CFPB headquarters in Washington, D.C. Credit/Shutterstock
These are heavy times in Washington, D.C. Elon Musk is rampaging through the bureaucracy like the proverbial bull in a china shop, and the Trump Administration is reportedly considering eliminating federal agencies via executive orders. Closer to home, Rohit Chopra has finally been removed as the CFPB’s director, and the Bureau has effectively been put on a hiatus pending further review. Last but not least, the ascendancy of Kyle Hautpman to the leadership of the NCUA has brought a welcomed change in tone, even as we wait to see how big an impact his leadership can have on regulatory substance.
But even as dramatic changes are announced on an almost daily basis and if history is any guide at all – and I fully concede that it may not be –at some point, the sugar rush will end and we will return to the glacial stability of the legislative and regulatory process. As for me, when the dust clears, there are two simple changes that are achievable in this environment and would have a big impact on the day-to-day operation of credit unions, while at the same time ensuring that consumers have the right to choose the financial products that are appropriate for their individual circumstances.
First, let’s end regulation by litigation. Second, Congress should amend the Dodd-Frank Act to either substantially narrow or do away with the Bureau’s authority to define and prohibit so-called “abusive” acts or practices.
These two proposals are actually closely related to each other. The CFPB has utilized regulation by enforcement as a primary tool to amplify its already enormous powers. And these enforcement powers have been augmented by its expansive interpretation of its authority to prohibit practices that are abusive, even when they are not particularly deceptive. In other words, what I am proposing would help all providers of financial services understand the rules of the road instead of having to react to the policy wins of a given director.
Lest you think I am exaggerating, let’s take a trip down memory lane to 2016. In a speech before the Consumer Bankers Association, former CFPB Director Richard Cordray extolled the virtues of regulation by enforcement. He explained that the Bureau’s public enforcement actions and their resulting orders “whether entered by our agency or by a court provide detailed guidance for compliance officers across the marketplace about how they should regard similar practices at their own institutions.” In fact, he explained that it was “compliance malpractice” for executives not to consider these orders when determining how to comply with consumer protection laws. The regulations and interpretations to which he is referring are applicable to any institution – regardless of its asset size – that must comply with consumer protection laws.
These actions also are intended to provide guidance for primary regulators such as the NCUA as to how regulations and laws are to be interpreted and enforced.
What is wrong with this approach? Well, if I can borrow a metaphor recently used by Chairman Hauptman, institutions should be held accountable when they violate the speed limit, not for knowing how other institutions were driving. He has even called on the NCUA “to protect Americans from regulation by enforcement.” He went on to explain that “no enforcement action should ever be set to even clarify policy.” He is spot on. Your average credit union doesn’t have the time or resources to analyze the fact pattern of every enforcement action. Furthermore, even for those with the time and resources to do so, every enforcement action should be fact-sensitive. To the extent that regulators are seeing commonalities in the way regulations are being interpreted, they can, of course, use the regulatory process to propose and make changes to the regulations.
And while we are taking a look at regulation by litigation, Congress should reexamine the powers it gave to the NCUA in the first place. When Congress passed the Dodd-Frank Act, it gave the CFPB not only the power to prohibit practices that were unfair and deceptive, it also gave the new Bureau the power to outlaw abusive practices as well. As explained in the congressional report outlining 12 USC 5531 “abusiveness requires no showing of substantial injury to establish liability but is rather focused on conduct that Congress presumed to be harmful or distortionary to the proper functioning of the market.” To be fair, Congress granted the Bureau this power following years of criticism that the existing formulation of UDAAP was too restrictive and that the FTC was underutilizing the powers it did have.
We now have more than a decade of experience with this legal standard. What has become abundantly clear is that what constitutes abusive conduct is too often in the eye of the regulator as opposed to the written letter of the rule or regulation. For example, the question shouldn’t be whether regulators like overdraft policies; the question should be, does the member have the information they need to decide whether overdraft protection is right for them?
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