WASHINGTON — The Consumer Financial Protection Bureau was one of the most active regulators in 2013, writing a slew of new rules and taking a host of enforcement actions against banks and nonbanks alike.

But that may pale in comparison to what the agency undertakes in 2014. Many of its actions to date have been laying the groundwork for significant changes still to come.

Lenders already face a major overhaul of mortgage rules due to take effect in January, followed by regulations that observers expect to see this year that would target small-dollar and online loans, prepaid cards and indirect auto lending.

"I expect next year we will see a much heavier emphasis on the regulatory work outside of mortgage loans," said Alan Kaplinsky, who heads the consumer financial services group at Ballard Spahr. "Year after year, there seems to be an unending source of things that the bureau can get involved in. And they have just scratched the surface."

Following are the key areas the CFPB has taken action in already, and what it might be targeting next:

Mortgage Rules
The biggest change the industry faces are new mortgage rules, most of which go into effect on Jan. 10.

Under those rules, lenders will now essentially have to categorize borrowers into those that receive "qualified mortgages" and those that don't. Such mortgages must meet higher underwriting requirements, including a debt-to-income ratio no greater than 43%, but offer greater legal protections to lenders. Lenders still have the ability to make non-QM loans, but must jump through additional hoops to ensure borrowers have the ability to repay the loan.

The rules also ban larger lenders from making balloon loans, revise loan originator compensation limits and expand restrictions on higher-cost mortgages.

In addition to those rules, there is a slew of new servicing standards to ensure servicers are working better with struggling borrowers, providing new, clearer disclosures and properly handling paperwork and error resolution requests.

"You can't talk about QM and the ability-to-repay rule in isolation when you look at the internal efforts going on inside" lenders and servicers for all the rules, said Paul Noring, a managing director in the valuations practice at Navigant Consulting. "The rules are just very complex and there's a lot of care being taken in order to ensure that people and processes exactly line up."

All of these rules were required by the Dodd-Frank Act and finalized by the CFPB in 2013 as means to fix the flaws uncovered by the housing crisis and foreclosure debacle.

Still, many in the industry are concerned about how the new rules will affect mortgage availability for borrowers who don't meet the QM standard and whether investors in the secondary market will purchase non-QM loans.

"The rules have to work well together comprehensively so that people understand them," said Bart Shapiro, a principal at Offit Kurman and a former senior advisor at the CFPB. "If they start jamming together, it will lead to confusion and then we'll just have chaos."

CFPB officials have told lawmakers that they will be sensitive to how the rules will affect credit availability and note that they are required by Dodd-Frank to assess the rules' impact several years after they go into effect. The agency also crafted a large exception that allows any loan approved for purchase by Fannie Mae and Freddie Mac to temporarily be considered as QM.

"Our goal here is not only to stop reckless lending, but to enable consumers to access affordable credit," said CFPB Director Richard Cordray at a field hearing in Baltimore when the final rules were first released last January. "We can draw up the greatest consumer protections ever devised, but if consumers cannot get credit, then there is nothing to protect."

The CFPB has also repeatedly amended the rules, mostly to help ease the regulatory burden on small banks who have threatened to pull back from the mortgage market.

But that has not completely eased industry and even fellow regulators' concerns. In December, a group from the Conference of State Bank Supervisors issued a white paper urging policymakers to carve out broader exemptions for all community banks that keep loans on their balance sheet.

"Our issue right now truly is that the banks are just not sure of taking on what they see as additional risk in an environment where they're already feeling a huge burden," said Shane Deal, deputy commissioner of financial institutions for the Minnesota Department of Commerce, during a conference call on Dec. 9. "I don't think anybody is arguing that there needs to be a look at and verification of an ability-to-repay. But… from our perspective we think all community banks, if they portfolio a loan, should meet the QM standards."

At this stage, the CFPB is unlikely to make further adjustments immediately prior to Jan. 10, observers said, but it remains a mad rush for lenders and servicers to ensure they are ready.

"Everyone is extremely busy. They're focused on the rules and there's still a lot of work to be done … people aren't in the position to go away for the holidays for long periods of time," Noring said. "There are going to be bug fixes and patches at least for the first six months."

Many expect there to be a bumpy start through next year as lenders and regulators adjust to new exams after implementation. Cordray has tried to reassure nervous bankers, telling them that the agency will work with lenders who make a good effort to comply through January.

"We are all in this together, and so we appreciate the urgency and the resources that the mortgage industry is bringing to bear in preparation for the approaching effective dates," Cordray said at the Mortgage Bankers Association's annual conference in Washington Oct. 28. "Let me also say that our oversight of the new mortgage rules in the early months will be sensitive to the progress made by those lenders and servicers who have been squarely focused on making good-faith efforts to come into substantial compliance on time — a point that we have also been discussing with our fellow regulators."

Shapiro said it's unclear when the agency will begin taking punitive action against lenders but he understands regulators need time to create a track record to review for compliance.

When enforcement does come, Shapiro said the CFPB, as well as the other regulators that enforce the new rules for smaller institutions, are likely to take a conservative approach.

"My view is if you're a regulator, it's a lot easier to be strict initially than to go in too loose because then everybody in the industry thinks that's the standard and then there's a shock to the system when you tighten up later," he said. "We're now moving from rule-writing to implementation and at some point, it becomes a routine business examination. And that's going to be what changes the industry."

Payday and Online Lenders
In many ways, the CFPB was almost preoccupied with preparing the new mortgage rules. With them completed, however, many observers said the CFPB will have more time and energy to tackle other areas such as small-dollar lending and prepaid cards.

Many predict a renewed focus on payday loans and deposit-advance products.

"Those are all clustering in the area of small-dollar, short-term credit that the bureau thinks about holistically," said Jo Ann Barefoot, co-chair at Treliant Risk Advisors. "And it will be fostering safe alternatives and probably seeking to rein in on the practices in that area that it feels are misleading or abusive."

The Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency have already finalized guidance on certain deposit-advance products. But the CFPB has a much broader reach as any rules it writes would apply to all lenders, including store front payday lenders and online lenders.

In December, the agency took its first major stop to target online lending when it joined four state attorneys general in a series of actions against CashCall, which serviced loans and collected debt for the online lender Western Sky Financial.

During a conference call with reporters about CashCall's lawsuit Dec. 16, Cordray warned that the young agency is gearing up for further actions.

"We have a lot of work that is ongoing but … has not yet resulted in public filings. But you'll being to see a stream of those as we go into the future," he said. "It just has taken time for us as a new agency to get things into the pipeline and moving through the pipeline. And now we're pretty much to that point."

The agency also recently issued its tentative rulemaking agenda which lists pre-rulemaking for payday loans and deposit advance products to begin sometime in March. It suggested it plans to issue a proposal on prepaid cards in May and for overdraft programs in July.

Debt collectors
The CFPB is also expected to write new rules and release a wave of enforcement actions against debt collectors.

It already unveiled an advance notice of proposed rulemaking against the industry, suggesting the regulations would cover every player in the market, from first-party creditors collecting on their own behalf down to third-party collectors and other debt buyers. It is also expected to restrict how many times a debt is sold and to whom.

The agency's focus is on stopping shoddy practices, including collectors that harass consumers for money they either don't owe or for which data is inaccurate.

"For decades, many consumers have reported various unacceptable practices in the debt collection industry. Today's action will allow us to hear from the public as we consider what rules are needed," said Cordray when the advanced notice was unveiled on Nov. 6. "We want to ensure that all players in the industry are working with correct information, that consumers are fully informed, and that consumers are treated fairly and with dignity."

Though the agency is expected to bring significant change to the debt collection industry, some collectors have said they're hopeful it will weed out the bad actors that have long plagued the industry's reputation.

"The last thing we're going to do is run because of regulatory headwinds. It's not going to put us out of business. It's just unpleasant and sad that we need this," said Clint Sallee, president and chief executive of California-based debt collector Fidelity Creditor Service, in a recent interview. "But I can fully appreciate where the CFPB is headed."

Indirect auto lenders
The financial services industry is far more worried, however, about the CFPB's recent fair lending actions against lenders that partner with auto dealerships.

Of particular concern for the agency are lenders who partner with dealers that are compensated based on the interest rate of the loan. Many auto dealers are generally paid based on the increase from the wholesale rate that the lender first sets.

But the CFPB warned in early 2013 that such practices run the risk of being cited for violations if it appears that minorities are being charged higher rates, even if such discrimination is unintentional.

The use of disparate impact is controversial particularly with non-mortgages since such loans do not legally have information on the race or ethnicity of a borrower. As a result, regulators use "proxy" data to try to determine the legal status of a borrower.

Lawmakers and the industry have repeatedly asked the CFPB for more details of its methodology, but the responses the agency has provided have only provoked more questions. In short, the agency maintains it uses a similar method to determine the status of a borrower as the Justice Department and other federal agencies.

The debate over the issue hasn't stopped the CFPB from taking action. On Dec. 20, the CFPB solidified its stance by reaching a $98 million settlement with Ally Financial over claims it discriminated against minorities through its indirect auto lending business. Observers expect more actions soon.

Ally's consent order "was really the first domino to fall and we know they're investigating a lot of other companies for the same practice," Kaplinsky said. "I would expect to see more consent orders like that unless somebody challenges them in court."

Though the agency has not indicated it would create new rules for the indirect auto finance industry, Kaplinsky said it is likely to do so. He pointed to the CFPB's rulemaking agenda, which left a slot to cover so-called larger participants "for supervision of certain nonbank covered persons."

Overall, observers said the CFPB is gearing up for more enforcement actions in a host of areas. In December alone, it announced six settlements that reinforced its stance on areas like auto finance and add-on products as well as cemented key partnerships with state and federal authorities.

"I don't know how many investigations they have ongoing but I've got to believe it's well over 100 just based on how many we have," Kaplinsky said. "We alone have 14 that are ongoing right now and … the volume of investigations at the bureau continues to increase."

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