CFPB Director Richard Cordray updates the agency’s perspectives and activities
The Consumer Financial Protection Bureau has been busy developing and issuing new consumer protection regulations since it opened its doors in 2011 as a new financial regulatory agency supervising depository and nondepository financial institutions. With the CFPB completing a host of new mortgage lending regulations stemming from the Dodd-Frank Act this past fall, ICBA Independent Banker reached out to ask the bureau’s perspective on various recent topics and activities relevant to community banks.
CFPB Director Richard Cordray filed written answers to IB’s written questions. What follows is the full version of the exchange.
IB: As CFPB director you have met directly with many community bankers across the country. What’s the most useful thing you’ve learned from those encounters? What are some common misperceptions about the CFPB that you’ve heard?
Cordray: Since our inception, we have met with community bankers from every state. We host regular meetings with community bankers when they are in Washington and hold roundtable discussions with them when we travel across the country for our monthly field hearings. This year we opened the Office of Financial Institutions and Business Liaison to work with banks, trade associations and other covered businesses to ensure that the bureau incorporates their perspectives into our policymaking process. We also continue to value the input that we receive from the bureau’s Community Bank Advisory Council.
We find it quite useful to hear directly from community bankers about what they are seeing and hearing in their communities. The more perspective we have about their experience in the consumer financial marketplace, the better we will be able to figure out what, if anything, we should be doing in response.
Sometimes we hear that the bureau has taken a “one size fits all” approach to rulemaking. The facts are that we pay careful attention to the impact that our rules have on smaller institutions and many of our rules to date include exemptions or other burden-reducing provisions for small creditors. For example, the bureau’s ability-to-repay/qualified mortgage rules contain a special category of qualified mortgage loans designed for small creditors. If you have less than $2 billion in assets and originate 500 or fewer first mortgages per year, any loan you make that meets the basic product feature requirements and that you hold in portfolio is a qualified mortgage as long as you have considered and verified a borrower’s debt-to-income ratio (though no specific DTI limit applies). And those who service fewer than 5,000 mortgages are exempted from large chunks of our new mortgage servicing rules. These special provisions for smaller creditors cover a large majority of community banks.
IB: You were instrumental in quickly forming the CFPB’s Community Bank Advisory Council, which meets quarterly with a panel of community bankers across the country. Many ICBA leaders serve on the council. How has the council helped the bureau do its work?
Cordray: Just over a year ago, we created the Community Bank Advisory Council to provide information, analysis and recommendations to better inform our policy decisions. Because we generally do not supervise community banks with $10 billion or less in assets, the CBAC has helped to fill this gap in our day-to-day contact and helped to ensure that the lines of communication remain open at all times.
During this first year, the CBAC members have brought important information and insight to the bureau. In these interactions, CBAC members have cautioned the bureau about the challenges faced by small community banks, which did not cause the financial crisis, but are managing different regulatory pressures while trying to ably serve their customers. CBAC members have also shared with us tools and approaches to financial education, which the bureau has used to inform its own approach to financial education.
During the March meeting of the CBAC, members shared with us their successes in financial education through outreach to faith communities. This prompted us to reach out to faith communities to let them know about the resources that are available through the bureau to assist those they serve.
IB: Under your leadership, the CFPB has been responsive to community bankers by writing consumer regulations that distinguish between large financial service providers and locally operated community banks. The CFPB did that when it wrote and implemented its mortgage lending standards. What other opportunities are there for implementing tiered consumer regulation?
Cordray: Many of our rules to date include exemptions or other special provisions for small creditors because we recognize that the traditional lending model followed by community banks deserves respect and in some cases should be treated differently under our rules.
We will continue to evaluate the impact of our proposals on smaller institutions and will avoid a “one size fits all” approach to our rulemaking to meet the special circumstances of smaller creditors where appropriate.
We have used a tiered approach thus far with our remittance rules, our qualified mortgage rule and our mortgage servicing rules. We will listen closely to you to identify more opportunities to do the same.
IB: What has the CFPB learned so far from its supervision of nonbanks?
Cordray: Since the bureau began to exercise its supervisory authority, we have continued to develop, expand and improve our supervision program as we gained valuable experience through our reviews of both bank and nonbank compliance with federal consumer financial laws.
The bureau supervises depository institutions (banks, thrifts and credit unions) with total assets of more than $10 billion, and their affiliates. The bureau also has authority under the Dodd-Frank Act to supervise nonbanks, regardless of size, in certain specific markets: mortgage companies (originators, brokers, servicers and providers of loan modification or foreclosure relief services), payday lenders and private education lenders. The bureau can also supervise the “larger participants” in other nonbank markets as the bureau defines by rule, as well as other nonbanks that pose risks to consumers.
The bureau has found, through supervisory work, that nonbanks are more likely to lack a robust Compliance Management System, as their consumer compliance-related activities have not been subject to examinations at the federal level for compliance with federal consumer financial laws prior to the bureau’s existence. The CFPB has identified instances of nonbanks that lack formal policies and procedures, have not developed a consumer compliance program or do not conduct independent consumer compliance audits. Lack of an effective CMS has, in a number of instances, resulted in violations of federal consumer financial laws. In these instances, the CFPB expects the institution to implement appropriate corrective action, and in general, both banks and nonbanks have committed to improving their CMS accordingly.
We seek a level playing field where nonbanks no longer can enjoy a competitive advantage by cutting corners and avoiding compliance costs.
IB: As a result of the new Dodd-Frank Act mortgage lending regulations taking effect in January, you’ve said you expect new players and new innovation to emerge in the mortgage lending market. What kinds of changes do you anticipate the rules spurring in the mortgage marketplace? How do you expect the new mortgage rules to affect community banks and the mortgage lending marketplace?
Cordray: By our estimates, more than 95 percent of loans being made in the current market will be qualified mortgages. While qualified mortgages cover the vast majority of loans made in today’s market, they are by no means all of the mortgage market. There are plenty of good loans made every year that are nonqualified mortgages.
The bureau has carefully calibrated the qualified mortgage definition to avoid unnecessary disruption of the mortgage market and to protect consumers’ access to credit during the housing market recovery, including a temporary qualified mortgage definition pegged to the standards used by the government-sponsored enterprises and various federal agencies to cover a greater percentage of the mortgage market and the special provision we adopted for smaller creditors such as community banks. However, the bureau expects a healthy market for nonqualified mortgages to develop over time.
Lenders that have long upheld sound underwriting standards have little to fear from the ability-to-repay rule; the strong performance of their loans over time (and through the crisis) demonstrates the care they have taken in underwriting to ensure that borrowers have the ability to repay. Nothing about their traditional lending model has changed, and they should continue to offer the same kinds of mortgages to borrowers whom they evaluate as posing reasonable credit risk—whether or not they meet the criteria to be classified as qualified mortgages.
We are encouraging community banks to continue to lead the market in customer-friendly mortgage practices focused on responsible lending.
IB: How is the CFPB’s new compliance project, which you’ve called “regulatory implementation,” involved with the mortgage lending standards? What kind of help is it providing?
Cordray: We believe that the bureau’s responsibility for the rules we promulgate does not end with simply finalizing a set of regulations. It is not good enough for us to take the view that once these new rules are published, our work is then done and we can say to financial institutions that “it’s your problem now.” If the whole point of our regulations is to protect consumers and promote fair, transparent and competitive markets, then we should care about how well the rules are understood and implemented, how operational issues can be more easily addressed and the amount of effort required. And we have shown that we do care deeply about these things by making numerous adjustments over the course of this year to ease compliance, including special provisions for smaller creditors.
Our regulatory implementation project goes further than simply responding to industry inquiries, as we are doing many times every day. We have also taken more affirmative steps to help the industry understand our rules. We published plain-language compliance guides that we will update as necessary. We launched a series of videos explaining our rules. We worked closely with the other financial regulators to develop examination guidelines that reflect a common understanding of what the rules do and do not require, which were published well in advance of the effective date. Our goal with all of these efforts has been to provide as much advance notice as we could about what you should expect from the financial regulators as they engage in supervisory oversight on the mortgage rules.
All of these resources can be found by visiting our website at http://www.consumerfinance.gov/regulatory-implementation/. You may submit specific questions about the interpretation or application of our rules by emailing CFPB_reginquiries@cfpb.gov or by calling 202-435-7700.
IB: Earlier, many community banks had indicated that the mortgage rules were complicated and onerous enough, and that the potential penalties for inadvertent missteps in compliance with those rules were severe enough, that the final rules could make them stop originating mortgages. If the CFPB were to see that happen, would it reexamine how it can redraft the rules to allow community banks to remain in the mortgage lending business?
Cordray: We will be monitoring the mortgage market in January and beyond. The bureau’s ultimate goal in both crafting the rules and monitoring implementation is to assure that responsible, affordable mortgage credit remains available to consumers. We feel especially strongly that community banks are a sound and important source of responsible lending.
We always anticipated that we would monitor the market’s progress as stakeholders get more comfortable with our rule and as other regulatory and economic developments occur. We are required by the Dodd-Frank Act to conduct an assessment of all major rules no more than five years after implementation. But we will monitor throughout that process and would respond appropriately if conditions require reassessment before that date.
But let me emphasize again: If you follow sound underwriting models and provide responsible loans that have historically performed well—even through the worst financial crisis of our lifetime—there is nothing in the ability-to-repay/qualified mortgage rule that says you should not continue to make those loans to your customers. Don’t let anybody talk you out of doing what you do best—what you do as well or better than anyone in America.
IB: Now with the CFPB finished writing the mortgage lending rules, what other regulatory priorities do you see the bureau focusing on in 2014?
Cordray: Our immediate focus is working through the Dodd-Frank Act mandates. These include the TILA-RESPA disclosure integration project, where we will grant a significant implementation period. We have also signaled, with Advance Notices of Proposed Rulemaking, our intention to begin rulemaking processes on debt collection and prepaid cards. As we have more time to plan and assess our other priorities, we will use our Unified Agenda publication and other means to keep stakeholders updated.
IB: The CFPB has collected more than 225,000 complaints from consumers. What should community banks know about the bureau’s efforts to collect and monitor consumer complaints? Are there any patterns in the complaints that the bureau is seeing?
Cordray: The CFPB accepts consumer complaints about consumer financial products and services, and currently handles complaints about credit cards, mortgages, bank accounts and services, private student loans, vehicle and other consumer loans, money transfers, credit reporting, debt collection and payday loans. Consumers can submit complaints on our website at consumerfinance.gov, by calling our toll-free telephone number (1-855-411-CFPB), by fax or by mail. After a consumer submits a complaint, they receive email updates and can log onto our secure “consumer portal” to track the status of their complaint.
Complaints are screened based on several criteria, including whether the complaint falls within the CFPB’s enforcement authority, whether the complaint is complete, and whether it is a duplicate of a prior submission by the same consumer. If a particular complaint does not involve a product or market within the bureau’s enforcement authority, it is referred to the appropriate regulator. Currently, complaints submitted about banks with total assets under $10 billion are referred to the appropriate regulator.
The CFPB sends screened complaints via a secure web portal to the appropriate company for response. The company reviews the information, communicates with the consumer as needed, and determines what action to take in response. The company reports back to the consumer and the CFPB via the secure “company portal.” The CFPB then invites the consumer to review the response and provide feedback. The CFPB reviews the feedback consumers provide about company responses, using this information along with other information such as the timeliness of the company’s response, for example, to help prioritize complaints for investigation.
More information about how the CFPB handles consumer complaints and data summaries can be found on our website, in the CFPB’s Semi-Annual Reports, and in Consumer Response’s Snapshot and Annual Reports (http://www.consumerfinance.gov/reports/). Additionally, consumer complaint data is made available to the public and can be independently analyzed through the Consumer Complaint Database (http://www.consumerfinance.gov/complaintdatabase/). The database is updated nightly.
The database can be searched in a number of ways—by company, by product, by ZIP code. Only complaints sent by the CFPB to companies for response are listed publicly in the CFPB’s Consumer Complaint Database, so it does not include any complaints against banks with assets under $10 billion.
IB: You’ve highlighted the importance of financial literacy, and the CFPB has begun some efforts to help educate consumers. What plans does the bureau have to make more progress on financial literacy? What do most consumers need to learn most?
Cordray: The bureau’s mission is to help make consumer financial markets work for consumers by making rules more effective; by consistently and fairly enforcing those rules; and by empowering consumers to take more control over their economic lives. That last part is absolutely essential to our mission. That’s why we have made financial education a critical component of our work.
We want to help consumers learn to avoid problems in the first place and know what to do about it when they do experience a problem. We focus on providing consumers with tools and information to develop practical skills to navigate the financial marketplace effectively and support sound financial decision-making that will serve their own life goals.
Promoting this financial capability requires more than simply providing consumers with information. It requires a combination of knowledge, skills and action. We are targeting our efforts toward assisting consumers with shopping for the financial products that serve big life goals, such as going to college, buying a home or retiring; and on smaller decisions that can have big life consequences, such as starting a habit of saving or passing along financial life skills to one’s children. We are also working to identify, highlight and spread effective approaches to financial education.
Community bankers can have tremendous influence, including on the issue of requiring financial education in our schools. You know your customers need and deserve a stronger foundation for managing their financial affairs to improve their lives. It is a shame and a scandal that most states do not insist on this key support for their citizens. You can make all the difference in your state, but we need you to speak up and help make this happen.
We are helping consumers directly by providing innovative tools and information online. These include Ask CFPB, which provides more than a thousand questions and answers about financial products and services at consumerfinance.gov/askcfpb/; Paying for College, which helps students and families compare college costs and loans; and CFPB en Español, which makes CFPB resources available in Spanish.
We are also working with a broad range of community partners to provide financial education and decision-making supports in moments when consumers need it most. These include initiatives to integrate financial education into K-12 school curricula, develop workplace financial education programs, and provide resources to faith communities and other local community organizations. Community institutions are key to helping to build a nation where every consumer is financially capable.
Currently, we are running a nationwide multimedia campaign to inform consumers about new protections that apply when they send international money transfers. We have prepared posters, brochures and other printed materials in several languages and have made them available to international money transfer providers, community groups, immigrant organizations, consulates and other government agencies that can reach the consumers who can benefit from these protections.
IB: Where does preserving consumer choice in a diversified financial services marketplace fit into the CBPB’s role as a consumer regulator?
Cordray: Preserving competition and consumer choice is an integral part of consumer protection. In our recent mortgage rules, for example, we have balanced the need to protect consumers from loans they cannot afford with the need to preserve consumer choice and access to credit during the housing market recovery.
Other CFPB initiatives are focused squarely on improving consumers’ ability to make sound choices in a complex marketplace. For example, through our TILA-RESPA disclosure integration project, we are bringing greater transparency to mortgage markets while preserving consumer choice and enhancing consumer shopping and decision making. We have also undertaken other initiatives, such as a student financial aid-shopping sheet, to facilitate consumer shopping in nonmortgage markets. As we move forward with our work in these and other areas, we will continue to focus on access to a robust market for financial products and services where consumers can make the choices that are best for them.