Will Honeymoon Period for CFPB End in 2012?

WASHINGTON — Despite the hand-wringing and nail-biting, the Consumer Financial Protection Bureau made it through 2011 without any major confrontation with the banking industry.

To be sure, lawmakers complained about the agency's involvement in the global mortgage servicer settlement earlier in the year. But for the most part, the CFPB focused on public initiatives with widespread support, issued a series of requests for information from the industry and consumers and launched a supervision program that hews closely to the examination guidelines used by prudential regulators.

In turn, the feedback from the banking industry has been largely positive. Just don't expect it to last.

"I think they've done everything this year by the book," Jeffrey Taft, a partner with Mayer Brown LP, said of the agency. "They've been very cautious — calling things notices rather than proposed rules, requests for comments rather than proposed rulemakings — and done a very good job of adhering to the letter of Dodd-Frank and the authority they currently have."

But Taft said 2012 will likely be different.

"I think next year may be a year where they start to push the envelope a little bit," he said.

The CFPB's agenda alone is enough to invite more controversy.

Early in the year, it is expected to finalize a Federal Reserve Board proposal requiring lenders to verify a borrower's ability to repay a mortgage — one of the more contentious provisions of the Dodd-Frank Act.

The agency is also working with other federal regulators to develop national mortgage servicing standards amid continued criticism of servicers' foreclosure practices.

"In terms of tangible kind of policy results, clearly mortgages" will be a priority for the CFPB in 2012, Raj Date, the bureau's de facto director, said in an interview with American Banker this month. "Because the statute and any sense of reality would dictate that there have to be reforms in the mortgage marketplace, and Dodd-Frank mandates that we execute against some subset of that."

Observers also have been waiting for the bureau to release more guidance on how it gathers and shares information, a particularly sensitive topic for supervised institutions that have long been able to share data with regulators with assurances that it was privileged and protected information. Under Dodd-Frank, institutions are not assured those same protections when they share information with the CFPB.

Industry observers also expect to see more action from the bureau's enforcement unit as its supervision team digs deeper into large-bank consumer practices.

"There is certainly concern in terms of how much can the agency do given that it doesn't have a confirmed director," said Kevin Petrasic, a partner with Paul Hastings LLP in Washington. "However, there are things that the agencies can do, working with states and other federal banking agencies. I would expect the agency would start to become more active or aggressive in terms of using the options that it does have to work with other agencies."

Although President Obama has nominated Richard Cordray as director of the CFPB, the nomination is not expected to clear the Senate anytime soon. Senate Republicans have vowed to block any nominee unless changes are made to the agency's structure.

Until the Senate confirms a director, however, the agency's powers are limited. For example, it cannot regulate nonbanks, but must focus its attention solely on banks.

Even without a permanent director, the bureau managed to tackle a number of projects in 2011.

Supervision

On July 21, the agency officially inherited supervision authority over banks with more than $10 billion of assets.

Since then, the agency has released a supervision and examination manual, based on many of the same practices and guidelines used by prudential regulators in their safety and soundness exams. It also released a special section with guidelines for examining mortgage-related products in particular, and plans to update the manual with similarly detailed guidance for other consumer products and services.

The agency also has been meeting with executives from the banks it will oversee.

"This bureau, it's obviously a new agency, so it has many of the characteristics of a startup," said Amy Brachio, a partner with Ernst & Young's financial services office.

"So financial institutions are working to establish a process that provides a good introduction for the bureau, but at the same time has thought about the level of detail and the timing of providing the information so that the introduction isn't overwhelming."

Although the bureau doesn't have supervision authority over nonbanks yet, it has requested comment on a proposal that would define the term "larger participant," the first step in the process to determine which nonbanks will ultimately be supervised.

Know Before You Owe

One of the most visible initiatives was the CFPB's Know Before You Owe project, launched in May with the release of a simplified, model mortgage disclosure. The single-page, double-sided prototype — meant to combine the Truth In Lending Act and Real Estate Settlement Procedures Act requirements — earned praise from the banking industry, which has long been pushing for a simplified form.

In October, the bureau announced it was extending the project to student loans, and proposed a standardized financial aid offer letter that would give students a clear picture of the long-term costs and risks of those loans up front.

The CFPB's proposal for a streamlined credit card agreement, released in December, was met with some skepticism by bank lawyers concerned about legal requirements.

Infrastructure

The bureau spent much of the first part of the year filling out its ranks and developing the internal systems it needed to take over authority for consumer financial protection laws on July 21.

At Dec. 20, the bureau had 745 employees — nearly half of the 1,500 or so that CFPB officials have said they plan to hire over the next couple of years. The agency's top officials include a mix of industry veterans and consumer protection experts, including former state and federal officials and academics.

"I think they've done a very impressive job of recruiting talent," said Jo Ann Barefoot, a co-chairman of Treliant Risk Advisors. They have hired "a lot of very interesting, impressive people who are trying to be highly innovative, so I think they've been successful in creating a dialogue that is robust and innovative and aimed at some better solutions."

The bureau also launched an online portal to begin taking consumer complaints about credit cards, and had resolved more than 3,100 of the 5,000 complaints it received by Nov. 30. It began accepting complaints related to mortgage products on Dec. 1.

The agency also opened its ombudsman's office in December to handle complaints about the bureau itself. And it launched a hot line and exclusive email address for whistle-blower tips from employees who know about violations of consumer financial protection laws.

Outreach

Representatives from the bureau's consumer education division, which includes the offices focused on servicemembers, older Americans and students, have traveled across the country to meet with consumers about the challenges and concerns they have with consumer financial products and services. It also has hosted town halls for consumers in Cleveland and Minneapolis.

To augment its face time with consumers, the bureau has issued a slew of requests for feedback on everything from military products and student loans, to efforts to streamline regulations.

It also has reached out to other state and federal officials, forming cooperative working agreements with state attorneys general, the military's Judge Advocate General, and the special inspector general for the Treasury Department's Troubled Asset Relief Program.

The bureau's early activities have left the industry with little to complain about so far, at least in public. Privately, however, some are still wondering whether these efforts — from streamlining regulations to revamping disclosures — are actually meaningful, or merely good public relations opportunities for the agency. They're eager to find out in 2012.

"Invitations are cheap to print and mail, but actions in this context are really going to demonstrate what the bureau is all about," said L. Richard Fischer, a partner with the law firm Morrison & Foerster. "It's one thing to say we're prepared to do this; it's quite another to actually do it."

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