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Promontory Sightlines: Consumer Financial Protection Developments

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July 24, 2013

Dear Clients and Friends,

The Senate last week confirmed Richard Cordray as director of the Consumer Financial Protection Bureau after more than two years of skirmishing in Congress and the courts. His formal confirmation marks the end of the bureau’s beginning, but those expecting big changes for the nation’s newest financial services regulator may find last week’s conclusion anticlimactic. All signs point to the bureau continuing its current transition from regulatory novelty to a permanent part of the federal regulatory infrastructure.

The most visible effect of last week’s confirmation may well be enforcement actions rooted in examinations or investigations that began in early 2012, but stalled by legal and political uncertainty about Cordray’s recess appointment. But a near-term increase in enforcement actions against nonbank financial firms or service providers is less likely to be the consequence of enhanced will and vigor at the bureau than it is the removal of obstacles to their issuance. Over the longer term, resolving the CFPB’s leadership question is more likely to result in steady and measured investment in the bureau’s established themes, rather than signaling sweeping changes ahead.

Leadership certainty should allow the CFPB to consolidate and complete work to stand-up the agency, and much implementation work remains. Foremost among those tasks are knitting together disparate cultures across the operating divisions, fine tuning its policy-development processes, deepening expertise across the agency, and building effective relationships with external stakeholders, including industry and other state and federal agencies.

Cordray’s tenure as director could be more than six years — long enough that his vision for the bureau will be hard-wired into the institution’s DNA. Sen. Elizabeth Warren’s (D-MA) founding vision of an interdisciplinary, data-driven regulatory regime will continue to guide all aspects of the institution’s work. Some early initiatives — even controversial ones such as the use of enforcement attorneys to support examinations — will now have the time and space to gain acceptance as elements of the bureau’s standard operating procedure.

News coming out of Capitol Hill in the immediate aftermath of the Senate’s vote makes plain that political challenges to the CFPB will not end. For example, Director Cordray will begin testifying before the Senate Appropriations Committee, and Sen. Rob Portman (R-OH) said he will introduce a bill to give the CFPB its own inspector general. But even these developments suggest that fundamental political threats, including quests to alter CFPB’s leadership or funding structures, are giving way to a new focus on the agency’s priorities and performance — a type of oversight that has long been the norm for CFPB’s prudential peers.

The shift away from existential challenges is still unlikely to prompt the bureau to expand dramatically the range of its initiatives. Nor is this development one that will likely free its hand in crafting responses to any one problem. The bureau essentially remains a fledgling regulator that needs to build broad-based credibility with the political class, industry, and the public. Certainty about Cordray’s leadership does not fundamentally change the risk-reward calculus of major actions. Any major misstep — a rule struck down by a court, a decisive setback in significant litigation, or an initiative that reinvigorates political opposition to the bureau — will cost the bureau credibility and potentially limit its ability to act in the future.

Senate confirmation of Cordray also does nothing to ease the very real constraints on the bureau’s operational capacity. In the near term, a depleted and relatively inexperienced staff, as well as the limitations of its evolving internal processes, will keep the CFPB from drastically expanding the scope of its work. Over time, the cap on the CFPB’s budget — which limits its overall size to a fraction of prudential regulators and permits no pass-through of its costs to supervised entities — should ease industry concerns that the arrival of a confirmed director will unleash the CFPB.

The bureau is the most tangible representation of this regulatory moment, and it has never known a day in which it was not at the center of a political firestorm. Unprecedented commitment to customer protection animates the regulatory world and is pressuring the economic structure of retail credit markets. By now, major financial institutions have all experienced the effects of a race to the top in consumer protection.

Cordray’s confirmation may go some way to convince the CFPB’s foes that their energies might be better spent on constructive engagement to shape bureau’s work, rather than on continued objection to its existence. For its part, the CFPB has the opportunity to prepare for its greatest long-term challenge: performing effective oversight of consumer finance markets when the regulatory paradigm shifts once again and consumer protection is no longer at or near the top of every financial regulator’s agenda.

Yours truly,

P-R Stark
Senior Principal
prstark@promontory.com
+1 202 370 0392

P-R Stark
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Regulators Testify on Debt Collection; CFPB Begins Taking Complaints

Corey Stone, an assistant director at the CFPB, testified July 17 before the Senate Banking Committee on debt collection. “When one excludes mortgages and auto loans, debt issued by financial institutions no longer represents the largest focus of debt collection activity in our country, either by dollar amount or number of consumers affected,” he said. “This has been surpassed by medical debt.” The Office of the Comptroller of the Currency and the Federal Trade Commission both provided statements to the committee. “When banks sell debt, the agency expects them to have policies, procedures, and practices that result in the third party treating customers fairly and consistently with the expectations of the banks and regulators,” said the OCC’s statement. FTC associate director James Reilly Dolan summarized recent FTC enforcement actions in his testimony.

The CFPB announced in a July 10 press release that it is now taking debt-collection complaints, and released a bulletin outlining potentially unfair, deceptive, or abusive acts or practices; a separate bulletin on debt collectors discussing consumers’ credit; and five action letters for consumers to use when corresponding with debt collectors. The bureau also posted a transcript of Director Cordray’s remarks at the Portland debt-collection field hearing. “Our supervision authority extends to about 175 debt collectors and debt buyers, which account for over 60 percent of the consumer debt collection industry as measured by annual receipts,” he said. “Through our examinations, we are now in a position to evaluate whether federal consumer laws are being followed at every stage of the process — from credit origination to debt collection.”

Debt Collectors Settle with FTC

The FTC said July 22 that it reached a partial settlement with AMG Services, a payday lender that the FTC said had threatened consumers during debt-collection calls and violated the Electronic Fund Transfer Act. The commission said in a press release that it is still litigating other charges against AMG, including allegations the firm “deceived consumers about the cost of their loans by charging undisclosed charges and inflated fees.” The release also noted a recent decision by United States Magistrate Judge V. Cam Ferenbach finding that payday lenders affiliated with American Indian tribes must still comply with federal laws. One of the AMG defendants had argued that the FTC lacked authority to enforce the Federal Trade Commission Act, the Truth in Lending Act, and the EFTA against tribes and tribal businesses.

The FTC announced July 9 that it reached a settlement agreement with the world’s largest debt-collection operation, Expert Global Solutions, to resolve allegations the firm harassed customers with illegal calls. EGS will pay $3.2 million — the largest civil penalty ever obtained by the FTC against a third-party debt collector, said the agency’s press release.

FTC Settles with “Rachel”

The FTC announced July 12 it has settled with a set of defendants connected to the A+ Financial Center, which was charged last year with making millions of illegal robocalls claiming to be from “Rachel” and “Cardholder Services” and pitching bogus interest rate reductions on credit cards. The defendants were barred from making robocalls or pitching unsecured debt relief services, in addition to being assessed a $9 million, which the FTC said “will be suspended after defendants transfer all of their assets (except $25,000), including a 2007 Mercedes Benz CL, a 1999 boat valued at approximately $17,000, and a 2002 boat worth about $45,000.”

Cordray Defends QM Rule; CFPB Clarifies Ability-to-Repay

CFPB Director Cordray defended the qualified mortgage rule in a July 10 speech at the annual conference of the National Association of Federal Credit Unions. “Those that lend responsibly — like almost all credit unions — have no reason to fear the Ability-to-Repay rule,” he said. “In fact, we have tried to ensure that the risk differential between those categories is not substantial (we have conservatively estimated that the potential liability cost associated with making non-QM loans would add less than one-eighth of a point to the interest rate) so that credit unions and other responsible lenders can continue to make traditional relationship loans regardless of how they are classified for purposes of the Ability-to-Repay rule.”

Separately, the CFPB on July 10 announced it has finalized corrections, clarifications, and amendments to its ability-to-repay and mortgage servicing rules first proposed in April. The final rule is available here.

The CFPB announced via its blog July 2 that it has posted the final 2014 list of rural and underserved counties for use with the Escrows and Ability-to-Repay rules. However, the bureau noted that “small creditors that do not operate predominantly in counties on the Bureau’s list can still take advantage of the balloon QM provision if they meet the rule’s other criteria.”

Interagency Proposal to Exempt Some Higher-Priced Loans from TILA Appraisal Requirements

The CFPB, the OCC, and the Federal Reserve on July 10 announced a proposed rule to exempt some higher-priced mortgage loans (mortgages of $25,000 or less, some streamlined refinancings, and loans for existing manufactured homes) from new TILA appraisal requirements. The full text of the proposed rule is here.

Antonakes Testimony on Data Collection

CFPB Acting Deputy Director Steven Antonakes testified July 9 before the House Financial Services Committee on the bureau’s data-collection efforts. Citing language in the Dodd-Frank Act, Antonakes defended initiatives such as the National Mortgage Database solely as efforts to “to understand the market for consumer financial products and services, to assess the conduct of providers of such products and services, and to inform, educate, and protect consumers of such products and services.”

CFPB Releases Financial Literacy Annual Report and Semiannual Rulemaking Agenda

The CFPB on July 18 released its Financial Literacy Annual Report. The report summarized the bureau’s recent initiatives to promote financial literacy, including regional listening sessions and outreach calls to legal-aid and legal-services entities.

On July 5, the bureau posted its semiannual rulemaking agenda. The bureau said in a blog post it released the agenda “in conjunction with a broader initiative led by the Office of Management and Budget (OMB) to publish a Unified Agenda of federal regulatory and deregulatory actions across the federal government.”

 

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Promontory's Consumer Protection Team includes:

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P-R Stark
 

Konrad Alt
Managing Director
kalt@promontory.com
+1 415 986 4160

P-R Stark

Michael Dawson
Managing Director
mdawson@promontory.com
+1 202 384 1080

P-R Stark

Linda Gallagher
Managing Director and Global Head
of the Consumer Protection Practice

lgallagher@promontory.com
+1 202 370 0411

P-R Stark

Simon McDougall
Managing Director
smcdougall@promontory.com
+44 207 377 2367

P-R Stark

BJ Sanford
Managing Director
bsanford@promontory.com
+1 202 384 1020

P-R Stark Julie Williams
Managing Director and
Director of Domestic Advisory Practice

juwilliams@promontory.com
+1 202 384 1087
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Promontory Sightlines Consumer Financial Protection Developments

 
EDITOR IN CHIEF

P-R Stark

GLOBAL HEAD OF THE
CONSUMER PROTECTION PRACTICE

Linda Gallagher

FOUNDER AND CEO
Eugene A. Ludwig

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