LAS VEGAS-The Consumer Financial Protection Bureau is a new kind of regulator, and will be a "work in progress" for some time.
And that means credit unions better be prepared for ongoing changes in rules from a very powerful agency, according to Michael Benoit a partner with Hudson Cook LLP, a Washington, D.C.-based law firm that specializes in consumer financial services. Benoit told attendees of the recent CU Direct Lending Conference here the Bureau's mission-to protect consumers-is a "great one," but the "problem" is how the new regulator is going about its business.
"The CFPB has a broad reach that is unprecedented," he declared, noting its budget for 2012 was $550 million. He described it as "similar to a start-up company" in that the people in charge are still "figuring out how to do things."
Inexperience An Issue
One of the biggest issues, according to Benoit, is many CFPB examiners "have never worked in financial services," yet they are charged with overseeing financial institutions.
"The CFPB has misaligned internal agendas due to silos," he said. "The enforcement group is far more aggressive than the examination folks. The Bureau makes large document requests to be produced in a short timeframe, and without reason."
Benoit said a CFPB examiner's role is limited to assessing compliance with federal consumer financial law. The CFPB is authorized to examine credit unions with assets in excess of $10 billion, but it can require reports from CUs with less than $10 billion. Reports are related to detecting and assessing risks to consumers and financial markets.
The 'Four D's'
The CFPB is giving priority to the "Four Ds"-deception, debt traps, dead ends and discrimination, Benoit reported, explaining that:
Deception covers acts, practices or representations that mislead a consumer. One example is Capital One and its debt protection insurance. Those calling to cancel coverage were told they could not do so, which was false. This led to a hefty fine for Capital One.
Debt traps include payday loans and deposit advance loans. This area has what Benoit termed a "rather subjective" definition of "products that trap consumers in a cycle of debt." Many people in the U.S. live paycheck to paycheck, and need a support system of some sort, so Benoit wondered exactly how enforcement will shake out.
Dead ends relates to situations in which consumers cannot choose their provider of financial products and services, such as debt collectors, loan servicers or credit reporting. The CFPB has not done anything with this area, yet.
CFPB's 'Especially Concerned'
Discrimination can be overt, or simply disparate treatment. Redlining is disparate treatment by definition, for example not lending to anyone who lives in a particular ZIP code. The CFPB is "especially concerned" how discretion is exercised in pricing, underwriting and servicing, he explained. "The Bureau does not like discretion. If an examiner asks why exceptions were made, the financial institution must be able to show how the file supports it."
Related to the latter, the CFPB is looking closely at indirect lenders. Benoit told the audience he is not stating explicitly, but rather is suggesting the Bureau would like to see dealers get paid a flat fee instead of buy-rate incentives.
"Big banks are arguing this impacts them more," he said. "The CFPB tells banks it is finding disparate impact in their portfolios, but it has not issued a specific rule. The guidance says if dealers are allowed to mark up the rate there needs to be a robust monitoring system in place."
Benoit said he believes eventually indirect lending will see buy rates turning into resale rates, and dealers will be given some number of basis points out of every deal.
"And at the end of the day that is the same thing," he said. "The next fight will be how many points a credit union is giving to a dealer versus how many points a bank is giving the dealer."
Watch Those Vendors!
The CFPB wants to see compliance management systems in place, including vendor management. It wants to know volume and nature of consumer complaints received, as recorded in logs, along with evidence of root cause analysis and remediation.
Benoit warned credit unions the CFPB will treat vendors as if they are employees of the CU-making the credit union responsible.
"Every credit union needs to have clear expectations for compliance written into contracts with third-party service providers," he advised. "Any action or inaction that breaks any CFPB rule, the CU is responsible. The CFPB expects robust procedures for evaluating compliance. The credit union needs to show what was in effect at what time."
Fair Lending
The CFPB will test 100+ variables over a two-year period to ensure a fair lending compliance management program is in place. Benoit said CUs must be able to produce data quickly.
"To deal with this, there must be a culture of compliance in the credit union," he said. "Credit unions must document, document, document. Even for credit unions that are used to documentation, they might want to take it to the next level."
