The CFPB’s impact on community banks

Many bankers and commentators have expressed concern about the CFPB’s extensive rulemaking and enforcement authority. Although the CFPB’s primary focus is on large banks and consumer finance companies, community banks have felt the impact the CFPB’s broad powers. In fact, ICBA CEO Camden Fine pointed out that of all the provisions of Dodd-Frank, the creation of the CFPB has impacted community banks the most:

“If Dodd-Frank was written exactly as it’s written except there was no Consumer Financial Protection Bureau, no Title X of the law, community banks really wouldn’t feel much of the impact from Dodd-Frank — it would be marginal at the most.”

The CFPB does not have direct supervisory authority over community banks with less than $10 billion in assets. However, a CFPB examiner may accompany an OCC, FDIC, or Federal Reserve examiner on a community bank exam to assess compliance with consumer finance law. More importantly, the prudential regulators with authority over community banks appear to be following the CFPB’s lead when it comes to the enforcement of consumer finance laws. Thus, it is important for community bankers to closely follow the CFPB’s rulemaking and enforcement activities.

Community banks feel the CFPB’s impact in several areas—perhaps most in mortgage lending. The CFPB has focused on mortgages since its inception, enacting reforms aimed at curbing predatory and high-risk mortgage lending. The CFPB’s recent focus also includes requiring that lenders assess a borrower’s ability to repay, ensuring compliance with the new Home Mortgage Disclosure Act, and protecting consumers from unfair collection practices. In addition to mortgage lending, the CFPB also has recently identified small business lending as a new area of focus. As this is a new area of focus, it remains to be seen what rules the CFPB will make for small business lenders. But this promises to be an additional area that impacts community banks. Lastly, the CFPB has taken an expansive reading of Dodd-Frank’s prohibition of unfair, deceptive, or abusive acts or practices (UDAAP). Community banks must be diligent in reviewing their advertisements (and those of their vendors) to minimize UDAAP risk.

In light of the CFPB’s impact on community banks, bankers should pay close attention to the case between the CFPB and PHH Corp., currently pending before the D.C. Circuit Court of Appeals. The case arises out of the CFPB’s charges accusing PHH, a mortgage lender, of violating the Real Estate Settlement Procedures Act (RESPA) by accepting reinsurance premium payments from mortgage insurers as compensation for referrals. PHH took the case to trial in front of an administrative law judge, who found in favor of the CFPB and recommended disgorgement of $6.4 million. On appeal, CFPB Director Richard Cordray also found against PHH but raised the disgorgement amount to $109 million.

PHH appealed the case to the D.C. Circuit, which heard arguments in front of a three-judge panel on April 12. The panel’s questions revealed skepticism for the CFPB’s position and suggested that the court might reject the Cordray’s decision. For example, the panel asked why the CFPB classified the payments to PHH as kickbacks rather than bona fide payments for services provided, as permitted by Section 8 of RESPA. The court also questioned whether PHH had fair notice that the CFPB considered the payments unlawful, given that the entire industry was engaging in the same practice. Additionally, the panel was skeptical of the CFPB’s position that RESPA’s statute of limitations applied only to cases pending in court and not to administrative actions such as the PHH case.

Most interestingly, the D.C. Circuit questioned whether the CFPB’s structure is unconstitutional. In particular, the court was concerned that Cordray, the sole director of the CFPB, could only be removed by the President for cause. This makes the CFPB unique among federal agencies in vesting power in a single individual without any oversight, which the court was concerned might violate the separation of powers. As one of the judges noted,

“Historically, independent agencies have been multi-member on the theory that they’re non-partisan or bi-partisan. This is a novel structure [with] very few precedents that I found.”

In summary, community banks should pay close attention to the CFPB’s rulemaking and enforcement actions, particularly in areas such as mortgage lending and small business lending. Bankers will also want to stay tuned as the D.C. Circuit decides the PHH Corp. case to see how the CFPB’s enforcement process and general authority may be modified.