A political savant and leader in policy and legislation, Donald Gainsborough is at the helm of Government Curated. With the Consumer Financial Protection Bureau’s (CFPB) future uncertain, he unpacks the tensions between banks and less-regulated non-banks, a dynamic reshaping U.S. financial policy.
Big banks cite overlapping authority from regulators and state attorneys general. How effective are existing tools like the CAMELS rating system for consumer protection, and can you walk us through a specific example of how this overlapping authority works in practice during an examination?
Large banks insist their oversight remains rigorous. They feel constant pressure from the overlapping authority of federal regulators and state attorneys general. For example, the CAMELS rating system already includes consumer protection measures. In practice, a bank’s prudential regulator might examine its lending compliance while a state AG simultaneously investigates consumer complaints on those same loans. This dual scrutiny means that even with a less active CFPB, they feel they are never truly off the hook.
The text notes a less active CFPB creates a “headache” for small banks. What specific competitive disadvantages do they face when non-banks offer similar financial products without the same rules? Please describe a common scenario where a community bank loses out.
It’s a headache born from a fundamentally unfair playing field. A community bank like CorTrust must follow strict compliance rules, adding cost to their services. Meanwhile, a non-bank can offer a similar loan while “deliberately avoiding bank-like rules and supervision.” A common scenario is losing a small business loan customer to a faster, less-regulated online lender. From a community banker’s perspective, it feels deeply unfair.
A former official stated that without the CFPB, “basically no one” regulates non-banks at the federal level. What are the most significant consumer risks from these platforms, and can you share an anecdote of an unfair practice that has become more common in this environment?
That former official highlighted a critical regulatory void. Without the CFPB, there’s no primary federal regulator for non-bank financial firms. The biggest risk is the growth of unfair practices, like hidden fees on payment platforms, an issue the Biden-era CFPB targeted. When a consumer is hit with surprise charges from a non-bank lender, they have little federal recourse. That lack of accountability is precisely the danger.
Fed Vice Chair Bowman believes deregulation empowers banks to compete with non-banks. How exactly does easing consumer compliance rules for traditional banks level the playing field, and what are the metrics for measuring if this strategy is working without harming consumers?
The view from regulators like Vice Chair Bowman is that deregulation is a pro-competition tool. The idea is that if you ease the compliance burden, you empower banks to “compete effectively with nonbanks.” This should allow them to innovate and offer more competitive products. The difficulty is measurement; there are no clear metrics. Success would mean banks gaining market share from non-banks without a corresponding rise in consumer harm.
What is your forecast for the future of consumer financial protection, considering the upcoming D.C. Court of Appeals case that could determine the fate of the CFPB?
The future is on a knife’s edge, pending the D.C. Court of Appeals decision. This case will determine the fate of the CFPB. If the agency is weakened, it will leave a major void in federal oversight, particularly for non-banks, putting both consumers and regulated banks at a disadvantage. The late February arguments aren’t academic; their outcome will fundamentally shape consumer protection in America.
