Since the beginning of 2018, the Consumer Financial Protection Bureau (CFPB), under the leadership of an acting director since the 2017 departure of Richard Cordray, has taken multiple steps to reevaluate the agency’s mission, progress and rules. In a widely-publicized memo, agency leadership indicated that it is the CFPB’s intent to evaluate all aspects of its operations, including investigations, enforcement, supervision and rule-making. Leadership stated that it intends to focus the agency’s efforts on enforcement where there is quantifiable and unavoidable harm, as well as clearer rulemaking (rather than regulation by enforcement), and both supervision and enforcement activities that are grounded in data (such as consumer complaints activities).
In concert with that memo, the agency has taken several immediate actions:
- In January 2018, the CFPB issued a statement that it plans to reconsider its final rule related to payday, vehicle-title and certain high-cost installment loans (known as the Payday Rule). Currently, most provisions of the rule are not effective until April 2019; the CFPB indicated that it will entertain requests for waivers from entities required to comply with licensing requirements, though, by April 2018.
- Also in January, the CFPB announced updates to its 2016 Prepaid Rule, adjusting requirements related to error resolution on unregistered prepaid accounts, and for credit cards linked to digital wallets. Notably, the CFPB extended the implementation date of the rule by one year, to April 1, 2019, to allow the industry more time to address its requirements.
- As part of a broader restructuring, the agency consolidated oversight and enforcement authority of fair lending laws and regulations into its supervision, enforcement and fair lending division in February 2018. The Office of Fair Lending and Equal Opportunity, which previously had such responsibilities, will now focus instead on advocacy, coordination and education.
- The CFPB has submitted four requests for information (RFIs) to the public in response to agency leadership’s “call for evidence” in terms of how it performs its enforcement, supervisory, rulemaking, market monitoring, and educational activities. Feedback has been requested regarding the impacts of these processes on consumers and the financial institutions covered by the CFPB. The RFIs include the following.
- An RFI regarding its Civil Investigative Demand (CID) process was issued in January 2018. CIDs are issued during the CFPB’s investigation process to entities and persons that the CFPB has reason to believe have information relevant to a violation of the federal consumer financial laws the CFPB enforces. Recognizing the burdens CIDs may impose, the CFPB seeks feedback on how the process can be updated, streamlined and revised – including, notably, whether contested CIDs should be made public.
- An RFI regarding its rule for adjudication proceedings was issued in January 2018. Administrative adjudication is one of several methods the CFPB may use to enforce compliance with federal consumer financial laws; the term refers to the process by which an administrative agency engages in an adversarial proceeding with a supervised party, the outcome of which can be an affirmative, negative, injunctive or declaratory order against that party.
The CFPB published its original rule in 2012 regarding the handling of administrative hearings and adjudications in accordance with the requirements of the Dodd-Frank Act. Among other items, the CFPB seeks feedback on technical requirements related to discovery, notification of action, subpoenas and appeals. A notable question for feedback is whether contested matters should be pursued only in federal court rather than through this process at all.
- An RFI regarding the efficiency and effectiveness of the agency’s enforcement process was issued in February 2018. Among other items, the CFPB seeks feedback on its communications with the subjects of its investigations, its Notice and Opportunity to Respond and Advise process, the calculation of civil monetary penalties, the standard provisions of its consent orders, and coordination of its activities with other regulatory agencies.
- An RFI regarding the efficiency and effectiveness of the agency’s supervision program was issued in February 2018. Under the Dodd-Frank Act, the CFPB was assigned supervisory examination authority of insured depository institutions with assets greater than $10 billion, all non-depository institutions in certain markets (such as mortgage, payday and private education lenders), certain non-depository institutions that are larger participants in their markets (such as debt collectors and credit reporting agencies) and third parties providing services to these entities. Among other items, the CFPB seeks feedback on: its supervision process, examination materials, examination reporting and appeals, and coordination of its activities with other regulatory agencies.
It is important for financial institutions – banks and non-banks alike – to continue to monitor the developments and assess the impact on their institutions. In addition, financial institutions may seek to take advantage of the opportunities to provide thoughtful feedback to the CFPB on its operations through the RFI process. Financial institutions, however, should not view these actions as a lessening of financial regulation and oversight. Though the CFPB might no longer seek to push the envelope in its supervision and enforcement activities, its leadership cautions that the agency will continue to take actions necessary to protect consumers and vigorously enforce the law.
Indeed, the agency’s intent to prioritize its activities using quantifiable means may bring certain products, services and institutions more fully into its focus than ever before. In addition, other regulatory agencies at the federal, state and local level still have an interest in consumer protection, the conduct of financial institutions and how they manage these risks.
We will continue to monitor these developments in future issues of Compliance Insights.
According to a memo published by the U.S. Census Bureau, the population age 65 and over is projected to be 98.2 million by 2060, more than double the estimated 47.8 million in 2015. As the country’s demographics shift over time, many regulators, including the CFPB, have noted that financial crimes involving elderly Americans are increasingly a significant concern for financial institutions to guard against. As such, various financial regulators, including the CFPB and the Financial Institutions Regulatory Authority (FINRA), among a host of state and local agencies, have established resources to assist financial institutions and the public with combatting elderly financial abuse.
In 2015, FINRA established the Securities Helpline for Seniors, a toll-free number available to senior investors to obtain assistance from FINRA or raise concerns with their brokerage accounts or investments. Through this service, FINRA has identified issues that investment firms may be facing regarding servicing senior investors and the adequacy of their responses if they suspected that a senior investor was potentially subject to financial exploitation. As a result, FINRA issued a Regulatory Notice in March 2017 addressing financial exploitation of seniors, which amends an existing FINRA rule and establishes a new one to provide broker-dealers with a way under FINRA rules to respond to situations in which they identify potential financial exploitation or the risk of its occurrence. These new rules became effective in February 2018.
The new rules implement two key changes aimed at protecting senior investors:
- Trusted Contact Person (Amendment to Rule 4512). The amendment to Rule 4512 requires that member firms that sell securities to the public (and that must be registered with FINRA) make reasonable efforts to gather information for a “trusted contact person.” Reasonable efforts to obtain the name and contact information must be made during account opening or when updating information for accounts opened before February 5, 2018.
The trusted contact person is intended to be a resource for the firm in administering the customer’s account, protecting assets and responding to possible financial exploitation. Member firms must disclose in writing (which may be electronic) to the customer that the member is authorized to contact the trusted contact person and disclose certain information about the customer’s account. Member firms are not prohibited from opening an account where the customer fails to provide the information so long as the firm took reasonable efforts to obtain the information (which includes asking a customer to provide the name and contact information of a trusted contact person).
- Temporary Hold on Disbursement of Funds or Securities (New Rule 2165). In general, member firms are prohibited from withholding funds from an individual (FINRA Rules 2010, 2150 and 11870). Under new Rule 2165, however, a firm is allowed to place a temporary hold on the disbursement of funds or securities from the account of the specified adult customer if the firm reasonably believes that financial exploitation has occurred or has been attempted. This rule does not obligate firms to do so, but provides them with a safe harbor from other FINRA restrictions when they do so. Key parameters of the new rule include the following:
- The customer must be a person who is age 65 or older, or age 18 or older if the firm believes the customer has a mental or physical impairment that renders the individual unable to protect his or her own interests.
- A temporary hold may be placed on a suspicious disbursement but not on other, non-suspicious disbursements. The rule does not apply to transactions in securities, only disbursements.
- The trusted contact person (and other authorized persons) and the customer must be notified of the hold within two business days; however, if the firm believes these individuals were involved in the transaction, notification is not required.
- The firm must have a reasonable belief of financial exploitation.
- FINRA encourages firms to attempt to resolve the matter of a potential hold with a customer before action takes place and places significant discretion on the firms in resolving the situation. In placing or lifting a hold, the firm must take into account a customer’s objection, information obtained during an exchange with the customer or trusted contact person and all other information available.
- When a temporary hold is placed, the firm must immediately initiate an internal review of the facts and circumstances that caused them to reasonably believe financial exploitation applies.
- Member firms are required to retain records related to compliance with the rule and must establish and maintain written supervisory procedures to achieve compliance with the rule and training policies to ensure compliance of the requirement must be developed and documented.
To comply with these changes, member firms should follow prudent regulatory change management and project-planning processes to determine whether and how they must enhance their policies, programs and systems to ensure compliance with the technical and operational requirements of the new rules. Improvement to record-keeping capabilities may be needed to ensure ongoing rule compliance. Policies and procedures should be reviewed to ensure that identification, escalation and reporting of potential, expected or actual abuse is taking place. A firm’s management and regulators should be informed of compliance with the rules through regular monitoring and reporting routines and training should ensure understanding of policies and procedures for the discretion and judgment of the firm.