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Traditional community banks are the good guys; Elizabeth Warren is wrong

Traditional Community Banks – The Good Guys

 

By Roger Beverage
OBA President & CEO

Elizabeth Warren's argument for creating a new Consumer Financial Protection Agency [“Wall Street's Race to the Bottom”, WSJ Feb. 9, 2010] is misguided. The effort to insert itself between traditional banks and their customers is yet another example of Washington's approach to problems – trying to solve them with a “one-big-size-fits-all” mentality. For consumers, the proposed CFPA is too expensive, too intrusive and not needed to “protect” them from the nation's traditional banks.

Ms. Warren blasts “Wall Street” in general for producing and selling bad mortgages to “financial wizards” who packaged and sold them to an unsuspecting world. Oops. There's a problem with the bill pending in Congress: it exempts the folks that brought us to the edge of the financial abyss from oversight by the proposed new agency. Traditional banks and, ultimately, their customers are the ones in the cross hairs of Ms. Warren's faux populism.

Basic banking principles are fairly standard, especially in traditional community banks, no matter what kind of loan is involved. Every loan transaction boils down to a basic question: “If I loan you this money, will you pay it back?” There are other principles, of course, but if this question can't be answered in the affirmative, based on proper analysis of a borrower, a good banker will stop the process dead in its tracks. Why? Because traditional bankers get paid when people repay their loans.

The folks Ms. Warren complains about didn't ask that question. Why? Because the compensation for these traders and “financial wizards” wasn't tied to repayment of the underlying loans. They were simply passed on up the chain by the “wizards,” packaged like the sausage being made in Washington and sold to unsuspecting buyers with stamps of approval from the various rating agencies. Whether the underlying loans were repaid became, ultimately, our problem as taxpayers.

What's most offensive is that Ms. Warren implies that all banks operate a deceptive way. She's wrong of course, but why let the facts louse up a chance to bash banks? If she wants to target the unregulated entities, most traditional bankers will gladly work with her to create the right reform package and bring these outliers into the regulatory reality that's made “consumer protection” a focus for traditional banks and their regulators for more than 30 years.

This “bait-and-switch” proposal – saying you're going after “Wall Street” but targeting traditional banks – means more costs for consumers. It punishes good lenders, the ones at the heart of the nation's economic recovery and lets the outliers who avoided the basics of consumer protection imposed on banks skate.

Most significantly, it injects yet another layer of government regulation where it's not needed. If you're concerned about the federal government injecting itself into some of basic decisions about what you do with your life, you're gonna' love having them balance your checkbook. 

 

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