A dizzying number of policy changes and enforcement actions by the Consumer Financial Protection Bureau in recent weeks has prompted aggressive pushback from banks and industry executives.
Efforts by CFPB Director Rohit Chopra to extract hefty fines and settlements from
Chopra also has made several policy changes outside the normal notice-and-comment process that are renewing concerns about regulatory risks and big compliance costs ahead, especially for large firms.
“We have a new leadership that is intent on expanding their reach and the likely effects of that are going to be broader investigations involving a greater number of entities,” said Bryan Schneider, a partner at the law firm Manatt, Phelps & Phillips and a former CFPB associate director of supervision, enforcement and fair lending.
The bureau recently expanded its supervisory authority over
“The number of things coming out of the agency for which there could be challenges with respect to its authority is growing,” said Eamonn Moran, of counsel at Morgan Lewis.
Though Chopra has been on the job just seven months, bankers already are pushing back
The wide array of new policies and actions has bankers and other financial executives scrambling to read the tea leaves of the CFPB’s orders to figure out how to comply in the absence of further guidance.
“All of these things combined creates an additional layer of responsibility for compliance, which, again, includes personal liability and the sense that there’s no room for error,” said Catherine Brown, a partner at Klaros Group, a financial advisory and investment firm.
Personal liability
Some see personal liability and protracted litigation as potential hallmarks of Chopra’s tenure at the CFPB. The very mention of personal liability causes anxiety for chief compliance officers, chief risk officers or any signatory on quarterly and annual certifications.
Financial regulators have rarely held individual executives accountable for wrongdoing at least not since the savings and loan crisis of the early 1990s, Brown said.
Chopra said in a recent speech that his thinking on the subject stems from regulators' not holding enough executives accountable for wrongdoing after the financial crisis.
"After the savings and loan crisis of the 1980s and early 1990s, scores of individual bankers were convicted by the Department of Justice," Chopra said in March at the University of Pennsylvania Carey Law School. "Many were sent to prison. But almost no single senior executive went to jail or was truly held financially accountable for their role in the 2008 financial crisis, even as so many Americans paid a serious price when they lost their homes because they were underwater with toxic mortgages."
Chopra has repeatedly stated that he is primarily interested in going after large companies that have breached terms of a past settlement with regulators.
In two recent lawsuits, the CFPB alleged that individual executives at
The CFPB also recently
“This is in the vein of Chopra keeping his word that he is going to go after repeat offenders, he’s going to use the levers of the media to exact maximum reputational impact so you can see an immediate effect on market capitalization and of stocks taking a hit, even if it may be temporary,” Brown said.
In a lengthy rebuttal, MoneyGram this week pushed back on what it called Chopra’s “false, inflammatory and misleading statements.” The CFPB has alleged that the Dallas-based remittance firm repeatedly violated rules around remittance transfers for years.
“While we prefer to not comment on pending litigation, we cannot stand by quietly while unfair and disparaging public statements are made about our company,” MoneyGram said in a press release.
Meanwhile, TransUnion called the CFPB’s lawsuit “meritless” and cited “failed settlement negotiations,” despite the company's good-faith efforts, it said, to resolve the matter. TransUnion said in a regulatory filing that it has a $56 million accrued liability related to the CFPB’s lawsuit which could have “a material adverse effect” on the company’s operations and financial condition.
“Despite TransUnion’s months-long, good faith efforts to resolve this matter, CFPB’s current leadership refused to meet with us and were determined to litigate and seek headlines through press releases and tweets,” TransUnion said. “The CFPB’s unrealistic and unworkable demands have left us with no alternative but to defend ourselves fully.”
Both companies were accused of being repeat offenders — having agreed in fix a problem in the past with the CFPB or another regulator — which is just one element driving up the cost of settlements, lawyers said. The CFPB's settlement demands are considered to be too far apart from what companies are willing to agree to based on the claims and allegations, lawyers said.
Still, a key concern is that any allegations of wrongdoing can be extended beyond just management. The CFPB has the authority to hold accountable third-party service providers, joint venture partners, independent contractors and even shareholders if any person offers substantial assistance to someone violating the law, experts said.
Is discrimination 'unfair'?
One of Chopra’s most provocative moves involves a
The policy states that discrimination on the basis of age, race, national origin, religion, sex and marital status — regardless of intent — violates the prohibition on “unfair, deceptive or abusive acts or practices," known as UDAAP violations.
The move is a significant departure from past practices, some experts said, and is seen as expanding the scope of the CFPB's scrutiny to non-credit products.
“If the intention is to declare that everything is potentially a UDAAP violation, that’s going to have a significant impact,” said Joe Lynyak, a partner at Dorsey & Whitney.
Some experts have said the CFPB may try to allege that certain fees, such as overdraft fees, could be deemed “unfair” to protected classes of consumers and could be considered a UDAAP violation.
“Banks want clarity about disclosures on overdraft fees and whether the CFPB is going to consider it a UDAAP violation to even charge an overdraft fee,” Lynyak said.
Alexandra Megaris, a partner at Venable, said the CFPB likely will be challenged on the policy because of the “highly problematic” way in which it was released, without a rulemaking.
“Fundamentally making law through press releases and blog posts evades the basic notice-and-comment process that we all expect,” she said. “Even further, this is an interpretation of a statute for which it’s not clear that [any] practices outside of lending violate" the Equal Credit Opportunity Act.
Megaris also said the issues related to ECOA are not settled.
“Any financial service other than lending has now been included within the gamut of making sure there is not overt or unintentional discrimination, and that’s when it gets difficult to be in compliance,” she said.
Banks are especially concerned that the CFPB is signaling a big shift in compliance management that now entails additional work, and by extension additional costs. Many are looking at systems’ testing for alleged discrimination or discriminatory effects.
The CFPB said it will closely examine financial institutions’ choices in advertising, pricing and other areas to ensure that companies are “appropriately testing for and eliminating illegal discrimination.”
“The testing of discriminatory impact is very tricky and very difficult to get right, no matter what size of organization you are,” Megaris said. “It remains to be seen how that will play out in real exams. It will be easily an add-on claim in enforcement actions that are already there.”
Some note that the CFPB and Biden administration have been
Nonbank supervision
Chopra has gained some credibility with banks by saying the CFPB will hold nonbanks including fintechs to the same supervisory authority as regulated banks. That has all types of nonbank fintechs companies on edge.
“Until now there hasn’t been the thought that fintechs would be subject to supervisory oversight,” said Jessica Rodriguez, a senior associate at Morris, Manning & Martin.
In April, the CFPB expanded its authority over nonbanks by invoking what it called “a largely unused legal provision” that would allow the agency to examine nonbank financial companies that pose risks to consumers.”
The CFPB cited the need to ward off further risks to consumers and specifically cited fintechs that are not subject to the rules and regulations that come from having a bank, thrift or credit union charter.
“This authority gives us critical agility to move as quickly as the market, allowing us to conduct examinations of financial companies posing risks to consumers and stop harm before it spreads,” Chopra said.
Whichever nonbanks the CFPB is targeting would have to be outside its
Some suggest the push is related to Chopra’s efforts to rein in Big Tech companies with products or services that encroach on regulated banking activities.
“The bureau may decide to push the envelope into players that might not traditionally have fallen into the consumer finance bucket,” Moran of Morgan Lewis said. “This director is very interested in making use of every single authority the bureau has and in taking stands that may be untested."
The CFPB also is putting some booming fintech sectors on notice, particularly buy now/pay later companies that appear to be operating outside existing regulations.
In addition, many small companies, such as restaurants, are relying on earned wage access programs that provide benefits to employees. Some companies worry that providing employees early access to their pay may be considered an extension of credit and therefore subject to CFPB regulations.
“Some of these providers are so new, it’s unclear whether they fall under the definition of offering a loan, and the fear is it will increase the cost of compliance,” said Rodriguez. “I do think there is a concern that this type of move into nonbanks could potentially lead to excessive oversight.”
The CFPB said it will base its determination of whether company poses a risk to consumers on complaints, judicial opinions, administrative decisions and other input such as whistleblower complaints and news reports.
Many contend Chopra is an even more aggressive regulatory than former CFPB Director Richard Cordray, who assessed more than $13 billion in fines and settlements.
“There’s just a lot on their plate,” Moran said.
