Editor’s note: This article is the second in a two-part series.
Part I of this series outlined the evolution of the Consumer Financial Protection Bureau (CFPB), the scope of its powers, and the in-roads the fledgling federal agency has made in material areas of the consumer financial product and service industry. This article, Part II in the two-part series, serves to summarize and highlight the recent activities of the CFPB, which warrant close and continued monitoring.
The CFPB has shown a steady increase in investigations and rule-making, and has increased its partnerships with local and national government agencies, as well as national organizations. All of these developments make the CFPB an agency worthy of every company’s attention.
Speaking before the Philadelphia Residential Mortgage Diversion Program on June 12, CFPB Director Richard Cordray emphasized the bureau’s first responsibility: “to write clear rules of the road to address the obvious problems in the mortgage market.” In January, the CFPB finalized new mortgage rules, which are slated, in large part, to take effect in January 2014. As part of its rule-making process, the CFPB engages in what it refers to as “regulatory implementation” — a project in which the bureau engages in “vigorous” outreach and assistance to the financial institutions currently at work on implementation. Consistent with that approach, the CFPB issued proposed modifications to the new mortgage rules, shortly after the director’s remarks in Philadelphia, addressing questions and complaints the bureau claims it received during the implementation process. In recent comments to another group, the director left open the possibility that more modifications to the mortgage rules may yet come.
The new mortgage rules include an “ability-to-repay” rule, designed to protect consumers from “irresponsible mortgage lending,” requiring lenders to make a good-faith effort to determine whether prospective borrowers have the ability to repay their loans in the first place. The mortgage servicing rules are designed to protect homeowners from foreclosure; others are intended to protect consumers from risky, high-cost mortgages. In an effort to assist the industry in complying with the new mortgage rules and aid implementation, the CFPB recently launched a regulatory implementation page on its website. As the industry continues to grapple with understanding and implementing these rules, only time will tell how effective the Web page — and the rules themselves — prove to be.
As a further step to increase its presence and pursue its mission, the CFPB has sought partnerships with local governments, as well as nationwide organizations. In June, the CFPB announced a partnership with the city of Boston that will facilitate the ability of consumers to submit questions and complaints to the CFPB. As part of that partnership, a hotline with a local Boston number was established, allowing consumers to contact the CFPB directly with any question or complaint related to a financial product or service. Previously, the CFPB entered into similar arrangements with the cities of Chicago, New York and Newark, N.J., as well as one with the tribal government for the Navajo Nation. These types of partnerships should raise the CFPB’s profile with consumers and result in the submission of a greater number of consumer complaints to the CFPB, thus creating a steady source of investigations for the bureau. In his comments in Philadelphia on June 12, Cordray noted that the bureau has already handled more than 130,000 consumer complaints, as of March 1 of this year. That number is expected to increase dramatically in the wake of these new community-outreach efforts.
In addition to city-based partnerships, the CFPB has been following through with efforts to coordinate with state bank regulators, as well as with state and national regulatory and enforcement agencies. In May, a framework was announced for the coordination of supervision and enforcement matters between the CFPB and the Conference of State Bank Supervisors — an entity that acts on behalf of state financial regulatory authorities nationwide. Further, the CFPB continues to coordinate with the Federal Trade Commission and U.S. Department of Justice on issues regarding education, as well as enforcement and regulation.
Belying the rapid expansion of the breadth, scope and volume of the CFPB’s work, however, is substantial uncertainty surrounding its authority. In late June, the U.S. Supreme Court granted certiorari to review a decision by the U.S. Court of Appeals for the D.C. Circuit to invalidate President Obama’s January 4 recess appointment of three members of the NLRB. Significantly, Cordray was appointed director of the CFPB on the same day as the National Labor Relations Board members at issue in the case, and through the same exercise of recess appointment authority held unconstitutional by the D.C. Circuit. As such, the Supreme Court’s ruling in Noel Canning v. NLRB will effectively determine the validity of Cordray’s appointment, as well. Indeed, challenges have been made to Cordray’s appointment and authority in other litigation across the country, as well. In the absence of a validly appointed director, these non-bank litigants argue, the CFPB cannot exercise its supervisory or enforcement authority over them.
With a decision in Noel Canning not expected from the Supreme Court until late 2013 or early 2014, the efficacy of the bureau’s authority in the interim remains unclear. Such uncertainty is particularly disconcerting, given the pendency of the new mortgage rules promulgated by the CFPB, and the recent re-affirmation by Cordray, in a June 19 speech to the Exchequer Club in Washington, D.C., that the bureau fully expects all institutions to be in compliance with those new rules by their effective date in January 2014.
Meanwhile, congressional challenges to the CFPB continue, as well. Both the Obama administration and congressional Democrats have largely resisted Republican demands for changes in both the structure and governance of the CFPB, including two recently proposed House of Representatives resolutions seeking to convert leadership of the bureau from a single director to a five-person commission. Further, Republican lawmakers have sought to subject the CFPB to the congressional appropriation process and, in a recent House Financial Services Committee hearing, challenged the CFPB’s chief financial officer on the bureau’s spending habits, including its elevated salary structure for top earners and its expenditures on office renovations. Concurrently, committee members from both sides of the aisle expressed significant concern over the high turnover rate amongst the CFPB’s leadership — an issue highlighted in a Legal affiliate The National Law Journal article published June 10.
Though the CFPB’s spokesperson has described the turnover rate at the bureau as consistent with expectations, the issue warrants watching, as it may bring a subsequent change in focus and/or prioritization for the bureau. Similarly, while Cordray shows no signs of abandoning his ongoing confirmation battle, everyone has a breaking point. If a new name were to enter the fray for the director’s role — or the director’s position were abolished in favor of a multi-person board or commission, as recently proposed in the House — that, too, could cause the still-young bureau to tack in a new direction.
All of this has undermined and, indeed, slowed the bureau’s continuing efforts to expand its influence and impact. The uncertainty regarding the leadership of the CFPB and the structure of the bureau itself, combined with the breadth of power and authority imparted to it, make it an influential agency with significant enforcement powers that financial institutions shouldn’t ignore and, in fact, should closely monitor.
Lesli C. Esposito is a partner with DLA Piper in Philadelphia, where she focuses her litigation practice on antitrust and consumer protection matters. She was formerly a senior attorney with the Federal Trade Commission’s Bureau of Competition.
Kevin W. Rethore is a partner with the firm in Philadelphia, where he focuses his practice on complex commercial, business and civil litigation matters.