The CFPB at 10 Years: A Look Back and a Look AheadOver the years, we have followed actions of the Consumer Financial Protection Bureau (CFPB) and published information that can be found on our Financial Services Perspectives blog. Now that the 10-year anniversary of the CFPB opening its doors has passed, let’s take a look back at where it started and where it may be going. Title X of the Consumer Financial Protection Act of 2010 (the Dodd-Frank Act) created the CFPB as an independent agency within the Board of Governors of the Federal Reserve System. The stated purpose of the CFPB was to regulate the offering and provision of consumer financial products and services under federal consumer financials laws. As part of its creation, several functions left to other regulators, such as the FTC, the OCC, and the Federal Reserve, were transferred to the CFPB – such as oversight of several consumer financial lending laws.

One of the more controversial aspects of the CFPB is that it is headed by only one director. Under the initial structure, the director could only be removed by the president “for cause,” giving the director strong power and control. The director was required to establish the Office of Fair Lending and Equal Opportunity, the Office of Financial Education, the Office of Service Member Affairs, and the Office of Financial Protection for Older Americans. The director was also required to establish a Consumer Advisory Board to advise the CFPB.

Under the Dodd-Frank Act, the CFPB has broad authority to administer, enforce, and otherwise implement federal consumer financial laws, including the power to make rules, issue orders, issue guidance, issue civil investigative demands, conduct hearings and adjudication proceedings, and commence lawsuits in federal court. The CFPB also has exclusive federal consumer law supervisory authority and primary enforcement authority over insured depository institutions with over $10 billion in assets.In addition, it has specific jurisdiction over certain industries, such as payday lending, and can bring in other industries through the use of larger participant rulemakings.

Despite this broad supervisory authority, it appeared the CFPB – in its early years – often resorted to use of its enforcement authority, rather than its supervisory authority, to accomplish its goals. The CFPB came out swinging against industry in the name of consumer protection with the issuance of many Civil Investigative Demands, lawyer investigation teams, troubling press releases and very large fines against businesses. It definitely made itself heard, and industry scrambled to try to comply with the new agency’s expectations, guidelines and standards. In 2017 when Richard Cordray stepped down as the CFPB’s director, the CFPB started to take a more cooperative approach to working with industry to improve disclosures and innovation with marked changes in its Office of Innovation that were well received by both sides. There also appeared to be a more balanced use of its supervision and enforcement authorities.

The CFPB Constitutionality Challenge

The first notable decision regarding the constitutionality of the CFPB’s structure came in 2016 after a company argued that the single CFPB director being removable only for cause violated the separation of powers by limiting the president’s power of appointment. Ultimately, in 2018 the D.C. Circuit found in an en banc decision that the CFPB was constitutional, and an appeal was not pursued. Around the same time, the CFPB began investigating Seila Law LLC, and as a part of its investigation, the CFPB issued a Civil Investigative Demand. When Seila Law refused to comply, the CFPB filed a petition in the district court to enforce compliance. The district court granted the petition, and Seila Law appealed. On appeal, Seila Law challenged the constitutionality of the CFPB’s structure. Seila Law took the case and constitutionality challenge to the Supreme Court where the Court found that the removal restrictions of the CFPB director violated the Constitution’s separation of powers. Rather than strike down the entirety of Title X of the Dodd-Frank Act, the Supreme Court instead struck only the “for cause” employment clause, effectively making the CFPB director now serve at the will of the president. The result of the decision has been an apparent end to constitutional challenges of the CFPB’s single director structure, ratification of prior CFPB actions by the then-current director, and a CFPB that will, in all likelihood, more closely align with the presiding presidential administration. It remains to be seen whether this will be viewed by industry as a good thing in the long run. However, as we have already seen in the first half of 2021, administration changes will likely affect the stability of previously issued guidance and long-term planning from the CFPB, making it more challenging for industry to follow.

The Evolution of the Abusive Standard

Section 1031(a) of the Dodd-Frank Act states that the CFPB may use its authority to prevent a covered person or service provider from committing or engaging in an “unfair, deceptive, or abusive act or practice” (UDAAP). This authority takes language from the Federal Trade Commission’s definitions and adds the term “abusive.” However, unlike the terms “unfair” and “deceptive,” “abusive” is broadly defined in the statute and often duly pleaded by the CFPB, leading to ambiguity on the scope of the definition.

In the early stages, the CFPB used the ambiguity of the term “abusive” in several of its enforcement actions. The concept of “abusive” infers that a financial institution does not have the consumer’s best interest as a priority, looking at activities from the perspective of a consumer.

On June 25, 2019, the CFPB held a forum to discuss the topic of the abusiveness standard in consumer financial products and services. As a result of this forum, the CFPB issued a much needed policy statement on January 24, 2020, providing clarity for the application of “abusive acts or practices.” The policy statement laid out three provisions to assist financial institutions in assessing their own compliance with the abusiveness standard of UDAAP:

  • The CFPB would apply a cost-benefit analysis and challenge conduct as abusive “only when the harm to consumers outweighs the benefit.”
  • The CFPB would generally avoid dual pleading of an “abusive” claim with one based on alleged unfairness and deception.
  • The CFPB would only seek civil penalties when “there has been a lack of good-faith effort to comply with the law,” but would continue to seek restitution, regardless of whether a company acted in good faith.

However, on March 11, 2021, the CFPB rescinded the Abusiveness Policy Statement, announcing that it was “contrary to the CFPB’s mission of protecting consumers” and that it would “skew the consumer financial marketplace, to the detriment of market participants that do not act abusively.” Unfortunately, this appears to be a political tug of war, and the ambiguity will only make it more difficult for industry to comply.

The Current CFPB Agenda

In the current administration, the winds blow from the Democratic Party side and we expect a return to the more aggressive CFPB. This means more reliance on its enforcement power as a means for achieving its objectives, especially if Rohit Chopra is confirmed as the next director of the CFPB. The CFPB’s priorities will likely focus on COVID-19 and related issues such as forbearances, foreclosures, credit reporting, and income protection, with racial equity and economic justice as additional top priorities. Some of the issues we are particularly concerned with include:

  • Potentially naming CEOs, CFOs, etc. in order to resolve enforcement actions, which appears to be a tactic that is supported by people within the CFPB
  • ECOA concerns, including increased reliance on artificial intelligence in underwriting and whether it will create racial profiling, and reverse redlining
  • Military lending
  • Marketing and advertising

One thing is for sure, while we hope for continued outreach and collaboration, the CFPB will continue to keep industry on its toes.