1 CFPB Update GCOR XI April 5, 2017 Edward J. DeMarco, Jr., General Counsel & Director W. Bernard Mason, Regulatory Relations Liaison -- Operational Risk & The Risk Management Regulatory Relations Association The Risk Management Association
2 Mission We are the Consumer Financial Protection Bureau, a U.S. government agency that makes sure banks, lenders, and other financial companies treat you fairly. Source: https://www.consumerfinance.gov/
3 CFPB Formation In July 2010, Congress passed and President Obama signed the Dodd- Frank Wall Street Reform and Consumer Protection Act. The Act created the Consumer Financial Protection Bureau ( CFPB ). The CFPB consolidates most Federal consumer financial protection authority in one place.
4 CFPB S Agenda To make consumer financial markets work for consumers, responsible providers, and the economy as a whole. To protect consumers from unfair, deceptive, or abusive practices and take action against companies that break the law. To arm people with the information, steps, and tools that they need to make smart financial decisions. Note: the CFPB is an enforcement agency, not a prudential regulator. The Dodd-Frank Act provides that: The Bureau may take any action authorized under part E to prevent a covered person or service provider from committing or engaging in an unfair, deceptive, or abusive act or practice under Federal law in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service. The Bureau may prescribe rules applicable to a covered person or service provider identifying as unlawful unfair, deceptive, or abusive acts or practices in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service.
5 An Enforcement Agency The central idea behind the creation of the CFPB was the need to increase accountability by consolidating core consumer financial protections that were scattered across government. Previously, seven different federal agencies were responsible for consumer financial protection, but none of those agencies viewed consumer financial protection as their top priority.
6 Structure & Budget The CFPB operates as an autonomous agency within the Federal Reserve System, meaning that the Federal Reserve has no authority over officers of the CFPB, and cannot approve or reject the CFPB s rules or orders. Under the Dodd-Frank Act, the CFPB is funded by transfers from the Board of Governors of the Federal Reserve System. The CFPB can request funds from the Federal Reserve that are reasonably necessary to carry out its consumer financial protection functions, but the CFPB s funding from the Federal Reserve is capped at a pre-set percentage of the total operating expenses of the Federal Reserve, subject to an annual adjustment.
7 Structure & Budget Under Dodd-Frank, the CFPB is headed by a single director appointed for a five-year term by the President. Significant power is reserved to the Director; i.e., the Director is empowered to determine on an annual basis the amount of Federal Reserve funding that will be reasonably necessary, subject to the annual spending cap.
8 CFPB Funding Request
9 CFPB Funding Requests Since its inception the CFPB has requested an aggregate of almost $3 billion in funding, as follows: Fiscal Year Funding Request Aggregate 2010 $18,400,000 $18,400,000 2011 $131,200,000 $149,600,000 2012 $343,281,000 $492,881,000 2013 $518,400,000 $1,011,281,000 2014 $533,800,000 $1,545,081,000 2015 $485,100,000 $2,030,181,000 2016 $564,900,000 $2,595,081,000 2017 (to date) $391,800,000 $2,986,881,000
10 Regulation In July 2011, the CFPB assumed responsibility for enforcement of existing consumer related banking regulation including Regulations Z, X, B, C, V, etc. Since inception the CFPB has focused its efforts on: Mortgages Prepaid cards Consumer reporting Arbitration Sales and Production Incentives Small business lending
11 Mortgages In 2016, the CFPB outlined consumer protection principles to guide mortgage servicers, investors, government housing agencies, and policymakers as they develop new foreclosure relief solutions. The principles announced by the CFPB call for assistance to consumers facing foreclosure that is: Accessible Consumers should easily be able to obtain and use information about loss mitigation options, and how to apply for those options Affordable Repayment plans and mortgage loan modifications should generally be designed to produce a payment and loan structure that is affordable for consumers Sustainable Loss mitigation options used for home retention should be designed to provide affordability throughout the remaining or extended loan term Transparent Consumers should get clear, concise information about the decisions servicer make.
12 Prepaid Cards On October 5, 2016, the CFPB announced its final rule addressing protections for prepaid account users. The new rule requires financial institutions to limit consumers losses when funds are stolen or cards are lost, investigate and resolve errors, and give consumers free and easy access to account information. The CFPB also finalized new know Before You Owe disclosures for prepaid accounts to provide consumers with information about fees and other key details. The rules also require prepaid companies to offer protections similar to those for credit cards if consumers are allowed to use credit on their accounts to pay for transactions that they lack the funds to cover. On March 9, 2017, the Consumer Financial Protection Bureau issued a proposal to delay the effective date of the agency s rule governing prepaid accounts by six months. The CFPB explained this proposed delay by citing its recognition that some industry participants fear they will have difficulty complying with certain provisions of the rule by the current October 1, 2017 effective date. The CFPB expressed its view that a six month delay will be sufficient for industry participants to ensure they can comply with the rule.
13 Consumer Reporting On March 2, 2017, the CFPB released a report detailing the problems in the credit reporting industry. According to the CFPB, it has handled approximately 185,700 credit reporting complaints as of February 1, 2017. The CFPB is focusing its efforts on: Data accuracy at consumer reporting companies; and Dispute processes at consumer reporting companies
14 Arbitration On May 24, 2016, the CFPB issued an NPR which would prohibit financial institutions from including class action waivers in pre-dispute arbitration agreements with consumers ( arbitration agreements ). The CFPB s conducted a study regarding banks use of arbitration agreements that led it to conclude that class actions provide a more effective means for consumers to challenge problematic practices by financial services providers. The CFPB says its preliminary findings, which are consistent with the study, show that pre-dispute arbitration agreements are being widely used to prevent consumers from seeking relief from legal violations on a class basis, and that consumers rarely file individual lawsuits or arbitration cases to obtain such relief.
15 Sales Practices & Incentives On November 28, 2016, the CFPB issued a bulletin warning financial companies that creating incentives for employees and service providers to meet sales and other goals can lead to consumer harm if not properly managed. The CFPB warned that tying bonuses or employment status to unrealistic sales goals or to the terms of transactions may intentionally or unintentionally encourage illegal practices such as unauthorized account openings, unauthorized opt-ins to overdraft services, deceptive sales tactics, and steering customers into less favorable products. Specific examples of problems include: Opening accounts without consent: Sales goals and incentives may encourage employees and service providers, either directly or indirectly, to open accounts or enroll consumers in services without their knowledge or consent. Consumer harm can include unauthorized fees, improper collections activities, or negative effects on their credit scores. Misrepresenting benefits of products: Sales benchmarks may encourage employees or service providers to market products deceptively to consumers who may not benefit from or even qualify for the products. Steering consumers towards less favorable products or terms: Consumers may be placed in less favorable products than they qualify for or may be sold more products or credit than they requested or needed.
16 UDAAP The Bureau may take any action authorized under part E to prevent a covered person or service provider from committing or engaging in an unfair, deceptive, or abusive act or practice under Federal law in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service. The Bureau may prescribe rules applicable to a covered person or service provider identifying as unlawful unfair, deceptive, or abusive acts or practices in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service. Rules under this section may include requirements for the purpose of preventing such acts or practices.
17 UDAAP Since its formation, the CFPB has brought more than 100 enforcement actions under UDAAP. Perhaps more importantly, the language of the UDAAP provision is broad and vague, allowing the CFPB to rely on its UDAAP authority to challenge conduct it finds troubling, even if not in violation of any express legal requirement. https://www.skadden.com/insights/cfpb-definesunfair-deceptive-and-abusive-practices-throughenforcement-activity
18 PHH v. CFPB The CFPB brought an administrative action against PHH for PHH s alleged violation of Section 8 of the Real Estate Settlement Procedures Act (RESPA) to prohibit captive reinsurance arrangements. The ALJ recommended that PHH be required to disgorge more than $6 million in damages Both the CFPB and PHH appealed the ALJ decision. The appeal was heard by Director Cordray who ordered PHH to disgorge approximately $110 million. PHH appealed to the Court of Appeals for the District of Columbia Circuit, which held that (i) the CFPB was unconstitutionally structured and (ii) Section 8(c) of RESPA allows captive reinsurance arrangements provided that the amount paid by the mortgage insurer for the reinsurance does not exceed the reasonable market value of the reinsurance.
19 Future of the CFPB In February, the U.S. Court of Appeals granted the CFPB s motion for a rehearing en banc in the PHH case thereby vacating the panel s earlier ruling that the CFPB was unconstitutionally structured. The Justice Department has signaled the Administration s opposition to the CFPB in a brief filed March 17 the CFPB s single director structure poses Separation of Power problems There is a great risk that an independent agency headed by a single director will engage in extreme departures from the president s executive policy. Senator Ted Cruz proposed SB 370 which would repeal the Consumer Financial Protection Act; an identical bill was proposed in the House. An alternate bill has been filed which would not threaten the CFPB s existence but would make its funding subject to Congressional appropriation. Yet another bill would address the structure of the CFPB, eliminating the single director and institution a 5-person bipartisan commission.