Consumer Financial Protection: Bureau or Bureaucracy?

Part III of a Three-Part Series on Financial Reform Legislation
Dodd-Frank: Legislation - Reactive or Proactive
Author: Jonathan Foxx
Published in National Mortgage Professional Magazine
First Published: October 2010

Although Elizabeth Warren has left the Consumer Financial Protection Bureau, her views continue to provide inspiration to its management and staff. Perhaps it would be wise to read the article I wrote last October, outlining the CFPB, its mandates, and its prospects.

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Society is founded not on the ideals but on the nature of man

and the constitution of man rewrites the constitutions of states.

But what is the constitution of man?[i]

Will and Ariel Durant

In the first two parts of this 3-part series,[ii] we have explored the basic structure of the new financial reform law, known as the Dodd-Frank Act (“Act”), as it affects residential mortgage loan originations.[iii] We have already given consideration to the many mortgage loan regulatory provisions that the Act covers[iv] and especially to the Mortgage Reform and Predatory Lending Act, a primary component of this landmark financial legislation.[v]

Now, we will turn our attention to the very core of the Act itself vis-à-vis the mortgage industry and consumer financial protection: the Bureau of Consumer Financial Protection (known also as the “Consumer Financial Protection Bureau,” or “CFPB,” and hereinafter as “Bureau”).[vi]

But first, a Thought Experiment.[vii]

A vast, entangled array of very small and sleek wires, super strong magnets, and very wide and long cables extend out omnidirectionally – all of which lines and circuits are laid throughout a network of interlocking, electrically generated devices that are held in place in their respective positions on a shaky iron scaffold by fraying, single-knotted ropes. The devices are needed to power vital and critical services to a community. But, due to wear and tear on their bindings, some devices are about to break free, threatening to pull down with them the entire array of wires, magnets, cables, and other devices. Any device can plummet at any time. Before it is too late, all the lines must be disentangled, traced to each of the devices, and rerouted to a new and more stable grid; plus, the devices themselves must be transferred, one by one, to the new grid without damaging them, and then reconnected to their lines. But the collapse can take place at any time. A “crisis” looms!

So, how are you going to accomplish this heroic task quickly and effectively?

Now let’s consider this analogue: the energy source is Constitutional authority; the grid is the financial regulatory framework; wires and cables are the ways and means that implementing regulations affect one another; magnets are the legal foundations (i.e., case law precedents (stare decisis), statutes (federal and state), Constitutional laws or rights) on which all subject enumerated laws (see below) rest; devices are the existing regulations; and ropes are the various governmental agencies that are charged with enforcement of and monitoring compliance with specific implementing regulations.

By the end of this article, I hope you will have decided how best to solve the above-described and admittedly convoluted “crisis.” This article and the preceding articles in this series outline how Congress decided!

Please keep in mind that this series on the Dodd-Frank Act is meant to provide an overview. However, the legislation itself is extremely detailed and extensive. Therefore, for guidance and risk management support, I strongly recommend that you consult a risk management firm, residential mortgage compliance professional, or regulatory counsel to develop policies and procedures to implement the Act’s requirements.

One Bureau, Many Bureaucrats

Nothing is more destructive of respect for the government

and the law of the land than passing laws

which cannot be enforced.[viii]

Albert Einstein

There are numerous existing consumer protection laws that will be included in the transfer to the Bureau by July 21, 2011, the Designated Transfer Date,[ix] thereby giving it exclusive rulemaking and examination authority.[x]

These “enumerated laws” include:[xi]

• Alternative Mortgage Transaction Parity Act (AMTPA)[xii]
• Community Reinvestment Act (CRA)[xiii]
• Consumer Leasing Act (CLA)[xiv]
• Electronic Funds Transfer Act (except the Durbin interchange amendment) (EFTA)[xv]
• Equal Credit Opportunity Act (ECOA)[xvi]
• Fair Credit Billing Act (FCBA)[xvii]
• Fair Credit Reporting Act (except with respect to sections 615(e), 624 and 628) (FCRA)[xviii]
• Fair Debt Collection Practices Act (FDCPA)[xix]
• Federal Deposit Insurance Act, subsections 43(c) through 43(f)(12) (FDIA)[xx]
• Gramm-Leach-Bliley Act, sections 502 through 509 (GLBA)[xxi]
• Home Mortgage Disclosure Act (HMDA)[xxii]
• Home Ownership and Equity Protection Act (HOEPA)[xxiii]
• Real Estate Settlement Procedures Act (RESPA)[xxiv]
• S.A.F.E. Mortgage Licensing Act (S.A.F.E. Act)[xxv]
• Truth in Lending Act (TILA)[xxvi]
• Truth in Savings Act (TISA)[xxvii]
• Omnibus Appropriations Act– Section 626 (OAA)[xxviii]
• Interstate Land Sales Full Disclosure Act (ILSFDA)[xxix]

As I have discussed elsewhere, the Bureau would be assigned primary authority to enforce the aforementioned laws, but other federal regulators, including the Department of Housing and Urban Development (“HUD”), the banking agencies, and the Federal Trade Commission, would retain overlapping, secondary enforcement authority over certain requirements. State Attorneys General would be empowered to enforce federal laws under the Bureau (subject to any existing limitations in the laws to be transferred to the Bureau's authority).[xxx] And state consumer financial protection laws would not be preempted, except to the extent that they are inconsistent with federal law (although such state laws could be stricter than the federal laws, in which case they would not be preempted by federal law).[xxxi]

CFPB: The Headless Horseman

COMMENTARY: by JONATHAN FOXX

Jonathan Foxx, former Chief Compliance Officer of two publicly traded financial institutions, is President and Managing Director of Lenders Compliance Group, the nation’s first full-service, mortgage risk management firm in the country.

At this writing, we are almost a week away from the Designated Transfer Date - the date on which the Consumer Financial Protection Bureau (CFPB) receives its enumerated authorities - and nobody has been chosen, appointed or nominated to head the new agency. Several suggestions for the principal position abound, primarily Elizabeth Warren.

How can such a monumental lack of political discipline, by Democrats and Republicans alike, be accounted for? 

CFPB: Laws

The CFPB, created by the Dodd-Frank Act, on July 21st it will receive authority over:

-Alternative Mortgage Transaction Parity Act (AMTPA)
-Community Reinvestment Act (CRA)
-Consumer Leasing Act (CLA)
-Electronic Funds Transfer Act (except the Durbin interchange amendment) (EFTA)
-Equal Credit Opportunity Act (ECOA)
-Fair Credit Billing Act (FCBA)
-Fair Credit Reporting Act (except sections 615(e), 624 and 628) (FCRA)
-Fair Debt Collection Practices Act (FDCPA)
-Federal Deposit Insurance Act, subsections 43(c) through 43(f)(12) (FDIA)
-Gramm-Leach-Bliley Act, sections 502 through 509 (GLBA)
-Home Mortgage Disclosure Act (HMDA)
-Home Ownership and Equity Protection Act (HOEPA)
-Real Estate Settlement Procedures Act (RESPA)
-S.A.F.E. Mortgage Licensing Act (S.A.F.E. Act)
-Truth in Lending Act (TILA)
-Truth in Savings Act (TISA)
-Omnibus Appropriations Act- Section 626 (OAA)
-Interstate Land Sales Full Disclosure Act (ILSFDA)

In just a few days, the CFPB is going to have authority over the above-stated enumerated laws through rulemaking, orders, guidance, interpretations, policy statements, examinations, and enforcement actions.

The CFPB will be assigned primary authority to enforce the aforementioned laws, but other federal regulators, including the Department of Housing and Urban Development (HUD), the banking agencies, and the Federal Trade Commission, will retain overlapping, secondary enforcement authority over certain requirements. State Attorneys General will be empowered to enforce federal laws under the CFPB (subject to any existing limitations in the laws to be transferred to the CFPB's authority). State consumer financial protection laws would not be preempted, except to the extent that they are inconsistent with federal law (although such state laws could be stricter than the federal laws, in which case they would not be preempted by federal law).

CFPB: Products

The CFPB will have oversight over many financial products and services, including, but not limited to, credit extension; credit counseling; loan servicing; Credit Reporting Agencies, their agents and affiliates; real property leases; real estate settlement services; real estate appraisals; depository accounts; financial advisory services; exchange of funds and transmittal of funds; consumer custodial fund services; so-call "stored value cards;" check cashing; debt management, settlement, and collection services; payment processing services; and, a catch-all "other products and services" (as the CFPB so defines).

CFPB: New Offices

There will be various units and offices: a research unit to monitor the consumer financial products and services market, and a unit to collect and track complaints; three new offices to be established within one year of the Designated Transfer Date, an Office of Fair Lending and Equal Opportunity, an Office of Financial Education, an Office of Service Members Affairs; and, an Office of Financial Protection for Older Americans, which must be established within 180 days after the Designated Transfer Date. Furthermore, there will be a Private Education Loan Ombudsman to process complaints from borrowers of private education loans.

CFPB: Staff

In addition to the CFPB's responsibility to build its own staff and administrative operations, it will collaborate with the federal banking agencies and HUD to choose employees to be transferred from their agencies to the CFPB. All such employee transfers are to be fully effectuated not later than 90 days after the Designated Transfer Date.

CFPB: Director

The Director must establish all units and offices within specific time frames, include various coordinating and administrative mandates, provide for reporting requirements to Congress, and must see to it that the various components of the CFPB function through interacting participation within and across all CFPB units and, where applicable, certain federal and state agencies and regulators. 

In addition to the foregoing, the Director must also establish the Consumer Advisory Board and appoint its members. By July 21st, as well as its receiving other authorities pursuant to Dodd-Frank, the CFPB must, among other things, conduct research relating to consumer financial products and services, develop its nationwide consumer complaint response center, plan and take steps to implement the risk-based supervision of non-depository entities, and prepare for the opening of outreach offices.

"You say yes, I say no / You say stop and I say go, go, go"  (Beatles) 

     

Whatever your political persuasion these days, it is irrefutable that this new agency is soon coming into its powers! 

Some people believe that the Director should be industry friendly; others believe the Director should be consumer friendly. Does it occur to any of them that these predilections are not mutually exclusive?

Some legislators want to defund the CPFB or "defang" it (as one Congressperson has opined); others want it to have full funding and all the enforcement powers granted by Dodd-Frank. 

But defunding an agency that is set to receive all the enumerated laws is entirely counterproductive, inasmuch the industry will depend on it for oversight of these laws. And the CFPB, as required by Dodd-Frank, that is deprived of enforcement powers is virtually no agency at all: this is to "defang" it without regard for the consequences. 

Every compliance officer knows that compliance means nothing without enforcement!

"I say high, you say low / You say why, and I say I don't know" (Beatles)

We all know that the President cannot make a recess appointment if Congress is not in recess, notwithstanding the "pro forma sessions" that may be conducted in order to keep the Congress "in session." Essentially, the tactic is for opposition legislators - primarily Republicans - to prevent an appointment of anybody at all to the CFPB unless the CFFB is changed. 

As to confirming an appointment, at this time the President has put forth almost 300 civilian appointments this year, but fewer than 100 of them have been confirmed by the Senate - and these are instances where there is no opposition! Indeed, there are 15 judge nominees who have already been unanimously approved by the Senate Judiciary Committee, but their nominations have not even been sent to the floor of the Senate.

Importantly - and, at this late date, inexplicably - President Obama has not even announced his choice for the Director! How can consumers or industry expect congressional action when the President himself won't choose?

At this time, Elizabeth Warren is standing up the CFPB. She is the very person who devised the idea of a consumer financial protection agency and then advocated in the halls of Congress, in speeches, lectures, and interviews throughout the United States, for its creation. Since September 17, 2010, she has been building the CFPB in accordance with the requirements of Dodd-Frank. 

While proponents and opponents lambast each other, and a Director is not appointed, the stakes for the mortgage industry continue to grow ever higher and perilous. The many enumerated laws being fully empowered into the CFPB on July 21st affirmatively require substantive, continuous, and very careful oversight. 

The individual who manages that agency matters!

Headless Horseman      

• "The dominant spirit, however, that haunts this enchanted region, and seems to be commander-in-chief of all the powers of the air, is the apparition of a figure on horseback, without a head. It is said by some to be the ghost of a Hessian trooper, whose head had been carried away by a cannon-ball, in some nameless battle during the Revolutionary War, and who is ever and anon seen by the country folk hurrying along in the gloom of night, as if on the wings of the wind."

    - Washington Irving, "The Legend of Sleepy Hollow"

The principal character in "The Legend of Sleep Hollow" is Ichabod Crane, a school teacher. Sleepy Hollow is believed to have been located in the area of Tarrytown, NY. Ichabod is killed quite dramatically when the headless horseman, a ghost - and it is believed that ghosts can't cross water! - throws his severed head across a bridge, over the water, and hits poor Ichabad off his horse. The next morning, Ichabod's hat is found nearby, and beside it is a shattered pumpkin. Ichabod was never seen in Sleepy Hollow ever again. In Irving's story, one is led to conclude that the headless horseman was really no ghost at all, but Abraham van Brunt (aka "Brom Bones"), Ichabod's rival for the hand in marriage of Katrina van Tassel, the beautiful daughter of a rich farmer.

Any agency without a head is crippled, but, given the mandates arrogated to the CFPB, not to have a Director immediately is especially debilitating to consumers and mortgage industry participants alike.

Instead of being rivals, like Ichabod Crane and Brom Bones, it is in the interest of both consumers and industry to lobby for a strong CFPB, under the direction of a wise, knowledgeable, and experienced leader.

This is not a job for a career bureaucrat. It requires a Director with considerable managerial, legal, political, and financial knowledge, all of which ideally would be expressed through a balanced temperament, a focused and incisive mind, a fierce consumer advocacy, and sophisticated communication skills.

It seems that Sleepy Hollow has relocated to the Congress of the United States.

What do you think? 

I would welcome your comments.

Please contact me if you want to contribute an article.

CFPB: Defining "Larger Participant"

On June 29, 2011, the Consumer Financial Protection Bureau (CFPB) issued a request for comments regarding the requirement to implement a program to supervise certain nondepository covered persons for compliance with Federal consumer financial laws.

The scope of the CFPB's supervision coverage varies for different product markets. Section 1024 of the the Dodd-Frank Act (Dodd-Frank) provides that the CFPB may supervise covered persons in the residential mortgage, private education lending, and payday lending markets. For other markets for consumer financial products or services, the supervision program generally will apply only to a ''larger participant'' of these markets.

Therefore, the CFPB is required to issue an initial ''larger participant'' rule not later than July 21, 2012, one year after the designated transfer date.

Essentially, under Dodd-Frank, the CFPB's non-bank supervision program will be able to look at companies of all sizes in the mortgage, payday lending, and private student lending markets. For all other markets - such as consumer installment loans, money transmitting, and debt collection - the CFPB generally can supervise non-banks only if they are larger participants in these markets.

Hence, in order to supervise them, the CFPB must write a rule within the next year to define who is a "larger participant."

The following outline is a brief synopsis of the questions requiring comments.

COMMENTS DUE DATE: AUGUST 15, 2011.

THREE ESSENTIAL QUESTIONS

• Should a larger participant be defined based on the relative size of the participants within a market (i.e., whether the number of annual transactions of the market participants is above the mean or median) or, alternatively, should a larger participant be defined based on an absolute threshold, such as doing business in a specified number of states?
• Should more than one criterion be used to determine the size of a market participant, such as the number of annual transactions and/or the number of states in which the participant conducts business?
• Should the same criteria and thresholds be used to define a larger participant for every market, or should different criteria and thresholds be tailored for each market based on the market's characteristics?

SIZE = AGGREGATE = LARGER PARTICIPANT

In considering how to define which nondepository covered persons are larger participants in a particular market, a number of approaches are be suggested.

Determining the appropriate criteria and thresholds are being approached in light of the applicable statutory language, which refers to a ''larger participant'' of a market. (This statutory language is not limited only to the ''largest'' participants in each market, but at the same time does not encompass smaller market participants.)

Dodd-Frank provides that, for purposes of computing the activity levels of a market participant, the activities of the participant ''shall be aggregated'' with the activities of nondepositor ''affiliated companies.''

Examples of potential criteria that could be used to define larger participants of a market include one or a combination of the following: annual number of transactions in the market; annual value of transactions (i.e., total loan volume); annual receipts or revenue; geographic coverage (i.e., number of states where engaged in business); asset size; and outstanding loan balances.

CRITERIA

• The number of states in which a market participant conducts business. Public data, including from sources such as the Securities and Exchange Commission's online EDGAR database, and state and federal licensing and registration records.
• Nonpublic state or federal supervisory or other data.
• Commercial data, such as proprietary industry market analyses.
• Data obtained directly from  market participants.

REGISTRATION?

The CFPB is considering the establishment of a registration program for certain covered persons through a future rulemaking that will serve to supplement existing data used to measure market participants.

Questions:

• For each market, what reliable data sources are available and would be suitable for the CFPB to use in its larger participant determinations?
• What data should the CFPB collect through a registration process to use in its larger participant determinations?

MEASUREMENT DATES AND SUPERVISION TIMEFRAMES

Questions:

• What factors should the CFPB consider in connection with the treatment of events such as the merger market participants during an assessment time period?
• Are there alternative approaches for establishing an assessment time period the CFPB should consider?
• For what length of time should a market participant be subject to supervision once it meets the applicable threshold?
• How should subsequent changes in the participant's size be treated?

MARKETS

The CFPB seeks comments regarding the following markets: Debt Collection; Consumer Reporting; Consumer Credit and Related Activities; Money Transmitting, Check Cashing, and Related Activities; Prepaid Cards; and, Debt Relief Services.

Questions:

• What consumer financial product or service markets should be included in the initial rule?
• How should the financial product or service markets included in the initial rule be defined?
• In addition to considerations relating to how to define the relevant product markets, should all markets be national in scope, or should the CFPB consider regional or other geographic markets in certain instances?
• If regional or other geographic markets should be considered, describe with specificity how they could be defined?
• What specific criteria should be measured, and threshold levels set, to define a larger participant in the markets identified above, and in any other markets that should be included in an initial rule?
• What data should be used to assess whether the thresholds have been met?

LIBRARY

CFPB: Defining Larger Participants in Certain
Consumer Financial Products and Services Markets 

Notice and Request for Comment. (12 CFR Chapter X)
Federal Register, Vol. 76, No. 125
June 29, 2011