CFPB regulatory compliance has become a growing concern for financial institutions, particularly smaller community banks that must manage regulatory requirements with fewer employees and more limited resources than their larger competitors. As the Consumer Financial Protection Bureau exercises its authority over the financial services industry, some institutions have questioned both the agency’s regulatory decisions and its organizational structure.
One such challenge comes from State National Bank of Big Spring, which argues that the CFPB’s leadership structure is unconstitutional because authority is concentrated in a single director rather than a multimember commission. The legal challenge comes amid broader concerns among financial institutions and mortgage originators about the scope of the agency’s authority and the effect of its regulations on the industry.
Originators have long lamented some of the CFPB’s decisions, and one bank is taking the regulator to court, alleging it is unconstitutional.
“One bank’s challenge to the CFPB will move forward after the D.C. Circuit Court of Appeals reversed dismissal of the lawsuit,” law firm Manatt, Phelps & Phillips wrote on the legal website lexology.com. “In its suit, Texas-based State National Bank of Big Spring argues that independent agencies must be led by multiple members (such as the five Commissioners of the Federal Trade Commission) and not a single person, as is the case with CFPB director Richard Cordray.”
And while the outcome is yet to be determined, mortgage originators are already arguing in favor of the suit’s objectives.
“The CFPB has a lot of power and it shouldn’t be ruled by just one person,” Steve Kirmish, president of Residential Mortgage Corporation told Mortgage Professional America. “I’m not so sure how far the lawsuit will go, though.”
Many of today’s financial institutions, and particularly smaller community banks, are becoming increasingly vocal in their concerns about the regulatory and compliance actions that they feel disproportionally affect them. Many feel that some of these actions create undue burdens on them, particularly because they have limited staffs and budgets compare to larger FIs. They argue that this is a strategic concern because it ultimately affects their profitability and ability to invest in needed operational improvements.
Regardless of the outcome of the legal challenge, the debate highlights broader concerns about CFPB regulatory compliance and its impact on financial institutions of different sizes. Community banks must often meet many of the same regulatory obligations as much larger institutions despite having substantially fewer employees and smaller compliance budgets.
For these institutions, regulatory requirements can affect more than the compliance department. Resources devoted to implementing new rules, documenting compliance, training employees, and responding to regulatory changes are resources that cannot be directed toward technology, customer service, product development, or other operational improvements. As a result, smaller institutions argue that disproportionate regulatory burdens can ultimately affect their competitiveness and profitability.
The challenge for regulators is therefore to achieve consumer protection objectives without creating unnecessary burdens that disproportionately affect smaller financial institutions. The debate surrounding the CFPB’s authority and leadership structure also demonstrates how questions about regulatory governance can have practical implications throughout the financial services industry. As community banks and other institutions become more vocal about these concerns, the cost and operational impact of CFPB regulatory compliance are likely to remain significant issues for the banking industry.
Overview by Ed O’Brien, Director, Banking Channels Advisory Service at Mercator Advisory Group
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