1. Presented by Andrew Campbell Ober|Kaler Preparing for the CFPB in 2012 © Copyright 2012. Sheshunoff Consulting + Solutions. All rights reserved.

2. 2 © Sheshunoff Consulting + Solutions Central Mission “The central mission of the Consumer Financial Protection Bureau (CFPB) is to make markets for consumer financial products and services work for Americans — whether they are applying for a mortgage, choosing among credit cards, or using any number of other consumer financial products.” -- CFPB Website

3. 3 © Sheshunoff Consulting + Solutions AGENCY HISTORY Created by Title X of the Dodd-Frank Act, the Consumer Financial Protection Act of 2010, to address “widespread failures in consumer protection and rapid growth in irresponsible lending practices.” Agency formed to: –focus directly on consumers, rather than on bank safety and soundness or on monetary policy –heighten government accountability by consolidating in one place responsibilities that had been scattered across government –Exercise responsibility for supervision and enforcement of consumer protection laws and providers of consumer financial products and services that escaped regular Federal oversight –protect families from unfair, deceptive, and abusive financial practices

4. 4 © Sheshunoff Consulting + Solutions Inherited Laws Laws inherited to the CFPB: Electronic Fund Transfer Act (except with respect to Section 920) Equal Credit Opportunity Act Fair Credit Reporting Act (except with respect to red flag rules and proper disposal of records the Fair Debt Collection Practices Act Consumer Privacy the Truth in Savings Act Section 626 of the Omnibus Appropriations Act, 2009 (mortgage advertising; foreclosure and modification scams) Supervision of non-insured depository institutions Consumer Leasing Act the Interstate Land Sales Full Disclosure Act.

5. 5 © Sheshunoff Consulting + Solutions Inherited laws continued Mortgage Related Laws the Truth in Lending Act (“TILA”) the Home Mortgage Disclosure Act (“HMDA”) the Real Estate Settlement Procedures Act (“RESPA”) the S.A.F.E. Mortgage Licensing Act Alternative Mortgage Transaction Parity Act of 1982 the Home Owners Protection Act of 1998 (“HOPA”) the Home Ownership and Equity Protection Act of 1994 (“HOEPA”)

6. 6 © Sheshunoff Consulting + Solutions Agency Jurisdiction “A senior agency official said the bureau potentially could be responsible for tens of thousands or even 100,000 firms. To help cull the list, the agency is considering requiring certain firms to register with the bureau to help it determine which companies should fall under its supervision.” Solomon, Deborah and Jackson Randall, Maya, “Agency Outlines Role,” The Wall Street Journal, June 24, 2011

7. 7 © Sheshunoff Consulting + Solutions Firms covered by CFPB jurisdiction Large depositories (more than $10 billion in assets) Lenders and loan services, including payday lenders, automobile lenders, mortgage-related businesses, and private student loan providers Loan acquirers, purchasers, sellers, and brokers Sellers, providers, and issuers of stored-value instruments Those engaged in check cashing, collecting, and guaranty services Payment processors Providers of credit counseling, debt management, and debt settlement services Consumer reporting services Debt collectors Service providers to any of the above persons

8. 8 © Sheshunoff Consulting + Solutions Smaller Depository Institutions CFPB will not generally have examination authority over banks and credit unions with under $10 billion in assets CFPB may require reports of these entities to support its exams of other depository institutions or assess risks to consumers and markets “Ride along” provision - CFPB may include examiners on a “sampling” basis on exams of smaller banks and credit unions

9. 9 © Sheshunoff Consulting + Solutions Exempt Persons Attorneys Merchants, retailers, and other sellers of non-financial goods or services Realtors Manufactured and modular home retailers (who do not offer consumer financial products or services) Tax preparers Persons regulated by state insurance or state securities regulators Persons regulated by the SEC, CFTC, and Farm Credit Administration Auto dealers Employee benefit and compensation plans Activities related to charitable contributions

10. 10 © Sheshunoff Consulting + Solutions Two Types of Authority SUPERVISORY AUTHORITY, which includes the power to examine and require reports from the persons that it supervises to: –Assess compliance with Federal consumer financial law –obtain information about such persons’ activities and compliance systems or procedures –detect and assess risks to consumers and to the consumer financial markets ENFORCEMENT AUTHORITY, which allows it to bring to bear its arsenal of enforcement powers against an entity that has violated one of its inherited areas of jurisdiction or committed an unfair, deceptive, or abusive act or practice (UDAAP)

11. 11 © Sheshunoff Consulting + Solutions Supervisory Authority Dodd-Frank gave the CFPB supervisory authority, which is the power to examine and require reporting (think bank regulator), over Very large banks (over $10 billion), thrifts, and credit unions, and their affiliates, and Nonbank covered persons of all sizes engaged in the following activities –Origination, brokerage, or servicing of residential mortgage loans secured by real estate, and related mortgage loan modification or foreclosure relief services, mortgage servicers are subject to examination –private education lending, and –payday lending markets

12. 12 © Sheshunoff Consulting + Solutions Supervisory Authority continued The CFPB also has the authority to supervise nonbank ‘‘larger participant[s]’’ in markets for other consumer financial products or services. The Bureau must define such ‘‘larger participants’’ by rule to be issued by July 21, 2012. February 17 proposal, the Bureau proposed to define larger participants in two markets: –consumer debt collection and –consumer reporting. The Bureau intends that this proposal and subsequent initial rule will be followed by a series of rulemakings covering additional markets for consumer financial products and services.

13. 13 © Sheshunoff Consulting + Solutions Enforcement Authority Nonbank entities are subject to the CFPB’s regulatory and enforcement authority regardless of size or whether they are subject to the Bureau’s supervisory authority; i.e., everybody is subject to enforcement action The CFPB is in the position of drafting rules that interpret the inherited laws and is able to enforce compliance with those rules The CFPB also has a catch-all authority to address unfair, deceptive or abusive acts and practices (UDAAP) and is able to include a UDAAP and in some cases a fair lending component to its rules, thereby giving itself additional enforcement jurisdiction

14. 14 © Sheshunoff Consulting + Solutions Agency Structure – Core Functions Rule-making Supervision, and Enforcement Restrict unfair, deceptive, or abusive acts or practices (UDAAP) Process Consumer Complaints Promote financial education Research consumer behavior Monitor financial markets for new risks to consumers Enforce laws that outlaw discrimination and other unfair treatment in consumer finance

15. 15 © Sheshunoff Consulting + Solutions Enforcement as THE Core Function Aggressive statements from Director Cordray and other agency staff Large Enforcement staff dwarfs other agencies Enforcement attorneys will accompany examiners Fair lending staff member assigned to each supervisory exam for banks and nonbanks

16. 16 © Sheshunoff Consulting + Solutions Sources of Enforcement Action Supervisory Exams Consumer Complaints – “State of the Art” call center and information handling systems Agency statement on whistleblowers – being given top priority Cross-referrals from and joint initiatives with the FTC and other federal agencies Market Data Research

17. 17 © Sheshunoff Consulting + Solutions Structure of Investigations Based on FTC/SEC models –Civil Investigative Demands –Privilege issues –Objections to the Bureau Director; waives confidentiality –Enforcement actions may be initiated in Federal or State court Early Warning Notices

18. 18 © Sheshunoff Consulting + Solutions Enforcement Remedies Rescission or reformation of contracts Refund of money or return of real property Restitution Disgorgement or compensation for unjust enrichment Payment of damages or other monetary relief Public notification regarding the violation Limits on the activities or functions of the person against whom the action is brought Civil Money Penalties –up to $5,000 per day for the violation of a rule imposed by the CFPB –up to $25,000 per day for the reckless violation of a federal consumer protection law, and –up to $1,000,000 per day for a knowing violation of a federal consumer financial law.

19. 19 © Sheshunoff Consulting + Solutions UDAAP UDAAP = Unfair, Deceptive, or Abusive Acts or Practices In addition to the authority to enforce the laws that it has inherited, the Dodd-Frank Act gave the CFPB “catch-all” authority to go after UDAAP cases Creation of a new acronym and potentially a new standard with addition of the term “abusive” Previously UDAP standard was established by FTC Act and State “UDAP” statutes, but adds the term “abusive” CFPB considers “unfair”, “deceptive,” and “abusive” as three separate terms, each with its own meaning to be determined Congress and Industry concerns that standard will be interpreted subjectively

20. 20 © Sheshunoff Consulting + Solutions Traditional UDAP Standard Section 5 of the FTC Act: “Unfair” – an act or practice is unfair if it : –Causes or is likely to cause substantial injury to consumers –Cannot be reasonably avoided by consumers; or –Is not outweighed by countervailing benefits to consumers or to competition Public Policy may be considered with all other evidence “Deceptive” – an act or practice is deceptive where: –A representation, omission, or practice misleads or is likely to mislead the consumer –A consumer's interpretation of the representation, omission, or practice is considered reasonable under the circumstances –The misleading representation, omission, or practice is material"

21. 21 © Sheshunoff Consulting + Solutions New Term: “Abusive” Under Dodd-Frank, CFPB may not declare an act or practice abusive in connection with the provision of a consumer financial product or service, unless the act or practice— materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or takes unreasonable advantage of— –a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service; –the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service; or –the reasonable reliance by the consumer on a covered person to act in the interests of the consumer CFPB will likely define by enforcement action, will take the “you’ll know it when you see it” approach”

22. 22 © Sheshunoff Consulting + Solutions Potential Applications of UDAAP Standard Truth in Lending/RESPA disclosures Risk-based pricing notices Mortgage Loan Originator compensation Mortgage loan products and pricing Credit card programs and pricing Overdraft protection programs Debit card practices and pricing. Fees of any kind Information reporting and sharing: FCRA to Reg P Practices in industries that provide financing to consumers: –Payday –Automobile financing –Student loans Fair Lending

23. 23 © Sheshunoff Consulting + Solutions Mortgage Related Initiatives Know Before You Owe (KBYO) – integrated disclosure of TILA and RESPA Disclosures Mortgage Originator Compensation Verification of the Borrower’s ability to pay – the Qualified Residential Mortgage (QRM) and Qualified Mortgage (QM) standards

24. 24 © Sheshunoff Consulting + Solutions National Servicing Standards CFPB to issue new mortgage servicing rules January 2013 Theme is “No Surprises” Clear monthly mortgage statements Warning before interest rate adjustments Options for avoiding Forced-Place insurance Early information and options for avoiding foreclosure Payments immediately credited Records kept up-to-date and accessible Errors corrected quickly Direct and ongoing access to servicer’s foreclosure prevention team

25. 25 © Sheshunoff Consulting + Solutions Fair Lending One of CFPB’s primary responsibilities and emphasis CFPB’s fair lending unit has begun planning several rulemakings mandated by the Dodd-Frank Act, including those regarding –collection and reporting of small, minority- and women-owned business loan data under ECOA and –reporting of additional data fields for all companies required to report under HMDA. CFPB’s Fair Lending and Enforcement offices have “begun investigating fair lending matters, including those transferred from the prudential regulators. In addition, the offices are engaging in early-stage research to identify new investigations. Further detail regarding these and other ongoing investigations will not be made public by the Bureau until such time that a public enforcement action is filed.” Semi-Annual Report of The Consumer Financial Protection Bureau July 21 - December 31, 2011 (January 30, 2012)

26. 26 © Sheshunoff Consulting + Solutions Fair Lending continued According to Patrice Ficklin, CFPB Assistant Director for Fair Lending: CFPB has authority to enforce the Equal Credit Opportunity Act and the Home Mortgage Disclosure Act while banking regulators continue to enforce the Fair Housing Act and the Community Reinvestment Act CFPB has independent litigating authority and may bring fair lending cases against banks and non-banks in federal court CFPB may also hold adjudication proceedings before its own administrative law judges, which can issue cease and desist orders and penalties, and provide equitable relief for borrowers CFPB must still refer fair lending violations to the Justice Department when there is evidence of a "pattern or practice" of discrimination Davidson, Kate, “CFPB's Fair Lending Chief Outlines Enforcement, Rulemaking Priorities”, American Banker (April 19, 2012)

27. 27 © Sheshunoff Consulting + Solutions Fair Lending continued CFPB is considering an amendment to Regulation Z that would address fair lending as a UDAAP issue Disparate Impact Analysis in Fair lending Cases –CFPB Bulletin 2012-04 (Fair Lending) (April 18, 2012) –Fully embraces the use of disparate impact analysis in lending discrimination cases CFPB has likely initiated research into market data to find instances of disparate impact

28. 28 © Sheshunoff Consulting + Solutions Interaction State Attorneys General Memorandum of Understanding and Information Sharing Agreements Development of a national strategic plan to address common issues Working groups meeting regularly to discuss payday loans, foreclosure scams, auto loans, and debt collection Joint initiatives in areas of shared jurisdiction

29. 29 © Sheshunoff Consulting + Solutions Other Issues Memoranda of understanding with FTC Confidential treatment of privileged information in CFPB investigations Overdraft fees Pre-dispute arbitration agreements Credit card fees