business. The bank has operated this segment of their business at a loss for the past three years because of all the new requirements. Given that they originate 97% of the loans they service, he doesn’t understand why all these mortgage servicing regs should apply to their bank. Plus all the new appraisal requirements are frustrating, especially in small towns. He said its taking from 12 to 18 weeks to get appraisals completed in some of these small towns and the appraisers simply can’t keep up. The bank encouraged the CFPB to keep small servicers in mind as they are promulgating new rules. Director Cordray seemed to agree that perhaps mortgage servicers such as this bank should be given some leeway on some of these requirements. He said the CFPB is mindful of all the new Freddie Mae and Fannie Mac requirements and they intend to coordinate their efforts with these organizations. Director Cordray said in general they are looking for ways to modify or eliminate regulations that are not helpful to consumers and only add increased costs for banks. For example, he mentioned that he’s heard from several banks that they are getting sued for bogus lawsuits claiming violation of Reg. E due to the bank’s failure to put a sticker on the ATM warning consumers of the ATM surcharge (notice is also provided prominently on the screen and customer has to agree). He said the bureau plans to revisit this requirement and determine whether it can be eliminated in light of the disclosures provided on the screen. Good news.
4. The President of South Dakota Banker’s Association wanted to share some statistics with Director Cordray about ag competition with a large credit union. He said last year the credit union reported $456 M in net income, paid federal and state taxes equivalent to a 2.06% tax rate, saw a ROA of 2.8% and a ROE of almost 17%. Meanwhile, the 61 state chartered banks in SD reported approximately $192 M in net income, paid federal and state taxes equivalent to a 40% tax rate, had an ROA of 1.03% and an ROE of 7.4%. Community banks are already having a tough time competing in the ag lending space and the regulatory creep is making it nearly impossible. Director Cordray said he understood the regulatory concerns, but there’s obviously not much the CFPB could to do to fix some of the tax issues that make it hard to compete with this credit union.
5. Since Director Corday never really answered the prior question on the ability of an institution to submit product proposals to the CFPB for approval prior to launch, another member of the audience asked if he could perhaps talk about that a little more. He said it’s something they have discussed quite a bit and he understands that regulators tend to provide wishy-washy answers leaving institutions subject to attack later and leery to roll out new products. As an example, he stated that they’ve been looking heavily at payday loans. He knows these products are in high demand and recognizes there’s a consumer need for short term loans. He understands that these products are not profitable at 5 to 10%. He would like to see more alternatives available, but understands institutions are hesitant to introduce these types of products. They are talking about ways they might potentially provide some latitude in this area. He said they have talked about developing a review process at some point so institutions can feel more comfortable rolling out new products, but they are trying to balance that with giving a go-ahead and then finding out later that the institution didn’t give them the whole story or perhaps the market place changes. As such, an outright blessing of new products and services is problematic for them at this point.
6. Director Cordray was then asked what he considers to be “abusive”. Director Cordray said his folks probably wouldn’t want him saying this, but in his opinion, he thinks that if you are offering a certain product or service and you make a judgment about certain terms and conditions based on a well-reasoned and reasonable approach, he can’t imagine this would be considered abusive. He said he doesn’t have an exact answer as each act will need to be evaluated in light of the surrounding facts and circumstances.
7. Another member of the audience asked Director Cordray how he thought the pricing of products factored into the “abusive” standard, if at all. He acknowledged the CFPB has no authority to regulate interest rates or fees or otherwise engage in price fixing. He said where he sees the abusive standard intersecting with pricing is the manner in which the pricing is disclosed. He said pricing disclosures should be clear, there shouldn’t be any backend pricing and consumers should be allowed to make informed decisions. He said he understands that consumers are willing to pay a higher price for certain products because they like how the product works or the convenience of a product. However, the concern with the CFPB would be when a consumer gets a product thinking it costs less than it does because the pricing isn’t properly disclosed. He thinks banks should be able to set reasonable prices and make a reasonable profit margin on top of that.
8. Finally, Director Cordray was asked what the CFPB intends to do about all these unregulated lenders out there today (payday lenders, rent-a-centers, etc.). Director Cordray said they are prepared to go after the payday lenders and nonbanks but intend to work with the states to coordinate efforts with entities that are already licensed through the state.