By Brett Husak
National Bank Services
There is a constant flow of change through the payments industry whether it be credit card terminals, startups, POS systems or more gateways than you can keep track of. But if you have not yet heard of the Consumer Financial Protection Bureau's involvement in the business, you might need to check your pulse.
The agency was legislated in 2010 as part of the Dodd-Frank Act, which was created in response to the financial crisis of 2008. According to its director Richard Cordray, the CFPB is tasked to protect consumers from "unfair, deceptive or abusive practices and take action against companies that break the law." It is also a watchdog for mortgage servicers, payday lenders and debt collectors.
Indeed, the CFPB has been extremely busy over the past five years. It has obligated lenders to verify the ability of borrowers to repay loans and has mandated enhanced disclosures in mortgage, credit card, and student loan forms and statements. In sum, this agency has gained acclaim among those concerned with consumer rights, as it has provided almost $12 billion in rewards to about 27 million consumers since 2011.
Some may view this agency as a government arm of advocacy that is there to protect and maintain the checks and balances of financial companies. Others might say it is an extension of the government that is operating under the guise of activism, but is more or less a rogue regulatory unit whose purpose, structure and reach are borderline illegal.
The CFPB has proven to be a force to be reckoned with during its short existence. It has taken regulations to a new level and has disrupted the financial industry in various ways. Critics are concerned by the seeming unaccountability of this Washington organization, which does not employ elected officials or have any required presidential oversight.
John Berlau, Senior Fellow at the Competitive Enterprise Institute, alleges CFPB rules make consumer financing more difficult and likely impossible for the poorest Americans. He also accuses the bureau of inundating financial companies with "burdensome mandates" while imposing large fines.
Indeed, the CFPB levels fines as if it were Oprah or Ellen during their December giveaway specials. Generally, the bureau orders between $500 million and $1 billion in fines annually; 2014 proved to be a notable year: it issued more than $3 billion in fines, with $2 billion in penalties stemming from one case alone involving mortgage service violations by Ocwen Financial Corp. and Ocwen Loan Servicing LLC.
Financial institutions such as JPMorgan Chase and Bank of America are other big CFPB targets. In 2016, the agency charged Wells Fargo a $100 million fine after the discovery that employees had opened unauthorized customer accounts in an effort to meet sales goals.
Hitting closer to home, the CFPB has taken action against processors, which has crippled some verticals that most payment providers were once able to service. In April 2015, the CFPB sued Global Payments Inc. because the company ignored red flags for a few companies processing for debt collection services. That vertical has been complicated to navigate since then.
Over the past year alone, payment processors have been facing increased scrutiny by the CFPB. Enforcement and litigation by this bureau are highlighting regulations on the processing industry based on their role as intermediaries or "gatekeepers" to the banking system. The CFPB is particularly interested in the processors' unique position of enabling businesses, including those that are high risk, to obtain funds from consumer's bank accounts.
The CFPB noted that, "gatekeepers to a system in which so much money changes hands, third-party payment processors as well as the banks they work with have responsibilities to monitor their transactions for suspicious activity and not enable fraud on the ACH network." The CFPB has chosen to supervise such entries into the financial system with customized management. Industry insiders can gain insight by understanding the agency's perception of payment processors. This should allow them to dodge or prepare for possible regulatory examinations that may not be typically expected. The CFPB has proven through past lawsuits that it is looking for payment processors to be proactive in their risk mitigation tactics and maintain acceptable levels of compliance and monitoring systems. To get down to specifics, here are a few key points to help guide you in navigating all of this:
Whether the CFPB's current level of control will continue remains to be seen. It should come as no surprise that the Trump administration would be hostile to the CFPB, and the agency has become a target of intense scrutiny by Republicans since they gained control of Congress last November.
Representative Jeb Hensarling, Chairman of the House Financial Services Committee, is expected to introduce a bill that would diminish the power of the CFPB and make it easier to remove its director. Many are hopeful that Cordray will be replaced by a more business-friendly leader or possibly by a panel of commissioners.
Meanwhile, a dozen Republican senators introduced a bill last month that would give lawmakers control over the CFPB's funding, which is currently subsidized by the Federal Reserve. And the drama gets even more interesting. In response to a 2014 lawsuit by a mortgage service provider, a panel of three judges in the U.S. Court of Appeals found that the structure of the CFPB itself was unconstitutional. But just recently, the court granted the CFPB's request for a review by a broader set of judges. Stay tuned: oral arguments will begin May 24, 2017.
The following resources were used in researching this article:
Brett Husak is Director of High Risk at National Bank Services. Contact him via email at bhusak@nationalbankservices.com.
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