This Thursday, December 6, Kathleen Kraninger was confirmed as director of the Bureau of Consumer Financial Protection by a slim margin of 50-49. Previously a mid-level manager at the Office of Management and Budget (OMB), Kraninger’s confirmation elevates her to one of the most commanding bureaucratic positions in Washington, overseeing an abnormally powerful and aggressive regulator. Not only does the Bureau have the authority to regulate nearly every consumer financial product in the economy, but the director has enormous unilateral power and discretion in writing and enforcing those rules.
In her confirmation hearing, Kraninger assured the Senate Banking Committee that she would continue the work of her former boss at OMB, Mick Mulvaney, who has also overseen the Bureau as acting director this past year. She has promised to implement a free market reform agenda, focusing on greater competition and lighter-touch enforcement actions. To provide some guidance on how Kraninger, as director, can go about achieving this, I have outlined five reform priorities for the Bureau (in no particular order):
1. Rewrite the Payday Loan Rule. Perhaps the most pressing issue for the new Bureau chief is in how to go about rewriting a recently finalized rule governing Payday, Vehicle Title, and Certain High-Cost Installment Loans. I have discussed this issue at length recently, both how the Bureau can rewrite the rule narrowly or more broadly.
The difficulty in rewriting finalized regulations is that the revised rules must pass judicial review to ensure an agency was not acting in an “arbitrary and capricious” manner. However, this should not be a high hurdle when it comes to the payday rule, as the original research conducted by the Bureau to justify the regulation was deeply flawed. This should allow the Bureau to successfully rewrite the rule by revisiting those flawed empirical underpinnings.
2. Define the term “Abusive.” Prior to Kraninger’s confirmation, the Bureau indicated that it would conduct a rulemaking to define the term “abusive” as part of the prohibition on “Unfair, Deceptive, or Abusive Acts or Practices” (often referred to by their acronym, UDAAP). The abusive standard, a new provision in consumer protection created by the Dodd-Frank Act, is particularly confusing because it is both very broad and vague. This has led at least one financial expert to call the standard “the most feared word in Dodd-Frank.”
In particular, the problem with the abusive standard is the Bureau’s insistence that it be defined through enforcement actions as opposed to a rulemaking. In effect, the practice involves not telling financial institutions or the public that something is illegal until you bring a lawsuit against them. And because the abusive prong is so broad and vague, the Bureau can exercise enormous discretion in enforcing the law.
An ambiguous abusive standard is not conducive to a well-functioning financial market or regulatory system. Financial institutions need clarity. They cannot wait years for court decisions to determine the extent of a given regulatory scheme. Arbitrary punishment of activities long been deemed lawful is a detriment to all participants in financial markets. Clearing up the confusion over the abusive standard through a prospective rulemaking will benefit all parties involved, consumers, industry, and the Bureau itself.
3. Reform Enforcement of the Equal Credit Opportunity Act. Along with defining “abusiveness,” the Bureau further indicated in its fall 2018 rulemaking agenda that it would reexamine the requirements of the Equal Credit Opportunity Act (ECOA) concerning the disparate impact doctrine, something I have strongly recommended in the past.
The Bureau has been highly aggressive in enforcing ECOA, shifting from the long-held belief that companies should be prosecuted for actual discriminatory treatment to prosecuting companies for perceived discriminatory effect. Worse, the Bureau has relied on dubious statistics and unfounded legal theories to bully firms into multi-million dollar settlements.
Most importantly, the Bureau has no authority under ECOA to enforce disparate impact claims. To impose disparate impact liability, a fair lending statute must speak to the detrimental “effects” of a certain policy on a protected group. ECOA, on the other hand, includes no such language; it merely prohibits discriminatory treatment. The Bureau, therefore, should conclude that it has no authority under the statute to enforce disparate impact claims.
4. Shifte the Focus of Enforcement. As noted, the Bureau has too often relied on aggressive enforcement actions to implement policy changes. One of the best examples, alogn with the “abusive” standard described above, is the case of Ally Financial and the enforcement of the Equal Credit Opportunity Act.
The Dodd-Frank Act explicitly prohibits the Bureau from regulating auto-dealers. Despite this, the Bureau sought to regulate auto dealers through the back door, by targeting the auto finance companies that work with them. The Bureau alleged that these third-party auto finance companies’ markup and compensation policies trigger disparate impact liability if the auto dealers’ credit decisions result in discriminatory outcomes.
In pursuing these cases, the Bureau used its substantial leverage over these companies to force them into settling and to drive through new policy changes. For example, the enforcement actions stipulated that the auto finance companies could no longer engage in the kind of markup or compensation practices that consumer groups have lobbied against for years.
This is not how new, broad policy changes should be implemented—that is what rulemaking is for. While the choice between rulemaking and ad hoc decision making may remain the exclusive choice of the agency, as established in the Supreme Court case Chenery II, it is far from best practice in declaring new policy. Indeed, the Chenery II court, along with the text of Administrative Procedure Act, clearly favor rulemaking as the best method of declaring new policy.
Regulated parties deserve clear, predictable rules, promulgated in a transparent way, that mak obvious what a firm may or may not do under the law. The new director should endeavor to stay away from “pushing the envelope” with these kind of enforcement actions, and instead focus on the straightforward bread-and-butter application of consumer finance laws.
5. Reform the Internal Operations of the Bureau. Perhaps the most important, yet least visible, change a new director could make at the Bureau is the reform of its internal operations, such as the structure of its departments and staffing. The internal culture at the Bureau is a major cause for concern—as it was clear from the start that the Bureau was ideologically biased towards progressive causes. Under its first director, the CFPB hired all but exclusively from one political party, deliberately weeding out applicants with differing opinions. Data from OpenSecrets.org reveals that nearly 600 CFPB bureaucrats have donated to Democratic candidates, while a mere 1 percent donated to Republicans. Hiring and appointing more free market-oriented employees at the Bureau is low-hanging fruit for a new director, yet would have a significant impact in shaping its future.
In addition, Director Kraninger should work to reinforce the departmental changes that have occurred under former Director Mulvaney’s watch. He has abolished duplicative departments within the Bureau, added additional ones to improve its rulemaking process, abolished the ideologically slanted Consumer Advisory Board, and sought to rethink the entire Bureau’s internal operations by seeking public comment. In particular, Mulvaney established two critical new offices: the Office of Innovation and Office of Cost-Benefit Analysis. While Mulvaney has done a good job overseeing the Bureau’s transition, Director Kraninger must follow through and consolidate these critical new offices.