United States: Strategies For Fundamental CFPB Changes

The Consumer Financial Protection Bureau (CFPB or Bureau) announced on January 17, 2018 that it will issue a series of requests for information (RFIs) on its enforcement, supervision, rulemaking, market monitoring and education activities – i.e., every component of its regulatory functions. This process will kick off with the issuance of a request for public comment on the civil investigative demands (CIDs) that initiate CFPB enforcement investigations. This announcement follows hard on the heels of the Bureau's announcement on January 16, 2018, the effective date of its small dollar lending rule, that it will engage in a rulemaking process to reconsider that rule. These announcements proclaim the Republican leadership's intent to fundamentally alter the CFPB's regulation of the industry and point to two paths to effectuate that change: (1) amendment of substantive CFPB rules, and (2) transformation of the CFPB regulatory paradigm. Leveraging these review processes to obtain optimal, lasting change will require a long game of strategy, evidence and analysis, built on a foundational understanding of the CFPB's operational blueprint and activities over the last six years.

Changing Substantive CFPB Rules

The CFPB's regulations became obvious targets for change with the switch in the agency's leadership, especially after the Bureau added "addressing outdated, unnecessary, or unduly burdensome regulations" as a central tenet of its mission statement within mere weeks of President Trump's appointment of Mick Mulvaney as its Acting Director. The CFPB also announced plans to reconsider the rules governing prepaid cards, home mortgage disclosures and other activities within that short timespan. Even before the recent change in leadership, however, the CFPB already had signaled its inclination to fine-tune those regulations. Its decision to reconsider the small dollar lending rule is far more significant, given that the CFPB had adopted the rule only two months previously in November 2017, and establishing a basis to undo that determination thus would present a high hurdle (as Mulvaney recognized in December in expressing his support for use of the Congressional Review Act (CRA) to repeal the rule). The CFPB's charge to reconsider the recently adopted and highly controversial small dollar lending rule confirms that no Bureau rule is sacrosanct, and there is an opening for the industry to seek amendment of any aspect of the CFPB's rules not mandated by statute.

The small dollar lending rule provides a fine example of the opportunities and challenges to change the CFPB's rules. The prospect for CRA or other legislative efforts to undo the rule is low, given the crowded Congressional agenda and the extremely close CRA vote to repeal the arbitration rule, which had a much larger base of industry and Republican support. In contrast, the CFPB now offers a ready avenue to dramatically change key components of the rule, including:

  • Radically revising or eliminating the requirement for lenders of covered products to conduct an ability-to-repay (ATR) analysis that includes income verification, debt obligation verification and forecasting of the borrower's basic living expenses;
  • Significantly modifying the requirement for a 30-day cooling off period after a borrower enters a third short-term loan or longer-term balloon loan in a sequence; and
  • Exempting depository institutions' deposit advance products (DAP exemption).

Because federal agencies cannot change their regulations based on a mere switch in policy, obtaining amendment of the rule will demand substantial data and analysis to demonstrate the need for change. In addition, the agency must fulfill the requirements of the Administrative Procedure Act (APA) to provide notice of the amendments, including the basis for its proposal, and obtain and consider public comments before adopting any revisions. This process potentially could move quickly, as in the case of the Federal Communications Commission's recent reversal of its position on the highly controversial net neutrality issue. The net neutrality rule already had a long history of FCC switches with each administration and the accompanying court decisions to provide a roadmap for change, however. The lack of such a record, as well as the ongoing court challenge to Mulvaney's authority to serve as Acting Director, increase the likelihood that the CFPB will not take final action on the small dollar lending rule until a permanent Director is in place.

In addition, certain rule changes – such as the DAP exemption – require the support of other regulators. Here, Joseph Otting already has expressed support from the Office of Comptroller of the Currency (OCC) for the DAP exemption, but the required concurrence from the Federal Deposit Insurance Corporation (FDIC) must await the confirmation of Jelena McWilliams as its new Chair. Likewise, getting the backing of sister agencies may be important in the advocacy for other rule changes.

For many CFPB rules, including the small dollar lending rule, the states also have a critical role. Not only are the states likely to take more aggressive regulatory action to fill perceived voids left by the CFPB, but, alongside private litigants who may struggle to establish standing to sue, state attorneys general (AGs) also may challenge the Bureau's actions in court (as 22 state AGs have challenged the FCC's net neutrality rule change, for example).

Companies should conduct a thorough review, including consultation with their business teams, to pinpoint those aspects of the CFPB's regulations that impose the most onerous burdens, before developing a strategy to achieve change. Given competing demands at the CFPB, they should arm themselves with substantial data and analysis, identify potential allies and anticipate the opposition, before launching their advocacy for the rule amendments that they seek. Moreover, even after gaining the support of the CFPB, companies should continue building their case in order to provide a strong evidentiary basis for the CFPB to defend against potential legal challenges, including claims that the Bureau has violated the APA by taking "arbitrary and capricious" actions or bypassing required rulemaking procedures.

Transforming the CFPB Regulatory Paradigm

While its substantive regulations present more obvious targets for change, the CFPB's upcoming series of RFIs to review its enforcement, supervision, rulemaking, market monitoring and education activities present avenues for even more fundamental transformation of the CFPB regulatory paradigm. The review will kick off with the issuance of a request for public comment on the CFPB's CIDs, issued to compel the production of information to support its enforcement investigations. Reform of the CID process potentially could run the gamut from more specific disclosure of the Bureau's legal authority and potential claims supporting the issuance of individual CIDs, to changing the requirements for companies' certification of their responses to the CIDs, to modifying the processes for companies to obtain modifications or to quash a CID.

As the reviews move forward, other areas of reform to the enforcement process could include, for instance, changes to the conduct and content of the CFPB's Notice and Opportunity to Respond and Advise (NORA) letters to give parties a clearer understanding of the Bureau's basis for pursuing enforcement action against them, or the timing and procedures of the Bureau's administrative adjudications. Such reforms ultimately could be far more impactful than the CFPB's shift in position in individual enforcement cases, even those involving major legal questions (e.g., the Bureau's move today to dismiss a closely-watched case it initiated in April 2017 against four payday lenders affiliated with the Habematolel Pomo tribe). Turning to the rulemaking arena, the Bureau might commit to conduct cost-benefit analyses before adopting any rule or, in the consumer response realm, it might consider verification of consumer complaints or scaling back on the publication of information received through its consumer portal. In sum, the opportunity to alter the CFPB's regulatory framework is limited only by stakeholders' commitment to affect change and the effectiveness of their strategy.

Underscoring this opportunity, Mulvaney's request today to the Federal Reserve for "$0" funding for the CFPB in the second quarter of fiscal year 2018 – noting that the Bureau's $177.1 million reserve should be "sufficient for the Bureau to carry out its statutory mandates . . . while striving to be efficient, effective and accountable" – is a public statement that the old CFPB has been an unnecessary drain on resources, and the new CFPB will be far more efficient and restrained. Yet the prospect for dramatic change to the Bureau's framework during Mulvaney's tenure is limited. A more likely scenario is that the CFPB's upcoming series of RFIs will fuel a detailed review similar to the Treasury Department's 2017 study and recommendations for financial regulatory reform, laying the groundwork for a new permanent Director to adopt long term changes at the Bureau.

Given the many regulatory functions that the CFPB potentially could alter and the many approaches that it could apply, it is imperative for companies to conduct a thoughtful review of how Bureau operations potentially could affect them, identify priorities and develop a pragmatic strategy to achieve the reforms that they seek. The task of identifying CFPB processes and tools that present the greatest pain points may require deeper analysis than pinpointing onerous rules, but also could present opportunities for broader and more lasting impact.

Like many organizations, particularly those with broad authorities, a large portion of the most crucial CFPB operations and decision-making lies below the surface level of its published rules and procedures. It is therefore vital for companies to base identification of their priority areas and develop their strategy upon a thorough analysis of the operational blueprint that underlies the CFPB's actions over the last six years. In developing their strategy, companies should support their advocacy with a concrete demonstration that the requested changes would increase efficiency, assure due process and/or strengthen the basis for agency actions, from responding to consumer concerns, to pursuing enforcement investigations, to developing effective regulations. Processes and procedures aimed at enhancing efficiency, due process, and safeguards are less subject to attack and thus less likely to be undone with future changes in administration and leadership. Consequently, a thoughtful and pragmatic strategy can bring about a transformation of the consumer finance regulatory paradigm that will withstand the changing political winds and provide a stable framework for efficient growth.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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