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Miller-Moore: It Still Works

Adam Rust's picture

Posted October 16, 2009

Today's Miller-Moore amendment makes more sense than would first appear.  The new rule, coming out of the House Financial Services Committee, exempts most financial institutions from new regulatory review by the proposed CFPA.

Banks with assets under $10 billion, and credit unions with assets under $1.5 billion, would not be examined by the CFPA.  It seems like a cave-in, right?  What's up with the lobbyists giving up on so much work from those 8,000 clients? What's up with helping the country prevent another meltdown?

Advocates initially responded with some frustration.  The National Community Reinvestment Coalition published a

harsh review to its advocate partners on Friday:

The impact of this amendment will prevent the CFPA from conducting annual examinations or “audits” of the lending practices at more than 8,000 of the nation’s 8,200 banks, leaving only the largest banks and other lenders subject to the agency’s examiners.

They are not happy.  However, the amendment may not be quite as bad as it might seem.

Why it Still Works

Yesterday afternoon, a wrinkle in this amendment suggested that CFPA might exert both a regulatory standard and an enforcement regime.  Miller-Moore only applies to the latter.  The regulatory standards will still be met.  All financial institutions are still forced to meet the rules of CFPA.  The key difference is in who does the enforcement: the CFPA itself would only enforce the rules upon the largest institutions.  The others would have to follow the dictates of the FDIC.

That's an interesting switch.  It saves money by eliminating some of the regulatory workforce.  Moreover, the idea included the right for CFPA to intervene if the FDIC failed to meet its regulatory responsibilities.  Thus, the CFPA puts some fire under the FDIC.  Either the FDIC does its  job, it says, or the FDIC will lose its authority.  It is worth mentioning, then, that this is likely to be a partnership that works.  Among all of the agencies, it is the FDIC that has been most vigilant about doing its job.

For the Small Banks

This amendment was championed by the Community Bankers Association.  While it sounds nice to say that community banks are always helpful and active in their communities, the truth is that there is never an "always."  Yes, some small banks and medium-sized credit unions are doing their jobs. Most of these banks already operate with fewer regulatory expectations than the larger institutions.  For example, under the Community Reinvestment Act, banks or savings and loans are only reviewed once every three years.  For those that get good marks on their exam, the next exam is put off for five years!

That is why it shouldn't be a surprise, on a second glance, that many community banks are hardly "all about the community." Small banks are increasingly irrelevant.  Most small banks hardly do any business at all any more.  In 2007, for instance, more than 4,000 financial institutions made fewer than 100 mortgage loans.  More than half of the mortgage loans made in the first quarter of 2009 were originated from the parent corporations or a subsidiary of just four bank holding companies (Citigroup, Bank of America, Wells Fargo, and JP Morgan Chase.)

Upstart institutions, often still in de novo status, are among the groups least likely to make loans to low-income borrowers.  These institutions fly under some of the regulatory radar for their first few years.  I say "some" because de novo status comes with extra safety and soundness scrutiny.  At the same time, the basic plan for many of these banks is to be extra careful about lending and then to exit via acquisition by a larger bank.

I've already talked about the lack of effort by regulators.  I offered the example of the supervision of Ephrata National Bank in an earlier post.  It's all too common of an example - a bank that has no branches in low or moderate income census tracts ,that only made one loan to an LMI consumer in 2007, and that gets an "outstanding" rating for its service to low and moderate-income communities.  Does that sound like regulators are leaning too hard on these banks?  Or, maybe its just empirical evidence of how shallow our existing regulatory scheme is in doing its job.

A Possible Concern

It will be interesting to see how the asset bar is defined.  If banks are allowed to divide themselves into subsidiaries prior to meeting the threshhold test, then its possible that the CFPA will regulated only a few banks.  Call them banks with "higher standards."