Monday, March 28, 2011

Elizabeth I

"My concern about a rule-based approach is straightforward. Putting down rules here and there can be like putting down fence posts on the prairie:  They can be too easy to run around. And when the lawyers show everyone how to jog around the fence posts, the regulator responds with more rules. Pretty soon, there are so many rules that it is hard to move. Newcomers are scared off before they start. Small competitors-- particularly in this context, community banks and credit unions--can't afford to hire an army of lawyers, which puts them at a competitive disadvantage. We can choose a better way."  (Elizabeth Warren special adviser to the Treasury Secretary for the Consumer Financial Protection Bureau as quoted in U.S. Treasury News, as part of her written testimony before the House Subcommittee on Financial Institution and Consumer Credit Committee on Financial Services.  March 16, 2011.)

On March 16, 2011 interim head of the CFPB and its de facto czar Elizabeth Warren testified before Congress as to the goals of the Consumer Financial Protection Bureau, one  most powerful organizations ever to be created within the government.  If you recall, the White House did not believe that Warren could pass confirmation so they appointed her as interim director instead.  Although Warren has testified that she is really just an adviser to the President and the Treasury Secretary, House Financial Services Chairman Spencer Bachus (R-Al) argues that she is in fact acting director and that the Obama Administration has skipped the confirmation process. Earlier this month, Bachus introduced a bill which would replace the single individual Director of the CFPB with a five member bi-partisan commission (as the legislation has been presented, no more than three members of the commission could represent a single political party, so the commission would always represent divergent views. Each member of the commission would be appointed by the President and confirmed by the Senate.)  "A balanced bipartisan commission will protect consumers without giving such incredible power to just one unelected person in Washington D.C, as the Dodd-Frank Act does," Bachus stated.  A few hours ago, Bachus's new bill picked up an endorsement from the Independent Community Bankers of America, which could help catapult the bill to passage.

Although the Bachus bill would change the structure of the leadership of the CFPB, it does not change the fact that Dodd Frank has created a massive new bureaucracy which will take power this July.  Starting July 21, the CFPB will regulate credit cards, mortgages and other financial instruments.  For those of us working in financial services who have been dealing with incredible regulatory uncertainty, statements like the one I quoted by Warren at the beginning of this post regarding rule-making just give us another reason to shudder.  We are already trying to bring our industry into compliance with complex new Federal Reserve Rules on loan originator compensation and appraiser independence with very little clarification about what those rules mean or how we are to obey them.  And this blatant lack of regard for our need for information has created fear, uncertainty and cynicism throughout our industry.  At a time when the new home sales are at their lowest levels since the government began keeping records, and housing is headed into a double dip, uncertainty about compliance is bringing the mortgage industry to a standstill. Take for example, this actual opening paragraph from a memo sent out today by a wholesaler that I use with regard to the Federal Reserve Rule, "We have made every effort to bring our valued customers the best training and most up to date, relevant information on the Fed rule changes to TILA/Reg Z. I acknowledge that these rules make little sense. The Fed has provided minimal guidance on how to comply with these rules. We have all struggled to find a single way that these changes benefit the borrower, will help the recovery of the housing market, or help avoid future problems to the housing market and the economy as a whole. But, as Voltaire famously quoted, 'It is dangerous to be right when the government is wrong.'"  Does that sound like confidence to you?

When I read Warren's statements scoffing at clear-cut rules, I cringe.  In order to comply with rules, the industry being regulated must first understand what the rules are, how to comply with the rules, and exactly what we are expected to do.  The mortgage industry is overwhelmed with compliance issues.  But Warren seems to want to move away from rules and compliance and toward the "make it up as we go along" strategy that we are now suffering through with the Federal Reserve.  And that is extremely dangerous.  While it is true that "small competitors can't afford to hire an army of lawyers," to interpret the rules, they also cannot afford massive fines and examinations if they are found in violation of some obscure regulation that they did not know existed.  "While there is certainly a place for rules aimed at specific abuses, we do not envision new rules as the main focus of how the CFPB can best protect consumers. Indeed, the ideas put forth by the Administration and the legislation adopted by Congress provided several different tools for protecting consumers precisely so that the CFPB could use the best one for the job and not be forced to rely solely on its authority to write new regulations."

Consider this:  The CFPB is responsible for supervising all non-bank financial institutions including mortgage brokers, mortgage lenders, mortgage servicers, payday lenders, and private student loan providers.  The CFPB also regulates and examines depository institutions and credit unions with more than $10 billion in assets.  Smaller banks and credit unions will continue to be regulated and supervised by the agencies who currently regulate them.  So the CFPB handles the larger players in the market and the really tiny ones--independent mortgage brokers like me. Where do you suppose that most of their regulatory emphasis will be?  According to a story by Think Big Work Small last week, Warren has stated that nearly half of her department's budget will go to regulate non depository institutions.  In her prepared testimony before the House Financial Services Committee, Warren says, "This will be the first time that many of these non-bank financial services companies will be subject to federal compliance examinations.  We intend our examinations to be conducted efficiently and in a fair and transparent manner. We will strive to enforce the federal consumer financial laws appropriately while remaining cognizant of increasing compliance costs and burdens for regulated entities."  Warren is apparently planning extensive investigations; the FY 2011 budget for the CFPB is approximately $404 million, FY 2012 budget is approximately $445 million and FY 2013 is approximately $485 million.   That's a lot of oversight to complete what Warren says are the CFPB key functions, "consumer financial education, consumer complaint intake; registration of non-banks, supervision, examination and enforcement efforts, analytical support, monitoring and research, and industry guidance and rulemaking." 

While rulemaking is a "key function" and in fact the chief rulemaker is being hired from the Federal Reserve--the agency that gave us our current nightmares with the loan originator compensation rule--Warren has far-reaching goals for her new agency.  "Just as important, in my opinion, is the need for data and data analytics to be a defining focus of the agency....The consumer bureau should not blindly follow the conventional wisdom of the time, but must be a thinking, investigating, questioning agency--and it's my hope that if the agency  is truly committed to examining data and making its decisions based on data, it can avoid capture by ideology or intellectual fashion."  The CFPB of Warren's design appears to be an ever-evolving agency which will gather data in order to determine which behaviors are acceptable and which are forbidden as it goes along.  "We have the opportunity to build a consumer bureau that is responsive to the dynamics of our time, using changes in technology to propel us....The consumer bureau can empower a well-informed population to help expose, early on, consumer financial tricks.  If rules are being broken, we don't need to wait for an expert in Washington, or the next scheduled examination to recognize the problem. If we set it up right from the beginning, the CFPB can collect and analyze data faster and get on top of problems almost as they occur, not years later...Using state of the art technology, the consumer bureau can solicit information from the American people about the benefits and frustrations that they face with consumer financial products---and it can organize that information and put it to good use...As we investigate anecdotal evidence, we can learn about good practices, bad practices, and downright unlawful practices. Then we can report on the good, the bad, and the ugly--subject, of course, to confidentiality and privacy concerns--to increase transparency and to push markets in the right directions."

There you have it--our new regulator with a massive budget, much of which is turned on small non-depository lenders, will be relying on technology and consumer complaints to decide policy and create a "thinking, investigating, questioning agency" which does not "blindly follow the conventional wisdom of the time" and which is not excessively hampered with a set block of rules.   And the current monarch of this new agency is our very own Elizabeth I, a consumer advocate whose nomination would not have been confirmed through the Senate but who is making the decisions guiding this massive, enormously powerful, well-funded beast of agency.  It is dangerous to be right when the government is wrong.

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