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From Banking and Finance Law Daily, May 12, 2014

Cordray tells Chicago Fed that the bureau will prevail over opposition

By Katalina M. Bianco, J.D.

Speaking at the Federal Reserve Bank of Chicago, Consumer Financial Protection Bureau Director Richard Cordray said that it took the financial crisis and resulting Great Recession to “bring to life” the CFPB, a federal agency with the mission of reaching for “a new normal” in the consumer financial marketplace post-crisis.

Changes brought by Dodd-Frank Act. Cordray said that the Dodd-Frank Act, enacted in the aftermath of the recession, imposed two particular changes in financial regulation with the advent of the bureau. The first change is that there no longer is a “sharp divide” between banks and nonbanks in terms of federal oversight of compliance with consumer financial law. “Whatever you think about government regulation, it cannot work in a piecemeal or patchwork manner, by having a system that addresses some competitors while leaving others alone. The most glaring example is the race to the bottom with underwriting standards in the mortgage market, which caused the entire financial system to teeter on the brink of collapse,” Cordray said.

Second, Cordray said, banking regulation based on attention to the safety and soundness of the institution itself is now separated from regulation based on protection of its customers. The bureau director noted that the CFPB’s supervision authority requires a focus on compliance with consumer financial law and on whether consumers are being subjected to unfair, deceptive, or abusive acts or practices. “Yet as we are seeing more and more, banking regulators do not regard these two foci as being at odds with one another. Certainly when we take the long-term view, no bank can remain safe and sound if it mistreats its customers over time,” said Cordray.

Creation of the CFPB. The Dodd-Frank Act created the CFPB, and Cordray acknowledged that the existence and workings of the bureau have been the subject of opposition. The director noted that “every milestone in history,” including the creation of the Securities and Exchange Commission and the Federal Reserve Board, “met with considerable opposition at the outset. Ultimately, however, the critics often became champions. I firmly believe that our new Consumer Financial Protection Bureau will also one day be championed by the financial industry as well as consumers, because accountability creates a better marketplace for all who take part in it.”

Expectations. Cordray spoke about what companies under the bureau’s oversight can expect from the CFPB. “We expect a marketplace where companies are honest and clear so that consumers know the key terms and conditions of financial products up front, including pricing. We expect a marketplace where quality customer service is standard. And we expect a marketplace where financial products are designed to help consumers, not harm them.” He quoted former Solicitor General Charles Fried as saying, “Lying, cheating, and stealing are not traditional American virtues,” and stressed that at the bureau, “we believe they never have been and they never should be. Instead, we see candor, responsibility, and accountability as distinct American virtues.”

Cordray said that consumers must have the ability to compare between two financial products with knowledge of the true costs, actual benefits, and real risks so as to make better financial decisions. Informed decision-making allows consumers to drive the market toward products and services that meet genuine consumer preferences.

The bureau director said that business should succeed by enabling customers to succeed. This means ensuring that consumers can repay their debts over the life of the loan and that the deal that they sign on for is the deal that they receive. It means “not structuring a product so that the lender can succeed regardless of whether the consumer fails.” Cordray emphasized that predatory lending practices are not acceptable and “will not be tolerated.” Consumers also are entitled to good customer service from companies and deserve a response from companies to any communications with them.

Enforcement actions. Cordray provided three examples of how accountability affects participants in the financial marketplace. The first is compliance with consumer financial laws. “It is most definitely the case, for example, that when we take either an enforcement action or a supervisory action, we are deciding what backward-looking relief the company itself should be affording to consumers who were harmed. Likewise, through either approach we are deciding what forward-looking relief should be imposed to change the company’s business practices so as to comply with the law,” he said.

In the bureau’s enforcement actions thus far, monetary relief was provided to past and current consumers supplemented by prospective injunctive-style relief. In some cases, the CFPB also imposed civil money penalties as a means of deterring such violations. “Many of our most significant enforcement actions have occurred after the initial work was done by examination teams that identified violations and laid groundwork that was later taken up, developed, and completed by our enforcement teams,” Cordray said. Other matters may have begun and proceeded as enforcement investigations, prompted by some source of information that gave rise to an inquiry leading to determinations of legal violations.

Risk-based supervision program. Cordray said the bureau has established a risk-based supervision program based on consumer financial protection for the largest banks and, “in a historic first at the federal level,” for a significant number of nonbank financial firms. The bureau director said the program is providing a more level playing field for those who compete in consumer financial markets. ” A conscious focus on consumer compliance management is now tending to converge across the bank/nonbank divide,” he said, and noted that “we are now in position to hold any and all of these entities accountable for their conduct that harms consumers.”

The CFPB has “taken pains to signal other actors in the marketplace about the precise nature of matters we have addressed at a particular entity, regardless of whether we act by enforcement or supervision,” said Cordray. He pointed out, for example, that the bureau publishes periodic documents known as “Supervisory Highlights,” that outline problems and remedial actions to the rest of the market without identifying the underlying institutions.

Pursuit of individuals. The director said that there are “legitimate occasions” when it is appropriate to pursue not only the company that was a party to the consumer’s transaction, but also individuals who were decision-makers or actors relevant to that transaction. Therefore, the bureau has sued not only companies but also their executives in cases where the bureau is authorized to do so. In some cases, this may include anyone with “managerial responsibility” or who “materially participates in conduct of [its] affairs.”

Cordray also said that a company may bear responsibility for the conduct of someone other than the company itself when a third party is acting as its agent or in concert with it or at its direction. “In particular, we have made it clear both that service providers can also be liable for violations of the consumer financial laws, and conversely that banks and other financial firms can be liable for violations by their service providers.” He noted that the bureau had published a bulletin clarifying that banks and other financial firms are required “to oversee their business relationships with service providers in a manner that ensures compliance with federal consumer financial law.”

MainStory: TopStory CFPB DoddFrankAct EnforcementActions FederalReserveSystem Loans Mortgages UDAAP

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