Thoughts & Comments
Thumbs Down On The CFPA
President Obama's proposed Consumer Financial Protection Agency would weaken the financial system and slow economic growth

Thomas Brown  ( about me )
Posted 12/11/2009
bankstocks.com
tbrown@bankstocks.com

“Hindsight is a wonderful thing,” Tim Long, the OCC’s chief bank examiner, told the New York Times last month as he explained why his regulators didn’t crack down on dodgy lending practices before the housing bubble popped. “At the height of the economic boom, to take an aggressive supervisory approach and tell people to stop lending is hard to do.”  

Good lord. The whole reason we have regulators is so that, “at the height of an economic boom” like the one that crested in 2007, someone from the government will be standing by to tell lenders not to go overboard. If Long and his crew had done that this past cycle, the ensuing hangover wouldn’t have been nearly so painful. Instead, now he says that trying to rein in unsound lending practices during a boom is some sort of metaphysical impossibility. Pathetic.

Regular readers know that Tim Long is nobody’s idea of a softie when it comes to regulatory matters. Nor do I mean to single him and his office out for blame for the credit crunch. But if even Tim Long can’t bring himself to slow lenders down when the credit cycle is roaring, I can’t imagine who could. 

The reason I mention all this is that the House this week is considering creating yet another financial regulatory agency: the Consumer Financial Protection Agency. It is a bad, bad idea.

The CFPA, as you probably already know, is supposed to be a financial-products version of the Consumer Products Safety Commission. The idea, apparently, is that it will regulate consumer financial products, from credit cards, to mortgages, to payday loans, to ensure that they are “safe” for consumers. As a practical matter, that will presumably mean the agency will, for instance, cap fees and rates on credit cards, limit prepayment penalties on mortgages, and who knows what else. 

Which is to say, the CFPA will be unique among banking regulators: it will exist to, at the margin, help weaken the financial system, by preventing banks from offering profitable products that their customers actually want. Instead, the agency will get in between lender and borrower and force banks to price key products at levels that will either undermine their profitability or render them uneconomic, or useless, or both.

Which is exactly the opposite of what the government should be wanting to happen right now. The country’s banking system, remember, has at last begun to recover from its worst freezeup in most people’s memory. Balance sheets are battered. Many banks are losing money, and figure to keep on losing money into next year. The most effective way for banks to repair their balance sheets (and thus fund loans in the next cycle) is for them to return to robust profitability ASAP. Diktats from the CFPA, in the name of “consumer protection,” will only slow that process down—perhaps by a lot. Why that’s supposed to be a good thing for consumers I don’t understand. 

But the CFPA won’t just hobble the banking industry’s recovery. It will also reduce the amount of credit available to individuals and businesses. Say what you will about the aftershocks of the subprime bust, the democratization of credit is a good thing, not a bad thing. Innovative lending products—yes, even ones aimed at subprime borrowers—can, when properly underwritten, finance home purchases and business startups and expansions that would otherwise go unfunded. If CFPA meddling renders some of these products unprofitable, lenders simply won’t offer them. How’s that supposed to help fuel the recovery?

Critics of the banking system say that the credit crunch is proof the industry needs to be more tightly regulated. No. As it is, the industry’s overseen by four separate agencies. Where were they when lenders went off the deep end in 2006 and 2007? Besides, the market itself has already imposed more new discipline on the banking industry than any new passel of bureaucrats can. The list of institutions that have collapsed, from Lehman Brothers, to Washington Mutual, to Countrywide, is long and impressive. Their demise has concentrated the minds of the executives that manage the institutions that remain. So, CFPA or not, you won’t be seeing many 95% LTV no-doc option ARMs being written any time soon.  

Will lenders eventually loosen their underwriting standards again, and start to do dumb things? Of course; that’s how cycles work. But don’t look for any help from the CFPA then, either. “Hindsight is a wonderful thing,” Tim Long says, in defending his agency. His OCC either wouldn’t or couldn’t prevent banks from overreaching at the peak, when active regulation would have done some good. Why should we expect the bureaucrats at the CFPA to be any wiser? They won’t. Instead, all they’ll do is gum things up in the meantime—and help retard the credit creation that will fund the next economic expansion.

What do you think? Let me know!


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csb Posted On 12/11/2009 12:45:26 PM

Terrible idea - except that banks and their regulatory lapdogs can't be trusted not to screw customers. The banking industry and the regulators are not trusted for the best of reasons - or perhaps you didn't notice what went on in the industry for the last number of years. Dont whine for them, Brown.

tom4 Posted On 12/13/2009 11:33:44 AM

The lynch mob is in charge now, and will be making the rules that govern commerce.

JRB Posted On 12/14/2009 2:02:24 PM

You may be right that this agency will likely inhibit better products that benefit the customer. At the same time the industry brought this on itself by offering mortgages and credit cards to consumers that did not have the repayment capacity and offering products like overdraft protection that have little to no value. It was just a matter of time before we got called out on overdraft fees. Consumer resentment of this product has been growing for some time yet the NII from this product has become a major revenue contributor at many banks. Ironicaly one of the key selling points of payday loans is that they are cheaper than incurring overdraft or late payment fees. Some value proposition. I can go without another downcycle and hope we can avoid doing dumb things again. The simple answer is that the industry should police itself but we have been unable to do so for the last thirty years. Lets reflect on LDC loans in the 70s, LBOs the SL crisis and commercial realestate in the 90s, and in this decade subprime, home builders and surprise commercila real estate again. My sense is that regulators and government are going to be a lot more involved in our indutstry for many yeas to come. To expect regulators to identify problems before they occur is expecting to much. This is well beyong their capabilities. The likely scenario is much higher capital requirements and significant restrictions on what banks can and cannot do. We are being forced to be more conservative an example of which is this new agency. Limiting growth prospects may hasten consolidation which is probaly a good thing. Overcapacity in the industry has played a major role in the latest downturn. There just isn't enough good business out there to justify all of this banking capacity.

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Ed Crutchfield Posted On 12/31/2009 6:01:26 PM

The idiot bankers needed to be protected from themselves, eh? Commercial bankers, their stupid organizational politics, their M&A empire-building and groupthink brought this disaster upon themselves and their shareholders. These dopes should be paid what they are actually worth which is— of course: NOT MUCH. Of course, regulators aren't the solution; only a moron would think otherwise.

MasterMind Posted On 1/18/2010 2:05:14 PM

In Mexico we had an issue with the banks back in 1994 when the peso devaluated against the US dollar, the banks had huge losses in mortages and the government approved a huge bailout for them that consisted in the government buying all the bad loans the banks had and paying them interests on that bad loans. Banks are still making a fortune just receiving that interests which are huge and since 1994 they stopped lending to individuals and businesses, needless to say the economy in mexico has been in big downward spiral since then because of no credit available simply because the banks don´t have a good reason to lend when they can receive taxpayers money without risk. If you make lending difficult for a bank because either you gave them money for free so they can avoid risk or because you make it tough and legally over risky for them to lend you will stop the credit flow in its feet. Good luck USA I really hope that this crisis can be left behind!

MasterMind Posted On 1/18/2010 2:06:52 PM

In Mexico we had an issue with the banks back in 1994 when the peso devaluated against the US dollar, the banks had huge losses in mortages and the government approved a huge bailout for them that consisted in the government buying all the bad loans the banks had and paying them interests on that bad loans. Banks are still making a fortune just receiving that interests which are huge and since 1994 they stopped lending to individuals and businesses, needless to say the economy in mexico has been in big downward spiral since then because of no credit available simply because the banks don´t have a good reason to lend when they can receive taxpayers money without risk. If you make lending difficult for a bank because either you gave them money for free so they can avoid risk or because you make it tough and legally over risky for them to lend you will stop the credit flow in its feet. Good luck USA I really hope that this crisis can be left behind!
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