When Richard Cordray served as director of the Consumer Financial Protection Bureau, Republicans on the Hill expressed serious concerns with the way he exercised the bureau’s enforcement discretion. Former Rep. Jeb Hensarling, then-chairman of the House Financial Services Committee, explained that he objected to “an agency that essentially has the power of unelected, unaccountable bureaucrats writing law as opposed to enforcing law.”
Now that Kathy Kraninger serves as director of the Consumer Financial Protection Bureau, Democrats on the Hill have expressed misgivings about the bureau’s new enforcement regime. The current House Financial Services Committee Chair, Rep. Maxine Waters, recently wrote to Kraninger to explain that “[t]he Committee has serious concerns about how the consumer bureau is exercising its enforcement authority.”
In other words, Republicans and Democrats appear to agree that the bureau’s broad enforcement discretion may be wielded in a way that undermines the bureau’s mission.
The good news is that a partial solution exists: The bureau could adopt a civil money penalty, or CMP, matrix that establishes parameters to ensure that financial institutions that violate the law face consistent, appropriate penalties. Such a matrix would create a channel through which the bureau’s powers can flow with sufficient control and strength.
Current law provides the bureau with the kind of broad discretion in setting penalties that inevitably leads to complaints like those voiced by members of Congress. The Dodd-Frank Act authorizes CMPs of anywhere from zero dollars to: 1) $5,000 a day for violations of law; 2) $25,000 a day for reckless violations of law; and 3) a million dollars a day for knowing violations of the law. The breadth of these tiers and the malleability of what constitutes a separate violation of law makes this standard infinitely flexible — and thus inadequate to guide the bureau toward appropriate penalties.
Similarly, the law sets forth a series of mitigating factors that the bureau must take into account, including the size and history of the offending institution and the severity of the losses to consumers. However, these factors include such qualitative factors as “the gravity of the violation,” and “other matters as justice may require,” and the statute fails to describe how such considerations should be weighed. So, like the broad dollar thresholds, these statutory mitigation factors do not guide the bureau toward consistent and appropriate results. In short, the statutory standards allow the bureau to impose an enormous CMP — or none at all — on the same facts. Over time and as bureau administrations change, this flexibility means that similar cases may be dealt with in very different ways.
The bureau itself has provided little additional explanation of how it determines the appropriate civil money penalty in a given case. Bureau consent orders involving similar allegations — such as those relating to credit card add-on products, or those relating to auto lending discrimination — have resulted in widely variable CMPs. And whether the bureau is imposing a billion-dollar fine, or none at all, its consent order typically uses the same terse boilerplate assertion that the bureau is “taking into account the factors” established by statute.
If there is some internal logic to the way the bureau imposed those and other CMPs, agency officials have failed to disclose it. If there is no such internal logic, the bureau is failing to be fair to defendants and consumers alike, both of whom have an interest in penalties that fit the facts.
A CMP matrix offers a way for the bureau to establish and follow rules regarding the size of civil money penalties. Such matrices are an established feature at many of the bureau’s sister agencies: The Office of the Comptroller of the Currency uses a CMP matrix “to help ensure that CMPs are imposed consistently and equitably,” and the Federal Deposit Insurance Corp. and the Federal Reserve Board do the same. Each matrix consists of about a dozen factors, such as the extent to which a financial institution acted intentionally, concealed its conduct, and/or gained financially. Each factor is also assigned a relative weight toward a final matrix score. That score does not bind the agency to a particular penalty, but guides it toward a result that is consistent with other cases and with the agency's overall principles and priorities.
Importantly, an agency’s decision to use a CMP matrix is wholly independent of a debate over the criteria and the relative weights within the matrix. A matrix may establish a regime that guides penalties higher or lower. However, the calibration and disclosure of the matrix forces an agency into a principled, prospective effort to identify appropriate punishments, rather than imposing them in an ad hoc fashion. For example, the OCC recently updated its matrix and reduced the relative weight given to an institution’s good faith. This may or may not have been a wise decision — but it is clear and transparent.
The CFPB’s recent request for information on enforcement processes raised the issue of whether the bureau should employ a CMP matrix. In response, organizations representing both bankers and consumers endorsed the idea. These comments also provided a range of useful insights into how to ensure that a matrix protects consumers and incentivizes self-reporting and self-remediation.
Once established, a bureau CMP matrix would give all interested parties a yardstick by which to measure the bureau’s enforcement cases. During settlement negotiations, defendants and CFPB staff could discuss penalties based on a detailed and established framework. More generally, a CMP matrix and its application in particular circumstances would give consumers and Congress alike an important tool to evaluate the bureau’s enforcement decisions.
Finally, a civil money penalty matrix would be a sign of stability and maturity at the CFPB. As the bureau approaches its 10th year of existence, this is a good time to reflect on how it could be improved as an institution, independent of particular cases or policies. Indeed, now that the bureau has been led by both Democrats and Republicans, all concerned should have a renewed interest in giving the bureau some ballast that keeps it on a steady course, even as the political winds change. A civil money penalty matrix would be a step toward transparency and consistency that would benefit consumers, business and the bureau itself.
