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Director Richard Cordray’s possible departure from the Consumer Financial Protection Bureau is likely to result in incremental change rather than a big shake-up immediately, consumer-finance attorneys say.
Expect less “rulemaking by enforcement” and a slowdown or even freeze on formal rulemaking. The agency is likely to focus on blatant fraud rather than push the envelope on its jurisdiction and rely more on supervisory referrals with fewer actions against certain non-banks.
“There will be significant changes, but they will be more incremental than monumental,” said Alan Kaplinsky, a partner at Ballard Spahr. “After the new director is there for a year or so, that’s when I would expect that people might notice more readily what has actually changed.”
Such changes fall far short of the wholesale restructuring — or outright elimination of the agency — sought by House Republicans, whose overhaul legislation is unlikely to go anywhere in the Senate this year.
Richard Cordray’s five-year term as director expires next July, but there are signs that he could depart soon to run for governor of Ohio. While a clear successor has yet to emerge, consumer advocates fear the bureau’s priorities will shift — perhaps dramatically — under a Trump appointee.
“The CFPB was making tremendous progress catching up on several decades of neglect for consumer protections and it was improving financial markets in important ways,” said Michael Calhoun, president of the Center for Responsible Lending. “There’s certainly a large risk that parts of that will be rolled back and that progress will be slowed or stopped — and that’s a huge loss.”
The CFPB’s rulemaking agenda is an area where a new director could make quick headway by slowing down or effectively halting pending rules that haven’t been finalized. Potential targets include rules governing payday loans, debt collection and overdraft policies.
“I think new bureau leadership can stop the forward-advance of new rules and enforcement actions coming out of the CFPB fairly easily — and that will be a major relief to industry in terms of catching its breath after a whirlwind seven years since the Dodd-Frank Act was passed,” said Benjamin Olson, a partner at Buckley Sandler, who previously served as deputy assistant director for the office of regulations at the agency.
Updating or rolling back rules already in effect is a more difficult task under the Administrative Procedure Act, Olson added.
Still, there are several existing rules that could be targeted early, observers said, with changes that might benefit small lenders in particular. The bureau could tweak the “qualified mortgage” rule as it applies to smaller institutions, as it did in 2015, said Isaac Boltansky, director of policy research at Compass Point Research and Trading.
For rules in development, such as pending debt-collection standards, the agency could move forward in a way that’s more industry friendly. Cordray said in July that the CFPB plans to issue a proposed rule later this year focused on communications practices and consumer disclosures, though it may still be difficult to finalize the rule before the director’s departure, particularly if he chooses to leave this year.
Debt collectors have sought clarity around the use of email and texting, for example, which didn’t exist when the Fair Debt Collection Practices Act was passed in 1977.
“My thinking is that the rulemaking will proceed, but very slowly, and it will not be nearly as draconian as what Cordray has put on the table,” Kaplinsky said.
Another measure to watch closely will be the recently completed arbitration rule, which makes it easier for consumers to file or join an existing class action lawsuit against a financial institution. The banking industry has pushed back hard against the rule in the weeks since its July 10 release, and House Republicans recently voted to block the rule using the Congressional Review Act, which permits Congress to block regulations within 60 days of their release. The rule’s fate in the Senate is yet unclear, and if it is not unwound legislatively, a new director could take an early crack at limiting its scope.
“Timing is important — if a new director is in place before year-end, I think that person would probably be in a stronger position to revisit the rule versus if they are not in place until next summer,” said Brian Gardner, managing director at Keefe, Bruyette & Woods.
A new director may also seek to delay any payday lending rule, should Cordray finalize it before departing.
“We believe that a payday rule will be issued given that it’s one that is deep in the rulemaking process — they started that many years ago and it’s already been over a year since they published a proposed rule,” said Calhoun. “Even by a normal rulemaking process, this one is more than ripe for a final rule to be issued.”
The banking industry is also looking for curbs on what critics charge is “rulemaking by enforcement,” where the industry is put on notice regarding a particular practice or activity through an enforcement action against one or more companies. Analysts pointed, for example, to the agency’s crackdown against indirect auto lenders in recent years or to its earlier work targeting the marketing of credit card add-ons.
“There were messaging enforcement actions that the bureau undertook that I don’t expect to continue under the new regime,” said Boltansky.
The efforts of the enforcement team may also become more driven by supervision referrals. Gerald Sachs, of counsel at Paul Hastings, who previously served as senior counsel for policy and strategy with the CFPB’s enforcement office, estimates that referrals currently account for about 30 percent to 40 percent of enforcement actions taken by the bureau. At other regulators, including the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp., referrals account for nearly all of the actions taken.
If the CFPB were to move in that direction, there would potentially be fewer actions against some non-banks.
“You could see less enforcement activity on markets that they don’t supervise,” said Sachs. “Debt relief companies, credit repair companies, firms of that nature — with the exception of those that are outright fraudulent — might see less activity.”
Turnover at the agency will likely increase with new leadership, particularly in senior positions, as a new director will want to select his or her own deputies.
Still, Olson suggested, those in control of the agency will need to find ways to work with existing staff if they want to move forward with deregulatory measures and other projects.
“You need the people with the expertise to understand what changes need to be made to a rule and, more importantly, the expertise to understand as a technical and procedural matter how one goes through the process of amending the code of federal regulations — those people don’t grow on trees,” he said.
The biggest threat to CFPB staff remains legislative changes to the agency’s funding. A successful push to put the bureau under congressional appropriations could lead to even more departures.
Staff working on supervision, enforcement and fair lending make up nearly half the agency’s employees, which could make the division vulnerable if Congress were to intercede.
Sachs, of Paul Hastings, called proposals to put the CFPB’s purse strings in the hands of Congress “the third rail for the CFPB.”
“Appropriations is what has people most afraid,” he added. “But otherwise I think most people will weather the storm and keep on doing their work.”
To contact the editor responsible for this story: Michael Ferullo at firstname.lastname@example.org
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