MGMT IANCE MANAGEMENT

BY CARL G. PRY, CRCM

Preparing for a (Potential) Seismic Shift
of a New Regulator

PLENTY HAS BEEN WRITTEN LATELY about the possibility of a new federal agency charged with protecting consumers, to be called the Con- sumer Financial Protection Agency, or CFPA. This is but one part of the Obama Administration’s financial industry restructuring agenda, but it has the potential of being the compliance equivalent of a nuclear bomb.

The CFPA would become the pri-

mary federal supervisor of consumer

financial products and services. Mass

pieces of regulatory authority and visi-

tation power would shift to the CFPA

from current federal agencies. The

purpose here isn’t to throw gasoline

onto the existing bonfire of resistance

to this proposal, but to consider its

impact on the “average” compliance

officer. In other words, if you’re asked

what this plan would do to your day-

to-day operations, what would you say?

1. Not Only a Change
in Regulator, But Also
a Major Change in
Regulation

Taking regulation writing and inter-

pretive authority away from the ex-

isting banking agencies (OCC, Fed,

FDIC, and also the OTS, which may

be folded into the OCC, but that’s

another story) and giving it to the

CFPA will mean a gigantic review and

rewriting effort on the new agency’s

part. There are often multiple versions

of the same rule (flood insurance and

privacy come immediately to mind),

and sometimes they have small (or

maybe not so small) differences. These

must be unified across banks of all

types, meaning changes to many rules

we wouldn’t normally expect.

The CFPA would handle any and

all consumer protection-type rules,

while the existing agencies would con-

tinue to oversee safety and soundness

matters. This sounds like a clean divi-

sion of authority except that many

regulations deal with both, such as

AML rules and loan underwriting

regulations. Who will “control” these

rules and how will this be handled? If

history is any guide, the result will be

more regulation in general, especially

given the current climate of ensuring

that all bases are covered.

According to the initial CFPA pro-

posal, the new agency would be tasked

with making sure all disclosures are

“clear, concise, and timely,” and com-

munications with customers are “rea-

sonable” and balance benefits with

risks and costs. This puts virtually

every form and procedure you have

up for review. For example, for years

there has been a general call for the Fed

and HUD to unify Reg. Z and RESPA

disclosures, and it hasn’t happened

yet. For it to happen under this new

scheme (and it’s specifically mentioned

in the proposal), plan on a long and

difficult transition period. Your bank’s

management should be made aware of

the possibilities.

2. Shift in Regulatory
Priorities

The word “Protection” isn’t in the new agency’s name for nothing. The CFPA’s mandate is to “promote transparency, simplicity, fairness, accountability, and access in the market for consumer financial products or services.” 1 This would be met in part by placing re-

newed emphasis on UDAP-style rules (in fact, the FTC’s authority in this area would be transferred to the CFPA). As currently proposed, the new agency would have virtually unchecked authority to pass rules designed to prohibit practices it sees as harmful to consumers. Some such practices already in the crosshairs include overages, yield spread premiums, and prepayment penalties in loans, and certain overdraft protection practices on deposit accounts.

Enforcement of the Community Reinvestment Act (CRA) would also be ceded to the CFPA. This is evidence of another shift in focus toward increased enforcement of fair lending laws of all types (although one might argue this “shift” is already well underway). The result may be a wave of additional restrictions and requirements in rules such as Reg. B and HMDA; in fact, it’s been posited that to ensure more accurate and meaningful HMDA data, additional fields (credit score, total points and fees, term, broker flag, and interest rate type, among others) should be added. Reg. B data collection for small business loans is also proposed. A separate section of the proposal would even require information collection and geocoding of deposit accounts. This all adds to the regulatory burden, which of course translates into additional cost.

3. New Emphasis on
State Laws

Handling a raft of new or revised federal regulations is only part of the outlook. Under the current proposal, states would retain the ability to adopt laws that go beyond the protections of