The Consumer Financial Protection Bureau (CFPB) was created under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) in July 2010 in the wake of a financial crisis, as an independent agency tasked with preserving the rights of consumers utilizing consumer financial products and services.
In the last 12-18 months, the structure of the CFPB has come under fire, being challenged both in the courts, in Congress, and politically, creating uncertainty for the consumer financial industry.
In the past year, the structure of the CFPB has been challenged as unconstitutional in several cases in federal court, including:
- October 2016 (U.S. Court of Appeals for the District of Columbia Circuit; PHH case) –in a unanimous three-panel decision the Court finds the structure of the CFPB unconstitutional citing that "[b]ecause the Director alone heads the agency without Presidential supervision, and in light of the CFPB’s broad authority over the U.S. economy, the Director enjoys significantly more unilateral power than any single member of any other independent agency." The CFPB won the right for the case to be reheard in front of all the justices of the Court of Appeals, essentially wiping out the first decision. A decision is expected by the end of 2017.
- April 2017 (D.C. S.D. Fla.) – defendant Ocwen Financial Corporation raises the constitutionality of the structure of the CFPB as a defense in an action against it for numerous mortgage servicing violations against consumers. The case is still pending.
- August 2017 ruling (M.D. Pa.; Naviant case) – the Court finds the CFPB's structure constitutional holding that the "CFPB’s structure does not violate Article II or the principle of separation of powers in that it does not impede the President’s ability to `take Care that the Laws be faithfully executed."
In June 2017, the House passed the Financial CHOICE Act which would undo significant parts of Dodd-Frank. The Financial CHOICE Act would allow the President to terminate the director of the CFPB at will and also make the budget of the CFPB subject to Congressional review, meaning it could be defunded or significantly limited by Congress. The bill then went to the Senate where lawmakers were attempting to rewrite it in a manner that would get enough bipartisan votes to pass, which has not occurred.
Corday Resigns: Who is in Charge?
Recently, the CFPB's independence has taken another hit. On November 24, 2017, Director James Corday resigned as Director of the CFPB, naming Leandra English to serve as acting director following his resignation. Immediately following the resignation, President Trump nominated Mick Mulvaney, director of the Office of Management and Budget (OMB) and outspoken critic of the CFPB, as acting director, citing authority under the Federal Vacancies Reform Act of 1988. English challenged the appointment, which is pending in federal court.
There has also been at least one private lawsuit filed over Trump's appointment. On December 6th, Lower East Side People's Credit Union filed an injunction against both Trump and Mulvaney stating that Trump has attempted an "illegal hostile takeover" of the CFPB and created uncertainty with the credit union about who is in charge and whose rules to follow, among other claims.
CFPB Actions Overturned
Even some substantive rules and guidance of the CFPB have been tested and overturned recently using political means, including Congress's action, via the Congressional Review Act, to overturn the CFPB's ban on mandatory arbitration clauses in financial contracts, and the Government Accountability Office's finding that the CFPB's 2013 automobile lending guidance constituted a rule and did not go through the proper notice and comment period, effectively undoing the guidance that had made indirect auto lenders liable for any unintentional discrimination on behalf of their dealer partners.
Dealing with Uncertainty
With clear political pressure to reform the CFPB and remove its independence, what does this uncertainty mean for the future of the CFPB and the consumers it was designed to protect and the financial institutions and products it oversees?
An independent CFPB meant that, ideally, the agency would be free from political pressure and influence, and could work swiftly to enforce existing laws and regulations and create additional regulations to protect consumers from unfair, deceptive, or illegal acts and practices of financial organizations. While the specifics of how the CFPB would approach a specific regulation or issue created uncertainty within the financial industry, the industry has been completely clear that the CFPB would require financial businesses to engage in more oversight of consumer products and business partners, focus on compliance, provide fuller consumer disclosures, and institute internal policies and procedures to ensure each level within the organization understood and would comply with the law.
While the Trump administration is pushing for deregulation and removing the independence of the CFPB, if it is successful, it may be risky and costly for the financial industry to abandon all of the concepts of fairness to consumers that have been embodied in the CFPB's actions. Certainly less regulation and oversight would provide the financial industry more leeway with financial products, but any shift could be temporary. If the CFPB is not immune from the political process, it will be subject to constant changes in policy and leadership with each new administration. Programs instituted in a deregulated environment can quickly become unmanageable or obsolete with a change in Washington.
Certainly, some financial institutions may wish to capitalize on deregulation to offer programs they could not previously offer, including programs where they perhaps thought the CFPB was overreaching and stifling growth without truly protecting the consumer. As a whole, financial institutions may want to consider if their programs are viable long-term assuming a new administration would favor regulation similar to the current environment. Alternatively, financial institutions should consider whether the potential short-term gains are sufficient based on the cost of developing and implementing the programs. Finally, they should consider the types of provisions that should be included in their program agreements, including termination provisions in the event of changes in laws that make the program, as structured, illegal, or even impractical.
Removing the independence of the CFPB would have short-term effects in leadership, policy, and enforcement actions. However, with political influence comes the possibility of changes in policies every two or four years (either funding appropriations by Congress or executive appointment), leaving greater uncertainty in consumer financial markets. Financial businesses may want to consider this uncertainty prior to implementing consumer financial products and when designing these products.