While the mortgage settlement sellout has been a singularly depressing process, once in a while there are encouraging bits of news on the bank regulation front.
An open question has been whether the Consumer Financial Protection Bureau would live up to its promise. It appeared, like so many Obama Administration efforts, that the formation of the agency was a cynical move, to create the appearance of Doing Something without roughing up the banks in a serious way (of course, you’d never know that give the way they carry on at any minor trimming of what they see as their imperial right to profits).
One of the Administration’s cagiest-looking moves was enlisting Elizabeth Warren to set up the agency. This was clearly an intention to neutralize her as a critic while ultimately deep sixing her. It isn’t hard to imagine that the powers that be hoped she’d perform poorly at the task (building an organization is vastly more daunting than running one) so they could deny her the role of first CFPB chief with clean-looking hands. When she did an undeniably stellar job and refused to take the hint that she should take herself out of the running and pursue the shiny consolation prize of a Senate seat, she showed that the Administration was no where near as committed to having a tough regulator (which is what would have resulted had she become its permanent head) than it pretended to be.
But Warren may have given the Administration more than it bargained for. One of the things she said in her numerous hazing sessions before Congress was that the role of the director was not as important as it seemed, that she had set up the agency with a strong culture and staff in each of its divisions, and she had also gone to some lengths to put mechanisms in place to foster communication and coordination across divisions. If that were true, that would mean it would take some time and effort to erode the tough enforcement mindset that she had endeavored to put in place.
It’s too early to reach a definitive judgment, but this Bloomberg story on bank overdraft fees is an encouraging sign that the CFPB may well prove to be a competent, forceful regulator. Admittedly, at this stage the CFPB is only reviewing the practices of nine major banks in the checking account overdraft arena, but they are looking well beyond the fee structures and probing whether the banks engaged in deceptive practices. New regulations required banks to require banks to have consumers opt in to overdraft protection programs and to stop the abusive practice of ordering debits from accounts in a way designed to maximize income. Note that for any customer with a credit line, an overdraft service is superfluous and more costly, so the banks are motivated to steer customers to this service.
The inquiry focuses on how financial institutions persuade customers to enroll in what they call overdraft protection programs. Examiners are looking at online and mailed marketing material as well as scripts used by the banks’ customer-service representatives to determine whether they could be confusing to consumers, said the people.
Bureau examiners have conveyed “a tone of skepticism that this is really a good product for borrowers,” said Jo Ann Barefoot of Washington-based Treliant Risk Advisors, who counsels banks on dealing with federal supervisors.
While tighter rules could help U.S. consumers, they also could threaten a major revenue stream for banks already struggling to replace income pinched by new regulations including a cap on debit-card “swipe” fees. Last year bank customers paid $31.6 billion in overdraft fees, down from $33.1 billion in 2010, according to Moebs Services, a Lake Bluff, Illinois-based research firm. About 15 million Americans overdraw their accounts 10 or more times a year, the firm said.
The bureau’s examiners also are reviewing the banks’ justifications for the size of overdraft fees, two of the people said. Large banks charge an average $35 per overdraft, compared with $25 at community banks and credit unions, Moebs reports.
There is also a remarkable lack of information on the customer uptake rate:
Moebs estimates that 77 percent of bank customers have opted in, while the Consumer Bankers Association concluded in an October study that the rate was 17 percent. The Center for Responsible Lending, a Durham, North Carolina-based advocacy group, estimated the opt-in rate at about 33 percent.
Wonder why the Consumer Bankers Association (the industry group) came up with what looks like an awfully low estimate? A high opt in rate for such a crappy product would look to be prima facie evidence of deceptive selling practices.
The CFPB is also taking a hard look at bank servicing and that will prove to be an even more important test of its seriousness. Let’s keep our fingers crossed that the Obama Administration may have, despite its intent otherwise, put an effective regulator in place.