CFPB 101: THE BEGINNINGS OF A NOT-SO-SIMPLE GOVERNMENT AGENCY – by Gihan Shahidy

For more than a year, the recently created CFPB made headlines for its aggressive moves in monitoring and managing the business activities and marketing practices of giants in the financial industry. Fines for apparent deceptive marketing practices levied against powerhouse credit card companies Capital One, Discover and American Express totaled more than $500 million, for example.magnifyingglass

The agency even expanded its reach and impact through recent modification to the Automated Teller Machine Disclosure requirements (http://www.consumerfinance.gov/regulations/).

So what exactly is the CFPB?

Created out of several needs – need to protect consumers and the need to avoid another financial meltdown, for example – the CFPB supported its mission to “…help[ing] consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives.”

For decades consumers have expressed injustice in the financial marketplace even before the financial crisis of 2007 and recession that followed. Complaints have remained relatively consistent in nature.

Consumers argued they were getting the run-around, not being provided accurate information, being hit with unexpected fees, and not being provided with alternative solutions. They expressed concern that they found themselves stuck in a relentless cycle to stay afloat, as struggling consumers often pay higher prices in the financial marketplace and experience deterioration in their credit standing as standards are tightened.

As such, the CFPB initiated efforts primarily around the monitoring and regulating of the mortgage market – the single largest consumer financial market in the United States – with potentially profound effects on consumers. The bureau accepted and published consumer complaints, examined the industry’s procedures, and passed numerous rules around servicing, including disclosures, treatment and protections for homeowners facing foreclosure, risky features, and misrepresentation.

Soon, the CFPB expanded its reach and began examining the private student loan industry, particularly regarding aggressive marketing, risky underwriting, unclear terms & conditions, lack of clear or responsive answers, and minimal options to refinance. As with its efforts in the mortgage industry, the bureau’s methodologies remained unchanged in its information gathering, evaluation, and course of action: Complaints were collected, evaluated and reported, and procedures for examining student lenders were developed. Recently, the CFPB launched an inquiry into the impact of financial products marketed to students through universities in an effort to determine whether these marketing strategies are in the best interest of students.

The CFPB also addressed debt relief, collection practices and consumer reporting, from supervision of the larger consumer debt collectors to the underscoring of consumer reporting agencies’ obligation to provide a streamlined process for free annual consumer reports. Again, following its established methodology, the CFPB passed new rules, such as unlawful charging of advance fees for debt-settlement services.

Within the credit card market the CFPB is currently seeking public comment on how the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) has impacted consumers and the behavior of the industry. The Bureau is reviewing such items as terms of credit card agreements and issuer practices, protections against unfair or deceptive acts, changes in the cost and availability of credit, and use of risk-based pricing. If past is prologue, the recent CFPB examination into the credit card industry will likely produce a publicly available report on the state of the consumer credit card market, which will be utilized to help form future policy decisions.

Simply stated, during its inaugural year the CFPB has consistently followed a common theme:

–          Requirement of corporate transparency

–          Creating a consistent methodology for addressing issues that consumers face

–          Adopting rules to improve consumers’ economic state

Looking forward into 2013, analysts expect increased supervision, additional enforcement actions, continued focus on third party providers and a myriad of new rules.

Financial institutions must brace for another long year ahead with the CFPB. Given the consistent approaches by the CFPB, those within the target sites of the bureau should at least know what to expect.

By: Gihan Shahidy