You might not have noticed it amid all the political bickering and budgetary crises happening in Washington these days, but the centerpiece of the Dodd-Frank Act—the Consumer Financial Protection Bureau—is finally getting off the ground.
The new agency, with a broad mandate to regulate mortgages, credit cards, payday loans, and pretty much any other financial product intended for the consumer market, will formally go into business on July 21. But already it is busy hiring staff, launching a Website, and appointing high-level personnel—even without a full-time director, who will require Senate approval and probably spark a nasty partisan fight.
As of that July 21 date, the regulatory power most other government agencies now have over consumer financial products will transfer to the CFPB. The change will be immense, says Alan Kaplinsky, chair of the consumer financial services practice at the law firm Ballard Spahr.
“The authority the Bureau will have is overwhelming in terms of rule writing, supervision, and enforcement,” he says. “There's a lot of anxiety among banks and non-banks about where the Bureau is headed.”
The CFPB has been divulging some of its plans through its new Website and via updates on Facebook and Twitter. One early signal was the appointment of Richard Cordray, former attorney general for the state of Ohio, as head of the CFPB's enforcement division; many have taken that news as a sign that the Bureau plans to police the market aggressively. Cordray himself has vowed to hit the ground running. Asked how soon the CFPB would start bringing enforcement actions, he said in one media interview: “I will be seeing to it that we will be ready with some of our priorities immediately.”
Russell Bruemmer, head of a CFPB working group at law firm WilmerHale, says financial institutions had been trying to figure out which path the CFPB might take: sticking close to the “financial” part of its mission and acting like a bank regulator, or embracing the “consumer” part and acting more like the Federal Trade Commission.
With Cordray's appointment, he says, the CFPB appears ready to follow yet a third path: “that of state attorneys general who have been more confrontational and more litigious over issues perceived as violating consumer protection and privacy provisions.”
The exact details of the CFPB's powers and its budget, however, remain in flux. In Feb. 17 testimony before the Senate Banking Committee, Acting Comptroller of the Currency John Walsh said a lack of clarity about the Bureau's exact role could lead to duplicative and potentially inconsistent regulation. For example, he said, the CFPB and other banking regulators need clearer guidance over who handles consumer complaints. He also cited “confusing overlap” about the roles of the federal banking agencies and the CFPB for supervising and enforcing fair lending provisions for insured depository institutions with assets of more than $10 billion.
Then there is the question of the CFPB's budget. Under the Dodd-Frank Act, the Bureau is supposed to be independently funded through fees collected by the Federal Reserve. But what that budget actually is (like that of numerous other regulatory agencies) has been in limbo in Congress for months. In recent weeks, some House Republicans who fought to keep the agency out of the Dodd-Frank Act last year have attempted to weaken its power by slashing its budget.
“The authority the Bureau will have is overwhelming in terms of rule writing, supervision, and enforcement. There's a lot of anxiety among banks and non-banks about were the Bureau is headed.”
Chair of Consumer Financial Services Practice,
Business groups have also been lobbying against the CFPB's authority, arguing that over-regulation will stifle smaller institutions such as community banks and credit unions. On March 1, a coalition of 13 business groups, led by the U.S. Chamber of Commerce, sent a letter to Treasury Secretary Timothy Geithner with recommendations for the Bureau's creation, cautioning its creators to avoid duplicative and inconsistent regulation. One concern is how the CFPB will coordinate its enforcement authority with the FTC and state attorneys general. Among other things, the group has called for the CFPB to defer any rulemaking until after a permanent director is in place.
“We don't want a long, drawn-out process where no one is in charge, or a situation where there's a brief burst of enforcement or regulation from Treasury and then a confirmed director who might have gone in a different direction,” Jess Sharp, executive director of the U.S. Chamber's Center for Capital Markets Competitiveness told reporters during a March 1 call. “We're asking for pause on enforcement and regulation.”
One day later, during a March 2 House Financial Services Sub-committee hearing, Sharp and other representatives from the consumer financial services industry raised concerns about the excessive compliance burden the Bureau would impose on smaller business.
Life at the Top
The largest question of all is who will lead the agency as its first permanent director; any partisan fight over approving President Obama's nominee will likely harm that person's ability to lead the CFPB effectively and undercut the agency's mission. But partisan fights seem to be the order of the day in Washington, and already the Obama Administration has retreated from pushing its widely perceived first choice, Harvard Law School professor Elizabeth Warren. She now leads the CFPB on a temporary basis.
If Washington can't agree on a permanent head by July 21, the Dodd-Frank Act allows the CFPB to operate with only limited power. For instance, it wouldn't be able to exercise most of its authority to regulate or examine non-bank firms, according to a January letter written by the inspectors general of the Treasury and the Federal Reserve. “Until they have a Senate-approved director, they're really hamstrung in what they can do,” Kaplinsky says.
The following excerpt from a WilmerHale alert discusses what possible enforcement actions the Consumer Financial Protection Bureau might take against companies:
Organizations regulated by the Bureau should take action to avoid, and prepare for, heightened enforcement actions and collateral litigation. Such action may include:
- Conducting periodic reviews of internal compliance functions to ensure they meet evolving regulatory requirements, particularly in areas that have been identified as potential priorities.
- Staying abreast of new rulemaking. In the coming months, the Bureau will likely issue a range of new rules that will require active changes to internal compliance and lending programs. The rulemaking process provides an organization with the opportunity to help shape the regulatory regime (through the notice and comment process) as well as to ensure early notice of new regulatory requirements.
- Preparing for Bureau examinations, which will likely target consumer issues and disclosure, and give rise to enforcement inquiries and actions.
- Paying close attention to developments that may increase the leverage and resources of the plaintiffs' bar, which will surely exploit any new opportunities to bring private actions against financial institutions.
Source: WilmerHale Alert.
Warren herself has publicly acknowledged industry concerns about the new Bureau. “I recognize that some of the problems facing credit unions and community banks and others who want to serve their customers … have been exacerbated by government regulation,” she said in a March 1 speech to the Credit Union National Association. “I understand the frequent difficulty of determining what is or is not required by a particular regulation. I appreciate the widespread anxiety and frustration over the future of credit unions and other small financial institutions.”
To allay those fears, she vowed that the CFPB would work to cut regulatory costs, giving the example of an initiative to consolidate the information required in various mortgage origination forms. She also promised to maintain a dialogue with the smaller institutions. “We intend to maintain an ongoing conversation—both in Washington and outside the Beltway—with credit unions and community bankers,” she said, adding that she's spoken already with small financial firms from nearly 40 states.
In preparation for the CFPB's arrival, Kaplinsky says, “Banks need to review everything they're doing in the consumer financial services area.” In particular, firms should review their offering in mortgages and credit cards, two areas that Warren has targeted among the agency's initial priorities.
“Warren has made it clear that she wants everything simplified and shortened,” he says. “Right now, I would be looking at all of my product offerings and focusing immediate attention on the clarity and the length of the contracts you're asking consumers to enter into.” That review should also include marketing practices, which are expected to come under CFPB scrutiny for fairness.
The House Financial Services Committee Financial Institutions Subcommittee is slated to hold a hearing on March 16 on the CFPB's oversight. Warren is scheduled to testify.