U.S. Consumer Bureau Mulling Rule Exemptions for Smaller Banks

Jan. 24 (Bloomberg) — The U.S. Consumer Financial Protection Bureau may weigh size or market share in exempting community banks from its rules to shield them from the greater regulatory burdens facing their larger rivals.

Richard Cordray, the former Ohio treasurer and attorney general appointed to head the consumer bureau Jan. 4, touted the idea of exclusions for smaller lenders in a conference call organized by the Independent Community Bankers of America.

“The bureau will be considering two-tiered regulatory requirements and exemption thresholds as it writes regulations so that community banks will be able to conduct their business without overly burdensome regulatory requirements,” the Washington-based trade group said in its internal newsletter, citing Cordray’s comments during the Jan. 12 call.

Jen Howard, a spokeswoman for the bureau, declined to comment and didn’t dispute the newsletter account.

Congress created the bureau as part of the Dodd-Frank Act after lawmakers said existing regulators failed to protect consumers before the credit market collapse that led to record home foreclosures and bailouts for lenders including Bank of America Corp., JPMorgan Chase & Co. and Citigroup Inc.

In promising to favor smaller firms, Cordray is following in the footsteps of Elizabeth Warren, who wooed community banks while setting up the agency as an adviser to President Barack Obama. Soon after starting work in September 2010, Warren touted the bureau as an ally that could help smaller banks in competition with firms whose trading practices and compensation incentives were faulted for increasing risk before the crisis.

Going Further

By raising the prospect of exemptions, Cordray is going further than Warren, who is credited by Obama with conceiving the consumer bureau. Dodd-Frank, which authorizes the agency to give exemptions based on criteria such as asset size or transaction volume, doesn’t require them.

“He kept emphasizing the point about two-tiered regulation,” Chris Williston, the head of the Independent Bankers Association of Texas said in an interview after the conference call. “He hit the point over and over.”

Community banks were politically powerful enough to obtain an exemption from the consumer bureau’s supervision, which will aim at banks with more than $10 billion in assets. The smaller banks’ primary regulators — the Federal Deposit Insurance Corp. and the Federal Reserve — will still examine them for compliance with the regulations the bureau writes, according to Alex Sanchez, president of the Florida Bankers Association.

“At the end of the day, the community banks have to comply with CFPB rules,” Sanchez said in an interview. “So if there’s an exemption for community banks, that really matters.”


Though many community banks got bailout funds alongside the Wall Street giants, bureau officials have extolled the smaller lenders for being closer to customers and local affairs.

On the call this month, Cordray contrasted community banks with the bigger firms, calling their work a “traditional, time- honored model,” said Paul Fitzgerald, president and chief executive officer of Hamilton, New Jersey-based First Bank.

Most community banks focus on retail finance and lending to local and regional businesses, rather than the capital markets speculation that caused losses at bigger firms. Cordray said on the call that community banks weren’t responsible for the financial crisis, according to Fitzgerald.

The Fed has expressed similar views regarding the need to support smaller banks, an idea endorsed by Dodd-Frank provisions that lower deposit insurance fees for smaller banks and impose capital surcharges for larger ones.


Fed chairman Ben Bernanke, in a speech to the Independent Community Bankers of America last March, said “focusing reform on our largest, most complex financial firms makes sense.”

ICBA President Camden Fine said carve-outs from regulations would mark an additional political victory for community banks over Wall Street giants.

“It’s something we have been advocating for years and years, and we got a little bit of what we wanted in Dodd- Frank,” Fine said in an interview.

In the 40-minute conference call with several hundred participants, Cordray touted his experiences in working with community banks as Ohio’s treasurer and attorney general, according to Robert Fisher, president and chief executive of Tioga State Bank of Spencer, New York.

In the context of new regulations and the “two-tiered approach”, Cordray also said that “one size does not fit all,” according to Fisher. “We community banks very much like to hear the words ‘two-tiered,’” Fitzgerald said.

Compliance Cost

Cordray also acknowledged a point made by community bankers that their size restricts their ability to cope with the cost of complying with new regulations.

“We cannot cover the cost of regulation the way a mega- bank can by spreading the costs over a large number of customers,” Fisher said.

The possibility that smaller banks will escape some of the bureau’s regulations is likely to trigger pushback from bigger companies, said Richard Hunt, president of the Consumer Bankers Association, which represents retail units of lenders including JPMorgan, Bank of America, Citigroup and Wells Fargo & Co.

“We agree with the many statements made by the CFPB that there should be a level playing field in the banking industry,” Hunt said in an e-mail.

Cordray, in a Jan. 19 interview, said the question of whether the metaphor applies to competition between large and small banks is “a more complicated issue than it appears.”

“Everybody needs to play by the rules; the rules may not be the same for every player,” he said. “We will calibrate this as we go.”

During the conference call, Cordray gave community bankers the impression that he’s seeking the same political alliance that Warren offered during her time shaping the bureau, said Williston of Texas bankers’ association. If the bureau can give the smaller banks a competitive edge, they will support its work, he said.

“He is on the road to that goal,” Williston said.

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