Compliance   Mortgage Industry   Mortgage Insight   

The State of Consumer Protection

The outcome of the next Presidential election is likely to have a significant impact on the mortgage banking industry and those who provide compliance advisory services.

In the meantime, the history-making leadership of the newly elected House of Representatives is sure to set in motion an immediate wave of changes to the mortgage industry’s governing laws and regulations.

The Democrats’ midterm election wins shifted the balance of the 2019 House class in their favor, 235 to 200, a 21.8% increase over the previous House. The most diverse class yet, the 116th House saw significant increases across the board in women, Asian, African American, and openly identifying LGBTQ representatives, with a staggering 420% increase in representatives under the age of 38.

The Democrats’ midterm election wins shifted the balance of the 2019 House class in their favor, 235 to 200, a 21.8% increase over the previous House.

In terms of the potential impact of this change on the mortgage banking industry, it has aptly been observed by the American Banker: “What has been a focus on easing rules, tax cuts, and expanding access to credit will likely be replaced by more attention on the industry’s mistakes and efforts to protect consumers.” While Democrats may not yet have the political ability to tighten banking regulations, they are now in a position to block further deregulation and to publicly challenge through oversight hearings any further efforts to loosen consumer protection and other similar initiatives. Washington once again finds itself at a turning point.

Prudential Regulators, Consumer Protection, and Financial Crime

The change in the composition of the House will no doubt be impactful. But there are other factors also in play. Despite active efforts to drive further deregulation, the prudential regulators such as the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), and the Federal Reserve Board (FRB) are likely to continue their efforts to protect bank customers from abuse or mistreatment.

For example, if the CFPB were to reduce fair lending exams, which it performs under the Equal Credit Opportunity Act (ECOA), the prudential regulators could undertake such exams under the Fair Housing Act (FHA). The OCC has already conducted some and is likely to continue doing so.

After more than two years of trying, a rollback of the Dodd-Frank law has not yet happened. Although the current proposed legislation would represent the most significant scaling back of financial rules since 2010, it is filled with caveats and exclusions and many provisions that apply to only certain slices of the banking industry. The centerpiece of the bill relaxes rules for approximately two dozen large regional banks with assets between $50 billion and $250 billion.

And, as it relates to financial crime measures, the regulatory focus continues to remain strong. On May 11, 2018, the Customer Due Diligence (CDD) rule, which has been termed the fifth pillar of the Bank Secrecy Act (BSA) regime, went into effect. The CDD rule requires banks to expand their customer identification programs to include legal entity (e.g. limited liability companies and partnerships) ultimate beneficial ownership. Banks will now need to establish a legal entity’s beneficial ownership and control before opening a new account, even if that entity is an existing customer with other accounts. The new rule has caused longtime business customers to question their bankers about the change as they adjust to the new information requirements.

“While the requirements of the rule are relatively straightforward, changing business operations to accommodate them is not,” argued Buckley Sandler partner Daniel Stipano in a December 2018 American Banker article, “a far better way would be to require companies to disclose their beneficial owners at the time of incorporation.”

“While the requirements of the rule are relatively straightforward, changing business operations to accommodate them is not. A far better way would be to require companies to disclose their beneficial owners at the time of incorporation.”

Daniel Stipano in a December 2018 American Banker article

Even as the current administration calls for a regulatory rollback of consumer protection efforts, it seems clear that financial crime remains on the top of its agenda. The Bank Secrecy Act (BSA) and anti-money laundering (AML) requirements are key weapons in the fight against terrorism and fortunately continue to get universal support from legislators and regulators across the globe. This is one area where banks must continue to be proactive if they want to avoid severe penalties as well as loss of reputation.

State Governments are Stepping in to Fill Regulatory Gaps

Where the CFPB and federal agencies have decreased enforcement, state-level governments are increasing consumer protection activities. Pennsylvania, New Jersey, New York, and Maryland have created divisions within their respective Attorney General (AG) offices devoted to consumer financial protection issues, referred to by some as “state” or “mini” CFPBs.

Pennsylvania Attorney General Josh Shapiro was one of the first to take such a step, announcing in June of 2017 the launch of a Consumer Financial Protection Unit designed to “better protect Pennsylvania consumers from financial scams.” According to AG Shapiro’s office, the state’s Consumer Financial Protection Unit will “focus on lenders that prey on seniors, families with students, and military service members, including for-profit colleges and mortgage and student loan servicers.” While there was a serious push in Washington, DC to blunt, if not eliminate the CFPB, the states are taking action to protect citizens. For instance, Pennsylvania appointed Nicholas Smyth to take point in Pennsylvania’s Consumer Financial Protection Unit. As one of the attorneys who helped to establish the CFPB, he is well prepared to continue the mission of consumer protection.

In January of 2018, New York Department of Financial Services (DFS) Superintendent Maria Vullo criticized efforts by the Trump administration to scale back the CFPB, asserting her agency stood ready to fill any “regulatory voids.”

She said in a statement: “I am disappointed by the new administration’s sudden policy shift, which is clearly intended to undermine necessary national financial services regulation and enforcement. DFS remains committed to its mission to safeguard the financial services industry and protect New York consumers, and will continue to lead and take action to fill the increasing number of regulatory voids created by the federal government.”

Soon after, the New Jersey AG, Gurbir S. Grewal, announced that New Jersey Governor Phil Murphy would nominate Paul R. Rodriguez to serve as the Director of the New Jersey Division of Consumer Affairs, the state’s lead agency charged with protecting consumer rights, regulating the securities industry, and overseeing 47 professional boards. According to Grewal’s press release, Rodriguez’s selection was intended “to fill the void left by the Trump Administration’s pullback of the CFPB” and fulfilled the promise of Governor Murphy “to create a ‘state-level CFPB’ in New Jersey.”

Most recently in New York, the Attorney General Letitia James announced that Chris D’Angelo, the CFPB’s Associate Director of Supervision, Enforcement and Fair Lending, was leaving the Bureau to serve in the Office of the New York Attorney General as Chief Deputy Attorney General for Economic Justice. Under James, the Office is expected to continue the aggressive pro-consumer approach of former New York AG Eric Schneiderman.

A group of 17 state Attorneys General, including Eric Schneiderman, wrote in a December 12, 2017 letter to the President, “if incoming CFPB leadership prevents the agency’s professional staff from aggressively pursuing consumer abuse and financial misconduct, [they] will redouble efforts at the state level to root out such misconduct and hold those responsible to account.” They further stated that “regardless of the future direction or leadership of the CFPB, we as state Attorneys General will vigorously enforce state and federal laws to ensure fairness and deter fraud.”

Some observers noted that CFPB staff, who may feel handcuffed by the current leadership, can share information with sympathetic state AGs. “State Attorneys General have express statutory authority to enforce federal consumer protection laws, as well as the consumer protection laws of our respective states,” they continued in the letter. “We will continue to enforce those laws vigorously regardless of changes to CFPB’s leadership or agenda.”

“State Attorneys General have express statutory authority to enforce federal consumer protection laws, as well as the consumer protection laws of our respective states. We will continue to enforce those laws vigorously regardless of changes to CFPB’s leadership or agenda.”

A group of 17 state AGs from a December 12, 2017 letter to the President.

Democratic state AGs are also increasing collaboration with the FTC, combining their collective legal authority and substantive expertise to expand their enforcement capabilities. Within their states, AGs typically have a broad mandate to enforce state-level consumer protection laws against any businesses operating within their jurisdiction, including their own state-level unfair or deceptive acts or practices (UDAP) laws. In addition, AGs can, in certain circumstances, enforce federal laws.

There are now 27 State AGs who are Democrats, and California could be the next state to join the mini-CFPB fray.

The Makings of a Political Storm

With the general election 18 months away, the number and breadth of state “mini CFPBs” increasing, and the House of Representatives controlled by the Democrats, it is essential to consider what the “political” and regulatory landscape ahead looks like.

Candidates in the just-beginning 2020 Democratic presidential primary are far more emboldened to propose radical reforms to the financial system at this stage in the game, begging the question: what would the financial system look like under Democratic control of the House, Senate, and Executive branches of government?

In the face of imminent change on the horizon, regulated entities would be wise to not let the current state of regulatory relief lure them into a false sense of complacency. History has proven time and again: it is easy to cut back on compliance initiatives but difficult to build back up in time to avoid the impact of the shifting pendulum.

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Ed Kramer

Senior Advisor

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