2011 was a very busy year in terms of regulation in the consumer financial services industry, especially with regard to mortgage lending. But this is just the beginning – much greater changes in mortgage regulation, at both the federal and state levels, are to come. Here we recap some of the current developments and make a few observations about what the future may hold.

The driving force behind all of the regulatory changes discussed here is the Dodd-Frank Act and its creation of the CFPB. Passed in 2010, many of the act’s provisions went into effect in July 2011. Most significantly, on July 21 of this year, we had the “designated transfer date”: the date on which the CFPB officially came to life and assumed the consumer protection functions that had previously been carried out by the federal banking agencies.

Absent some major change to Dodd-Frank as a result of the political process, the CFPB will have a very significant impact on consumer financial services regulation, and reverse mortgages in particular, in the years to come. Moreover, even without a confirmed director, the bureau has a great deal of power to make rules and take enforcement action under pre-existing federal consumer protection statutes like TILA, RESPA and ECOA. And on Dec. 1, the CFPB opened its online mortgage complaint process, which will allow reverse mortgage customers to make complaints directly to the bureau.

There are a couple of areas of focus that have become apparent from the bureau’s public statements and mortgage-related supervision manuals. First, the bureau has a keen interest in financial services that affect senior citizens, and announced in October that Skip Humphrey, most recently from AARP, had been appointed to head up the CFPB’s Office of Older Americans. In their press event to announce Humphrey’s appointment, reverse mortgages were mentioned as one of the many products his office within the CFPB will focus upon. With respect to reverse mortgages, it is likely that the CFPB would be focused on protecting borrowers through regulation of both disclosures and (perhaps ultimately) the substantive terms of reverse mortgage loans.

Second, the bureau’s Mortgage Servicing Examination Procedures reveal a number of other focus areas that may be applied to reverse mortgages. In particular, the procedures call for careful assessment of fair lending issues above and beyond the usual types of assessment and including both disparate treatment and disparate impact analysis. As the director of the CFPB’s Office of Fair Lending, Patrice Ficklin remarked at a recent industry meeting that the CFPB’s application of the consumer regulations is based upon the consumer’s perspective, not concerns around the safety and soundness of the lending institution. The CFPB also has placed great emphasis on the content of consumer complaints and the manner in which mortgage servicers respond to those complaints. Although the CFPB does not have examination or enforcement authority over most reverse lenders at present (only banks with more than $10 billion in assets), it still has the ability to make rules and to gather complaint information and provide it to other enforcement authorities, such as state attorney generals, even with no director in place.

If a director is confirmed, the CFPB will gain examination and enforcement authority with respect to non-bank lenders, and will also be vested with one of its most important powers: to declare specific conduct “unfair, deceptive or abusive.” This virtually blank regulatory check would allow the CFPB to make rules relating to disclosure, counseling, underwriting, servicing and the terms of reverse mortgages. This broad power – coupled with Dodd-Frank’s mandate for the CFPB to study reverse mortgages and make regulations if it sees fit to do so – clearly places the CFPB in a position to have a profound influence on the future of the reverse mortgage industry, especially if it gets a director.

But our attention should not be focused entirely on the CFPB, or even on Washington, D.C. Already, the changes to federal law made by Dodd-Frank have ushered in a new era of much greater activism by state banking regulators and state attorneys general, and states may have the more immediate impact on reverse mortgage lending. By way of background, prior to Dodd-Frank, reverse mortgage lenders who were not federally chartered banks could invoke “parity” with those federal institutions under the Alternative Mortgage Transactions Parity Act (AMTPA), and could pre-empt state laws inconsistent with federal standards for reverse mortgage lending. Even if most state-licensed reverse mortgage lenders have not ignored state law under AMTPA, the effect of AMTPA’s pre-emption was to check state legislative efforts to regulate reverse mortgages, because the prospect of pre-emption under ATMPA might have made such legislation a wasted effort.

But Dodd-Frank cleared the way for states to get back in the game of substantively regulating reverse mortgage lending since reverse mortgages are no longer covered by AMTPA, unless they have a variable interest rate. Now state legislatures can pass laws affecting reverse mortgages without fear of federal interference. Congress has invited the states to enact such laws, and one of the things to watch for in 2012 is how much state legislative activity we see in the reverse mortgage industry.

But even beyond this, the whole ethos of Dodd-Frank is rooted in the idea that states should be free to regulate consumer financial services to a greater extent than they have in the past, and state attorneys general have taken this activism to heart. In the mortgage industry in particular, we have seen all 50 attorneys general jointly investigate foreclosure documentation, and lawsuits have recently been filed by Delaware and Massachusetts against mortgage servicers and MERS. Given the degree of public attention around mortgage lending issues, it is only natural to expect that state attorneys general will continue to be highly motivated to address issues in the mortgage industry, including reverse mortgages. And bear in mind that, although the CFPB may not have the authority to examine and prosecute non-bank lenders without a director, it has already said that it can – and will – share complaints it gathers with state attorneys general.

The importance of consumer complaints cannot be overstated. The CFPB’s future regulatory direction will be influenced by such complaints, valid or not, and such complaints will also inspire, in large part, the enforcement agenda of state attorneys general. The best way for reverse mortgage lenders to stay out of the enforcement crosshairs and for the industry as a whole to forestall regulatory changes is to effectively respond to and resolve all consumer complaints. In the new era of consumer protection regulation ushered in by Dodd-Frank, putting extra emphasis on the resolution of consumers’ problems before they ripen into complaints to the government should be a top priority for reverse mortgage lenders.