A creation of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. Law 111-203 (“Dodd-Frank Act”), the Consumer Financial Protection Bureau (“CFPB”) is charged with regulating consumer lending activities of financial institutions and, in partnership with state attorneys general, enforcing numerous federal consumer protection laws. Despite recent assurances by CFPB Director Richard Cordray that smaller community banks and credit unions will not face unnecessary regulatory burdens, it is important for bankers in such institutions to understand how the CFPB alters the regulatory landscape.
I. STRUCTURE, PURPOSE AND ENFORCEMENT
Previously, agencies charged with enforcing various consumer protection laws were spread across the government, including Federal Reserve, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, the FDIC, the Department of Housing and Urban Development, and the National Credit Union Association. (Pub. Law 111-203, § 1061; 12 U.S.C. § 5581.) Some of the 17 laws previously enforced by these agencies that will now be enforced by the CFPB include the Fair Debt Collection Practices Act (“FDCPA”), the Fair Credit Reporting Act (“FCRA”), the Equal Credit Opportunity Act (“ECOA”), the Truth-in-Lending Act (“TILA”), and the Real Estate Settlement Procedures Act of 1974 (“RESPA”). (§ 1002; 12 U.S.C. § 5481.)
The CFPB exists with the Federal Reserve (“Fed”), but it is an expressly independent unit. (§1011; 12 U.S.C. § 5491.) The Fed is essentially prohibited from intervening in CFPB action, including rulemaking, orders and personnel. No federal government authority can require the CFPB to submit advance versions of communications with Congress as long as the CFPB conveys that its views are those of neither the Fed nor the President. (§ 1012; 12 U.S.C. § 5492.)
The director of the CFPB is the only political appointment, for a term of five years, and he or she must be confirmed by the Senate. (§ 1011; 12 U.S.C. § 5491.) Recently, President Obama made the controversial recess appointment of Richard Cordray, the former Ohio Attorney General, to lead the CFPB. Importantly, several members of Congress have vowed to challenge Cordray’s appointment and the validity of his work with the CFPB thus far. The director occupies a significant role in the affairs of not only the CFPB, but also several other financial regulatory entities, such as the FDIC and the new financial Oversight Council created by the Dodd-Frank Act. (§ 111; 12 U.S.C. § 5321.)
Several units within the CFPB will assume the regulatory functions of the agencies currently charged with enforcing federal consumer protection laws, including departments focusing on research, community affairs, military service-member affairs, fair lending and equal opportunity, and financial protection for older Americans. (§ 1013; 12 U.S.C. § 5493.)
Purpose and Duties
The designated functions and duties of the CFPB extend to all types of financial institutions, including banks, loan modification companies, brokers, nonbank lenders, small banks and large banks. The CFPB’s stated mission is to help “consumer financial market works by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives.” (Building the CFPB, CFPB, p. 2 (July 18, 2011).) Full supervisory authority of the CFPB extends to all depository financial institutions with assets over $10 billion, with less extensive authority over smaller banks. (§ 1025; 12 U.S.C. § 5515.) Such authority entails examinations of large institutions to ensure that these entities comply with consumer laws throughout the process of developing products, marketing, originating and managing assets. (Id.) The CFPB has indicated that it will implement ongoing supervisory programs for certain institutions, rather than periodic examinations.
In states with active attorneys general, the Dodd-Frank Act will result in a nearly certain uptick in the number of enforcement actions. The unique enforcement scheme empowers state attorneys general to bring an action in federal district court or state court to enforce federal consumer protection laws arising under Title X of the Dodd-Frank Act. (§ 1042; 12 U.S.C. § 5552.) A state attorney general may also bring an action to enforce any CFPB regulation (but not underlying statute) against a national bank or federal savings association. (Id.) A state regulator (other than attorney general) may enforce Title X of the Dodd-Frank Act and CFPB regulations against any entity authorized to do business under state law. (Id.)
Beyond enforcing its regulations through state attorneys general, the CFPB may bring its own enforcement actions, including seeking cease-and-desist orders for perceived violations of federal consumer protection laws, injunctive relief and actions for civil penalties outlined in the CFPB. (§ 1054, § 1055; 12 U.S.C. § 5564, § 5565.) The Dodd-Frank Act provides that collected civil penalties shall be paid to “victims” of violations of consumer protection laws, or if this is not practicable, then for financial education purposes. Numerous other enforcement provisions that allow increased powers for state attorneys general and the enforcement arm of the CFPB are spread throughout Title X of the Dodd-Frank Act.
II. EFFECT ON COMMUNITY BANKS
As previously mentioned, banks with less than $10 billion in assets are excluded from the full supervisory authority of the CFPB. Moreover, Richard Cordray has stated that because the business model of community banks emphasizes customer service in the community, they were not responsible for the financial crisis. He plans to create an advisory panel of community bankers throughout the country and has proposed different regulatory tiers and exemption thresholds to permit community banks to operate without overly burdensome regulatory requirements.
Nonetheless, community banks will be affected by the CFPB. For example, one of the recent projects, “Know Before You Owe,” examined the combination of two federally required mortgage disclosures (RESPA and TILA) into one straightforward form, and it received thousands of comments on the new disclosure. Standards on mortgage origination examinations were published by the CFPB in January 2012. Smaller institutions engaged in mortgage lending have an interest in the new disclosure requirements and need to ensure they are in compliance with new standards.
Also, although smaller financial institutions are not subject to the full supervision authority of the CFPB, the compliance manual makes clear that institutions’ boards of directors will be held to a high standard in assessing potential liability. Thus, with respect to compliance, the minutes and reports prepared by a board of directors must articulate clear expectations, statements about policies and training, compliance officer authority, and allocation of resources to compliance and audit commensurate with the institution’s size. Smaller financial institutions may not be held to the same standard as large national banks, but allocating resources to compliance could yield significant benefits if the CFPB extends its reach. Moreover, such practices promote operational excellence regardless of institution size.
As the CFPB continues to define its goals and priorities, the extent of the CFPB’s effects on community banks will come into greater focus. For now, paying attention to CFPB projects that affect community banks, such as new mortgage lending disclosures, should be a priority. It will benefit smaller banks in the long run to bolster compliance efforts to address some of the CFPB requirements of larger banks – to the extent it is practical to do so.
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