Get ready. Even small banks and thrifts are going to be affected by a post-crisis shift in regulation toward what’s fair and transparent to consumers, says Tim Burniston, until recently a senior associate director with the Federal Reserve Board’s Division of Consumer and Community Affairs. In that position he was detailed to the Consumer Financial Protection Bureau (CFPB) to develop its large depository institution supervision program. He now heads the consulting practice at Wolters Kluwer Financial Services.

What will be the impact of the new CFPB?

This is an agency that has unprecedented reach, authority and concentration of power. It has not only supervision responsibility for depository institutions with assets above $10 billion and their affiliates, and nonbank institutions, but rulemaking responsibilities transferred to it for 18 federal statutes, including the Truth in Lending Act and the Equal Credit Opportunity Act. It has enforcement powers for addressing wrongdoing by those who violate regulations and it acts on consumer complaints. Among other things, the CFPB has the authority to write rules that prohibit abusive practices, which are forbidden by the Dodd-Frank Act.

How is this creating a new tone for supervision?

Fairness is really the lens through which the CFPB will likely look at practices and processes across an institution’s product and services life cycle. The agency is focusing on the concept of risk to consumers. That represents a big departure from what banks have been used to, where the emphasis was traditionally placed on risk to the bank itself.

How will this change the exam process?

The CFPB has a responsibility to ensure that institutions follow the laws, so there is a technical compliance element to their work, but they are also looking at supervision from a consumer risk perspective. The CFPB has stated that the goal of its large bank supervision program is to “prevent harm to consumers from unlawful financial practices and ensure that markets for consumer financial products and services are fair, transparent and competitive.”

What specifically is the CFPB interested in regulating?

CFPB’s charge is quite broad, and I am not surprised by what it has shown an interest in so far. They did a town hall meeting on payday lending. They did another on checking accounts and just launched an inquiry into overdraft programs with a focus on order processing, marketing, misleading information and customer demographics. They released mortgage servicing and origination examination procedures. They issued a proposal on remittances. We see them starting to take a look at issues that consumer advocates have raised questions about during the last few years. The regulation of non-depository companies, which includes payday lenders and debt collectors, is challenging. These entities largely have not been subject to routine federal supervision in the past. The CFPB’s nonbank supervision program in accordance with Dodd-Frank is risk-based, which means it will concentrate on those entities that pose the greatest risks to consumers. To regularly examine every one of them would require huge numbers of staff.

How will the CFPB impact banks below $10 billion?

Although there is a growing recognition and empathy for the regulatory burdens faced by smaller institutions, there is also the reality that the CFPB will have influence in the supervisory and regulatory community. It is a part of the Federal Financial Institutions Examination Council, which is a body that tries to promote uniformity in the exam process, and the CFPB director sits on the Federal Deposit Insurance Corp. (FDIC) board as well. The CFPB’s voice will be heard in those agencies.

How can bank directors monitor management’s progress in addressing these changes?

No one is expecting directors to be technical compliance experts, but it’s important for directors to be aware of, and to understand, what the hot button issues are so they can ask good questions of management and ask what steps the institution is putting in place to address those issues. One place for the board to start is with questions about how the supervisory emphasis on fairness and transparency could affect their institution.

But if you’re less than a $10-billion asset institution, should you still be preparing for an exam where fairness to consumers is emphasized?

Yes. I think that fairness in how consumers are treated will continue to be prominent in the post-crisis supervisory environment. In addition to the CFPB, over a year ago, the FDIC re-established a dedicated consumer protection division. They had merged their former compliance division within the safety and soundness group in 2002 and have now broken it back out again. That’s a good example of how this is not just about the CFPB and not just about big banks.

Tim Burniston