The CFPB pushes the limits of regulatory power

The use of disparate impact has been curtailed by the Supreme Court but the CFPB has not acknowledged those holdings."

The Consumer Financial Protection Bureau was created as part of the Dodd-Frank Act of 2010. The brainchild of then-Professor Elizabeth Warren, it was designed to be a financial version of the Consumer Product Safety Commission. The progressive Democrats in Congress gave the agency authority over most of the financial services arena. It has purview over at least 17% of our economy. By design, CFPB is the least politically accountable regulator in Washington.

The power of the agency is vested in one Senate-confirmed Director who can only be removed at the discretion of the President. The CFPB doesn’t have to go to Congress to get funding or assess regulated entities. It has automatic access to 12% annual of the revenues of the Federal Reserve System.

Richard Cordray was the first Director of the CFPB. The former Ohio AG went after big financial institutions and garnered some big fines. The MOUs used in the settlement process served as a guide to all other financial services providers and acted in lieu of regulations produced in the normal notice and comment process. He was succeeded by Kathy Kraninger, a Trump appointee who emphasized consumer education, and had a more limited role with enforcement. Kraninger did not access all of the funds available to the agency from the Fed.

Then we come to Rohit Chopra, who is President Biden’s new director of the CFPB. He is a progressive firebrand who helped Warren set up the new agency in 2011. He most recently served at the FTC and is a take-no-prisoners regulator who worked with two other FDIC board members to oust the FDIC Chair, Jelena McWilliams. Once he was confirmed for his CFPB role, Chopra immediately accessed $595.9 million from the Fed from the allowable cap of $717.5 million. Those funds have mostly been spent on hiring attorneys with a focus on enforcement.

Chopra is going all-in on the use of disparate impact analysis in fair lending examinations as well as in new areas like consumer banking accounts. The use of disparate impact has been curtailed by the Supreme Court but the CFPB has not acknowledged those holdings. The use of the analysis in the provision of products such as checking accounts is not based on any federal law.

If Cordray was known as regulating by enforcement actions, Chopra began his tenure by regulating by press release. He is fond of accusing banks of charging “junk fees” analogizing them to “resort fees” and “ticket fees.” These same bank fees have been approved by prior regulators and many have been tested by the CFPB. Chopra is asserting that overdraft fees and minimum account balance requirements are illegal if they disproportionately affect certain groups.

Prior to Dodd-Frank, federal law prohibited Unfair or Deceptive Acts or Practices. DFA added “Abusive” to the law, which is now UDAAP. For Chopra, “Abusive” is in the eye of the beholder. Expect him to label certain products as such. 

Without much public scrutiny, the CFPB also changed the administrative procedures for reviewing CFPB holdings. The Director is now allowed to make enforcement decisions without the interference of an impartial administrative law judge.

Chopra has also expanded his reach into rural communities. In a press release, the CFPB stated that many rural communities are “banking deserts” that lack access to physical bank branches. These areas are said to have to seek credit from nonbanks. 

The lack of awareness by the CFPB is astounding. There are 35% fewer community banks than there were prior to Dodd-Frank because of regulatory cost-driven consolidation, especially in rural communities. And, many small banks got out of the mortgage business because of costs and risks. Further, most mortgages these days are originated by nonbanks.

What does this mean for Texas community banks? It will take a while for these threats to reach banks under $10 billion. In the meantime, there will be legal challenges to CFPB actions. Chopra is a Harvard trained lawyer. He appears to be betting that the sheer weight of his legal staff, combined with that of the Justice Department, will allow him to get away with writing his own laws to the detriment of banks and their customers.