Right after one of the debates I found myself knee deep in a debate about Dodd-Frank.  A close personal friend of mine, a very bright bulb who I’ve never found a reason to disagree with brought up Dodd-Frank as an example of horrible legislation that’s crippling banks and contributing to our horrible economic conditions.  Whoa, whoa, whoa…. rail against taxes, complain about government spending, assail the current administration for the dramatic escalation of our national debt.  But leave Dodd-Frank out of it because that’s not one of our bigger problems.  I can offer a five thousand word defense of the best parts of Dodd-Frank without even pausing to organize my thoughts but I don’t need to go that far.  I can sell it’s virtues in a single, simple sentence:  Any legislation that created the Consumer Financial Protection Bureau is instantly more effective than anything that’s come before it in my lifetime.

No, seriously… in my lifetime.

I’ve already screamed from the rooftops about how much I like the CFPB.  In my own geeky, nerdy way I’m proud to admit that I look forward to getting their regular updates and announcements because they always seem either ridiculously relevent or illuminate how they’re hot on the heels of yet another predatory business practice.  In barely a years time they’ve pushed deeper into the heart of the issues that crashed Wall Street in 2008 than anyone could have hoped (that’s my opinion but one I’m willing to defend).  And their examiners appear to be freaky efficient.  I’ve been hearing from our banking clients that they’re drilling in on details and covering more territory than was expected and that they’re discussing issues much closer to protecting customers (and members).   Our practice recently issued a bulletin to our clients alerting them to the fact that CFPB examiners are expecting related oversight to be pushed down to external business parters and vendors.  This is not a new consideration, it’s exactly the same as what’s supposed to happen with regards to GLBA (and one of the reasons we developed our related software and services for same) but still, we anticipated this would take several exam cycles to surface.  CFPB cut right to that chase in a heartbeat, which is stunning for such things.  It’s almost like someone told them where to look and what to look for which to a certain extent is true.

The CFPB didn’t start as most new agencies do.  They didn’t recruit green examiners and place them under the management of a few practiced hands.  What they apparently have done is to hire well seasoned examiners from related regulatory agencies (e.g. FDIC, FRB, OCC) have them contribute to creating the necessary procedures and then send them out to bring it all to life.  So on Day One they already know where the bodies are likely to be buried and what to do about it.  It’s brilliant, it’s efficient and it’s the very best example of  your government doing its job.

Here are some snippets from my in-box:

• Regarding the three main credit reporting agencies, the CFPB released a report that said “Among the key takeaways in the report, which is one of the most comprehensive studies of credit reporting to date, are that credit card history dominates the information in credit reports and that debt collection items  generate the highest rate of disputes”.  This becomes important for consumers who are trying to either establish or repair respectable credit ratings.  The news release further explained about the report that it “will help educate regulators and consumers about how this important industry works,” said CFPB Director Richard Cordray. “If consumers know how these companies handle their credit histories, they can make better decisions on how to handle their financial lives.”
• This was another headline “CONSUMER FINANCIAL PROTECTION BUREAU HALTS ALLEGED NATIONWIDE MORTGAGE LOAN MODIFICATION SCAMS”.  The news release explained that the CFPB is  “taking on schemes that prey on consumers who are struggling to pay their mortgages or facing foreclosure,” said CFPB Director Richard Cordray. “We are especially concerned with those who misrepresent government programs or websites to divert distressed homeowners from needed assistance.”
• And even still, another headline “CONSUMER FINANCIAL PROTECTION BUREAU PROPOSES ALLOWING COMPANIES TO RUN TRIAL DISCLOSURE PROGRAMS”.  And while this may seem dry to so many not close to the related issue this is signficant because right now most of us ignore all the small print.  The CFPB is trying to figure out better ways to present disclousre information so that us consumers both think to read it and, more importantly, understand what it’s telling us.  Rather than try and stuff a once-sized-fits-all solution down the industries throat they’re opening it up and authorizing institutions and lenders to explore different approaches.

And the kicker about these three items?  This was all issued this month (December 2012) and we’re not even quite halfway through it.

Things are looking up a bit because I have a new favorite regulatory agency to follow, the Consumer Financial Protection Bureau (CFPB).  And here’s why:  They focus on things that impact my day-to-day life (and yours as well).

I started tracking what the CFPB was doing about five months ago by accident.  Someone I know who used to be an examiner for the FRB switched over to the newer agency right at its infancy and I noticed this courtesy of a LinkedIn update.  Because I consider the Fed to be the Big Kahuna of the regulatory agencies I was surprised (you don’t leave the Yankees to sign with an expansion team unless you have to, or so I thought).  Compelled a bit by the update I started poking around the CFPB website.  For the first few months of this year it seemed to have potential but was little more than brochure-ware.  But last month that all changed.

The first CFPB update that caught my attention was labeled 12 CFR Part 1070 and it was all about the protection of consumer data, only with a slight twist.  Basically it was all about how any information they received as part of their field work would be protected exactly the same way that any third party vendor would be required to.  Despite their being a Federal agency they weren’t going to hide behind that as a means to simplify their lives.  They spearheaded an update to the underlying regulation that frames their charter so that consumers and their institutions can be assured that all PII and NPPI would be protected.  For me it was a rare win-win topic; protection of PII and NPPI combined with a reference to vendor management (these are a few of my favorite things).  And really for me it was that much more significant because I’ve known of a few situations where representatives of Federal and State regulatory agencies were responsible for the outright loss of confidential and/or restricted data.  Beyond a slap on the wrist there wasn’t much else done to the offending examiner or their agency.  And the affected institution couldn’t really complain too loudly because it’s always a bad idea to challenge your regulators, even when you’re in the right.  So I thought this was all at once a compelling and remarkably sensible update by a regulator, not something I’d expect to see.  That was the first points on the board for the CFPB.

The second set of points were scored almost on the same day.  I wanted to check one of the details related to the aforementioned update and noticed this one “Consumer Financial Protection Bureau report finds confusion in reverse mortgage market“.  Because I have a parent who is a senior citizen and who I think might one day soon be open to at least exploring a reverse mortgage I read with great interest.  The report was in plain English, was oriented in such a way that I could share it with my family and have them understand the issues and concerns detailed within and most importantly it made sense.  Reverse mortgages are growing in popularity and its main audience is the senior citizens segment of society.  Seniors tend to be  more easily misled, they’re under greater pressures to find new money sources (courtesy of our recession) at a time in their lives where going back to work is often not an option.  And because a parent would do almost anything rather than turn to their children for financial assistance they see a reverse mortgage as a way out of their predicament.  So for me having this content available was quite the relief.  I can caution and advise all day and night but the risks presented by a reverse mortgage are much more credible coming from an authorized source.  And so I celebrated July 4th this year by declaring the CFPB my new FDIC (the Sheila Bair inspired version, not the current blah one).

Here’s my really bizarro advice to any of you with even the slightest interest in regulatory oversight; if you haven’t already done so visit www.cfpb.gov and take a look around.  It’s oriented towards lay people, not just lawyers and regulators (and practitioners like me) and addresses topics and concerns that affect the majority of our population.  Basically it’s what I would expect from a regulator that still has that new agency smell but nothing like I’ve come to know from those that preceded it.  To those who have had a hand in defining its charter and organizing its content, great job!   Now repay my kind words by going out and getting me some juicy enforcement stories to write about.

Now I’m not sure if everyone enjoys reading Michael Lewis’ books the way that I do, but his approach to framing a story and providing seemingly unrelated perspectives so that you gain a much fuller understanding of the situation is perhaps the best I’ve ever encountered.  And in detailing the mess on Wall Street, he has provided me with more to think about than anything previously.

I recall when I purchased my last house in the New York market, I was concerned that the lenders were willing to finance deals in which houses were selling for more than double what they had sold for just a few years earlier.  I couldn’t figure out what the banks were thinking by entering into those deals.  The day I moved into that house I started forming predictions regarding when the real estate bubble would burst, how it would impact me personally and what it would mean to the economy at large (I was right more than wrong but not all results have been reported as of yet).  I’ve since sold out of that market, moved to another part of the country where financially everything made a bit more sense to me and have watched as events have continued to unfold.

But there’s that one question that has been stuck in my mind for nearly eight years: what were the banks thinking?  The short answer is that they weren’t.  They were along for the ride like most of us and  in order to keep pace with the market, shed solid lending practices that had always provided some measure of sanity to the process.

Now I have a new  question that’s knocked the older older one from its place of prominence: What are we going to do in order to make sure this doesn’t happen ever again ( a question perhaps only a regulatory compliance professional such as myself could be consumed by)?

Enter Chairman Bair. As most of my readers know, I’m a longtime, big time fan of hers and she’s done nothing to disappoint me this time around either.  In her speech, she said that the “pervasive breakdown in financial practices at the peak of the housing bubble points to the need for fundamental reforms in mortgage finance.”

She continued: “While regulation is necessary to set the ground rules and protect consumers, excessively proscriptive rules are likely to either stifle the initiative of the market or be circumvented by new practices. Instead, we need a whole new set of basic ground rules that go from origination to securitization to the servicing of the loans. These rules should create the transparency and incentives needed for this market to do what competitive markets do best – efficiently allocate resources and price risks.”  I like her thinking is because it’s all encompassing.  One of the most glaring problems in obtaining a mortgage based on my own experiences is the origination process.  The first time I practically had to submit DNA samples and waited for weeks to get a decision, the second time I was pre-approved for both the primary loan and a home equity line-of-credit after barely more than a 15-minute conversation. The third time, I didn’t have a clue what was going on until a week before the closing despite multiple attempts to get someone, anyone, to return a phone call.  Shouldn’t there be a consistent process that’s followed and perhaps even required by law?

Chairman Bair added: “We need to have some basic underwriting guidelines that apply to mortgages originated not just by FDIC-insured depository institutions, which are already heavily regulated, but also for the thousands of mortgage brokers who fall outside the rules for banks and thrifts. Basic limits on loan-to-value and debt-to-income ratios, and consistent documentation requirements should be set for any loans held by a depository institution or sold to a securitization trust.”  Do you think the real estate bubble would have grown so large if loan-to-value and debt-to-income ratios had been in place, required by law and enforced?  In “The Big Short,” Michael Lewis writes about a farm worker earning $14k per year  securing a mortgage for a house worth over $700k.  If there had been a way to prevent such deals, it’s not likely we’d be in this mess.  And regarding those lenders who fall outside of the banking industry, there definitely needs to be a new set of rules to govern what they do.  I recall talking with a mortgage broker when purchasing my first home who said, “Don’t worry about your credit score or income, I’ll find you a deal somewhere”.   Well if there were enforceable rules in place governing the various formulas used to assess an applicant, that would no longer be possible.

And lastly, for those who rail against the idea of new legislation and insist that the market can manage itself and that government should stay out of it, I offer Chairman Bair’s closing comments: “We need to get back to a world where our financial sector supports the functioning of our economy, and not the other way around. And we need to fix what caused the crisis by reforming our mortgage lending and securitization practices. Only by getting back to basics in these most fundamental areas of our financial system can we begin to restore balance to our broader economy and confidence in our economic future.”

Let’s face it folks: Left up to their own devices, the lending markets will repeat these mistakes at some point in the future.  Without a set of enforceable rules that ensure some measure of sanity and sensibility, a future generation who didn’t really feel the pain of the experience will figure out they can make a boatload of money in the short run, enough so that they won’t have to worry about the potential (and inevitable) collapse that’s sure to follow and do this all over again.  The bigger mistake would be to let that happen again.

I sure hope Chairman Bair has a fan or two up on Capitol Hill who finds her words and ideas as refreshing and relevant as I do.