By Jeff Bater
Jan. 22 — The Consumer Financial Protection Bureau (CFPB) is running out of time before the 2016 election could bring a possible change in direction — or an entirely new structure should Republicans take the White House.
Left unfinished in 2015 are a series of significant rulemakings affecting debt collection, prepaid products, mandatory arbitration clauses, and payday loans.
The CFPB needs to pick up the pace of its rulemaking “if the agency intends to make a dent in its agenda before the end of [Director Richard] Cordray's term or changes to the CFPB's structure are imposed, whichever comes first,” Jonathan L. Pompan, a partner at Venable LLC, told Bloomberg BNA in an e-mail.
In the meantime, Pompan predicted the “CFPB will continue to make examination findings and bring enforcement actions that are groundbreaking and test the boundaries of the agency's authority, fair notice, and due process.”
Tony Alexis, the CFPB's enforcement director, told an American Bar Association conference Jan. 8 that he expects the bureau to be “very active” on debt collection, mortgage servicing and student loans.
The CFPB is also likely to focus on marketplace lending activities, fair lending and aggregators who collect consumers' personal financial information, Jolina Cuaresma, an attorney at White & Case, told Bloomberg BNA in an e-mail.
The scope of future CFPB enforcement actions may hinge on the outcome in a case pending before the U.S. Court of Appeals for the D.C. Circuit. Mount Laurel, N.J.-based mortgage company PHH Corp. says CFPB Director Richard Cordray overreached in a $109 million enforcement ruling against PHH.
The case marks the first challenge to a CFPB administrative ruling and subsequent action by Cordray, and tests the CFPB's ability to choose when and how it moves against enforcement targets.
Much also depends on the outcome of the November election. While Cordray's five-year term doesn't end until 2018, congressional Republicans have made clear they would prefer to alter the CFPB's governance.
Legislation replacing the CFPB director with a five-member bipartisan commission, which has become a perennial for House Republicans, was approved by the chamber's Financial Services Committee last year and a spokesman for the bill's sponsor, Rep. Randy Neugebauer (R-Texas), said he will continue to push the measure (H.R. 1266) this year.
In addition, Republicans could pull the bureau into Congress's annual appropriations process, a move that could reduce the CFPB's independence.
Many of the rulemakings on the CFPB's agenda aren't likely to take effect until 2017 or later, Guggenheim Securities analyst Jaret Seiberg said in market commentary.
The average CFPB rulemaking has taken 18 months or longer. Debt collection, for instance, has been on the bureau's list of initiatives since 2013, yet the latest agenda, issued in November, shows the practice under scrutiny remains in pre-rule stage.
In November, the CFPB indicated in a blog post that it expects to finalize a rule on prepaid cards in the spring. The agency first proposed in 2014 that prepaid accounts receive certain protections that are similar to those that exist now for debit and payroll cards. It also proposed general credit card protections to prepaid accounts that access overdraft services or offer certain credit features.
Obrea Poindexter, a partner at Morrison & Foerster LLP, told Bloomberg BNA she thinks the bureau will finalize some part of a prepaid rule early this year, and that the bureau might seek additional comment on some aspects of the proposal, such as virtual currencies. Poindexter said how the proposal deals with overdraft services and credit features remains “another sticking point.”
“I wouldn't be surprised to see additional comment on that aspect of the proposal as well, because it's so complex and has such a larger potential impact on the market,” Poindexter said in a telephone interview.
Industry representatives have raised concerns about language in the proposed rule and the breadth of potential targets, ranging from peer-to-peer lenders and virtual currency providers to checking or deposit accounts.
“The rule has just become more expansive,” David Beam, K&L Gates LLP partner and payments specialist, told Bloomberg BNA.
If the CFPB doesn't address some of the vagueness of the definitions, banks may reconsider their product offerings, an outcome that could reduce access to credit products for underbanked populations, said Nessa Feddis, American Bankers Association senior counsel, told Bloomberg BNA.
The bureau is preparing a rulemaking regarding overdraft programs on checking accounts, an area that has been a focus of attention for the CFPB since its inception.
Guggenheim's Seiberg said he thinks the CFPB remains concerned that many consumers pay too much in overdraft fees and that the agency will propose limiting the number of overdrafts and requiring banks to give consumers an extended period in which to repay the loan.
Morrison Foerster's Poindexter expects a proposal in the latter half of this year, although the timing could depend on when the bureau finishes work on its rule targeting payday and short-term loans.
“The closer they get to releasing something on short-term loans, I think they'll get closer to really being able to deal with overdraft,” Poindexter said.
The regulator published an outline in April 2015 of payday lending proposals under consideration. Those proposals would cover short-term credit products that require consumers to pay back the loan in full within 45 days, such as payday loans, deposit advance products, certain open-end lines of credit and some vehicle title loans.
The proposals would also apply to high-cost, longer-term credit products of more than 45 days where the lender collects payments through access to the consumer's deposit account or paycheck, or holds a security interest in the consumer's vehicle, and the all-in (including add-on charges) annual percentage rate is more than 36 percent.
While the CFPB has said it expects to release a proposal on payday lending in the first quarter of this year, a final rule might not come until 2017. “It will take a while for the CFPB to really digest payday and short-term loans,” given the likely volume of comments and the fact that new fintech entrants, including marketplace lenders, are looking to provide solutions to short-term liquidity, Poindexter said.
The CFPB hasn't specifically targeted marketplace lenders, although they could be wrapped into other rulemakings to define larger participants in markets for consumer installment loans and vehicle title loans, according to Ori Lev, partner at K&L Gates.
“Depending on how the CFPB defines the ‘consumer installment loan' market, its larger participant rule may sweep in only true lenders or also encompass other marketplace loan participants,” Lev said in a blog on the K&L Gates website.
Poindexter said she thinks the CFPB is closely studying marketplace lenders and other fintech products — which could result in a request for information so the agency can “understand some of those models a bit more,” she said.
In the payments space, the CFPB is more likely to rely on its enforcement authority than regulation and supervision, said Kevin Petrasic, a partner at White & Case said in an e-mail. Issues likely to attract CFPB scrutiny include industry practices deemed unfair, deceptive or abusive; concerns about improperly secured customer personal financial data; and payment providers that fail to ensure the safety and security of customer payments, Petrasic said.
The CFPB says it is gathering additional research for a rulemaking on debt collection activities, which are the single largest source of complaints to the federal government of any industry. Poindexter said a proposed rule might emerge in the latter part of this year.
The CFPB is also working to finalize a proposal published in December 2014 to amend certain aspects of the bureau's 2013 mortgage servicing rules. The proposal addressed, among other things, enhanced loss mitigation requirements and compliance with certain rules when the borrower is a potential or confirmed successor in interest or is in bankruptcy.
Further out on the horizon is CFPB action on mandatory arbitration. The bureau announced in October it is considering proposing rules that would ban consumer financial companies from using “free pass” arbitration clauses to block consumers from suing in groups to obtain relief. The announcement came seven months after the agency issued a study that found arbitration clauses in agreements with the financial services industry are little understood by consumers and can restrict their ability to seek redress through class-action settlements when disputes emerge.
Republican lawmakers, who oppose efforts to limit such arbitration clauses, are likely to hold hearings on the proposal, Jared Sawyer, a staff member on the House Financial Services Committee's Financial Institutions and Consumer Credit Subcommittee, said during a panel discussion Jan. 9 at an American Bar Association's Banking Law Committee meeting in Washington.
The CFPB finalized a rule in June that extends its oversight of the auto financing market to more than 30 of the largest nonbank finance companies and their affiliated companies. The final rule means that the CFPB, for the first time, will be supervising large auto finance firms that aren't banks for compliance with consumer protection laws such as the Equal Credit Opportunity Act, the Truth in Lending Act, the Consumer Leasing Act, and the Dodd-Frank Act's Unfair, Deceptive or Abusive Acts or Practices prohibition.
White & Case's Cuaresma said that now that the CFPB has supervisory authority over larger entities in the auto financing space, the bureau may “step up its supervision over some larger auto companies that provide loans and leases through dealer franchise arrangements.”
— With assistance by Stephen Joyce
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