CFPB Turns Two with a Bang – What Now?

The Consumer Financial Protection Bureau (CFPB or the Bureau) hit its second birthday this week in grand style. Has it really been just two years? I don’t believe I would be in minority in feeling CFPB has been around much longer given all the Dodd-Frank rules it has cranked out and all the press it has received over the controversial recess appointment of Rich Cordray in January 2012. But, who’s counting, right?

Speaking of Rich Cordray, his recent formal Senate confirmation was perhaps the biggest birthday present of all to the Bureau. Majority Leader Harry Reid (D-NV) had to threaten the Senate with the “nuclear option” (a change of Senate rules to allow “majority” rule) over several stalled Obama nominees to key administration positions.  The Senate was close to DEFCON 1 before a handful of Republicans told Harry to take his finger off the button because they would allow votes on the nominees. Cordray was the first nominee to get confirmed. House and Senate republicans have been pressing for structural changes to CFPB pretty much after the ink was dry on the Dodd-Frank Act. Senate Republicans were united in 2012 and 2013 that no CFPB Director nominee would be confirmed unless the CFPB became a commission (like the FTC or FCC) and received its appropriations from Congress and not the Federal Reserve. Two federal courts even called into the question the “recess” appointment of Cordray as they ruled that President Obama’s recess appointments to the National Labor Relations Board were unconstitutional. The Supreme Court even agreed to hear the case in October. All this legal uncertainty is fairly moot given the Senate’s confirmation (and the Supreme Court’s recent proclivity to threading the needle on touchy constitutional issues).

But, enough about history. What does the future hold for the Bureau? I don’t buy quite into the hype by some that the Bureau is coming out swinging against banks now that Cordray has lost his “recess” tag. I expect the Bureau will be sensitive and responsive to the concerns from Capitol Hill. It will certainly be responsive to the Government Accountability Office (GAO) as it begins to examine its data collection practices. As requested by Sen. Mike Crapo (R-ID), ranking Republican on the Senate Banking Committee, GAO will review identity, account and transaction data the Bureau collects during its supervision of banks or through other direct request. The Bureau claims that the transaction data is de-linked with any personally-identifiable information. We’ll see what GAO comes up with (presumably in 2014).

The Bureau also released its updated regulatory agenda through the end of the year. Expect to see a notice of proposed rule-making on extending Reg E protections to general-reloadable prepaid cards in addition to new proposed rules on debt collection and payday loans. I suspect CFPB will continue to tinker with the Dodd-Frank mortgage rules to take effect in January 2014. It certainly doesn’t want to be tagged with tanking the housing market if no one can get a loan. If you really want to peer into CFPB’s future, follow its consumer complaint portal progress reports. CFPB has stated that the trends it sees through the complaint portals will drive its enforcement and regulatory agenda.

Industry and CFPB need to work together more than ever to ensure balance is struck between consumer protection and a healthy financial services industry. Consumers are hurt if the pendulum swings too hard one way. Keep checking with this blog for progress reports. 

CFPB Update

The 112^th Congress may be winding down, but the Consumer Financial Protection Bureau (CFPB) keeps chugging. Before Congress scurried off home for electioneering in September, CFPB Director Richard Cordray paid a visit to both the Senate Banking Committee and House Financial Services Committee for a biannual update on the Bureau’s activities. House Financial Services Committee Chairman Spencer Bachus (R-AL) even quipped that Director Cordray “made some news” during his appearance on September 20. Yes, it’s news when an Administration official appears before Congress and says something of interest.

The Consumer Financial Protection Bureau is poised to
issue two important proposed rules on overdraft
protection and prepaid cards.

What did Cordray say of interest? At issue is the 2009 CARD Act’s “ability to pay” rule. The Federal Reserve Board had responsibility for the implementing this provision of the CARD Act (the CFPB had not existed at this time). The Board created a uniform standard requiring all consumers to demonstrate “an independent ability to repay.” The Board’s rule took effect October 1, 2011 and almost immediately Congress began asking questions on the rule’s impact on stay-at-home spouses and their ability to obtain credit. Dodd-Frank gave the CFPB rule-making authority over Regulation Z (Truth in Lending). At another House Financial Services Committee hearing during the summer, Gail Hillebrand of the CFPB did not appear very sympathetic to opening up the rule again. But Cordray believe enough evidence had been produced to warrant a new rule that would disadvantage stay-at-home spouses who may ample “household income” to secure credit. CFPB will likely issue the revised rule for public comment later this year or early 2013.

Senate and House leaders also expressed concerns with CFPB’s final rule on international remittance transfers (Sec. 1073 of Dodd-Frank). Several House members wrote Cordray in August asking for a delay in the effective date (February 2013) while the CFPB studies its impact on consumers. The CFPB’s rule on international remittance transfers required several disclosures to be made to consumers including exchange rates and fees charged by other entities and taxes to be charged by foreign governments. The only relief CFPB has given to exempt those financial institutions providing less than 100 remittances annually from the new disclosure rules. I do not expect this will be the last we hear of this issue. How far will consumer choice be limited as institutions exit the business because compliance requirements are not financially viable? Stay tuned.

Looking ahead to 2013, the CFPB is poised to issue two important proposed rules on overdraft protection and prepaid cards. EFTA has provided comment to the Bureau on both subjects in 2012 as part of an Advanced Notice of Proposed Rule-Making. Gov. Mitt Romney also called out the Bureau for slow progress on issuing rules on qualified mortgages. Expect some busy beavers in the hallways and offices of the CFPB in the weeks and months ahead.

Coming to Grips with Overdraft Protection

The Electronic Funds Transfer Association has put together a task force of industry veterans to tackle the tough issue of overdraft protection. The task force's mission is to focus on the legal and operational issues of extending overdraft protection.

In a quick, three-minute video, Kurt Helwig, president and CEO of EFTA talks about the issue.

Louie's Looking for You

Interesting editorial this morning in the Wall Street Journal. In its role as the defender of free markets, the Journal's editorial board usually fires back in eloquent defense of financial institutions, hedge funds and the mortgage industry. This morning the editorial board put on their jeans and tee shirts and went down market to show some love to the storefront payday lending industry.

A payday loan is a short term loan meant to tide the borrower over until his next paycheck. It is a service targeted primarily to low and moderate income households, known as LMI households. According to a payroll industry survey more than three-quarters of households now live paycheck-to-paycheck.

Payday lenders are often accused of charging usurious interest rates, being an unregulated industry, and preying on the poor. Apparently that's all the mandate the new Consumer Financial Protection Bureau needs to jump into the payday lending wars. The Bureau held it first field hearing last week in Birmingham, Alabama to discuss the small loan industry, of which payday lending is a big part.

But the CFBP needs to consider the accuracy of the charges against the these businesses. Typically opponents of the industry will accuse payday lenders of charging 391 percent annually on a $100 loan. But that's misleading. Payday loans aren't annual contracts. They're short term loans. In reality most lenders charge $15 for that $100 loan. That's 15 percent, not 391 percent. The only way you get to 391 percent is by rolling over a two-week $100 loan 26 times.

As to the charge that payday lending is largely unregulated, the fact is that over 60 percent of the states regulate the practice already. The industry's position is that payday lenders would like to see regulation in all 50 states. In the interest of fairness, I should point out that regulation of this type often becomes a barrier of entry to new, potential competitors entering a market. So when storefront lenders cry "Regulate me!"they may be motivated less from a consumer standpoint and more from a desire for territorial protection.

As to the charge that payday lenders prey on the poor, the Journal cites a Federal Reserve study that found nearly all payday loan customers knew the terms of their loan agreements and were satisfied with the loan product.

So you have to ask the question: What does the CFPB hope to accomplish by regulating payday lenders? They provide a valuable service in the communities in which they operate. Where else could a laborer bringing home $190 a week borrow $100 to fix a 15-year old Econoline van? Payday lenders are already regulated at the state level, where the regulators are closer to the businesses and can probably protect consumers better. And the customers themselves seem satisfied with the deal they get.

Payday lending is part of what the Treasury Department terms "money services businesses, " or MSBs.  These include check cashing businesses, money transfer businesses, pawn shops, gold and silver dealers in and payday lenders. These are businesses that don't prey on the poor; they offer products no one else will. The problem in regulating MSBs like payday lenders is that you can regulate them out of existence but you can't regulate the need they meet out of existence. LMI households have the same need for credit as higher income households. The only difference is that LMI households have limited options. The next rung down from MSBs on the credit ladder is some guy named Louie with a real bad temper.

Overregulating, or squeezing might be a better word, payday lenders out of business only hurts LMI households because it further limits their credit options.

I know about MSBs because I worked with this industry for ten years. I know about the Louies of the world because my father had to borrow money from him once to make the rent. Didn't end well.

This is the world in which LMI households reside. They don't live in a federal office building and they don't live in a field hearing. They live in twilight zone between almost-made-it and never-will. And always waiting for them at never-will is Louie.

I have found over the years that regulatory agencies have some of the best and brightest stars in federal service. People who really know how to get their arms around a problem. Quick studies. And good analysts. But I wish next time this comes up, as it does periodically, some regulatory agency, whether it be the CFPB or someone else, would put assets on a case that have actually borrowed money from someplace other than a bank. Have actually cashed a check without having access to a bank. Or pawned a guitar in college to pay the rent. I think those folks would inform the debate more than a photo-op road show.

That's my opinion. What's yours?

ATM Fee Disclosure: Updating Regulation to Limit Jackpot Justice

   In July of this year Kurt Helwig, president and CEO of the Electronic Funds Transfer Association and Dennis Ambach, director of the Association's Legislative and Regulatory Council, met with the staff of the House Financial Services Committee regarding a regulation that requires ATM owners to display a sign specifying the fee charged to use the machine. There has been evidence of unscrupulous gold diggers ripping the fee signs off of ATMs and then attempting to file class action lawsuits against the owners of the ATMs for failing to post notice of the fees. There are even websites that troll for alleged victims and encourage the filing of these suits.
   Members of the EFTA, which represents a wide spectrum of companies involved in electronic payments, believe that the sticker requirement is an antiquated requirement since modern ATMs post the fee on the ATM screen and ask the user whether he wishes to accept the fee before continuing. They are joined in this belief by members of various other groups including the ATM Industry Association (ATMIA).
   Following the July meeting the Committee's chairman, Rep. Spencer Bachus (R, AL) wrote to Raj Date, a special advisor to Treasury Secretary Tim Geithner and the interim head of the new Consumer Financial Protection Bureau. Chairman Bachus asked whether the CFPB has the authority to amend Regulation E of the Electronic Funds Transfer Act to eliminate what amounts to dual notification.
   The CFPB recently published what the government calls a "Notice for Comment." This is an invitation for the public to comment on some pending regulatory action. In this case, the CFPB is looking for public input on regulations that fall within the Bureau's authority and which could use a little streamlining. Specifically, the CFPB is looking for regulations which it has "inherited" from other regulatory bodies, and which could be updated or modified because they are "outdated, unduly burdensome or unnecessary."

HFSC Chairman Bachus contacted
 the CFPB concerning its authority
to amend the EFT Act to
eliminate dual notification

   Among the suggested areas for comment in the Notice is ATM fee disclosure. The Bureau is looking for comment on whether the requirement to post a sign on the ATM should be eliminated and whether other disclosures, such as the on-screen fee notice, are adequate for informing consumers.

   The Bureau's desire to quickly identify the regulations for which it is now responsible and to streamline those requirements is welcome news. How the newly minted CFPB manages this comment period and deals with the public comment will go a long way in establishing the Bureau's credibility with consumers and with industry.
   In you are interested in commenting to the CFPB on this issue the comment period is open for 90 days. It's hard to believe that we can't find a way to ensure that consumers' rights to know upfront the cost of using someone's ATM can't be balanced with the right of that ATM owner to avoid financial calamity through the jackpot justice of frivolous lawsuits.
   That's my opinion. What's yours?