The Consumer Financial Protection Bureau (CFPB), created by the Dodd-Frank Act, is shifting its focus to the nonbank sector. Institutions such as mortgage companies (originators, brokers, servicers, and provider of loan modification or foreclosure services), payday lenders and private education lenders now fall under the CFPB lens. Further, through the ‘larger participant rule’ in Dodd-Frank, the CFPB is now the first federal regulator to supervise other nonbank markets.
So far, supervision has been expanded to consumer reporting agencies, consumer debt collection, student loan servicing, international money transfers and, most recently automobile financing. More markets may be added as the CFPB increases the frequency of its writing of “larger participant rules.” These institutions will need to ensure they have strong compliance management systems in place, amidst imminent CFPB examinations – a discipline traditionally examined only at depository institutions.
A&M Global Marketing sat down with Anthony Gibbs, Senior Director of the firm’s Financial Industry Advisory Services Group and former regional director of supervision at the CFPB, for his thoughts on why the CFPB’s move to keep closer watch over the nonbank industry is a turning point and how the sector must prepare for more rigorous compliance systems tests.
Q. What factors have driven the CFPB’s shifted focus on the nonbank sector?
In response to the financial crisis of 2008, Congress enacted Dodd-Frank to address the perceived weaknesses in the U.S. financial system. Dodd-Frank included comprehensive rules impacting almost all sectors and activities of the U.S. financial system. Title X of Dodd-Frank was specifically enacted to address the issues related to the negative impact of the financial crisis, and the period leading up to the financial crisis, as well as the impact these factors had on the U.S. consumer of financial products and services.
The CFPB was created to ensure that the federal consumer financial laws are enforced consistently so consumers may access markets for financial products and services that are fair, transparent and competitive. To achieve the consistency objective, Title X, for the very first time, resulted in several new and critical changes to the way financial institutions are regulated with regard to consumer protection laws and the supervision and enforcement of compliance with those laws.
First, it established the Consumer Financial Protection Bureau (CFPB) and gave a single agency the authority to write and update regulations for 18 consumer protection laws, moving that role from the federal prudential regulators. Second, the CFPB mission is specifically focused on protecting the consumer and does not have a mandate or role related to safety and soundness of the financial entity – the consumer is the focus. Third, Title X transferred supervisory authority and enforcement actions for consumer protection regulatory supervision to the CFPB from the federal prudential regulators for bank institutions with assets great than $10 billion from the federal prudential regulators to the CFPB. Finally, and probably most challenging for the industry, the rule expanded for the first time federal regulatory supervision (and greater enforcement resources) to non-banks financial institutions.
Q. What do you foresee as being the greatest challenge(s) for the industry in preparing for more robust compliance?
The greatest challenge I have seen for non-banks is a lack of experience with the degree and nature of scrutiny of a federal regulatory supervisor and the heightened compliance expectations with consumer financial laws and regulations. Non-banks have not been subject to a federal prudential regulatory supervision to-date. The mission, level of authority and resources that the CFPB possesses means the exams are very thorough and comprehensive. The enhanced focus on consumer protection is also a largely new experience.
Unfortunately, in too many cases, the institution realizes it has a consumer protection compliance issue too late, after the company is under supervisory and/or enforcement action by the CFPB. A sound Compliance Management System (CMS) can be effectively strengthened in advance of any supervision or enforcement investigation to mitigate this risk. However, the approach needs to be conducted in advance and not when notice of exam or investigation is received.
This challenge is also relevant for banks with assets over $10 billion. They have not experienced the CFPB’s examination focus on consumer and consumer protection. Federal prudential regulators’ supervisory activities focus mainly on the safety and soundness of a financial institution. The CFPB does not have safety and soundness in their mission. The CFPB mission is solely focused on the consumer.
Q. How is A&M best-suited to help prepare non-banks with putting a checks and balance system in place?
A&M has an excellent team with deep regulatory and business experience. This mix enables us to make meaningful solutions that can be implemented across the industry spectrum. A&M’s competitive advantage is its ability to design solutions for each specific company that are practical, effective, efficient and most importantly, that are executed through to complete implementation. Another strength of A&M is its ability to add full service value to new and existing financial services clients across all areas of A&M compliance management system advisory services.
Q. What will your former supervisory role with the CFPB bring to A&M’s clients in this space?
My CFPB supervisory, policy and enforcement experience helps A&M clients be successful. My background provides several categories of services related to consumer protection compliance and the CFPB. This enables me to 1. Prepare clients well in advance for the new and heightened expectations of the CFPB and other regulators; 2. Help clients prepare and navigate through regulatory examinations; 3. Help clients manage issues that may come up during supervision and enforcement actions and partner with them throughout the issue resolution process; 4. Provide expert testimony for our clients; 5. Extend my insights across the global A&M client roster.
Global Marketing: What key takeaways do you have for your A&M colleagues and clients?
Regardless of where on the financial services industry spectrum (bank and non-bank) an institution falls, A&M can add incredible value by partnering with the organization to ensure a strong compliance management system is in place. Advising our clients on the value of doing this proactively, can help ensure that the company can continue to focus on the business and not become consumed in dealing with regulatory issues.
Regulatory issues can be very expensive, require significant employee and management attention to perform look-backs, provide restitution to customers, and remediate systems, processes and practices. Regulatory issues also risk monetary penalties and regulatory restrictions on the company’s ability to proceed with their business strategy. In my experience, the adage of an ounce of prevention is worth a pound of cure, is very true when it comes to a strong CMS. The challenge for us, and our clients, is to identify this in the absence of a regulatory crisis.
About Anthony Gibbs
Anthony Gibbs is a Senior Director with Alvarez & Marsal Financial Industry Advisory Services based in Chicago, specializing in all aspects of governance, enterprise risk management, regulatory compliance, and process and system optimization. His primary areas of focus are Consumer Financial Protection laws and regulations and designing and building effective, efficient and sustainable enterprise compliance risk management processes.