With Appointment of Richard Cordray Consumer Watchdog Sets its Agenda

With the January 4, 2012 recess appointment of former Ohio Attorney General Richard Cordray as its first director, the Consumer Financial Protection Bureau quickly is coalescing around an aggressive regulatory agenda.  What can large financial institutions and other participants in the financial services industry expect from this new federal regulator?

Formed by Congress as part of the 2010 Dodd-Frank financial reform legislation, CFPB only recently assumed its full regulatory powers through the President’s recess appointment.  CFPB’s regulatory authority derives, in part, from the traditional consumer protection functions set forth in a number of federal statutes previously enforced by the Federal Reserve Board, OCC, FDIC, and others.  But CFPB appears to define its mandate more broadly.  In testimony before Congress, Cordray noted that “[p]rior to the financial crisis, seven federal agencies had some responsibility for consumer financial protection, but none of these agencies had consumer financial protection as its sole priority, or the tools to regulate and oversee the whole market,” and went on to state that “[w]e plan to use all of the tools available to us to ensure that everyone respects and follows the rules of the road. Where we can cooperate with financial institutions to do that, we will; when necessary, however, we will not hesitate to use enforcement actions to right a wrong.” 

Who is subject to CFPB Oversight?

CFPB has supervisory, rulemaking, and regulatory authority over banks with over $10 billion in assets.  With the Cordray appointment, CFPB may now begin supervising non-bank participants in the consumer financial markets, including non-depository “mortgage related” companies, payday lenders, student loan providers, or other entities that qualify as “larger participants” in the financial markets or whose products or services pose potential risks to consumers. 

Last month, CFPB released a proposed final rule defining some of the “larger participants” in the consumer financial markets that will be subject to federal supervision and enforcement authority.  Debt collectors with annual receipts over $10 million are considered “larger participants” under the proposed rule.  In recent months, debt collection practices have come under greater scrutiny, similar to the scrutiny applied to mortgage foreclosures practices.  Courts and enforcement agencies have faulted debt collectors for failing to properly document and verify amounts owed.

Consumer reporting agencies, on the other hand, are deemed “larger participants” if they have over $7 million in annual receipts.  Though CFPB estimates that this includes only about 30 companies, they account for 94% of the credit reporting market.  Subsequent rulemakings will define thresholds applicable to prepaid credit card issuers, finance companies, and debt relief companies.  Companies that service, originate, or broker residential mortgages, payday lenders, and private education lenders are subject to CFPB’s supervision regardless of their size or impact in the financial markets.

CFPB’s proposed rule is the first effort to subject these non-bank entities to the same CFPB oversight as banks.  Non-bank entities will be subject to CFPB examination to assess compliance with all federal consumer financial laws and potential risks to consumers and the financial markets. 

What is CFPB’s Preliminary Focus?

With an estimated budget of $365 million in 2012 and a proposed budget of $448 million for 2013, CFPB is expected to scrutinize broadly consumer lending practices through on-site examinations and targeted investigations into possible violations of existing laws.  Significantly, CFPB has authority under Dodd-Frank to define and ultimately proscribe any acts or practices that it deems unfair, deceptive, or abusive.  This includes acts that CFPB believes are likely to cause substantial injury or interfere with the consumer’s ability to understand a particular product or service.  CFPB has yet to define what it considers unfair, deceptive, or abusive. 

On March 2, CFPB announced the launch of a web-based tool for collecting complaints related to checking, savings and other bank accounts.  CFPB implemented similar systems for mortgage and credit cards complaints in 2011.  

Last month CFPB announced an inquiry into checking account overdraft programs.  The investigation will consider how overdraft practices are affecting consumers and will focus on transaction re-ordering to increase fees, the clarity of the information provided to consumers, and any disproportionate impact on young and low-income consumers.  CFPB also appears to be focusing in on the payday lending industry, holding a public hearing in Alabama in January and issuing examination procedures for short-term, small-dollar loans. 

Other CFPB initiatives include issuance of several prototype disclosure forms for consumers — including a monthly mortgage statement, a model form to help students compare student loans, and revised mortgage loan disclosures.

As CFPB continues to define the scope of its regulatory power, it remains subject to intense scrutiny on Capitol Hill, from both Republicans who object to Cordray’s recess appointment and the scope CFPB’s power and Democrats who expect CFPB to correct lending practices believed to have contributed to the credit crisis.  Industry participants will have to watch carefully in the coming months to see how CFPB meets these competing expectations. 

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