CFPB 2018 outlook: More deregulation, more upheaval

To say that 2017 was a year of upheaval for the Consumer Financial Protection Bureau is putting it mildly.

The first 11 months alone under former CFPB Director Richard Cordray saw a steady stream of enforcement actions and regulatory policies that by itself would make the bureau's year more eventful than that of other agencies. That span also saw the Trump administration's challenges to Cordray's leadership, and the congressional repeal of the CFPB arbitration rule.

But then one could write an entire book just on the last month, with Cordray's departure, an unprecedented legal fight over who would succeed him, and early moves by the apparent victor in that fight, current acting CFPB Director Mick Mulvaney, to take the bureau in an entirely new direction from his predecessor.

Andrew Harrer/Bloomberg

If Mulvaney ultimately prevails in the lawsuit brought by CFPB Deputy Director Leandra English, who claims she should be acting director based on the Dodd-Frank Act, he is expected in 2018 to continue implementing the most significant changes to the agency in its six-year history, with the focus on reducing companies' regulatory burden.

Even more change could be in the air if the administration moves quickly in 2018 to nominate a full-time CFPB director. Several names have been mentioned for the permanent role, with National Credit Union Administration Chairman J. Mark McWatters having emerged as a candidate just last week.

Mulvaney, who is also White House budget director, already has reopened the CFPB's rulemaking that imposed new requirements under the Home Mortgage Disclosure Act, saying the CFPB will not assess penalties against mortgage lenders for "material" errors in mortgage data collected next year. The bureau also will propose changes in January to its prepaid rule, which will not go into effect in April 2018 as originally scheduled.

Both announcements were hailed as victories for banks and financial companies. They are signs that Mulvaney could tweak or reverse as many rules as possible that were issued under Cordray.

"I do see very beneficial changes for business and more moderation at the bureau," said Stephen Ornstein, a partner at Alston & Bird.

Perhaps the clearest sign that a new era has begun for the CFPB is a recent change to the agency's mission statement under Mulvaney, which now includes an added line that the bureau "regularly" identifies and addresses "outdated, unnecessary or unduly burdensome regulations."

Jaret Seiberg, an analyst at Cowen Washington Research Group, said it is still unclear whether the CFPB merely intends to tweak the prepaid rule "or if it is looking for a way to reverse the entire rule."

"This matters as it will tell us what to expect from Mulvaney and Team Trump, especially with conservatives like Mulvaney expected to have more influence in 2018 than in 2017," he wrote in a research note.

Despite President Trump's election in 2016, the CFPB had operated for most of this year largely as if there had been no change in power in Washington, fining companies for consumer law violations and strengthening rules of the road for everyone.

Cordray, threatened by a lawsuit over the constitutionality of the CFPB's single-director structure and daily rumors of President Trump wanting to fire him, seemed to have nine lives at the agency. He stayed despite speculation that he wanted to leave to run for governor of Ohio.

The two most notable examples during 2017 of the CFPB's broadening its power under Cordray were the July issuance of the final arbitration rule, banning firms from forcing arbitration on consumers, followed by a final rule in October cracking down on payday lenders.

Yet Republicans in Congress rediscovered their authority to curb the CFPB through the Congressional Review Act, a dusted-off law allowing lawmakers to repeal regulations within a narrow time frame with just a simple legislative majority. In late October, Congress used the law to repeal the arbitration rule. Later in the year, the Government Accountability Office ruled a separate CFPB policy restricting indirect auto lenders needed to be resent to Congress for review, essentially invalidating the auto lending policy.

But the push-back against the CFPB came to a head right after Thanksgiving when Trump installed Mulvaney, who had once called the CFPB a “sad, sick joke,” as acting director.

Cordray had resigned just after naming English, previously his chief of staff, as deputy director. The move was an attempt to automatically install her as acting director based on a provision of the Dodd-Frank Act pointing to the deputy director as the agency's de facto head whenever a Senate-confirmed director is unavailable.

Mulvaney, the director of the Office of Management and Budget, was named acting director of the CFPB by Trump, prompting English to sue them both to block Mulvaney's appointment in a bizarre power struggle in which two separate people claimed to be running the same agency.

A federal judge initially sided with Trump, allowing Mulvaney to keep the acting director job, and is expected to uphold Mulvaney's appointment. Upon his arrival, Mulvaney announced a freeze on new regulations, and said he planned to bring more political appointees into the agency — pairing a political staffer with each senior career head of a CFPB unit.

The ongoing court case will keep the leadership controversy at the CFPB alive while it winds its way through the courts, hanging over Mulvaney until it is resolved or Trump appoints a permanent CFPB director who gets confirmed by the Senate. A separate case challenging the CFPB's constitutionality, PHH Corp. v. CFPB, is still pending before the U.S. Court of Appeals for D.C. Circuit Court.

Against that backdrop, Mulvaney is expected to revisit the CFPB's controversial small-dollar payday lending rule, which is widely expected to be scuttled, either by delaying its effective date or reopening a new rulemaking. Some lawmakers are also seeking to overturn the rule using the Congressional Review Act.

"I think the payday rule is in trouble and they are going to get rid of it because there are Democratic constituencies where people have no access to credit," Ornstein said.

But Seiberg warned that going too far in changing the CFPB's direction could have consequences.

He said an outright repeal of the prepaid rule, as opposed to just tweaking it, "would be negative by suggesting policy could yo-yo based on White House control."

"Financial firms benefit most from a stable regulatory environment," Seiberg wrote. "Tweaks [to rules] are much different than having one party impose a regulatory regime, another withdraw it and then the original political party [reinstate] it when it regains power."

If "Mulvaney and the eventual Trump nominee to permanently run the CFPB are going to seek radical regulatory changes, that means significant investments in new compliance regimes," he wrote. "And if the Democrats retake the White House in 2020, it could mean all these rules come back."

Yet observers think Mulvaney will potentially change or reverse other regulations still in the works, such as the debt collection rule. There also is an expectation that Mulvaney will pull back on enforcement actions, and reduce fines and penalties for all but the most egregious wrongdoers.

High on Mulvaney's agenda in the new year will be a five-year look-back review of the CFPB's "qualified mortgage" and mortgage disclosure rules. Mulvaney is expected to use the statutory review vehicle to amend both rules, lawyers said.

Mortgage lenders have asked for more clarity around the CFPB's rule that is supposed to help consumers more clearly understand the total cost of a mortgage. The rule, commonly known as TRID, combines the Truth in Lending and the Real Estate Settlement Procedures acts into a single integrated mortgage disclosure. Lenders want changes after complaining for years that compliance has become a nearly impossible task.

It remains to be seen how the bureau deals with the scandal-ridden Wells Fargo, given that President Trump vowed to come down hard on the bank in a tweet. Wells is playing offense, claiming it raised its minimum wage to $15 an hour, a plan that was already in the works, because of the Republican tax bill.

Mulvaney has not been shy about his intention to radically change the CFPB.

"The way we go about it, the way we enforce it, the way we interpret it, will be dramatically different under the current administration than it was under the last," he said on his first day at the job. "Anybody who thinks that a Trump administration's CFPB would be the same as the Obama administration's CFPB is being naive. Elections have consequences at every agency and that includes the CFPB."