Image: Rick Reinhard
Image: Rick Reinhard "There will be time for them to work to get it right. They don't have to be perfect the first day," said CFPB Director Richard Cordray.

WASHINGTON — Since it opened its doors three and a half years ago, the Consumer Financial Protection Bureau has been one of the busiest regulators in banking, finalizing rules that tackle mortgages, disclosures and remittances, among many other things.

That rapid pace is expected to continue in 2015, with the CFPB due to address some of its trickiest areas yet, including payday loans, debt collection and overdraft protection, which are likely to have a significant impact on the financial services arena.

"How the bureau determines the right approaches and what restraints are applied in its rulemaking is ultimately going to shape what the economics will be of the credit market," said Richard Riese, the senior vice president for the Center for Regulatory Compliance at the American Bankers Association.

Debt Collection

Many observers agreed that one of the most significant rulemakings slated for this year will be on debt collection. Depending on how the CFPB structures its proposal, the plan could capture a broad range of companies that have a hand in the credit reporting system.

"Right now the CFPB is looking very broadly in terms of debt collection by looking at everything from debt buyers and collectors, first-party creditors, and banks colleting for others and themselves," said Lisa Stifler, an attorney specializing in debt collection at the Center for Responsible Lending. "This is the first time a lot of these rules pending on the CFPB's agenda are being addressed at a federal level so there's some importance to that."

Bankers are hoping for a more limited proposal, arguing that it should just target third party debt collectors. They say first-party banks that deal directly with a customer should be viewed differently.

"We really do think the bureau needs to recognize the position of the original creditor where they have credit relationships and deposit relationships," Riese said. "That is a different dynamic than what happens in debt collection or a debt sale ... we are very concerned about how the bureau approaches a credit relationship."

But consumer groups say the CFPB should regulate the entire life cycle of debt, rather than issuing rules that primarily affect one part of the industry. They say that is consistent with CFPB's mission to "even the playing field" for all types of credit.

Historically, "the reason not to extend [collection laws] to first-party creditors was the idea that they do work with the customer and they have more of a reputational risk that would, in theory, keep them from engaging in some bad acts that were known to be a problem with debt collectors," Stifler said. "But I think there are examples of these creditors engaging in those bad acts that may necessitate a look at how they are engaging with consumers and collecting debt."

The CFPB has said it wants to look at the way debt collectors report debts, how they handle disputes and the time period for reporting certain information to the credit reporting agencies. The CFPB said in November that it expected to have a proposal on the issue released in April.

Payday Lending

The agency has a quicker timeline for its proposal targeting deposit advance products and payday lending — another plan that could reshape the industry. Unlike the banking regulators who have taken aim at such products, the CFPB has much wider jurisdiction. Its proposal would be the first to capture banks, nonbanks and online lenders under the same umbrella, affecting the entire product marketplace.

Payday lending has been under increasing scrutiny by policymakers in recent years, with consumer groups arguing it is one of the biggest spaces for predatory lending and traps people in a cycle of debt.

While details of the plan are unknown, observers predict the CFPB will limit the amount of times a consumer can draw credit within a certain timeframe. But the agency has also placed a lot of attention in its research and field hearings on whether consumers fully understand disclosures for payday loan agreements.

"The bureau is considering what rules may be appropriate for addressing the sustained use of short-term, high-cost credit products," said Kelly Cochran, the CFPB's assistant director for regulations, in a blog posting Nov. 21 announcing the updated agenda. "In addition to conducting additional research, we are evaluating what types of rules would be appropriate and warranted under CFPB authorities. Rulemaking might include disclosures or address acts or practices in connection with these products."

The CFPB is currently slated to propose rules on payday-type loans in February. The agency also plans to release a proposal on overdraft protection in July and should finalize its proposal on prepaid cards sometime next year, which has so far mostly received backlash from consumer groups for not going far enough in disclosure requirements.

Arbitration Clauses, Mortgage Servicing

Another sensitive rulemaking area for the CFPB is what it will determine in its final study on arbitration clauses that force borrowers to settle disputes outside of court.

In December 2013, the CFPB released its first study and indicated it was staunchly against the use of forced arbitration while also concluding it needed to perform further analysis. A key concern by the industry is whether the CFPB will ultimately ban the use of arbitration clauses in credit agreements through some form of rulemaking. Many had expected the second study to come out at the end of 2014, which has now been pushed to early 2015.

"It will be interesting to see how part two of the study shapes what the CFPB will do going forward and if they will look at arbitration as whole or aspects of it instead," said Benjamin Diehl, who practices in the financial services/class action and government relations practice groups at Stroock law firm. "I don't think they're going to recommend in the study that arbitration be banned all together ... but it's not clear which path the CFPB is going to go down."

The CFPB is also expected to finalize its most recent revision to its mortgage servicing rules that went into effect a year ago. The revisions came somewhat as a surprise to the industry considering the initial rule was only recently implemented, but the CFPB has made it clear it intends to tweak rules after seeing how they impact the industry.

"Since the Bureau's mortgage servicing rules took effect, the CFPB has continued to engage in outreach with consumer advocacy groups, industry representatives, and other stakeholders," said the agency when it announced the amendments Nov. 20. "This proposal reflects our ongoing effort to ensure the rules are working as intended and to smooth the path for companies to better protect consumers and comply with the CFPB's rules."

The CFPB is taking comments on the revision until March 16.

Enforcement Activities

While the industry is anxiously awaiting the CFPB's new proposal, it is also concerned about where it will focus its enforcement activities next.

Many observers expect mortgage servicing to be high on the agency's list. The CFPB sent a resounding message to the industry in September when it cited Flagstar Bank as the first servicer charged with violating the new mortgage servicing rules. The $37.5 million in charges and requirements for redress were extensive, citing mortgage modifications dating back to 2011, before the mortgage servicing rule took effect.

At the time, CFPB Director Richard Cordray said the action "signals a new era of enforcement" for the agency, putting mortgage servicers on high alert.

"I do know they have already examined and are examining a number of mortgage servicers regarding compliance with the new rules because we've gotten number of calls from our clients about it," said Alan Kaplinsky, who heads the consumer financial services group at Ballard Spahr. "It's going to continue to be a top priority of theirs going forward."

The agency is also likely to focus on debt collection and student lending, among other areas, observers said.

"The industry needs to look at all of the CFPB actions, even though it may not apply to their particular company because the CFPB applies the same mindset when examining other companies," Diehl said.

The agency has a handful of pending lawsuits against for-profit colleges, including against Corinthian Colleges and ITT Educational Services, on allegations of predatory lending, the first time the agency went after for-profit colleges directly.

Another pending lawsuit that will be closely watched this year is the CFPB's allegations filed in December against Sprint Corp. for allowing third parties to charge fees for wireless products that were not authorized by the customer, as well as ignoring subsequent related complaints. The action surprised many in the finance industry who did not predict the CFPB could extend its jurisdiction to telecommunications companies, although CFPB officials have said they can because a part of the Dodd-Frank Act gives them power over payment processing and mobile deliveries.

"One of the things we're now watching is to see if the Sprint action is reflective of broader trends in terms of the CFPB expanding who might be subject to an action," Diehl said. "I don't think the CFPB acts in a one-off capacity" and "it will be interesting to see where the agency goes next."

The industry is also bracing for a policy change in which the CFPB will publicize longer narratives of consumer complaints. Currently, it publishes the name of the company and product after a consumer complains, as well as the eventual resolution (or lack thereof) of the complaint. But the agency issued a proposal in July to allow consumers to publicize their narrative with more details. Although the industry strongly objected, arguing the complaints don't show the full story, it is unclear if the agency will back down.

"The CFPB is carefully reviewing and considering all the comments that it received on the proposed policy to publish complaint narratives," said a CFPB spokesperson.

Regardless of the CFPB's decision in this area, the industry argues the agency is using its studies and field hearings — often done immediately prior to a significant rulemaking — to steer consumers into specific financial decisions.

"On the one hand, the bureau believes that by putting a lot of information out into the public realm, it helps consumers make better financial decisions. On the other hand, this is sophisticated information and indicates the bureau doesn't believe consumers can make sophisticated choices for themselves," Riese said. "Part of what's going on is the bureau is going to continue a publicity campaign and political campaign of transparency that ultimately really cloaks a motivation that's more about socially engineering consumer choice rather than empowering individual judgment.

Disparate Impact

Additionally, there's likely to be continued scrutiny of the CFPB's efforts to cite indirect auto lenders for unintentional discrimination through a legal theory called disparate impact. The Supreme Court is slated to make a decision on the use of disparate impact later this year, but it's unclear if the case will affect the CFPB. In the meantime, the agency does not appear to be slowing down on its use of disparate impact and is expected to finalize a rule to supervise the largest non-bank auto lenders.

The use of disparate impact may also reappear in congressional hearings this year as many observers expect the agency will face added pressure in the Senate now that Republicans control that chamber. This means there might be more questions coming from the Senate on the agency's jurisdiction and rulemaking.

"Will it amount to anything where Congress is going to pass legislation that would have a huge impact on the CFPB? I doubt it since I'm quite sure that Obama will veto any major changes to the CFPB, like creating a 5-member commission or subjecting its funding to the congressional appropriations process," Kaplinsky said. "However, there is some possibility that a major structural chance could happen as part of a deal where the Democrats extract certain concessions from the Republicans. But I'm not holding my breath."

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