Consumer Financial Protection Bureau Director Rohit Chopra sat down with American Banker last week for an interview about the bureau's forthcoming proposals to lower credit card late fees, implement open banking in the United States, and rein in nonbank activities in finance. Chopra also discussed a case before the Supreme Court challenging the bureau's funding mechanism and the reason the bureau has had so few enforcement actions lately.
What follows is a lightly edited transcript of the interview:
I'd like to start with the recent enforcement action. The CFPB recently
ROHIT CHOPRA: The practice at hand involved double dipping of fees. So in other words, the same transaction was getting multiple $35 fees. I don't want to go into the specifics of what we uncovered in the Bank of America investigation other than to say that it was pretty clear there was a very significant problem and Bank of America very clearly broke the law.
But what I will say, and big picture, we really have to acknowledge — and I always do this — that the banking industry has actually made pretty dramatic changes when it comes to overdraft, [nonsufficient funds] and other fees. And we always do acknowledge that. We did announce very early on that there was a set of practices that clearly were problematic. We have issued a number of guidance documents to be crystal clear about where we see those problematic practices. And we've focused our supervision on the entities that are most dependent on charging lots of these fees.
What we have seen through that process is really a lot of positive changes. But of course there have been some entities where the conduct required a very significant enforcement action. So in the context of
Is there any reason why the sales practices cases against
On the sales-practices issues, when we look at penalties we have a set of factors that are required by law that we assess. There was no question that Wells Fargo's sales practices really permeated the bank. It was extremely systemic.
In the case of Bank of America, we of course assessed and looked at penalties for each of the categories of illegal conduct, including credit card rewards, double dipping on fees and the fake accounts. What I will say is that we continue to want to remind financial institutions that opening bank accounts is really an "in" to identity theft. You're taking your customers' very personal information and using it to open an account, which is why you're also seeing the Justice Department also exercising its authority under FIRREA [the Financial Institutions Reform, Recovery, and Enforcement Act of 1989], which is essentially a bank fraud statute. So I think overall we have seen a lot of institutions take a hard look at their sales practice incentives to make sure they're not creating that pressure-cooker environment.
On credit cards, the big issue of the day, can you describe how the CFPB came up with the $8 late fee?
We're talking about the immunity level. The statute actually does not require that the regulators provide any immunity whatsoever. We revisited a lot of the rules we inherited from the Federal Reserve and the Federal Trade Commission. And the [Credit Card Accountability Responsibility and Disclosure] Act's initial rules are over a decade old. They included a fairly substantial immunity provision. And you can take a hard look at their analysis. I won't comment on that here. But we actually have a lot more information about the market over the past decade. We also have a credit card agreement database of every issuer, including the web agreements they use as the terms and conditions. And so what we did is we took a look [at], does that immunity provision make sense? And if that immunity provision is set too high, it really undermines the purpose of the CARD Act because we really want to make sure that card issuers feel very motivated to get their customers to repay.
But we do see that in some instances, a card issuer can build a business model where it's very profitable to have customers be late. That's the sentiment that the CARD Act really sought to get out of the market. The way in which we proposed an adjusted immunity provision level, and the way in which we did that is, we took a look at a whole set of market data. Those card agreements were obviously constantly informed by discussions with the market participants, and we have our own insight from supervisory exams.
The analysis of where we came up with that proposed [$8] figure really is laid out in the proposed rulemaking, and we're right now looking at all of the comments we received about that analysis to determine where we go in any sort of final rule. We also sought comment on whether there should be any immunity provision at all. It's not required by the statute. And in addition, many issuers may simply decide what is the standard approach outlined in the statute, which is determining a "reasonable and proportional" penalty based on their costs and other factors. They absolutely can go outside the immunity provision. In fact that is something that we want to provide clarity in the rule on how they can do that.
We really want to urge everyone to look at the details of this. Because it would be inaccurate to say that we have proposed a hard cap. What we proposed is to actually retain the immunity provision for which the card issuer does not have to demonstrate and show their math at all if they charge below that amount. The other piece is that we took a hard look at the Fed's provision when it comes to inflation. The way the existing immunity provision works is the late fee goes up by inflation. But actually when you look at what has gone on, not only in the credit card market but in consumer financial services writ large, we have seen market players embrace technology in extraordinary ways.
We now actually have a market where so much is done electronically, whether it's delivering statements, setting up auto pay, and many issuers even allow you to automatically pay your credit card through their own website. That use of technology has driven down costs across the industry. Part of what our proposal asks is, does it really make sense to just assume that those costs go up by inflation? That's really about the immunity provision itself. Of course, if they use the standard approach, and some of their costs have gone up, they would be able to charge it, they would just need to show them. The other point I'd add is, in our analysis of the market, we actually saw a couple of different business models. Some card issuers, including large card issuers, are not so dependent on penalty fees. Others are much more dependent.
We also took a hard look at small credit card issuers, and most of them run their business more like a traditional relationship-banking model, where they also have other products with that customer, like a deposit account or auto loan or mortgage. It's hard to find many that are deeply dependent on late fees. It's really a different approach altogether. We really think that making sure the market is competing fairly with the right set of incentives will also help more small financial institutions. The credit card market is one of the most important markets that we oversee, with almost $1 trillion outstanding. It's the most common product in America, especially when it comes to small-dollar lending. Credit cards are the No. 1 source, so that's why we think it's so important to get this one right.
Can you talk briefly about the dearth of enforcement actions in the first six months of this year?
We really have made some pretty substantial moves when it comes to enforcement. First, we have refocused the attention on larger players who are repeat offenders. We have also demonstrated a
A different approach is to focus on small-time actors to quickly get some settlements. While that might rack up numbers, in terms of number of actions, it doesn't really speak to impact. I think there's many metrics we can use to do that, but I focus the most on consumer harm and deterrence. Part of that requires deeper investigations and it requires sometimes very, very challenging litigation with well-financed defendants. I think we've still achieved some enormous successes and certainly the volume, the level of redress and penalties we have obtained in the last 18 months is a true testament to the work of the CFPB.
It is true that we had very high levels of penalties and redress. But again, I really take a holistic approach and also a patient approach. Sometimes we will take a long time, including demonstrating a willingness to litigate and even naming individuals. We have named individuals and we will continue to do that. And we have been seeking remedies beyond money and often that does take more time.
I will acknowledge our own legal uncertainties that have led to more protracted litigation. We're so grateful to have very strong support from state attorneys general, from other state regulators and importantly, the other federal agencies who really — when we partnered with them, it's really a big boost and helps us move more quickly.
Do you want to talk about the Supreme Court case, CFPB vs. Community Financial Services Association? Because many companies have asked for a stay of enforcement actions pending the outcome of that case.
The CFPB is certainly no stranger to these types of challenges. We'll of course let the case play out and let the solicitor general and the court proceed with its decision. My top priority is to really think hard about all of the uncertainty that could be created by this. We hear across the board from the mortgage market players and others, what will it mean and how chaotic will it be if many of the rules that the CFPB has put in place, sometimes over a decade ago — does that create chaos?
I think there's also a very real concern about what does this really mean for not just the CFPB but the entire Federal Reserve System. Both the Federal Reserve Board and the CFPB get its funding from the same source, the Federal Reserve banks. But, also, there are many other agencies in the bank regulatory system — in fact, every single one of them funds its operations through fees or assessments on their insurance funds. And we need to make sure that uncertainty does not create chaos.
You've talked a lot about Big Tech. What's your thinking on 1033, the CFPB's open-banking proposal?
We're going to be proposing rules in October that will accelerate the shift to open banking in the U.S. I think we're going to be able to put out a framework that ultimately will put a lot more control in the hands of consumers. It will inch it closer to more seamless switching, especially when it comes to getting a better deal on a deposit account, credit card, auto loan or mortgage.
So far, we've received pretty good feedback across the board. I think that's going to be something that will allow the U.S. to really stay competitive globally and to allow more competition. It's going to lower barriers to entry, which I think can be a boon for consumers and businesses alike. However, we are wanting to ensure that no single company has the ability to take a lot of control of the ecosystem. We don't want there to be choke points or middlemen who create a system that makes it harder to get in the game.
Right now we do observe that big companies are expanding their reach into consumer financial services, and they've long played a big role in harvesting consumer data. We do want to make sure to have a thriving open-banking ecosystem. We really need a fair and competitive payment system. Right now, for example, many banks cannot offer their own payment app that utilizes a mobile device's
We want an ecosystem where people can securely make payments and ultimately getting at a competitive payment system and a safe, real-time payment system is just so critical for open banking writ large. You'll be hearing more from the CFPB about some of the issues when it comes to Big Tech in payments and in open banking in general.
The Federal Trade Commission's mandate is perhaps a little bit more focused on consumer data and privacy issues across the economy not really related to banking. We obviously are looking closely at some of their proposed rules on commercial surveillance, since they will ultimately be enforceable by the CFPB as well. And of course, the FTC has an important mandate on antitrust. And we hear time and time again from mortgage market players, auto lenders and others about anti-competitive practices.
There was a lot of concern in the mortgage industry about a merger involving Black Knight [and Intercontinental Exchange, Inc.] We obviously don't have a role in that, but making sure the system is competitive is just so important to consumers.
I've heard that CFPB enforcement lawyers are issuing broad and repeated civil investigative demands to both large and small companies with very short deadlines. Bank lawyers are complaining this is burdensome and raises due process concerns.
I would kick the tires on that because there's certainly not been any major changes to our investigative approaches in that regard. I will say that when it comes to civil investigative demands, we do have, as other agencies do as well, a set of procedural rules that require a meet-and-confer process to negotiate the scope and timing. The way that generally works is a firm will say, 'It's really hard for us to produce that in this format. How about we do it under this schedule?'
You mentioned the issue of small. I think if you compare our enforcement approach to others in the past, you'll see that most of our work has been focused on larger market actors.
Can you talk about the
We're taking a lot more interest in the plumbing of consumer finance. That involves a lot of the infrastructure including credit reporting, payments, the handling of data. One of the things that the other regulators really depend on us for is looking at these large nonbank players.
We have seen significant shifts in markets like payments. Many of them serve tens of millions of consumers. We want to make sure our supervision program is really focused more on those emerging areas where there's a lot of consumer reach. I don't have too many more details on that yet. I will say that some payments players are already subject to our supervisory authority, since they may serve as service providers to a large number of banks and credit unions. But we're always looking at ways to fill in the gaps.
