Consumers Bear Costs of Banking Regs
Hood, John, Taylor, Jeff A., Consumers' Research Magazine
The ongoing restructuring of America's financial institutions has been a familiar topic for the business pages during the past two years of economic stagnation--and with good reason. Anyone with a savings account has watched rates of return plunge below the inflation rate while small businesses have seen sources of capital dry up. At the same time fees for bank services have shot up while the level of service has gone down. But seldom are these changes linked to an increase in federal banking regulations.
Yet regulations play a major role in what banks have to spend on services, what services they offer, and where they choose to offer those services. Even the smallest bank is subject to a panoply of these regulations, which concern financial soundness, consumer protection, and even service to the community. Look at a typical bank, for instance, and you'll find rules to follow and reports to file under the Equal Credit Opportunity Act, the Home Mortgage Disclosure Act, the Truth-in-Lending Act, the Funds Availability Act, the Real Estate Settlement Procedures Act, the Fair Housing Act, the Bank Secrecy Act, and the Community Reinvestment Act, not to mention various IRS and federal insurance regulations, among many others.
Intended to protect taxpayers from the costs of financial collapse, and consumers from financial chicanery, these seemingly well-intentioned requirements exert an enormous cost on banks, and by extension, banking consumers.
The American Bankers Association (ABA), an admittedly interested party, estimates that the banking industry spent $10 billion in 1991 to comply with federal regulations, many mandated in the past several years. That number could be smaller, but no one disputes that compliance costs money or that those costs are passed on to the consumer. Chief among these costs are the heavy paper-work burden placed both on banks--especially small establishments--and consumers, and the expensive legal tangles created by various, sometimes conflicting goals of the regulations. The crucial question, then, is do these regulations pay for themselves in the protection they bring to the consumer of bank services? A review of one major regulatory requirement suggests that some of these benefits may be dubious at best.
The Burden of CRA
The case in point concerns the paperwork and documentation requirements imposed under the Community Reinvestment Act (CRA). This law, intended to make sure that banks lend in all neighborhoods where they take deposits, particularly low-income communities, has been cited in surveys of bankers as the most burdensome of all banking regulations.
Under the Act, bankers must document their credit practices and policies in their local communities so regulators can grade them on their performance. Grades depend upon records of meetings with community groups, detailed maps of service areas based on sophisticated zip code analyses and census data, and the correct presentation of brochures, loan applications, and mailings. For banks, such attention to form of presentations to satisfy bank examiners takes away from the work of providing loans to the community.
"The problem with CRA is not that it |requires' bankers to invest in the community--they do that anyway," Alan Tubbs, president of the ABA and a banker in Maquoketa, Iowa, told the Federal Financial Institutions Examination Council in June. "The problem is that CRA has grown into such a compliance nightmare for banks that it is robbing time and resources that would otherwise have been invested in the community. "
And while bankers complain about wasting time and resources documenting their activities for regulators, narrowly focused community activist groups and their lawyers use the regulatory process to force loan concessions from the banks. For these groups, the key to success is to keep the focus on racially disparate lending practices of banks, and away from the costs to ultimate consumers. …