WASHINGTON — It was a year of firsts for the Consumer Financial Protection Bureau in 2012 as it finalized its first rule, took its first few enforcement actions and struck its first deals with state regulators and municipalities to enhance data sharing.

But the real challenges for the agency — and the banking industry — lie ahead as the CFPB next year is expected to complete new rules covering a broad swath of the market and significantly ramp up its enforcement against banks and nonbanks.

"I can't recall ever seeing so many regulations hitting so quickly across such a wide spectrum of industries," said Jo Ann Barefoot, co-chair at Treliant Risk Advisors. "It's going to be a challenge to implement."

Rules

The CFPB is required to finalize a slew of new mortgage rules by Jan. 21, including regulations governing so-called qualified mortgages, originator compensation, high-risk appraisals, high-cost mortgages, escrow requirements and force-placed insurance. Many lenders are anxiously waiting to see how these new rules will affect the entire lending process — from disclosures to relationships with third-parties like appraisers and determining who qualifies for a loan.

The final mortgage rules "will dramatically change the way mortgages are written as well as access to credit," said Leonard Chanin, a partner at Morrison & Foerster who recently served as the assistant director of the CFPB's regulations division. How these mortgage rules are written "will send a message from the bureau as to what they think practices should be, aside from what they are legally required to do through the Dodd-Frank Act."

The chief concern among bankers is how the agency will define qualified mortgages. Under Dodd-Frank, lenders must ensure they sell mortgages only to those with the ability to repay. But the law creates an exception for qualified mortgages.

As a result, most lenders are expected to make loans that are considered qualified mortgages, putting even more pressure on the CFPB to ensure the definition is workable. If new requirements are too strict, it will squeeze out potential homeowners with low-to-moderate income. If they are too vague, however, it could make lenders afraid to lend at all.

"Depending on how the CFPB defines qualified mortgage and the ability to repay, it could restrict credit," Chanin said. "It's hard to write a rule that, in essence, deals with the ability to underwrite."

Also unclear is what kind of protection the CFPB will provide lenders that make qualified mortgages. Banks have pushed for a safe harbor, which would mean that they are protected from consumer lawsuits if a loan is a qualified mortgage. Consumer groups, on the other hand, are lobbying the agency for a rebuttable presumption, a less strict standard that would still allow lenders to be challenged in court.

But the qualified mortgage rule is just the start of a series of rules related to mortgages. Another key change expected later in the year is the consolidation of two mortgage disclosure documents: the Truth in Lending Act and Real Estate Settlement Procedures Act forms. Most bankers have encouraged combining the disclosures to ultimately make for a smoother process for both the lender and consumer.

But lenders are wary of the implementation process needed to comply with many changes to forms, which won't just affect documents, but the entire system. For example, regulators are pushing lenders to create a single point of contact for mortgage borrowers rather than the layers of silos most lenders have long used to save costs, said Jeff Hulett, managing director in KPMG's financial services credit risk practices.

"It's really forced big-box servicers to go back and view their systems, view skill sets of people and implement new business models around a single point of contact," he said. "That approach is much more expensive."

Supervision and Enforcement

Even as it finalizes new rules, the CFPB is also expected to step up its supervision and enforcement activities.

"A key thing is to get the examination and supervision process really going," said Barefoot, who is on the CFPB Consumer Advisory Board. "Both the bureau and the [financial] industry feel they really need to get that going well."

The CFPB has already begun supervision of the large banks, giving some insight into how the bureau proceeds with its examinations. But most of these exams have not been closed yet, said Linda Gallagher, head of KPMG's financial services regulatory practice.

"The CFPB had a more immediate and profound impact than at least I, personally, anticipated," Gallagher said. "Even in the manner in which their examiners conducted pre-exam reviews, it's certainly got the attention of the industry."

For example, multiple consultants noted that the CFPB is bringing enforcement attorneys into an exam, making it unique among the banking regulators.

"Historically, in the banking industry when a routine exam was going on, the enforcement attorneys were only brought in if the examiner thought there was a major issue," she said. "As you can imagine, when enforcement shows up, it tends to inhibit strain in dialogue."

In an interview earlier this year, CFPB Director Richard Cordray defended the practice, saying the agency wants enforcement to be better integrated into the supervisory process.

"From the beginning, this bureau integrated enforcement and supervision," he said. "We want supervision examiners to understand the role of enforcement. But we also — and this is important and the banks miss this — we want the enforcement attorneys to understand the role of examination and supervision."

Gallagher also noted that CFPB examiners have taken a particular interest in a bank's third-party vendors as well as its fee-based products for consumers, such as credit cards and how they monitor credit.

Because of this, financial service companies "have undertaken a review of their fee-based products to assess whether customers are driving value," she said. "In some cases, they are exiting those products."

Observers said the CFPB is likely to continue in-depth monitoring of third-party vendors when examining lenders.

Some third-party "providers like attorneys are absolutely not used to being managed that way and it will be a little bit of a culture shock," Hulett said. "Third parties are feeling that they're under the microscope because it's a new way of operating."

The CFPB has taken just a handful of enforcement actions this year, but they have been primarily focused on banks' third parties. Its first two orders, against Capital One and Discover, were focused on the marketing of the banks' payment protection plans.

Observers said the agency will increase and expand its enforcement actions in the New Year as it has more time to complete investigations.

"You will see more enforcement actions," Barefoot said. "And I would expect they will be hitting some new areas" of consumer finance as well.

Chanin agreed, adding he expects to see more actions against violations of fair lending and overdraft laws next year as well as supervision of auto loans.

"There's no shortage of potential topics they're focused on," he said.

Infrastructure

What the CFPB might target next is unclear, but the agency has been on a data-collecting whirlwind this year. Between taking consumer complaints on a variety of financial products, including credit cards, mortgages and student loans, the agency has also sought highly detailed information from lenders.

CFPB examiners "have requested and are continuing to request massive, almost unimaginable, amounts of data" from financial institutions, Gallagher said. "Some of these are 70-odd pages in request letters."

The CFPB has said that it is gathering information from credit reporting agencies to build a more extensive national mortgage database that will begin releasing information next year. Most of the data gathering the CFPB has announced to date was to help the agency make policy decisions or satisfy reports required by Congress.

Gallagher said her banking clients don't know what all the information collected will be used for as the expanse of questions have gone beyond typical consumer-related queries.

"We're trying to read the tea leaves and say 'why are they focused on something like liquidity'… that's a safety and soundness matter," she said. But "companies need to understand what their business model is and what impact does that have on consumers."

Another major unknown is the CFPB leadership in 2014. Cordray's recess appointment expires at the end of 2013 and the deputy director, Raj Date, is expected to leave at the end of next month.

It is unclear whom the Obama administration will choose to succeed Date, or whether it will seek to confirm someone new through the Senate (Republicans have said they will not approve any nominee unless structural changes are made to the agency.)

"There is a real question about continuity of leadership" after 2013, Chanin said. "Particularly when you have a new organization that is establishing policies."

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