How a new CFPB head may revamp rules, enforcement

November 16, 2017 5:39 PM

A new Republican director of the Consumer Financial Protection Bureau is likely to take immediate action to roll back certain rules while curbing pending enforcement actions that are considered too harsh on financial firms.

The Trump administration is considering naming Mick Mulvaney, the director of the Office of Management and Budget, on an interim basis to replace the CFPB's director, Richard Cordray, who announced Wednesday that he will leave the agency this month.

While there are some legal limitations on what a GOP appointee to the CFPB can do, attorneys, analysts and former agency officials said that there are actions that could be taken promptly to change the direction before a permanent successor is named and confirmed. Those range from scaling back enforcement actions in the pipeline to taking a hard look at the CFPB’s “Qualified Mortgage” rule, which lenders have argued is hurting availability of credit.

"A new director is likely going to want to understand what is going on and to change course," said Ori Lev, a partner at Mayer Brown and a former CFPB deputy enforcement director. "The first thing a new director is going to want to do is to get a lay of the land and the kinds of issues that are the most imminent in the enforcement realm."

"I’d expect one of the first things he would do is review pending litigation to see if the agency wants to drop claims or cases, seek different relief, or stick with the agency’s position."

Following is a guide to what’s likely to be targeted first.

Mick Mulvaney, director of the Office of Management and Budget.

A new Republican director of the Consumer Financial Protection Bureau is likely to take immediate action to roll back certain rules while curbing pending enforcement actions that are considered too harsh on financial firms.

The Trump administration is considering naming Mick Mulvaney, the director of the Office of Management and Budget, on an interim basis to replace the CFPB's Director Richard Cordray, who announced Wednesday that he will leave the agency this month.

While there are some legal limitations on what a GOP appointee to the CFPB can do, attorneys, analysts and former agency officials said that there are actions that could be taken promptly to change the direction before a permanent successor is named and confirmed. Those range from scaling back enforcement actions in the pipeline to taking a hard look at the CFPB’s “Qualified Mortgage” rule, which lenders have argued is hurting availability of credit.

"A new director is likely going to want to understand what is going on and to change course," said Ori Lev, a partner at Mayer Brown and a former CFPB deputy enforcement director. "The first thing a new director is going to want to do is to get a lay of the land and the kinds of issues that are the most imminent in the enforcement realm."

"I’d expect one of the first things he would do is review pending litigation to see if the agency wants to drop claims or cases, seek different relief or stick with the agency’s position."

Following is a guide to what’s likely to be targeted first.

Richard Cordray, director of the Consumer Financial Protection Bureau (CFPB), listens during a Senate Banking Committee hearing in Washington, D.C., U.S., on Thursday, April 7, 2016. Testimony from Cordray today may shed light on the status of several regulations that could curtail revenue from payday loans, prepaid cards and other financial products. At a March 16 hearing, Cordray hinted that a rule to limit prepaid cards won't be finished until June. Photographer: Andrew Harrer/Bloomberg *** Local Caption *** Richard Cordray

Andrew Harrer/Bloomberg

Easing enforcement

Arguably the biggest change a new director could bring is in scaling back enforcement actions, according to banking attorneys. In the past few months, the CFPB has rushed to file a number of lawsuits against debt collectors, payday lenders, student lenders, and banks for failing to disclosure overdraft policies, among other issues.

One of the major criticisms of Cordray, a former attorney general of Ohio, is that the agency he led engaged in regulation by enforcement.

A new director could try to change the CFPB's current culture by barring enforcement attorneys from taking part in rulemakings or policy decisions.

"A new director will come in and the first they will do is look at everything in litigation, everything that is an open investigation, how old is it, what was the last activity on it," said Lucy Morris, a partner at Hudson Cook and a former CFPB deputy enforcement director. "There likely will be some pretty quick decisions to close some matters or just refer them back to supervision, if it came out of the exam process."

One potential obstacle is how a new CFPB director would get along with the CFPB's enforcement director, Kristen Donoghue, who was named early this month to the post.

Isaac Boltansky, director of policy research at Compass Point Research & Trading, said he expects a new CFPB director could settle or drop outstanding litigation against several public companies, including the student lender Navient (formerly part of Sallie Mae), the mortgage servicer Ocwen Financial and TCF National Bank.

A shift in CFPB leadership also "would conceivably lower the odds of an enforcement action" against a handful of companies that are known to have received civil investigative demands or Nora letters, including the payday lender World Acceptance Corp. and Banco Popular, for servicing violations, Boltansky said.

It’s "a broad positive for all of those firms and for all the firms who are in enforcement down the pipeline, those engaged in court, or facing imminent action," he said.

Mark Calabria, chief economist for Vice President Mike Pence

Mark Calabria, director of financial regulation studies with the Cato Institute, speaks during a Senate Banking Committee hearing in Washington, D.C., U.S., on Wednesday, Sept. 14, 2011. The hearing was entitled Ònew ideas for refinancing and restructuring mortgage loans.Ó Photographer: Andrew Harrer/Bloomberg *** Local Caption *** Mark Calabria

Andrew Harrer/Bloomberg

Aiming at Qualified Mortgage, HMDA rules

The Trump administration has already signaled that it wants to take a look at revamping the CFPB's Qualified Mortgage rule.

"We are re-examining the uncertainty caused by the qualified mortgage rule," Mark Calabria, the chief economist for Vice President Mike Pence, said earlier this month. "We want a world where lenders are willing to take credit risk and we are not in that world today.”

A new director, even a temporary one, gives the administration a chance to revamp the rule. It can point to the fact that so few non-QM loans are being made.

But revamping QM could be tricky, as lenders have become used to it. While they support changes, doing so haphazardly could cause ripple effects in the market.

Lenders, meanwhile, are also likely to lobby for changes to a different mortgage rule, one targeting the expanded data requirements for the Home Mortgage Disclosure Act, known as HMDA.

In March, the CFPB issued a proposal to its 2015 HMDA rule that gave lenders some flexibility in collecting information on the race, sex and ethnicity of home loan applications. Small banks and community lenders have said the 2015 expanded HMDA data, which added 25 new data points and modified 14 others in addition to the existing nine data fields that lenders were already required to report is overly burdensome.

David Stevens, the president and CEO of the Mortgage Bankers Association, said the mortgage trade group will advocate changes to some mortgage rules without eliminating them.

"My concern is that the bureau did not go far enough in creating clarity for the industry and they can make some significant improvements," Stevens said.

Signage advertising short-term loans stands in front of stores in Birmingham, Alabama, U.S., on Tuesday, Feb. 10, 2015. In Alabama, the sixth-poorest state, with one of the highest concentrations of lenders, advocates are trying to curb payday and title loans, a confrontation that clergy cast as God versus greed. They have been stymied by an industry that metamorphoses to escape regulation, showers lawmakers with donations, packs hearings with lobbyists and has even fought a common database meant to enforce a $500 limit in loans. Photographer: Gary Tramontina/Bloomberg

Gary Tramontina/Bloomberg

Delaying payday, scrapping auto guidance

A new director could temporarily delay the implementation of several rules, including one to rein in small dollar lending, which was to be published in the Federal Register on Friday.

With the implementation date set for mid-2019, a new appointee could seek to study the issue further.

There is even precedent for doing so.

In July, Cordray delayed the effective date of its final rule on prepaid cards by saying industry participants needed more time to comply. The payday lending rule could be delayed pending another round of public comment. Aftewards, the rule could be amended or dropped altogether.

That process will take some time, lawyers said and could engender resistance from inside the CFPB.

Other rulemakings may be in a new director's sights. The CFPB has yet to issue its rule on debt collection, which could be indefinitely shelved.

Lenders and auto lenders are also likely to lobby a new director to roll back a 2013 bulletin on vehicle finance that said banks are responsible for discrimination if their auto dealer partners mark up the interest rates on loans for minority borrowers or engage in other fair-lending abuses.

Targeting the consumer complaint database

Banks and other lenders want a new CFPB head to put an end to the public disclosure of consumer complaints, saying they can be unfairly maligned by consumers whose grievances have not been vetted for accuracy. The CFPB receives thousands of consumer complaints about financial products and services that are published online after the company responds, or after 15 days, whichever comes first.

"A new CFPB director could issue a directive that complaints will no long be made public," said Bill Hempler, a lobbyist with the American Financial Services Association, a trade group that represents installment and indirect auto lenders. "A company can be totally unaware of a complaint until it shows up in the database. Now how is that fair?"

Bankers have been particularly incensed that the full narratives of complaints can be published. They claim that consumers can make outlandish claims about them, with no recourse by the CFPB.