Community banks fear weight of CFPB's reach
The banking sector in Texas sees a new lawsuit filed against the Consumer Financial Protection Bureau by one of its own state banks as a natural reaction to unfinished Dodd-Frank rules and fears that loan products could be banned by the CFPB.
Last week, a Texas community bank and two nonprofits filed suit against the CFPB, claiming the bureau's structure and the president's means for appointing Richard Cordray CFPB director violated provisions of the U.S. Constitution.
State National Bank of Big Spring is the lead plaintiff in the case. The 60 Plus Association, a nonprofit that represents the interests of senior citizens, and the Competive Enterprise Institute, which advocates for limited government, are the remaining two plaintiffs.
The community bank, which is located in Big Spring, Texas, alleges that Title X of the Dodd-Frank Act and the CFPB's promulgation of a final rule regulating international intermittence practices has placed onerous burdens on the bank, forcing it to end certain services for clients.
Furthermore, the bank challenges the CFPB's power under the Dodd-Frank Act to write rules that could impact smaller banks' ability to provide certain loan products.
"The bank must conduct its business, and make decisions about what kinds of business to conduct, without knowing the CFPB will retroactively announce that one or more of the bank's consumer lending practices is 'unfair, deceptive or abusive," the bank said in its lawsuit.
A CFPB spokesperson Jennifer Howard doesn't think the suit holds water, however.
"This lawsuit appears to dredge up old arguments that have already been discredited. We're going to keep our focus on the important work Congress created us to do — making markets work for consumers and responsible providers," she said.
John Heasley, executive vice president and general counsel for the Texas Bankers Association, said State National Bank's suit is in line with concerns expressed by other community banks.
One of the association's top concerns is the qualified mortgage rule, which when defined by the CFPB, will create the baseline for what types of loans are considered abusive, unfair or deceptive, Heasley said. He added that community banks are wary of any uncertainty or risk that could surface on this issue.
"A lot of rural banks make small loans that are balloon, two-year, only-interest-rate (loans)," Heasley told HousingWire. These are loans that create much-needed financing for local communities and rural areas, he explained. But he fears products of this type could eventually be regulated out of the market by rules written to curb the practices of big banks.
Heasley claims some of the big lenders' pick-a-mortgage rate products were the real targets of the Dodd-Frank rule, but he fears smaller banks will feel the effects too.
The real result of Dodd-Frank "will be increased costs for traditional banks that had nothing to do with the crisis and less credit availability for the middle class," Heasley asserted.
Specifically, the lawsuit claims the CFPB is in violation of the separation of powers provision of the U.S. Constitution since it retains a number of exclusive powers.
The main plaintiff, State National Bank of Big Spring, believes there are not enough checks on the agency.
Furthermore, the bank claims President Obama's in-recess appointment of CFPB director Richard Cordray violated the appointments clause of the Constitution since it was an appointment made without the Senate's consent even though the Senate was technically still in session.
Finally, the bank claims Dodd-Frank's creation of the Financial Stability Oversight Council violates the separation of powers clause since the members of FSOC, which was designed to watch for systemic risks in the market, includes nonvoting members who are not appointed by anyone in the executive branch. Despite not being appointed, they still partake in the proceedings, the parties contend in the lawsuit.