How to Get the Consumer Agency Through Congress

by Noam Scheiber | September 25, 2009

I've spent part of the week complaining about the way community banks are trying to gut the administration's consumer financial regulatory agency even though, in principle, they stand to benefit. (Short explanation: Community banks excel at getting to know their customers, building relationships with them, and vetting their loan applications carefully, not by trying to screw them. Megabanks make their money through various hidden or confusing costs and through volume--that is, they often want to approve as many dodgy loans as possible, the theory being that even if some go bad, the overall portfolio will be profitable. Or they can get them off their books through securitization. The consumer financial regulator would presumably crimp the megabanks' business model, but not the community banks'.)

The reason the small banks are opposed to the new agency is:

a.) there's always a concern that new regulations could be restrictive in practice, whatever advantage they may afford in principle (i.e., pure anti-regulatory reflex);

b.) small banks are often so small that merely interacting with a new regulator can keep a decent chunk of its work force occupied even if it doesn't crimp its business model per se (unlike big banks, which have teams of lawyers/compliance officers to deal with this stuff); and

c.) they worry that the big banks will have the political wherewithal to influence the regulator in ways that benefit the big guys at their expense.

Anyway, I just happened to be seated next to a former community bank executive at a dinner tonight, and, before long, I started complaining about the small banks' opposition to the new agency. He made a couple of the aforementioned points, then offered an interesting proposal: Why not just exempt every bank below a certain size (say, a few hundred million or a billion dollars in assets) from regulation by the new agency? As we've discussed, their business model is much more focused on servicing customers than screwing them, so this sort of regulation isn't nearly as  pressing for them. And it would eliminate a huge political obstacle to reform. What say you Congressman Frank?

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