LEVICK Senior Vice President Jack Deschauer, an expert on the corporate governance challenges facing financial services institutions, discusses “What’s Next?” for so-called “non-banks.”
Jack, what’s the biggest issue facing non-banks at the moment?
There’s no doubt that the Consumer Financial Protection Bureau (CFPB) continues to scrutinize those “non-banks” that serve less fortunate communities and those that cannot avail themselves of services from traditional banks. There’s also no doubt that the CFPB and its allies in the Executive Branch, on Capitol Hill, and at think tanks and advocacy groups believe their mission is to legislate, regulate, and/or litigate to protect less fortunate Americans from what they perceive to be predatory lending practices. What the CFPB doesn’t always grasp is that certain Americans would never qualify for a conventional bank loan, which is why non-banks have to step in to ensure that poorer communities have access to capital. The classic example is CFPB’s rigid policies toward non-bank lending by Native Americans. Yes, CFPB has succeeded in cracking down on certain institutions that were undeniably predatory. But they’ve also made it considerably more difficult for Native American organizations, many of which are solely responsible for the operating budgets of the reservations on which they exist, to legally do business.
Why are CFPB policies a threat to non-bank business operations and plans for growth?
Because those policies are getting more rigid and more intrusive; CFPB isn’t about to mitigate them anytime soon. Like other public regulatory agencies, CFPB is looking to crack down on what it views as high-profile offenders—those institutions engaged in practices that, if exposed, will garner the most media attention. Companies have to remain vigilant to ensure that employees adhere to a high code of conduct and that business practices meet and when possible, surpass, federal regulations.
If non-banks don’t mitigate this threat, what’s likely to happen?
Within five to ten years, any number of non-banks could be either out of business or have their customer bases and operations seriously diminished. Non-bank leaders need to recognize that the CFPB continues to have them in their sights. The training and oversight they provide their employees in every branch and subsidiary is absolutely essential. So are business practices that are transparent and easily catalogued.
What would you and LEVICK recommend that non-banks do now to inoculate themselves?
Be proactive. Strengthen their code of ethical conduct. Train all employees in the most stringent practices—and make them take regular do-and-don’t “tests” to ensure compliance. Don’t be shy about reminding communities about the importance of non-bank financing. Build a broad cadre of third-party advocates, including prominent business leaders, community officials, former regulators, and respected Native Americans.
Tell stories of individuals and families whose lives are better because of access to non-banks. Use all channels: earned, digital/social, video.
Above all, be transparent with the CFPB. Invite CFPB officials to examine their practices—and keep CFPB informed of any changes. Tell CFPB: “if there’s a problem, we want to correct it now—not be the target of a hostile regulatory action or lawsuit four years from now.”