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Beware the Trickle-Down Effect

By: Bill Poquette

As it should, the new Consumer Financial Protection Bureau seems to be focusing initially on nonbank entities — specifically, on payday lenders and unregulated mortgage originators and servicers. As related on page 20 of this issue, CFPB Director Richard Cordray hit the ground running when his appointment to the office was made effective Jan. 4 in a controversial move by President Barack Obama. The next day, a press release from the bureau described its mission and how that would be implemented.

A week later, the Mortgage Origination Examination Procedures were published, a key initial step in implementing the CFPB’s nonbank supervision program. “The mortgage market cannot work well for consumers if the spotlight shines only on one part of it, while the rest is left in darkness,” said Cordray. “Our supervision program will illuminate the entire marketplace by making nonbanks play by the same rules as the banks.”

Next, the CFPB convened the agency’s first-ever field hearing in Birmingham, Ala., to gather information and input on the payday lending market. The hearing on Jan. 19 coincided with the publication of the bureau’s Short-Term, Small-Dollar Lending Procedures, a field guide CFPB examiners will use to make sure payday lenders — banks and nonbanks — are following federal consumer financial laws.

“We recognize the need for emergency credit,” said Cordray in his opening remarks at the hearing. “At the same time, it is important that these products actually help consumers, rather than harm them. Now, the bureau will be giving payday lenders much more attention.”

However, lest smaller financial institutions be lulled into thinking they will never hear from the CFPB, Charles L. Evans, president and CEO of the Federal Reserve Bank of Chicago, pointed out during the bank’s Community Bankers Symposium last fall that it is not clear how community banks will be affected by changes instituted by the CFPB. At the same conference, a panel of regulators had these suggestions:

First, bank executives should include regulatory compliance officers at meetings about new business strategies and new products. Second, clear communication with regulators is critical during these turbulent economic and regulatory times.

Similar caveats were expressed in a recent Banking Law newsletter by Harold P. Reichwald and T.J. “Mick” Grasmick of Manatt, Phelps & Phillips. Reichwald is co-chair of financial services and banking for the law firm and Grasmick is a partner in the same group. The actions of Cordray and his agency on his first days in office were noteworthy, they wrote. “However,” they cautioned, “community bankers who look at the CFPB as the agency that is likely to have little impact on their activities should recognize that its breadth and scope will provide significant challenges for the day-to-day business of banking.”

Prudence would suggest that community bankers, as they hone their compliance strategies, keep in mind the remarks of Charles Evans and the regulatory panel at the Chicago Fed conference, as well as these words of Messrs. Reichwald and Grasmick:

“In our experience, regulatory actions applicable to larger banks over time have a way of expanding to community banks through the regular examination process. Dodd-Frank gave the CFPB the authority to federally regulate the offering and provision of consumer financial products generally, and the implementation of that mandate is likely to find its way into new interpretations of the consumer laws by the CFPB and new standards and ‘best practices’ expectations that will eventually be applied to smaller banks regardless of size.”

Bill Poquette is editor-in-chief of BankNews.

Copyright (c) February 2012 by BankNews Media