Harsher rules, more enforcement: What to expect from Chopra's CFPB

Soon after he was inaugurated as president, Barack Obama famously quipped to congressional Republicans that “elections have consequences.”

One of the consequences of Obama’s election was the passage of the 2010 Dodd-Frank Act, which, among other things, established a new federal agency known as the Consumer Financial Protection Bureau. The brainchild of then-Harvard Law professor Elizabeth Warren, the bureau wielded broad authority to define what consumer lending practices are unfair and punish companies that offered them.

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A lot has changed since the CFPB opened its doors in 2011. The bureau’s director, originally protected from removal by the president but for cause, now serves at the pleasure of the president after a landmark decision from the Supreme Court last year. Elizabeth Warren is now the senior senator from Massachusetts and a force within the progressive wing of the Democratic Party. And the bureau itself has been led by both Democratic and Republican administrations, pursuing both Democratic and Republican visions of what consumer financial protection should mean.

But one thing will be the same: the presence of Rohit Chopra.

Chopra, 39, has spent the past three years as a Democratic member of the Federal Trade Commission, making a name for himself as a vocal critic of tech companies and concentrated power who relishes calling out bad corporate behavior.

But before that, he served for five years at the dawn of the CFPB’s formation as the bureau’s student loan ombudsman. And with his Senate confirmation to head the CFPB — expected imminently, albeit with limited bipartisan accord — he is poised to return to the bureau and move it in a more aggressive, pro-consumer direction.

“What everybody’s bracing for is more enforcement and when it happens, bigger dollars,” said Christopher Willis, a partner at Ballard Spahr and co-leader of the firm’s consumer financial services group. “His FTC comments also suggest an interest in more frequently holding individual members of management responsible in enforcement actions. The message we are giving industry is to prepare for a high level of scrutiny with higher risks.”

Chopra’s long paper trail at the FTC, where he has issued more than 120 statements, provides a glimpse into his priorities. People who have worked with Chopra describe him as a close reader of statutes and rules who often is the only high-level decision maker in the room who is not a lawyer.

He has long advocated for tougher settlements and increased restitution for consumers who are victims of wrongdoing. He also has written that breaking the law must be riskier than following it — and that repercussions should be severe for individual executives.

Though a relatively small agency, the CFPB embodies the divergent political visions about the role of government in the lives of the people it governs. With 18 separate consumer finance laws under its purview, the CFPB is poised to enact policies impacting millions of consumers and a wide range of products and services, from student loans to credit cards, debt collection to mortgage servicing, small-business loans to online banking.

“There is a decades-old debate about what should be the role of the government in consumer protection,” said Jenny Lee, a partner at Arent Fox. “Chopra is not afraid to think outside the box. So the agency will be matched with a leader who is not shy about finding the legal provisions to justify the bureau’s authority.”

White House ties

Though the CFPB was created as an independent agency, the Supreme Court changed the game.

In Seila Law v. CFPB, plaintiffs challenged the constitutionality of the bureau in its entirety as well as the constitutionality of having the broad power of the agency vested in a single director whom the president could not summarily dismiss. Other independent agencies whose leaders enjoyed “for cause” protection were structured as multimember commissions — such as the FTC and the Federal Reserve Board of Governors. Alternately, federal agencies that did have sole directors largely stipulated that those directors serve at the pleasure of the president. The CFPB, the plaintiffs argued, broke the spirit of the Constitution’s separation of powers by having both.

The Supreme Court decided in 2020 that the CFPB’s existence was constitutional, but its single-director structure was not, and its remedy — that its director could be fired by the president — changed the character of the agency from an independent watchdog into a formal arm of the administration.

But while the CFPB was independent in theory, it was always highly partisan in practice. The bureau didn’t even have a permanent director for more than two years until Richard Cordray was finally confirmed by the Senate in 2013, a delay born of political gridlock about the agency’s power and legitimacy. After Cordray’s resignation in 2017, the Trump administration moved to install then-White House Budget Director Mick Mulvaney as acting director.

After a brief but fiery legal challenge between the White House and then-CFPB Deputy Director Leandra English (who argued she should be automatically elevated to the acting director’s position upon Cordray’s resignation), Mulvaney went on to serve in both positions concurrently for more than a year.

It was an eventful year. Mulvaney reversed course on many of Cordray’s policies, including (but not limited to) revising the definition of “qualified mortgages” that can be sold to Fannie Mae and Freddie Mac, dismissing the CFPB’s advisory board and even trying to change the bureau’s name.

“We are going to do what the law says, but not what the law doesn’t say,” Mulvaney said of his vision for the agency in 2018.

Kathy Kraninger, a veteran civil servant and Trump appointee, was sworn in December 2018 and largely continued in Mulvaney’s mold, removing restrictions imposed by a Cordray-era payday lending rule and significantly ramping down fines associated with those actions. She resigned on the day of Joe Biden’s inauguration as president.

Dave Uejio — who has been with the bureau since 2012 and was serving as chief strategy officer when Biden was inaugurated — was named acting director upon Kraninger’s resignation. His months at the helm of the agency have been spent reversing the Trump administration’s course. He has put financial firms on notice that the CFPB will address the economic fallout from the pandemic and will push for more clarity and enforcement of fair-lending laws, particularly related to housing. Many of these “low hanging” reversals were recommended by the head of the Biden administration’s CFPB transition team — English, now with the White House Council of Economic Advisors and a close friend of Chopra’s.

“The overarching priorities of the Biden administration have been very clear on issues that are now squarely in the realm of consumer finance, like fighting systemic racism through fair-lending laws,” Lee said.

Chopra, who also worked briefly at the Consumer Federation of America before becoming an FTC commissioner, is expected to pursue a substantive and creative policy agenda.

“He’s going to take concrete steps to use the government to improve the lives of working Americans,” said Chris Peterson, a law professor at the University of Utah’s S.J. Quinney College of Law and a former CFPB special advisor.

But while Chopra is in step with the administration’s priorities and shares its values of social justice, he also has an MBA from the University of Pennsylvania’s Wharton School, and spent two years as an associate at McKinsey & Co.

“He doesn’t really have the background of some leftist consumer advocate, so it won’t be a truthful battle cry for business to say, ‘You don’t understand our business or industry,’ ” said Nate Viebrock, a partner at Viebrock & DeNittis. “He’s going to understand all the issues that come across his desk.”

‘Extraordinarily active’

In part because of the frequent changes in leadership in the last five years — and because those changes have brought such drastic revisions in the bureau’s rules — banks and financial firms have struggled to find their footing with the CFPB over the past 10 years. Many are concerned that Chopra will simply return to the mold first cast by Cordray, who assessed more than $13 billion in fines and settlements.

That fear may be well founded. Regulated companies already are seeing a flurry of enforcement activity under Uejio, who moved quickly in January by vowing toexpedite enforcement investigations tied to the Military Lending Act and the Coronavirus Aid, Relief, and Economic Security Act.

“The CFPB has been extraordinarily active under acting Director Dave Uejio, who is not acting like a typical acting director," said Jeff Naimon, a partner at the Buckley law firm. “He knows how things work and how the administration wants him to work. He's very effective.”

Uejio has delayed rulemakings on debt collection and qualified mortgages, rescinded the Trump administration’s policy guidance on combating “abusive,” practices, that had sought to reduce monetary penalties levied against bad actors, and issued numerous warnings about the pandemic response.

He also recently reinstated supervision of the Military Lending Act, which caps interest rates at 36% for service members and provides other restrictions on products such as payday and auto loans, reversing a 2017 decision by Mulvaney not to enforce the law because the bureau did not have explicit authority to do so. How far the agency can go in pursuing those kinds of enforcement actions is unclear.

“Everybody agrees on the ends, that the bureau should be able to supervise for MLA compliance,” said Brian Johnson, a partner at Alston & Bird and the former deputy director of the CFPB, the agency's No. 2 under Kraninger. “The question is about the means. Is the agency bound by the law to grant themselves additional authority? The ultimate resolution has to be either through Congress or the courts.”

A potentially more contentious battle is brewing over fair lending, where the CFPB is ramping up enforcement cases, supervisory exams and hiring.

The CFPB recently hired Carol Evans, a 15-year veteran at the Federal Reserve, who is on temporary detail as a senior advisor to Patrice Ficklin, director of the CFPB’s Office of Fair Lending.

“The CFPB is going to have a singular focus on racial equity looking at issues from redlining to appraiser discrimination,” said Richard Horn, co-managing partner at the law firm Garris Horn and a former CFPB senior counsel and special advisor. "There's going to be a lot more fair- lending enforcement and more enforcement against executive owners of companies. That's the new mindset."

The CFPB's website makes clear its focus. Emblazoned with the words "We're on your side," the agency now has a racial equity page with several graphics showing a breakdown of borrowers most likely to be in forbearance or delinquency. The site also has personal stories from staff members highlighting their experiences with discrimination. Racial equity issues are such a focus that Uejio has alleged that financial firms have dragged their feet in responding to consumer complaints, including those filed by minorities.

"Chopra is walking into an agency with a lot of mission-driven people in an administration that is unflinching in its commitment to equity," said Allyson Baker, a partner at the law firm Venable, who chairs the financial services practice, and is a former CFPB enforcement attorney.

Chopra is expected to push further by reviving the CFPB's use of “disparate impact,” a legal standard that allows federal agencies to punish lenders that exhibit a pattern of discrimination even without demonstrable intent. And he’s not alone — the secretary of the Department of Housing and Urban Development, Marcia Fudge, reinstated disparate impact as a policy in April as part of the Biden administration’s efforts to address discriminatory housing policies.

Banks have had a complicated relationship with the disparate impact standard, claiming to support the goal of ending racial discrimination in lending but arguing that the legal theory unjustly targets lenders for neutral policies that may result in unintentional discrimination.

At the FTC, Chopra supported a disparate impact case in which a Bronx Honda auto dealer was charged with illegal racial discrimination for charging Black and Hispanic families higher interest rates than their white counterparts. Chopra wrote that “disparate impact analysis is a critical tool to uncover hidden forms of discrimination.”

Additional CFPB probes have been launched into lending discrimination in the form of redlining, underwriting, loan pricing and the steering of minority and low-income borrowers to high-cost loans. Willis said Chopra also likely also push fair-lending tests of automated and algorithmic lending decisions.

“The CFPB under Chopra will be much more attentive now at looking under the hood of model testing and the development of the [artificial intelligence] models,” Willis said.

‘Pushing the envelope’

One of the powers Dodd-Frank vested in the CFPB was the outlawing of “unfair, deceptive and abusive acts and practices,” or UDAAP, and the expectation is that Chopra will use UDAAP to take aggressive actions against debt collectors and payday lenders, among others. Financial institutions have long complained that the term “abusive” should be defined narrowly, but Chopra is unlikely to do so, experts said.

“You’re definitely going to see him build out the UDAAP doctrine,” Baker said.

Critics are raising similar questions about whether the CFPB has “interpretive” authority to impose a foreclosure moratorium under the Real Estate Settlement Procedures Act, known as RESPA.

“When you have a political agency that is following the White House’s policy objectives, you’re going to have an agency that is pushing the envelope in this way,” said Horn, who worked in the CFPB’s Office of Regulations and led the final rule integrating mortgage disclosures under the Truth in Lending Act and RESPA.

Consumer protection law is relatively new, and really begins with TILA, a law enacted in 1968 that required lenders to provide standard disclosures to consumers describing the costs associated with taking out a home loan.

“If you go back decades, the dominant economic theory was that markets function well for the most part, and the way to deal with asymmetric information was to provide disclosures to consumers,” said Jeff Sovern, a law professor at St. John’s University School of Law. “Republicans and conservatives tend to focus on the classic view.”

But while the CFPB remains stuck in a political merry-go-round — making rules, only for the next administration to undo them again, only to have the next administration bring them back — a new field of behavioral economics has emerged and taken root since 2008. Scholars have begun to rethink the conventional wisdom that adequate consumer protection is synonymous with adequate disclosure to consumers.

“Behavioral law and economics says consumers can’t protect themselves because they aren’t reading disclosures,” Sovern said.

Todd Zywicki, a law professor at George Mason University's Antonin Scalia Law School, chaired a CFPB task force under Kraninger that made more than 100 recommendations on changes to CFPB policies. He said it’s unclear where Chopra will come down on the debate between these competing views.

“If Chopra wanted to, he could try to push the envelope with respect to behavioral economics, which emerged at the very end of the Cordray era in the payday loan rule,” Zywicki said. “It’s the idea that consumers think they understand the risks of a product and the risks are fully disclosed, but they really don’t.”

The fight over the CFPB’s payday lending rule encapsulates the intersection of the two schools of thinking on consumer finance.

The CFPB’s final payday rule issued in 2017 called out lenders that make short-term loans for engaging in “an unfair and abusive practice,” for not reasonably determining a consumer’s ability to repay the loans according to the terms. The rule also found that repeat borrowers underestimated the likelihood of revolving a payday loan. The bureau said that to protect consumers it would limit repeat borrowings to six loans in a specific time frame.

Last year Kraninger rescinded the 2017 payday rule, eliminating the ability-to-repay requirements, but the rule has not yet been implemented and remains mired in court challenges. Chopra is expected to reverse course, potentially reinstating Cordray’s payday rule.

But whatever Chopra does, he will do it in an environment where the very question of what it means to protect consumers is inherently partisan, without popular or academic consensus.

“There’s never been an agreed-upon definition of consumer protection,” Johnson of Alston & Bird said. “It’s always going to be mired in these controversies. Should the government be in the business of designing financial products by saying what features can or cannot be offered? The real disagreement is about the extent to which the government should be empowered to make decisions for consumers. That’s the real battle.”