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Let’s Not Create Another Monster

POV By Gabrielle Sheshunoff Bekink on 09/21/2009

Why in the world would Congress want to create a new bureaucracy to “protect” financial services consumers? Last week the SEC Inspector General released his finding that bureaucratic myopia was the main reason the Commission failed to protect investors from Bernie Madoff’s colossal fraud. The proposal to create a massive Consumer Financial Protection Agency would do the same nutty thing over again—spawning another government bureaucracy—and expecting a different result. That’s the street definition of insanity.

Insanity is not too strong a word.  Let’s look at it from the point of view of our small and mid-sized financial institutions. They were not the institutions that polluted the market with bad subprime mortgages, gambled with customer assets, or pushed high-cost credit cards on already over-burdened consumers. Quite the contrary.

Throughout the crisis, community-focused institutions observed time-tested lending practices and ran their businesses with the firm conviction that success depends on their own stability and the prosperity of their customers. The FDIC’s Quarterly Banking Profile for the second quarter of 2009 confirms this. Institutions with less than $1 billion in assets had the best capitalization of any in the industry and better credit quality than their larger counterparts. An analysis of the FDIC data by the Independent Community Bankers of America revealed that these smaller institutions were also the only segment of the industry to experience growth in net loans and leases, and that they led the industry with a 4.5 percent growth in domestic deposits last quarter.

Yet these backbone institutions that carried on throughout the crisis will be hurt the most by a new bureaucracy with an expansive mandate and rule-writing power unfettered from any parallel duty to preserve the industry’s safety and soundness. Although House Banking Committee Chairman Barney Frank insists that community institutions are not the target of the CFPA, they will surely be the victims of its costs and red tape — and that will affect their profitability in trying economic times. More regulation will also mean less product choice and higher costs for consumers.

The idea of establishing a CFPA raises another topic that should be — but hasn’t been — part of the discussion: consumer responsibility. Consumers of financial services need to be told the truth and offered fair and transparent products and services. But they also need to know what they can afford, understand what they are signing, and be responsible for the choices they make. The CFPA will be just one more lumbering bureaucracy – burdensome on financial institutions and ill-suited to protect consumers.

Consumer protection should concentrate on stopping the real monsters that prey on consumers and investors. For financial institutions, consumer protection authority should continue to be vested in the existing financial services regulatory agencies and should focus on requiring simple, comparable disclosures.

Let’s remind our representatives in Congress that while community banks may not be the target of this ill-conceived legislation – they, and the consumer, will be the victims.