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Warren Plans Information-Sharing on Non-Bank Lenders

White House Adviser Elizabeth Warren
Elizabeth Warren, the Harvard University professor appointed by President Barack Obama. Photographer: Jin Lee/Bloomberg

Elizabeth Warren, the White House adviser assigned to set up a U.S. consumer financial-protection bureau, plans to share information with state supervisors to streamline oversight of non-bank firms such as payday lenders.

The bureau will exchange information about banks and non-bank financial companies normally examined by state regulators under a memorandum of understanding announced today by the U.S. Treasury Department, which is housing the agency until it begins operation in July.

Information-sharing “will help states and the Feds” and should be welcomed by the lenders, said Thomas Gronstal, Iowa’s superintendent of banking and chairman of the Conference of State Banking Supervisors. “What you don’t want is the state coming in January and the Feds in February,” Gronstal said in an interview yesterday.

Warren, 61, the Harvard University professor appointed by President Barack Obama in September, is establishing oversight of non-bank lenders under the Dodd-Frank Act. The regulatory law brought the firms under the new agency’s watch after consumer groups accused them of taking advantage of borrowers through high interest rates or hidden fees.

Regulation of non-bank financial firms, which finance their business through wholesale borrowing, will affect payday firms such as Advance America Cash Advance Centers Inc., which is based in Spartanburg, South Carolina, and installment lenders such as Greenville, South Carolina-based World Acceptance Corp. It will also cover non-bank subsidiaries such as CitiFinancial, a consumer unit New York-based Citigroup Inc. wants to sell.

Attorneys General

The agreement to have the consumer bureau share information with banking supervisors follows the pattern of Warren’s outreach to state attorneys general, said Arthur Wilmarth, a law professor at Washington’s George Washington University.

“Politically, supervisors are supporters rather than opponents,” Wilmarth said in an interview yesterday. “And they can solve staffing problems that Warren probably cannot.”

Warren, who has promised tough regulation of non-bank firms, said in a statement that the agreement “allows us to bring thousands of financial service providers out of the shadows and to begin the process of ensuring that all lenders comply with the same basic rules.”

States’ Expertise

The information-sharing agreement will allow the consumer bureau to take advantage of states’ expertise in ensuring U.S. rules are being followed, Gronstal said. When state examiners turn up violations they will be able to pass them along to attorneys general or the consumer bureau for enforcement action.

“The states have been, for the most part, doing licensing and regulation for a long time, so we have quite a bit of experience,” Gronstal said.

The new consumer-protection agency, which will operate as an independent unit within the Federal Reserve, may focus on non-bank financial firms that work in multiple states, said Mark Kaufman, Maryland’s commissioner of financial regulation.

“I think there will be federal examiners of some scope,” Kaufman said in an interview. “It will not be of the scope to supplant state examiners.”

Federal-state cooperation could help bring uniformity to regulation of non-bank lenders, which “varies wildly by state,” said Jean-Ann Fox, director of financial services for the Washington-based Consumer Federation of America.

There were 71,121 non-bank financial firms in the U.S. at the end of 2009, about 10 times the number of banks and thrifts, according to a survey conducted by the state supervisors. There are also more than 121,000 mortgage originators, according to a separate state survey.

‘So Large’

“The numbers are so large that it would be absolutely impossible for a federal agency to regulate and supervise those entities without help,” said Chris Stinebert, president and chief executive officer of the American Financial Services Association, a Washington-based group representing companies that offer installment credit and auto loans.

Stephen Altobelli, a spokesman for the Hackensack, New Jersey-based Financial Service Centers of America, which represents check cashers, small-dollar lenders and some title lenders, said the industry welcomes any state-federal cooperation that minimizes overlap.

“One concern we have with the CFPB is that we are layering on a level of federal bureaucracy, beyond what the states do,” Altobelli said.

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