Earlier this month, Wells Fargo entered into a consent order with the CFPB and OCC after regulators discovered that bank employees had opened more than 1.5 million fake deposit and credit card accounts. The scandal involved more than 5,000 employees who opened the fake accounts in order to pad sales numbers and meet quotas the bank used as part of an incentive compensation plan. In the aftermath of the scandal, Congress and the regulators have begun to scrutinize what went wrong and what steps can be taken to prevent these problems going forward. Although big banks are the focus of this scrutiny, it is important for community banks to pay attention to possible regulatory changes that may impact banks of all sizes.
Since the adoption of Dodd-Frank and the formation of the CFPB, there has been widespread disagreement regarding whether Dodd-Frank has adversely affected community banks. Community bankers and trade groups claim that Dodd-Frank has been disastrous for the growth of community banks, adding substantial compliance costs and drastically reducing the number of de novo banks. The government and regulators, on the other hand, insist that the impact of Dodd-Frank has been minimal, that community banks continue to thrive, and that any downturn in community banking is the result of factors other than increased regulation. Last week, the President’s Council of Economic Advisers (CEA) weighed in on the debate, joining other government groups in downplaying the impact of Dodd-Frank on community banks.
As widely reported in the media last week, the CFPB introduced a long anticipated proposal to prohibit banks and consumer finance companies from using mandatory arbitration clauses to block class action lawsuits. Several publications have weighed in on the merits of this proposal and its impact on the financial industry. But little has been written about the impact this proposal will have on smaller financial institutions. Although consumer class actions involve large banks far more frequently, community banks are not immune to class action litigation. Thus, it is important to understand the changes that the CFPB’s proposal would require.
On Thursday and Friday, I had the privilege of attending the Texas Bankers Hall of Fame Gala and the 20th Annual Bank Executives’ & Directors’ Seminar hosted by the Smith-Hutson Endowed Chair of Banking at Sam Houston State. First, I’d like to thank Sam Houston State (including Pam Thaler and my grandfather, Dr. Jim Bexley) for hosting these great events. Second, I want to congratulate the new inductees into the Texas Bankers Hall of Fame: Charlie Cheever, Bookman Peters, Stretch Smith, and Terry Tuggle. I don’t know them personally, but their introductions made clear that they have had a tremendous impact on the banking industry and their communities. I also want to congratulate my grandfather, Dr. Bexley, on his receipt of the first ever Texas Bankers Association Lifetime Achievement Award in honor of his contributions to community banking and in particular to educating future bankers. Lastly, I want to recap some of the interesting and useful information that we learned from a panel of regulators who graciously took the time to come answer questions.
Many bankers and commentators have expressed concern about the CFPB’s extensive rulemaking and enforcement authority. Although the CFPB’s primary focus is on large banks and consumer finance companies, community banks have felt the impact the CFPB’s broad powers. In fact, ICBA CEO Camden Fine pointed out that of all the provisions of Dodd-Frank, the creation of the CFPB has impacted community banks the most:
“If Dodd-Frank was written exactly as it’s written except there was no Consumer Financial Protection Bureau, no Title X of the law, community banks really wouldn’t feel much of the impact from Dodd-Frank — it would be marginal at the most.”
Last week, the CFPB brought its first enforcement action related to a data breach. Although the CFPB action involves an online payment system operator, it serves as a reminder that data breaches put banks at risk of regulatory action. While most banks have prioritized the security of their own IT systems, they may overlook data security issues when selecting third-party vendors. Given the volume of tasks that community banks outsource to vendors, it is critical that banks thoroughly vet any potential vendor to ensure strong data security practices.
On February 25, the CFPB released a fact sheet laying out its policy priorities for the next two years. The CFPB identified nine areas of focus, two of which are likely to have a direct impact on community banks: mortgages and small business lending. The CFPB’s prioritization of mortgage regulation should come as no surprise, given its focus on consumer credit markets since its inception. The focus on small business lending, however, is a new development that has the potential to affect community banks more broadly. Continue reading