Consumer Protection at the Local Level: Community Banks

By: Katie Busby, J.D. Candidate ’14 | April 23, 2014

Consumer Protection & A Local Level

In 2007, mortgage lenders began creating non-traditional mortgages for people with bad, hoping to benefit from historically low interest rates. When interest rates later began to climb, mortgage rates were reset to much higher monthly payments, causing many subprime borrowers to default. Consequently, mortgage lenders were left with worthless property in a weakening housing market. The problem snowballed when defaults increased, eventually leading to the subprime meltdown of 2007.

In response, Senator Chris Dodd and Representative Barney Frank spearheaded a major financial reform bill, eventually titled the “Dodd-Frank Wall Street Reform and Consumer Protection Act,” aimed at reducing systematic risk in the marketplace and streamlining regulatory authority.

One critical element of the new law was the creation of the Consumer Financial Protection Bureau, or CFBP. The idea of CFPB was simple, if agencies existed to protect consumers from buying exploding appliances, there should be an agency that protects them from buying exploding mortgages. Essentially, Dodd-Frank and the CFPB gave the American public something they desperately needed – a consumer watchdog with the authority to regulate institutions that sell consumer financial products or services.

Aimed at reducing systematic risk in the marketplace, the Act and Bureau seemingly created the insulation against dramatic economic downturn that the American public was desperately needing. Consumer confidence in the U.S. economy began to rise, and the market seemed stable once again. But the economic bliss didn’t last long.

Government Shutdown

In 2013, a battle between the Democrat and Republican Parties began over funding President Obama’s signature legislation, the Affordable Care Act. On one side of the ring stood the Republican-controlled House of Representatives that wanted to defund significant portions of the Act. On the other was the Democratic Senate, who refused to budge. The stalemate caused the first government shutdown in 17 years, ending 16 days later when the group essentially tabled the discussion for later. According to the Gallup Economic Confidence Index, American confidence in the U.S. economy plummeted 16 points during the shutdown, the sharpest monthly drop since Gallup began tracking daily economic confidence in 2008.

The resulting economic impact was astounding:
• $24 billion – impact to the U.S. economy according to an estimate by Standard and Poor’s
• $152 million – Amount lost per day in travel spending, according to the U.S. Travel Assn.
• $76 million – amount lost in daily visitor spending in national parks in 12 states, according to the Coalition of National Park Service Retirees
• 800,000 – number of federally workers that were furloughed for 16 days

As an isolated event, the American public would have likely been able to easily overcome the brief economic decline. Unfortunately, it came on the heels of what has been dubbed the worst financial crisis since the Great Depression. So, where Dodd-Frank and the CFPB fall short of reducing systematic risk in the marketplace, community banks fill the void.

Consumer Protection at the Local Level: Community Banks

As America continues to face unforeseen economic downturns, and Congress continues to respond with the influx of new legislation, understanding how current legislation impacts the local community banks is necessary. In the article “Consumer Financial Protection and Community Banks,” author John T. Adams describes how community banks create the economic backbone of financial activity at a local level, and how the installation of the rulemaking authority of CFPB creates regulatory risks for community banks during the implementation of the Act.