CFPB goes Global

Who would have thought that in this era of anti-globalism and deep state subterfuge we would see the Consumer Financial Protection Bureau or, if you’d like, the Bureau of Consumer Financial Protection, going global! Well, maybe not global in the sense that the whole world will get involved, but at least eleven financial regulators are jumping on a new initiative which, for United States companies, is run out of the offices of the CFPB. Then again, perhaps the whole world will not get involved, but supposedly enough of the world’s financial regulators will get involved in this willowy scheme for it to somehow make some sense.

Before I get into those plans, a word about the name change from Consumer Financial Protection Bureau (CFPB) to Bureau of Consumer Financial Protection (BCFP). Although the change in the name conforms with the statutory name given the agency, the branding effect is to make “consumer financial protection” play second fiddle to the concept of a mere “bureau.” From a marketing point of view, think of it as a kind of demotion, a blurring of focus, a mangling of an intuitive juxtaposition.

Maybe the name change is an apt decision, since the agency at this time is hardly involved in enforcement and has either throttled down enforcement litigation or cancelled it out altogether. Remember the CFPB’s dispute with Equifax over letting 143 million emails get filched? Iced by the BCFP! Maybe the idea is to leave the enforcement to the states; after all, Equifax has been under investigation by every state attorney general and has faced more than 240 class action lawsuits. In any event, the BCFP doesn’t seem to mind much about the 20,000 complaints from consumers about Equifax’s cyber-breach. I guess they’ll just let the states figure it all out. The Feds have better things to do, like join a global interface!

Anyway, for the time being, I’m still stuck on “CFPB” over “BCFP,” so I’m going with it.

Welcome to “GFIN” – yet another acronym to be added to the great pantheon of acronyms!

It stands for Global Financial Innovation Network. The name contains some modernistic sounding buzz words, such as “global,” innovation,” and “network.” It consists of eleven financial regulators,[i] hence the overly abused word “financial.” I am not sure how to contract GFIN into a monosyllabic word, let alone a polysyllabically pronounceable word, like “Go-Fin” or “Gaf-In” or “Goof-In” or “Gay-Fin” or “Gee-Fin” or “Gy-Fin” – so let’s just say “G,” “F,” “I,” “N,” and hope for the best!

The CFPB has said the new network will seek to provide a more efficient way for innovative firms to interact with regulators by helping them navigate between countries as they look to scale new ideas. Who gets to choose what is and what is not “innovative?” Not yet determined. Maybe “innovative” means “make money for investors” or maybe “innovative” means “less regulations.” This initiative will also create a new framework for cooperation between financial services regulators on purportedly innovation-related topics.

Will the real borrower please stand up?

A large servicing client called me about feeling she is a sitting duck when it comes to servicing litigation, most especially in the loss mitigation area. The caller, the company’s Chief Compliance Officer, referenced the “loss mitigation option” and felt that there is a tremendous burden placed on the servicer to implement the applicable guidelines.

The conversation went something like this.

Me: I feel for you, but this rule was not designed to assuage your inconvenience.

She: Maybe so, but I think there should be an Article III procedure to strengthen these litigation attacks, so that it is more of a two-way street.

Me: Well, under RESPA, only a borrower may bring a civil action and only a borrower would have Article III standing.

She: Wait, what?

Me. That’s correct. In fact, in this instance there has been litigation to determine who is entitled to the loss mitigation protections, and that is given Article III requirements being judicially applied.

[Long Pause.]

She: We are going to have to take yet another close, hard look at our procedures!

First, let’s get the “Article III” terminology out of the way. It is pretty much well settled now that there are constitutional requisites under Article III for the existence of standing; that is, the party seeking to sue must personally have suffered some actual or threatened injury that can fairly be traced to the challenged action of the defendant and that the injury is likely to be redressed by a favorable decision. For the most part, there must be a causal connection between the injury and the conduct complained.

Unintended Consequences

Back in the 20^th century, the American sociologist, Robert Merton, promoted the phrase “unintended consequences,” to denote outcomes that are not the ones foreseen and intended by a purposeful action.

According to modern sociology, there are three types of unintended consequences:

• Unexpected Benefits: A positive unexpected benefit, also referred to as luck, serendipity or a windfall;
• Unexpected Drawback: An unexpected detriment occurring in addition to the desired effect of the policy; and
• Perverse Result or “Backfire”: A perverse effect contrary to what was originally intended, when an intended solution makes a problem worse. 

The great Scottish empiricists, such as Adam Smith and David Hume, discussed the concept.

But let’s just call it Murphy’s Law – the fandangled notion that anything that can go wrong will go wrong.

The current iteration of attempts to decombobulate, degrade, defund, and deregulate the Consumer Financial Protection Bureau (“CFPB”) seems to be forging ahead ineluctably using slash and burn tactics that may someday be rued as excessively countervailing responses.

One way the Congress is handling its attack – or, au courant, “reform” – is to pump up a swelling addiction to the Congressional Review Act (“CRA”), a device not used all that much over the years but used more and more these days. The CRA is a 1996 law that gives lawmakers a mechanism for overturning agency rules they don’t like within 60 legislative days after such rules are reported to Congress or published in the Federal Register.

Case in point is the Senate’s recent scrimmage to neuter the CFPB’s guidance on auto lending. Although this particular target rule is not mortgage compliance, it certainly shows the addiction is growing. Last year, the CRA was deployed to whack the CFPB’s Arbitration Rule, which I wrote about HERE and HERE. But, like any addiction, the end never justifies the means.

In the subject guidance, the CFPB endeavored to prevent discriminatory mark-ups by auto lenders that operate through dealerships. Now you might think, What’s wrong with that? Seems something like preventing discrimination should be regulated, right? However, auto industry groups and many lawmakers have criticized this guidance relentlessly since its issuance in 2013. Their gambit is to argue that the CFPB was grabbing power and arrogating to itself authorities it does not have, especially since the rulemaking process was not followed.

Now, on the surface, it may appear that the auto industry and lawmakers have an authentic fondness for following the rulemaking process. Far be it from me to assert that their interests are motivated by anything other than an abiding dedication to the rule of law.

In any event, this past Wednesday the Senate used the CRA to narrowly approve a resolution rolling back the guidance. Although the CFPB didn’t believe the 2013 guidance counted as a rule under the CRA, the Government Accountability Office determined otherwise last year after a review requested by one of the Senators, who was obviously deeply distressed, bothered, and concerned about following the rule of law and for no other reason.

So, if the resolution passes the House and is signed by the President, it will be the first time the CRA has been successfully used to repeal this kind of informal agency guidance, establishing what legislative nerds call a “proof of concept” for a new strategy that lawmakers could use to challenge agency interpretations of laws going back years.

These Senators, clearly and conspicuously being deeply disquieted and afflicted by the issuance of such guidance, have contended that using the CRA to go after guidance is entirely consistent with both the text of the CRA and the intent of its drafters and, specifically in the case of the CFPB, it is a necessary counteractant to this roguish consumer advocacy agency that is trying to squeak past them some guidance on non-discrimination in auto lending.

But what about that three-headed dragon of unintended consequences, the kindly Unexpected Benefits, the fire-breathing Unexpected Drawback, and the rapacious Perverse Result?

Consider this potentially unintended consequence: an agency may not be able to continue to bring enforcement actions based on valid legal positions in guidance once that very guidance has been upturned by the CRA.

Consider this potentially unintended consequence: if the guidance doesn’t create a new standard that an agency may hold a defendant to, but rather lays out a statement of how the agency reads a particular law, then rescinding this kind of nonbinding guidance would not necessarily stop the agency from arguing the same position in a court case.

Consider this potentially unintended consequence: assuming the guidance is nonbinding, an agency would be setting itself up for failure if it argued the position in court, since such a claim would likely cause Congress to cry foul, notwithstanding the likely possibility that a court would interpret the CRA resolution as having effectively rejected the position’s legal viability.

Consider this potentially unintended consequence: rather than wait for a CRA resolution to trip up its guidance efforts, an agency might be more inclined in the future to avoid issuing guidance in the first place.

Consider this potentially unintended consequence: lack of guidance may lead to eroding consumer trust and diminish business efforts to earn that trust, leading to a diminution of certainty in the marketplace, reduction in standards, and adversely impacting the examination and enforcement process.

There is a name for this kind of gambit: the “chilling effect.” Being unsure of guidance may mean exposure to enforcement or unpredictable results.

What enforcement actions would an agency predictably bring?

Not sure; nobody knows; maybe this; maybe that; let’s wait and see. You go first!