Cloud of uncertainty hangs over new banking compliance rules
- October 30, 2012
In August, lawyer Ari Karen sent out an email blast to several hundred potential clients, advertising the mortgage-compliance services that his law firm, Offit Kurman, has started offering. Karen was new to the firm’s Tysons Corner office and was hired to run its new mortgage banking compliance department. It was his first marketing pitch, so he wasn’t expecting more than a few nibbles.
Instead, in the next few days he received about two dozen responses, including some from companies that signed up on the spot. “I never anticipated the kind of response we’ve had,” he says.
The angst being felt among banks and financial services firms stems from uncertainty over how to meet the compliance requirements being developed by the new Consumer Financial Protection Board (CFPB), an entity created by the Dodd-Frank Wall Street and Consumer Protection Act that became federal law in July 2010. The law, sweeping in its scope, has met substantial opposition, with Republicans in particular trying to slow its implementation. The CFPB’s stated intent is to “promote fairness and transparency for mortgages, credit cards and other consumer financial products and services.” But Karen and others say there are lots of devils in the details as regulators and the CFPB decide how it will ensure those goals are accomplished.
The uncertainty is made worse by the delays in getting those details. As of early September, the deadlines had passed for implementing 237 rules required by Dodd-Frank, which has a total of 398 such requirements. But regulators missed 61 percent of those deadlines, according to a report from Davis Polk, a New York-based law firm. “The good news is that the regulatory agencies have acknowledged they simply can’t keep up with the Dodd-Frank requirements and produce thoughtful, well-crafted regulations,” says Bruce Whitehurst, president and CEO of the Virginia Bankers Association (VBA). “The bad news is that it only extends the time of uncertainty ... It will be that much longer until we have a more stable regulatory environment.”
Karen says one big difference that is driving many firms to hire outside help is a sea change in the approach taken by federal regulators. “Up until this point, compliance in this industry was a little bit of a joke, to be honest,” he says. “The way it would work is: There would be a hot issue and everybody would scamper around” to show they were in compliance. Then in March the CFPB issued a new Examination Guide, outlining its compliance and enforcement strategy. The message it delivered from regulators was, “You’re now responsible. It’s your job to set up an internal compliance department so that you can self-correct,” Karen says. Now, regulators who find something amiss will assume there are other violations, too, he says. “It’s stunning from the industry’s perspective. I have to give them credit, whether I agree with it or not, it very much requires that a company take it seriously.”
Banks are used to being regulated so this is a somewhat familiar experience for them, says David Anthony, a partner at law firm Troutman Sanders with experience in financial services and commercial litigation. Not so for other firms. “Credit-card issuers, credit-reporting agencies, users of credit information, mortgage lenders, mortgage servicers, student lenders … for the most part those folks have never really been subject to federal oversight, with the full-blown supervision and examination authority,” he says. “They’re beginning to face the reality.”
The goal of protecting consumers against unfair financial practices is laudable, but Anthony is among those who think that the CPFB’s search for how to do that could wind up hurting businesses that don’t need correcting; they just need to know what the rules are. “There’s a tremendous amount of uncertainty over how this is going to shake out over the next 18 months,” he says.
Lawmakers have been getting involved. In August, Democratic Sen. Mark R. Warner co-sponsored a bill that would allow more cost-benefit analysis to be done of new regulations coming from independent regulatory agencies. In early September, 53 senators, including Warner, who was the first signature, wrote to Federal Reserve Chairman Ben Bernanke and others, asking them to be careful of the impact new regulations could have on community banks. Raising the capital requirements for banks to make them more financially sound could hurt smaller banks, the senators said. “In fact, some small banks may be unable to serve the future needs of the communities they serve because they simply do not have the resources to meet the new compliance obligations,” they wrote. “These institutions are different from many larger institutions in size and scope, and we do not see the value in requiring them to adhere to regimes designed to manage larger and more complex risks.”
That’s where Whitehurst from the VBA stands. The rules are going to bring changes that aren’t good for the banking industry and the consumers and businesses that it does business with, he says. If the cost of banking goes up, the amount of banking at the local level will go down, Whitehurst argues. “If they aren’t as profitable, they aren’t going to be able to invest as much,” he says. “This has far-reaching implications. Banks should be regulated. We’re just saying as an industry that it’s out of balance.”
The regulatory development, however, has been good for the law firms that can help banks and other financial institutions navigate the maze of new and pending rules. Karen says his firm’s new mortgage banking compliance department has about a half-dozen attorneys right now. “I think we’re frankly going to have to double that,” he says. “It’s growing very quickly.”