Prospects for CFPB transition: guide for the patient banker

After a campaign predicated on shaking up Washington, the prospects for a CFPB transition are comparatively modest—and bankers will need to play a part in realizing what can be accomplished.

Those who are thinking that the bureau’s work will be undone should reflect that rollback of federal consumer financial protections has not been a priority either for the new Republican base nor the old Republican guard, as evidenced by the bipartisan condemnation of Wells Fargo’s sales incentive practices.

Here is what the patient banker might expect looking ahead.

Agency leadership

Unlike the Treasury Department, with numerous appointees who serve at the pleasure of the President, or the Federal Reserve Board with two existing vacancies and the chairman’s post at stake in January 2018, CFPB has only the one Senate-confirmed Director, whose term does not expire until Spring 2018.

Nevertheless, it is inevitable that the new President will have his opportunity to appoint the second-ever Director of the CFPB, subject to Senate confirmation. That confirmation process will generate its own spectacle. But with so much intervening experience between Congress and the President by then, it is pointless to speculate about whom might get the nomination nod.

Once a Republican Director makes it through the confirmation gauntlet, the biggest impacts should be in the areas of discretionary rule-making, enforcement policy, and regulatory burden reduction.

Rulemaking: Having completed the Dodd-Frank Act mandatory rule assignments, the bureau’s agenda has been taken over by discretionary rules like arbitration, debt collection, and payday lending—with overdraft practices still on the horizon.

Not only will there be fewer such initiatives under a Republican Director, he or she will also be in a position to reconsider those discretionary rules already promulgated after re-proposal, notice, and comment following Supreme Court precedent recently elucidated during the Obama Administration. 

There will be no wholesale re-visiting of Dodd-Frank mandatory rules on mortgage reform. However, there is the possibility that refinements may be undertaken where there is statutory latitude now or that may be provided by any future legislative amendments.

Bankers can also expect a change in the tone at the top of the bureau. One should anticipate a greater policy emphasis on balancing the free market equation that recognizes that both consumers and providers have respective responsibilities for the choices they make in selecting and delivering financial products and services.

On the other hand, bankers will need the new Republican Director to match the Democrats in pursuing policies that maintain the level playing field for insured depositories and their non-bank competitors, especially as fintech incursions spread across the consumer finance market.

Enforcement: Enforcement priorities will also change—most likely in two ways.

First, the penchant for developing novel application of UDAAP or fair-lending theories and applying them retroactively will diminish. The current administration has pursued unprecedented legal theories and used untested evidentiary standards to pressure targeted providers into settlements that have become templates for industry-wide obligations.

Look for a Republican Director to hew to well-established precedent when pursuing enforcement cases and not to paint an entire industry with the same broad brush.

A second area of enforcement policy change under a Republican administration is the likely insistence on a greater degree of proportionality between alleged consumer harm and enforcement remedies. Far less reliance on civil money penalties being superimposed on consumer compensatory damages and more credit given for self-identifying and self-correcting compliance programs will characterize future CFPB enforcement cases.

This will mean generating less money for the CFPB slush fund and applying more resources to robust consumer protection processes in industry systems and culture.

Burden reduction: During the term of the next Director, the Dodd-Frank-mandated regulatory review cycle will take place. With Republican hands at the helm this should result in more realistic adjustments than would be expected under a Democratic regime—especially one that would have immediately followed the founding administration and would have been more intent on cementing its Dodd-Frank accomplishments rather than critically evaluating its excesses.

Another aspect of burden reduction will be a more committed effort to eliminate supervisory redundancies and inconsistencies that plague the current oversight of banks that haplessly suffer both CFPB and prudential regulator scrutiny.

Furthermore, as Republican appointments to prudential regulators take effect, more conservative interagency interactions should help constrain any lingering bureau staff tendencies to depart from established supervisory principles or to impose unnecessary burdens that could impair industry safety and soundness.

All of these developments are in the barely foreseeable future. In the meanwhile, until a new Director takes office, bankers will be looking for ways to keep the current Director in check. This is where Congress will play a more immediate role.

Legislative activity

The next Congress will likely be engaged along three lines of activity regarding CFPB transition: amending agency structure, fine-tuning agency statutory authority, and conducting vigorous oversight.

Structural change: No doubt the Republican majority in both Houses will continue efforts to change the regulatory structure of CFPB and alter its budgetary appropriation status.

Whether the prospect of a Republican Bureau Director changes the Democrats’ opposition to a commission-type organizational structure is unknown. If the commission proposal was pursued separately from the appropriation issue, it could have a greater likelihood of success.

On the other hand, Republicans may be less enthused about creating a commission on the eve of their opportunity to appoint the next independent Director.

Alternatives to the long-pursued commission structure include changing the Director position to an at-will Executive Agency appointment, as directed in the PHH Mortgage case, or possibly adding a few more political appointments to the agency in the form of a Senate-confirmed Deputy and General Counsel. This would give those offices an independent source of authority when engaging in internal deliberations. (Two example: Both Treasury’s General Counsel and the Environmental Protection Agency’s General Counsel are Senate-confirmed.)

Finally, we should expect that the Democrats will dig their heels in to maintain the Federal Reserve mechanism for funding CFPB. Without some creative legislating, this issue is likely to stall any structural reform package in which it appears.

Authority amendments: Beyond the battle over regulatory structure, legislative change should also include an array of other reforms to Dodd-Frank’s Title X.

Among the possible tweaks would be:

• Eliminating CFPB authority to prohibit pre-dispute arbitration agreements.

• Refining Equal Credit Opportunity Act rule-writing provisions to remove CFPB authority to regulate commercial credit discrimination standards.

• Inserting additional legislative limitations on the pursuit and proof of abusive practices.

• Capping civil money penalties to a single-digit multiplier of compensatory damages similar to the treble damage awards in antitrust litigation or the maximum ratios placed on punitive damages in comparison to compensatory damages by some states—and making such penalties payable to the U.S. Treasury, rather than the bureau.

Additional revisions to Dodd-Frank’s Title X will be developed as constituencies propose improvements to their elected representatives. Whether changes involving Title X are packaged separately from other Dodd-Frank statutory reforms, collected in an omnibus bill, or peppered throughout other diverse legislation, there will be a flurry of ideas introduced in the next Congress on behalf of bankers and their financial industry competitors.

Oversight: Congress is well practiced in conducting agency oversight hearings. This will take on an even more robust posture in the next Administration when the current Director knows that the White House no longer has his back.

But this alone will not deter Director Cordray from pursuing already announced rule-makings. Congressional staff must be prepared to meet the bureau’s assertions of regulatory necessity with well-documented counter-arguments.

Bankers and their trade associations cannot simply trust to an amorphous electoral mandate to block CFPB efforts to embed the last agenda items of the Democratic administration into the bureau’s DNA. They will need to mobilize facts and effort to turn back unwarranted rules and enforcement initiatives.

Greater consideration by Congress must be given to using the Congressional Review Act process to block any unwarranted provisions in rules issued by the bureau in the next 16 months. Without this degree of commitment, congressional oversight will be more political theater than the exercise of real political power.

Industry leadership

Ultimately, the prospects for reform in the consumer financial protection space will be the product of industry efforts exercised on the political front—and in the marketplace.

Bankers have always asserted that they are the trusted providers of financial services and products to responsible customers. They must live that pledge every day—now more than ever.

Banker challenges are not only what they face from political adversaries, but what they reap from how bankers conduct their business and treat their customers.

Bankers at every level must perform to the highest ethical standards; infuse their culture with respect for compliance; and deliver real economic value for the products they promote.

Only by building such a track record will the banking industry be able to earn the reform they need to continue to be financially successful and to resume their leadership role in driving the economic success of our country and its citizens.