FDIC Chairman Sheila Bair emphasized the “common goal” that should exist between banks and consumers regarding access to credit and healthy lending for the health of consumers and banks, as well as for the entire economy.
“We’ve seen what happens to the real economy when the financial system breaks down, and the dramatic pull back and credit availability as the crisis unfolded,” she said during remarks given this morning at the 2011 National Community Reinvestment Coalition conference.
But despite all that, community banks actually increased their portfolios during the recession, she said, adding that supporting community banks is key, particularly in lower-income communities:
Most community banks specialize in the type of high-touch lending and customer service that you support, most would like to diversity their balance sheets to include commercial lending, mortgages, and other consumer retail products.
“Yet, in many cases they are uncertain as to how to properly serve their communities. On the one hand they cannot effectively compete with the larger banks and their huge compliance operations and on the other hand they are undercut by non-bank providers who have little or no regulatory compliance costs.”
Bair lauded a promising component of the Consumer Financial Protection Bureau that will make bank disclosures more transparent as well as provide more oversight for non-bank lenders. “The lack of sensible, consistent mortgage lending standards and consumer protections that led up to the crisis ended up destabilizing housing markets and the entire financial system,” Bair said.
“This race-to-the-bottom mentality imposed large losses on banks and non-banks alike, and it imposed long-term damage on household balance sheets and on consumer confidence.”
Bair noted that the FDIC has instituted its own organizational changes included the creation of a new Division of Depositor and Consumer Protection. “Consumer protection and safe and sound banking are two sides of the same coin.”
Bair also blasted what she termed the “misuse” of fee-based overdraft protection because of the disproportionate impact on consumers. Last year, 5 percent of consumers accounted for roughly 70 percent of fees collected. Those consumers, who are often lower-income consumers, pay on average $1,600 per year in fees because they are using them as short-term loans. We need better ways to offer those short-term loans, and FDIC has worked on some pilot programs for small-dollar loans that would be a replacement. “The cost of overdraft fee is staggering,” Bair said. “Selling consumer products that don’t serve consumers well hurts both consumers and banks.”
(RH Photos Charles Matthews and Dave Patterson)