The Consumer Financial Protection Bureau. A Cicero Consulting Special Report December 2011

Transcription

1 The Consumer Financial Protection Bureau A Cicero Consulting Special Report December 2011

2 Overview If it were needed, December 8 offered another reminder of how much controversy surrounds the CFPB, as Senate Republicans blocked the Obama administration s appointment of Richard Cordray as the CFPB s director. Contents: PEOPLE, POLITICS AND STRUCTURE Leadership 4 Confirmation row election 6 Organizational Structure 7 Key positions filled 8 REGULATION AND SUPERVISION Supervision Credit Card Reform 13 Know Before You Owe Other initiatives 18 The GOP says that it s nothing personal with Cordray. They just don t like the way the CFPB is set up and will block any appointment until they extract concessions from the administration on accountability and funding. President Obama said the move makes no sense and that the GOP was more interested in picking political fights than protecting consumers. But we should not lose sight of the more prosaic fact that despite the CFPB not having a permanent director, it is now well over 100 days past the date at which it formally assumed its financial protection responsibilities from other federal regulators. It is already in the process of building its bank supervision capabilities. Even in areas where progress is hamstrung by the lack of a permanent director, such as regulating and supervising non-banks, the agency is quietly progressing. This special report looks at both the politics and the policy. Regardless of whether you think the CFPB is a bulwark against an industry that failed its customers during the crisis, or an example of unaccountable regulatory overreach, you cannot afford to ignore it. John Rowland, Senior Country Officer Peter Benton-Sullivan, Researcher e: john.rowland@cicero-group.com t:

3 PEOPLE, POLITICS AND STRUCTURE 3

4 Lack of permanent director has slowed progress but Raj Date pushes forward The intellectual Elizabeth Warren - The original Special Adviser to Secretary Geithner, Prof Warren was instrumental in the agency s creation. - A vocal consumer advocate, she is loved by liberals and loathed by conservatives in equal measure. - While her commitment to the CFPB was unwavering, in the end she was probably too divisive a choice to be its permanent head. - No longer at the CFPB, she has recently announced a Senate run in Massachusetts to unseat Senator Scott Brown (R). The caretaker Raj Date - Date replaced Warren as Special Adviser. He oversees day-to-day operations and filling key staff positions. - He has worked in the banking industry for many years, including positions at both Capital One (where he was strategy director) and Deutsche Bank Securities (where he worked on coverage of the largest banks and thrifts). - In 2009, Mr. Date founded the Cambridge Winter Center for Financial Institutions Policy, a private, non-profit research and policy organization that supported reform of the U.S. financial system. The nominee Richard Cordray - Cordray, the former Attorney General for Ohio, is the Obama administration s nominee director. He is currently head of enforcement at CFPB. - The appointment of Mr Cordray, a widely respected public official, was blocked by the GOP in December in the ongoing row about the powers of the CFPB. - The agency is unable to exercise new Dodd Frank powers until a director is in position. - President Obama may attempt to sidestep Senate confirmation by making Cordray a recess appointment. The GOP may use Congressional procedure to prevent this. 4

5 GOP: No Accountability, No Confirmation In May, 44 Republican Senators said they would not support any nominee unless major changes were made to the structure of the CFPB to make it more accountable. The administration does not think the claims stand up to scrutiny and are a diversion. Here is a summary of the debate The issue The GOP says: The administration says: Funding Accountability Prudential soundness Subject the Consumer Financial Protection Bureau to the appropriations process. To ensure that the CFPB does not engage in wasteful or inappropriate spending and has effective oversight, the CFPB should be subject to the Congressional appropriations process instead of receiving funding from the Fed. The SEC, CFTC and FTC have long been subject to the appropriations process. Establish a board of directors to oversee the CFPB. To prevent a single individual from dominating the actions of the CFPB it should be governed by a board of directors. Diversifying the leadership of the CFPB would also reduce the potential for the politicization of the CFPB and ensure the consideration of multiple viewpoints in the CFPB s decision-making. This structure is consistent with the organization of the Federal Reserve, the SEC, and the FDIC. Establish a safety-and-soundness check for the prudential regulators. Federal bank regulators should be given meaningful tools to prevent the CFPB s regulations from needlessly causing a bank failure. After all, one of the best consumer protections is a safe and sound bank. Such a check by the prudential regulators will provide a reasonable restraint on the CFPB s authority and ensure that the CFPB s regulations strike the right balance between consumer protection and safety-and-soundness All federal banking agencies (e.g. FDIC) are funded outside the appropriations process. In addition, the CFPB alone has a statutory cap on its funding. For additional resources, the CFPB must request an appropriation from Congress rather than levy fees on banks, as the other banking regulators may do. Congress exercises oversight over the CFPB through statutorilyrequired hearings, reports, and audits. The director is required to testify before the relevant committees at least twice a year. The agency must submit annual financial reports and semi-annual budget justifications to Congress. GAO performs an annual audit. An independent Inspector General also reviews the CFPB s activities to inform Congress and the public about the CFPB s programs and actions The director structure is not unusual for financial regulators. The OCC, which has oversight over national banks, has been led by a single director for more than a century. The Financial Stability Oversight Council (FSOC) can review and reject the CFPB s regulations. No other regulator has this restriction on it. This will protect the soundness of the financial system. 5

6 2012 elections: what they could mean for the CFPB Status Quo Democrats retain control of the Senate, Presidency and Republicans control House Cordray will have most likely been named director through a recess appointment, and the CFPB s budget will remain safe as it will be drawn from the Federal Reserve Republicans will continue to use committees and legislative procedure to try to effect change Divided Government Republicans control both chambers of Congress, President Obama remains in White House If both chambers are controlled by Republicans, they could easily pass legislation to change the CFPB. This could include adding a board to the agency, bringing funding under the appropriations process or more radical changes President Obama would still possess his veto to counter Republican legislation Total GOP control Republicans control both chambers of Congress, as well as the Presidency The CFPB could be entirely reformed, greatly downsized or eliminated by Republican officials in the White House and lawmakers on Capitol Hill with relative ease Democrats only counter would be to filibuster the Republican agenda Other aspects of DFA may also come under threat of repeal or reform

7 Structure of the CFPB Director Chief Operating Officer Consumer Response CTO CIO CFO Human Capital Inclusion FOIA, Privacy and Inclusions Consumer Education & Engagement Financial Education Consumer Engagement Older Americans Service Members Students Financial Empowerment Research, Markets & Regulations Research Regulations Card Markets Mortgage Markets Installment & Liquidity Lending Markets Deposits, Collections, & Credit Information Markets Supervision, Enforcement, Fair Lending & Equal Opportunity Fair Lending & Equal Opportunity Large Bank Supervision Non-bank Supervision Enforcement General Counsel Principle Deputy GC Deputy GC Deputy GC ALJ Staff Director External Affairs Media Relations Legislative Affairs Small Businesses, Community Banks & Credit Unions Intergovernmental Affairs Consumer Advisory Board Community Affairs 7

8 The CFPB has filled important staff positions, but many are still vacant Meredith Fuchs Holly Petraeus Hubert Humphrey Lisa Konwinski Chief of Staff Assistant Director, Office of Service Member Affairs Assistant Director, Office of Older Americans Assistant Director, Legislative Affairs Nicholas Rathod Sartaj Alag Stephen Agostini Roberto Gonzalez Assistant Director, Intergovernmental &International Affairs Assistant Director, Consumer Response Chief Financial Officer Principle Deputy General Counsel Chris Willey Rohit Chopra Steve Antonakes Peggy Twohig Chief Information Officer Private Education Loan Ombudsman Large Bank Supervision Nonbank Supervision 8

9 REGULATORY AND SUPERVISORY INITIATIVES 9

10 Areas of the financial sector that will be overseen by the CFPB Debt Relief Services Banks & Credit Unions Debt Collection Credit Cards Student Loans Credit Bureaus Mortgage Brokers Payday Lenders 10

11 Bank supervision: CFPB outlines approach DFA transferred a raft of powers over consumer financial protection from 7 agencies to the CFPB on 21 July 2011 The Supervision and Examination Cycle The agency s staff will supervise the 111 depository institutions that have assets of over $10 billion Examiners will be managed from satellite offices in Chicago, New York, San Francisco, and Washington, D.C. The CFPB expects eventually to have several hundred examiners. Over 100 of these have already transferred out of FDIC, Fed, OCC and OTS to the CFPB. For the largest, most complex institutions, the CFPB will have a year-round supervision process. The CFPB will assess each institution's ability to prevent and remedy violations that may harm consumers by reviewing internal procedures and conducting interviews with personnel. Examiners will look at the products and services the institution offers, with a focus on risk to consumers. The institution's compliance with requirements during the entire life cycle of the product or service will be reviewed from product development to after-sales. Fair lending reviews will be conducted to detect and address potential discriminatory practices. If a company is not fully compliant, the CFPB will seek corrective actions and where necessary take enforcement action. Source: CFPB Supervision Manual v1.0 11

12 Non-bank supervision so far DFA specifically authorizes the CFPB to supervise mortgage companies, payday lenders and private student lenders. For all other markets, the CFPB will only be able to supervise directly larger participants. What constitutes a larger participant must be defined in a rule by July The CFPB has initially identified the following as areas where it wants to develop criteria to designate larger participants : debt collection consumer reporting consumer credit money transmission and check cashing prepaid cards debt relief services Non-bank supervision is headed by Peggy Twohig, a lawyer and former Federal Trade Commission official. CPFB Powers without confirmed director A report by the Treasury Inspector General said that the CFPB can exercise inherited powers, but not new ones, without a director in place. Can Supervise and examine largest banks Enforce credit card laws Create new rules under existing consumer laws Can t Regulate under new powers created by Dodd-Frank Act (such as those on nonbanks) Ban products that might be abusive or deceptive 12

13 After the Credit CARD Act (2009) Protections provided: Grace period: Companies cannot raise interest rates on an individual during first year they own the card Limiting overdraft fees and only allowing overdraft transactions when the customer has agreed to them CFPB inherits powers to oversee the credit card market, which was overhauled by this 2009 legislation. One of the main goals of the act was to reduce surprise re-pricing of interest rates and fees by card companies and to make credit card pricing less opaque. Elizabeth Warren has said that although the act improved practice, it is still difficult for customers to compare cards and further changes are needed in the market to increase transparency. More stringent notification requirements: Forces companies to inform customer of any significant changes more than 45 days in advance The CFPB also now accepts formal complaints against card companies, and these can be filled online at the CFPB website In addition, the CFPB provides financial information and guidance on its website on credit cards and related issues. There are articles on improving your credit rating and shopping around for credit cards. It takes complaints about Credit Cards directly on its website and said in November that it had received around 5,000 complaints since July

14 CFPB puts public involvement at heart of Know Before You Owe initiative The CFPB has made public consultation a major feature of its strategy, particularly the know before you owe initiative which seeks to simplify disclosure around mortgages, credit cards and student loans to ensure that customers understand more about the agreements they are entering into. The CFPB says members of the public and industry have contributed thousands of comments regarding the new mortgage disclosure form. The CFPB website offers many opportunities for members of the public to give comment and feedback on proposals. It will take a similar approach to designing the new financial aid shopping sheet. In addition, senior CFPB officials are undertaking roadshows to hear from the public around the country. In early December, Raj Date visited Cleveland, OH for a Town Hall meeting to garner views on credit cards, mortgages and other financial products. Engagement: CFPB offers many opportunities for feedback on its website, and is undertaking a series of Town Hall meetings around the country 14

15 Know Before you Owe: Credit Cards We ve seen a real disconnect between how some consumers understand their credit card and how it actually works. That s why the CFPB has been looking at ways to simplify one source of the confusion: the credit card contract itself Raj Date CFPB prototype simplified contract is one fifth of length of standard contract (approx 1,000 words) Legalese moved into standard definitions to reduce the length CFPB says there will be rigorous testing Pentagon Federal Credit Union has signed up to test prototype Source: CFPB 15

16 Know Before you Owe: Mortgages The program, initiated in May, aims to create new disclosure forms for consumers Source: CFPB The forms will combine into two new forms: The initial Truth in Lending form and Good Faith Estimate HUD-1 Settlement Statement and final Truth In Lending disclosure In particular, the new forms will help make key information and will flag features of the loan that might make it more expensive to repay CFPB has received many thousands of comments on its prototypes which has led to substantial revisions It is still not clear when they will be fully rolled-out Various prototype forms: attempt to help customers make informed decisions 16

17 Know Before you Owe: Student Loans Student loans have become the number one source of household debt in the U.S. outside of mortgages. In response to concern s that information on financial aid is often not clearly communicated, the Department of Education and CFPB are working on a model format that schools can use. The aim is to make offers easier to understand and make them comparable with other school offers. The form would have key information that students need, such as estimated costs, finance options, debt at graduation. A thought starter has been provided (see right) to provoke comment and discussion. Source: CFPB 17

18 Other CFPB special reports and programs aim to help consumers, and to bring more clarity to financial products Office of Service Members Affairs promotes financial education among military families, and to protect service members from fraudulent activity. The office is led by Holly Petraeus, wife of General David Petraeus. The office has focused on financial products that are aimed at service personnel and their families, and to provide better outreach and education to members about these products. Service personnel face particular risks large due to deployment overseas. Mrs Petraeus has said that she hopes her office can provide the education and the tools necessary for military families to make the right financial decisions when it comes to large purchases such as buying a home. Remittance Transfers were looked into by the CFPB in a special report released in July of this year. The report focused on maximizing a consumer s ability to receive and use information on different exchange rates (FX) when transferring money to other countries. The CFPB found that remittance transfers could be made much more accessible for consumers who use them, recommending that FX rates be clearly shown, as well as any additional fees that might be coupled with the transaction. The report also suggested that remittance transfers could be used to help build an individual s credit report and history. Currently, credit agencies do not look at remittance transfer histories, but the CFPB report outlined that they could be valuable to predict risk for lenders. Credit Report Discrepancies were first noted in a report released by the CFPB which examined differences between credit score reports given to consumers versus ones given to lenders. In the study that the CFPB is conducting, regulators are examining how credit models are created for consumers, and how these models can produce vastly different results for the same individual. The Bureau has said that it is concerned that creditors are using these discrepancies in scores to offer products that are not suitable for consumers. The CFPB hopes that when completed, the study will help make credit scores more readily available to citizens, and also devise regulations and guidelines on how to create credit score models for individuals. 18

19 Cicero Group is a leading provider of government relations, research and public policy information services to the financial sector. We have over 100 clients in 22 countries, operating from offices in London, Brussels, Washington D.C. and Singapore. To see how we help the world s leading financial organizations navigate financial reform, visit us on the web at or contact john.rowland@cicero-group.com