Banks: New consumer watchdog is slow, costly

WASHINGTON Bankers and financial industry leaders are criticizing the early efforts of the government's new consumer finance watchdog, saying a slow and inefficient oversight process has slowed lending and made it more difficult for them to do business.

The Consumer Financial Protection Bureau's team that examines banks is understaffed, inexperienced and takes months to tell banks how they scored on routine audits, Consumer Bankers Association CEO Richard Hunt said Tuesday. For some bank examiners, it is their first job out of college, he said.

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Hunt said that CFPB Director Richard Cordray is aware of the problems with the examination program and hopes to do better in the agency's second year.

"He knows that in the first year, it's not acceptable to him that the process is taking too long, and he doesn't have enough examiners," Hunt said in a briefing with reporters. "In the second year he hopes to make it better, where examiners would be more experienced and the banks would not have to wait as long as they do this year."

CFPB spokeswoman Jennifer Howard said Hunt had mischaracterized the conversation.

"While we are still working to build out and refine our supervision program, we are pleased with the progress being made and the work being done," Howard said. "Director Cordray has great confidence in the supervision team and its leadership," she said.

The leaders of the bank oversight team have extensive experience, officials noted. As of this month, nearly half of the CFPB's 240 examiners had significant experience working for other financial regulators, and nearly 100 had high-level certifications from those regulators. Others on the team have industry experience.

The agency, which was created as part of the 2010 overhaul of financial rules, is tasked with protecting consumers from excessive fees, unsafe loans and other unfair practices. It sends examiners out to conduct routine examinations of certain types of financial firms, including big banks, mortgage companies, payday lenders, credit bureaus and debt collectors.

The CFPB has been supervising the institutions since July 2011 - longer than any other group.

A core industry complaint relates to delays in receiving formal, written reports that summarize bank examiners' findings and identify problems that banks must address. These reports are taking nine months or more to process because the agency's Washington headquarters is putting them through an extra round of scrutiny, Hunt and others in the industry said.

While other banking regulators typically offer immediate feedback as examinations conclude, with the CFPB, "you have your exit interview, and things could be bad or they could be good," but it's not clear until the final report arrives, said Suzanne Garwood, a consumer banking attorney with the law firm Venable.

The slow, inefficient audits are making it tough for banks to decide what products they can offer consumers without drawing the ire of regulators, said Robert Kottler, head of retail and small business banking for IberiaBank in New Orleans.

When banks consider rolling out a new product, "one of the first things we talk about is what our regulators think," said Kottler, who also chairs the CBA's board. Because it is so difficult to know what the new agency will think of a given product or loan, banks are less likely to offer it, he said.

Delays and other growing pains at the agency threaten to undermine its consumer protection mission and reduce the number of financial products available to consumers, according to bank attorneys and former regulators.

"For the examination process to be effective, there can't be a nine-month time lag between the examination and the examination findings," said Mark Williams, a former Federal Reserve bank examiner who favors stricter oversight of the banking industry.

While it would be impossible for the new agency to "create a crackerjack exam team overnight," the slow turnaround times are "a warning sign of a system that needs to be corrected," said Williams, who currently teaches at Boston University.

The threat, Williams said, stems from a resource imbalance between banks and regulators. The government can't afford bank-level salaries or complex risk management systems, leaving a large "sophistication gap" between them and the banks, he said. Before the 2008 financial crisis, banks took advantage of this disparity by taking on risks that their regulators didn't fully understand.

CFPB officials say they strive to help banks comply with the agency's rules by publishing guidance and manuals used by its field examiners, and through webinars and other outreach.

Yet many in the industry say their relationships with the agency have grown strained as they attempt to work with inexperienced regulators who have had little preparation.

"It's unfortunate that banks are really kind of the training ground for examiners, but hopefully they are learning the nuances of the industry," Garwood said.

Hunt is president and CEO of the Consumer Bankers Association, the leading trade group representing retail banking operations of the nation's biggest banks, including Bank of America (BAC), Wells Fargo (WFC) and JPMorgan Chase (JPM). The CBA loudly opposed the bureau when it was first proposed. Since Congress created it as part of a sweeping 2010 financial law, the trade group has pushed to limit its independence.

Banks and their allies in Congress, mostly Republican, vowed to block any nominee for director of the consumer agency until its leadership was divided between a bipartisan commission and Congress was given more control over its budget. President Barack Obama installed Cordray while Congress was in recess, so the appointment did not require lawmakers' approval.

The consumer agency's budget currently comes out of the Federal Reserve's profits, which otherwise would be returned to the Treasury. Banks in the Federal Reserve system paid $387 million in 2012 to fund the CFPB and the Office of Financial Research, a small advisory office inside the Treasury Department, the Fed said last week.

The CBA and other industry groups are still pushing for legislation that would transform the bureau's structure.

Meanwhile, experts say, the relationship between banks and the agency is growing more contentious as it feels its way through these early challenges. The re-election of President Barack Obama quashed many opponents' hopes of defanging the agency before it got to work.

"The CFPB went full-throttle into the field, and in some cases has yet to determine what it would view as problematic," said Jonathan Pompan, a banking attorney with Venable. "You've got folks who are looking at organizations for the first time and making potentially very significant findings" that could cost them millions of dollars, he said.