The Trump administration’s efforts to shutter the Consumer Financial Protection Bureau could be putting small community banks at a disadvantage against their larger counterparts.
The CFPB writes consumer protection rules for all banks and lenders, but is only in charge of enforcing them for banks with assets greater than $10 billion. For smaller banks, the main regulators — the Office of the Comptroller of the Currency, the Federal Reserve, and the FDIC — are in charge of enforcement. Those regulators continue to enforce consumer protection rules, even as the CFPB winds down, according to the small banks.
That has opened up a supervisory gap, small banks say. Community banks still need to plan for consumer enforcement actions, even as big banks may have room to lower their guard. In response, some Republican community bank advocates want the administration to be more specific about how bank regulation will be enforced if the CFPB is dissolved.
“We are at a severe competitive disadvantage,” said Jack Hopkins, CEO of CorTrust Bank, a community bank based in Sioux Falls, South Dakota. "We are having to allocate resources to the compliance exams, while the big banks are seeing those costs and fines reduced or eliminated. And the non-banks don’t even have the prudentials regulating them," said Hopkins, who chairs the Independent Community Bankers of America, a trade group.
The Trump administration has taken drastic measures to curtail the CFPB this year. OMB Director Russell Vought, who has served as acting director of the bureau since February, has made efforts to terminate 90 percent of its staff and freeze its spending. The administration is arguing in court that it is legally prohibited from asking for new funding for the agency from the Federal Reserve, the bureau’s main source of funding, implying that the CFPB will run out of funds in the coming months.
The agency has filed only one enforcement action this year, down from an average of 24 per year during the Biden administration and 29 per year during President Donald Trump’s first term, according to the CFPB’s website. As of October, the agency has also dropped 22 pending enforcement actions, including against notable organizations like Navy Federal Credit Union, says the Consumer Federation of America and Protect Borrowers.
The CFPB did not respond to a request for comment.
“Obviously, all the banks comply with the CFPB rules, but it's the enforcement mechanism that is out of balance,” said Paul Merski, EVP of congressional relations at ICBA, the bankers' association.
Republicans frequently draw attention to the needs of smaller community banks, many of which are in small towns or rural areas. They say the administration’s deregulation push will be a boon to the smaller institutions.
Some Capitol Hill Republicans say they would like the administration to put forward a plan to continue enforcing consumer protection rules on big banks. That might mean keeping the CFPB alive, but stripping it of its independence from Congress.
“Regulatory parity is essential to ensure banks can compete on a level playing field,” said Andy Barr, a Republican on the House Financial Services Committee. “By the very nature of its structure — and as proven by actions under Democrat leadership — the CFPB is unaccountable to normal checks and balances and takes away Congress’s power of the purse that would allow for proper oversight.”
House Financial Services Chair French Hill said he’d asked the administration for a “transition plan were the Consumer Financial Protection Bureau not to be actively doing that work.”
“All banks have a compliance responsibility for the consumer statutes and that the federal regulatory system has an obligation to examine them for proper compliance with those federal statutes that require consumer compliance,” he said.
Dissolving the CFPB is just one of several steps the Trump administration has taken to reduce regulations on financial institutions, moves that banks of all sizes have welcomed. Among them are new rules lowering capital requirements and focusing supervision more narrowly on capital, rather than on reputational matters.
But the big swings in bank regulation create a risk that a future Democratic administration could turn back the tide, according to an official at a major bank, granted anonymity to speak candidly.
“I think banks are right to see that they might get concessions and benefits in the short term, but it could come with costs over the longer term,” said Graham Steele, a fellow at the Rock Center for Corporate Governance at Stanford University and formerly assistant secretary for financial institutions at the Treasury.
Big banks say the gap in enforcement is not that large to begin with.
There are areas of overlapping authority between federal regulators and state attorneys general, which mean the big banks are not fully off the hook on consumer matters, even with a less active CFPB, they say. For example, the CAMELS rating, a supervisory rating system used by regulators, does include some measures of consumer protection.
“Oversight remains as rigorous as ever, regardless of a bank’s size, and both community banks and large banks are supervised for consumer protection by the CFPB, as well as the prudential regulators,” said Paige Pidano Paridon, executive vice president and co-head of regulatory affairs at the Bank Policy Institute, a trade group representing large banks.
Meanwhile, dissolving the CFPB would remove one of the only agencies tasked with regulating nonbank lenders and other less-regulated platforms, something that could put both big and small banks at a disadvantage.
“The more pressing question is who is holding nonbanks accountable as they increasingly offer bank-like products while deliberately avoiding bank-like rules and supervision,” Paridon said.
The Biden administration’s CFPB worked to curb unfair practices by nonbank lenders and payment platforms, according to Biden-era CFPB officials. “Without the CFPB, there is basically no one regulating them at the federal level,” said one former CFPB official.
“If no one is routinely examining the banks with assets greater than $10 billion for consumer compliance issues, or regulating the non-banks involved in financial services, that is unfair from my perspective,” said Hopkins at CorTrust.
Federal Reserve Vice Chair for Supervision Michelle Bowman, herself a former community banker, and other regulators have reasoned that the administration’s deregulatory blitz is partially to make small banks and big banks more competitive with nonbanks.
“Regulated banks must be empowered to compete effectively with nonbanks,” said Bowman in recent testimony on Capitol Hill. She did not respond to a request for comment.
The D.C. Court of Appeals will hear arguments in the case that could determine the future of the CFPB in late February.
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