The Impact of the CFPB On All Financial Institutions

By: Laura N. Pringle

December 4, 2012

Introduction

Although the Dodd-Frank Act was enacted on July 21, 2010, and the Consumer Financial Protection Bureau (“CFPB”) was established and the transfer of rulemaking authority for many laws occurred on the earliest date permitted for the transfer by the Act on July 21, 2011, there remain future implementations dates and a number of required regulations which have yet to be finalized by the CFPB.  The changes required by the Act and currently proposed regulations, the role of the CFPB, the responsibilities of other primary federal regulators, and the impact of the CFPB on all financial institutions and their service providers is a focus of important discussions.  Recent delays of implementation dates help to put these issues in perspective.

As we explained in publications in October and November of 2012, several important CFPB issuances for which the Dodd-Frank Act provided statutory effective dates eighteen months after enactment, January 21, 2013, had yet to be published in final form.  However, for the most part, actions by the CFPB had been consistent with expectations since the passage of the Dodd-Frank Act. We also explained that there have not been big surprises and the delays that occur are helpful and permit time for questions to be asked and guidance to be provided along the way. In addition, the current issuances by the CFPB are helpful for all financial institutions and, in some cases, their service providers, for compliance efforts and in preparation for upcoming regulatory examinations and for other purposes including reevaluating third party service relationships.

Areas of Law to be Readdressed by the CFPB

Because a dozen areas of statutory law were given by Congress to the CFPB when it was formed by the Dodd-Frank Act giving the CFPB authority to promulgate regulations and interpretations, even though the CFPB’s examination and enforcement authority principally applied to large financial institutions, the scope of the CFPB’s impact was immediately established as very substantial for all financial institutions.  Much attention has been focused on RESPA and TILA requirements, but because the jurisdiction to address implementation of many statutory provisions was transferred to the CFPB, the impact of its authority is much larger.  The transfer of the authority for implementation of the Equal Credit Opportunity Act (“ECOA”) may be the most significant in its long term implications for new interpretations for all financial institutions; however, the revisions of the Dodd-Frank Act for the CFPB to have the authority for the implementation of regulations, interpretations, and enforcement against Unfair, Deceptive, or Abusive Acts or Practices may be the most important.  There is no question that the body of laws transferred to the CFPB will have significant impact on lending and operations practices of all financial institutions.

Recent Delays and Pending Mortgage-Related Regulations

The CFPB announced on November 16, 2012, that it would be delaying the effective dates of many Dodd-Frank Act disclosure changes that would have otherwise been effective on January 21, 2013.  The CFPB explained that it did not expect to have the final rule for the TILA-RESPA Integration Proposal issued by January 21, 2013, “given the broad scope and complexity” of this Proposal.  The CFPB went on to reason that “to avoid potential consumer confusion and reduce compliance burden for industry” the CFPB intends to implement the other new requirements when it implements the combined RESPA and TILA integrated mortgage disclosure forms.  These integrated forms are expected to be finalized in the first quarter of 2013 and required compliance is expected to be by the end of 2013, unless the CFPB requires an earlier or later mandatory compliance date when the final rules are issued.  See CFPB’s Combined RESPA and TILA Disclosures Released for Comment article by Laura Pringle published on Compliance Headquarters on 07/17/2012.

The CFPB had published regulatory proposals besides the integration of the RESPA and TILA disclosures on August 23, 2012; that publication included limits on closing cost increases and eliminated most exclusion from the definition and triggering amounts in the “finance charge”.  Other pending proposals included CFPB loan originator or compensation provisions published on September 7, 2012, which would generally prohibit financing premiums for credit insurance and mandatory arbitration clauses.  The CFPB sought additional comments on the “ability-to-pay” mortgage rule, originally proposed by the Federal Reserve, including input on measuring debt-to-income ratios, in its June 5, 2012 publication.  The comment period did not close until November 16, 2012 on the CFPB Mortgage Services Proposal which includes the RESPA error investigation, force-placed insurance notice, TILA ARM rate adjustment notices, prompt crediting of full payments, providing payoff statements, and periodic statements or coupon books.  While provisions regarding consumer notifications for appraisals were delayed by the CFPB announcement on November 16, 2012, the CFPB had also published interagency “higher-risk mortgage” appraisal requirements on September 5, 2012, and the ECOA appraisal revisions on August 21, 2012.  Thus, other mortgage-related rules can be expected to be finalized by the CFPB in 2013 as well as these delayed rules which would otherwise have been effective January 21, 2013.

Remittance Transfer Providers Rules Delayed and Other Outstanding Issues

On November 27, 2012, the CFPB also put on temporary hold the final rule implementing provisions for Section 1073 of the Dodd-Frank Act which were to be effective February 7, 2013, and applies to “remittance transfer providers.”  See CFPB’s “Remittance Transfer Providers” Rule article by Laura Pringle published on Compliance Headquarters on 08/24/2012.  The industry had been concerned that those smaller financial institutions impacted by these EFTA and Regulation E revisions found the compliance dates to be unrealistic given their reliance on service providers which were not yet prepared.  Again, it appears that the CFPB may have looked at both consumer and industry concerns and at the service providers which continue to be evaluated and addressed by smaller to mid-size financial institutions.  However, even though the Bulletin announcing this delay included three proposals which provide some flexibility, the CFPB stated that the proposed effective date will be “sometime during the spring of 2013.”

Of course, there are other outstanding proposals and requests for comment by the CFPB impacting the operations-side of financial institutions.  The request for comments which relate to overdrafts, marketing, disclosures, fees and practices continues to be studied although the extended comment period expired June 29, 2012.  The specific questions being asked and issues raised by the CFPB are in the CFPB’s release on February 28, 2012, which can be found at www.spo.gov/fdsys/pkg/FR-2012-02-28/pdf/2012-4576.odf and the explanation of the extended comment period is available at www.spo,gov/fdsys/pkg/FR-2012-04-25/pdf/2012-9851.pdf.

The CFPB’s prepaid card proposed rule released on May 23, 2012, had a comment period which expired July 23, 2012 and the CFPB stated that it intended to extend Regulation E protections to general-purpose reloadable prepaid cards.  In addition, that release included “Ask CFPB: Prepaid Cards” and a fact sheet which provides guidance and can be accessed at www.consumersfinance.gov/pressreleases/consumer-financial-protection-burear-considers-rules-on-prepaid-cards/.

Impact of Oversight of Service Providers

When the CFPB released its bulletin on April 13, 2012, stating that its oversight of service providers includes the supervision of those entities which provide services to a substantial number of small insured depository institutions, it became clear that the due diligence, contract negotiations, and ongoing monitoring of service providers by all financial institutions could be helped by the CFPB’s regulatory authority over these “supervised service providers.”  This authority of the CFPB may have one of the largest impacts of the CFPB on the operations and lending businesses of financial institutions.  The examination results and any resulting enforcement actions and/or other required corrective action can be part of the due diligence and ongoing monitoring of service providers in each financial institution’s risk management processes and documentation, and thus, the risks of relying on service providers should be better addressed going forward.  See Service Provider Relationships Risks article by Laura Pringle published on Compliance Headquarters on 05/21/2012.

CFPB’s Impact on Fair Lending

In addition to Unfair, Deceptive, or Abusive Practices Act authority, the CFPB received the transferred authority to implement the requirements of the Equal Credit Opportunity Act (“ECOA”) and other fair lending laws.  The CFPB has made clear that fair treatment of individuals and small businesses must be prioritized in risk management.  On April 18, 2012 the CFPB stated in its “fair notice” on fair lending that the CFPB was “letting both lenders and consumers know that in our examination and enforcement work, we will combat unlawful, discriminatory practices – including those that have an illegal disparate impact on protected borrowers… [and that] we will look not only at mortgage lending, but also at other types of credit including student loans, loans for cars, and credit cards.”  This release can be found at www.consumerfinance.gov/b;pg/faor/notice/on/fair/lending/.

The CFPB also issued a release on April 18, 2012, on the topic of “Lending Discrimination.”  That release restated the “effects test” and the “disparate impact doctrine” in lending discrimination under the Equal Credit Opportunities Act ("ECOA”).  That release can be found at http://files.consumerfinance.gov/f/201404_cfpb_bulletin_lending_discrimination.pdf.

Conclusion

The impact of the CFPB on all financial institutions is manageable and not unlike many other changes which have been weathered by small-to-medium-size financial institutions for many decades.  In order to keep these compliance developments in perspective, it is important to take a measured approach and prioritize regulatory developments to prepare for upcoming safety and soundness examinations and strategic planning as well.

Other important matters have been readdressed by primary federal regulatory agencies and are an important part of current strategic planning and risk management. Revisions to capital adequacy requirements which were required by the Dodd-Frank Act were proposed for comment until September 7, 2012, and the impact of the capital adequacy proposals on all sizes of financial institutions and particularly community banks is also being explored and re-considered by the regulators.  Additionally, stress testing and other required compliance efforts for large institutions, have been separately explained for impact and compliance purposes for smaller institutions. In the regulatory issuance on June 7, 2012, credit risk stress testing was specifically addressed. However, stress testing for asset-liability risks and funding risks and interest rate risks continue to be focuses of safety and soundness examinations as well.  See Renewed Emphasis in Strategic Planning article by Laura Pringle published on Compliance Headquarters on 06/21/2012.

These and other important issues are addressed currently in the PRINGLE Compliance and Safety and Soundness Programs available from Wolters Kluwer Financial Services (“WKFS”) in ARC LogicsTM. As you continue to strive to successfully manage these CFPB and other changes, we encourage steady planning to address current requirements and anticipated developments in risk management.

©PRINGLE® 2012

This Article was also published at Wolters Kluwer’s Compliance Headquarters™ website: www.complianceheadquarters.com.