In the year and a half since opening its doors, the Consumer Financial Protection Bureau has hired more than 1,000 staffers, collected 90,000 consumer complaints, and begun supervising many of the 153 banks under its authority. The fledgling agency—a product of the 2010 Dodd-Frank financial overhaul—released its most ambitious new policy on Jan. 10: a set of rules that will shape the future of mortgage lending. “They have had a monumental impact for an agency that has only really been operational for a year,” says Alan Kaplinsky, an attorney at Ballard Spahr who represents companies on matters before the bureau.
The brainchild of then-Harvard Law School professor Elizabeth Warren, the CFPB is charged with preventing banks and other financial companies from taking advantage of consumers. Early hires reminisce about the pioneer spirit of the founding days, when Warren rallied the small staff, the office had a softball team, and colleagues often repaired to the Exchange Saloon after work.
The agency is no longer operating in startup mode. It has trained its staff, is redesigning its offices, and hosts internal “lunch and learn” sessions on work-life balance. It’s also ticking through its daunting Dodd-Frank to-do list, including requirements to write 44 specific rules, publish 11 reports, and conduct four studies, according to the law firm Davis Polk & Wardwell’s analysis of the law.
In addition to monitoring banks, the CFPB oversees debt collectors, private student lenders, credit reporting firms, and payday lenders. Many of these businesses have never been under federal supervision. “The challenge is there is not the same compliance culture in some of these nonbank entities that there is in banks,” says Richard Cordray, who succeeded Warren as head of the bureau a year ago. (Warren was elected to the U.S. Senate from Massachusetts in November.) “If we rebuild trust in these markets and make them more reliable and more accountable, that’s in everybody’s interest,” Cordray says.
The agency has made some controversial departures from the way bank regulators go about their business. At most agencies, supervision and enforcement staff operate independently. At the CFPB, enforcement attorneys tag along with examiners when they visit a company to look over its records. Some industry lawyers, as well as the bureau’s ombudsman, have raised concerns that this makes companies hesitant to share information. Cordray counters that it helps enforcement attorneys understand that every infraction doesn’t demand a lawsuit. “This was part of my education coming here,” says Cordray, pointing out that in his previous job as Ohio attorney general the threat of a lawsuit was his only tool.
In its first enforcement actions, the bureau fined three credit-card providers a combined $101.5 million, plus $435 million in restitution, for problems including misleading customers about the fees and features of credit-card add-on products such as identity theft protection. The agency also published a list of what it looks for when evaluating add-on products. Soon after, JPMorgan Chase (JPM), Bank of America (BAC), American Express (AXP), and others voluntarily canceled theirs.
Leonard Chanin, the bureau’s former regulations head who decamped to law firm Morrison & Foerster, says it can be “risky” if the bureau’s list of expectations replaces the deliberative and detailed process of writing rules: “You are basically creating policy without any input other than the bank you are taking action with.”
Despite such criticism, the CFPB hasn’t been the one-sided force the industry feared. “They are not reflexively doing everything they can to help consumers and screw the industry,” says Kaplinsky. After an industry outcry, the bureau amended disclosure requirements for international wire transfers and delayed the rule’s implementation.
One of the most arduous tasks has been writing mortgage rules, whose centerpiece is the “qualified mortgage.” For prime loans, if lenders follow the agency’s strict guidelines, such as not approving borrowers whose ratio of debt to income exceeds 43 percent, they will get some protection against lawsuits. Says Cordray: “We are really looking forward to getting through the mortgage rules so we can start to take on other issues.” Payday lenders, prepaid card providers, and banks that charge overdraft fees: You’re among the groups up next.