Inside Financial Services

For Bank Regulators, There’s Never Enough Micro-Management

If only banks could run themselves as if they were car rental companies . . .

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It continues to be a mystery to me why the financial services industry, of all the various businesses that make up the glorious wonder that is the American free enterprise system, is such an all-season magnet for abuse by regulators. But it is. I was reminded of this fact yet again on Saturday when I dropped off my rental car at the airport, on my way home after a week out of town. The rental charge for the week came to $337, but in addition, the company had tacked on a half dozen or so additional fees—items like an “FF surcharge” ($5.25) and  “O&M recovery fee” ($4.95)—that in aggregate tallied to roughly $100.   On a $337 charge. On the one hand, that does seem on the high side. On the other, car rental companies are for-profit enterprises in a very competitive business. If they need to pass through fees and tack on extra charges to stay solvent, so be it. The car I rented was clean and reliable, and the people I dealt with at both ends of the transaction were friendly and efficient.  I’m sure I’ll rent there again. Compare my rental-car experience to what would have happened if for some reason car-rental companies were under the purview of the federal financial regulators. To get a sense of what that would be like, here’s the opening from a CFPB press release a few years back:

WASHINGTON, D.C. – The Consumer Financial Protection Bureau (CFPB) today adopted a rule that will increase protections for consumers who transfer money internationally. Under the new rule, remittance transfer providers will generally be required to disclose the exchange rate and all fees associated with a transfer so that consumers know exactly how much money will be received on the other end. The rule also requires remittance transfer providers to investigate disputes and remedy errors. “People sending money to their loved ones in another country should not have to worry about hidden fees,” said CFPB Director Richard Cordray. “With these new protections, international money transfers will be more reliable. . . . . [Emph. added]

Then there was the tussle between CompuCredit Corp. (now Atlanticus) and the FDIC regarding its card solicitation practices:

 (Reuters) – U.S. regulators accused telemarketer CompuCredit Corp. and two banks on Tuesday of deceiving hundreds of thousands of credit card customers by withholding important details and blindsiding them with fees. The regulators filed a series of civil and administrative-proceeding charges against CompuCredit, First Bank of Delaware and South Dakota-based First Bank & Trust, seeking more than $200 million in restitution and civil penalties. After a joint investigation by one agency that regulates banks and another that enforces consumer fraud and deception rules, the regulators said CompuCredit and the banks engaged in “unfair and deceptive practices” by failing to properly disclose upfront fees and credit limits to consumers with poor credit. [Emph. added]

What exactly did the FDIC think CompuCredit did wrong? In its solicitation, the company offered prospects a credit line of “up to $1,000.” The FDIC claimed that was deceptive because a relatively small portion of applicants received a full $1,000 line—even though the solicitation clearly said the offer was “up to $1,000.” Talk about nit-picking!

And more broadly, what is this strange obsession that regulators have with hyper-regulating fees that banks charge? Lots of businesses charge ancillary fees. As long as the fees are disclosed up front (which they are), I’m at a loss to understand why they’re supposed to be unfair. As far as that goes, the banking business is at least as competitive as car rental is. If some enterprising bank could figure out a way to earn an adequate return and not nickel and dime its customers with fees in the process, it would exploit that advantage as aggressively as it could. But the economics of banks (and car rental companies, apparently) don’t work that way. The only difference is, rental companies and just about every other industry not called financial services get a pass, while the banks get hammered. How that is fair is beyond me.

What do you think? Let me know!

3 Responses to “For Bank Regulators, There’s Never Enough Micro-Management”

  1. Ellen Schloemer

    Wow, some amazing cherry-picking of data to support your argument. The CompuCredit article that you cite in your story says the company did lots more wrong than you mention. Like offering customers credit cards with a $300 credit limit and $185 in undisclosed fees; not mentioning that only half of some credit limits would be available for 90 days (does that mean borrowers incurred overlimit charges?); calling borrowers 20X per day.

    If you want consumers to make good financial decisions, they need to have accurate, complete information so they can comparison shop. Even you say fees should be disclosed upfront – seems like you agree with the CFPB and FDIC on that.

    • Adam Yale

      Actions like those at CompuCredit are precisely why good actors are being over-regulated. Those that push the envelope always seem to find a way around that which CFPB and FDIC are trying to curtail. Left in the wake are the institutions that more-or-less earnestly try to comply; driving up costs and getting mired in seemingly excessive process, raising the cost of financial services for everybody.

  2. F. Sopron

    Let’s not get too pious! For instance, $25 late fee for a credit card payment?
    A fee to use a teller! ( not all of us are tech savvy) There are others just a ridiculous but on the whole the banks are no worse than airlines, utilities etc.

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