CFPB in Production, Directed by Richard Cordray
On December 8, 2011, Republicans in the U.S. Senate voted to block the nomination of Richard Cordray to be the first director of the Consumer Financial Protection Bureau (CFPB). The vote was 53 to 45, with 60 votes required to move the nomination ahead. Republicans seek significant structural changes to the CFPB, including having the director position replaced with a 5-member commission and increased oversight. President Obama nevertheless appointed Mr. Cordray as the Bureau’s new chief, using his powers to make recess appointments, a move that bypassed the Senate’s confirmation process altogether.
Senate Republicans have reacted hostilely, claiming that Mr. Obama did not have the power to make the appointment. The Department of Justice Office of Legal Counsel issued an opinion on January 12, 2012, concluding that the President had authority to make an intra-session recess appointment. The opinion noted that the CFPB director’s position was created nearly 18 months prior to the appointment. It further concluded that the act of Congress to convene “pro forma” sessions in which no business is to be conducted does not prevent such intra-session appointments. If the appointment stands, it means that the President may make intra-session appointments any time Senators are not actually conducting business on the floor. It’s an interesting, and possibly unconstitutional, power play by the Executive branch.
Shortly after the appointment, on January 6, 2012, Mr. Cordray named Raj Date as Deputy Director of the CFPB. Mr. Date had been leading the day-to-day operations of the CFPB since its launch in July. His appointment as Deputy Director may mean that, even if Mr. Cordray’s appointment is successfully challenged, the CFPB will still have leadership under Mr. Date.
The CFPB was already hard at work before the appointment of its director and deputy director. But, with capable leadership in place, over 700 employees and bulletproof funding, the CFPB is moving full speed ahead.
The Bureau has the power to: (1) write rules, (2) exercise supervision and conduct examinations, and (3) investigate and enforce federal consumer protection laws, including the Truth in Lending Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act and a number of others. Although life under the CFPB authority remains largely uncertain for auto dealers and finance companies, the CFPB is rolling out proposals, guidelines and initiatives affecting other industries, including mortgage lenders and payday loan providers.
With a director in place, the CFPB has the authority to oversee nonbanks, regardless of size, in certain specific markets: mortgage companies (originators, brokers, and servicers including loan modification or foreclosure relief services), payday lenders, and private education lenders. For all other markets – such as debt collection, consumer reporting, auto financing, and money services businesses – the CFPB may supervise “larger participants” after defining what “larger participant” means. A proposed rule defining various markets and what entities would be considered larger participants in those markets is expected to come out within the next month.
For insight into how the CFPB may regulate finance companies and covered dealers, we look to the nonbank supervision program it launched on January 5 applicable to nonbank mortgage lenders and small-dollar/short-term lenders (payday lenders). The supervision program will include individual examinations of the named industries and larger participants, but may also include requiring reports from these businesses to determine which need greater focus. The CFPB will also exercise authority over folks about whom complaints have been received by the bureau’s complaint database.
The CFPB will analyze the risk posed to consumers of a particular business based on factors such as the volume of business, the types of products or services offered, and the extent of state oversight, which will then determine the extent of attention from the CFPB. Basically, the CFPB will analyze these factors to determine the degree of scrutiny that will be applied during an examination, once examination authority is established. The Bureau indicates it will follow the same approach to nonbank supervision as it does with banks, citing its bank examination manual at www.consumerfinance.gov/guidance/supervision/manual/.
In a January 5 press release issued by the CFPB, Director Cordray stated, “This is an important step forward for protecting consumers. . . . Holding both banks and nonbanks accountable to consumer financial laws will help create a fairer, more transparent market for consumers. It will create a better environment for the honest businesses that serve them. And it will help the overall economic stability of our country.”
The CFPB is training examiners to review financial services providers’ compliance with federal consumer financial laws for the entire life cycle of specific products or services, including how such products are developed, marketed, sold and managed. Examiners will conduct interviews with personnel and observe the providers’ operations. Much of the exam process may be subjective (e.g., as part of the examination process, CFPB examiners will consider a nonbank’s internal ability to detect, prevent and remedy violations that may harm consumers).
Once “larger participant” is defined, we can expect the CFPB to move forward with a supervision program similar to the nonbank supervision program that will be applicable to large participant buy here pay here dealers. For “smaller participant” dealers, the CFPB will have oversight authority in certain circumstances, and will, along with the FTC, share enforcement authority over most of those dealers.
To outline the manner by which the CFPB and FTC will share their authority, on January 23, those agencies signed a Memorandum of Understanding that details how they will coordinate efforts to protect consumers and avoid duplication of federal law enforcement and regulatory efforts.
Under the leadership of its new director, the CFPB is in full production; however, the CFPB may not dedicate resources toward the supervision of motor vehicle dealers for some time. Still, dealers should be adequately warned. It’s time to take a good look at the operation of your dealership and its compliance, or noncompliance. This production will eventually come to a dealership near you.