The rulemaking authority of the Consumer Financial Protection Bureau (”CFPB” or “Bureau”) kicked in on July 21, 2011, and the CFPB is wasting no time in addressing the variety of financial regulatory issues facing consumers. Raj Date, the current head of the CFPB while Congress debates the appointment of Richard Cordray, recently stated that he believes in the free market system, but that free markets need sensible rules and proper oversight to function. He added that three basic principles are necessary for a properly functioning market: transparency, aligned incentives and fair competition. According to Date, one of the goals of the CFPB will be to establish a mortgage market “where risk and return go hand in hand.” The CFPB has begun to look at areas of the financial sector that it believes need stronger consumer protections to affect these underlying policies.
QRMs – One of the most anticipated regulations concerns what constitutes a “Qualified Residential Mortgage,” or QRM. Loans that qualify as QRMs would not be subject to the 5% retention rule, which requires lenders to retain at least 5%of the credit risk for loans they sell. The QRM standard could include a 20% down payment requirement aswell as other restrictive provisions.Many feel this would cripple an already frail property market, but any proposed regulation will not be announced until early next year.
Ability to Repay – Another area of reform requires lenders to ensure that prospective borrowers have the ability to repay their mortgages, as required under the Dodd-Frank Act. The rule was first proposed by the Federal Reserve earlier this year, but the CFPB has recently taken on the task of reviewing the public comments. The rule will require minimum underwriting standards as required under the Dodd-Frank Act. The Bureau plans to issue a rule in early 2012, but there are still outstanding questions related to what legal protections would be offered to lenders who offer Qualified Mortgages. The industry is pressing for a safe harbor when it originates a Qualified Mortgage, while consumer groups only want lenders to receive a rebuttable presumption of compliance with the ability-to-repay rules.
Combined TILA/RESPA Disclosure – The CFPB, under the Dodd-Frank mandate, is also looking at mortgage disclosure forms and how to make them more useful to consumers. Through the program termed “Know Before You Owe,” the CFPB has been seeking feedback on its plan to streamline the current TILA/RESPA up-front disclosures into a single form. The current system has long confused home buyers, and the CFPB believes a single form will not only clarify loan terms to consumers, but also reduce costs for lenders. The Bureau is about to wrap up its consumer testing of the model disclosure. As soon as that is complete, the Bureau will begin drafting regulations to reflect and support the new simplified disclosure form. The CFPB plans on publishing proposed forms and regulations by July 21, 2012.
Overdraft Fees – The CFPB is also focusing on checking account overdraft fees. Date has noted that banks entice consumers to open accounts with the idea of “free checking,” but gouge them later with exorbitant overdraft fees. Despite the amendment to Regulation E last year, the Bureau is expected to review the structure of overdraft fees, including automatic enrollment in overdraft protection, and determine what works best for consumers. If more action is needed, Date said the CFPB will act.
Credits Cards – With respect to credit cards, Date acknowledged that the CARD Act has made progress in addressing transparency concerns and issues with fairness. However, the Bureau does not believe these changes are sufficient, and it will be looking at the creation of a credible and effective supervision program. The Bureau will also be reviewing ways to monitor the variety of products aimed at consumers in need of shortterm loans. It will review recent regulations to determine their effectiveness and whether additional protections are warranted.
Student Loans – Student loan practices will also be subject to the CFPB’s scrutiny. The CFPB will begin collaborating with the Department of Education this fall (2011) on a comprehensive study of the private student loan market. The Bureau will be looking at problems such as lenders offering loans they know the average student will not be able to pay and for-profit institutions pushing their own high-cost alternatives.
While the CFPB is taking strides to fulfill its mandate to protect consumers in the financial industry and is moving on several different fronts simultaneously, it does not expect to issue any rules until early next year. The Bureau also needs an approved director in place in order to assume its full authority, and the current impasse in Congress does not seem to be letting up anytime soon.