Small Banks Fear Consumer Agency Will put Them in Deep Freeze

Would the federal government's proposed Consumer Financial Products Agency hurt America's small banks by requiring them to offer "plain-vanilla" financial products?

Community bankers fear that would limit their ability to provide the kinds of mortgage loans, credit cards and other offerings customers want and to differentiate themselves from competitors. That, in turn, would lead to commoditization in lending, squeezing bank margins and ultimately forcing small institutions to exit parts of the consumer market. More broadly, small banks oppose what they see as government interference in product development, since the consumer agency would set the terms for basic financial offerings.

Such arguments seem to be getting through to prominent lawmakers. House Financial Services Committee Chairman Barney Frank, D.-Mass., on Thursday said the CFPA wouldn't mandate off-the-shelf banking products, tweaking the Obama administration by noting he sees "a little overreach" in its consumer proposals. That sets up a juicy fight with the White House, which continues to favor the plain-vanilla option.

it's understandable why small banks are concerned. But isn't lending already commoditized? Like many homeowners, my wife and I chose a mortgage lender based almost entirely on who offered the best interest rate and lowest price. One home equity line looks pretty much like another.

Besides, community banks have long competed more on the basis of forming good relationships with local customers than by trotting out all manner of financial products, especially the more exotic species -- option ARMS, balloon loans, high loan-to-value home equity offerings -- associated with the subprime bust.

Elizabeth Warren, head of the goverment group overseeing the financial reform effort and a leading advocate of the CFPA, contends that the agency won't limit consumer choice. I don't buy it. After all, that's an express goal of such regulation -- discouraging people from using potentially risky financial products they don't understand and funneling them into safer options.

The idea is to trade a measure of choice (not "innovation," as the banking industry would have us believe) for security. That's an exchange the U.S. economy, with an assist from government, makes all the time. Take pharmaceuticals. The FDA balances the cost of safeguarding the public, by setting standards for drug development, against the risk of slowing the commercialization of new products. It's not a perfect system, but mostly it works. So can the CFPA.