Acting Deputy Director of the Consumer Financial Protection Bureau
American Bankers Association
April 17, 2013
Good morning. Thank you for that kind introduction. It is a pleasure to have the opportunity to join you today at ABA’s Government Relations Summit. Since our inception, the Bureau has enjoyed a productive working relationship with the American Bankers Association and its state member affiliates which I believe has benefited us both.
Over five years removed from the onset of the financial crisis, we stand at a unique moment relative to the future of our nation’s system of consumer finance. I know there remains keen interest, curiosity, and even skepticism relative to the Bureau in terms of our areas of focus and how we will regulate these markets. My hope is that my remarks will provide greater insight into how we are continuing to approach our varied responsibilities.
By way of background, I am a career bank regulator having started in this line of work nearly 23 years ago as an entry-level bank examiner. I later served as Tom Curry’s deputy for 9 years in Massachusetts before eventually succeeding him as the Commissioner of Banks. Under this purview, I had a mandate to ensure compliance with safety and soundness, consumer protection, CRA, and fair lending. Moreover, I have supervised banks, credit unions, and non-banks throughout my career.
While the Bureau does not have a safety and soundness mandate, we very much care about the financial health of banks and nonbanks. As a veteran of two banking crises, I can tell you unequivocally that, in my view, consumer protection is not in conflict with safety and soundness. Consumers benefit from a healthy, competitive and diversified financial services system through greater access to credit and competitive pricing.
As you know, both financial and consumer compliance performance are dependent on strong management. Seldom do institutions excel in one and not the other. No business built on deceiving its customer base will be sustainable. Moreover, when businesses underinvest in compliance management systems it can pose significant reputational and financial risks. There is no better evidence than the banking industry’s ongoing recovery from a significant underinvestment in internal control systems relative to mortgage origination and servicing.
Since we opened our doors in July 2011, we have been working on rules to ensure the mortgage market is more transparent and accountable. We have been developing new tools to help people make sound and informed financial decisions, including our Know Before You Owe campaigns for credit cards, mortgages, and student loans. And we have been building our capacity to receive and handle consumer complaints and conduct examinations and investigations of the entities within our jurisdiction.
Our work is centered upon a belief that an educated consumer is a more capable and effective consumer. We also hold that banks and non-banks should be treated alike and receive similar oversight if they offer the same types of financial products and services. Accordingly, we want responsible businesses playing by the rules to succeed, free of unfair pressure from predatory competitors.
I will spend the balance of my time briefly highlighting our recently released mortgage rules and then attempt to address the many questions that remain relative to how we will engage banks and non-banks through our supervisory function.
In drafting our mortgage rules, we have sought input from all stakeholders and attempted to carefully balance access to credit and consumer protection and also consider the compliance costs and impact on smaller lenders and servicers.
In January we issued our Ability-to-Repay rule, or Qualified Mortgage rule, to protect consumers by requiring lenders to make a good faith, reasonable determination that borrowers actually can afford to pay back their mortgages.
As we all know, in the lead up to the financial crisis, many consumers were sold mortgages they could not afford or understand. Lenders sold, and consumers purchased, no-doc and low-doc loans where consumers qualified for loans beyond their means. Lenders also sold and consumers purchased risky and complicated mortgages like option and hybrid ARMS.
During this time, credit underwriting standards significantly deteriorated. Uneven supervision and a widely held view that we had entered a new era in which property values would constantly increase contributed significantly to these practices. All of this ultimately culminated in a dramatic increase in mortgage delinquencies and foreclosures.
I witnessed firsthand widespread reckless and fraudulent activity in the form of forged 1003s, whited-out paystubs, falsified verifications of employment and deposit, and applications submitted to automated underwriting over 10 times a day until the income figure was just right.
The Ability-to-Repay rule builds into the law common-sense underwriting processes and considerations. It protects consumers from risky practices that helped cause the financial crisis and it ensures lenders can extend credit responsibly – without worrying about competition from unscrupulous companies. Under the new Ability-to-Repay rule, lenders will have to make a reasonable and good faith determination of the consumer’s ability to pay back both the principal and the interest, and any other mortgage related costs such as taxes and insurance. And they will have to consider the consumer’s ability to repay the mortgage over the long term − not just during an introductory period when the rate may be lower.
We have also issued mortgage servicing rules. Generally, as you know, consumers are not in a position to choose their mortgage servicer.Before the onset of the financial crisis, the servicing industry – or at the very least the larger players that dominate the industry – developed a low-cost, high-volume business model. Unfortunately, this system was not designed for and was easily overwhelmed by significant increases in delinquencies and foreclosures.
Accordingly, we have seen far too many instances of servicers failing to provide basic levels of support that borrowers need and deserve. Borrowers’ calls have gone unanswered, documents have been lost, and accounts mishandled. Communication and coordination has been poor. Considering all this, our new servicing rules seek to achieve two primary objectives. First, they help prevent borrowers from being hit by surprises or getting the runaround. Second, they provide special protections for borrowers who are having trouble making their mortgage payments.
As I noted, these rules were shaped by vigorous input from the public. That input came from people all around the country who have first-hand experience of the issues we are addressing. It came from consumers and it came from industry. That’s why in both of the rules we are taking into consideration special exemptions based on size. Many small lenders and smaller servicers would be covered by our proposed exemptions.
We recognize that compliance management will be managed differently by large, complex banking organizations at one end of the spectrum and small entities that offer a narrow range of financial products and services at the other end. While the characteristics and implementation will vary from entity to entity, we believe compliance management activities, including implementing new regulatory requirements, must be a priority and should be appropriate for the nature, size, and complexity of the financial entity’s consumer business. It is in the best interests of the consumer for industry to understand and properly implement these rules.
We are, however, also cognizant of the business challenges of absorbing and implementing several complex rulemakings. To this end, we will be working closely with you over the next year to aid and support the implementation of all of the new mortgage rules. We have begun to publish plain-language summaries of the rules in booklet format and will be issuing them in video form as well this spring. We will field questions and offer suggestions to help lenders determine how to implement the rules. And in coordination with our fellow agencies, we will publish materials that help lenders understand supervisory expectations. Accordingly, we will work to create common examination procedures so that the rules are enforced consistently.
Since before we opened our doors, many have asked how we will be different. Will our approach bear any resemblance to work done previously? Certainly there are similarities. Our examiners conduct on-site examinations, review files, transaction test, and interview personnel. We issue examination reports and utilize the existing interagency rating system. As findings warrant, our examination reports include necessary corrective action. Moreover, we utilize informal and formal enforcement actions when necessary.
Our examinations are intended to be rigorous and heavy on data analysis, with the important goal of also being fair and reasonable. We will focus on substantive consumer harm and, as such, ensure that our response to more technical violations is appropriate. Our examination process will strive for transparency, efficiency, and fairness. It will not be about “gotcha” or issues du jour. We communicate with institutions throughout the examination cycle. In most instances, institutions are advised of upcoming examinations well in advance of the start of our examinations. We also will work to keep the institution informed of the examination’s status and findings during the course of our review.
There are two key differences in our approach that I would like to highlight. First given the mission of the Bureau, our focus is on potential risk to consumers rather than risk to institutions. Second, eventually, our oversight work will become increasingly product-centric.
The Bureau’s jurisdiction is also unlike any traditional prudential bank regulatory agency. We have regulatory oversight for banks, thrifts, and credit unions with assets over $10 billion. These institutions and their smaller depository affiliates total less than 200 but on a combined basis account for $10 trillion in assets or nearly 80 percent of the nation’s banking market. The number of non-bank entities that eventually could be subject to the Bureau’s supervisory jurisdiction will likely number in the thousands.
A specific charge of the Bureau is to attempt to level the playing field between banks and non-bank entities relative to compliance with federal consumer financial laws. This dual authority provides the Bureau with the opportunity to oversee consumer financial products and services across charters and business models. Consequently, charter or license type is becoming less relevant in determining how we will prioritize and schedule our examinations and investigations.
Accordingly, we have begun to implement a prioritization framework that allocates our examination, investigation, and fair lending resources across product types. This strategy intentionally moves us away from static examination cycles.
In terms of our supervisory approach, it encompasses an assessment of potential consumer risk, as well as a number of quantitative and qualitative factors. These factors include: (1) the size of the overall market in which a regulated entity’s product line operates; (2) the potential for consumer risk related to a particular product market; (3) a regulated entity’s level of activity in the marketplace, or more specifically, its market share; and (4) field and market intelligence that encompasses a range of issues including, but not limited to, the quality of a regulated entity’s management, the existence of other regulatory actions, default rates, and consumer complaints.
We are also very much committed to coordinating our examinations with other regulators to reduce the burdens on supervised entities for their time, space, and resources. Some of that is prescribed by law, and some of it is good old-fashioned common sense. To this end, we have executed appropriate information-sharing agreements and communicate regularly with federal and state regulators about the scheduling of examinations and other supervisory activity. We will continue to coordinate closely with our fellow regulators above and beyond the minimum requirements.
Given the early stages of our supervisory program, we have intentionally employed a strong quality control function. In some instances, we have sacrificed timeliness in favor of consistency. But we are making progress and, importantly, we are hiring more staff. Simply put, our initial goal for our supervisory program was to do credible work. Going forward, we expect to see significant increases in efficiency while maintaining the quality of our supervisory findings.
As for the examiners themselves, we continue to build our staff toward a steady state. In doing so, we have hired – and continue to hire – people who bring valuable expertise and a broad range of transferable skills to their work, including considerable experience in examination processes and expert knowledge of consumer protection laws and regulations. We also continue our aggressive efforts to recruit new examiners from various backgrounds, from junior-level examiners to more senior-level candidates with prior regulatory or industry experience.
Right now, we have nearly 325 examiners. A significant majority of them have experience in examinations at the federal or state level or from private industry. Over 100 are commissioned. All are supervised by our headquarters and regional management teams, which include more than 50 people with significant experience in consumer protection.
We understand that no matter how qualified our exam staff may be when they arrive, they can always learn more and improve, particularly as the markets we regulate evolve over time. Since we launched our Supervision program, we have spent significant time and resources on training, including introductory training for new employees, training on applicable federal statutes and regulations, updates on internal processes, and other relevant topics. We are also developing our own commissioning program similar to those provided by the prudential regulators.
Finally, our approach of having enforcement personnel involved in the examination process has garnered a great deal of attention. So I will take a moment to address that specifically. Our Division of Supervision, Enforcement, Fair Lending and Equal Opportunity was strategically built to integrate the examination, enforcement, and fair lending functions. We have intentionally developed a coordinated approach to ensure that we get the best results for consumers, are as efficient as possible, create consistency in our approach to interpreting legal standards among our offices, and reduce unnecessary burden on the entities we supervise by consolidating their interactions with the Bureau.
This division works toward comprehensive integration by assigning Enforcement attorneys to support the work of each examination team, as well as by assigning Fair Lending attorneys to participate in examinations as appropriate. This physical presence is generally limited and intended to enhance coordination, as well as to ensure that our attorneys have a first-hand understanding of the issues arising in examinations. The presence of attorneys is not intended to be taken as a signal that an enforcement action is planned or even likely. Similarly, when enforcement matters arise out of examination activity, the supervision staff who conducted the underlying examination will remain involved to provide continuity and share relevant knowledge about the institution and its compliance history.
As noted, consistency is an important priority for the Bureau, which is why we have spent significant time and resources on training, on reviewing examination reports, and on establishing an Office of Supervision Policy, which provides guidance to examiners and ensures greater consistency across regions, markets, products, and firms. To the extent that more efforts at uniformity are necessary, we are open to suggestions and are committed to this goal.
In conclusion, our mission at the Bureau is fundamentally designed to improve the markets for consumer financial products and services for both consumers and businesses operating within the law. A renewed and appropriate focus on consumer protection will go a long way toward preventing the problems that gave rise to the financial crisis. Our goal is that this will allow substantial opportunities for all companies to innovate and compete in the marketplace.