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The jury is still out on the new CFPB

Mick Mulvaney, the acting director of the Consumer Financial Protection Bureau (CFPB), delivered what seemed to be a clear message this week at the Mortgage Bankers Association's annual convention in the nation's capital. He stressed that the bureau’s focus has changed, and that the prior CFPB leadership's era of regulation by enforcement is over. During a break at the conference, Benjamin Olson, a partner with the Washington, D.C.-based law firm of Buckley Sandler and a former CFPB regulator, discussed whether the bureau has, in fact, changed. 

Is the era of regulation by enforcement over?

benolsonRegulation by enforcement is somewhat in the eye of the beholder. To me, it means penalizing a regulated entity for conduct that they engaged in that was not specifically prohibited by written law. As to whether that is over, that is also in the eye of the beholder. The bureau has continued to make use of its authority to prohibit unfair and deceptive acts and practices [UDAP].

That is something that under prior leadership was subject to a lot of criticism because there is some amount of subjectivity as to what conduct rises to the level of deceptive and unfair. To the extent that the bureau continues to use that authority, some would view that as regulation by enforcement. But, in other ways, the bureau has made clear that they will not be enforcing regulatory guidance as if it were law. From that perspective, that is a reduction in regulation by enforcement. Again, it is really in the eye of the beholder.

Was there anything that Mulvaney said about UDAP that was surprising to you?

Well, it was intriguing for me to hear — but we have seen it from the public actions and from representations of clients in nonpublic matters — that the bureau views two of the three types of claims that are considered UDAP as very much within the black letter of the law that it enforces — deception and unfairness. Acting Director Mulvaney said [on Oct. 15] that there is extensive regulatory history with the elements of those actions. That is true. The FTC, in particular, has been bringing UDAP actions for decades. But he also distinguished another element of that, which is abusiveness. That is a new concept that Congress added in the Dodd-Frank Act. The statute does layout elements of what an abusiveness claim would look like, but there remains uncertainty as to how that really differs from deception or unfairness.

[Former CFPB Director Richard Cordray], when he was leading the bureau, testified on the Hill that he had difficulty conceiving of what would be an abusive act or practice that would not also be an unfair act or practice. So, the fact that Acting Director Mulvaney has stated that they intend to engage in rule-making to further define the standards around abusiveness has me very intrigued.

Mulvaney indicated that the CFPB had changed its tone, and he also implied that the bureau would endeavor to be more clear as to what the line was that companies can’t cross. Is it true that they are drawing a brighter line?

Personally, I think guidance is a good thing. I am biased, as a former regulator and writer of guidance. Like anything else, guidance can be used effectively, and it can be used ineffectively. When you use guidance in an attempt to establish new legal standards … that is probably not the best use of guidance. That is probably [better achieved through] notice and comment rule-making, where you give the public the opportunity to weigh in on the approach you are going to take.

I have been a little surprised by the extent to which guidance has been viewed as a bad thing by new leadership. That may reflect the way they view guidance being used or abused by the prior bureau leadership. But my hope would be that, properly used, there would be a willingness to provide guidance on highly technical issues that will give instruction to the industry on how they should proceed. Because, a lot of these issues are not grand questions of policy, but are instead very specific operational questions about how you fill out this line and this form. It is not so much that people care about what the answer is, as much as there be an answer so that everyone is on the same page and can proceed in a consistent fashion.  

So, they haven’t really been clear on how they are going to establish this bright line, then?

I think that is a fair assessment. It is also still early. While a year, on the one hand, is a long time, it can be a relatively short time in government. Establishing bright lines to me is about going through the public-notice and comment process under the Administrative Procedures Act. That takes time. You have to formulate a proposal. You have to put it out to the public. You have to view the comments you receive, then you have to finalize it. That typically takes a year to two years. They have not engaged in that exercise yet, but there is still hope that they will. Certainly through this request-for-information process, they have sought feedback on where they should focus their efforts. So, the hope is that they will begin to do so, and begin the process of drawing those lines. 

Mulvaney said he eventually would like to see a five-person commission oversee the bureau, but is that realistic given that it would take congressional action?

I am no expert on counting votes and knowing where everyone on the Hill is on this issue, but drawing lessons from the Crapo bill S-2155 [the Economic Growth, Regulatory Relief, and Consumer Protection Act sponsored by Sen. Mike Crapo, R-Idaho] — that was a measured and fairly modest regulatory reform effort to amend the Dodd-Frank Act. It did not touch the structure of the bureau in any way, shape or form, and my strong suspicion is the votes were not there for doing so, or there was not an interest in doing so. Is Congress likely to come back and take bolder action on Dodd-Frank reform, specifically on the bureau’s structure? Seems pretty unlikely, but we have an election coming up and I guess we will have to recalibrate then. 

The big message that Mulvaney delivered was that there is a different tone at the bureau now, and they will now focus on pursuing so-called bad actors. That sounds good in a packed room of mortgage bankers, but is it true?

You look down the list of the nine public enforcement actions that the bureau has brought under new leadership. Does that mean that a moral judgment has been made by the bureau that these are bad people? I don’t think so. I don’t think the regulator is in the business of making moral judgments about who is good or bad. It is really a question of did your conduct comply with the law? Most institutions, at some point in their life cycle, will experience a compliance event. It will often, generally speaking, not be intentional. Systems fail. Human beings make mistakes. This is part of being in business.

So, I don’t personally subscribe to the view that there are entities that are necessarily good actors or bad actors — although there probably are, out on the fringes, people who perhaps are unambiguously bad actors. But, to get back to your question, has anything changed? It is really hard to tell. Honestly, to me, a lot of the actions that they have brought look a lot like actions that were brought under prior leadership. So, to the extent there has been change, it has really been in what hasn’t happened. Rule-making has sort of ceased, at least on the big projects. On the horizon, we have heard that there is going to be more HMDA [Home Mortgage Disclosure Act] rule-making, debt-collection rule-making. They are going to revisit the payday [lender] rule. But, frankly, what is notable there [at the CFPB] has been that it has been a quiet period. 


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