What is the Consumer Financial Protection Bureau?
In 2010, the The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) was passed and included in the package was the formation of a new consumer financial organization that would oversee and monitor all types of consumer finance services and products. This was named the Consumer Financial Protection Bureau (CFPB), and it’s looking to change the way consumers receive consumer finance services.
The overall goals of the Consumer Financial Protection Bureau (CFPB):
Educate American consumers to know more about the risks, benefits and costs associated with using consumer financial products and services.
Monitor banks, credit unions, lenders and other financial institutions to make sure they are following the necessary regulations and processes that apply to financial companies.
Improve financial markets by gathering important information about the way consumer finances work in America.
More than anything else, the CFPB is tasked with providing awareness and accurate financial information to the general public. Because there is so much misinformation surrounding things like mortgage loans, debt consolidation, credit repair and short-term lending, the CFPB’s main challenge is to clear the air, and make sure consumers are getting treated fairly and receiving accurate financial information.
It’s a large order, but the aim of the CFPB is to ultimately reduce the risk and harm associated with various consumer finance products, in turn, preventing future financial collapses like the country has experienced in past years, and continues to be affected by to this day.
Although the CFPB has power and reach from the get-go, until a director is appointed, it will not be able to place regulations on non-banking companies, such as payday lenders. Once a director is appointed, the agency will have more power and is expected to make changes as it sees necessary.
What Will Be Affected by the Consumer Financial Protection Bureau?
Credit Cards: More Transparency, Less Hassle
In 2010, the FTC received more than 33,000 consumer complaints about credit cards. One of the main areas of interest for the CFPB is reducing the complexities of credit cards by streamlining the application process and requiring credit card companies to provide consumers with more transparency.
This means that all interest rates, fees and other costs associated with having a credit line will be clearly outlined upfront, before the consumer applies or gets approved for a credit card. This will help consumers have a better understanding of the overall risks and costs associated with credit cards.
Prior to the forming of the CFPB and the passing of the CARD Act in 2010, too many credit card companies pushed the features and benefits of their cards and downplayed the costs, so the CFPB will be instrumental in clearing the air for consumers with questions about credit cards.
The CFPB will also have the power to create future laws and regulations that will prevent banks and other large financial companies from skirting credit card laws. This will be done by closing all major loopholes and focusing on transparency and simplified credit card processing. Additionally, all consumer complaints made against credit card companies will be handled by the CFPB.
Credit Bureaus: More Efficiency
When a consumer gets denied for a line of credit, loan or other consumer finance product, the lender and the creditor is required to provide a credit report free of charge, helping the consumer see where they need to make improvements in the future.
The CFPB will enforce this and other regulations, and will attempt to make the credit report system more efficient by making it easier for consumers to fix errors on their reports and have credit accounts and lines updated faster. Recent studies suggest that the number of errors on credit reports is much higher than previously thought, so monitoring the credit bureaus will allow the CFPB to curtail the effects of these mistakes.
According to figures released by the CFPB, the discrepancies in credit reporting are so great that most likely, the credit score you receive from a report is different than the credit score that’s given to lenders, which is ultimately the score that matters. The CFPB, then, will be responsible for minimizing this gap in credit reporting.
Payday Lenders: The Waiting Game
The CFPB is expected to have a heavy hand in the payday lending industry, but change might have to wait. Although the bureau can regulate the payday loan industry, a CFPB director must be appointed before the agency can enact any regulations or limitations on short-term lending.
As it stands, the CFPB can’t implement laws that limit interest rates, loan fees or other costs associated with short-term loans. However, once a director is appointed – and there are a few nominations in circulation – industry experts expect the CFPB to make as many moves in payday lending as other consumer finance markets.
Although these loans don’t have the high-dollar amounts that are associated with mortgage, auto or student loans, the financial companies in this market are typically smaller and potentially more capable of building their businesses on unfair or predatory lending practices. Overall, the affect of the CFPB on the payday loan industry remains to be seen.
Mortgage Brokers: Focusing on Disclosure
The mortgage industry is expected to be the market that the CFPB gets most involved in. Ultimately, mortgage loans represent the most risk and harm to consumers if financial companies are using unethical business models or practices, so the CFPB stands to make the most impact in this area.
The focus on mortgage brokers and lending is also a direct result of the most recent housing crisis and its contributions to the recession of the past few years. The CFPB will not only force lenders to provide more information to potential borrowers, but will also require them to verify incomes and other personal information so that a homeowner’s ability to repay a loan is completely verified before a loan is taken out.
The CFPB also launched the Know Before You Owe initiative, an effort to simplify mortgage disclosure forms, which outline the exact costs and terms associated with taking out a mortgage loan. Current mortgage disclosure forms are convoluted and often add to the financial confusion of taking out a home loan. A new, simpler mortgage disclosure form is still in the works, and is expected to roll out in 2012.
Debt Relief Services: Targeting Disingenuous Providers
Consumers consult debt relief services for help managing their debt and often times achieve undesirable results. Last year, about 12,000 consumers filed complaints to the FTC against debt relief services regarding fraudulent or misrepresented services and unfair or abusive practices.
Under CFPB regulation, debt relief services will be made to comply with rules against providing misleading offers. These debt relief services subject to CFPB surveillance include providers of debt management plans, or debt settlement services particularly those offering debt relief services from credit card, medical and tax debt.
The CFPB will standardize the services offered by debt relief services by enforcing the laws in place from the FTC, banning these services from charging upfront fees and misrepresenting the outcome of their services.
As it stands, the CFPB only plans on regulating the debt relief services that telemarket their services, while some consumer groups hope for an expanded scope beyond those companies offering only telemarketing services.
Banks & Credit Unions: Enforcing Disclosure
The bank supervision segment of the CFPB will oversee financial institutions with $10 billion or more in assets; in total, this will cover over 80% of the banking industry’s assets.
The CFPB plans to identify risks presented to consumers that include hidden fees and unfair spikes in interest rates. To be sure that these banks are complying with these existing rules, the bureau will send representatives to inspect the institution’s financial records.
Representatives employed by the CFPB, eventually projected to equal hundreds of staff members, come from existing financial regulatory organizations such as the FDIC, the Federal Reserve, the OCC and the OTS.
Other measures the CFPB is rumored to implement are issuing checking account disclosure forms, which will provide consumers with any fees associated with their account requirements. In addition, the bureau plans to address consumers and their right to decline the use of overdraft protection.
Banks are taking a strong stance against possible regulation jurisdiction by the CFPB, demanding equal regulations of all financial institutions instead of singling out the “larger participants”, a term the CFPB has yet to define.
Debt Collection: The FTC's Most Wanted
The debt collection industry accounts for the highest amount of complaints to the FTC than any other financial industry. In 2010 alone, consumers filed over 140,000 complaints to the FTC against debt collections agencies. By collaborating with the CFPB, the FTC is able to double their effort to enforce regulation measures against debt collectors.
In an effort to protect consumers from abusive debt collectors, the CFPB will press legal action on the companies who pose threatening and harassing coercion on consumers.
The companies that the CFPB will take action against face accusations of harassment toward consumers as well as making illegal threats after consumers challenge the validity of what these debt collection agencies claim they owe. Quite frequently, consumers fall victim to debt collection companies due to identity theft, debts that have expired, and even debts that the consumers don’t even owe.
Although no regulation or enforcement can take place until a bureau leader is official, the appointed director of the CFPB, Richard Cordray, is known for taking a hard stance against debt collectors.
Student Loan Companies: Mediation for Borrowers
About 75% of students who attend college borrow student loans to pay for their tuition, and the average graduate finishes school with about $25,000 in student loan debt. That amounts to over $900 billion in student loan debt in the United States, which is more than the total amount of credit card debt across the nation.
Although student loan companies receive the lowest number of complaints from consumers to the FTC, the industry remains an area of focus within the CFPB. The CFPB will use its authority to regulate private education loans by assisting consumers with lender disagreements and alternatives.
In doing so, the CFPB will enforce regulations already in place, obliging student loan companies to comply with disclosing alternative, and possibly cheaper, federal student loan programs.
The Impact of the CFPB in the Future
As it stands, the affect of the CFPB is largely unsure because the final ruling on the terms of the CFPB regulation measures, including the definition of what type of company constitutes as a “larger participant” is set for one year from now, July 21, 2012. In addition, the CFPB cannot begin regulation or the formulation of new rules until the bureau names a director.
President Obama nominated the former Ohio Attorney General, and lest we forget five-time Jeopardy winner, Richard Cordray. A decision questioned by some because of the president’s lack of consideration of the CFPB mastermind, Elizabeth Warren.
Consumer groups and companies that stand to fall under regulation by the CFPB have already voiced their opinions regarding the bureau’s scope. Banks hold strong in their belief for equal supervision among banks and the targeted consumer financial services, while many consumer groups call for regulation to focus only among those deemed “larger participants”.
The companies subject to supervision by the CFPB must undergo various examinations including filing specified reports, employee interviews, and granting the bureau full access to any company records.
Equal supervision across all consumer financial services is unlikely due to the exorbitant resources and budget it would take for the bureau to do so. Perhaps the CFPB’s effort is better suited focusing on the “larger participants” that present the most harm to consumers – those targeted as their areas of focus.
Defining who these “larger participants” are presents a difficult task because of the multitude of variable possibilities by which to determine what services should fall under the category. Possible parameters up for determination include company sales, size of the company, and transaction frequency. Further complexities such as the possibility of defining “larger participants” by market play a part in the determination as well.
