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Today's Trends in Credit Regulation

Consumer Financial Protection Bureau - Ready to Strike
By Thomas B. Hudson

As we approach the one-year anniversary of the enactment of the Dodd-Frank Act — the federal law that, among other things, established the Consumer Financial Protection Bureau — it’s probably worth recapping the CFPB-related events of the last several months in order to get some idea of how our federal dollars are being spent protecting consumers’ financial interests.

Although it is not scheduled to formally assume any regulatory authority until July 21, 2011, the CFPB has launched its Website, www.consumerfinance.gov. There you’ll find a video that explains the causes of the financial crisis and how the CFPB will be a “cop on the beat” to protect consumers going forward. The site also provides links to the CFPB’s blog and its accounts on Facebook, Twitter, and YouTube. Professor Elizabeth Warren, the agency’s interim director, shows up in plenty of places on the Website. If you haven’t seen it, you ought to visit it, mark it as a “favorite.”

So, the big news is the CFPB is still without a director. President Obama hasn’t named anyone yet, and rumors are flying about a possible recess appointment of Warren. If he were to nominate a director now, it would leave only a few short weeks for a Senate confirmation of the selection before the Bureau officially assumes its duties. It’s still possible that Obama may nominate someone less controversial, such as Sarah Bloom Raskin, who currently sits on the Federal Reserve’s board of governors.

Despite the lack of a director, the CFPB, its interim director and her team leaders are moving fast to get the agency ready for its July 21 deadline. Some think it’s too fast. And some think there’s too much power in the hands of the director.

There are Republican proposals to “de-fang” and “de-fund” (Professor Warren’s words) the Bureau. They want to place it in Congressional hands, moving the Bureau to the Treasury Department and eliminating its status as an independent entity housed at the Federal Reserve Board. They also want to restructure the Bureau into a 5-member commission to make it a bit more answerable to the political process. Commissioners would serve staggered terms. And to ensure bipartisanship, no political party would have more than three members serving on the commission. This isn’t a radical approach – it’s how the Federal Trade Commission and the Securities and Exchange Commission are set up.

Other measures to reduce the Bureau’s power and independence have been introduced as well. Whether the current Republican efforts on the hill to curb the authority and speed of the CFPB will go anywhere is anybody’s guess.

Until such time as Warren is replaced, if at all, she will serve as the credit czar and remain the “go-to” person for the CFPB. On March 16, she testified before the House Subcommittee on Financial Institutions and Consumer Credit. She discounted a rules-based approach to financial services oversight, claiming that too many rules bog down the industry and put smaller competitors in the financial products marketplace at a competitive disadvantage. She’s also focused on creating a more level playing field between consumer and industry.

“A simple, straightforward, and consistent presentation of a credit agreement is the best way to level the playing field between consumers and lenders — and among different types of lenders — and foster honest competition,” she said.

The Bureau, in one of its first substantive actions, has issued its prototype “mortgage shopping sheets” required under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Dodd-Frank directed the Bureau to propose model disclosures that combine the disclosures required under the Truth in Lending Act and Sections 4 (the HUD-1 settlement statement) and 5 (the closing costs information booklet and the good faith estimate) of the Real Estate Settlement Procedures Act into a single, integrated disclosure.

Dodd-Frank gave the Bureau one year from the designated transfer date of July 21, 2011 to develop the combined disclosure, which aims to improve consumer understanding of mortgage costs. The Bureau has published two prototypes on its website at http://www.consumerfinance.gov/knowbeforeyouowe/ and seeks input from consumers and the industry on the prototypes.

We expect that the Bureau will eventually get around to the preparation of model forms for all types of credit, including auto credit. When the Bureau heads in that direction, we expect that these housing initiatives will provide some clues on the tack that it will take. Does this mean Warren wants to see an auto financing contract that can fit on a postcard? Probably not. But it may lead to abbreviated retail installment contracts for car dealers, as she spoke of revising or eliminating outdated regulations and disclosures that significantly burden lenders and obscure real credit terms.

So far, the Bureau’s staff consists of several hundred folks, most of them lawyers. And whoever is doing the hiring at the CFPB is doing a pretty fair job so far, at least as far as the positions directly involved with auto finance are concerned. With the auto sales, finance, and lease industries wary that the Bureau would be staffed by consumer advocate-type zealots with little experience, the appointments of Leonard Chanin as rule-writer in chief, and of Peggy Twohig as chief-in-charge of non-depository institutions (sales finance companies and dealers), caused folks to dial back the panic meter a couple of notches. Both are regulatory veterans, Chanin with the FRB and Twohig with the FTC.

We’ve also learned that Rick Hackett has been tapped to oversee the installment credit business (that includes dealer financing). That’s good news. Rick is a veteran, highly-regarded consumer credit lawyer who has done credit compliance work for many institutions and, in doing so, has developed a good sense of the businesses that he has assisted.

You can tell we think a lot of Rick, but make no mistake. He, like Chanin and Twohig, will be dedicated to the Bureau’s mission and won’t be any sort of push-over for industry.

So, those are some of the highlights from the CFPB’s first months. The events of the next few months will likely prove pivotal in determining how strong and independent the Bureau will be. Stay tuned!

Thomas B. Hudson is a partner in the Maryland office of Hudson Cook, LLP. Tom can be reached at 410-865-5411 or by email at thudson@hudco.com.

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