Dodd-Frank Act Two-Year Anniversary
Five takeaways on Dodd-Frank’s impact on consumer protection
As we approach the two-year anniversary of the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, it’s worth pausing for a moment to take stock of how it has already influenced the financial services and banking industries, and what may lie ahead. Today, its full impact remains to be seen – financial services institutions are still grappling with the enormity and complexity of the 2,300-page law. Federal regulators are still writing many of the rules that will affect different corners of the industry, contributing to continued uncertainty.
At the same time, after two years its impact has become clearer. For example, an underlying principle of the law is to enhance consumer protection through the establishment of the Consumer Financial Protection Bureau (CFPB), which oversees a vast array of consumer loan, deposit, and payment products and services. The goal is to assure that markets work for both consumers and responsible providers of those products. The CFPB will have far-reaching implications across the financial landscape, affecting financial institutions that are both banks and nonbank finance companies – each of which will engage with the CFPB in different ways based on their business strategy, consumer product profile, and compliance risk management process.
For financial services executives working to understand where they should focus when it comes to consumer protection issues in the age of Dodd-Frank, here are five important observations.
The CFPB will likely focus on mortgage servicing practices of financial institutions
As the Justice Department and state attorneys general wind down their investigations into mortgage servicing practices of the largest banks, CFPB examiners will likely start their inquiries into that area over the next several months. In the meantime, the new agency recently delayed issuance of a final “qualified mortgage” rule – which establishes standards for how lenders will determine a borrower's ability to repay – as it waits for the largest banks to finalize customer relief and national servicing standards. While mortgages will be the CFPB’s central focus for now, the largest financial institutions should expect the CFPB to also start looking into consumer products, such as credit cards, auto loans, and student lending, for practices like robo-signing – similar to what’s being examined in the mortgage area.
Uncertainty looms over how the CFPB will treat all other financial institutions
Federal bank regulatory agencies are focusing their efforts on the practices and past actions relating to mortgages and consumer loans of the largest banks and seeking related improvements to their controls and compliance programs. Meanwhile, other financial institutions are trying to figure out how those efforts may trickle down to them. They’re left with more questions than answers right now. Currently, CFPB examination teams have started to make general inquiries – with very lengthy request lists – at many financial institutions, but they have not focused on any specific area. These examinations will likely take some time to develop and take shape. In the meantime, the CFPB teams are approaching financial institutions with a reserved demeanor rather than a combative approach.
Expect the CPFB to press for coordinated response mechanisms for consumer complaints
The CFPB is emphasizing the need for financial institutions to have a mechanism or process in place to capture and address consumer complaints. Financial institutions have a relatively short time period to promptly record, categorize, address, and resolve a registered complaint. If they don’t respond in a timely manner, or if a response is unsatisfactory, the CFPB weighs in. Institutions that develop databases to capture these complaints could use that to their advantage by looking for common themes that might lead to efficiency in terms of remediation, escalation, root cause analysis, and other actions. For example, financial institutions may see that a group of complaints in one area, such as credit cards, may pose the same or similar concern in another area like auto loans.
Consumers can also lodge complaints directly through the CFPB website. Not only will the CFPB’s system be used to help scope examinations of institutions when an issue is detected, but it could also help identify and address emerging consumer issues earlier in the process.
New UDAAP and fair lending standards are coming
The CFPB will be applying its supervision and examination scrutiny and rulemaking powers related to compliance with an emerging regulatory standard under the Unfair, Deceptive, or Abusive Acts or Practices (UDAAP) statute. The CFPB will likely focus on lender risk assessments and how lenders develop, determine, and implement pricing and product features, marketing, origination, and servicing aspects across the lifecycle of all products. This includes use of third-party service providers. The CFPB has already begun UDAAP examinations at large banks and will likely launch inquiries at nonbank finance companies. Additionally, the CFPB is looking into fair lending practices that use adopted interagency fair lending procedures with a focus on higher-risk areas, such as indirect lending and default servicing.
Larger nonbank financial firms may need “bank-like” compliance systems
CFPB examination procedures related to compliance management systems will likely be applied to both bank and nonbank financial companies. This includes the larger-sized covered nonbanks -- residential mortgage, private education, and payday lenders – as well as the “larger participants” in the nonbank market as defined by a CFPB rulemaking process. These procedures may focus on four components of such systems: board and management oversight; a compliance program (including written policies, training, monitoring, and testing); responses to consumer complaints; and a compliance audit program (including the adequacy of coverage when compliance monitoring testing programs are incorporated). Since the CFPB and other prudential regulators have established standards for compliance management systems at banks, it’s reasonable to expect these standards may be applied to nonbank financial companies, which have such systems of varying degrees of maturity and formality.
Because there’s a lot more to know about the Dodd-Frank Act, these takeaways are presented as part of a series of issue-focused insights into the impact of this legislation. In the coming days, Deloitte will release a more in-depth look at the law’s implications in other areas, including derivatives, the Volcker rule and living wills. Deloitte has released takeaways on compensation and stress testing. For more information, please visit us at Financial Regulatory Reform.
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