Five issues to watch next year at Rohit Chopra's CFPB

December 28, 2022 3:58 PM

Rohit Chopra, the director of the Consumer Financial Protection Bureau, is ending 2022 on a high note after striking a multi-billion-dollar settlement with Wells Fargo.

Chopra has repeatedly said that the CFPB is looking for the worst types of repeat offenders. The $3.7 billion enforcement action against Wells proved that Chopra is not just spouting rhetoric — he intends to hold repeat corporate offenders accountable.

Among the U.S. financial regulators, Chopra is the one individual who bankers most fear. In 2023, he is expected to continue to be a thorn in the industry's side. The bureau will also remain in the news with a potential constitutional challenge to its funding mechanism likely to be accepted and heard by the Supreme Court.

In addition, Chopra will face more legislative scrutiny as Republicans take control of the House Financial Services Committee. Rep. Patrick McHenry, R-N.C., who is the committee's chairman-elect, has said he will pursue "aggressive oversight to rein in the unaccountable CFPB."

After announcing the Wells Fargo action, Chopra showed chutzpah by warning that the $1.9 billion-asset bank is "not out of the woods" because former high-level Wells executives were not given "immunity" in the settlement. Next year, he is expected to ratchet up efforts to penalize individual executives at companies suspected of repeat violations.

Fourteen months into Chopra's term as CFPB director, here are five major areas to watch in the year ahead.

A court challenge to an expansive policy on discrimination

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Earlier this year, Chopra adopted a new policy that claims discrimination associated with any financial product — not just credit — is illegal. Under the policy, the CFPB will look for discrimination in payments, deposit and checking accounts, prepaid cards, remittances and debt collection.

For years, financial services companies have operated under the assumption that the 1974 Equal Credit Opportunity Act prohibits discrimination on the basis of age, race or sex — regardless of intent — against credit applicants.

Industry groups alleged in a September 2022 lawsuit against the CFPB that the change, announced in March, was a major departure from anti-discrimination law. Many bankers also objected to how the CFPB enacted the change — by rewriting the supervisory exam manual and issuing a press release and a blog post.

The 116-page lawsuit filed by the U.S. Chamber of Commerce and six trade groups alleges the CFPB exceeded its authority, and that the change amounted to a power grab that was "arbitrary," "capricious" and in violation of the Administrative Procedure Act. The APA requires federal agencies to give public notice and allow for comments when issuing new rules.

In December, under harsh questioning from Republicans in Congress, Chopra said that the CFPB's exam manual outlined the agency's interpretation of existing laws but did not amount to a rulemaking.

Since Chopra announced the change early this year, banks and other companies have had to put processes and procedures in place to try to detect discrimination across a broad range of products.

The CFPB focuses on Big Tech

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The CFPB has Big Tech firms and other nonbanks squarely in its sights under a plan to create a public registry of companies that repeatedly violate state and local laws.

The public registry is needed to allow state law enforcement officials to coordinate with federal authorities, Chopra said in December. That's when the CFPB proposed a rule that would create the mechanism for policing nonbanks.

Throughout his first year at the helm of the CFPB, Chopra urged state officials to lead the charge in policing unlawful conduct by Big Tech firms.

A crackdown on technology companies is one area where Chopra may find wide agreement in Congress. He has laid the groundwork for regulatory oversight of Amazon, Apple, Alphabet's Google, Meta's Facebook, PayPal and Square, asking those firms to turn over reams of information about their payments products and practices.

"I am worried that big tech companies are coming for financial services, and I am uncomfortable not knowing anything of what they are up to," Chopra testified last year.

The CFPB has also targeted the major tech platforms by issuing an interpretive rule regarding digital marketing services.

Chopra said in August that digital marketing platforms are paid to identify consumers' personal data and to convert their interactions into revenue. The CFPB's rule would subject Big Tech firms to legal liability for violations of the Consumer Financial Protection Act if any misconduct involves consumer financial products or services.

Fair lending enforcement cuts across credit products

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Modern-day redlining takes many forms, and discrimination is pervasive in the eyes of the CFPB. Attempts by financial services firms to discourage minority applicants from applying for any type of credit, not just home loans, are expected to be a major focus of the bureau in the year ahead.

The CFPB claimed a victory in August when it shut down Trident Mortgage, a longtime mortgage lender in Philadelphia owned by Warren Buffett's Berkshire Hathaway. Berkshire agreed to pay $24 million to settle charges that Trident avoided making home loans in : Philadelphia; Camden, New Jersey; and Wilmington, Delaware.

The settlement was notable because loan officers had exchanged emails and photos containing racial slurs and pejorative language.

Chopra has also spoken about "digital redlining" amid the increased use of algorithms and artificial intelligence in the underwriting of home loans. He has called discrimination "an endemic problem," arguing that algorithms can never "be free of bias" and may result in unfair credit determinations.

While industry officials argue that the use of advanced algorithms can expand access to credit for unbanked and underbanked borrowers, the CFPB is clearly skeptical that they can eliminate bias in credit underwriting and pricing.

The CFPB’s authority faces major court challenges

Camp Street side of John Minor Wisdom United States Court of App

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Many companies that have been sued by the CFPB have filed lawsuits of their own, pushing back against the bureau's claims and refusing to settle for large sums.

In a July interview, Chopra said that the CFPB would see to resolve most enforcement actions through settlements, but that it was ready and willing to litigate.

"I think it's important that the agency really be willing to prove its case in court," he said. "I think we have more credibility when we can really litigate cases against well-resourced firms, who aren't going to easily just back down and, in fact, will be willing to spend the money sometimes to litigate."

Even more companies have asked for their cases to be dismissed or put on hold after an October ruling by the Fifth Circuit Court of Appeals, which found that the bureau's funding through the Federal Reserve Board is unconstitutional. The firms are seeking a reprieve until the decision is resolved — possibly by the Supreme Court.

Industry observers are also closely watching a 2019 lawsuit brought against the CFPB by online payments giant PayPal Holdings. PayPal claims that digital wallets should not be subject to the same fee disclosures as prepaid cards.

A ruling in the case, which is expected soon, could limit or potentially upend the CFPB's authority to mandate consumer disclosures.

A battle over ‘junk fees’

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Few issues have raised more ire from bankers than Chopra's many statements about what he calls "exploitative junk fees" that produce billions of dollars in income for financial institutions.

With a request for information about such fees, Chopra set the stage for a showdown with major banks, trade groups and their lobbyists, who argue that a crackdown is unwarranted. The big question going forward is whether Chopra plans to follow his rhetoric with a rule or enforcement actions against banks and other firms.

Banks collected roughly $15.5 billion in overdraft and nonsufficient funds fees in 2019, though the percentage of fee revenue has been dropping for years. More than a dozen large and midsize banks dropped or curbed overdraft fees this past year.

"People are getting sick and tired of this fee creep that is all over the economy," Chopra said early this year. "Banking is a bastion of many of these fees, and consumers want to know what is going on with this. In many cases, these are fees where there's not even a service provided or where the bank or financial institution doesn't even do any work."

The CFPB is expected to take action in at least one area: credit card late fees. Chopra plans to examine whether such fees are set at reasonable levels and if they should continue to be pegged to inflation. The bureau could potentially unwind a set of provisions created by the Federal Reserve Board in 2010, which have allowed credit card issuers to raise late fees annually due to inflation.

Under the current rules, credit card late fees could jump by 9% in 2023, experts have said.

Going forward, many financial institutions are worried that the CFPB will be listening to consumer advocates, who have long argued that comparing fees across financial institutions is difficult, and that the true cost of many fees is not clearly disclosed. Advocates want more scrutiny of account maintenance and inactivity fees, fees charged consumers to cash a bank's own check and fees to get a paper statement.