In the days following the elections, when commentators were abuzz with predictions of a quick demise for the Consumer Financial Protection Bureau ("CFPB" or "Bureau"), we were a lone voice in the wilderness warning that such predictions were premature and, indeed, we expected the CFPB to step up its enforcement activities. Events since then have led CFPB prognosticators to follow our lead. At the end of last week, they once again were abuzz – this time with the leak of a memo apparently outlining House Financial Services Committee Chairman Jeb Hensarling's revamped Financial CHOICE Act, including a plan to gut the CFPB. We believe that this latest development heralds an extended battle to stop the CFPB's activist agenda, not a quick one, while the Bureau continues to forge ahead and the States prepare to assert a stronger enforcement role.
The leaked document purports to be a February 6, 2017 memo from Chairman Hensarling to the House Financial Services Committee Leadership Team, outlining "the changes to be made to the introduced version of the Financial CHOICE Act for the 115th Congress." While the proposal would retain the CFPB and its sole Director (notably, removable at-will by the President), it would restructure the Bureau as "a civil law enforcement agency similar to the Federal Trade Commission, with additional restrictions on its authority." Among other things, the proposed legislation would repeal the CFPB's authority to prevent Unfair, Deceptive and Abusive Acts and Practices, as well as its supervision, consumer complaint, consumer education, market monitoring and research functions. The CFPB's rulemaking authority would be limited to enumerated statutes, and its enforcement powers would be limited to cease-and-desist and Civil Investigate Demand ("CID")/subpoena powers (i.e., no longer include authority to require broad conduct changes, redress, disgorgement, and civil money penalties). In short, the CFPB would be stripped of its most crucial levers over the industry, while the retention of the single director structure and certain rulemaking authorities would help a Republican-appointed leader to rein in the agency and roll-back irksome regulations.
While we anticipate that text for the CHOICE Act 2.0 could become available in the next few weeks, the dramatic gutting of the CFPB proposed in the leaked memo itself indicates that changes to the Bureau will not occur quickly. The threat of evisceration of the agency might help to persuade some Democrats to accept less sweeping changes – e.g., switching the CFPB to an appropriated agency or a five-member commission structure as has long been proposed, or (though less likely) perhaps even trimming some of its authorities. Such concessions would entail extended horse trading, however. In the meantime, the CFPB's supporters, including those in Congress, have all the more reason to fight vociferously for the agency.
On the other side, not only the Republican Congressional leadership, but President Trump has declared his intent to make sweeping changes to the Dodd-Frank Act. In practical terms, Vice President Mike Pence, the administration's designated Congressional liaison, has even tapped vocal Dodd-Frank critic Mark Calabria as his chief economist. But the administration has not identified the CFPB as a top priority within its busy agenda. Indeed, even the leaked memo contains a host of other high profile Dodd-Frank proposals (starting with significant changes to the Stress Tests for the largest institutions) that are also highly contentious and could take precedence over the CFPB.
While open questions remain regarding what, when and how major changes may be pushed on the CFPB, it is unquestionable that the Bureau is committed to keep driving its activist agenda notwithstanding the hovering threat. CFPB Director Richard Cordray made a special point of declaring that intent in recent public interviews with The Wall Street Journal and MSNBC's Morning Joe talk show. For supporting evidence, we need only look to the CFPB's roster of enforcement actions since the elections. These enforcement actions have not focused on a particular issue but instead have touched on a wide range of activities by both large and small entities, as the CFPB seeks to demonstrate the value of its wide-ranging regulatory powers and its commitment to continue policing all sectors of the consumer finance marketplace.
Just since the new year, the CFPB has announced settlements and enforcement actions alleging: (a) false advertising in the selling of credit scores (Equifax and Transunion); (b) misconduct in medical debt collection (Works and Lentz law firms and their president); (c) misconduct in student loan servicing and collection (Navient); (d) misconduct in the marketing of overdraft protection services (TCF National Bank); (e) misconduct in mortgage default servicing and loan modifications (CitiMortgage Inc. and CitiFinancial Servicing); (f) payment of alleged kickbacks to mortgage brokers (Prospect Mortgage); (g) improper delays in crediting and providing access to deposits on prepaid credit cards (Mastercard and UniRush); (h) misrepresenting the costs of pawn loans (Woodbridge Gold and Pawn); and (i) inducing first responders injured in the 9/11 attacks and former NFL players to pay excessive interest and costs on loans secured against future settlement payments (RD Legal Funding, related entities and owner).
The States have collaborated with the CFPB in its enforcement actions and also have begun to ramp up their own enforcement and regulatory activities. For instance, when the CFPB filed suit against Navient, the Attorneys General of Illinois and Washington filed parallel lawsuits regarding the challenged conduct. Similarly, the Virginia Attorney General collaborated with the CFPB in negotiating the settlement with Woodbridge Gold and Pawn, and the New York Attorney General is a co-plaintiff in the CFPB's suit against RD Legal Funding.
Industry also should be forewarned that, while key individual States often will take the lead in enforcement actions, multi-state enforcement actions may return to prominence during the Trump administration, despite stark political differences between Republican and Democratic Attorneys General. For example, every state Attorney General joined a January 31 States settlement (parallel to the federal settlement) resolving claims that Western Union facilitated wire transfers to con artists by failing to maintain adequate anti-fraud programs. Likewise, 21 State Attorneys General, plus the Attorney General of Washington, D.C. joined the Justice Department's January settlement with Moody's regarding credit ratings on investments tied to subprime mortgage loans. In addition to traditionally active Attorneys General from Iowa, California, and Massachusetts, the Moody's settlement was joined by the Attorneys General of conservative States such as Idaho and South Carolina.
In sum, we anticipate continued vigorous enforcement activities by the CFPB and the States, which are readying themselves to apply the CFPB blueprint for aggressive enforcement and assume the mantle of leadership when the Bureau finally is reined in. Although outside the scope of this bulletin focused on enforcement activities, we also have observed growing activity among state regulatory bodies (e.g., the New York Department of Financial Services initiative on reverse mortgages, the California Department of Business Oversight leading role in investigating nascent fintech practices). Thus, while Congressional and administration efforts to end federal financial regulatory activism will move apace, the battle to achieve fundamental change at the CFPB will be a prolonged one, during which the consumer finance industry will face rigorous enforcement by both the CFPB and the States before the Bureau gives way.
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