CFPB's 2015 Agenda Picks Up Pace
Possible new rules on overdraft protection and fees are one of the top items on the regulatory agenda of the CFPB this year that credit unions will be watching closely.
“This one slipped from last year's agenda and is up for consideration in the middle of this year,” John McKechnie, a partner at Total Spectrum, a Washington consulting firm, said.
In his regulatory watch list for the year, NAFCU President/CEO Dan Berger singled out overdraft protection as the CFPB agenda item that credit unions are particularly concerned about.
A number of other items listed in the CFPB's semiannual regulatory agenda in December have implications for credit unions. These include the agency's planned scrutiny of payday lending, prepaid cards, auto lending and leasing, and the ongoing project to streamline and codify mortgage lending.
As with possible action on debt collection and a project to identify large nonbank participants in financial services, the range of topics in the CFPB's agenda shows the open-ended scope of the agency created by the Dodd-Frank financial reform act as the single regulator for consumer finance.
“I said at the time CFPB could become the most powerful agency in the government,” said Dan Mica, a former CUNA president/CEO who is now a private consultant in Washington. “Its mission is so broad it could do anything it wants.”
For some Republican lawmakers who opposed creation of the agency, that mission remains too broad. They are likely to use the party's majorities in both houses of Congress to attempt to set some limits to CFPB's jurisdiction, to bring its budget under the congressional appropriations process – it is currently funded as an autonomous agency within the Federal Reserve – and perhaps, to restructure it as a full-fledged regulatory commission on the model of the SEC and others with a bipartisan balance among several commissioners.
“There are several prominent members of Congress who want to limit [the CFPB's] powers and institute tighter budgets,” said Mica, who served five terms in the House. “I guarantee that is going to happen.”
“I expect to see some legislative action. The political reality is that the president is very unlikely to sign it," he said.
The CFPB has taken no official stance on this congressional brouhaha and officials have made it clear they will simply continue with their work.
The wheels at regulatory agencies generally grind very slowly as staff conducts its research and analysis, consults with consumers and providers, drafts and fine-tunes rules, assimilates feedback and proceeds to a final rulemaking with deadlines for implementation.
The CFPB has been preoccupied since its inception in 2011 with streamlining the mortgage lending process since this was a specific mandate from Dodd-Frank that had a hard deadline.
The rule unifying the Real Estate Settlement Procedures Act and Truth in Lending Act disclosures were finalized in 2013 and are due to be implemented in August. Even now, considerable resources at the CFPB are being devoted to informing and educating mortgage lenders, including credit unions, and helping them get ready for compliance.
“You will see a lot of activity in mortgage lending,” said Mica, referring to the CFPB's priorities for 2015.
Lenders are trying to understand the term qualified mortgage as defined by the CFPB as they get acquainted with the new mortgage application forms, McKechnie said.
“It's still a learning process,” he explained. “It's still a period of adjustment.”
The CFPB considers the new mortgage application procedures its signature accomplishment so far, fulfilling its congressional mandate on time.
“That was the actual commitment of CFPB – the streamlining of procedures and eliminating redundant regulation,” Mica said. “So far, we haven't seen much of that.”
Despite its protestations that it doesn't pay attention to congressional critics, the CFPB will be eager to hold up the mortgage lending reform as a showpiece for what it can do. Whatever it says in its unified regulatory agenda, that is likely to be the top priority for 2015.
Read more: Courtesy pay and payday lending ...
The possible direction of new regulations for overdraft protection was indicated in a letter last fall from Rep. Carolyn Maloney (D-N.Y.) to CFPB Director Richard Cordray, drawing on the agency's report on overdraft fees.
She urged the bureau to extend opt-in rules currently applied to ATM withdrawals and nonrecurring point-of-sale transactions to include checks and automatic clearing house payments. Many institutions extend automatic overdraft protection unless a customer opts out of it.
Maloney, the top House Democrat on the Joint Economic Committee, also urged the CFPB to adopt rules requiring overdraft fees to be reasonable and proportional. She noted that small overdrafts of $24 were charged a median overdraft fee of $34, yielding a 17,000% interest rate on an overdraft resolved within three days.
“Regulators tend to look at overdrafts from a high level,” McKechnie said. “It can look very different on the ground.”
Many customers seem to like the protection and there are products that are not predatory.
“It's not black and white,” McKechnie said.
Inertia is what keeps customers who are unpleasantly surprised by an overdraft fee from opting out, but it would also prevent customers who may appreciate the protection from opting in, if that were to be the requirement across the board.
“It depends to what extent the CFPB looks at the big picture,” Mica said. Many customers might be happy to pay a fee to avoid a bounced check, but may not take the trouble to opt in for overdraft protection.
In today's low interest-rate environment, fees for overdrafts can be a significant boost to profit, so credit unions are wary of restrictions that could erode this revenue. Similarly, they may be worried that efforts to rein in abuses by some payday lenders will tar legitimate products with the same brush.
“There are not only crooks in this space,” Mica said.
Many credit unions have worked hard to introduce legitimate products to meet the need for small-dollar short-term loans, he added.
Credit unions became concerned when new rules proposed by the Defense Department to tighten restrictions on payday lending under the Military Lending Act turned out to be so strict that they violated existing NCUA rules.
The DoD proposed rules essentially widened the scope of what is covered beyond the narrow range currently specified, extending the credit cap of 36% annual percentage rate to more types of payday loans, deposit advance products, auto title and installment loans. It also prohibited any requirement to submit disputes to arbitration and calls for lenders to verify whether a borrower is covered by MLA.
Tellingly, the CFPB issued a report in late December backing the DoD proposals, and included this recommendation in a comment on the rulemaking. While the MLA proposal is separate from any action the CFPB might take, it provides an indication of which way the wind is blowing in the regulatory agency.
“The current rules under the Military Lending Act are akin to sending a soldier into battle with a flak jacket but no helmet,” CFPB's Cordray said in a statement releasing the report. “To give our troops full-cover protection, the rules need to be expanded.”
It seems likely the CFPB will want similar protections for civilians. In any case, the agency will also be responsible in part for enforcing the DoD rules.
The CFPB reportedly is planning to convene a meeting of small lenders early this year to discuss potential rules. Among other things, such rules could include requirements for lenders to verify borrowers’ income and credit history before lending money.
“Focusing on abuses in payday lending misses the mark,” Mica said, and this could lead to overly burdensome restrictions that would drive many out of the business. “I hope not to see credit unions excluded from payday lending.”
The focus of the CFPB's examination of prepaid products is limiting consumers’ losses when funds are stolen or cards are lost, on investigating and resolving errors, providing easy and free access to account information, and adhering to credit card protections if a credit product is offered in connection with a prepaid account.
As part of its “Know Before You Owe” program, the bureau also proposed disclosures on prepaid products that would provide consumers with clear information about the costs and risks up front.
The CFPB continues to work on a rule that would allow it to supervise nonbank auto lenders so that it would have more complete oversight on this credit market. Any restrictions put on dealers with regard to auto loans could well impact the indirect loans made by credit unions for auto purchases.
“Credit unions need to stay on top of this,” Mica advised. “There will be some regulations.”
McKechnie sees new regulations on auto lending as in keeping with CFPB's activist and aggressive approach.
“Mortgage lending is a big market, but auto lending is right behind it,” he said.