In its first enforcement actions, the Consumer Financial Protection Bureau (CFPB) caught the financial industry’s attention with restitution awards and refunds for consumers totaling $425 million and civil penalties exceeding $46 million. The CFPB also signaled its intention to ensure that financial institutions supervise their vendors, the products they sell and the services they provide. In addition, although the three enforcement actions involved credit card companies, the CFPB has warned that future enforcement actions will not be limited to credit card add-on products. Indeed, the director of the CFPB, Richard Cordray, recently acknowledged that “fixing the mortgage markets remains an urgent priority.” With final rules relating to mortgage products due by January 2013, the mortgage industry may be next.
Traditionally, financial institutions used third-party service providers because they lowered costs, reduced the risks of exposure on consumer claims and provided expertise that organizations could not be efficiently replicate in-house. The Dodd-Frank Act, however, significantly altered the pros and cons of that calculus. It requires supervised banks and nonbanks to oversee the actions of their service providers. The act also includes a very broad definition of “service provider,” which encompasses “any person that provides a material service to a covered person in connection with the offering or provision by such covered person of a consumer financial product or service.”