One year ago this week, a fledgling federal agency opened its doors for business amid a cloud of uncertainty.
The new Consumer Financial Protection Bureau (CFPB) had no official director. It was under attack from Republicans in Congress who wanted to cripple it before it got out of the gate. And it was under pressure to show results in its primary mission: rescuing consumers from financial harm at the hands of big banks and predatory lenders.
One year later, consumer advocates are beaming about their new champion of everyday Americans’ pocketbooks. Banks and other lenders are watching anxiously to see what this new and unknown entity will do next.
Controversy continues to shadow the agency, however, which grew out of the massive Wall Street Reform law. The agency is still battling critics in Congress. Its director, Richard Cordray, took office six months ago by virtue of a controversial recess appointment from President Obama. A federal lawsuit has been filed challenging his right to have the job and other legal battles may not be far behind.
Still, Cordray is upbeat about his accomplishments after year one.
“In the year since the CFPB opened its doors, we have focused on making the financial services marketplace work better for consumers,” he said in a statement released by his office. “We’re putting in place strong rules of the road to fix the broken mortgage market — a leading cause of the financial crisis and a key part of our economic recovery.”
He added: “We’re also working to cut down on fine print so consumers know before they owe on mortgages, student loans and credit cards.”
Year one initiatives
Among the initiatives launched since July 21, 2011:
- Releasing a prototype of a simplified, two-page credit card agreement that is being tested by a major federal credit union.
- Simplifying mortgage disclosures and forms to make it clearer to buyers what they are getting before they close on real estate deals.
- Creating two special offices focused on protecting military families and the elderly — two groups often targeted by scammers and predatory lenders — from abuse and deception.
- Publishing rules to identify larger participants in nonbank financial services markets, such as debt collection, credit reporting, payday lending and mortgage lending. Final rules for supervising large credit reporting bureaus were released July 16, 2012; the rules go into effect Sept. 30.
- Launching a website and complaint system to collect consumer feedback on their experiences with financial products such as credit cards, mortgages and student and auto loans.
- Starting a public complaint database accessible to anyone with access to the Internet. The database provides limited information about the nature of complaints and the banking industry has said it presents a skewed and limited view of complaints compared to the millions of active accounts in the market.
A year after opening, the agency is still staffing up. So far, it has hired nearly 900 of the nearly 1,300 employees it expects to staff its headquarters in Washington, D.C., plus three satellite offices in Chicago, San Francisco and New York. It has a $356 million budget, projected to grow to $447 million in 2013.
Consumers are better off, groups say
Consumer groups are praising the agency’s first year as a milestone for consumers.
“The agency has changed the conversation within the industry from, ‘Have we complied with the letter of the law?’ and ‘Can we find a loophole?’ to ‘Is this product unfair, deceptive or abusive?’ ” says Lauren Saunders, managing attorney for the National Consumer Law Center, a consumer advocacy legal group with offices in Boston and Washington, D.C.
A scientific poll commissioned by a coalition of consumer groups asked 803 likely voters what they felt about the CFPB and some of its initiatives. Two-thirds (66 percent) agreed that the agency was needed. More than nine out of 10 (92 percent) favored requiring credit card companies and other lenders to make borrowing terms, rates and fees clearer — a major part of the CFPB’s mission.
“The CFPB is demystifying the financial markets for consumers,” says Pamela Banks, senior policy counsel for Consumers Union, the advocacy arm of Consumer Reports magazine.
“The CFPB has given consumers a voice,” Banks adds. “It has empowered them with respect to being able to make informed decisions about their financial affairs.”
Bankers say it’s too soon to judge the impact the bureau has had on its industry. “It remains to be seen,” says Richard Riese, senior vice president for regulatory compliance for the American Bankers Association (ABA) trade group. “It’s only 1 year old. It’s done some things that make people go, ‘Ooh and ahh’ — like any 1-year-old.”
In the year since the CFPB opened its doors, we have focused on making the financial services marketplace work better for consumers.
|— Richard Cordray |
Consumer Financial Protection Bureau
Cordray and other CFPB staffers have appeared to testify before congressional committees more than a dozen times in the past year. The agency has also hosted town hall meetings around the country. The most visible activity has been in churning out press releases outlining initiatives to gather comments and feedback on proposed rules to oversee things like credit reporting bureaus, debt collectors, money transfer services and the like.
Bankers: Too early to judge
The ABA’s Riese says these are just first steps.
“They have shown an appetite for information, but they’ve also shown in some of their aspirations they may have underestimated the challenges in some of this,” Riese says. “They are coming to the realization that it is even more complex than they thought in the beginning.”
He added: “It will take time to follow through on those things and evaluate what’s appropriate.”
Tinkering with one aspect of a rule or regulation often leads to unintended consequences on another level, Riese says, adding, the CFPB’s staff was enthusiastic to make changes but saw that, “Oops. If I touch this, look at what happens over there.’ The fixes aren’t so simple.” He cited the simplified mortgage statements as an example. The timetable for final release was initially set for the summer of 2012, but has been pushed back to the end of the year.
“It has a pretty good handle on its press releases and puts things out and get press and has been jumping around on a lot of issues,” Riese notes. “The real work of the bureau — the mission of oversight that has the markets functioning for the benefit of consumers to be good marketplaces — is still the work ahead of it.”
It’s only 1 year old. It’s done some things that make people go, ‘Ooh and ahh’ — like any 1-year-old.
|— Richard Riese|
American Bankers Association
Even before it opened for business, the CFPB was already flexing its muscle. Then acting director Elizabeth Warren, a consumer advocate and now a U.S. Senate candidate, met with CEOs of the major banks. Her message: Times have changed, make credit card contracts easier to read and take the “gotcha” out of financial products. Many banks took note and started reviewing their practices. Some rewrote their credit card agreements in anticipation of regulations.
A survey of in-house attorneys and compliance executives for major financial services companies showed many are flustered by the uncertainty surrounding what the agency might do, and many have taken precautionary action (see chart). Many see the CFPB as an additional layer of regulation that duplicates many of the things the Federal Trade Commission continues to do.
Jeffrey Taft, a partner at the Mayer Brown legal group, which conducted the survey, says some companies began to focus more attention on how they handle customer complaints, recognizing that unanswered complaints become the basis for class-action lawsuits and more regulation.
Many watching and waiting
Around the financial services sector, all eyes are on the CFPB. Industries never subjected to the kind of close scrutiny given to banks by examiners have been bracing for their first reviews. Those nonbanks include businesses such as payday lenders, debt collectors, debt settlement companies, credit reporting agencies and mortgage brokers.
Debt collectors are still in the early stages of oversight. The CFPB is gathering comments on the criteria for selecting which collection agencies will fall under its umbrella of regulation. That industry, like others, is watching and waiting for its turn in the spotlight.
“Our antenna has been up. We’ve been following it very closely,” says Mark Schiffman, a spokesman for ACA International, a debt collection trade organization. “We are able to see what they are doing with other industries.”
Schiffman says his industry is working with the CFPB, exchanging information and inviting regulators to its annual convention. “We don’t necessarily agree with everything, but we are certainly working on helping to foster a good relationship. They’ve called us on a number of occasions to ask questions, which is great.”
The big consumer cop on the street collared its first offender on July 18, 2012, just three days shy of its anniversary. Capital One Bank was hit with $210 million in penalties and restitution for high-pressure sales tactics and deceptive marketing of its payment protection and credit monitoring plans.
Many were anticipating that first penalty action, says banking industry attorney Taft, from the financial services industry legal group.
Banks and nonbanks were wondering which type of business would be targeted first — or second. “They are wondering, ‘Am I going to be next? What should I be worried about? Is my industry going to be the focus?'” says Taft.
Before the Capital One announcement, Taft said the CFPB would likely choose a company with blatantly deceptive or abusive practices as its first case. “They’ll go after the low-hanging fruit,” he said, adding, “one that will settle quickly” without litigation.
The CFPB is demystifying the financial markets for consumers.
|— Pamela Banks |
As a major national bank, Capital One clearly falls under the CFPB’s jurisdiction and authority. That question may be less clear with nonbanks, which may fight enforcement efforts in the courts. Any nonbank companies could file suit challenging the agency’s authority to take action against them on the grounds that Cordray’s appointment may have been unconstitutional. A Texas bank filed suit in federal court June 22, 2012, challenging the appointment and the bureau’s “unbounded power.”
Banking and consumer groups have both noted that the agency has moved at a slower pace than some expected. Ironing out the best way to simplify the fine print of a credit card agreement, for instance, proved more time-consuming than some thought. The agency released a prototype of a two-page agreement soon after opening for business. At the same time, the CFPB was hammering out the details of its mortgage reform initiative, adding offices to focus on the military and the elderly financial abuse while continuing to hire and train new staff members.
“The biggest overall frustration is how much work there is to do and the amount of time things take, but that is natural given the CFPB’s mandate to hear from all sides, collect data, and be thoughtful and careful,” says Saunders from the consumer law group.
Banking industry representatives aren’t all critical of the new watchdog. Some acknowledge the positive changes the agency has generated, namely educating the public about mortgages and credit cards through the “Know Before You Owe“educational campaign.
“At the end of the day, a lot of institutions believe an educated customer is a good customer. The more we can encourage people to shop around and determine the best deal they can get, the better,” Taft says. “It’s going to help those in the industry that are providing the best service.”