Speaking before the Consumer Bankers Association annual conference, with Dodd Frank Update in attendance, Consumer Financial Protection Director Richard Cordray addressed criticism of regulation by enforcement.
In prepared remarks, Cordray talked about the public enforcement actions that have been marked by orders specifying the facts and legal conclusions in the enforcement.
“These orders provide detailed guidance for compliance officers across the marketplace about how they should regard similar practices at their own institutions,” Cordray said. “If the same problems exist in their day-to-day operations, they should look closely at their processes and clean up whatever is not being handled appropriately. Indeed, it would be ‘compliance malpractice’ for executives not to take careful bearings from the contents of these orders about how to comply with the law and treat consumers fairly.”
That strategy has been called regulation by enforcement, sometimes derisively, a characterization which Cordray does not care for.
“Some have criticized this approach as regulation by enforcement, but I think that criticism is badly misplaced,” he said. “Certainly any responsible official or agency charged with enforcing the law is bound to recognize that they should develop a thoughtful strategy for how to deploy their limited resources most efficiently to protect the public. That means working toward a pattern of actions that conveys an intelligible direction to the marketplace, so as to create deterrence that can be readily understood and implemented. The alternative is just a random series of actions that takes a few wild swipes at the bad actors without systematically cleaning up the practices that harm consumers across the marketplace.”
He said the bureau also has been criticized for not thinking through and explicity articulating rules for every eventuality before taking enforcement actions.
“But that aspiration would lead to paralysis because it simply sets the bar too high,” he said. “Particularly in an area like consumer financial protection, the vast majority of our enforcement actions involve some sort of deception or fraud. And courts have long noted that trying to craft specific rules to root out fraud or untruth is a hopeless endeavor, as they would likely fail to cabin ‘the ingenuity of the dishonest schemer.’
“For these reasons, we strive to present specific enforcement orders that meticulously catalogue the facts we have found in our very thorough investigations and set out the legal conclusions that follow from those facts. These specific orders are also intended as guides to all participants in the marketplace to avoid similar violations and make an immediate effort to correct any such improper practices.”
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