Since the credit crisis, the focus on consumer financial protection has escalated.
This has included an increased intensity in consumer compliance examinations, the passage of the Mortgage Disclosure Improvement Act of 2008, the Credit Card Accountability, Responsibility and Disclosure Act of 2009 and other recent changes in consumer law and regulations at the state and federal levels, along with stricter interpretations and enforcement of existing rules.
Though the financial services industry had already seen sweeping change through the MDIA and CARD Act, the Dodd-Frank Act went further, applying similar principles to change the way that all those who provide covered services will do business throughout the consumer financial life cycle.
Some companies are still grappling with the implications of the recent regulatory changes. With new disclosure requirements and restrictions on interest rate increases, fees and marketing practices, as well as limitations on repricing, consumer lenders are finding a need to be more averse to risk while adjusting to the effect that the new rules have on their revenue streams.
Careful planning is crucial to success in implementing and adapting to the changes required by the Dodd-Frank Act. Institutions will have to understand the law's full impact across business areas.
For most institutions, the Dodd-Frank Act will require a broad array of strategic changes in addition to process and system changes. The development of a road map to properly address these changes will be required and should take account of the following as it is being developed.
First, understand what changes are necessary:
• Evaluate current practices relative to areas of focus in the Dodd-Frank Act (for example, ability-to-repay standards and compensation strategies for mortgage products).
• Define required short-term changes in business practices, policies and procedures.
• Define changes in systems and controls (for example, enhancements in complaint monitoring and compliance governance).
Second, address short-term priorities:
• Assess current technology in anticipation of the need for significant changes (for example, additional data collection and reporting requirements).
• Enhance current compliance program attention on areas of focus under the Dodd-Frank Act such as unfair and deceptive acts or practices, fair lending for small businesses, the Home Mortgage Disclosure Act.
• Enhance governance for evaluating business practices and how customers are treated, including the complaint management processes.
Third, plan for change:
• Begin building processes for modifying business practices in anticipation of required changes such as compensation policies and product offerings.
• Assess current operational processes in anticipation of the need for significant changes (for example, verification of income, new disclosures).
• Assess the revenue impact of changes, as in transaction fees, and identify mitigation.
• Establish project management teams to address required business changes by the affected lines of business.
The challenge lies in the additional strain on already limited resources and an already stressed bottom line. However, some financial institutions will realize the benefits inherent in the ability to use newly formed processes and procedures designed in the wake of the CARD Act as a starting point for Dodd-Frank Act compliance.
Though many parts of the new laws have yet to be defined, we are already seeing changes in the marketplace, with consumer lending institutions advertising their approaches to providing clear disclosures — describing the terms of loans to consumers and giving speedy access to live customer service contacts.
As the Consumer Financial Protection Bureau exercises its power to create rules and broaden existing ones, it is impossible to gauge the implications. However, taking clues from the CARD Act and what has been defined, along with the overall tone, we can assume that additional changes will be extensive but not impossible to manage.