Jo Ann Barefoot: An SNL Exclusive Interview on Dodd Frank, UDAP and the CFPB
By SNL’s Tim Zawacki
As the architect of the OCC’s first consumer compliance department, Jo Ann Barefoot brings a unique perspective on the formation of the considerably broader U.S. Consumer Financial Protection Bureau.
Barefoot, a former deputy comptroller of the currency, longtime consultant on compliance and risk management to community banks and larger financial institutions, and now co-chair of Washington, D.C.-based compliance and strategic advisory firm Treliant Risk Advisors LLC, is more than an interested observer as CFPB implementation begins under the direction of special adviser Elizabeth Warren.
The implementation process includes meetings to better understand the needs and concerns of consumers and financial services companies, the laying of groundwork to enforce federal consumer financial laws, the issuance of new rules that are required by the Dodd-Frank Act and the collection of information about consumer financial products and services and their potential risks and benefits to consumers. Once fully established, the CFPB will be an independent bureau with the Federal Reserve System that, in addition to its enforcement capabilities, will review financial services industry business practices and monitor the marketplace to ensure transparency for consumers.
“[T]he CFPB will work to promote fairness and transparency for mortgages, credit cards, and other consumer financial products and services,” the bureau said on its website. “The CFPB will set and enforce clear, consistent rules that allow banks and other consumer financial services providers to compete on a level playing field and that let consumers see clearly the costs and features of products and services.”
Good intentions to be sure, but Barefoot said in a recent interview that the CFPB’s creation ‹ alongside various other aspects of Dodd-Frank is likely to bring significant new compliance challenges for financial institutions.
An edited transcript of that conversation follows.
SNL: What are the broad challenges facing the CFPB as it implements its mandate under Dodd-Frank?
Barefoot: The whole issue of consumer protection and compliance is not like anything we’ve ever seen before in my lifetime the escalation of the topic to becoming so high profile and it’s creating an entirely new risk environment for everybody.
I think one of the bureau’s big challenges will be to create a good working relationship with the web of other regulators. I think it’s important that they cultivate cooperation rather than polarization. Coming up with enough people to do the work in a sophisticated way is not going to be easy because the other agencies still feel like they need most of their folks, and the new agency is going to need a lot of people.
There’s also an issue with the degree to which the new agency will be part of a collaborative team in which everyone is expected to be mindful of both consumer protection and the prudential safety and soundness issues, or if it is purely a consumer champion, which is its mission. If that gets cast in opposition to the other agencies’ missions I think that will be very complicated. I think people at the bureau are mindful of this.
How much importance should be assigned to the decision as to who gets appointed to run the CFPB?
I think it’s extremely important. The first director is going to set a tone, create a culture, establish these working relationships, set priorities that will undoubtedly have staying power and the term will extend [past the next presidential election] regardless of who may [win]. It’s a blank slate.
It’s a remarkable, unique creation where it’s very difficult to point to precedents as to exactly how it ought to operate. The director will put a huge stamp on it, and Elizabeth Warren is already doing that.
What direction do you think the bureau will go in fulfilling its mandate?
They’re clearly stepping into a space that’s emotionally charged. It’s highly contentious between people who feel we need far more aggressive consumer protection and those who are more worried about overregulation.
With the House now having gone to the Republicans and the presidential [election] season already starting up, there’s undoubtedly going to be a lot of controversy over it.
I think Elizabeth Warren is trying to thread that needle. Š She’s trying to put the emphasis on improving the disclosure climate to make the market work better. Of course, that logic has been underlying all of our disclosure regimens for 30 years and, in my view, it has utterly failed. We have this massive machinery of disclosure mandates ‹ they’re very expensive and loaded with liability for the lender or the bank. At the same time, we don’t seem to have a very high quality of consumer understanding. We have millions of people in recent years who’ve gotten into mortgages and credit card obligations that they couldn’t handle.
That’s a lose-lose situation: lots of disclosure and nobody understanding what they’re getting. Š This is oversimplifying, but what we have now is almost worse than nothing because it’s a deterrent to even try to understand it. There was an old story of a bank years ago that put out one of its disclosure statements and they buried in the middle of it, ‘If you bring this into the bank, we’ll give you $100,’ and nobody showed up.
I think the theory is that if you streamlined [disclosure requirements], the industry would very happy Š if in fact it’s possible to create some simpler disclosures that people can really use to make choices. In theory, that would promote competition.
What other concerns or opportunities does the implementation of Dodd-Frank bring?
One area that I think is absolutely huge and the industry is barely has on the radar is the emergence of UDAP [or Unfair or Deceptive Acts or Practices] thinking. People know that’s in the bill. They know that the regulators have begun to bring UDAP enforcement cases. But my feeling is that the industry is underestimating how close and how big of a risk that is. It’s a huge area of subjective judgment where it’s going to be very hard to know ahead of time whether something you’re planning to do that meets [the letter] of the law is going to pass muster on UDAP.
All of the regulators are becoming much more aggressive in enforcing the UDAP concept. The guidance that exists is very, very general. It’s going to call for a different way of managing compliance. You won’t be able to send your product or your marketing piece to your compliance people so they can say, ‘Yes, this complies.’ It’s really creating a danger zone inside the law as to how close to a line you can go if the customer might not understand something.
I think the Dodd-Frank law is creating a de facto suitability standard, even if it wasn’t explicitly included. There’s going to be an expectation that if products are being targeted to more vulnerable groups the elderly, young, low income, financially troubled there’s going to be a lot more risk.
There’s really, in effect, going to be a duty to give more care to those customers.
Will banks steer clear of those vulnerable populations?
I think we will see some unintended consequences in which banks will be reluctant to try to serve difficult segments for fear that if, say, they charge more for what they consider to be a higher risk or higher cost, may they be in some kind of trouble?
From a public policy standpoint, it’s a big challenge for the regulators to try to not trigger that effect and, yet, provide adequate protection for people. It’s a whole new world.
What sort of burden will all of these new rules and uncertainties create?
The reality is it’s going to take more resources to do this. There’s not just going be sheer quantity of new regulatory requirements, there’s the qualitative change where you have to deal with these increasingly subjective standards and you have to do both of those in a much more aggressive regulatory environment where you’re much more likely to be criticized if you’ve gotten something wrong.
Institutions that are relying on their regulator to tell them what they’re doing wrong are going to be way behind the curve. They need to be much more proactive than that. It calls for a complete rethinking of the compliance function. Who’s going to have the money to just layer on a big, new compliance staff to do all of this work? It’s going to be tough.
The message for the industry to be highly proactive to understand the emerging risks and to make sure you can defend what you’re doing. That kind of proactivity is going to be the secret.
