Speculation about the future of the Consumer Financial Protection Bureau (CFPB) has been ever-present since Donald Trump’s victory in the 2016 Presidential election was first announced. Many industry experts initially predicted that Congress would quickly agree to replace the CFPB’s single-Director structure with a multi-member commission, which did not happen and now seems unlikely. On the other hand, few, if anyone, foresaw that the formerly obscure Congressional Review Act would emerge as a device for voiding rules and regulations issued under former Director Richard Cordray’s leadership. The November 25, 2017 resignation of Director Cordray has given rise to a fresh batch of conjecture.
Attempts to predict the future are inherently suspect, as they necessarily draw from knowledge of past events, which may not be indicative of what follows.1 The CFPB’s new leadership is quickly making major changes in policies and practices, especially in the areas of enforcement and rule-making, but the agency’s new approach has yet to emerge. Mindful of the above caveat regarding the inherent unreliability of predictions, below we offer our thoughts on the changes in focus and direction—or lack thereof—that we expect to unfold at the CFPB during 2018.
New 'Cop on the Beat'2
A change in the top position at the CFPB has a greater impact than a similar change at the FDIC or the OCC. This is because a sitting CFPB Director can only be removed by the President for cause, which gives that incumbent an unparalleled degree of independence in his or her decision-making. Former Director Cordray often referred to himself as a “cop on the beat,” but many would contend that he was additionally lawmaker, judge, and jury. The constitutionality of the CFPB’s unique agency structure has the subject of lawsuits, most notably PHH Corp. v. Consumer Fin. Prot. Bureau.3
In his initial press conference, on November 27, 2017, acting CFPB Director Mick Mulvaney outlined his basic plan for leading the agency as follows:
The rumors that I’m going to set the place on fire, or blow it up, or lock the doors are completely false. I’m a member of the executive branch of government and we intend to execute the laws of the United States, including the provisions of Dodd-Frank that govern the CFPB. That said, the way we go about it, the way we interpret it, the way we enforce it, will be dramatically different. . . 4
During the week of January 14th the CFPB took four significant actions . First, on January 16th , the CFPB announced that its intent to undertake a new rulemaking for the purpose of reconsidering its controversial new rule entitled “Payday, Vehicle Title, and Certain High-Cost Installment Loans” (the “Payday Loan” rule). Second, on January 18th, acting Director Mulvaney announced that the CFPB would be requesting no funding from the Federal Reserve Board for the first quarter of 2018. The reason given for this decision was that the CFPB already has adequate funds because former Director Cordray had held sizeable funds in reserve, which the new leadership considers unnecessary. This action was seen by many as an indication that the CFPB plans to scale back on its activities. Third, the same day the CFPB announced its decision to drop a pending lawsuit in Kansas against a group of payday lenders associated with American Indian tribes. Finally, also on January 18th, the CFPB announced plans to solicit public input regarding the agency’s enforcement, supervision, rulemaking, market monitoring, and education activities, including its use of civil investigative demands (CIDs) through Requests for Information to be published in the Federal Register. According to the CFPB’s press release, the goal these requests will be to “ensure the Bureau is fulfilling its proper and appropriate functions to best protect consumers.”
Although some may see the above actions as the first steps toward dismantling of the CFPB, the statutory mandate that drives and determines the CFPB’s activities serves as a break on such efforts. That mandate includes the following:
- ensure that consumers have timely and understandable information to make responsible decisions about financial transactions
- protect consumers from unfair, deceptive, and abusive acts or practices, and from discrimination
- reduce outdated, unnecessary, or overly burdensome regulations
- promote fair competition by enforcing the federal consumer financial laws consistently, and
- advance markets for consumer financial products and services that operate transparently and efficiently to facilitate access and innovation.5
More specifically, the Dodd-Frank Act (Dodd-Frank) gives the CFPB supervision and enforcement authority over a vast array of consumer financial products and services, including deposit taking, mortgages, credit cards and other extensions of credit, loan servicing, check guaranteeing, collection of consumer report data, debt collection, real estate settlement, money transmitting, and financial data processing. In addition, Dodd-Frank transferred to the CFPB from other federal agencies rule-making authority for fourteen of the most important federal consumer protection laws and attendant regulations.6 In light of these broad responsibilities, absent new federal legislation fundamentally restructuring the CFPB,7 acting Director Mulvaney’s statements about not seeking to dismantle the agency merely acknowledged reality; i.e., the CFPB will continue to be staffed appropriately and provided with sufficient financial resources to meet its statutory obligations.
Although acting Director Mulvaney cannot completely remake the CFPB, he can institute significant changes in emphasis and execution. Those changes have already begun. As one of his initial acts, acting Director Mulvaney revised the agency’s mission statement to provide as follows:
The Consumer Financial Protection Bureau is a 21st century agency that helps consumer finance markets work by regularly identifying and addressing outdated, unnecessary, or unduly burdensome regulations, by making rules more effective, by consistently enforcing federal consumer financial law, and by empowering consumers to take more control over their economic lives.
In comparison, below is the prior mission statement:
The Consumer Financial Protection Bureau is a 21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives.
The revised mission statement acknowledges an important facet of the agency’s statutory mandate that was missing from the prior version. Namely, the agency’s duty to promote more efficient regulation by identifying and reducing outdated, unnecessary, or overly burdensome regulations. Based on the rule-makings initiated by former Director Cordray, this addition plainly reflects a change in focus and not just a difference in semantics. For example, the Short-Term Lending Rule, which was issued on October 5, 2017, and will now be reconsidered, has been harshly criticized by the short-term loan industry as effectively precluding high-cost loans with a term of less than 45 days by requiring a burdensome costly ability to repay analysis for each and every loan. Moreover, the constraints this rule places on a lender’s ability to utilize ACH repayments for loans with greater than a 36 percent interest rate further renders such loans economically unfeasible. In short, the rule appears intended to curtail versus regulate certain types of high-cost credit.
We expect the CFPB’s new leadership to delay the Short-Term Lending Rule’s effective date. In addition, acting Director Mulvaney or his successor may seek to shift the rule’s emphasis to the adequacy and clarity of disclosures. More importantly, consistent with the revised mission statement, we expect future rule-makings in general to target the manner in which consumer financial products and services are offered, as opposed to attempting to determine what is available to consumers in the marketplace.
We also expect the CFPB’s new leadership to reevaluate aspects of newly-revised Regulation C, which implements Home Mortgage Disclosure Act (HMDA) and went into effect on January 1, 2018. As written, the revised regulation requires covered entities to collect and report a volume and detail of information that vastly exceeds what was previously required. In particular, the new or revised “data points” that must be collected include, without limitation, applicant or borrower age, credit score, unique loan identifier, property value, application channel, points and fees, borrower-paid origination charges, discount points, lender credits, loan term, prepayment penalty, non-amortizing loan features, interest rate, and loan originator identifier.
Lastly, The CFPB’s sole attempt to define UDAAPs in a formal regulation to date consists of a proposed rule governing debt collections (i.e., revised Regulation F), which has been pending since its November 6, 2013 publication as an advance of proposed rule-making (ANPR). In the ANPR, the CFPB suggested holding first-party creditors to essentially the same legal standards under UDAAP as what applies to third-party collectors under the Fair Debt Collections Practices Act (FDCPA). However, in its 2016 decision in Henson v. Santander Consumer USA Inc.,8 the U.S. Supreme Court held that Congress did not intend for the FDCPA to apply to first-party collectors whose primary business does not involve debt collection.9 Given this decision, it is unlikely that the CFPB would seek to impose requirements on first-party collectors through an interpretation of UDAAP that go beyond what Congress intended under a law which specifically addresses debt collection. Therefore, we consider it unlikely that the CFPB would finalize a debt collection rule without making significant changes from what was proposed in 2013.10
Revised Enforcement Policy
Nothing has drawn more criticism to the CFPB than the exercise of its UDAAP enforcement authority, including its practice of deeming acts or practices “abusive” in the absence of concrete standards. Beginning with what quickly became a succession of consent orders issued against credit card issuers in connection with sales of credit card add on products,11 the CFPB has been accused of creating new “rules” through unchallenged settlements, which it then seeks to impose against other supervised entities. This strategy has had a profound impact on the financial services industry. For example, the CFPB’s massive 2015 lawsuit against more than a dozen debt collectors, payment processors and related entities that allegedly failed to stop fraudulent collection tactics,12 along with collections-related lawsuits and enforcement actions, had the effect of substantially curtailing debt sales.
The Cordray-led CFPB was also criticized for its liberal use of CIDs, which are burdensome to comply with and extremely difficult to challenge successfully.13 We expect the new leadership at the CFPB to wield this powerful tool more judiciously. In addition, although CIDs which have already been issued are unlikely to be withdrawn, we are confident that the ultimate outcome of those investigations will result in far fewer lawsuits and enforcement actions than what the CFPB’s historical track record indicates.
In Bulletin 2012-04 (Fair Lending), which was issued on April 18, 2012, the Cordray-led CFPB “reaffirm[ed] that the legal doctrine of disparate impact remains applicable as the Bureau exercises its supervision and enforcement authority to enforce compliance with the [Equal Credit Opportunity Act] ECOA and Regulation B.”14 Yet, the question of whether disparate impact claims are available under the ECOA remains highly controversial. For example, the U.S. Court of Appeals for the District of Columbia questioned whether ECOA supports a disparate impact claim in Garcia v. Johanns.15 In addition, more recently, the U.S. Supreme Court’s decision in Texas Dep’t of Hous. & Cmty. Affairs v. The Inclusive Communities Project, Inc.,16 further called into question whether disparate impact claims are cognizable under the ECOA. Given this case precedent, and the controversy and legal uncertainty associated with disparate impact theory, we expect the new leadership of the CFPB to refrain from bringing such actions.
The Cordray-led CFPB’s efforts to hold auto lenders accountable for unlawful discrimination practiced by auto dealers quickly became another lightning rod for industry criticism.17 In 20l3, the CFPB issued guidance that sought to restrict the amount of compensation lenders were allowed to pay auto dealers and limit the discretion dealers could exercise in setting loan terms and rates.18 On December 5, 2017, the Government Accountability Office (GAO) issued a legal opinion finding that this guidance constituted a “rule” for purposes of the Congressional Review Act.19 The upshot of the GAO’s opinion is that the CFPB had to submit the guidance to Congress for review before it could take effect, and its failure to do so rendered the guidance null and void. We expect the CFPB’s new leadership to refrain from embarking upon similar attempts to stretch the agency’s jurisdiction beyond what Dodd-Frank expressly provides.
The consumer research the CFPB relied upon in issuing its July 2017 Arbitration Rule was widely characterized by the financial services industry as both incomplete and patently biased.20 Although the CFPB’s new leadership will undoubtedly continue to conduct research regarding consumers’ experiences in using financial products and services, we anticipate seeing a more balanced approach to collecting and analyzing data; albeit, consumer advocacy groups are sure to view such research with skepticism.
Efforts to Advance Markets
On September 14, 2017, the Cordray-led CFPB issued a no-action letter to Upstart Network, Inc., a company that uses alternative data in making credit and pricing decisions. In issuing this letter, which was the first of its kind and drew rare praise from the financial services industry, the CFPB explained that its decision was motivated by a desire “to explore the use of alternative data to help make credit more accessible and affordable for consumers who are credit invisible or lack sufficient credit history.”21 At the same time, however, the CFPB cautioned that it “has quite limited resources to devote to consideration and issuance of [No-Action Letters] at this time.”22 We expect the CFPB’s new leadership to find the necessary resources to issue additional no-action letters in 2018.
In her March 2011 testimony to the House Financial Services Committee, then Special Advisor to the Secretary of the Treasury Elizabeth Warren promised that the CFPB would “choose a better way” of seeking to accomplish its goals.23 The path selected by former Director Cordray centered on highly-aggressive enforcement actions and infrequent—albeit drastic—rulemakings. As noted above, this “tough cop” strategy met with fierce industry criticism and spawned multiple legal challenges. The new leadership at the CFPB has an opportunity to chart a very different new course. Without question, the agency’s new approach will be friendlier to providers of consumer financial products and services. Consistent with acting Director Mulvaney’s verbal assurances, we trust that they will also be focused on achieving the CFPB’s statutory responsibilities to both: (i) ensure consumers have timely and understandable information to make responsible decisions about financial transactions; and (ii) protect consumers from unfair, deceptive, and abusive acts or practices, and from discrimination. Regardless of what changes are made, however, we are confident that the CFPB will continue to be staffed appropriately and provided with sufficient financial resources.