CFPB releases compliance costs report

by Ballard Spahr LLP
Contact

The CFPB recently released a report on the operational costs of regulatory compliance. The 176-page report is entitled “Understanding the Effects of Certain Deposit Regulations on Financial Institutions’ Operations: Findings on Relative Costs for Systems, Personnel, and Processes at Seven Institutions.” In the report, the CFPB focused on “the costs banks incur to comply with the regulations that the Bureau inherited and that govern consumer deposit-related products and services.” In particular, the CFPB studied compliance costs associated with “checking accounts, traditional savings accounts (e.g., statement/passbook savings), debit cards, and overdraft programs (e.g., overdraft coverage for ATM and debit card transactions).” 

The report is based on data obtained from seven banks ranging in asset size from under $1 billion to over $100 billion. The regulations on which the CFPB focused were Regulations DD (implementing the Truth in Savings Act), E (Electronic Fund Transfer Act), P (Gramm-Leach-Bliley Act financial privacy requirements), V (Fair Credit Reporting Act), and relevant sections of the Fair Credit Reporting Act. The CFPB interviewed about 200 employees and executives at the seven participating banks, and the interviews focused on “identifying all of the banks’ operational activities and processes to comply with the regulations in question.” 

The study focused on ongoing or recurring operating costs of the regulations, with the CFPB noted that it was only able to capture limited information on the one-time or implementation costs of coming into compliance with the 2009 “opt-in” overdraft regulations. The CFPB found that compliance costs were concentrated in the following business functions: Operations, Information Technology, Human Resources (as it relates to employee training), Compliance and Retail.

For each function at each bank, the report indicates the percentage of total compliance costs that such function accounted for. For each bank, the report also presents total compliance costs as a percentage of total retail deposit operating expenses. The CFPB states in the report that it avoided reporting dollar figures because such figures have “little meaning without comparison to a common denominator” and it would have created a risk of “revealing the identities of the otherwise anonymous participant banks or divulging proprietary information.”

We fail to see how providing dollar amounts would have created such risks. By only using percentages, the CFPB has obscured the magnitude of the dollar costs associated with regulatory compliance. In addition, the CFPB’s percentage estimates do not take into account at least two significant categories of costs: opportunity costs (i.e. profits foregone from business opportunities not pursued because of regulation) and litigation costs. (In explaining its decision not to include opportunity costs, the CFPB observes that while such costs “represent a cost to the bank, such lost profits do not necessarily reflect a loss to society.”)

An important takeaway from the report is that the CFPB is likely to expect financial institutions when commenting on compliance costs associated with proposed rulemakings to follow the techniques and methods used by the Bureau in the study. For example, the CFPB suggests that in addressing costs of a potential new regulation, an institution should “describe the major business functions affected by [the] regulation and trace the effects of the regulation through each function.”

When the CFPB announced its plans in October 2012 to study compliance costs, it stated that it hoped “to become better and smarter regulators” through its research. We certainly hope the study has provided the CFPB with an understanding of bank operations that will be useful when assessing the compliance costs of future rulemaking. However, the CFPB’s statement that “the techniques the Bureau used in the Study will not necessarily work to produce reasonable estimates of the costs of a potential new regulation” does not provide us with great cause for optimism.

Most significantly, while stating in the report that the CFPB “will always strive to improve its ability to avoid or reduce unnecessary compliance costs,” the Bureau makes several other statements that lead us to question how seriously it takes that commitment. More specifically, the CFPB qualifies that commitment with the statement that “in many cases institutions themselves may be better able [than the Bureau] to reduce their [compliance] costs.” According to the CFPB, “the most significant potential savings may come from institutions’ increasing operational efficiencies rather than the Bureau changing [a] regulation.”

As a further qualification, the CFPB states that “where regulatory and business processes, systems, and personnel are interwoven, it is possible that institutions may be able to reduce regulatory costs by streamlining operating costs more broadly. Institutions may find ways to reduce their operating expenses through better technology systems.… To that extent, industry has at least some capacity to reduce its compliance operations costs independent of steps that regulators can take.” Of course, the ability of financial institutions to lower costs does not relieve the CFPB of its obligation to avoid imposing unnecessary compliance costs in the first instance.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Ballard Spahr LLP | Attorney Advertising

Written by:

Ballard Spahr LLP
Contact
more
less

Ballard Spahr LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.