Barely two months have passed since the November 24, 2017 resignation of Richard Cordray as director of the Consumer Financial Protection Bureau (CFPB), but important changes to the agency and its approaches to rulemaking, supervision, and enforcement are already under way. These changes will likely shape the Bureau's role in regulating consumer financial services for the foreseeable future. The CFPB made two announcements this week that reemphasized a swing toward a more collaborative and less confrontational relationship with consumer financial services businesses. First, the Bureau plans to reconsider the controversial Payday, Vehicle Title, and Certain High-Cost Installment Loans Rule ("Payday Rule"). Second, the Bureau intends to seek public input via Requests for Information (RFIs) on supervision, enforcement, and rulemaking initiatives moving forward.
These announcements come notwithstanding that the CFPB was already in the process of evaluating and reconsidering two key mortgage-related rulemakings from 2013 (Ability to Repay and Mortgage Servicing) as part of a mandatory 5-year lookback, with an eye toward addressing some of the more controversial aspects of those rules.
On January 16, 2018—the date that the CFPB's Payday Rule became effective—the CFPB announced that it intends to "engage in a rulemaking process so the Bureau may reconsider the Payday Rule" prior to its full compliance effective date of August 19, 2019. In the interim, the CFPB announced that it will entertain waiver requests for any potential applicants to become a registered information systems (RIS) under the Payday Rule prior to April 19, 2018. This signals that a significant revision to the Payday Rule is likely, if not a complete repeal of the 800-plus page regulation. Although Congress has a bill pending to repeal the Payday Rule through use of the Congressional Review Act (CRA), it may not be necessary, depending on the CFPB's announcement. We anticipate that the CFPB will issue an amended proposed final rule or interim final rule while it requests public comment. Regardless of what the CFPB proposes, there will be a new opportunity to engage the Bureau on any aspects of the Payday Rule.
The First Request for Information under Mulvaney: Enforcement Civil Investigative Demands
Acting Director Mulvaney has issued a "Call for Evidence Regarding Consumer Financial Protection Bureau Functions." This signals that there could be a significant reorganization of the CFPB in terms of structure and action. The first RFI seeks input about the Bureau's process for issuing Civil Investigative Demands (CIDs) during investigations. This RFI is a clear indication that the new administration at the CFPB is interested in responding to some of the more persistent criticisms of the Bureau's enforcement activity, which have focused on the issuance and content of CIDs.
Ever since the first CID went out the door shortly after July 21, 2011, businesses regulated by the Bureau have questioned the process and fairness of the burden placed on them when they receive a CID, whether as a subject of the investigation or as a third party. CID requests are often onerous, overly broad, and very expensive. Moreover, if a CID recipient challenges a CID through a Petition to Modify or Quash, that motion has to be filed within 21 days of receipt of the CID. And that motion and its disposition are nearly always made public. The Bureau's long-standing practice of publishing these challenges has the practical effect of punishing the CID recipient by disclosing the fact of an otherwise non-public investigation, which, in turn, deters parties from challenging the issuance or content of a CID.
In addition, on September 20, 2017, the Office of Inspector General for the Federal Reserve Board of Governors and CFPB issued a report on the CID process and detailed two areas that require improvement: 1. The proliferation of overly broad Notifications of Purpose in CIDs issued by the Bureau and 2. The Office of Enforcement's lack of a centralized record management system for CIDs and related materials. Indeed, five months earlier, in CFPB v. ACICS, a case that Venable's team argued and won, the United States Court of Appeals for the District of Columbia declined to enforce a CFPB CID. That court held that the statutorily mandated Notification of Purpose failed to give the recipient adequate notice as to the nature of the Bureau's investigation, in violation of the Consumer Financial Protection Act (CFPA).
Thus, it is not surprising to see that the CFPB now wants to consider how to "vigorously enforce consumer financial law in a way that guarantees due process." While we cannot predict what changes are in store for the CID process, there are some common concerns raised by various financial services businesses: (1) the low standard for issuing a CID; (2) the short deadlines provided to CID recipients for meet and confers, motions to quash or modify, and to comply, generally; (3) the punitive nature of making challenges to CIDs public; (4) the burden and cost of compliance with the CID; and (5) the use of investigational hearings of individuals at non-bank companies as a mechanism to subsequently argue related person liability under the CFPA.
We expect to see a large number of responses to this RFI. Any provider of consumer financial services or products should consider submitting a response.
5-Year Lookback of Mortgage Rules
As noted, even prior to these two announcements the CFPB already had shifted focus back to the mortgage rules that it promulgated under the Dodd-Frank Act, as part of a mandatory assessment of those rules. These assessments are under way and are scheduled for completion in January of 2019, with any findings potentially forming the bases for new rulemakings to address problem areas in the rules. The CFPB's 5-year evaluation of the Dodd-Frank mortgage rules thus presents two golden opportunities for the industry:
- a chance to reengage the agency under new leadership and help it work to improve the mortgage rules in a manner that balances consumer protection with other important factors, like access to credit, market innovation, and managing litigation risk; and
- an opportunity to revisit important issues that the CFPB declined to address in the past, like regulatory cures for disclosure errors or expansion of safe harbors for qualified mortgages.
Throughout this process, we expect the CFPB to place more emphasis on the ways in which its rules affect markets and access to credit than it has in the past and to look for ways to better balance consumer protections with these considerations. We expect CFPB to be more open to expanding cures that allow lenders and investors to correct harmless errors and avoid costly exposure to assignee liability or loan defects that can affect loan salability. Mortgage lenders and investors that have raised these issues in the past will now have a new audience that is likely to be more sympathetic to these and other concerns.