by Fredric J. Gooch, General Counsel – DocuTech Corporation
In a controversial move, President Barack Obama used a recess appointment to appoint Richard Cordray as the first director of the Consumer Financial Protection Bureau. This move which was seen as necessary to protect the public by the Democrats, and as unprecedented and unconstitutional by Republicans brings more change to the already volatile regulatory environment. The Republicans in the Senate were using a procedural technicality to keep the Senate in session even though it wasn’t conducting any business to stop the president from making recess appointments. Republicans were planning on using this tactic to prevent the appointment of a director because they wanted changes to oversight related to the bureau. They wanted to replace the single director with a five member board, they wanted to make the bureau subject to the appropriations process for funding and they wanted to have more power to overrule the bureau. Meanwhile, Democrats and President Barack Obama hailed this as a crucial step that was necessary to protect the consumer and the safety and soundness of the economy. Controversy, finger pointing and litigation will probably follow this appointment, but for many sectors in the financial services industry, including mortgage lending, this appointment ushers in a new era of federal regulation.
The appointment of a director gives the bureau the ability to carry out its full authority as designated in the Dodd-Frank Act. One of these important responsibilities is the ability to regulate and supervise “nonbanks.” Nonbanks are defined as companies that provide consumer financial products or services but do not have a bank, thrift or credit union charter. Now the bureau will supervise entities such as payday lenders, consumer reporting agencies, debt collectors, mortgage servicers and mortgage lenders. Previous to the passage of Dodd-Frank and the appointment of the director many of these entities were not subject to direct supervision by a federal regulator. In a blog post on the CFPB website Mr. Cordray stated that oversight and supervision of nonbank firms will be a “top priority.” The bureau expects to release more information in the coming weeks about how its nonbank supervisory program will work, but early indications are that it will continue its work toward improving the disclosures for mortgages, credit cards and student loans.
The nonbank supervision program will be designed to ensure that these entities are complying with federal consumer protection laws. Now nonbank entities will be subject to federal examinations in addition to existing examinations from state regulators. The CFPB has stated that the nonbank examinations will apply the same approach currently used to examine banks. The CFPB Examination Manual found at : http://www.consumerfinance.gov/guidance/supervision/manual/ will be the basis for both bank and nonbank examinations. The bureau has indicated that he nonbank supervision program will be coordinated with state regulators when applicable, so lenders can expect to see more cooperation between the federal and state regulators, as well as cooperation with the Conference of State Bank Supervisors and other regulatory associations.
The bureau has stated that these will be the priorities as it moves forward to implement this new supervision program:
- Expand its ongoing supervision of mortgage servicers to nonbank mortgage servicers;
- Publish additional examination procedures tailored to the types of consumer financial products and services offered by nonbanks;
- Propose an initial rule to begin defining who meets the test for “larger participants” in certain nonbank markets;
- Publish rules to establish procedures to supervise a nonbank company where the CFPB has reasonable cause to believe it poses risks to consumers;
- Continue ongoing communications with state and federal regulators with a more specific focus on examination planning; and
- Continue to obtain feedback on its supervision program from nonbank financial services companies, banks, thrifts, and credit unions, federal and state agencies, consumer and community groups, and the public.
The controversial appointment of Mr. Cordray will be a subject of debate around the country for some time. However, while the politicians and pundits argue over the legality of the appointment, nonbank organizations such as mortgage lenders will be busy keeping up with the new requirements published by the bureau and preparing for new federal examination requests. Nonbank lenders will hope that consolidation of regulatory power at the federal level will mean a more centralized approach to regulation, but only time will tell how closely the CFPB will work with the state regulators. But make no mistake about it, there is a new Sheriff in town.