CFPB structural changes
The appointment of Mick Mulvaney as CFPB Acting Director has led to significant changes to the Bureau’s structure and how it operates.
During 2017 and early 2018, the consumer financial services (CFS) regulatory landscape has undergone seismic shifts.
As the Trump Administration, Congress and the courts, in varying ways and to various degrees, rethink and reshape the Consumer Financial Protection Bureau’s (CFPB or Bureau) structure, agenda and approach, companies—notwithstanding the overall deregulatory trend of such activity—likely will experience continued uncertainty regarding the CFS supervisory and enforcement landscape. To help institutions navigate today’s rapidly evolving regulatory environment, we present a concise retrospective and guide for what likely lies ahead. Amidst so much change, and in an environment redolent with deregulatory rhetoric, it is important to take an intermediate and even long view toward compliance as the ramifications of many decisions made today might not become apparent for years. Thus, as always, a commitment to best practices, a strong compliance culture, and a firm grasp on enduring requirements will serve CFS market participants well.
The shifting landscape
Despite a contentious legal battle over the CFPB’s leadership, Acting Director Mick Mulvaney has pressed forward with significant changes to the Bureau’s organization and priorities. For the time being, it appears that the Bureau has recused itself from certain aspects of overseeing the CFS industry, a stark departure from former Director Richard Cordray’s approach.
In less than six months, the new leadership has announced several political appointments to key CFPB positions, and issued no fewer than ten requests for information (RFIs), asking the public to weigh in on nearly every aspect of the Bureau—enforcement, supervision, rulemaking, market monitoring and education activities, among others. In addition to a comprehensive review of all CFPB rules, the Bureau has specifically focused on rolling back requirements under its payday, prepaid card and HMDA-related rules.
Congress too has joined the fray, striking down the CFPB’s arbitration rule in November 2017. Bills have been introduced to subject the Bureau to Congressional appropriations—a proposal the Trump Administration adopted in its 2019 budget, which Acting Director Mulvaney also underscored as part of his proposed reforms. Other proposals would reconstitute the Bureau as a multi-member, bipartisan commission.
Separately, as our collective memory of the financial crisis fades and as they have become more accustomed to the CFPB as litigant, some courts appear to be less deferential to the CFPB’s enforcement efforts. Companies and institutions are increasingly challenging the Bureau’s civil and administrative actions, rather than swiftly settling.
The current CFPB leadership has also signaled a new approach to enforcement that includes the use of more traditional legal theories, de-emphasizing the broad and aggressive use of the Bureau’s UDAAP authority as an enforcement tool. Among other actions, the CFPB’s decision to remove its fair lending unit from the supervision and enforcement division, as well as its call for local enforcement of consumer protection laws likely will cause states to increase their enforcement activities. Indeed, several state attorneys general (AGs) have already signaled that they will use their enforcement powers, including their ability under the Dodd-Frank Act to enforce violations of federal CFS laws, with many ready to draw on or otherwise forming special consumer units. Beyond enforcement of law, state AGs, regulators and legislators also seem poised to revisit existing laws and regulations and issue guidance, as appropriate—all in the name of filling any void the CFPB might leave in its wake. Multistate coordination among these players remains possible, if not probable, in many instances.
A note on new technologies
Concurrent federal deregulation and increasing state oversight may pose unique challenges for tech, fintech and regtech companies as well as incumbent financial institutions leveraging new technologies. Although the Bureau’s Project Catalyst was designed and has the potential to balance oversight with the need to foster consumer-friendly innovation, the current CFPB leadership has yet to take a position on whether it will revamp this initiative, and if so how—regardless of how it will otherwise address fintech solutions in the CFS market.
Other federal agencies, including the federal banking regulators, have yet to demonstrate how they will strike this balance and manage tech innovation in the CFS sector. States, meanwhile, may seek to clarify and enforce time-tested laws and regulations, while also possibly offering a multiplicity of differing responses. All CFS market participants using or offering innovative approaches and products are thus encouraged to navigate this shifting landscape carefully by ensuring a sound understanding of new technologies, an ability to manage their risks, and an ability to communicate their risk management approach, when and as appropriate, to regulators.
The appointment of Mick Mulvaney as CFPB Acting Director has led to significant changes to the Bureau’s structure and how it operates.
In 2017, the CFPB issued several final rules to clarify, revise, and update the regulatory framework applicable to the home mortgage origination and servicing market.
The CFPB has historically focused on how to address so-called "debt traps" associated with payday lending.
The CFPB has historically focused on both federal and private student loans, with an increasing focus on loan servicing practices.
The CFPB has previously targeted the auto finance industry, with a particular focus on indirect (dealer-arranged) auto lenders and unfair or abusive loan servicing practices.
The CFPB has traditionally not prioritized marketplace lenders in its supervisory and enforcement efforts. The new CFPB leadership is expected to maintain the status quo and rely on state attorneys general to oversee industry participants.
The CFPB finalized its Prepaid Card rule in October 2017. It remains unclear, however, whether the CFPB’s new leadership will leave the rule intact, or instead seek to further delay or alter the rule’s requirements as part of the Bureau’s ongoing review of CFPB regulations.
The CFPB has historically focused on how to address so-called "debt traps" associated with payday lending.3
After five years of research and public comments, the CFPB released its final rule regulating payday lending in October 2017 (Payday Rule), shortly before former Director Cordray resigned.4 In addition to enhanced disclosure and registration requirements, the Payday Rule also imposes limits on how frequently a lender can offer, collect on and extend high-interest loans, as well as requires lenders to determine a borrower's ability to repay a loan (in full and with interest) within 30 days ("full payment test"). On the Payday Rule's effective date, CFPB Acting Director Mick Mulvaney announced that he would reopen the rulemaking process and reconsider the Payday Rule, while also granting waivers to companies regarding early registration deadlines.5 Currently, the Payday Rule's substantive provisions, including compliance program and documentation requirements, will come into force on August 19, 2019.
Given Mulvaney's known opposition to the Payday Rule,6 the rule will likely change and become less onerous for the payday lending industry. Nevertheless, the extent to which the Payday Rule can be relaxed remains unclear, given the time-consuming notice and lengthy comment procedures required under the Administrative Procedure Act.7 In addition, the Bureau would have to offer a sufficient rationale to support reconsideration of a final rule that resulted from extensive research and public debate to avoid judicial review by courts under an arbitrary, capricious or abuse of discretion standard8 in litigation that is likely to ensue.9 With these administrative hurdles in mind, the Bureau may opt to file a new notice of rulemaking and reopen the comment period to further delay implementation, or only seek to relax certain requirements instead of initiating a substantial overhaul. The status of the Payday Rule has also been put into question by bipartisan joint resolutions in the House and Senate seeking its repeal under the Congressional Review Act (CRA).10 Review under the CRA would provide a faster avenue to overturn the Payday Rule, as demonstrated with the CFPB's now defunct arbitration rule.
The Trump Administration has also taken notable steps to ease the burden placed on the payday lending industry. These include terminating the Obama-era "Operation Choke Point," which was designed to discourage banks from doing business with payday lenders,11 as well as removing payday-bank partnership restrictions for at least one payday lender.12 This signals a significant departure from regulatory constraints put in place a decade ago prohibiting affiliations between national banks and payday lenders that sought to circumvent state interest rate caps.13
On March 23, 2018, the House Financial Services Committee also voted in favor of the EQUAL Act. If passed, the bill would allow banks to issue high-interest payday loans by rescinding a 2013 FDIC guidance on bank payday loans, exempting banks and credit unions from the Payday Rule, and providing for express federal preemption of state law for bank and credit union small-dollar loans.14 States are likely to challenge such a proposal, particularly those with strict interest caps on small-dollar loans, such as South Dakota, Connecticut, Montana and Oregon.15
In 2017, the Bureau's enforcement efforts focused on policing in-person and online payday lenders that charged usurious or illegal interest rates and fees, and employed deceptive lending and debt collection practices, such as claiming to have tribal or out-of-state bank affiliations to conduct business in states where they were not licensed, and making unauthorized transfers from consumers' bank accounts.16
Notably, the new Bureau's leadership decided to drop a lawsuit initiated mid-2017 against a group of four payday lenders associated with a Native American tribe accused of deceiving consumers and failing to disclose the true cost of the loans, which carried interest rates as high as 950 percent a year.17 The Bureau also dropped at least one probe into a payday lender resulting from a 2014 civil investigative demand.18 Concurrently, a federal judge rejected the Bureau's previous request for money penalties against a nonbank lender that sought to circumvent state usury caps by claiming an affiliation with a tribe. While still ruling in the Bureau's favor, the Court instead allocated only a fraction of the relief sought.19
Although no new action has been introduced in 2018, several of the Bureau's enforcement actions are still pending.20 Considering the Bureau's recent policy changes, it is unclear how the new CFPB leadership will proceed in light of its ongoing review of pending enforcement actions.21 We expect the Bureau's retreat from the payday lending space to proceed further, especially in light of its new reliance on "quantitative analysis"22 to prioritize enforcement and Acting Director Mulvaney's recent statements that payday lending only represented 2 percent of overall consumer complaints in 2016.23 As in other areas, states may seek to fill any perceived voids left by the CFPB.
In addition to established market participants targeting borrowers with high credit scores, new internet-based startups are offering small-dollar loans to non-prime borrowers, directly targeting the payday lenders' customer base. Fintechs aim to compete with traditional payday lenders by marketing a more customer-centric approach, as well as flexible terms and lower fees. These new market entrants generally rely on the use of AI-driven scoring products and non-traditional data analytics to assess a borrower's creditworthiness. In addition to fair lending considerations, these new online startups generally rely on mobile devices and related technology to host their software and undertake lending decisions, thereby raising privacy and cybersecurity concerns.24
In 2017, state AGs have also targeted payday lenders for operating fraudulent lending schemes, charging excessive interest rates in violation of state usury limits, as well as using unfair and deceptive practices and communications with consumers.25
We expect this momentum to continue in light of the Bureau's recent call for state AGs to take the lead in enforcing consumer protection laws.28
1 Kevin McCoy, Mick Mulvaney: Payday Lending Campaign Contributions Pose No Conflicts Of Interest, USA Today (Dec. 4, 2017), https://www.usatoday.com/story/money/2017/12/04/mick-mulvaney-payday-lending-campaign-contributions-pose-no-conflicts-interest/920056001.
2 Julia Horowitz, CFPB says it will reconsider its rule on payday lending, CNN Money (Jan. 16, 2018), http://money.cnn.com/2018/01/16/news/cfpb-payday-rule/index.html.
3 CFPB, New Protections Against Payday Loan Debt Traps, https://www.consumerfinance.gov/payday-rule.
4 CFPB Rule on "Payday, Vehicle Title, and Certain High-Cost Installment Loans" (codified at 12 CFR Part 1041), https://files.consumerfinance.gov/f/documents/201710_cfpb_final-rule_payday-loans-rule.pdf.
5 CFPB, Statement on Payday Rule (Jan. 16, 2018), https://www.consumerfinance.gov/about-us/newsroom/cfpb-statement-payday-rule.
6 Chico Harlan, The Pending Crackdown On Payday Lending Is Causing The Exact Washington Argument You'd Expect, The Washington Post (Apr. 5, 2016), https://www.washingtonpost.com/news/wonk/wp/2016/04/05/the-pending-crackdown-on-payday-lending-is-causing-the-exact-washington-argument-youd-expect/?utm_term=.6df4a5af01cc.
7 5 U.S.C. §§ 551 et seq.
8 5 U.S.C. § 706 (2)(A).
9 Press Release, Sen. Richard Blumenthal (D-CT), As Mulvaney Rolls Back Borrower Protections, Blumenthal Calls for IG Investigation into the Acting CFPB Director's Predatory Payday Lending Conflicts of Interest (Feb. 1, 2018).
10 H.J. Res. 122 (Dec. 1, 2017); S.J. Res. 56 (Mar. 22, 2018).
11 DOJ Letter: Letter (Aug. 16, 2017): http://alliedprogress.org/wp-content/uploads/2017/08/2017-8-16-Operation-Chokepoint-Goodlatte.pdf.
12 OCC Order Terminating the Consent Order with Ace Cash Express (Feb. 14, 2018), https://www.occ.gov/static/enforcement-actions/ea2018-013.pdf.
13 Kevin Wack, OCC Once Wanted Payday Lenders To "Stay The Hell Away" From Banks. No Longer, American Banker (Mar. 19, 2018), https://www.americanbanker.com/news/occ-once-wanted-payday-lenders-to-stay-the-hell-away-from-banks-no-longer.
14 H.R. 4871, 115th Cong. (2017).
15 South Dakota, Measure 21 (Ct. 2016); H.B. 5571, Gen. Assemb. (Ct. 2016); Mont. Code Ann. § 31-1-108; Or. Rev. Stat. Ann. § 82.010.
16 See, e.g., Consumer Fin. Prot. Bureau v. Moneytree, Inc., 2016-CFPB-0023 (Dec. 16, 2016); Consumer Fin. Prot. Bureau v. LendUp, 2016-CFPB-0023 (Sept. 27, 2016); Consumer Fin. Prot. Bureau v. Woodbridge Coins and Jewelry Exchange, Inc., case no. 1:17-cv-00141-JCC-TCB (E.D. Va. Feb. 2, 2017); Consumer Fin. Prot. Bureau v. Pawn U.S.A., Inc., case no. 1:16-cv-01566-JCC (E.D. Va. Dec. 19, 2016); Consumer Fin. Prot. Bureau v. A To Z Pawn, Inc., case no. 1:16-cv-01567-JCC (E.D. Va. Dec. 19, 2016); Consumer Fin. Prot. Bureau v. Spotsylvania Gold & Pawn, Inc., case no. 3:16-cv-00988-MHL (E.D. Va. Dec. 19, 2016); Consumer Fin. Prot. Bureau v. Fredericksburg Gold & Pawn, Inc., case no. 3:16-cv-00987-REP (E.D. Va. Dec. 19, 2016).
17 CFPB v. Golden Valley Lending, Inc., et al., case no. 1:17-cv-03155 (N.D. Ill. Apr. 27, 2017).
18 Kate Berry, CFPB Drops Probe Into Lender That Gave to Mulvaney's Campaigns, American Banker (Jan. 23, 2018), https://www.americanbanker.com/search?query=drops+probe+into+lender.
19 Consumer Fin. Prot. Bureau v. CashCall, Inc., case no. 2:15-cv-07522 (C.D. Cal. Sept. 25, 2015).
20 Consumer Fin. Prot. Bureau v. NDG Financial Corp. et al., 1:15-cv-05211 (S.D.N.Y. July 6, 2015); Consumer Fin. Prot. Bureau v. All American Check Cashing, Inc. et al., case no. 3:16-cv-00356-WHB-JCG (S.D. Miss. May 11, 2016); Consumer Fin. Prot. Bureau v. Think Finance LLC, case no. 4:17-cv-00127 (D. Mont. Nov. 15, 2017).
21 CFPB, Call for Evidence (Jan. 17, 2018), https://www.consumerfinance.gov/policy-compliance/notice-opportunities-comment/open-notices/call-for-evidence; CFPB, Request For Information On Enforcement Processes (Feb. 7, 2018), https://www.consumerfinance.gov/about-us/newsroom/cfpb-issues-request-information-enforcement-processes.
22 Mick Mulvaney, Memorandum to Internal CFPB Staff, at 2 (Jan. 23, 2018), https://assets.documentcloud.org/documents/4357880/Mulvaney-Memo.pdf.
24 Penny Crosman, How Fintechs Are Using AI To Transform Payday Lending, American Banker (Mar. 7, 2017), https://www.americanbanker.com/news/how-fintechs-are-using-ai-to-transform-payday-lending.
25 NY Attorney General Office, Owner Of Payday Lending Enterprise Found Guilty By Jury Of Orchestrating $220 Million Fraudulent Lending Scheme (Nov. 15, 2017), https://www.justice.gov/usao-sdny/pr/owner-payday-lending-enterprise-found-guilty-jury-orchestrating-220-million-fraudulent; VA Attorney General Office, Attorney General Herring Reaches Settlement With Stafford-Area Pawnbroker Aug. 1, 2017), https://www.oag.state.va.us/media-center/news-releases/997-august-1-2017-attorney-general-herring-reaches-settlement-with-stafford-area-pawnbroker; VA Attorney General Office, With Virginia Beach Open-End Credit Lender (Jul. 25, 2017), https://www.oag.state.va.us/media-center/news-releases/992-july-25-2017-ag-herring-reaches-settlement-with-virginia-beach-open-end-credit-lender; VA Attorney General Office, Attorney General Herring Reaches Settlement With B&B Pawnbrokers, Inc. (Jun. 30, 2017), https://www.oag.state.va.us/en/media-center/news-releases/978-june-30-2017-ag-herring-reaches-settlement-with-b-b-pawnbrokers-inc.
26 VA Attorney General Office, Attorney General Herring Obtains Full Restitution For Customers Of Online Lender (Feb. 23, 2018), https://www.oag.state.va.us/media-center/news-releases/1129-february-23-2018-herring-obtains-full-restitution-for-customers-of-online-lender.
27 Fla. Attorney General Office, Attorney General Bondi and OFR Reach Multimillion Dollar Settlements with Online Lender (Jan. 12, 2017), http://www.myfloridalegal.com/newsrel.nsf/newsreleases/2F836464563D0EB5852580A600709370; Ga. Attorney General Office, Attorney General Chris Carr Announces $40 Million Plus Settlement with Online Payday Lender (Feb. 8, 2017), http://consumer.georgia.gov/news/press-releases/view/attorney-general-chris-carr-announces-40-million-plus-settlement-with-online-payday-lender; Va. Attorney General Office, Cashcall Borrowers To Begin Receiving Settlement Payments Totaling Over Nine Million Dollars (Sept. 6, 2017), https://oag.state.va.us/consumer-protection/index.php/news/237-september-6-2017-cashcall-borrowers-to-begin-receiving-settlement-payments-totaling-over-nine-million-dollars.
28 Rachel Witkowski, AGs, Not CFPB, Should Take Greater Role On Enforcement: Mulvaney, American Banker (Feb. 28, 2018), https://www.americanbanker.com/news/ags-not-cfpb-should-take-greater-role-on-enforcement-mulvaney.
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