When consumers shop for new cars or other major products, they often like to consult with Consumer Reports or some other resource that rates companies selling the products. Imagine if we had a Consumer Reports for banks that provided ratings on how well they treat consumers and the extent to which they complied with consumer protection and fair lending law. Wouldn’t that be a wonderful resource?
Since 1980, 36 years ago, federal bank agencies have been rating banks for their compliance with consumer protection and fair lending law. But there has been one major rub. The ratings have been secret! Not much help for consumers.
The federal bank regulatory agencies have just issued a request for comment on their proposed reforms to the consumer compliance rating system. But the ratings would still be secret!
Ironically, the agencies state that they are aiming to achieve the principles of transparency and motivation of compliance on the part of financial institutions. Well, how can financial institutions be motivated to comply with consumer protection and fair lending law if their ratings remain secret? There is nothing as powerful as publicly available ratings and public input mechanisms to motivate financial institutions to comply with the law.
Richard Cordray, the Director the Consumer Financial Protection Bureau (CFPB), is fond of quoting former Supreme Court Justice Louis Brandeis as saying “Sunlight is said to be the best of disinfectants; electric light the most efficient policeman.” This is the grand insight that motivated the Community Reinvestment Act (CRA) and the Home Mortgage Disclosure Act (HMDA) decades later.
In forthcoming comments, NCRC will be advocating that the agencies adopt a model like CRA for the consumer compliance ratings and examinations. The agencies should release quarterly exam schedules of financial institutions and provide an opportunity for interested members of public to comment on their records when it comes to treating consumers fairly and in complying with the law. Both banks and non-bank financial institutions must be examined on a regular schedule of approximately once every two or three years. This will reinforce the mandate that complying with the law must be a continuous process, not something to be addressed periodically.
The agencies are proposing to rate financial institutions on 12 assessment factors that are grouped into three categories: board and management oversight, compliance program, and violations of law and consumer harm. These factors are sensible but without weights assigned to them, financial institutions have no sense about which of the factors are most important.
Violations of law and consumer harm are the important factors that should receive at least 50 percent of the total exam weight. The agencies must be focused on developing a performance evaluation system that emphasizes results and does not dwell too much on process. A member of the public likely cares less about the particular form in which the institution’s board is devoted to compliance with the law and cares more about whether the institution complies with the law.
The agencies must also be more careful about how they assess the severity of violations of the law. In the proposal, they have a discussion about how rejecting a loan applicant could be a violation of the Equal Credit Opportunity Act (ECOA) but then suggest that it is a violation that entails no financial harm. This discussion implies that fair lending violations may be less severe than violations in which it is easier to assign a monetary value of harm. In fact, fair lending violations resulting in redlining can devastate entire communities. The agencies need to replace their current discussion of fair lending law with a discussion making clear that they will be assessing the impact of violations of law on communities as well as on individuals.
The proposal reads as if members of the public are passive and the main task is to avoid victimizing consumers. However, members of the public and community-based organizations are active and should be actively engaged in helping financial institutions comply with the law. The agencies should revise the proposal to encourage financial institutions to include fair lending organizations and legal aid societies in the training of financial institution staff.
The agencies also failed to consider how their various examinations could work together in a powerful way to assure compliance with the law. If CRA exams, fair lending reviews, and consumer compliance reviews were coordinated and occurred at the same time for each financial institution, the deterrent effect of these reviews would be magnified. It would take a simple addition for the agencies to say that the various exams would occur simultaneously and the exam schedules would be publicly released.
Finally, when federal agencies consider bank merger applications, they heavily consult CRA exams and fair lending reviews in order to gauge whether a bank’s future record of performance is likely to include responsibly and fairly serving minority and low- and moderate-income communities. It would be powerful if this review also included the consumer compliance ratings and exams. When community organizations identify deficiencies in bank performance, they can influence ratings on exams, which in turn, can influence whether a merger is approved, denied, or approved conditional on specified improvements in performance.
The concept of a consumer compliance rating is compelling. It could serve as a key guide for consumers to shop for a responsible lender. It could be a powerful motivator for compliance to fair lending and consumer law. But all of this potential is lost if these ratings remain secretive and not subject to influence from the community.
(Photo credit: ben dalton via flickr, CC BY-SA 2.0)