NEW YORK (Thomson Reuters Regulatory Intelligence) - The online complaint board run by the Consumer Financial Protection Bureau, which has drawn more than one million postings from financial-services consumers, is in the sights of Republican lawmakers who have made its elimination a high priority in its effort to repeal Dodd-Frank provisions.
The initiative to repeal the database comes as complaints against Wells Fargo and other banks (here) surged in the aftermath of the settlement of alleged phantom account openings at Wells Fargo last September.
Bank customers used the complaints log to report problems related to account openings along with related retail branch issues such as credit cards, credit reporting and mortgage servicing. Some of Wells’ main competitors also saw a sharp increase in similar areas.
“FRIGHTENING” RULES FOR BANKS
The banking industry has argued that the CFPB’s public database of complaints gives consumers a platform that unfairly singles out firms, treating low-level gripes the same as more serious allegations of fraud, and giving ammunition to plaintiff’s lawyers and other regulators pushing cases against the banks.
“It’s frightening for the businesses that have to deal with CFPB complaints, especially in the financial services industry where you are dealing with complex issues and you have complaints coming from consumers that sometimes make no sense,” said Scott Wortman, a consumer financial law specialist at Warshaw Burstein. The CFPB uses these “flawed and incomplete metrics to build cases against business and industries and also for rule making.”
The complaints may be vague and unsupported but banks have to take them seriously, he said. If the CFPB decides to take an enforcement action based on complaints, legal costs for banks defending action can be tens of millions of dollars a month. Even if the CFPB does not act, the data from the CFPB is used in costly private lawsuits in which banks may be liable to pay the consumers’ legal fees, Wortman said.
U.S. House of Representatives Financial Services Committee Chairman Jeb Hensarling called for the CFPB database to be shut down in memo leaked earlier this month of his plans for curtailing the 2010 Dodd-Frank regulatory overhaul. The plans stopped short of eliminating the agency created under Dodd-Frank, as some critics have sought. Hensarling’s memo was unequivocal about the database, however, listing in a bullet point: ”Consumer complaint database repealed.”
The CFPB says the complaint database plays a critical role in informing policy and enforcement cases and in deterring abuses. “All of these complaints have real people behind them,” said Darian Dorsey, the CFPB’s deputy assistant director for the Office of Consumer Response. “Each tells us a story about how consumers view their experiences with financial institutions. For the first time, individuals now have a place to turn to get the timely responses they deserve.”
Critics say the database amounts to an unfair “public shaming” of banks that lacks the validation of formal investigations and proper weighting to validate the severity of the complaints.
The logs showed that reports on Wells Fargo leaped 44 percent in the last three months of 2016 over the prior year, largely due to a sharp rise in complaints related to account handling after the CFPB and other bank regulators settled their high-profile allegations that millions of accounts had been opened by the bank without authorization. Since the bank last September agreed to a $185 million fine to the U.S. government, new managers at the third-largest U.S. bank by deposits have been trying to show it is holding management accountable.
As part of its housecleaning, the bank on Tuesday fired “for cause” Claudia Russ Anderson, who had been chief risk officer for the Wells Fargo branch banking unit when the sales abuses surfaced, and three other senior officers of the bank. Wells Fargo’s Chairman and Chief Executive Officer John Stumpf stepped down last October after forfeiting tens of millions of dollars in compensation.
Consumer complaints generally rise for a firm that has been cited as Wells Fargo was. For the overall financial services industry, reports of account problems rose 24 percent in last year’s final three months.
The number of complaints overall rose at its main competitors, with Citigroup’s jumping 37 percent and Capital One up 28 percent. JP Morgan and Bank of America remained in the top 10 banking companies for consumer complaints, but showed only modest increases, of 9 percent and 4 percent, respectively. The complaints were up in other areas that were not directly listed as “account complaints,” for which Wells Fargo was directly cited. The report showed double-digit rises in categories such as credit cards and credit reporting.
“UNSUBSTANTIATED” COMPLAINTS OR USEFUL GUIDE?
Banks have been highly critical of the CFPB’s use of the complaints board and many applauded the move by Republicans to shut it. “The bureau has chosen to become an official purveyor of unsubstantiated and potentially false information instead of fostering informed and responsible consumer choice,” said the former head of the American Bankers Association president, Frank Keating. “This risks tarnishing the reputation of individual companies without substantiation.”
Some industry figures privately concede that the Wells Fargo case showed why a consumer banking regulator and an effective complaints board might be needed to highlight clear sales practice abuses. But industry lobbyists have continued to pushed for curbs on the CFPB’s independence, as well as changes or elimination of the public complaints log.
“Abandoning existing regulations could hurt some firms that have already complied with existing regulations,” Wortman said. “The new administration has been ambitious in its goal of getting rid of regulation, but it needs to use caution so it does not lead to unintended consequences.”
The CFPB’s complaint logs, with more variables added and issues properly vetted and put into a fuller context, would make the process more understandable and fair to banks and their clients, he said.
The agency itself has opened a comment period to address industry complaints (here) over comparisons “to make raw complaint data more meaningful by supplementing that data with a context more useful for consumers and other market participants.”
But the CFPB said it remains committed to the complaints log as a way to “help us identify and prioritize problems, and we are seeing this valuable information being used by companies to identify pain points and inform the marketplace more broadly.”
Eliminating the complaints log entirely would face significant hurdles. Under its present structure, the CFPB operates independently and its director cannot be removed by the president. The structure was declared unconstitutional by a federal judge but that ruling was temporarily vacated on appeal and a full appeals court hearing is expected in May.
While Republicans have called for the firing of CFPB Director Richard Cordray, he has said he has no plans to step down early from a term that lasts into 2018. By that time the lower court challenges could have moved to the Supreme Court. The Republican measure to eliminate the complaints database could come earlier.
Other issues on the Hensarling agenda for the CFPB, such as curbing the agency’s enforcement and rule writing powers, are seen as causing relatively little real change from current practices, said the law firm Davis Polk in a memorandum to clients. The thrust of Hensarling’s proposed legislation is to preserve the agency but eliminate overlaps in enforcement and supervision with other banking regulators and create an agency similar to the Federal Trade Commission, Davis Polk said. The legislation follows “the more general notion that the restructured CFPB would function more like the FTC, whose scope of rulemaking authority is narrowly prescribed.”
Frank Keating statement: here
Davis Polk memorandum to clients: here
(Richard Satran is a financial journalist covering daily and emerging issues for Thomson Reuters Regulatory Intelligence.)
This article was produced by Thomson Reuters Regulatory Intelligence and initially posted on Feb. 23. Regulatory Intelligence provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 400 regulators and exchanges. Follow Regulatory Intelligence compliance news on Twitter: @thomsonreuters