On March 9, Consumer Financial Protection Bureau Director Richard Cordray addressed the CBA Live conference in Phoenix. He focused on the successes he perceives in the agency, i.e., improved supervision processes, the consumer complaint portal, and increased transparency through vehicles such as its periodic Supervisory Highlights. He also defended the bureau’s penchant for “regulation by enforcement,” the source of great consternation for financial institutions, and significant revenue growth for lawyers and consultants.
I’ve said on many occasions that I support the concept of the CFPB. My concern is that Cordray views its role to be that of law enforcement above all else. Law enforcement is certainly one arrow in a regulatory agency’s quiver, but in an ordered society, it’s not generally the primary arrow. Rules are. Financial services is a highly regulated industry so thoroughly woven into our societal fabric that where it goes, so goes the world economy.
Anyone remember 2008? What happened? Certainly, the financial services industry’s regulators were asleep at the switch while the mortgage industry recklessly chased money. But much of that industry — the primary driver of the financial crisis — operated in an environment lacking a “big picture” regulator. All of the non-bank mortgage market was state-regulated only. States are primarily interested in whether a given company is operating within the parameters of state law. State regulators might have seen state-related issues, but they never had the full picture. Even if they had, they had little power to help avert the financial crisis.
The auto finance industry, among others, is likewise primarily state regulated. Now that the CFPB is in the game, the agency has made clear that it seeks to eliminate “discrimination” in auto finance by bringing targeted enforcement actions against large players in the hopes that the industry will reach a “tipping point” where everyone eliminates or minimizes dealer discretion in setting their own rates. However, given the fragmentation of this market, even Director Cordray has to have realized by now that there is no real tipping point to be had. (I suspect he’s also developed a healthy appreciation for the power of the auto dealer lobby.)
Nothing screams more for a rulemaking than this effort to completely unwind a decades-old business model and create a new one in the CFPB’s image — whatever that might be. Yet, the bureau has resisted this expedited path of least resistance in favor of a messy and public demonization of good, law-abiding companies. It is clear from recent Supreme Court holdings, and from the bureau’s own internal documents, that its discrimination allegations are unlikely to survive a motion to dismiss or for summary judgment. It’s also clear that the bureau is beginning to lose Democratic Congressional support on this subject, something it can ill-afford. So why continue down this destructive path? Consumers’ best interests? Pride? Probably a bit of both.
My impression of bureau staff is that they run the gamut from thoughtful and experienced leaders, who recognize the care with which the bureau (or any industry regulator) must act to maintain balance in the marketplace for those with little or no experience, to a more evangelical view of the bureau’s role than might be healthy. (I was at once pleased, and more than a little disturbed, by Cordray’s remark at CBA Live that the CFPB was providing financial literacy training to its staff. I’ll concede it’s always good to learn, but I expect that average consumers would be under the impression that those charged with protecting their financial health might already be financially literate and more or less experts in the laws they enforce.) Add to that the human condition of wanting to look good (or make a name for oneself, or one’s agency look good), and the laws of unintended consequences kicks in with a vengeance.
Take, for example, the revelations that the bureau recognized a significant litigation risk in pursuing its discrimination allegations against Ally Financial Inc., yet forged ahead because of the leverage it was able to exert in blocking Ally’s much-needed financial holding company status. And the fact that the bureau insisted that 235,000 consumers get restitution from Ally, whether or not they were part of a protected class against which Ally allegedly discriminated. Consumers’ best interests? Pride? Again, probably a bit of both.
I don’t think the bureau takes lightly its efforts to continue discrimination enforcement actions. I just think it might be between a rock and a hard place, navigating internal philosophical squabbles about the best resolution — I know I’d be squabbling if I worked there. I’m sure some of the more evangelical staff at the bureau feel its efforts have been righteous; others may feel it has wandered too far down the path to turn back. While still others may be looking for a resolution that achieves some of its initial goals without providing more ammunition to those who vilify its efforts.
For me, the answer lies in the bureau’s rulemaking authority. It occurs in the open, with ample opportunity for public comment. And while a final rule is unlikely to make everyone happy, it should at least provide the foundation for the level playing field the bureau so aggressively advocates.
Michael Benoit is chairman of Hudson Cook LLP and a partner in the firm’s Washington, D.C, office. He is a frequent speaker and writer on a variety of consumer credit topics. Michael can be reached at 202-327-9705 or firstname.lastname@example.org. Nothing in this article is legal advice and should not be taken as such. Please address all legal questions to your counsel.Like This Post