Expect an Even Bolder CFPB in Year Three

WASHINGTON — The Consumer Financial Protection Bureau is already the busiest federal bank regulator in recent memory, but with a Senate-confirmed director finally at the helm two years after the bureau's launch, it's only going to get more aggressive.

"They really have momentum now and we're going to see much more from them on every front," said Jo Ann Barefoot, co-chair of Treliant Risk Advisors.

In its first two years on the scene — the bureau's second anniversary was Sunday — the CFPB was not at all restrained in its actions, despite claims that it was overstepping authority in the absence of a Senate-approved director. In the last year alone, the agency expanded supervision powers over certain nonbank sectors, issued hefty enforcement penalties against large financial companies and released rules to reshape the mortgage market.

But the July 16 confirmation of Richard Cordray — removing the cloud that had hung over his controversial recess appointment as bureau director — will likely result in an already more aggressive agency being less cautious about scrutinizing industry practices in the open.

Not only do observers expect the CFPB to continue progress implementing provisions of the Dodd-Frank Act — with a pending rule to simplify mortgage disclosures high on its agenda — but many anticipate the stream of public enforcement actions will be heavier. The bureau has already made clear its concerns about certain products, such as deposit advance and auto loans. Enforcement actions against institutions in those sectors are now expected to reach new heights.

"There's a lot going on with the CFPB's enforcement but about 95% of it has been behind the scenes," said Alan Kaplinsky, who heads the consumer financial services group at Ballard Spahr. "Now with Cordray's position being secure, I expect we will see a lot more enforcement activity."

Mortgage Focus

Although the CFPB over the past year has broadened attention to multiple types of credit products, its top priority in year No. 3 will likely continue to be mortgages.

Following release of a slew of final mortgage rules — including requirements that lenders evaluate borrowers' "ability to repay" mortgages, the criteria for safe "qualified mortgages" that will be protected from borrower litigation and a new set of servicing standards — observers expect the bureau to sharpen its focus on how the industry carries out the new mortgage regime.

"We have important work to do to ensure we implement these rules efficiently and effectively," Cordray said in an emailed response to questions from American Banker.

Under the QM rule, mortgages will get "safe harbor" legal protection so long as a loan meets certain credit quality benchmarks, including a debt-to-income ratio for borrowers of no more than 43%. Although the CFPB maintains less rigorous DTI requirements for smaller lenders and those helping the underbanked, lawmakers and community banks continue to argue that some institutions will pull back on lending because QM standards are too narrow.

The new rules are "going to significantly change the marketplace in terms of how mortgages are originated, who gets a mortgage, and the cost of mortgages," said Leonard Chanin, who helped lead the CFPB's rulemaking division before joining Morrison & Foerster late last year. "It's one of the most important, substantive regulations recently issued and probably will be for years to come."

But the CFPB is also expected to issue entirely new mortgage regulations in its third year of operation. Topping the list is creation of a simpler mortgage disclosure intended to consolidate the overlapping requirements of the Truth in Lending Act and the Real Estate Settlement Procedures Act. The bureau is also developing a report on the propriety of banks compelling borrowers to seek arbitration to resolve loan-related disputes, instead of resolving the issues in court. Both are expected out later this year.

"In light of the consumer orientation of Director Cordray, I think the CFPB will come out with an arbitration report that indicates it needs to be prohibited or regulated in some fashion," Kaplinsky said. "There is a lot of worry, and there should be, as to what the report is going to say."

Bulked-up Supervision

In its third year of operation, the CFPB will not only wrap up its first round of exams for large banks that fall under its purview — those with over $10 billion in assets — but will also accelerate its supervision of more nonbank industries.

"The supervisory area is becoming more advanced and functioning more strongly. I expect the CFPB's third year to be much more active," said Barefoot.

Through authority under Dodd-Frank to examine certain "larger participants" in nonbank sectors, the CFPB has already officially added debt collectors and consumer reporting agencies to its supervision program. But the bureau has yet to finalize a proposal to include larger student loan servicers to the pile, and has also indicated its interest in monitoring providers of deposit advance products.

"We've launched work in a number of issue areas such as payday lending, debt collection, auto lending, and student lending," Cordray said. "We want to continue our work to determine what tool is most appropriate to scope out issues and address any concerns."

Fair Lending

Consultants and lawyers speculate that one "tool" the bureau will broaden its use of to improve consumer protections is monitoring institutions' compliance with fair-lending laws. Fair lending up to now has been an issue of most concern to mortgage lenders, but the CFPB is expected to increase fair-lending supervision in other sectors, most notably auto lending.

"The bureau's most controversial initiatives are in the fair-lending area, where there's a real difference of opinion as to what evidence proves a violation," said Ronald L. Rubin, a former CFPB enforcement attorney who is now a partner at Hunton & Williams.

Earlier this year, the CFPB issued a bulletin essentially holding auto lenders accountable for pricing discrimination committed by third-party dealers. Most cases of discrimination are unintentional, which in regulatory lingo is known as "disparate impact."

"One of the areas where you're soon going to see some enforcement actions or consent orders will be against auto finance companies," Kaplinsky said. "I think you will see a lot of focus on that, probably before the end of this year."

Data Collection

The CFPB's unprecedented public database of complaints against specific financial institutions will likely continue to draw scrutiny from lawmakers in the regulator's third year.

Responding to concerns from Sen. Mike Crapo, R-Idaho, the top Republican on the Senate Banking Committee, the Government Accountability Office recently agreed to investigate the methodology behind the data collection practices. Lawmakers have specifically expressed concern over the amount of resources spent by the bureau to establish the database, and the potential for data security leaks resulting from having so much public information available.

Some observers said the database will likely drive efforts by financial institutions to improve their own internal complaint systems.

"The CFPB's complaint system is informing many of their decisions of who to examine" and how to regulate, said Ed Kramer, executive vice president of regulatory affairs at Wolters Kluwer Financial Services. "I've been telling [financial clients] that you need to have as good if not better a system than the CFPB's to handle consumer complaints … You don't want those complaints going to the bureau. You want them coming to the bank so you can solve them."

Staffing

Some expect the removal of uncertainty about Cordray's prospects at the agency to mean more experienced leaders will be encouraged to join the agency in senior staff positions.

Turnover has been somewhat of an issue at the CFPB with over a dozen senior officials having left the agency within the past year, including Cordray's former chief deputy, Raj Date. Steven Antonakes has been filling the role as acting deputy director since February. But Cordray's confirmation not only eases any morale issues but likely will resolve some uncertainty about looming hires.

"With Cordray confirmed, we're going to see some of the slots being filled, particularly who's going to be No. 2 person," Kramer said. "That's a big deal."