The Consumer Financial Protection Bureau may face an unsteady political environment and the potential of a leadership shakeup, but a new CFPB report on the agency's supervisory priorities has experts warning financial institutions not to rest on their laurels.
While the bureau's latest issue of Supervisory Highlights is somewhat of a relief to banks and credit unions worried about their implementation of new mortgage disclosures, the 48-page report raised concerns about other areas, including loss mitigation efforts, checking accounts, overdraft protection and auto loan servicing, among others.
Despite speculation that CFPB Director Richard Cordray may run for governor in Ohio, or be fired as the Trump administration pursues regulatory relief, observers said FIs cannot afford to overlook the areas still top of mind for CFPB examiners and potentially their enforcement attorneys.
"It would be at your own peril to ignore them, because whether Cordray stays or Trump decides to go with someone [to replace him], the priorities are indicative of where the agency may go," said Joe Jacquot, a partner and business attorney at Foley & Lardner.
Bankers have long viewed the semiannual report as a must-read because it signals specific issues that the CFPB is focused on based on the past six months of supervisory exams. The latest report, which was released Tuesday, focuses on supervisory activity from January to June of this year. The report for the first time provided data on how matters that originate from CFPB exams get investigated for possible public enforcement actions.
Jacquot, a former chief deputy attorney general of Florida, said even if the bureau chooses not to pursue enforcement actions based on certain supervisory findings, another reason financial firms pay close attention to the report is that it provides plenty of fodder for other regulators and law enforcement officials.
"This is the kind of information state attorneys general offices will mine to begin to develop cases," Jacquot said.
A major criticism of Cordray has been that the CFPB has engaged in "regulation by enforcement," essentially cracking down on violators by imposing big fines instead of going through the cumbersome rulemaking process.
The report signaled the agency's enforcement activity has not slowed down. It found that for all of 2016 roughly 10% of all supervisory exams and one-third of those considered by the CFPB's action review committee were referred for a possible public enforcement action.
"I don't see any change in the tone or that their approach is going to change. They will continue to regulate the way they have been," said Craig Nazzaro, of counsel at Nelson Mullins Riley & Scarborough.
The bureau's supervisory concerns included cases where auto loan borrowers had their vehicles repossessed after a repossession was supposed to be canceled, issues with credit card account management including how card companies were representing pay-by-phone options to consumers, deceptive practices related to deposit disclosures and misrepresentations about opt-ins for overdraft protection.
These were just a sample. The report made other observations in the areas of debt collection, mortgage origination, mortgage servicing, short-term small-dollar lending and fair lending.
"Recent supervisory resolutions have resulted in total restitution payments of approximately $14 million to more than 104,000 consumers during the review period," the report said.
However, the CFPB report may bring comfort to lenders in one key area: mortgage disclosures.
The report indicated that Cordray had kept a promise made to mortgage lenders in late 2015 that the CFPB would be sensitive to good-faith efforts made by lenders to comply with the "Know Before You Owe" disclosures.
At the time, the mortgage industry was concerned that the CFPB would crack down hard on companies that had nearly two years to make systems and operational changes to integrate disclosures through combining requirements of the Truth in Lending Act and the Real Estate Settlement Procedures Act.
The report said that after completing its first round of exams, the CFPB refrained from imposing civil penalties for compliance with the disclosure rule, known in the industry simply as TRID.
"Initial examination findings and observations conclude that, for the most part, supervised entities, both banks and nonbanks, were able to effectively implement and comply with the Know Before You Owe mortgage disclosure rule changes," the report said.
Some observers recalled that Cordray's promise to refrain from enforcement actions in the initial phases of TRID implementation was met with some doubt.
"They said they wouldn't" penalize institutions "and, as far as I know, they didn't, though people were very skeptical about the bureau's promises back in 2015," said Ben Olson, a partner at BuckleySandler and a former deputy assistant director at the CFPB's Office of Regulations. "Cordray put his name on the line with those promises and it's significant to see it play out. They found errors everywhere, because everybody's making TRID errors, but as long as you fix the problem and correct it, they haven't raked companies over the coals."
David Stein, of counsel at Bricker & Eckler in Columbus, Ohio, said one specific line about TRID in the report took him by surprise.
In the report, the CFPB said: "Examiners worked in a collaborative manner with one or more entities to identify the root cause of these violations and determine appropriate corrective actions, including reimbursement to consumers where tolerance violations occurred."
The CFPB likely would have been more aggressive if consumers had to be reimbursed for larger amounts, Stein said.
"It's a good lesson for anyone facing a CFPB enforcement issue to work in a collaborative manner to identify the root cause and that this is the key to the bureau tempering its approach," he said. "When you're in the midst of fighting with the bureau, it's not easy to be collaborative."
Still, the CFPB was less forgiving in other areas. For example, the agency found continued problems with how mortgage servicers sought to help customers complete loss mitigation applications.
Some lawyers have criticized the agency for referring too many cases from supervision to enforcement.
"The bureau has been at this for six years and they are largely examining institutions they've already examined, so why are they finding so many problems?" said Eric Mogilnicki, a partner at Covington & Burling. "If the agency were doing its job, the number of problems should be going down."
Still, Mogilnicki called the CFPB's Supervisory Highlights "one of the best things they do," in part, because the report signals what the agency is looking for without naming names of companies caught in its supervisory cross hairs.