With the Consumer Financial Protection Bureau (CFPB) focusing on preventing consumer harm, as CFPB Director Kathy Kraninger stated in her annual report to Congress, companies may be tempted to assume that means the bureau will be spending more time distributing educational materials than looking for compliance violations. However, that likely is not the case. In fact, the opposite may be true.
Having announced the CFPB’s new “prevention of harm” focus while testifying before the House Financial Services Committee, Kraninger affirmed that she believes the CFPB’s supervisory authority can be an effective component in doing so during her subsequent testimony before the Senate Banking Committee.
Kraninger noted that supervisory actions would be used to that end, in addition to its consumer education initiatives. She also noted that such an approach can be hard to measure in terms of its effectiveness in changing behavior and leading to action.
“I have talked to my examiners about working with institutions to build a culture of compliance, and how supervision should be a more prominent tool in the bureau’s toolkit,” Kraninger said. “Also on examinations, financial institutions and non-bank lenders alike have noted the value in the exam process, as well as their interest in having clear rules of the road.”
Former CFPB attorney and managing partner at Garris Horn PLLC Richard Horn told Dodd Frank Update that the bureau’s supervisory activities likely represent the most effective tools the bureau can utilize to prevent consumer harm.
“If the examiners identify something in a supervisory examination, where a company is engaging in an activity where there is a UDAAP issue, for example, the CFPB can try to get the company to fix it and prevent consumer harm more quickly than in a long drawn-out investigation or litigation, and that would be a good a thing for consumers,” Horn said.
Horn noted that sending out pamphlets and issuing bulletins and other guidance materials also can be effective means of preventing consumer harm, and addresses a point of contention the bureau has run into frequently about the clarity of its regulations, but supervision stands out as perhaps the most effective option.
“One of the criticisms people had about the bureau previously is that they would promulgate new policies not by issuing guidance, but by issuing enforcement actions,” he said. “A lot of issues can be prevented in a supervisory context, by issuing guidance that lets companies know what the agency believes is a violation. For new types of products or services by fintech companies, or even just generally for a relatively new agency interpreting very old statutes and regulations, that guidance can give companies the clear rules of the road they want.”
As an example of an instance of widespread consumer harm that potentially could have been prevented through supervisory oversight, Horn pointed to the circumstances surrounding the 2017 data breach at Equifax.
“The Dodd-Frank Act gives the CFPB such a unique ability to try and prevent a lot of consumer harm as a first-time federal supervisory agency for consumer financial protection, because they can go in with exams and try to prevent harm before it can metastasize and end up actually harming many, many consumers,” Horn said. “I don’t want to say that the CFPB could have prevented the Equifax breach, for example, in part because the agency’s authority is limited to particular set of consumer financial protection statutes, but they do supervise consumer reporting agencies. And imagine if they’d identified these companies’ cybersecurity issues before the hackers got to them.”
Enforcement actions are effective deterrents to harmful practices, Horn also noted, as did Kraninger during her testimony.
“State attorneys general and bank supervisors have cited the valuable work that we have done together, particularly on enforcement actions,” Kraninger said. “I’ve heard from legal aide providers how they play whack-a-mole against bad actors until one of the bureau’s enforcement actions deters certain behaviors.”
However, Horn suggested that the CFPB perhaps became overly interested in its enforcement authority during former Director Richard Cordray’s tenure.
“The problem with the CFPB before, under former Director Cordray, is they saw themselves primarily as an enforcement agency,” Horn said. “But if you really want to prevent consumer harm to the greatest extent possible with the limited resources that a government agency has, I think you need to consider the supervisory role to be the primary role, or at least, a major role for an agency.”
Politics may have played a factor in how the bureau operated under Cordray, Horn added.
“You don’t get a lot of headlines for fixing things in exams,” he said. “That might be why the CFPB before considered itself more of an enforcement agency; not for identifying things and subjecting them to the supervisory process, because the supervisory process is confidential. In that sense, examiners are like the unsung heroes of consumer protection.”
It is noteworthy that, in the past, many of the bureau’s outspoken critics, such as former House Financial Services Chairman Jeb Hensarling (R-Texas), sought to strip the bureau’s supervisory power, meaning it would have essentially become just a law enforcement agency.
Horn suggested that the notably large restitution amounts the CFPB demanded under Cordray also could have been motivated by a desire to attract attention to the bureau’s activities.
Horn noted that companies are encouraged to provide “voluntary restitution” in the CFPB’s bulletin on “Responsible Conduct.” He said as long as a company’s voluntary restitution amount matches the bureau’s calculation for the amount of restitution warranted in connection with a particular action, there should be no need for the bureau to request more, which could explain a trend that has emerged in settlements announced during Kraninger’s first months in office.
“In recent enforcement actions where the bureau got criticism, there may have been voluntary restitution, and perhaps the facts that didn’t really support trying to get further restitution,” Horn said. “If the bureau is supporting voluntary restitution, that might be why we’re not seeing restitution in enforcement actions.”
Horn characterized the practice of requesting redress in excess of the amount indicated by existing guidance on the bureau’s calculation methods, though within the bureau’s authority, as being tantamount to issuing a penalty as a deterrent to unfair, deceptive or abusive acts or practices (UDAAP), among other violations.
“That is what the CFPB’s civil money penalties are for,” Horn added.
Former CFPB head of enforcement and Goodwin Procter Partner Anthony Alexis offered insight how CFPB enforcement attorneys and examiners determine whether restitution is warranted in any particular matter, as well as what forms it can take, while previously speaking with Dodd Frank Update.