Bank lobbyists are fighting to derail a key element of consumer protection which they fought to preserve just four years ago, threatening to kill financial reform and harm the families that would be protected by it, argues bailout watchdog Elizabeth Warren in a forceful opinion piece published Tuesday.
"Banks or families?" Warren, a Harvard Law professor and chair of the TARP Congressional Oversight Panel, asks rhetorically in an op-ed in Politico. "For almost a year, the big banks and the American Bankers Association (ABA) have presented that choice to Congress. Lobbyists argue that meaningful consumer protection will jeopardize the safety and soundness of banks, telling lawmakers that they must decide between the two."
Indeed, bankers and federal bank regulators -- with the exception of Federal Deposit Insurance Corp. Chairman Sheila Bair -- argue that shifting consumer protection to a new agency, solely charged with protecting borrowers from abusive lenders, would irreparably hurt the nation's banks. Their argument is that by protecting consumers from particular products the new agency could have a detrimental effect on bank profitability, hurting the very lenders whose health is key to the economic recovery, according to bankers and their allies.
"ABA lobbyists now aggressively insist that separating consumer protection and safety and soundness functions would unravel bank stability," Warren writes. "Yet just a few years ago, they heatedly argued the opposite--that the functions should be distinct.
"In 2006, the ABA claimed to act on principle as it railed against...[a]proposal for 'combin[ing] safety and soundness guidance with consumer protection guidance, creating confusion that is best addressed by separating them...[The] ABA recommends that the safety and soundness provisions relating to underwriting and portfolio management be separated from the consumer protection provisions.'
"Read that again: the ABA in 2006 said that policymakers should separate safety-and-soundness and consumer protection--exactly the opposite of its position today," Warren notes.
The memo Warren publicizes is a March 29, 2006, letter the ABA sent to the four federal bank regulators -- the FDIC, Office of the Comptroller of the Currency, Office of Thrift Supervision, and the Federal Reserve -- arguing that the agencies were overstepping in trying to regulate exotic mortgages. The next year, what had began as an increase in home loan defaults on subprime mortgages mushroomed into a worldwide credit crunch before culminating in the fall of 2008 as a near-collapse of the entire financial system.
It all started with questionable, sometimes predatory subprime and exotic mortgages.
The ABA argues in its memo that bank regulators, in trying to rein in exotic mortgages, were going too far. The trade group had four main points:
First, the memo states, the rules would mainly apply to banks and their subsidiaries -- rather than the entire universe of lenders; second, regulators' proposed guidance "overstates the risks of these mortgage products"; third, the rules need a bit more flexibility -- they're just too strict; and finally, regulators were letting consumer protection issues impact their concerns about bank profitability.
"This 2006 memo illustrates the ABA's real consistency-- consistent opposition to meaningful reform," Warren says. "If there is a smoking gun in the battle over financial regulatory reform, the 2006 ABA memo is it."
A close look at the ABA memo reveals that the organization was trying to tell regulators that if they were concerned about consumer protection, they should address it using consumer protection laws on the books. Issues of bank profitability -- also known as safety and soundness -- were best to be addressed using a separate rules regime. The marriage of the two would ultimately lead to the best regulation, said Robert R. Davis, the ABA's executive vice president for mortgage markets, financial management and public policy, in a Monday interview with the Huffington Post.
"This doesn't say that consumer protection requirements and safety and soundness requirements don't need to be considered in context with one another. It just says that the proper place to propose the consumer protection regulations is in the body of consumer protection regulations," Davis said. The bank regulators' guidance on nontraditional mortgages was aimed to "prevent banks from making risky loans that affect safety and soundness," he added.
"Ideally these things could have been linked up at the same time," Davis said. But consumer protection and safety and soundness operate under different regulation regimes, he said. Hence, regulators should prescribe rules for each under the two different tracks, and then merge them together to come up with coherent policy.
"They shouldn't be competing with each another," Davis said. "You don't achieve one at the expense of the other; you have to achieve both of them."
"Now, it's been argued that there could have been more focus on consumer protection. You learn something through every cycle and every experience -- that's something we're going through now, to make sure we have the balance right," said Davis.
The House of Representatives passed a financial reform bill in December calling for a new consumer-dedicated agency. The legislation calls for the kind of agency -- with the kind of power and authority -- the ABA, along with other financial services trade groups, have been aggressively lobbying against. Senate Banking Committee Chairman Christopher Dodd (D-Conn.), in his bill, creates what's widely considered to be a weaker version of the House agency. It's housed within the Federal Reserve, and its decisions are subject to veto by the federal bank regulators.
"Our strongly-held view is you're never going to be able to get the balance right in a changing world if you separate the decision-making process," Davis said. "It's a joint product. The regulatory structure has to produce two things simultaneously -- safety and soundness and consumer protection, and we're in favor of both."
That's an illogical argument, says Raj Date, chairman and executive director of the Cambridge Winter Center, a non-profit, non-partisan think tank focused on U.S. financial institutions. Consumer protection can absolutely be separate from consideration of the banking sector's profitability; in fact, it'll lead to better outcomes on both ends, argues Date.
"Look, it's not like you have a choice between safe banks on one hand or consumer protection on the other -- it's a totally false dichotomy," Date, a former top executive at Capital One Financial Corp. and Deutsche Bank, told the Huffington Post on Monday. "My argument as a former banker is this: If you, as a banker, think that you need to abuse consumers a little bit in order to make a profit, why don't you get out of this business and leave it people who are smarter and more ethical than you are?
"It just totally isn't true that you need to be fleecing people left and right and being non-transparent to make this business viable. It's only the existence of people being non-transparent that makes it so difficult for an honest person to make a buck in consumer finance," Date said.
The ABA's current position that bank health and consumer protection are inextricably linked is "wrong-minded." As for its 2006 memo, Date said:
"What they were doing was they were arguing that you are not necessarily going to get good results on safety and soundness policy if you combine that analysis with analysis on consumer protection," Date noted. "I was astonished by the argument the ABA was making. It's silly. On its face it's implausible and illogical.
"It's as though their argument was: 'Listen, bank regulators, you're confusing yourselves and coming up with bad policy from a safety and soundness point of view by troubling yourselves with what the right consumer protection answers are. For consumer protection policy, we have a whole separate regime for that, and you shouldn't somehow let your worries that these are bad or inappropriate products for consumers bleed into your thinking that these are bad products for banks,'" said Date.
"The ABA's premise that the country can't have both meaningful consumer protection and safety and soundness is wrong," Warren writes. "In fact, its defense against an independent consumer agency boils down to this: if banks can't trick and trap people with fine print and legalese, they won't be able to turn a profit."
Among the ABA's most powerful and ardent supporters is Sen. Richard Shelby, the top Republican on the Senate Banking Committee.
Two weeks ago, during an ABA conference, Shelby energized the crowd of bankers, receiving several rounds of applause and a standing ovation at the conclusion of a speech in which he re-asserted his belief that the banking sector's profitability is more important than consumer protection.
"Safety and soundness trumps everything," Shelby said to loud applause. "It trumps the consumer finance whatever."
Shelby's point was that if banks aren't profitable, then they won't be in a position to lend to consumers.
Last week, shortly before the Banking committee voted along party lines to pass the Dodd bill and send it to the Senate floor, Shelby took a veiled swipe at Warren, who has emerged as a folk hero for her ardent and passionate defense of consumers and the middle class in the face of what appears to be overwhelming opposition by banks and their allies in Congress.
"The relationship between banks and consumers has attracted the most media attention, and perhaps the most rhetoric," Shelby said March 22. "Recently, a relatively well-known commentator characterized the debate over consumer protection as a clash between those who favor either the banks, or families.
"Not only is that particular characterization absurd, but it is also incredibly unconstructive. Reforming our entire financial regulatory structure is a difficult and complex undertaking. It requires people of good faith to work cooperatively toward a common goal, not an 'us versus them' mentality," said Shelby.
Warren told HuffPost earlier this month that the dispute over consumer protection is one "between families and banks."
In a January letter, Warren wrote supporters:
"The next few weeks will determine whether families will have to play by rules written by the banks and for the banks -- rules that let the industry get away with anything. In my view, we cannot let families lose again."
In her Tuesday piece, Warren doubled down, writing that the Senate -- Shelby included -- has a clear choice when it comes to resolving the dispute over beefed-up consumer protection:
"In the weeks ahead, the Senate does not need to decide between safety and soundness and consumer protection.
"[T]he Senate does need to decide between banks and families."
READ the ABA's 2006 letter below: