How far left will CFPB swing in 2021?
With a new Democratic president set to take office in January, the biggest question facing the Consumer Financial Protection Bureau entering 2021 is: How far will the pendulum shift back?
After three years of Trump-appointed officials at the bureau undoing much of the agency's Obama-era policies, the CFPB's focus could boomerang back to tough enforcement and aggressive rule writing rather quickly, some officials said.
Now that a Supreme Court ruling has made it easier for presidents to install CFPB chiefs of their choosing, President-elect Joe Biden is expected to appoint a new acting CFPB director either on or shortly after Jan. 20. Current Director Kathy Kraninger is expected to be fired or resign, although some Republicans are pushing for a legal battle over who would succeed her.
With a change in leadership, many predict the agency's agenda for the new year could quickly resemble that pursued by former CFPB Director Richard Cordray during the Obama administration.
“Everybody is expecting a more aggressive and active CFPB on a number of fronts,” said Eamonn Moran, of counsel at the law firm Morgan Lewis and a former attorney in the CFPB’s Office of Regulations.
The immediate focus will be on aiding consumers who have been harmed financially during the COVID-19 pandemic, observers said. Mortgage servicers, credit bureaus, debt collectors and auto lenders are expected to land in the CFPB’s crosshairs.
“There will likely be more mortgage-related investigations and a laser beam focus on what servicers are doing not to harm consumers,” Moran said.
The year ahead is going to present many challenges for whoever leads the agency, some immediate and others more long-term.
Kraninger’s response to the pandemic has been to offer regulatory relief to financial firms. For example, she promised not to issue enforcement actions to credit card issuers or cite them in supervisory exams as long as they make good-faith efforts to resolve consumer billing disputes during the pandemic. A new acting director would likely reverse such policies.
“Consumer debt is going to be a gigantic issue and a lot of work needs to be done around credit reporting,” said Ira Rheingold, executive director of the National Association of Consumer Advocates. “A new acting director will use the bully pulpit to get out there and tell consumers that the CFPB will protect them in a lot of these areas.”
A new director would also quickly have to make a decision about whether to preserve two recent final rules revising the definition of a “qualified mortgage.” The so-called QM rule is one of the CFPB’s most consequential rulemakings, affecting what types of “safe” mortgages can be made by banks and lenders.
The twin QM rulemakings could radically affect the booming housing market by redefining certain underwriting qualifications for getting a home loan.
Of immediate concern is that come July, Fannie Mae and Freddie Mac will lose an exemption that has allowed them to purchase loans with debt-to-income ratios above 43%, a carve-out that the mortgage industry has lobbied heavily to keep. The first QM rule replaced DTI with a new set of factors based on a loan's price, which was seen as a way to ease the transition away from Fannie and Freddie's exemption.
The second QM rule allows “seasoned” loans held on bank balance sheets for an extended period to receive QM status if they meet other criteria.
But consumer advocates have some misgivings about the QM rules and are likely to have the new acting director’s ear. It is not yet clear the extent to which the QM rules will be reassessed, tweaked or further delayed by a Biden CFPB, experts said.
More penalties ahead
Of all the expected changes, financial firms are bracing for increased enforcement and a return to stiffer penalties and fines. When Kraninger took over the CFPB two years ago, she listed enforcement last among her priorities. A new acting or permanent director could make enforcement a top priority.
Since then, enforcement actions have been on an upswing, a sign that Kraninger is committed to penalizing institutions for violations. In a press release in December, Kraninger touted the $1.45 billion in total consumer relief and $270 million in civil money penalties resulting from the 66 CFPB enforcement actions issued in 2019 and 2020 combined.
Even so, Democratic lawmakers accused Kraninger year of failing to extract sufficient monetary penalties from bad actors.
CFPB enforcement had ground to a halt for a year under former acting Director Mick Mulvaney, whom the Trump administration installed in late 2017 to succeed Cordray. Many of the actions brought by Kraninger — including lawsuits against Citizens Financial Group and Fifth Third Bancorp — were filed initially under Cordray.
Tony Alexis, a partner at the law firm Goodwin who heads the firm’s consumer financial services enforcement practice, said enforcement actions could spike simply as a result of the CFPB's likely focus on mortgage servicing issues.
"There are a lot more nonbank mortgage originators than banks within the CFPB’s jurisdiction and historically enforcement agencies take an inflexible line when there are more entities to enforce perceived violations," said Alexis, a former CFPB assistant director who headed the Office of Enforcement. "It takes about a full quarter to start those investigations, and I would think next year will be pretty active.”
Fair lending and student loans could also be high on the agenda for a Democratic-appointed director.
“Fair lending is going to be a big priority,” said Lucy Morris, a partner at Hudson Cook and former CFPB deputy enforcement director.
Under new leadership, the CFPB could get an organizational makeover as well. A new director would be able to hire senior managers. Many expect a changing of the guard in middle management since some of Kraninger's key hires lack union protection.
“The Democrats believe in empowering the staff to do the job and believe in the career public servants and sense of mission,” Morris said. “It’s been a real struggle to get things done in enforcement.”
Under Mulvaney, political appointees were embedded at the agency. He also realigned certain offices at the agency that resulted in the Office of Fair Lending having less authority — a restructuring that would likely be reversed under a Democratic appointee.
“They have a bureaucracy in place that has been depressed and demobilized so they will have to rebuild trust and structure,” said Rheingold.
A new CFPB acting director would likely be picked from a short list of candidates who all have the backing of the bureau’s architect, Sen. Elizabeth Warren, D-Mass. By statute, an acting director must have previously been Senate-confirmed for a different job or have held a senior position at the bureau for at least 90 days.
One leading contender is Rohit Chopra, a commissioner on the Federal Trade Commission and a former CFPB assistant director. Chopra was the CFPB’s former student loan ombudsman and, if he gets the job, is likely to reverse Kraninger’s policy of having that office focus solely on the private student loan market.
U.S. consumers owed $1.55 trillion in student loan debt in the third quarter, with federal loans making up 90% of the total. Warren and Sen. Bernie Sanders, I-Vt., want Biden to forgive up to $50,000 in student loan debt per borrower.
“It’s a big issue for Warren, and there has not been much from the bureau on student loans, which will be top of mind for a new acting CFPB director,” said Moran.
The CFPB also is expected to work more collaboratively with other regulatory agencies, including other banking regulators, the Department of Education and state attorneys general. The bureau also is expected to partner with state agencies including California’s recently renamed Department of Financial Protection and Innovation.
As for rulemakings, consumer advocates are pushing for a repeal of both the payday lending and debt collection rules.
An acting director may seek to reverse Kraninger’s final payday rule that eliminated ability-to-repay standards imposed in a 2017 regulation under Cordray. One complication, however, is that the rule continues to be the subject of ongoing litigation in Texas that could hamper an outright repeal. Meanwhile, two recent debt collection rulemakings that are largely backed by the industry could be reassessed and tweaked.
“Both of those rulemakings, since they are fresh, are probably up for reconsideration,” Moran said.
Among other changes, the CFPB also could look to expand its supervisory authority over additional markets. The Dodd-Frank Act gave the bureau the authority to supervise “larger participants,” and some expect the bureau to move ahead with a rule covering installment loans, an area that was shelved under Mulvaney. Such a move would bring fintech lenders under the CFPB's umbrella.
"They can put out a proposal that covers the largest participants in installment lending and after a 60-day period of public comment, they finalize it,” said Morris. “It’s not as hard as a rulemaking because it’s not as controversial and the statute provides for additional supervisory authority.”