On Its First Birthday, Consumer Bureau Flexes Its Muscle

U.S. Consumer Agency Girds for Enforcement Action in Second Year
The Consumer Financial Protection Bureau will uncork its enforcement powers for the first time “in a matter of months,” said Richard Cordray. “It will be a fairly steady clip.” Photo: Joshua Roberts/Bloomberg

One year after the U.S. Consumer Financial Protection Bureau began operating as an independent agency, Director Richard Cordray says it has achieved one of its chief goals: getting Wall Street to pay attention.

“I do think we’re keeping the industry on their toes,” Cordray said in an interview before the agency brought its first enforcement case yesterday -- a $210 million settlement with Capital One Financial Corp. for deceptive marketing.

The consumer bureau may be the most visible creation of the Dodd-Frank Act, the overhaul of financial regulation that President Barack Obama signed into law two years ago. Much of the work mandated by the law remains incomplete, including regulations with wide impact on the banking industry such as the so-called Volcker rule banning proprietary trading.

During the past year the consumer agency went to work laying the groundwork for oversight of banking products and services. Beside its newly deployed enforcement powers, the bureau is poised to set rules for areas including mortgage servicing, mandatory arbitration and the billions of dollars in fees customers pay each year for overdrawing checking accounts.

“I expect to see a lot more decisions and impacts on the market in the coming year, and those will create some real battles with the industry,” said Reid Cramer, who studies banking services for low-income people at the Washington-based New America Foundation.

Obama has touted Dodd-Frank and the creation of the consumer bureau as one of his administration’s key legislative accomplishments. Mitt Romney, the presumptive Republican presidential nominee, has pledged to repeal the law if elected.

Republican Opposition

Banking lobbyists and Republican lawmakers opposed the idea of the consumer agency when it emerged, arguing it would limit choice in financial products and curtail credit. If Republicans win control of the White House and Congress in the November elections, they would be able to pass legislation they’ve proposed to replace the director with a five-member commission and restrict the agency’s funding.

The Republican-controlled House has also passed bills that would delay, roll back or modify other parts of Dodd-Frank, including rules governing swaps and insolvent banks. Opponents of the regulatory law say it is too complicated, puts a costly burden on banking workers and doesn’t reduce risk in the financial system.

“Discussions about the economic burden of the Dodd-Frank Act must continue,” Steve Bartlett, president of the Financial Services Roundtable, said in a statement. “As we continue to work our way out of the economic decline, surely there is more useful work for these employees.”

Payday Lenders

The debate in Congress hasn’t yet changed the bureau’s course. Last July it began supervision of banks with over $10 billion in assets for compliance with federal consumer-protection laws. On Jan. 5, after Obama installed Cordray as the bureau’s director, it began examining payday lenders, mortgage originators and servicers, as well as private student lenders.

“We have access to their records,” Cordray said. “We see what they are doing.”

Yesterday’s settlement gave a first look at the agency’s enforcement agenda. Capital One agreed to pay $210 million to settle claims from the bureau and the Office of the Comptroller of the Currency that the firm deceived consumers in marketing credit card “add-on” products such as debt cancellation and credit monitoring. The McLean, Virginia-based firm didn't admit or deny wrongdoing.

“We are putting companies on notice that these deceptive practices are against the law and will not be tolerated,” Cordray said during a conference call with reporters yesterday.

Warren Statement

Noting that other companies market similar products with similar tactics, he promised in the interview that enforcement actions would now come “at a fairly steady clip.”

The action was praised by Elizabeth Warren, the Harvard professor whom Obama tapped to set up the agency before it officially started work. “The new consumer agency is only one year old, but it is fearless,” Warren, now running for the U.S. Senate from Massachusetts, said in a statement.

The bureau’s activities may already be changing some bank practices. In July 2011 the agency started up a system for collecting consumer finance complaints. Over the objections of banking groups, Cordray in June announced that the complaints would be open to public review. While the individual details are blocked out, anyone can now see whether consumers have criticized Bank of America Corp. or Wells Fargo & Co. over issues with credit cards, mortgages or checking accounts.

An informal survey of banks published this month by the law firm Mayer Brown found that 28 percent have altered their complaint-resolution systems in response to the system. Also, 22 percent said they created new procedures for evaluating possible consumer harm from their services.

‘Most Accessible’

Before he decided to make the database public, Cordray, along with other senior officials and the bureau’s staff, attended industry conventions, met with bankers visiting Washington and huddled with executives in New York.

“To date this agency has been the most accessible of any I’ve ever dealt with in this town,” Richard Hunt, head of the Consumer Bankers Association, said in an interview. “It’s not even close.”

Hunt, a veteran congressional staffer and lobbyist, said his group has been impressed with the information its members have received. Bureau staffers have spent time outside their formal meetings with members -- which include JPMorgan Chase & Co. and Regions Financial Corp. -- explaining how they will examine banks and enforce major laws, he said.

Travis Plunkett, the director of legislative affairs for the Consumer Federation of America, said before the bureau began its work that it had a year to “make a difference” to ordinary Americans.

Consumer Culture

“Maybe I was guilty of some hyperbole,” Plunkett said in an interview, “but they are demonstrating very concretely that they will improve the lives of consumers in financial services in any number of ways.”

Plunkett said that a central accomplishment of the bureau has been to anchor a regulatory culture focused on protecting consumers, not banks.

For example, Cordray imported a practice that Raj Date, his deputy, learned while an executive at Capital One Financial Corp. Senior agency officials are now required each week to read 5 to 10 of the detailed complaints that consumers send to the bureau about their experiences in the financial services market.

In months to come, few issues loom larger than the agency’s probe of checking account overdraft practices, the source of $31.6 billion in bank revenue, according to Moebs Services, a Lake Bluff, Illinois-based research firm.

‘We’re Listening’

The announcement early this year that the agency is mulling new types of disclosures for checking accounts led some banks to pause efforts to revamp their own paperwork.

“I think Richard Cordray is learning that when he talks, we are listening,” Hunt said.

The bureau is examining whether banks are changing the order in which transactions are completed to maximize the number of overdraft fees. Deutsche Bank AG, in a July 6 study, estimated that a regulatory crackdown could cost Bank of America Corp. $480 million per year, and JPMorgan $288 million.

So far, the agency has emphasized the need for better disclosures to consumers. Consumer groups want the agency to go further by limiting the fees for each overdraft -- which can reach $35 per transaction.

“Telling somebody you’re going to rob them before you rob them is not okay,” Plunkett said.

Cordray hasn’t provided details about the bureau’s plans He said his staff will carefully study the data and will consult with the banks as it evaluates what to do next.

“We will be working to do the right thing and we will make people angry and happy on both sides,” Cordray said.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE