The CFPB Is Coming

 | Jul 11, 2013 | 4:00 PM EDT
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The Consumer Financial Protection Bureau was required to be established as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The CFPB began operations almost exactly two years ago. 

The CFPB operates as a supervisor, regulator and regulation enforcer within a larger regulatory body, the Federal Reserve. The creation of the CFPB was deemed necessary because of the profound failures by both the private and public sector leading up to, and facilitating the opportunity for, the subprime debacle and the subsequent failure of much of the financial system as a result.

The CFPB's primary goal is to try to prevent such irrational behavior from occurring again by establishing pre-emptive prescriptions for the operations of financial institutions that do business with retail customers.

The necessity for its creation is somewhat akin to that which required the creation of the Securities and Exchange Commission in 1934.

Whether or not we agree with the need for there to be a CFPB, it is here now, and it is beginning to have an impact on the retail banking industry.

The CFPB has spent most of its first two years getting organized, figuring out its priorities and testing its ability to perform its functions by concentrating on the largest financial institutions

Its primary areas of interest now are retail lenders that make mortgages and auto loans and offer credit cards, because this is where the majority of consumer complaints have come from.

If the experiences of the top 20 money centers and national lenders in interacting with the CFPB in the past two years provides any guidance to what the super-regional and regional lenders are about to face with respect to CFPB audits, these organizations have a major challenge in front of them.

Some of the largest financial institutions have claimed that the CFPB is using heavy-handed tactics. In response, about three weeks ago, the CFPB issued a guidelines report for financial institutions to follow when interacting with the auditors.

The lenders that will be targeted next as the CFPB expands its operations will be the regional banks that rely heavily on their retail mortgage operations.

There are too many to enumerate here, so I will highlight the ones that investors should be mindful of as most probably next in line for greater CFPB scrutiny. I am not, however, taking a negative position on these companies. I'm just noting that they are about to begin the onerous ordeal of having their operations audited for compliance by the CFPB. 

SunTrust Banks (STI) has about 25% of its loan assets in first trust mortgages, 10% in second trusts, 10% in auto loans, and 1% in credit cards. In the last three years, SunTrust has cut its nonperforming mortgages in half, from about $3 billion to $1.5 billion, and that's good. However, it has not grown its mortgage business and has instead focused its attention on commercial loans. This may indicate that SunTrust has not dedicated resources to ensuring that its mortgage operation is in compliance with the new rules.

Regions Financial (RF) has about 20% of its loan assets in first trusts, 15% in second trusts, 3% in auto loans and 1% in credit cards. Like SunTrust, Regions has concentrated its business on the commercial side and has not grown its residential mortgage business. It has also experienced an increase in nonperforming mortgages. 

BB&T (BBT) has about 33% of its loan assets in first trust mortgages, and it has increased its retained portfolio by 50%, from $24 billion to $36 billion in the past three years. Although it has grown its commercial business, its concentration on retail mortgage lending likely indicates it has dedicated resources to ensuring compliance to the new rules.

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