Since going live in July, the Consumer Financial Protection Bureau has installed directors of several key offices and published its exam manual for monitoring banks. It started a blog on its website and a presence on Facebook, where it has garnered more than 10,000 fans expressing a thumbs-up "like" for the page, to report on its progress for anyone interested in keeping track.
None of it has cured the concerns of financial services companies, which continue to express the same worries that seemingly began the minute Elizabeth Warren dreamed up the bureau during a cross-country plane trip.
Will the bureau ban products? Will it horn in on other agencies' interest in overseeing compliance with fair lending and equal-credit opportunity laws? And how much can an individual director at the CFPB impact policy anyway?
Even after launching a universally welcomed effort to simplify mortgage disclosures, the bureau remains in the crosshairs of a wary industry it was created to police.
The guarded attitude of the sector seems to be a cue received by the bureau, which has been trying to respond. Earlier this year it hosted officials from the card industry, consumer groups and academia to talk through the impact on credit-card costs and credit availability following the 2009 enactment of the Credit Card Accountability Responsibility and Disclosure Act. In its first three months in operation this year, the CFPB has been reaching out to banks, through industry conferences and personal contacts, to explain new exam procedures and a decision to transfer many examiners from other agencies for their experience in monitoring safety and soundness issues.
The CFPB also has explicitly laid out for banks the thinking behind its decision to apply equal scrutiny to banks and nondepository institutions—something that most banks welcome as a way to curb players that they view as having had a greater hand in the financial crisis.
The effort to keep the playing field equally regulated is being coordinated via an internal organizational plan to integrate bank and nonbank examiners. "We're going with a blended examination approach," says Steve Antonakes, associate director of the bureau's large-bank supervision unit. "The thought process here (is) we didn't want a hierarchy in the examination force to develop" that favored one group or the other.
Together with the nonbank supervisory teams overseen by Peggy Twohig (a former Federal Trade Commission official in financial practices), the dual-team concept also "creates flexibility" to spread expertise among the examiners, so that the bureau could "deploy all our assets in one market segment, if necessary," Antonakes adds.
Richard Riese, senior vice president at the American Bankers Association's Center for Regulatory Compliance, thinks the CFPB's plan for a blended approach to exams is "pretty good news," as almost 90 percent of insured-deposit institutions have healthy CAMELS ratings. "After they've been to a few nonbanks, they're going to come back and really appreciate how well the banks do compliance," says Riese.
But analysts say that much of what the bureau wants to do, including the blended exam process, is held up by the political arm-wrestling in the U.S. Senate over whether to confirm former Ohio Attorney General and current CFPB enforcement head Richard Cordray as director of the bureau.
At press time, the Senate Banking Committee had passed along Cordray's nomination to the full chamber, but he still faced a GOP-led stalemate over his approval. Republicans were holding out for a restructuring of the CFPB into a commission-led agency with direct Congressional funding and oversight (a plan supported by industry trade groups like the Financial Services Roundtable, but vehemently opposed by Democrats and President Obama).
While the CFPB is officially leaderless, it is not rudderless. Raj Date, who replaced Elizabeth Warren as the president's special advisor to the U.S. Treasury on bureau matters, has been headlining public initiatives and industry outreach on the bureau's initial priorities: mortgages and student loans. The bureau already has launched pilots of its simplified mortgage application disclosure form, clearing up the confusing and sometimes conflicting overlay of disclosure forms from the Federal Reserve and the U.S. Department of Housing and Urban Development. Now the bureau is looking at proposing improved mortgage-closing disclosures.
Some of the CFPB's divisions are themselves led by outspoken, high-profile leaders who have hit the public-speaking circuit. The bureau's assistant director for service member affairs is Holly Petraeus, the wife of CIA Director and retired four-star general David Petraeus. She has spoken out about payday lending's impact on military families, and she penned a New York Times op-ed criticizing the for-profit private college industry for targeting service members with misleading or unscrupulous pitches for questionable, and pricey, degree programs.
In September, the CFPB appointed former Minnesota politician Skip Humphrey, the 69-year-old son of the late U.S. Vice President Hubert Humphrey, to lead the Office of Older Americans, which was designed to prevent scams and drive out abusive products and services that victimize the elderly.
But even banks that typically walk the straight and narrow on these kinds of issues are worried about how the CFPB plans to police them generally.
In its new exam manual released in October, the bureau suggested it would conduct compliance exams with many of the same methods banks have experienced with other federal regulators. (More than 75 percent of the duties laid out in the manual are transferred duties from other exam authorities, according to Antonakes.) But some key differences will be the CFPB's close watch on potentially abusive practices by institutions with $10 billion or more in assets, which will be supplemented with consumer feedback and loan data that's been collected previously.
According to Antonakes, exams for "a majority" of banks under $100 billion in assets will be fairly routine and, for the most part, innocuous. "We would look to do a 'point in time' exam, where we would do a full review of the institution...and presuming there were no significant problems, probably would not go back into that institution for the next couple of years," he says.
For banks over $100 billion in assets, there will be a "continuous supervisory presence," with examiners assigned full-time to the largest institutions, Antonakes says. The plans are for those banks to be examined in different categories throughout the year. "For example, they would do four different product reviews on a quarterly basis—they may look at mortgage origination in first quarter, mortgage servicing second quarter, credit cards third quarter, and deposit products the fourth quarter."
But of particular concern to these larger banks is how far the bureau will go in judging compliance practices in each of those areas. Regulatory attorney Joseph Lynyak, a partner with law firm Pillsbury and member of the American Bar Association's banking law committee, worries that examiners will conflate "abusive" practices with products and services that are deemed as being unsuitable. Will CFPB examiners limit themselves to ensuring that truth-in-lending statements meet compliance requirements, "or, do we look beyond that and decide whether or not the overall terms of a product or service are fair to consumers?"
The more aggressive of those interpretations arguably might fall under the CFPB's purview of determining the safety of a particular product across the industry. But if that's the case, then what sort of distinctions might the CFPB make between banks and nonbanks with a "blended" approach to exams? If a national retail money-services chain offers high-interest, short-term loans in states that permit them, should examiners judge those products in the context of what depository banks or card issuers provide? Or should the loans be evaluated solely on the basis of how they suit the consumer? In other words, Lynyak asks, "Is an excessive interest rate charge, while still legal, fair?"
These are quandaries that could take months or even years to settle as the CFPB, like other regulators before it, tries to balance traditional consumer protection oversight concerns against issues of safety and soundness—only with a new mechanism that will allow for public feedback, by phone and online, regarding specific products or institutions.
Jo Ann Barefoot, co-chair of Treliant Risk Advisors, told an audience of bankers and regulators at an American Banker regulatory symposium in September that the CFPB has embarked on a unique mission: to be the "first 21st century" agency of the new financial-reform era. After first absorbing a team of rules-writing attorneys from the consumer protection area of the Fed, the bureau also hired hundreds of examiners (including many newly minted college graduates) to fill new types of exam roles—ones which will look beyond the capital risk to banks and include more research and the integration of public input on the impact of products and services.
To succeed, Barefoot says, the CFPB probably has to tread lightly and provide banks a chance to understand what's expected of them—along with an appropriate opportunity to correct infractions without incurring penalties. (Industry groups already are characterizing the bureau's 30-day claims resolution expectations as ambitious.) "The pathway is going to have to include enabling the institutions to get some safe harbors," says Barefoot.
But without those explicit permissions, banks have reason to keep their guard up.
"What they're worried about is that there's still so much that's unknown," says Suzanne Fay Garwood, a lawyer for Washington, D.C. law firm Venable LLP.
And that means preparing for one the thing banks least enjoy preparing for: uncertainty.
