Congress writes strong new regulations for banks--and then exempts everybody but my grandma

10/16/2009 4:16 pm EST


Jim Jubak

Founder and Editor,

Maybe it's a seasonal thing.

We carve pumpkins at Halloween.

We carve turkeys at Thanksgiving.

So why shouldn't Congress carve out its own legislation in mid-October.

You may not be familiar with the term "carve out." I wasn't until this round of action in the U.S. Congress.

A carve out is when you write really strong regulations--regulations that voters think will do the job that needs to be done--and then gut them in a way that you hope nobody will notice by making sure that they apply to almost nobody.

Lobbyists, I'd note, love carve outs.

The House Financial Services Committee delivered a big carve out to the banking industry on October 15.

 The pumpkin on the table was a bill to set up a new consumer financial protection agency to prevent banks from writing confusing or just plain deceptive mortgages, from hiding all the important details of a credit card in dozens of pages of fine print so that no consumer without the patience of Job could be expected to know what the fees and charges were, or from piling fees on top of fees until a consumer wound up paying hundreds of dollars for bouncing a $25 check.

No consumers don't need anything like that. The sub-prime, alt-A, and prime mortgage meltdown shows that banks can be trusted to do the best for their customers. And the aftermath of the global financial crisis, a period when banks are attempting to plug the holes in their balance sheets with the flesh of their customers, shows that banks never overcharge for their services or try to hide the full extent of the fees that come with a checking account or credit card.

As you might imagine the banks aren't overjoyed with the idea of creating a new regulator charged with making sure they don't rip off their customers. And they've pulled out all the stops to prevent it, sending an army of lobbyists to the House Financial Services Committee where chairman Barney Frank (D-MA.) was cobbling together both a bill and the political coalition to pass it.

It's never a good idea to watch sausage being made, the saying goes, because if you see what goes into it, you won't want to eat. It's always a good idea to watch how Congress puts together legislation because then, at least, you won't have any illusions about what's being forced down voters' throats.

The key moment to watch with this legislation, to date anyway, came on October 15 when Representative Brad Miller and Representative Dennis Moore, Democrats from North Carolina and Kansas, respectively, offered their carve out amendment. Using exactly the arguments of lobbyists for the Independent Community Bankers of America, which represents 5,000 smaller financial institutions, Representatives Miller and Moore, proposed exempting any bank with less than $10 billion in assets and any credit union with less than $1.5 billion in assets from regular examinations by the new consumer protection agency. Such exams, they argued, would be excessively disruptive and costly for small banks and credit unions.

The result of this carve out? About 98% of U.S. banks will be exempt from visits by the new regulator. These "carved out" financial institutions will still be required to meet the requirements of the new law but the new consumer protection agency won't be able to conduct the kind of detailed, on site examination needed to make sure the bank is following the rules. That will be left up to the examiners employed by existing regulators. You know, the folks who did such a great job of protecting consumers during this financial debacle.

Who will be covered? The 150 largest banks in the country. Nobody else. Now it's certainly worth putingt these banks under tougher scrutiny since they committed some of the worst offenses in the run up to the meltdown.

But exempt everybody smaller than the top 150 from regular onsite scrutiny by an agency with the mission of protecting consumers? That doesn't make any sense.

I wonder if the lobbyists understand the incentive they've just created for consumers: Bank at one of the big boys and get at least a chance at more consumer protection or bank at the little guys where it's business as usual.

That's not a tough choice.

Serve 'em right if consumers carved these financial institutions right out of the market.
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