While speculation about the leadership, mandate, and future path of the Consumer Finance Protection Bureau remains at the forefront of financial news, the CFPB’s regulatory functionality has to some extent avoided the spotlight since the appointment of Mick Mulvaney as its acting director in November 2017. Still, as emphasized by intermittent flurries of news activity, the administration of President Donald Trump has significantly accelerated the pace of reform. Before prognosticating about the future course of the Bureau, we will review its recent trajectory for indications of what might lie ahead.

Recent CFPB Timeline

Recent history reminds us that the CFPB lives through interesting times. Major external-facing reforms have yet to occur, but other initiatives move forward, such as putting new regulations on hold while reorganizing internally and seeking broad public input on policy and regulations. These steps may signal more significant substantive changes in the months ahead.

October 12, 2016: DC Circuit panel rules CFPB unconstitutional in PHH case and finds CFPB violated defendant’s due process rights
April 20, 2017: CFPB again delays its prepaid card rule to April 1, 2018
July 10, 2017: CFPB announces rule to limit arbitration and bar class action waivers in consumer finance
August 21, 2017: CFPB rolls-out new online inquiry option for regulatory questions
October 5, 2017: CFPB announces proposal for final rule on small-dollar lending that is significantly more limited than prior proposals
October 25, 2017: Congress overturns CFPB arbitration rule
November 24, 2017: Trump appoints Mulvaney as CFPB acting director
January 16, 2018: CFPB announces intent to reconsider payday rule and notes its willingness to consider requests for waivers from rule
January 31, 2018: Full DC Circuit rules CFPB constitutional in the PHH case but agrees CFPB violated defendant’s due process rights
April 17, 2018: CFPB announces that it will be issuing numerous requires for information seeking comment on enforcement, supervision, rulemaking, market monitoring, and education activities
May 9, 2018: Leak of memo indicating internal reorganization of CFPB by Mulvaney
May 22, 2018: Congress approves legislation with some bipartisan support rolling back Dodd-Frank but leaving the CFPB largely unaltered
June 6, 2018: Mulvaney dismisses all members of CFPB’s advisory boards
June 16, 2018: White House announces nomination of Kathy Kraninger as CFPB director
July 6, 2018: Announcement made that lawsuit challenging Mulvaney’s authority to act as director will be dropped

Before proceeding further, we make three observations about this timeline. First, perhaps the CFPB had begun to reform itself prior to the resignation of its former director Richard Cordray. Actions such as delaying the prepaid rule and (finally) rolling out a more user-friendly system for obtaining informal input on regulatory questions may have been a reaction to growing political pressure.

This leads to the second observation—that pressure was intense. In addition to a constant barrage of heated political rhetoric, the CFPB was also subjected to actual checks on its power by other branches of government during this time, such as Congress overruling the CFPB arbitration rule, or numerous federal judges finding both that the CFPB violated due process rights in enforcement actions and that the CFPB is unconstitutionally organized.

Our third observation: the uncertainties regarding the CFPB’s leadership and authority have been mostly resolved at this time. For instance, for now, the CFPB is constitutional (in most courts), and it will likely soon have a director with a more certain day-to-day authority over the agency. We believe the resolution of these issues may clear a path forward for further CFPB reform in the near future.

New CFPB Leadership

Last week saw several headlines relating the CFPB’s new leadership. The lead stories focused on the first hearing held by the Senate Banking Committee regarding Kathy Kraninger, the 43-year-old nominated by the White House to lead the CFPB until 2023, well past the 2020 presidential election.

Some irony may tinge the opposition of the Democratic Party to Kraninger’s appointment. For instance, Congress had a Democratic majority when it was decided to have the CFPB controlled by a single director appointed to five-year terms who cannot be removed at-will by a President elected quadra-annually. Similarly, current criticism by Democrats of Kraninger’s lack of experience loses a little something when one looks at the resume of former Director Cordray and notes a similar lack of experience with federal consumer financial regulation when he was appointed by the Obama administration at the age of 51. Indeed, much of the hearing on Kraninger strayed from consumer financial regulation and instead focused on matters such as Kraninger’s role in the immigration policies of the Trump administration and its response to the Hurricane Maria disaster in Puerto Rico.

Either way, Kraninger’s confirmation seems inevitable, given the Senate Democrats’ decision in 2013 to use the “nuclear option” and eliminate a 60-vote cloture requirement for confirming non-Supreme Court presidential nominations. Looking ahead, it appears that she will continue Mulvaney’s agenda of reforming the organization and culture of the CFPB and then amending the regulations promulgated by the Bureau. We also would not be surprised if Kraninger continues to implement this agenda with Mulvaney’s taciturn, below-the-radar approach.

CFPB Office of Innovation

Along with headlines about the confirmation process for the next CFPB director, last week also saw some press coverage of the appointment of Paul Watkins as the head of the CFPB’s new Office of Innovation.

First, in case you missed it, in May 2018 Mulvaney created an Office of Innovation within the CFPB. Missing this is forgivable—the office was established without even a press release by the CFPB. Further, the CFPB already had a team working on innovation, known as “Project Catalyst.” The “Project Catalyst” functions have been transitioned to the Office of Innovation as part of Mulvaney’s quiet internal reorganization of the Bureau.

However, as shown by a seemingly rare CFPB press release on the topic, the appointment of Watkins to head the Office of Innovation does seem significant. The results of Project Catalyst to date are hard to ascertain. For instance, it released only one no-action letter between its founding in 2012 and Cordray’s resignation in November 2017. Watkins joins from the Office of the Arizona Attorney General, where he has overseen Arizona’s “regulatory sandbox” fintech initiative, the first of its kind in the United States.

Watkins’ appointment may signal an intention for the CFPB to take the lead in fintech regulatory review and potential reform/evolution. This would have interesting legal complications, given that other federal financial regulators such as the Office of Comptroller of Currency have been more active in this area, and given that the extent of the CFPB’s legal authority to institute such reform has not been tested. Nevertheless, the overall prospect of regulatory reform/evolution at the federal level is exciting to the fintech industry and its investors regardless of which agency champions that reform.

CFPB Regulatory Reform

Reading the tea leaves for other regulatory reforms by the CFPB presents more of a challenge. The CFPB under new management has mostly put pending new regulations on hold and solicited input on regulatory reform. The possibilities are endless—reforms could be small, such as adjusting some small but incredibly frustrating problems with Regulations X and Z, to large, such as a UDAAP-related rulemaking process that provides fair prior notice about actual UDAAP standards. Since a wish-list for CFPB reforms from the financial services industry could generate several separate, highly speculative (yet surely fascinating) articles, we will not dwell here on guessing what the future holds for external-facing CFPB reforms. But given the internal reorganization of the CFPB and the CFPB’s broad requests for input on external reforms, it seems likely that a large regulatory reform push will be made before the 2020 election season begins in earnest.

CFPB Enforcement Trends

The pace of public enforcement actions announced by the CFPB has slowed under Mulvaney. It is unclear, though, whether this is a permanent reduction in activity or a temporary reduction during the transition to new leadership and internal reorganization. While the CFPB filed one enforcement action between Mulvaney’s appointment and May 2018, in June it announced a consent order with Citibank for $335 million in restitution, and so far in July, it has announced three more upcoming consent orders resolving enforcement actions.

Moreover, we have not observed a notable change in the pace of CFPB examinations and non-public enforcement actions. We, therefore, must inform our clients and friends that the death of CFPB’s examination and enforcement practices has been greatly exaggerated. The CFPB’s approach does seem notably changed, with a de-emphasis on practices criticized by many (including Mulvaney) as “regulation by enforcement.” While we do expect this welcomed and reasonable new approach to persist, we do not expect that the CFPB will abandon its core examination and enforcement functions anytime soon.

CFPB Constitutional Challenges

Politically speaking, those who do want to abolish (or at least hobble) the CFPB would prefer that federal courts accomplish this rather than the legislative or executive branches. While the PHH case has been dismissed after the CFPB was widely criticized from the bench for violating due process, other pending cases may provide this opportunity.

In June of this year, Judge Loretta Preska of the Southern District of New York ruled that the CFPB was unconstitutional because it has a director that cannot be removed at will by the President in a case against RD Legal Funding. The CFPB has not sought review of this decision and the New York Attorney General is still pursuing the anti-usury enforcement action here. While this interlocutory opinion from one district judge is not binding on other judges, even within the district or circuit, it nevertheless provides interesting (if potentially transitory) persuasive precedent in the most important financial center in the United States.

Similarly, the Fifth Circuit has agreed to hear an interlocutory constitutionality appeal in CFPB v. All American Check Cashing, Inc. The CFPB had been defending its constitutionality in this lawsuit prior to Cordray’s resignation, and Mulvaney has indicated he has ratified the decision to file the lawsuit, which seems at least to imply that he believes the CFPB has the constitutional authority to act. The defendant and a number of amici, including several states, have filed briefs in this matter. The CFPB has asked for an extension from August 1 until September 10 to file its opening brief.

While the CFPB is expected to defend its authority, this appeal should be watched for many reasons, including as an interesting exercise in game theory. It is possible that a court would address the perceived constitutional problem not by abolishing the CFPB, but by holding that the director can be removed by the President at-will or for a very low standard of “cause.” This removal of a meaningful “for cause” removal standard may be the worst of both worlds for the critics of the CFPB—if the Trump administration loses the White House in 2020, then the next President would be able to select a new CFPB director on January 20, 2021, rather than mid-2023. While we have not yet seen a pro-CFPB group arguing that the for-cause removal standard is, in fact, unconstitutional, politics has made stranger bedfellows from time to time.

Conclusion: Stay Engaged

While financial institutions and other business in the consumer finance sector should not reduce their efforts to comply with consumer financial regulations based on the reforms afoot at the CFPB, members of the consumer finance industry should seize this opportunity to right-size and rationalize some of the regulatory burdens they bear. The CFPB’s calls for commentary should be answered in a thoughtful, persuasive, and detailed manner. Financial institutions should actively engage in subsequent rulemaking activities. Further, the willingness of the CFPB to provide meaningful guidance, as opposed to regulation-by-enforcement, should be explored. Establishing precedents for a more responsive and transparent regulatory philosophy would be quite positive for the future relationship between the CFPB and the consumer finance industry.

Dykema’s Financial Services Regulatory and Compliance practice regularly advises clients on all things CFPB, so if you have questions regarding these products, contact someone in our practice group for assistance.

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