Cordray Defends Complaint Database, Talks Qualified Mortgage Plan

By Rob Blackwell http://www.americanbanker.com/authors/49.html

JUL 9, 2012 6:08pm ET

WASHINGTON – In its first year of operation http://www.americanbanker.com/issues/177_131/how-specter-regulatory-capture -shaped-cfpb-first-year-1050723-1.html> , the Consumer Financial Protection Bureau has already proved to be one of the busiest regulators in Washington.

The agency has released a consumer complaint database as well as a prototype credit card agreement written in plain language, and launched the first federal program overseeing nonbank lenders.

The man at the center of all that is former Ohio Attorney General Richard Cordray, who deftly handled the controversy surrounding his recess appointment as CFPB director and charted an ambitious agenda for the agency.

In a recent sit-down interview at his office in Washington, he discussed why the complaint database was so important, how he is trying to create a new culture for the agency and why the agency delayed the much-anticipated qualified mortgage proposal.

Following is an edited Q&A of the interview:

What do you see as the agency’s biggest accomplishment during the past year?

Cordray: People talk to me from time to time and ask an important question: how do you build a culture and a DNA that is enduring over time? How do you prevent yourself from becoming one of the captured regulatory agencies?

So one of the things that we’ve been working very hard to do – and I do think we are doing well on it, but it’s not a job that is ever done – is trying to attack that problem by building into this agency a direct relationship with consumers across the country. So that what they tell us, what they bring to us, really informs the work that we do, the priorities that they set and really brings us face to face with their frustrations.

The consumer complaint center brings us just an avalanche of data of that kind on a daily basis.

The database that we launched last week – I think is reflective and I think signals our approach to being very transparent about information. If we have information from the public that’s helping us do our job, we think it’s going to help the public make choices as well and people can dig into that.

With regards to the consumer complaint database, the industry is concerned that it’s unfair, arguing many of these complaints are unfounded. What’s your response to that? First of all, it’s information. It’s just information, that’s what it is.

It can be countered, people can give their own work to show what kind of conclusions can be drawn from it. It’s a free market of ideas.

We verify that there is a customer relationship between the complainer and the institution, so we weed out those where someone is just completely making something up. We take out double hits so people aren’t being double, triple or quadruple counted.

So the complaint goes to the institution, and they have an opportunity to respond to it.

Frankly, they all want us to send the complaint to them and have the opportunity to deal with it. I will say part of what this database shows is that they’ve been highly responsive in addressing consumer complaints. Which is as you would hope it would be.

The fact that this is public, this puts pressure for everyone to compete with one another over customer service. It’s something they should be competing over. The notion that you have to hide that information – this is a different era than it was 20 years ago. All kind of information is out there now. I think everyone has developed a thicker skin, including federal officials like myself. I understand the concerns. We have made some adjustments in the way we handle complaints in response to lots of discussion with industry.

For example, we are now posting that some of the complaints lead to non-monetary relief and we’ve agreed that simply focusing on dollars is not the right answer. In many situations, there is good help that is given that is not quantifiable in terms of money. We will continue to listen to all sides in terms of how we can improve that database.

You mentioned fear of regulatory capture. Was the CFPB reluctant to take staff from existing regulators for fear that some of them are already captured? In fact, there were a lot of examiners from the other banking agencies who applied to us. We did a pretty thorough assessment of the applicants. We did get a number of people from the banking agencies.

We have a somewhat different approach here. We’re very candid about acknowledging that. We have done so in the interview process, we’ve done so in the hiring process and the training process.

We are now examining institutions for how they treat consumers. It’s not about the institution itself. It’s about the impact on consumers.

It’s almost as though if you take your traditional examination mode and you take that examiner and turn them around 180 degrees to look back at the public and how they’re affected rather than solely at the potential impact to the institution.

The nature of safety and soundness regulation is that certain consumer harms and impacts were not highlighted because if they weren’t at a high level of dollars, they didn’t affect the safety and soundness of the institution, they didn’t seem as important to [them]. That’s our focus.

One of the areas CFPB receives mixed reviews is in the exam process. People tell me some examiners know what they are doing, but others seem entirely new to the banking industry. Is that a concern at all? It’s kind of a mixed workforce. Some of them have lots of experience in examining. Some of them have examined at the state level which may or may not be exactly the same. Some of them are new to examining and we try to blend people from different backgrounds on our teams.

One specific concern is that the CFPB brings enforcement lawyers into the exam. That has spooked a number of bankers, who say, ‘Why are they in here?’

I feel like that has been much misunderstood and it has come up and I take pains to explain what we’re doing.

From the beginning, this bureau integrated enforcement and supervision. We want supervision examiners to understand the role of enforcement. But we also – and this is important and the banks miss this – we want the enforcement attorneys to understand the role of examination and supervision.

Many of the attorneys have come to us from backgrounds where they don’t have experience with bank examination. I’m one of those. I came from an attorney general’s office. Our only tool was to file a lawsuit. That was what you had, that was what you did. You either did nothing or you filed a lawsuit.

The fact that we have the examination tool and it’s a way to get a lot of problems corrected-that’s important for enforcement attorneys to understand as well. So there’s a kind of socializing that’s going on back and forth.

The other thing is I’ve told people we are not trying to send a message. We are just trying to train our workforce and also we want people to be in communication with one another and this facilitates that.

But banks see it as more ominous than that. They fear that if you bring your lawyers, they have to bring theirs and it interferes with the exam process. So what we’re told by a lot of our examiners is: financial institutions that aren’t sure of us – which is most of them – they are bringing their lawyers anyway.

And our examiners don’t mind having a lawyer there on our side.

But that’s typically a meet and greet meeting. They are not embedded in the examination teams. It’s the examiners that are doing the examining. We are not trying to have attorneys do examining. That’s not their role. But there needs to be communication back and forth. You don’t want examinations to result in resolving issues inappropriately.

You want there to be a uniformity and consistency. And I think the institutions really should want that.

But they’re aware – there will be enforcement at this agency.

One of the things I’ve tried to stress both to our folks and externally: we are not going to go out and try and nickel and dime people on things that are in the gray area.

We have many, many institutions that we need to clean up their practices. So we are not going to be out there playing gotcha with people on technical issues.

If you had to choose, what’s more important: regulation or enforcement? I don’t think we have to choose. There’s three core tools for us, all of which can matter. Our core tools are regulation, where we write rules, supervision, where we go in and examine institutions. For me, I have learned here that’s a very powerful tool. And it’s often a very fast tool for getting something resolved. And there’s enforcement, and that’s a tool too.

All of its situational, you just have to see what the problems are.

When are we going to see the CFPB start taking enforcement actions? Can you give me some sense of timing on that? It’s hard to predict timing. When I was an Ohio attorney general, that office had been in existence 160 years, so there was all kinds of stuff at various stages. You step in and nothing misses a beat. Attorneys general come and go.

Here, as a new agency, starting from scratch – and we didn’t have a director until January – so the nonbank area was behind.

So timing is not easy to calibrate. Things ripen on their own. But once we start it will be a steady stream of things.

Are we more likely to see bank or nonbank enforcement actions first? It’s important as an agency that we be looking at both. If you are a consumer out there, if you are at all sophisticated, you know if you are dealing with a bank or not dealing with a bank. But often you don’t. Often the impact is the same on you.

It doesn’t matter so much whether the institution you are dealing with has a charter. It matters how they are treating you, whether you are being treated fairly or whether you are being exploited and how.

Is there any particular practice, product or business line out there now that concerns you? I’d say there are a number of them. Talk to anybody who has their eyes on the industry, there have been significant problems in the mortgage market – indisputable at this point. In fact, those were so significant that they caused the whole economy to crash.

On credit cards, the Card Act we believe has made a significant difference. There are a lot of practices that were cleaned up by first the Fed rules and the Card Act pretty much codified those rules. But we still see issues through our complaint line, we see it through, ‘Tell your story’, we see it through our own market analysis.

Student loans: all kinds of problems in terms of whether they are understanding what they are getting into and the risks are made clear. The difference between federal student loans and private student loans is often not made clear to young people. Problems in servicing the loans and how people are being dealt with as they get behind.

You can kind of look across product lines — and we have more than a dozen product lines – there are specific problems in each of them.

Is the CFPB more likely to deal with those problems by coming up with a rule, or will it use an enforcement action to make an example of someone? I think there are different ways to approach different problems. What we are trying to do – and I think will be a hallmark of this agency over time – there are different areas that inform one another.

What we learn through examination activity will help us determine whether we need a rule – to change something across the board. Or if we are examining on it and spreading the word that it’s a concern to us and you need to get your compliance in order, whether that can resolve the problem. Whether we need to do one or more enforcement actions. Those are all different tools, there are times when some will seem more appropriate and more effective than others. I’m sure we won’t always get that judgment right but it’s going to be a mix and a balance for us.

How much does politics play into CFPB’s thinking? Are you feeling political pressure to take an enforcement action? We are not political ourselves, but the Hill is an important influence on us and they are exerting pretty aggressive oversight, which is fine. I don’t mind that. I’m happy to continue to go up to testify as much as they want so they can know what we are doing and we get a chance to tell our story about what we’re doing.

I would say that the broader political context, you know, can get to be a distraction if you let it. I’ve been proud of the people at the agency because they just haven’t let it distract us.

My view has always been and continues to be that the important thing for us to do is to do our work. If we are doing it well, we will be able to see the difference, people will be able to feel it in their lives.

But how does politics affect, say, the qualified mortgage proposal, which has now been delayed? Is that for practical reasons – it’s difficult to write – or is it delayed for political reasons – look, if we get it wrong, the mortgage market implodes before the election? Election cycles are going to come and go. They are always going to come and go every two years, not just every four years.

That can’t really affect our work. Much more important to us, on QM, this is an important rule. And it’s important to the biggest consumer financial market we’re involved in, which is mortgages.

I asked a lot of people: what’s the concern on both sides about potentially having to delay a little bit in order to get new data and make sure we get it right? The overwhelming reaction was – it isn’t a problem for the mortgage market whether this takes a few more months. The problem for the mortgage market is if you got it wrong, that could really be a pretty big problem for people and institutions. I think we’ll have a better rule as a result.

Looking at the implementation of Dodd-Frank, what’s your assessment of its progress? On the consumer financial part of it, we have made it a point to meet every deadline and to do the work that Congress identified as the most important work and to get started on much more. I’ve been pleased with our progress but it is hard work. It’s a big workload for our folks and I imagine the same is true across the other agencies.

How Specter of Regulatory Capture Shaped CFPB’s First Year

By Rob Blackwell

JUL 9, 2012 12:29pm ET

WASHINGTON – While all camps praise the Consumer Financial Protection Bureau’s efforts to get off the ground in its inaugural year, there is one sore point: exams.

Bankers complain that some of the CFPB’s examiners are too green and the agency’s practice of sending enforcement lawyers on exams has made the process too confrontational.

Agency officials dispute both claims, but all sides agree the concerns stem from a conscious effort by top CFPB leaders to avoid the criticism that has long dogged traditional bank regulators – that they sometimes go soft on the banks they oversee because they become too close to them.

“People talk to me from time to time and ask an important question: how do you build a culture and a DNA that is enduring over time?” CFPB Director Richard Cordray said in a wide-ranging interview to discuss the agency’s first year. “How do you prevent yourself from becoming one of the captured regulatory agencies?”

After the financial crisis, many critics accused the banking agencies – fairly or not – of regulatory capture. As the newest banking regulator – one tasked with a fundamentally different mission than the others – the CFPB has taken pains to avoid that label since it opened its doors on July 21, 2011.

For starters, although it has hundreds of jobs to fill, the CFPB has sought to limit its hiring of existing federal bank regulators.

As of June 2, 28% of the CFPB’s 920-person staff had come from the Federal Reserve Board, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency, Department of Housing and Urban Development or the former Office of Thrift Supervision.

In interviews with both Cordray and Steve Antonakes, the CFPB’s enforcement chief, it is clear they have sought to keep that percentage relatively low. Part of it, Cordray said, is because the agency has a different job than the banking agencies, which are focused on safety and soundness issues.

“We have a somewhat different approach here,” Cordray said. “We are now examining institutions for how they treat consumers. It’s not about the institution itself. It’s about the impact on consumers.”

But one of the motivations is more philosophical: the desire to create a new culture for the CFPB.

“We hired a significant number of examiners from federal agencies, but by the same token, we didn’t want to fill our entire allotment with those,” said Antonakes. “We weren’t trying to replicate another agency’s culture – we wanted to create our own.”

The situation has given rise to one of the few complaints leveled at the CFPB in its first year: that some on its exam teams are inexperienced.

“It’s very mixed,” said Jo Ann Barefoot, co-chair of Treliant Risk Advisors. “I know some banks that have had very good experiences and some that have been concerned and frustrated.”

Barefoot, in addition to others who did not want to speak on the record, point to the agency’s hiring practices as the cause.

“They made a decision – a conscious choice – to avoid importing large chunks of the other agencies, because they didn’t want to import their cultures,” Barefoot said. “Therefore, they’ve had more start-up challenges than they would if they brought in existing examiners.”

Alan Kaplinsky, a partner at Ballard Spahr, said it’s clear the agency has brought in some very experienced personnel – both from state regulators and the federal supervisors – but some on its staff have a lot to learn.

“A lot of people are described as very inexperienced,” Kaplinsky said. “They are trained on the job while they are doing an exam – it is frustrating.”

CFPB officials say they have hired a range of examiners, from the highly experienced to others who are relative novices. But Antonakes emphasized that experienced personnel lead the exams.

“There will be instances with us – as with all other agencies – in which there are variances in experience on the exam team,” he said. “The examiner-in-charge is likely to be deeply experienced. There will be other folks with more experience, but there may be folks that are junior.”

Overall, however, Antonakes said he is “really pleased with the blend of examiner experience.”

“We have a number of people with deep experience and some 20 to 30 years of regulatory experience, both on consumer protection and safety and soundness,” he said.

Antonakes estimates that roughly 50% of his supervision staff comes from the former banking regulators, while the other half is drawn from the states and private sector. Many state examiners also have experience regulating nonbanks such as mortgage lenders – a sector the CFPB now oversees but that federal banking regulators did not.

Still, many in the industry say experience at the CFPB isn’t the only issue. They argue that the agency has changed the tone of exams by bringing in enforcement lawyers early into the exam process – spurring fears that the CFPB intends to resolve matters primarily with enforcement actions.

This, in turn, has caused many bankers to bring their lawyers into the process earlier, industry representatives said.

“Sending out enforcement lawyers along with examiners is unnerving to banks, since they aren’t used to it,” said Tom Vartanian, a partner at the law firm of Dechert. “Banks will have to decide whether to bring their own lawyer into the room.”

The presence of enforcement lawyers in the exam is a significant shift from the banking regulators, which do not typically bring attorneys into the process until an enforcement order is in the offing.

The situation sparked an angry demand to stop from the U.S. Chamber of Commerce last week, which accused the agency of making exams too confrontational.

“This fundamentally alters the supervisory relationship, transforming it into an adversarial proceeding,” wrote David Hirschmann, the president and chief executive of the Chamber’s Center for Capital Markets Competitiveness. “If the goal of the supervision process is an open exchange of information between the bureau and the companies it supervises, this practice is counterproductive.”

That is not the CFPB’s intent, Cordray says. The agency is trying to manage its exams differently than other regulators, he says.

“I feel like that has been much misunderstood,” Cordray said. “From the beginning, this bureau integrated enforcement and supervision. We want supervision examiners to understand the role of enforcement. But we also – and this is important and the banks miss this – we want the enforcement attorneys to understand the role of examination and supervision.”

Both he and Antonakes emphasized that the lawyers are only present at the beginning of the exam, mostly just to meet with bank personnel. They are not intended as a threat, Cordray says.

“We are not trying to send a message,” Cordray said. “We are just trying to train our work force and also we want people to be in communication with one another and this facilitates that.”

Enforcement lawyers “join the exam team during the entrance meeting in an effort to meet the leadership of the institution,” Antonakes said.

“They are not engaged on site in the normal course of the exam,” he said. “The examiners are communicating with enforcement lawyers during the course of the exam, but their presence is not meant to signal an enforcement approach versus supervision approach .The enforcement lawyers are not rolling up their sleeves with the exam team day in and day out – that’s not the model at all.”

But many industry observers said the practice has made banks more distrustful of the CFPB’s motivations.

“None of the other federal banking agencies have ever done it,” Kaplinsky said. “I don’t think it’s a good thing. It puts a chilling effect on the exam process.”

Barefoot agrees.

“There are definitely banks lawyering up in the exam process,” she said. “If banks start hiding their problem, the system isn’t going to function.”

The tension speaks to a larger concern the banking industry has over what type of agency the CFPB will be. So far, it has been squarely focused on meeting statutory deadlines, including issuing proposals on mortgage disclosures and student loans, as well as studying issues like arbitration and overdraft fees.

In other words, it’s been primarily working on the regulation side of its mandate. But – particularly since Cordray is a former Ohio attorney general – the industry fears the CFPB will become an agency that regulates by enforcement orders.

“As the agency finds its footing, there will be a struggle with whether it should be an enforcement agency or a regulatory agency,” said Vartanian. “There are two ways to effectively create the law as a regulator – one is to write regulations and enforce them. The other is to just bring the enforcement actions you want to bring – and that will make the law.”

So far, industry observers praise Cordray for avoiding the latter approach.

“He did not meet the assumption that he would approach the role as an enforcement attorney and former state AG,” said Barefoot. “Clearly he’s taken a broad approach; they haven’t brought any enforcement actions.”

But those actions are coming – and likely soon.

“There will be enforcement at this agency,” said Cordray. “Timing is not easy to calibrate. Things ripen on their own. But once we start, it will be a steady stream of things.”

Still, Cordray said it’s just one tool the agency will use. He said the agency is not out to get banks on small issues, but instead focused on products and practices that truly harm consumers.

“One of the things I’ve tried to stress both to our folks and externally: we are not going to go out and try and nickel and dime people on things that are in the gray area,” he said. “We have many, many institutions that we need to clean up their practices. So we are not going to be out there playing gotcha with people on technical issues.”

The industry is anxiously awaiting to see which the CFPB will hit first: banks or nonbanks. There are likely more bank actions in the pipeline already, given that the agency inherited some from the other federal agencies.

Some predict the agency will act before the election, in part because President Obama has made the creation of the CFPB a critical part of his accomplishments during his first term.

“We still expect enforcement actions against banks and nonbanks before the election,” said Richard Hunt, the president of the Consumer Bankers Association. “I hope I’m proven wrong.”

But Cordray is quick to dismiss political motivations.

“Election cycles are going to come and go. They are always going to come and go every 2 years, not just every 4 years,” he said. “That can’t really affect our work.”

To him, the driving force is ensuring that the CFPB stays true to its mission – protecting consumers.

“One of the things that we’ve been working very hard to do – and I do think we are doing well on it, but it’s not a job that is never done – is trying to attack that problem [of regulatory capture] by building into this agency a direct relationship with consumers across the country,” he said. “What they tell us, what they bring to us, really informs the work that we do.”

Banks Set to Post Blowout Mortgage Earnings for 2Q

By Harry Terris

JUL 6, 2012 5:26pm ET

Expect banks to report another quarter of blowout mortgage revenues in coming weeks.

Mortgage rates touched new lows and refinancing volume continued to climb during the last three months. The spread between interest rates paid by consumers and the lower yields demanded by bond investors remained wide. That reflected either the pricing power of the surviving lender oligopoly or discipline among originators and production bottlenecks in the face of surging homeowner demand.

Mortgage rates spiked briefly as the first quarter came to a close, raising the prospect that a rebound in refinancings originating in the fourth quarter would peter out. Instead, a string of weak employment reports and an escalation of the euro-zone crisis helped push the 30-year fixed-rate mortgage to below 3.9% in recent weeks, according to a Mortgage Bankers Association survey. Meanwhile, the trade group’s index of refinancing activity increased to levels last observed in late 2010 (see the first chart).

MBA forecasts suggest that the elevated volume could have some staying power. In June, the organization predicted that refinancings would fall 20% from the first quarter to $218 billion this quarter, an amount that is still roughly twice what the MBA forecast in March for the second quarter.

Meanwhile, mortgage rates available to consumers were more than 100 basis points higher than rates on bonds that fund the home loans for most of the second quarter, with the spread widening to more than 125 basis points in June (see the second chart). The relationship between asset prices and yields is inverted, so higher consumer rates relative to secondary market rates indicate higher profits for lenders, which mostly sell mortgages to investors.

In a report last month, KBW lifted earnings projections for banks ranging from the $805 million-asset Access National (ANCX) in Reston, Va., to the $341 billion-asset U.S. Bancorp (USB) because of the strong mortgage earnings outlook.

Critics have argued that crisis-era consolidation has concentrated the bulk of originations among a handful of lenders, allowing them to pad earnings and prevent the benefits of low rates from flowing fully to borrowers.

In particular, criticism has focused on elements of the Home Affordable Refinance Program. An Obama initiative designed to allow borrowers with little or no equity in their homes to access market rates, it has been criticized for giving lenders added pricing power over mortgages in their own portfolios. Under Harp, lenders that refinance borrowers serviced by competitors expose themselves to greater risk of having to buy back loans because of underwriting flaws than in refinancing mortgages they already service. (Harp volume has spiked since the program was expanded early this year.)

Lenders argue that they are pricing rationally in view of waves of losses from repurchases of bad loans and that the mortgage industry is a highly competitive place where fat profits are transitory.

At least one major competitor, Bank of America (BAC), is seeking to reclaim market share ceded as it narrowed its focus to retail originations. “We have grown loan officers now dramatically,” Chief Executive Brian Moynihan told investors in late May, saying that revenues were as strong as they had been in previous quarters despite the smaller footprint because of wide spreads.