Consumer Protection Debate Hits Capitol Hill

By Flitter, Emily | American Banker, June 23, 2009 | Go to article overview

Consumer Protection Debate Hits Capitol Hill


Flitter, Emily, American Banker


Byline: Emily Flitter

WASHINGTON -The drive to create a new consumer protection agency - a key component of the Obama administration's regulatory restructuring plan - will get its first test in a House hearing this week and has already sparked fierce debate.

The banking industry and its federal regulators oppose the plan, which would strip current agencies of their power to write and enforce rules related to consumer protection. They argue that safety and soundness and consumer protection are closely related and that separating them would be needlessly burdensome and expensive and could even threaten the industry's health.

"It'd be a disaster" to create a new consumer protection agency, said Nicholas J. Ketcha Jr., a managing director at FinPro and a former director of supervision for the Federal Deposit Insurance Corp. "When they separated the consumer compliance division from the bank supervision division, it just set up a dichotomy of examiners working against the interests of what's being done on either side."

But consumer advocates claim regulators have failed to adequately enforce consumer laws because compliance too often takes a back seat to safety and soundness concerns.

Even some former examiners agreed that safety and soundness and consumer protection could be handled by different people at different agencies.

"They are different skill sets," said Carmina Hughes, a former special counsel for enforcement and special investigations at the Federal Reserve Board and now an executive director of Daylight Forensic and Advisory LLC in Washington. "Consumer protection issues are much more bound by regulations; they're very specific programs. Whereas safety and soundness is a very broad concept."

Though the witness list was not public on Monday, the House Financial Services Committee is expected to collect testimony from both sides on Wednesday. None of the banking agencies would answer questions about the Obama proposal on the record for this story.

Emphasis on consumer compliance has waxed and waned depending on which political party was in charge of Congress and the White House, and how the banking industry was performing.

At the beginning of this decade, all four banking agencies had consumer protection and supervision divisions.

But shortly after President Bush took office, the FDIC and Office of Thrift Supervision combined those departments and began conducting joint examinations. The two agencies also adopted a "risk-based model" of supervision for compliance examinations. Previously, the agencies had randomly pulled loan files and tested them for compliance violations. Under the new system, the agencies interviewed senior bank officials to determine an institution's overall consumer protection strategy.

The move was popular with banks and was soon adopted by the Office of the Comptroller of the Currency. Only the Federal Reserve Board continued to keep supervision separate from consumer protection. Ironically, it is the Fed that has been the focus of criticism because it chose not to exercise its authority over unregulated mortgage players.

Some former regulators said the jobs should be separate but equal parts of the exam process.

"I favor carving consumer compliance out as a separate discipline but working hand-in-glove with the prudential examiners under the same supervisor," said Wayne Rushton, former chief national bank examiner at the OCC and now working at Promontory Financial Group. …

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