What Can Be Done? Strong Financial System Regulations and Consumer Protections

Financial system regulations and strong consumer protections can guard consumers and communities of color against being charged more for inclusion in the financial system and participation in the economy. For instance, existing guidelines and standards encourage banks to voluntarily offer safe and affordable checking accounts. The FDIC’s Model Safe Accounts recommends core checking account features that include an opening deposit of $10 to $25, a monthly maintenance fee up to $3, no overdraft or insufficient funds fees, and free online and mobile banking. ¹ More recently, the CFE Fund’s Bank On National Account Standards recommends an opening deposit of $25 or less, a monthly maintenance fee up to $10, no overdraft or insufficient funds fees, and free online and mobile banking. ² However, few banks voluntarily comply with these guidelines and standards, with only 9 percent of banks having checking accounts that meet the core Bank On National Account Standards.³ Without mandatory regulations or protections, communities—and especially communities of color—may be at risk for paying higher costs and fees.

The Community Reinvestment Act (CRA) is another way of imposing mandatory regulations on banks and ensuring protections for consumers; though, the CRA emphasizes banks’ lending activity over safe and affordable checking or transaction accounts. The CRA was passed in 1977 to assess FDIC-insured financial institutions’ lending activity in low-income and economically-distressed communities and arose out of the need to redress banks’ racially discriminatory redlining practices.⁴ Through the CRA, FDIC-insured banks receive ratings of “substantial non-compliance” to “outstanding” that have implications for their abilities to make business decisions, and the largest banks with $1 billion or more in assets receive the most scrutiny. However, the CRA has been found to dilute the quality of lending activity while expanding its quantity.⁵ Moreover, banks’ CRA ratings are incongruent with current evidence of redlining and racialized patterns of entry-level checking account costs and fees,⁶ given that 97 percent of banks earn the highest ratings.⁷ Banks’ superficially high ratings may be due in part to the fact that the CRA only requires banks to report borrowers’ and communities’ income—not race.⁸ Thus, the CRA inadequately redresses banks’ racially discriminatory practices by conflating income and race and underestimates discriminatory practices in checking and transaction accounts by emphasizing lending.

New regulatory oversights and consumer protections were introduced in 2010 with the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act,⁹ which was precipitated by a financial system crisis that resulted in taxpayer-funded bank bailouts and the Great Recession.¹⁰ The Dodd-Frank Act established the Consumer Financial Protection Bureau (CFPB), a new government agency designed to protect consumers by providing regulatory oversight of the financial system and filling gaps in regulation. Since the agency’s creation, the CFPB has issued guidelines and rules to protect consumers that cover a range of activities across the financial system. These guidelines and rules have covered banks’ overdraft protections and mandatory arbitration clauses on checking and transaction accounts, payday lending, medical debt, and student loan debt.¹¹

Financial system regulations and strong consumer protections can guard consumers and communities of color against being charged more for inclusion in the financial system and participation in the economy.

Consumers of color stand to benefit the most from the protections offered by the CFPB.¹² For example, the CFPB levied millions of dollars in fines after discovering that Wells Fargo’s employees were illegally opening transaction accounts and lines of credit without consumers’ knowledge or permission in order to meet demanding sales quotas.¹³ Notably, bank employees admitted to targeting immigrant and Native communities.¹⁴ Consumers (disproportionately of color) whose checking accounts were opened (perhaps unknowingly) by bank employees to meet sales quotas can be charged fees when their accounts remain dormant through no fault of their own, and banks can involuntarily close these accounts altogether. This account activity can be recorded by screening agencies and become part of consumers’ financial and credit histories, further maintaining disenfranchisement in the financial system. Therefore, the CFPB’s response was necessary for protecting consumers of color against racially discriminatory practices.

While communities and consumers of color can benefit from financial system regulations and strong protections, policy is moving in the opposite direction. Recent policy changes are characterized by fewer regulations and weaker consumer protections. The House of Representatives passed the Financial CHOICE Act in 2017, and the bill awaits voting in the Senate.¹⁵ The Financial CHOICE Act removes many of the financial system regulations put into place by the Dodd-Frank Act following the financial crisis and weakens the authority of the CFPB. For instance, the Financial CHOICE Act changes the CFPB’s leadership from an independent director to a five-member commission subject to congressional oversight, eliminates the database for collecting financial system complaints directly from consumers, and exempts payday and auto title lenders from CFPB’s regulatory oversight.¹⁶ Moreover, President Trump’s 2019 budget proposes restructuring the CFPB’s funding so that it passes through Congress instead of the Federal Reserve. Such a change limits the agency’s independence from political maneuvering and partisan debates by giving policymakers direct control over the CFPB’s budget.¹⁷

As another example, bipartisan efforts in Congress recently led to the passage of S.2155 Economic Growth, Regulatory Relief, and Consumer Protection Act.¹⁸ This bill attempts to separate Main Street banks from Wall Street banks, suggesting that Main Street banks need less oversight and accountability than their Wall Street counterparts. The bill amends prior legislation to allow 25 of the largest 38 banks to avoid stricter regulatory oversight and exempts 85 percent of lenders from Home Mortgage Disclosure Act (HMDA) reporting requirements that monitor racially discriminatory lending patterns.¹⁹ However, the racialized costs of banking revealed in this report are based on a sample of mostly Main Street banks and suggest exactly the opposite. Main Street banks are not innocent: They exhibit racially discriminatory patterns and need oversight just like their Wall Street counterparts. While checking and other transaction accounts are different financial products than the lending products targeted by S.2155, the racially discriminatory patterns in the costs and fees of these Main Street banks’ most basic, entry-level checking accounts may very well exist in their lending.

Given the findings discussed in this report that are supported by a rigorous and robust research literature,²⁰ it is not sufficient to simply encourage banks to offer safe and affordable checking accounts and discourage racially discriminatory practices. Within our capitalist and market-driven economy, regulations and strong consumer protections are clearly necessary for guarding consumers and communities of color from racially discriminatory practices and ensuring full and dignified economic participation.