Date: February 2, 2012
Time: 9:00 AM – 3:00 PM
Location: Marriott Northwest, San Antonio, TX

Topic: Compliance Management for the Dodd-Frank Era

The Dodd-Frank Act and the reaction of the federal banking agencies have fundamentally changed the way compliance programs must function. For example, the increase in UDAAP (Unfair, Deceptive or Abusive Acts or Practices) enforcement by the federal regulatory agencies has changed the way successful bank compliance programs must be managed. Enforcement is subjective and broadly applied, targeting practices that occur “between the cracks.” While compliance functions are operating from checklists and testing programs that are tied to specific regulations, violations are being cited in operational areas outside of the bank’s scope. These factors all make UDAAP compliance a moving and challenging target.

This session explores how compliance management must evolve to meet these types of challenges. Regulatory compliance must move beyond subject matter expertise to acquire more diverse skill sets and better integration with the other areas of the bank-particularly risk management functions. Smart chief compliance officers will utilize technology more than ever to identify problems. Piling on processes and procedures and hiring more people will be unacceptable to management in these times of revenue reduction. Compliance managers must use process improvement methodologies to see the waste in their programs and work to eliminate it whenever possible, without sacrificing effectiveness.

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Reprinted courtesy of BAI Banking Strategies Online Magazine. For the latest issue, visit www.bankingstrategies.com.

As we move into the height of the 2012 presidential election cycle, issues of consumer protection in the financial services industry are front and center on the political agenda, as can be seen in the recent controversy involving the president’s recess appointment of Richard Cordray as director of the Consumer Financial Protection Bureau (CFPB).

Central to the discussion of consumer protection and the role of the CFPB is the mortgage servicing industry and its role in the foreclosure crisis. In the wake of the “robo-signing” scandal, the largest and most sophisticated mortgage lenders and servicers continue to work with their prudential regulators on resolving the vast implications of a presumption of systemic failure and the public perception that banks have once again proven to be unsuccessful in protecting the rights of consumers. This perception was central to the Dodd-Frank financial reform act signed into law on July 21, 2010, which provided the legislative foundation of the CFPB.

Banks overwhelmed by the broad implications of oversight by the newly empowered CFPB and other aspects of Dodd-Frank continue to direct significant resources to managing and responding to lingering effects of the foreclosure crisis without knowing how aggressively the CFPB will exercise its authority in the servicing industry and precisely which standards will form the basis of the Bureau’s approach. Although the CFPB has issued supervision and examination guidelines for both mortgage origination and mortgage servicing exams, it is not yet clear the impact that the ongoing remediation and ultimate results of the April 2011 foreclosure Consent Orders will have on the Bureau’s approach to supervision and enforcement in mortgage servicing. Meanwhile, Congressional committees also continue to look into the situation.

Some mortgage servicers fear that the influence of this intense scrutiny coupled with the results of the consent order remediation efforts will provide a road map for regulators to identify technical compliance violations in traditional areas of consumer compliance such as Truth-in-Lending, RESPA, and fair lending. This creates additional cause for all mortgage servicers to work proactively to identify and correct deficiencies in mortgage servicing operations – throughout the entire life cycle of the servicing activities. This includes minor exceptions that don’t directly impact borrowers all the way up to especially egregious errors such as failing to afford the required protections for our nation’s active duty military members.

All banks with mortgage servicing operations should recognize the significance of this emerging risk and be proactive in assessing the effectiveness and sustainability of controls, policies, and procedures governing mortgage servicing functions. As with other types of risk management, the foundation lies within an effective risk assessment program, which should encompass all aspects of the loan servicing, loss mitigation, and foreclosure activities, with particular emphasis on activities performed by third parties on behalf of the bank. This risk assessment should also reflect the relationship of concepts such as fair lending, which is consistent with regulator’s approach of now including loan servicing and loss mitigation activities in fair lending examinations.

The results of the comprehensive risk assessment should be used to identify risks and to direct resources to making appropriate enhancements to mortgage servicing risk assessment programs based on evolving industry standards and best practices. Utilize risk assessment results to develop specific action plans for program improvements prior to internal audits and external examinations. Continue to refine the risk assessment standards as expectations change and as regulator’s approach to mortgage servicing supervision and examination progress. By performing a robust risk assessment and adopting a continuous improvement model in mortgage servicing operations, your bank will be better positioned to avoid regulatory and reputation risk, and most critically to protect the rights and interests of borrowers.

Fed Transparency & The Markets

Fourth Quarter GDP Up 2.8%

Legislation Halts During Election Year

President Obama assured that 2012 would get off to a rousing start when he made a recess appointment of Richard Cordray as head of the Consumer Financial Protection Bureau. Predictably, the appointment generated both praise and outrage.

To date, much of the discussion has focused on the constitutional issues raised by the appointment, and the impact of the precedent on presidential/senatorial relations, but little has been said about the impact on the banking industry. Let’s assume that the appointment remains in place and consider the implications.

First, and critically important, the substantial new authority conveyed to the new agency by Dodd-Frank will now be available to the new director. The bill specifically limited the agency’s new authority until the new director was in place.

In Director Cordray’s first speech following the announcement, he made it quite clear that his first priority was to go after the un-regulated or under-regulated providers of retail financial products. Bankers should take this as good news. Many of the most egregious abuses occurred in less regulated markets outside the banking industry. But bankers still received a disproportionate amount of the blame; as neither the general public nor the mainstream media carefully distinguished bank-generated financial products from nonbank-generated products.

Bringing the nonbank abuses under tighter scrutiny may not immediately improve the banking industry’s image, but it will limit the contagion effect of the bad will generated by nonbank providers.

Another possible impact of the appointment is to make bank compliance issues a focus of this year’s presidential campaign. Bankers should not think of this potential outcome as good news. The recent Republican Primary debates have generated comments in opposition to the CFPB and the Dodd-Frank Act more generally. Bankers may be lulled into thinking that there is a groundswell of support for repeal of the bill. These signals are easy to misread. Even the most aggressive legislative initiatives to limit the CFPB (that have gained any traction) have only attempted to change its organizational construct from a bureau to a commission. Few members of Congress want to go into the next election cycle having voted to repeal “consumer financial protection.” A challenger to an incumbent from either party who voted against “consumer protection” would be sure to make an issue out of that vote.

On a related point, we still hear about bankers who are not preparing to implement provisions based on a belief that the bill, or major portions of it, will be repealed or not implemented. That approach now seems short sighted. I am still of a mind that the CFPB’s organizational structure will, at some point, change from a bureau to a commission, thus distributing the policy making authority to five independently appointed commissioners rather than with a single bureau director. But I see no likelihood of repeal.

An open question is how the recess appointment of the CFPB director will impact the likelihood of other financial regulators receiving Senate confirmation. As of this writing, the FDIC and the Office of the Comptroller of the Currency are both being led by acting chairman though the president has nominated new heads for both and the Senate Banking Committee has cleared both. President Obama also recently nominated a vice chairman of the FDIC. That nomination awaits confirmation. There are two recent nominees for the Federal Reserve Board of Governors who are awaiting confirmation.

At this point, it is not clear if the CFPB appointment will increase or decrease the likelihood of the Senate moving on the other nominations. But these vacancies continue to create uncertainty in financial markets at a time when the economy is already stagnated.

The only real certainty is that we will have a presidential election in November. Typically in a presidential election year very little controversial legislation gets a serious hearing, to say nothing of achieving passage. This year likely will be no exception. Therefore, not only will Congress not deal with Fannie Mae and Freddie Mac, both of which are still in conservatorship, but it is also not likely to deal with any legislation to alter the current construct of the CFPB.

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A compliance checklist for CEOs? That almost sounds like an oxymoron. Traditionally, bank CEOs did not give much thought to regulatory compliance unless something went wrong. However, as the regulatory environment continues to be enforcement-focused, bank CEOs must scan not only the economic landscape, but the regulatory one as well.

As CEOs set the priorities for their bank each year, what should be the regulatory compliance priorities for 2012? The problem is — there are so many regulations, and with Dodd-Frank, many more to come, where do you start?

Based on our experience and on recent bank regulatory enforcement actions (both public and private) here is a compliance “to-do list” for 2012 for banks of all sizes.

1. Establish a UDAAP Compliance Program

Unfair, Deceptive, or Abusive Acts or Practices is perhaps the biggest consumer protection regulatory risk facing banks today. Many enforcement actions, both formal and informal, cite UDAAP as the source. Even before the CFPB was officially up and running, the other banking regulators were aggressively examining for UDAAP compliance. UDAAP is unusually subjective and very broad, covering most banking transactions. Interpretations are not black and white and activities that have not previously been criticized are coming under fire. An institution’s best compliance defense is to develop a UDAAP compliance program specifically designed to produce fairness and clarity in banking transactions.

A good UDAAP program, at the minimum, must have the usual compliance elements: policies, procedures, risk assessments, monitoring and testing and a formal governance structure. However, it needs more than this. UDAAP violations are often found deeply embedded in the operations of the institution — areas where compliance departments usually do not venture. Effective UDAAP compliance will need more than just regulatory subject matter expertise (the typical compliance department skill set). It will need operational and IT experience. Successful regulatory compliance departments of the future will consist of a variety of experts — with the ability to analyze bank products and services comprehensively — and see them from a consumer perspective. Another essential component to a UDAAP compliance program is a well-managed consumer complaint process that captures all complaints, notes the root causes and tracks complaint trends over time.

2. Perform a comprehensive fair lending check up

Fair lending compliance presssure has not abated at all. The Justice Department recently imposed the largest ever civil money penalty for fair lending violations. Prudential bank regulators also continue to issue fair lending enforcement actions; the regulatory emphasis in examinations is as focused as ever.

A fair lending program must include all bank lending products, not just mortgages. While mortgage lending remains the area of highest scrutiny — especially mortgage servicing, other types of loans can be problematic as well. A fair lending program must include such products as direct and indirect auto loans, unsecured consumer loans and hybrid products, such as deposit advance loans.

High risk areas in fair lending include discretionary pricing and product steering. These activities are under particular scrutiny.

If the bank allows lenders to set prices on any types of loans — even for purposes of meeting the competition — a well-designed risk management program is essential to monitor and test for fair lending concerns.

3. Conduct a proactive redlining review

Redlining claims are making a comeback. Banks should not wait for their regulator to determine where the bank’s loans are being made and if the bank is serving all areas of its communities. CEOs should have a complete and thorough understanding of where the bank’s loan dollars are going as well as how their marketing dollars are being spent. Special attention should be paid to low and moderate income areas within the bank’s assessment area(s).

Mortgage lending is not the only type of loans to consider in a redlining review. Take a look at where consumer loans and small business loans are made. If there are low or moderate income geographies within the bank’s footprint that are light on loans, determine the reason before your regulator asks. Having a plan and knowing and being able to tell your story (before your examiner does) is one of the best ways to avoid redlining problems.

4. Get your small business lending in shape for data collection

One of the new requirements of the Dodd-Frank Act is that banks must collect and report small business loan data annually — much like HMDA data is now reported. This data collection will enable regulators to determine if an institution is fairly lending to women and minorities. Until the actual regulations are written, data collection is not required. So, in the time available before the rules are in place, banks should take the opportunity to get small business portfolios in good shape—from a fair lending perspective.

One potentially troublesome small business loan issue is pricing. Many institutions have rate sheets and controls on consumer loan pricing, but not for small business loans. Regulatory agencies will eventually be able to analyze small business loan data much like they now review HMDA data, and will be able to compare pricing on loans made to women and minority borrowers. It is crucial to develop and implement effective pricing and underwriting policies and controls for small business loans. 2012 is the time to get these policies and control elements in place.

5. Make sure your BSA/AML program “pillars” are still intact and working

For the last couple of years there has been a prevalent perception that the regulatory agencies were placing less emphasis on Bank Secrecy Act/anti-money laundering programs. Whether or not that perception was true, BSA compliance enforcement is definitely making a comeback. Every bank CEO should be sure that the essential BSA program “pillars” are in place and effectively working. These pillars include: effective BSA/AML internal controls; a qualified BSA officer; an independent BSA/AML audit, preferably annually; and BSA training.

Here are a couple of specific things to watch for. Weak or ineffective suspicious activity reporting is most often the culprit when a BSA enforcement action is issued. Make sure that the bank has updated transaction monitoring software. Remember that not all such software is created equal and SAR look backs are very expensive. If the bank’s suspicious activity monitoring and fraud identification are in two separate areas — think about combining them. Not only can efficiencies often be gained, but this combination of effort can be helpful in identifying and reporting suspicious activity.

Secondly, BSA training is often taken for granted, but the lack of effective training can, by itself, be the grounds for an enforcement action. Make sure training is broad enough, is provided to enough of the bank’s staff and is of high quality. Job specific training is the best.

Narrowing down bank regulatory issues to five priorities is inherently difficult in these extraordinary regulatory times, but if these five are in good shape, the bank has a good chance of a having a quiet 2012 on the compliance front.

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January 10, 2012
Thomson Reuters
Sarah N. Lynch

U.S. securities regulators will question the top U.S. audit watchdog about his budget and policy priorities on Wednesday, in a rare public meeting designed to shed more transparency on the agency that has tightened the screws on the auditing profession over the past year.

The meeting at the Securities and Exchange Commission will be styled like a congressional hearing, with Public Company Accounting Oversight Board Chairman James Doty on hand to answer questions and make the case for why the SEC should agree to give the PCAOB a budget boost.

The meeting on the PCAOB budget comes at a crucial time. Since Doty first joined the PCAOB about a year ago, he has greatly raised the profile of the audit watchdog.

A vocal critic of the way auditors did their job during the 2007-2009 financial crisis, Doty has called for a series of major regulatory changes that have been met with strong resistance from accounting firms.

The PCAOB is considering whether to limit the number of years an audit firm can work for the same client – an action that could break up some business relationships more than a century old. It also is considering forcing auditors to put their names on the audit reports attached to companies’ financial statements.

Further, Doty has been fighting for the ability to inspect overseas accounting firms, especially in China where they have denied U.S. regulators access to documents despite a rash of accounting scandals at U.S.-listed companies based in China.

Doty may face questions on some of these controversial policy areas in addition to the PCAOB’s 2012 budget request, according to people familiar with the matter. For 2012, the PCAOB is requesting approval of a $227.7 million budget, which is up from its 2011 budget of $204.4 million.

Its budget is not funded with taxpayer money, but through fees imposed on public companies and broker-dealers. However, the SEC must sign off on it.

Those who know Doty or who are familiar with his tenure at the PCAOB so far say they expect he will do well when he presents the PCAOB’s budget request before the SEC.

“Chairman Doty is a veteran securities lawyer and is well respected on both sides of the aisle,” said Bradley J. Bondi, a partner at Cadwalader, Wickersham & Taft LLP and former SEC attorney.

Created by the Sarbanes-Oxley Act of 2002, the PCAOB has the power to impose rules and to inspect and fine accounting firms, including the Big Four accounting firms: Ernst & Young LLP, KPMG, PricewaterhouseCoopers and Deloitte & Touche LLP.

RARE MEETING

Wednesday’s meeting will mark only the fifth time the SEC has met in public to vote on the PCAOB’s budget since the board was established. In most years, SEC commissioners have treated the budget approval as a formality and voted on it behind closed doors without any public debate.

The last time the SEC met publicly to discuss the PCAOB’s budget was in December 2008, the same month that Bernard Madoff’s Ponzi scheme came to light and the U.S. government was still grappling with a response to the financial crisis.

The first open meeting on the PCAOB budget was held at the request of SEC Republican commissioners Cynthia Glassman and Paul Atkins. Over the years, Atkins was often critical of the high salaries paid to the PCAOB chairman and its members.

According to PCAOB records, the 2011 salary for the chairman was $672,676 while members made $546,891. Salaries have remained flat since 2009. As a comparison, SEC Chairman Mary Schapiro’s 2012 salary is $165,300.

This time, the SEC’s newest commissioner Dan Gallagher, a Republican who once worked for Atkins, is the one calling for a public review of the PCAOB’s budget.

“This meeting adds sunlight to the PCAOB budget process,” Gallagher said in a statement provided to Reuters. “It is no different in kind to the congressional hearings at which Congress asks the SEC and other federal agencies about their budget and spending priorities each year. Indeed, our public meeting on Wednesday is the only mechanism by which the public is assured that the SEC is properly exercising its oversight of the PCAOB.”

Atkins said in an interview he is glad to see the SEC is getting back to holding public meetings on the PCAOB budget, and urged commissioners to ask questions about salaries, plans for how they will use the funds, policy and enforcement matters, among other things.

“Organizations usually love to try to gloss over the difficult issues,” Atkins said.

Atkins added that he feels the SEC has “neglected its duty” in recent years to more closely scrutinize the PCAOB’s spending, but Mark Olson, a former PCAOB chairman who has in the past participated in public SEC meetings over the budget, said the lack of a public meeting in recent years is understandable.

“I think the SEC believed they had bigger fish to fry, especially in the post-Madoff environment,” said Olson, now a co-chairman of Treliant Risk Advisors. “I think Rome was burning all around them and…contrary to back in the Sarbanes-Oxley days, the PCAOB and audit standards in general were not the same priorities.”

(Reporting By Sarah N. Lynch; additional reporting by Dena Aubin in New York; editing by Carol Bishopric)

Online Article

Jan. 6 (Bloomberg) — Richard Cordray’s appointment as director of the U.S. Consumer Financial Protection Bureau moves the new agency nearer to fulfilling its intended role as a one- stop shop for borrower safeguards.

Unlike the historically patchwork oversight of consumer finance, the bureau centralizes the federal government’s authority and in some cases extends it. Consumers may benefit from its reach whenever they take out a payday loan, negotiate a mortgage rate, borrow money for school or pay a credit card fee. For those who think they’ve been wronged, there will be a complaint system to help them fight back.

Cordray, 52, who was seated by President Barack Obama on Jan. 4 over Republican objections, takes over a bureau created under the Dodd-Frank Act in response to complaints that existing regulators didn’t do enough to protect consumers before the 2008 credit crisis. The rules overhaul shifted consumer protection from regulators responsible for banks’ financial stability, removing a potential source of conflict.

“Consumers deserve to have someone who will stand on their side, who will protect them against fraud, and who will ensure they are treated fairly in the financial marketplace,” Cordray said yesterday in a Washington speech. “The new consumer bureau was created to make sure these things are achieved for all Americans.”

Obama lauded the agency today as the way “to make sure the rules of the road are enforced” on behalf of consumers. “You’ve finally got a great director who was tailor-made to lead this agency in Richard Cordray,” Obama said during a visit with bureau staff in Washington.

Elizabeth Warren, the Harvard Law School professor credited by Obama with conceiving the bureau, viewed it as a “cop on the beat” to protect Americans against unscrupulous lenders by — among other things — eliminating jargon-filled loan documents in favor of plain-English paperwork.

“It is impossible to buy a toaster that has a one-in-five chance of bursting into flames and burning down your house,” Warren wrote in the journal Democracy in 2007. “But it is possible to refinance an existing home with a mortgage that has the same one-in-five chance of putting the family out on the street — and the mortgage won’t even carry a disclosure of that fact to the homeowner.”

The consumer bureau was envisioned as a bulwark against the kind of credit bubble that inflated from 1999 to 2007, when household debt tripled to more than $12 trillion, according to the agency.

Foreclosures

Warren said effective federal consumer protection might have kept banks from improperly foreclosing on homes after the collapse of the U.S. mortgage market. The 14 largest mortgage servicers entered a consent decree with the Office of the Comptroller of the Currency that cost JPMorgan Chase & Co. $1.1 billion. Consumer protection rules might also have prevented the rise of so-called liar loans, mortgages that were given to borrowers without documented evidence of ability to repay, advocates for the bureau said.

The bureau’s creators also foresaw an agency that would replace inconsistent state regulation with more stringent federal rules on short-term, small-dollar lenders including payday firms, whose annual interest rates can top 400 percent.

Disclosure Form

The agency, which Warren shaped while serving as an Obama adviser, was churning out drafts of a model mortgage disclosure form as part of an initiative dubbed “Know Before You Owe” even before it officially began work on July 21. These forms are intended to help consumers understand the costs of a mortgage and shop around for the best deal.

Similar initiatives have been announced for credit cards and student loans, the other two leading types of consumer credit in the U.S.

The bureau’s direct supervision of mortgage servicers, payday lenders and private student-loan companies will give consumers a watchdog to protect their interests in dealings with nonbank firms “that often compete with banks but have largely escaped meaningful federal oversight,” Cordray said yesterday in a speech at the Brookings Institution in Washington.

“This is an important step forward for protecting consumers,” Cordray said in a statement on the bureau’s website. “Holding both banks and nonbanks accountable to consumer financial laws will help create a fairer, more transparent market.” The speech was Cordray’s first since Obama used a recess appointment to give him the top job.

Legality Questioned

Republican lawmakers are questioning the legality of the move. Senator Charles Grassley of Iowa, the top Republican on the Judiciary Committee, asked the Department of Justice for information on the appointment in a letter signed by seven other Senate members.

Representative Spencer Bachus of Alabama, the chairman of the House Financial Services Committee, has begun an inquiry into the appointment. He has requested from Attorney General Eric Holder any information on the Justice Department’s role, as well as its opinion on the legal basis for the decision.

“The rule of law and Congress’ constitutionally grounded authority to conduct oversight of the executive branch requires that the administration explain the basis for its actions,” Bachus wrote to Holder in a letter dated today.

‘Jeopardy’

Cordray, a Democrat who served as Ohio’s attorney general, was tapped by Warren to run the bureau’s enforcement arm a month after he lost a re-election bid in November 2010. Cordray had previously served as Ohio’s treasurer, a state representative and as a law clerk to the U.S. Supreme Court, and has personally argued seven cases before the high court, according to his official biography. He was also a five-time winner on the television quiz show “Jeopardy.”

Congressional Republicans opposed the creation of the consumer bureau during negotiations that led to enactment of Dodd-Frank in 2010. Senate Republicans last year vowed to block confirmation of any director nominee while seeking changes including replacing the top job with a five-member commission and subjecting the bureau’s budget to the congressional appropriations process.

Senator Richard Shelby of Alabama led a group of 45 Republicans who vowed to deny Obama the 60 votes needed to ensure confirmation by the 100-member Senate. He released a statement Jan. 4 faulting Obama for bypassing lawmakers with an “end run” to seat “an unaccountable bureaucrat who will have immense power over the economy.”

Needless Bureaucracy

Lobby groups representing financial firms including JPMorgan and Bank of America Corp. fought against the creation of an independent consumer bureau, saying it would create needless bureaucracy. Payday lenders like Advance America Cash Advance Centers Inc. won a rule preventing the agency from limiting interest rates, but couldn’t avoid being covered by its rules.

“It has been widely reported that we were against the creation of a Consumer Financial Protection Bureau (C.F.P.B.),” JPMorgan Chairman and Chief Executive Officer Jamie Dimon wrote in an April 4 letter to shareholders. “We were not — we were against the creation of a standalone C.F.P.B., operating separately and apart from whatever regulatory agency already had oversight authority over banks.”

Complaint System

Consumers may benefit from the bureau’s complaint system, its coming regulations and the corps of examiners it is building to examine the books and practices of financial firms.

The bureau, which began taking complaints about credit cards on July 21, said it had fielded 5,074 inquiries as of Oct. 21. The bureau said it would make complaint information available — without personal information — to the public, bucking objections from credit card issuers.

“The complaint system has identified recurring scams and helped to obtain redress for defrauded consumers,” the bureau said in a Nov. 30 report.

Supervision of financial services firms could turn out to be a tactic for reducing the fees that consumers pay for overdrawing their checking account. A study by the Federal Deposit Insurance Corp. published in 2008 concluded that 9 percent of customers paid 84 percent of all overdraft fees.

Felt, Not Seen

Jo Ann Barefoot, a consultant with Treliant Risk Advisors in Washington, said the key tactic in reducing overdraft fees could be supervision, work that would be felt, but not seen, by consumers.

Traditionally, banking supervisors visit firms and examine their records, and prompt changes “every day of the week,” Barefoot said.

“Now for the first time, an agency is conducting examinations with a focus on harm to the consumer,” Barefoot said in an interview.

The existence of a new consumer bureau doesn’t mean that every mortgage will be refinanced, or every bad debt forgiven, Travis Plunkett, director of legislative affairs for the Consumer Federation of America, said in an interview.

“Americans have a right to expect that this new agency will start to address some of the financial problems that are affecting them,” Plunkett said. “That does not mean a startup agency can work miracles.”

The agency begins its work in earnest with a structure that will be largely invisible to the consumer.

Behind its website, consumerfinance.gov, lies the complaint system — which can also be accessed by mail or telephone. Apart from the team that tends to that system, examiners will handle the day-to-day scrutiny of banks and other consumer finance companies.

Alleged lawbreakers will face its enforcement team, which Cordray set up over the past year. And a research and regulations team will both track industry developments, and write and revise the rules of the road for consumer finance.

–With assistance from Phil Mattingly in Washington. Editors: Gregory Mott, Dan Reichl

Online Article

WASHINGTON — One day after his appointment as the director of the Consumer Financial Protection Bureau, Richard Cordray sent a clear signal that he intends to move aggressively to enforce the agency’s expanded authority.

The former Ohio attorney general announced the launch of the agency’s nonbank supervisory program, defended his controversial appointment, promised that the CFPB was already working on significant enforcement actions, and pledged it would not be cowed by the threat of legal challenges.

“The appointment is valid,” Cordray said when asked how he would respond to skeptics. “I am now the director of the bureau.”

The tone of his remarks surprised few industry observers, who have long believed Cordray would move decisively if confirmed. Cordray, who first joined the bureau in 2010 as enforcement chief, built a reputation in his home state as a consumer warrior who went after mortgage servicers for flawed foreclosure practices.

Asked about the enforcement strategy at the bureau, Cordray said there is “lots of work in the pipeline.”

“We are actively moving forward on all fronts and will have more to say as things ripen,” he said during a question and answer session at the Brookings Institute.

With a permanent director in place, the CFPB ostensibly has the authority to supervise nonbanks, including mortgage companies, payday lenders and private student lenders. It also has the ability to prohibit “abusive” acts or practices by banks and nonbanks.

Republicans and industry observers continued to raise doubts Thursday about the validity of Corday’s appointment, as well as the ability of the bureau to exercise its new authority with a recess-appointed director, as opposed to one confirmed by the Senate.

The battle is almost certain to end up in the courts, but in the meantime, Cordray said the CFPB has no intention of treading lightly.

Asked if the bureau planned to proceed with caution in light of potential legal challenges to his appointment, Cordray answered with a forceful, “no.”

“I don’t say that in any sort of militant or challenging way,” Cordray said. “The law of the land gives us certain responsibilities, important responsibilities, that matter to people in this country. With a director in place … we now have our full authority to move forward. We will do that.”

Backing up Cordray’s statements was the announcement Thursday that the agency had already launched its nonbank supervision program. Under Dodd-Frank, the bureau has the authority to oversee mortgage companies, payday lenders and private student lenders, regardless of size, and may also regulate large nonbanks in other markets.

The bureau has proposed a handful of other markets for potential inclusion — debt collection, consumer reporting and prepaid cards, to name a few — and plans to issue a final rule soon to define which companies would be subject to its oversight.

Industry observers said staff at the bureau have long been frustrated by their inability to exercise their full authority under Dodd-Frank. The White House waited nearly a year to nominate a Cordray, after months of speculation that the job belonged to Elizabeth Warren, the bureau’s architect and person in charge of getting it off the ground.

Cordray’s comments and the bureau’s actions on Thursday make clear that they are ready and eager to exercise those powers.

“The staff there I think did their prep work and have been waiting for the starting gun, and that shot happened yesterday,” said Joseph Lynyak, a partner with Pillsbury Winthrop Shaw Pittman LLP.

Jo Ann Barefoot, a co-chairman with Treliant Risk Advisors, said, “They’ve been eager to feel that they had the ability to go flat out with their full spectrum of power and they are planning to do it.”

The expectations are heightened by the fact that Cordray is viewed as one of the more aggressive attorneys general in recent memory, at least in the consumer lending space, said Arthur Wilmarth, a law professor at George Washington University Law School.

As attorney general, Cordray distinguished himself by filing lawsuits against mortgage servicers for their foreclosure practices well before the “robo-signing” scandal vaulted the issue to a national stage.

In March 2010, Cordray and a local prosecutor announced indictments of 16 individuals on charges related to mortgage fraud, alleging artificial inflation of home values and providing false information on mortgage applications.

In July 2010, his office reached a $725 million settlement with insurance giant AIG over allegations that the company engaged in accounting violations and stock price manipulation.

Meanwhile, in October 2010, Cordray sued GMAC Mortgage and its parent company, Ally Financial, over allegations of robo-signing. His office said that it was the first in the nation to take legal action in the robo-signing scandal. The Ohio attorney general’s office recovered more than $2.7 billion from major Wall Street firms during Corday’s two-year tenure, according to the office’s 2010 annual report.

“His approach is low key, but he has a steel rod down his spine,” said Cam Fine, the president and chief executive of the Independent Community Bankers of America. “He is just as enthusiastic as Elizabeth Warren but is more subtle in his approach. I think he will be very aggressive so as to make his mark.”

But Fine does not think Cordray’s primary focus will be on community banks, who are covered by new rules from CFPB but are not examined by the agency unless they have more than $10 billion of assets.

“I believe that Cordray’s attention will be focused on the non bank financial sector and the major Wall Street firms over which the CFPB has primary consumer compliance examination authority,” he said. “Let’s face it, I can’t think of any policy maker who wants to see headlines that say they are picking on George Bailey and the corner bank or credit union.”

Industry observers also said it’s a smart move for the bureau to move quickly to establish its standing.

“If you go slow, there’s some risk that everything you do might be unwound,” said John Beaty, a partner with the Venable law firm in Washington. “And if you go fast, you put some pressure on the courts because they, in deciding to unwind everything, recognize that there’s going to be severe damage to the regulatory structure that’s been created in the interim.”

L. Richard Fischer, a partner with Morrison & Foerster, agreed.

“If I were him I would do exactly the same thing,” Fischer said of Cordray. “I would move forward and I would move forward very quickly, because one, you want to establish legitimacy, and you want to make it clear that there was a purpose in the presidential action and that that purpose is going to lead to results”

“From a political perspective, that’s essential,” he added.

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Here are some fearless forecasts for bank regulation and reform in 2012 from our stable of BankThink bloggers and columnists:

Regime Change

“The 2012 elections will usher in a government that is laser-focused on economic growth and improving America’s competitive standing in the world. Dodd-Frank will be flushed in 2013, replaced with smarter, more effective regulation. The U.S. will end its love affair with lowest common denominator international regulatory accords. A less complicated regulatory regime will be established to prevent the extinction of community banks. Megabanks will simplify their business models and shrink their balance sheets.”

William M. Isaac, FTI Consulting

New Sheriff in Town

“Benjamin Lawsky will ascend to national prominence by turning a formerly moribund New York State Banking and Insurance commission into a powerful force for consumer ‘good’ as director of the re-branded New York State Dept of Financial Services. As newly anointed ‘Sheriff of Wall Street,’ his picture will replace Gretchen Morgenson’s on dartboards hanging prominently in many Mega-Banking boardrooms. ”

Joel Sucher, Pacific Street Films

Debit Do-Over

“The Durbin Amendment to Dodd-Frank will be substantially amended in 2012, and Senator Durbin will be a co-author.

“Explanation: Nothing has yet emerged from passage of Dodd-Frank that has had as many unanticipated consequences as the Durbin amendment. The amendment was billed as pro-consumer and since enactment has been anything but. It has been a short term windfall for retailers with no measurable benefit for consumers. Look for Senator Durbin to remove the formulaic price mechanism of the bill and replace it with a requirement for mediated agreements between debit card issuers and merchants.”

Mark W. Olson, Treliant Risk Advisors

Morning in America

“The efforts at strengthening U.S. banking from balance sheet and risk management perspectives will be shown to bear fruit, as it becomes clearer that U.S. banking is poised to retake global leadership.

“A much more workable and somewhat simplified version of the Volcker Rule regulations will emerge.

“Consumer compliance issues will continue to emerge as an area of intense focus from a regulatory perspective with some notable enforcement actions brought.”

Eugene A. Ludwig, Promontory Financial Group

Dismantling Empires

“In 2011, we saw the end of the beginning of the Basel III capital, resolution and liquidity rules – now, the battle isn’t over what’s in them, but rather how they will be implemented in the U.S. In 2012, a new issue will be added to the already-formidable mix of industry challenges: the beginning of the end of highly-integrated, inter-connected and diversified holding companies. Regulators will now move on to ring-fence different business lines, essentially corralling traditional banking in fields far from more innovative activities like investment advice and wholesale financial services. This will undermine the operational, funding and capital efficiencies that are predicate strategic assumptions in diversified financial firms, and regulators can force this structural rewrite under current rules. Thus, Congressional confusion in 2012 is no impediment to far-reaching regulatory demand.”

Karen Shaw Petrou, Federal Financial Analytics

Mortgage Mea Culpa

“Those elected officials who ignored the warning signs during the last decade will admit that their policies led to the near collapse of the U. S. housing market… A new non-government-backed secondary mortgage market will take root from its ashes.”

Richard Booth, America’s First Funding Group