the 4 ds and beyond

November 2013

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How the Consumer Financial Protection Bureau sets the tone for consumer compliance oversight and what it

means for banks and their competitors.

The 4 Ds and beyond

Remarks by Richard RieseSVP, American Bankers AssociationNovember 20, 2013

The 4 Ds

• Deception

• Debt Traps

• Dead ends/Debt collection

• Discrimination

November 2013

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Ending Deception

• Focus on deceptive marketing

• Disclosure improvement

• Includes “KBYO” = know before you owe• TILA/RESPA

• Student Loans

Avoid Debt Traps

• Cycle of Debt concerns

• Payday Lending

• Direct Deposit Advance

• Overdraft Protection

November 2013

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Negotiate Dead Ends

• Debt Collection with Dignity

• Debt Collection ANPR with comment deadline of February 10, 2014

Discrimination

• Disparate Impact under Regulation B and ECOA

• QM and Fair Lending

• Indirect Auto Finance and Dealer Premiums or “reserve”

November 2013

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Mortgage Reform Status

• Will there be a postponement of the January deadlines?

• QM—Appendix Q and the practicality of “safe harbor” status

• Non-QM ATR

• QRM—the risk retention rule has been proposed to match QM, but options remain under consideration.

Customer Service Leadership in a UDAAP World:

Competing for the Privilege of Serving Customers Well

We will focus on how the CFPB and the banking regulators are transforming the concept of compliance risk into consumer risk and what that means for future rule‐making, supervisory oversight and bank leadership in your institutions, your community and in government and legislative relations.

November 2013

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aba.com |1-800-BANKERS

Understanding Complex Transactions

• The crisis was not just the result of decisions made by the mightiest…It was also the result of decisions made by ordinary Americans to open credit cards and take on mortgages. And while there were many who took out loans they knew they couldn’t afford, there were also millions of Americans who signed contracts they didn’t fully understand offered by lenders who didn’t always tell the truth….By setting ground rules, we’ll increase the kind of competition that actually provides people better and greater choices, …not the ones that are most complex or most confusing.

– President Obama at Federal Hall, 9/14/09


Understanding Complex Transactions

• “Nobody has the time or cognitive resources to be completely thorough and accurate with every decision, and as more decisions are required and more options are available, the challenge of doing the decision making correctly becomes ever more difficult to meet.”

– Barry Schwartz, The Paradox of Choice, 2004

November 2013

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More Consumer Choices…

• Products

• Services

• Features

• Decisions

• Risks

• Analysis

• Vulnerability


Warren Goal For Bureau Approach

• “We want to make prices and risks clear, and we want consumers to be able to compare two or three credit cards or two or three mortgages head to head. We think every consumer should have the information they need to answer two basic questions: “Can I afford this?” and “Is this the best deal I can get?” That’s how markets are supposed to work, and that’s where this new agency is headed.” (Emphasis added.)

– Elizabeth Warren , July 14, 2011 Testimony

November 2013

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Responsible Customers?

“American families aren’t looking for a free ride. They expect to be held responsible for the purchases they make. If they don’t keep up with payments on their credit cards, car loans and mortgages, they expect to face the consequences. They also expect to pay for the services they receive. They know that businesses need to make a profit, and “free” usually means that the real costs will eventually show up somewhere. They aren’t look for a free ride, but they are looking for an honest marketplace. They want to know the costs up front, before something gets added that they never knew was coming.”

Elizabeth Warren, September 29, 2010


More from the CFPB Leadership…

“No one denies that borrowers have to be responsible for their financial decisions. In fact, that is a bedrock premise of the Bureau’s approach to markets. But when risks and costs are obscured, it becomes very difficult for borrowers to make responsible decisions. And just layering on page after page of additional disclosures doesn’t necessarily make the choices any more clear.”

Raj Date, Special Advisor to Treasury Secretary, September 20, 2011

November 2013

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Cordray on Consumer Decisions

• People can make their own decisions, and nobody can or should try to do that for them. But it is the American way for responsible businesses to be straightforward and upfront with their customers, giving them all the information they need to make informed decisions. That is good for honest businesses and good for the overall economy.

– Richard Cordray, HFS Testimony, March 29, 2012


Cordray Still Invokes Consumer Responsibility

• At the same time, we recognize that consumers bear their own share of responsibility for how they participate in the financial marketplace. … Consumers need to put themselves in position to make sensible decisions that they can live with over the entire course of their lives. They need to recognize that the best form of consumer protection is self‐protection: avoiding problems before they

occur and the damage is done.– Richard Cordray, ABA Annual Convention Remarks, 10/21/13

November 2013

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International Consumer Financial Protection

• “Consumer protection is not about protecting consumers from bad decisions but about enabling consumers to make informed decisions in a marketplace free of deception and abuse.”

• Financial Stability Board, October 26, 2011

• “It is essential to protect consumers’ rights while also recognizing the fact that these rights do come with consumer responsibilities.”

• OECD, G20 High-Level Principles on Financial Consumer Protection, October 2011.

Pitching in the Financial Ball Game

“Pitch…to sell or advertise especially in a high-pressure way …” Webster’s New Collegiate Dictionary

“Advertising is the science of arresting human intelligence long enough to get money from it.” Stephen Leacock,

The Perfect Salesman, (1924)

November 2013

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Reasonable Customer Behavior?

Reasonable Customer Behavior cont’d

November 2013

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UDAAP‐ the new core of consumer protection?

• Unfair, Deceptive or Abusive Acts or Practices

• “Unfair” and “deceptive” standards parallel FTC Act

• “Abusive” is an act or practice that:

– Materially interferes with a consumer’s ability to understand a term or condition of a product or service, or

– Takes unreasonable advantage of:• A consumer’s lack of understanding of the material risks, costs, or conditions of the product,

• The consumer’s inability to protect his interests in selecting or using a product, or

• The reasonable reliance by the consumer on a covered person to act in the interests of the consumer.

CFPB Consumer Risk Assessment Templatefrom Bureau Exam Procedures

• Nature and structure of products• Profitability based on penalty fees, packaging obscures costs

• Targeted customers• Vulnerable populations

• Marketing methods and sales organization• Compensation incentives, deceptive advertising

• Customer relationship management• Lack of evaluation of customer satisfaction, under-resourced

• Compliance management challenges• Decentralization, third-party delivery

Similar considerations are being applied by prudential regulators’ examiners

November 2013

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Compliance Risk Through Consumer Eyes

• Consumer Risk Analysis drives bureau scoping

• Customer Complaints provide focus

• UDAAP provides remedies

• Vendor management extends liability and compliance responsibility

Third Party Risk Management

• OCC Bulletin 2013-29

• FDIC FIL 2013-43 (and

• Wachovia Case—OCC 2008

• CFPB Exam Procedures on UDAAP

November 2013

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Financial Fraud Enforcement Task Force

• “It comes down to this: When a bank allows its customers, and even its customers’ customers, access to the national banking system, it should endeavor to understand the true nature of the business that it will allow to access the payment system, and the risks posed to consumers and society regarding criminal or other unlawful conduct.” --Executive Director Michael Bresnick, 3/21/13

Another indicator of banks’ gatekeeper role—and vicarious liability?

Operation Choke Point

• “Mass market scammers need access to payment systems (RCCs, ACH,CC) to take consumers’ money. Without bank access there are no unauthorized withdrawals.”

• “Banks are stationary (no ‘Whack-a-mole’), regulated and are concerned about reputational risk.”

• “Banks already are required to have systems in place to prevent criminals from accessing the banking system.”

• “Cutting off the scammers’ access to the payment systems is relatively efficient and fast, and protects consumers prospectively as we investigate.”

November 2013

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November 2013

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Obama Proposal for Reform

“Taken together, we are proposing the most ambitious overhaul of the financial system since the Great Depression. But I want to emphasize that these reforms are rooted in a simple principle: we ought to set clear rules of the road that promote transparency and accountability. That’s how we’ll make certain that markets foster responsibility, not recklessness, and reward those who compete honestly and vigorously within the system, instead of those who try to game the system.”

President Obama’s remarks at Federal Hall, September 14, 2009

November 2013

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Honesty in Business

• “ I sometimes think that when all is said and done at our Commission, the main conclusion we may come up with is that top management should be honest and insist that everyone in the organization be the same.”• James Treadway, quoted by Professor Manuel Tipgos about the COSO

Compliance Framework, The CPA Journal, May 2003.

• A bank’s compliance policy will not be effective unless the board of directors promotes the values of honesty and integrity throughout the organization.• Basel Paper 113, April 2005, Paragraph #14

• “American families… aren’t looking for a free ride, but they are looking for an honest marketplace..”• Elizabeth Warren, September 29, 2010


Honesty as an International High-Level Principle

• All financial consumers should be treated equitably, honestly and fairly at all stages of their relationship with financial service providers. Treating consumers fairly should be an integral part of the good governance and corporate culture of all financial services providers and authorized agents.

• G20 High-Level Principles on Financial Consumer Protection (October 2011)

November 2013

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Honest Disclosures and Honest Business

• It is the American way for responsible businesses to be straightforward and upfront with their customers, giving them all the information they need to make informed decisions. That is good for honest businesses and good for the overall economy.

– Richard Cordray, HFS Testimony, March 29, 2012

• Honest disclosures are a great equalizer in the markets because they inherently increase competition by depriving any business of an unfair advantage that would result from customer confusion.

– Richard Cordray, March 28, 2012


UDA(A)P Pointers

• Market Honestly

• Reach your targeted customer with a straight-forward statement of the true value proposition of your product.

• Transparently Communicate the Bargain

• Be open about the trade-off between benefits and costs.

• Disclose the downside. Protect against bad surprises.

• Enable informed—and personally responsible– customer choice

• Deliver what you promise

• Make sure that legal obligations and operations are executed in conformity with the features you pitched to the customer.

• Respond to feedback

• Cure the causes of customer misunderstandings.

• Earn your good reputation every day

• Bankers do not game the system

November 2013

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Opportunity and Innovation

• "So far you've seen institutions almost in a reflexive defensiveness — it's as though the entire industry decides to get into the fetal position because things are changing. That's not smart. … Anything that changes the status quo is an opportunity, and someone's going to see that opportunity and drive a truck through it.“

– Raj Date, Former CFPB Deputy Director and current CEO, Fenway Summer


What do we mean by “innovation?”

The “v” in Innovation stands for “value.”

Hence to innovate is to create New Value

Value promised = Value delivered

November 2013

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Common Goals of Reform (i.e., Change)

• Common oversight (supervise non‐banks)

• Simplified disclosures (leads to less burden)

• Improve access (increase bank market share)

• Clear rules (reduce risk and uncertainty)

• Transparency (customer assumes responsibility)


Thank you!

the 4 ds and beyond

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