The Consumer Financial Protection Bureau: Key Developments ... · 5/8/2013 · Protection Bureau” Remarks at Consumer Federation of America (CFA) Financial Services Conference

The Consumer Financial Protection Bureau:Key Developments

and Regulatory Impact Going Forward

May 8, 2013

Housekeeping

•Turn electronic devices to mute or vibrate

•Return completed CLE credit request forms and evaluations to the registration desk

•Please feel free to ask questions at the end of the presentation

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Today’s Schedule• 8:00 – 8:30 a.m. REGISTRATION / BREAKFAST• 8:30 – 8:35 a.m. WELCOME• 8:35 – 9:10 a.m. The Consumer Financial Protection Bureau: Beginnings & Background

of a “New Cop on the Beat”Topics: Genesis of a Movement

Dodd-Frank Wall Street Reform and Consumer Protection ActArchitecture of the CFPBCFPB Divisions & Key Players

• 9:10 – 9:25 a.m. The Consumer Financial Protection Bureau: Implementation & Interaction

Topics: Timeline: From Dodd-Frank to PresentNavigating the CFPB Website

• 9:25 – 9:45 a.m. Dissecting the CFPB’s Regulations Topics: Consumer Complaint Process

Civil Investigative Demands• 9:45 – 10:10 a.m. The Consumer Financial Protection Bureau: Prospective

Topics: Oversight & RulesCordray Nomination FightPotential Opportunities: Lobbying & Regulatory

• 10:10 – 10:35 a.m. Concluding Notes / Q&A Panel

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The Consumer Financial Protection Bureau:

Beginnings & Background of a “New Cop on the Beat”

How We Got Here

• October 2008 – Troubled Asset Relief Program

• March 2010 – Affordable Care Act signed into law, significant expansion of government oversight

• Obama Administration– Cass Sunstein – Administrator of Office of Information and Regulatory

Affairs in the Executive Office of the President (Sept. 2009 – Aug. 2012)– J. Thomas Rosch – Commissioner of Federal Trade Commission (Jan. 2006

– Sept. 2012)• CFPB

– Elizabeth Warren (June 2007)• Unsafe at Any Rate (2007); Making Credit Safer (2008)

– Academic Research Counsel (Sept. 2012) (“Behaviorally Flavored”)• Richard Thaler, Christine Jolls, Justine Hastings

– Research, Markets & Regulations Division (May 2011)• Sendhil Mullainathan

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Genesis of a Movement:Background

• Prospect Theory (1979)– Representativeness– Availability– Adjustment / Anchoring

• Libertarian Paternalism (2003)– “an approach that preserves freedom of choice but that

authorizes both private and public institutions to steer people in directions that will promote their welfare.”

• 10,000 Foot View of Behavioral Model– Identify Normative Models of Neoclassical Economists– Document Departures (“Anomalies”) from Rational Choice Model

• Estimate Social Costs of Specific Departure, i.e. Those Not Attributable to Subjects’ Confusion or Transaction Costs

– Develop Alternative Model– Test Alternative Model: Cost-Benefit Analysis of Corrective Action

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Genesis of a Movement:Public Policy

• CFPB’s Adoption of the Behavioral Model– Data Compilation

• Identifying Systemically Irrationally Behavior‒ Access to 9 Largest Credit-Card Issuers’ Records‒ Consumer Complaint Database‒ Issuance of Data Requests

– Data Interpretation• Distinguishing Rational Behavior from Error/Costs

‒ Research, Markets & Regulations & Academic Research Council

– Intervention• Promulgate Rules & Regulations (“Choice Architecture”)

‒ Supervision, Enforcement, and Fair Lending & Equal Opportunity & Research, Markets & Regulations

• Consumer Assistance‒ Consumer Education & Engagement

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Dodd-Frank: By the Numbers

0100200300400500600700800900

SecuritiesAct of 1933

SecuritiesExchange

Act of 1934

Sarbanes-Oxley

Dodd-Frank

• $2,900,000,000 cost of Dodd-Frank implementation over the next 5 years

• $1,800,000,000 implementation cost for commodities traders and more than $1 trillion in broader economic costs.

• 383,013 words in Dodd-Frank • 2,600 new positions at regulatory

agencies• 2,319 pages in the final bill (vs. 2,409

for Healthcare Reform).• 533 new regulations• 243 rules created by Dodd-Frank

(Sarbanes-Oxley created 16)• 94 reports• 67 studies required by Dodd-Frank

(Sarbanes-Oxley requires 6)

Number of Pages in Financial Reform Bills

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Dodd-Frank: Rulemakings & Studies

Agency Rulemaking Studies

Commodity Futures Trading Commission 61 6

Consumer Financial Protection Bureau 24 4

Financial Stability Oversight Council 56 8

Federal Deposit Insurance Corporation 31 3

Federal Reserve 54 3

Federal Trade Commission 2 0

Government Accountability Office 0 23

Office of the Comptroller of the Currency 17 2

Office of Financial Research 4 1

Securities and Exchange Commission 95 17

Treasury Department 9 1

Total 243 67

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Dodd-Frank: 13 New Regulators, 533 New Regulations

Created 13 new regulatory agencies and offices while eliminating only one

Established by Dodd-Frank1. Consumer Financial Protection Bureau2. Financial Stability Oversight Council3. Federal Insurance Office4. New Offices of Minority and Women

Inclusion5. Investor Advisory Committee6. Office of Investor Advocate7. Office of Credit Ratings8. Credit Rating Agency Board9. Office of Financial Literacy10. Office of Financial Research11. Office of Housing Counseling12. Office of Fair Lending and Equal

Opportunity13. Office of Financial Protection for Older

Americans

Eliminated by Dodd-Frank1. Office of Thrift Supervision

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Dodd-Frank Wall Street Reform and Consumer Protection Act

• Title X – Bureau of Consumer Financial Protection– Subtitle A—Bureau of Consumer Financial Protection– Subtitle B—General Powers of the Bureau– Subtitle C—Specific Bureau Authorities– Subtitle D—Preservation of State Law– Subtitle E—Enforcement Powers– Subtitle F—Transfer of Functions and Personnel;

Transitional Provisions– Subtitle G—Regulatory Improvements– Subtitle H—Conforming Amendments

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Dodd-Frank Wall Street Reform and Consumer Protection Act (cont.)

• Title XIV – Mortgage Reform and Anti-Predatory Lending Act

– Subtitle A—Residential Mortgage Loan Origination Standards

– Subtitle B—Minimum Standards For Mortgages– Subtitle C—High-Cost Mortgages– Subtitle D—Office of Housing Counseling– Subtitle E—Mortgage Servicing– Subtitle F—Appraisal Activities– Subtitle G—Mortgage Resolution and Modification– Subtitle H—Miscellaneous Provisions

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Architecture of the CFPB:Powers

• Supervise, Examine & Enforce– Insured Depository Institutions (Banks and Thrifts) and Insured Credit Unions with $10

billion in assets (extends to affiliates and service providers of any size)

– Any nonbank entity in Residential Mortgage, Private Education & Payday Lending Markets

– “Larger Participants” in consumer financial products or services markets

• Consumer Reporting & Consumer Debt Collection (2012)

• Student Loan Servicing (2013)

– Any nonbank entity it considers to be a “risk” to consumers or who engages in “unfair, deceptive, or abusive practices.”

– Enforce CFPA, enumerated consumer laws, including fair lending (disparate impact)

– Penalties – Up to $1,000,000 per day

• Rule Promulgation• Collect Consumer Complaints

– Credit cards, mortgages, bank products / services, consumer loans, student loans, & credit reporting

• Conduct Original Research– Undergirds rulemaking and enforcement activity

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Architecture of the CFPB:Funding & Oversight

–Funding– Fixed percentage of Federal Reserve’s operating budget

• $356 million 2012 and projected $448 million 2013*– Not subject to Congressional appropriation process

• Congressional Oversight• Financial Stability Oversight Council: May overrule CFPB regulation if “pose[s]

risk to the financial system”• Must provide Congress with annual financial reports; bi-annual budget

justification; bi-annual testimony from director• Subject to GAO audit; provide forecast to OMB

• Many have criticized the CFPB’s single-director structure and lack of Congressional oversight.

• Several bills were introduced and passed by the House Financial Services Committee and the full U.S. House (along a party-line vote) to make changes to the CFPB. These bills never came to a vote in the Senate.

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CFPB Divisions & Key Players

CFPB Divisions & Key Players (cont.)

• Enforcement & Supervision• 100 enforcement attorneys by Jan. 2012• President’s 2014 Budget contemplates 500 new CFPB

hires• Enforcement attorneys attend supervisory exams• Fair lending reviews can result in enforcement actions

• Memorandums of Understanding• Federal Trade Commission• State Attorneys General• Conference of State Bank Supervisors• Prudential Regulators• Department of Justice• Navajo Nation

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• Office of Director– Richard Cordray (Jan. 2012)– Ombudsman – Wendy Kamenshine (May 2012)– Senior Advisor and Counselor to Director – Len Kennedy

(June 2012)– Senior Counsel – Chris Lipsett (August 2012)

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• Supervision, Enforcement, and Fair Lending & Equal Opportunity

– Director of Enforcement – Kent Markus (Jan. 2012)– Assistant Director of Supervision Examinations – Paul

Sanford (Dec. 2012)– Assistant Director of Supervision Policy – Peggy Twohig

(Dec. 2012)– Assistant Director of Fair Lending and Equal Opportunity

– Patrice Ficklin (May 2011)

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Implementation & Interaction

Timeline: From Dodd-Frank to Present:2011

• Elizabeth Warren, “Fighting to Protect Consumers” (September 17, 2010)

• Elizabeth Warren “Priorities for the New Consumer Financial Protection Bureau” Remarks at Consumer Federation of America (CFA) Financial Services Conference (December 2, 2010)

• Treasury Department Announces Launch of ‘Beta’ Consumer Financial Protection Bureau Website (February 3, 2011)

• Building the CFPB: a progress report (July 18, 2011)• Official Launch & Begins Taking Credit Card Complaints (July 21,

2011)• CFPB Issues Company Portal Manual (September 20, 2011)• Supervision and Examination Manual – Version 1.0 (October 13,

2011)• Raj Date Written Statement “The First 100 Days” Before

Subcommittee on Financial Institutions and Consumer Credit (Committee on Financial Service) U.S. House of Representatives (November 2, 2011)

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• President Obama appoints Richard Cordray as Director (January 4, 2012)• Bulletin 2012-03 (Service Providers) (April 13, 2012)• Proposed Rule on Procedural Rules to Establish Supervisory Authority over Certain

Nonbank Covered Persons Based on Risk Determination (May 25, 2012)• CFPB launches Consumer Complaint Database (June 19, 2012)• CFPB proposes “Know Before You Owe” mortgage forms (July 9, 2012)• CFPB probe into Capital One credit card marketing results in $140 million consumer

refund (July 18, 2012)• CFPB proposes rules to bring greater accountability to mortgage market (August 17,

2012)• Federal Deposit Insurance Corporation and Consumer Financial Protection Bureau

Order Discover to Pay $200 Million Consumer Refund for Deceptive Marketing (September 24, 2012)

• CFPB orders American Express to pay $85 million refund to consumers harmed by illegal credit card practices (October 1, 2012)

• CFPB report highlights problems in market discovered through supervisory actions (October 31, 2012)

• CFPB halts alleged nationwide mortgage loan modification scams (December 11, 2012)

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• Statement by Consumer Financial Protection Bureau Director Richard Cordray on re-nomination (January 24, 2013)

• CFPB warns mortgage servicers about legal protections for consumers when transferring loans (February 11, 2013)

• CFPB lays out implementation plan for new mortgage rules (February 13, 2013)

• Department of Urban Housing and Development Final Rule on Disparate Impact (February 15, 2013)

• Carter Dougherty, “Consumer Bureau Said to Warn Banks of Auto Lending Suits” (February 21, 2013)

• Office of Management and Budget Sequestration Report (March 1, 2013)

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Navigating the CFPB Website

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Navigating the CFPB Website (cont.)

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Dissecting the Regulations

Dissecting the Regulations: Consumer Complaint Database

• The CFPB launched its consumer complaint database in June 2012, and on March 28, 2013, it published more than 90,000 complaints online.

• The CFPB does not verify complaints before publishing them.• After the CFPB receives a consumer complaint, they route the

information to the financial institution in question, giving it 15 days to acknowledge that the person is a customer. If the company confirms the relationship or if it does not respond by the deadline, the information goes live online.

• Complaint Intake & Review Metrics– July – December 2011 – 13,210– January – September 2012 – 59,087– October 2012 – February 2013 – 70,913– July 21, 2011 – February 28, 2013

• 131,300 • 91,000 in 2012• credit card and mortgage 70% of all 2012 and 72% of all through

February 28, 2013 (approximately 94,300)

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Dissecting the Regulations:Consumer Complaint Process

• Complaint Procedure– Complaint Submission – telephone, mail, email, and fax– CFPB Review – within primary enforcement authority,

whether complete (not necessarily factually accurate), and whether duplicate submission.

– Forward to Company – notification and view in portal• 15 calendar days to respond• 60 calendar days to resolve

– Consumer Response – accept or dispute• Implications of Complaint & Database

– Trigger CFPB scrutiny– Trigger scrutiny by other agency, e.g. FTC, DOE, State AG

• Consumer Sentinel Network• Repeat Offenders Against Military (ROAM) Database

– Database use by plaintiff’s bar

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Dissecting the Regulations:Civil Investigative Demands

• 12 C.F.R. 1080.1 et seq.• Scope. documents and tangible things, written

reports, interrogatories, and oral testimony.– Production under oath

• Timing. Meet and confer within 10 days / Petition within 20 days / CID outlines production deadline

• Requests for Extension of Time. Assistant Director of Enforcement may grant (requests disfavored).

• Conferral & Petition Substance. Privilege, confidentiality and factual/legal objection, including arguments, affidavits, and supporting documents.

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Dissecting the Regulations:Civil Investigative Demands (cont.)

• September 20, 2012 – Denies PHH Corp CID petition – “determine whether mortgage lenders and private mortgage

insurance providers or other unnamed persons have engaged in, or are engaging in, unlawful acts or practices in connection with residential mortgage loans in violation of the [Dodd-Frank] and [RESPA].”

– Objected to as overly broad, unreasonable and irrelevant– Warn financial institutions that decision should be guide in

“developing [their] expectations about how they should handle the CID process.”

• October 5, 2012 – Denies Next Generation CID petition– Untimely (not within 20 days)– No meet and confer attempt (within 10 days)– Substantive defenses and/or compliance with laws not valid

defense to CID

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Prospective

State of Play to Date

• As of April 1, 2013, a total of 279 Dodd-Frank rulemaking requirement deadlines have passed. This is 70.1% of the 398 total rulemaking requirements, and 99.6% of the 280 rulemaking requirements with specified deadlines.

• Of these 279 passed deadlines, 176 (63.1%) have been missed and 103 (36.9%) have been met with finalized rules. Regulators have not yet released proposals for 65 of the 176 missed rules.

• Of the 398 total rulemaking requirements, 148 (37.2%) have been met with finalized rules and rules have been proposed that would meet 121 (30.4%) more. Rules have not yet been proposed to meet 129 (32.4%) rulemaking requirements.

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Student Loans

• The CFPB made student loans an early priority.• Financial Aid Shopping Sheet”: a model disclosure

required for all student loan providers when providing loan information to prospective borrowers.

• The CFPB has recently expanded its authority to oversee student loan servicers.

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Auto Lending

• On March 21, 2013, the CFPB announced that it would start evaluating potentially discriminatory activity in auto lending.

• Although the CFPB does not have the authority to oversee auto lenders, it is using its authority to oversee their lending partners, or “indirect auto lenders” to regulate the industry.

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Mortgage Rules

• On January 10, 2013, the CFPB set the “ability to repay” standard in defining a “qualified mortgage.”

• The rule establishes a safe harbor for prime loans and creates a maximum 43 percent debt-to-income ratio on loans.

• The rule takes effect in January 2014.• The CFPB also issued high-cost mortgage standards

on the same day. • The standards ban high fees and certain risky

features.

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Foreclosure Rules

• On January 17th, 2013, the CFPB issued final rules on foreclosure procedures.

• The rule limits “dual-tracking” foreclosures and negotiating loan modifications.

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Loan Origination

• On January 18, 2013, the CFPB issued final rules on loan originators.

• The rules will grant access to appraisal reports and special appraisals for high-priced mortgages.

• The origination rules prohibit loan officers from receiving compensation that varies with loan terms.

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CFPB Structure

• On March 21, 2013, the U.S. House of Representatives approved a budget resolution that would subject the CFPB to Congressional appropriations.

• On February 1, 2013, Rep. Bill Posey (R-FL), introduced H.R. 450, which would subject the CFPB to Congressional appropriations.

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Cordray Nomination Fight:Background

• July 21, 2010, Dodd-Frank & Appointment• Senate Committee on Banking, Housing and Urban Affairs Schedules Cordray

Appointment Hearing for August 4, 2011 at 2 PM• Senate Committee on Banking, Housing and Urban Affairs Re-Schedules Cordray

Appointment Hearing for September 6, 2011 at 2 PM• October 5, 2011, Senate Banking Committee party-line vote (12-10) to confirm

Cordray as first Director of the CFPB.• December 2011 – January 2012, Senate pro forma sessions• January 4, 2012, Cordray Installation• January 8, 2013, Noel Canning v. NLRB, 2013 U.S. App. LEXIS 1659 (D.C. Cir. 2013)• February 1, 2013, Senatorial Letter to Obama Regarding Cordray Nomination• February 7, 2013, Kent Markus Remarks at DBA Annual Conference

‒ “That is a case in one court, about the NLRB. It is a not a case about the CFPB. It is not a decision that is done, necessarily, being litigated in any way so our view is that we have a director, we have our authority, we have our responsibility to American consumers and American businesses and we intend to proceed.”

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Cordray Nomination Fight

• Senate Republicans have repeatedly refused to support any nominee for CFPB Director until these structural issues are addressed

• After his nomination stalled in the Senate for six months, President Obama used his recess appointment powers to install Cordray as Director on January 4, 2012. The President also appointed two Members of the NLRB on the same day.

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• On January 25, 2013, a panel of the U.S. Court of Appeals for the District of Columbia Circuit ruled that President Obama's NLRB recess appointments were invalid as they were not made during an intersession recess of the Senate.

• It further concluded that the Recess Appointments Clause only permitted the President to fill a vacancy if it arose during an intersession recess of the Senate, and the President moved to fill it during the same recess.

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• Amid concerns that the recess appointment would not survive a Constitutional challenge, On January 24, 2013, President Obama re-nominated Cordray to serve as Director.

• On February 13, 2013 54 of 55 Senate Democrats signed a letter to President Obama calling for Cordray’s confirmation. 43 of 45 Republicans signed a separate letter opposing the nomination until the agency is restructured.

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• On March 19, 2013, the Senate Banking Committee approved Richard Cordray’s nomination to serve as Director of the CFPB.

• The appointment is not expected to come to a vote before the full Senate.

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Noel Canning v. NLRB

• Holding: Obama’s recess appointments invalid• Reasoning:

– Defining “recess”– When “vacancy” occurs

• Facts: – Terrence F. Flynn, Sharon Block, and Richard F. Griffin Jr. (and Crodray) nominated

for Senate confirmation during the first session of 112th

– Senate never confirms the President’s nominees– Jan. 4, 2012, President states Senate in recess despite pro forma, and stresses need

for a fully functioning CFPB and NLRB – appoints all four– Administrative decision against Noel Canning (a Pepsi distributor and bottler) in Feb.

2012, ruling that company violated NLRA by failing to reduce to writing collective bargaining agreement with a local Teamsters Union

• Take-Away (for CFPB)– De Facto Officer Doctrine– Transfer of Regulations & Orders– Newly Created Authority– Actions Taken to Date– State National Bank of Big Spring v. Geithner– CFPB v. Chance Edward Gordon

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What if the Appointment Were Struck Down?

• Precedent suggests that many of the CFPB’s actions under Director Cordray could be at risk.

• In 1989, following the creation of the Office of Thrift Supervision (OTS), which was created by President George H.W. Bush and led by a director who had not be confirmed by the Senate.

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What if the Appointment Were Struck Down?

• An OTS regulation was challenged in the U.S. District Court of the District of Columbia and Judge Lamberth found that the company raising the challenge “was subject to regulation only by individuals with legal authority to act.”

• The case went on to state, “Because the director was not properly appointed, he has no more power or right to exercise the director's powers than this court does.”

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Potential Opportunities:Legislative (Lobbying)

• House Republicans are expected to continue to use their oversight authority to scrutinize the CFPB and pursue legislation that will impose limits on the Bureau.

• Senate Democrats will continue their defense of Dodd-Frank and work to protect the Bureau and Director Cordray.

• Expect hearings to continue in the House Financial Services Committee, the Senate Banking Committee, and the House and Senate Appropriations Committees.

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Potential Opportunities:Legislative (Lobbying)

• The CFPB has accepted certain legislative changes to Dodd-Frank.

• For example, in early 2012, the CFPB promulgated rules clarifying that it will honor attorney-client privilege.

• The House and Senate passed legislation to clarify that sharing privileged information with the CFPB does not waive attorney-client privilege.

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Potential Opportunities:Executive (Regulatory)

• The CFPB has demonstrated a willingness to meet with stakeholders both in Washington, D.C. and through “field hearings” being held nationwide.

• Significant opportunities exist to work with the CFPB as it continues to promulgate rules.

• The CFPB has been very transparent about actions it has taken, but has not been nearly as forthcoming about actions it intends to take.

• Access to inside information can give clients the tools they need to be proactive with the CFPB and influence regulations, rather than simply complying with them.

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Conclusion

We do not “anticipate [the CFPB] writing a rule around UDAAP.” Asked in a follow up question whether his statement meant that “people will mostly have to look at your actions as the

model for how this new term is defined,” Mr. Cordray is reported to have responded “I think that’s probably right.”

- Richard CordrayMarch 22, 2013 Briefing

“No one will know until this is actually in place how it works.” – Senate Banking Committee Chairman

Senator Chris Dodd (D-CT)June 2010

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Concluding Notes

Questions?

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APPENDIX

CFPB Division Key Players Organizational Chart Details

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CFPB: Operations

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CFPB: Consumer Education & Engagement

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CFPB: Supervision, Enforcement & Fair Lending

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CFPB: Research, Markets, & Regulations

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CFPB: External Affairs

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CFPB: Legal, General Counsel

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Documents

The Consumer Financial Protection Bureau: Key Developments ... · 5/8/2013 · Protection Bureau” Remarks at Consumer Federation of America (CFA) Financial Services Conference