Evolving Landscape of Consumer Finance Regulation

In today’s podcast episode, we are joined by Raj Date, who has served in a variety of roles at the Consumer Financial Protection Bureau, including as the acting head of the agency and as it’s first-ever Deputy Director. He recently wrote a thought-provoking article in a new online publication, Open Banker, entitled “Banks Aren’t Over-Regulated, They Are Over-Supervised.”

Alan Kaplinsky, Senior Counsel in Ballard Spahr’s Consumer Financial Services Group, leads the discussion, and is joined by Joseph Schuster, a partner in the Group.

By way of background, Mr. Date described how bankers have almost uniformly complained to him that banks are over-regulated. Mr. Date responds to these complaints in his article as follows:

At the time, in the still-smoldering ruins of the financial crisis, this struck me as bizarre. Banks are the beneficiaries of an array of government privileges: subsidized leverage (through insured deposits), liquidity (through the discount window and the home loan banks), exclusive access to payment rails (both through the central bank and bank-only private networks), and even choice of law (through federal preemption). Given all that, safeguards on capital, liquidity, credit exposure, market and interest rate exposure, cybersecurity, and consumer protection seemed like a fair trade to me.

More than a decade later, I realize that those bank CEOs were not exactly wrong, they were imprecise: Banks are not over-regulated, but they are — quite dramatically — over-supervised. 

Mr. Date makes the following points in support of his thesis that the banking industry is over-supervised:

1.       Bank examination tries to cover too many areas and, as a result, sometimes fails to see the forest through the trees.

2.       Bank examination obsessively focuses on process rather than substance.  That focus is evidenced by the supervisors’ requirements that the banks document everything.

3.       It takes far too long for banks to receive examination reports after exams are completed, sometimes years later. The final exam reports are often anachronistic.

4.       Bank examinations often stultify bank innovation because supervisors’ examinations are often critical of banks offering new products and services and this results in bank management being reluctant to innovate out of fear that they will be downgraded.

5.       Examiners’ focus on process rather than risk itself has resulted in a bank management brain drain.

Mr. Date then explains how the examination process should be changed. Mr. Date first calls for immediate changes even though the banking industry is largely thriving.  

Mr. Date suggests the following approach in his article and during the podcast:

The regulatory agencies are, probably justifiably, proud of their long histories of public service. But that pride breeds cultures that are strikingly conservative and resistant to change. As importantly, unlike private sector firms, they do not have the crucible of a profit imperative to burn away unproductive practices and orthodoxies. And it shows. It is not as though bank examiners cannot articulate the most important issues facing their regulated charges; it is just that they often just have no reason to stop working on things other than the most important issues.

The only solution is strong top-down leadership that imposes ambitious goals. Without stretch goals that will feel strikingly out of reach at the outset, real change will not be possible. If it were me, I would set out, in a pilot with a handful of mid-sized banks, to structure a supervisory exam strategy that costs 75% less (in combined bank and agency costs) and is 75% faster from first-day letter to final report than today’s norms.[9] I would embrace pilot uses of new technology tools in pursuit of those goals. And then I would iterate on those initial (almost certainly unsuccessful) results.

This will be difficult, and even painful. But I very much believe it will be worth it.

While acknowledging the issues with over-supervision, Joseph directs significant attention to the problem of over-regulation. He argues that modern regulatory practices have become more complex, restrictive, and less clear, creating barriers to innovation and access to credit. Joseph highlights how over-regulation stifles the development and availability of consumer finance products.

Joseph explains how products like "Buy Now, Pay Later" (BNPL) face regulatory hurdles despite addressing consumer needs effectively. Joseph also discusses the potential negative impact of proposed changes to late fee regulations, warning that such measures could limit access to credit and push consumers toward higher-cost alternatives. Joseph criticizes the heavy-handed approach taken by regulators, such as the CFPB’s issuance of circulars, which adds further uncertainty and complexity for institutions attempting to innovate in this space.

Joseph advocates for a return to a more structured and transparent regulatory framework. He suggests that agencies recommit to the principles of the Administrative Procedures Act (APA), emphasizing the importance of notice-and-comment rulemaking. Drawing parallels to the Federal Reserve Board’s process during the implementation of the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act, Joseph argues that meaningful engagement with the industry could lead to clearer regulations that balance consumer protection with innovation and operational feasibility.

Joseph endorses Raj Date’s call for clear and focused priorities in the supervisory process, and emphasizes that both banks and examiners benefit from a more straightforward understanding of the rules. Joseph concludes by warning against the trend of "regulation through enforcement," which undermines transparency and predictability, ultimately harming consumers and financial institutions alike.