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Year in Review 2018: Consumer Financial Protection

2018 was a big year for the Consumer Financial Protection Bureau (also known, for a while, as the Bureau of Consumer Financial Protection). The past year marked the first time that the Bureau changed political hands, from the former Democratic Director Richard Cordray, to Republican acting Director Mick Mulvaney, and now to the new permanent Director, Kathleen Kraninger. That political transition came with a revolution in how the Bureau conducts itself as a regulatory agency, with reform to its rules, enforcement actions, and regulatory procedures. Below is a brief recap of some of those major changes the Bureau has made, as well as the challenges it has faced, in 2018.

Organizational Restructuring

One of the first priorities for former acting Director Mulvaney was to restructure the Bureau internally. While this may be one of the least visible reforms, reshaping the Bureau’s culture and processes is perhaps one of the most important. For example, the Bureau was designed and implemented by a Democratic administration, which hired and appointed around 1,600 staff members, the overwhelming majority of which lean politically left. Hiring and appointing staff from more diverse ideological backgrounds will balance out the progressive one-sidedness

Further, the Bureau has demonstrated a bias towards aggressive rulemaking and enforcement actions that may not, overall, make the consumer financial marketplace better off. To better ensure that the Bureau’s actions have a net benefit on the consumer finance marketplace, former acting Director Mulvaney created the Office of Cost Benefit Analysis and the Office of Innovation. The two departments are placed under the Director’s control and are designed to review rulemaking and enforcement actions to better ensure that the Bureau is not having an adverse impact on financial innovation or outcomes for consumers.

Rulemakings

2018 was a tumultuous year for rulemaking at the Bureau. Perhaps the only major rulemaking was the revision of the Payday, Vehicle Title, and High Cost Installment Loan rule. Finalized in 2017, the payday loan rule sought to impose strict underwriting criteria for lenders making small dollar loans, a requirement that will make around three-quarters of all loans unprofitable. The new leadership at the Bureau swiftly sought to rewrite the rule, and I have outlined at length how the Bureau can go about doing this.

While there may have been little in the way of rule writing in 2018, the Bureau did announce a number of rulemakings to come in the future. For example, the Bureau announced that it intends to write regulations defining the contours of its “UDAAP” power, the law prohibiting Unfair, Deceptive, or Abusive Acts or Practices, as well as regulations concerning debt collection practices and fair lending laws. This, along with a sway of other reforms to the Bureau, sets out an ambitious rulemaking agenda for the Bureau going into 2019.

Constitutional Challenges

While there may have been a lack in rulemakings for 2018, there was plenty of constitutional litigation against the Bureau. While some promising challenges fell flat, a number of other challenges have emerged and will possibly proceed to the Supreme Court.

PHH v. CFPB

On January 31st, an en banc D.C. Circuit Court of Appeals reversed a previous decision written by then-judge, now-Justice Brett Kavanaugh, declaring that the Bureau was unconstitutional as it violated the Take Care clause of Article II of the Constitution. I have highlighted previously the flaws in the en banc opinion and why now-Justice Kavanaugh’s original circuit opinion is correct. However, the petitioner, PHH Corp., won on the statutory question of whether it violated the Real Estate Settlement Procedures Act, and so it declined to petition the Supreme Court for review. The PHH case seemed like the best vehicle for Supreme Court review of the Bureau’s constitutionality in 2018, but now we must wait to see whether another case will be granted certiorari this coming year.

Collins v. Mnuchin

Another interesting case with implications for the constitutionality of the Bureau is Collins v. Mnuchin, a case out of the Fifth Circuit Court of Appeals involving the Federal Housing Finance Authority. The court was posed the question of whether FHFA’s leadership structure, which is eerily similar to the Bureau’s, violated the Take Care clause of Article II. The court reasoned that it did—but was careful to draw a distinction as to not inadvertently also declare that the Bureau was unconstitutional. As I’ve written elsewhere, the court’s approach in distinguishing the two agencies is wholly unsatisfactory. If the FHFA is unconstitutional because of its structure, then so too is the Bureau. On appeal, this case could eventually make its way to the Supreme Court, where the justices may be more open to dealing with the constitutionality of both agencies at the same time.

State National Bank of Big Spring v. Mnuchin

Last, but not least, is CEI’s own case against the Bureau, State National Bank of Big Spring v. Mnuchin. The lawsuit argues that the structure of the Bureau violates the Constitution's separation of powers because the agency is insulated against meaningful checks by the legislative, executive, and judicial branches of government. Unlike the other two cases above, which focus almost solely on the sole director of the Bureau violating the Take Care clause of Article II, CEI’s case focuses on the problem of appropriations. The Bureau was designed to be insulated from Congress’ “power of the purse.” Instead of being funded by Congress, its budget is taken from the budget of the Federal Reserve, rendering the agency unaccountable to the elected branches of government. This is an issue that now-Justice Kavanaugh did not deal with in his opinion in PHH, where he called it the “extra-icing on an unconstitutional cake already frosted.” We are now awaiting the Supreme Court’s decision on whether to grant certiorari.

A New Direction at the Bureau

As described above, new leadership at the Bureau has sought to dramatically change the way in which the Bureau regulates consumer financial services. This is not an abandonment of the Bureau’s mission, but merely a recalibration. As I have outlined previously, there is more than one way to protect consumers, and aggressive regulation can often do more harm than good. Recently, Deputy Director Brian Johnson made clear what he believed the new direction at the Bureau to be:

[We will be] guided by a presumption in favor of consumer choice. That is our guiding principle. Because when consumers are free to choose among an array of financial products that potentially suit their needs, it creates competition, expands choice, and promotes individual autonomy, and liberty. It’s an environment where everyone is better off. And the Bureau can support that marketplace by making sure consumers have good information and are properly educated about financial products.

2018’s political shift has revolutionized the Bureau’s role as a regulatory agency. According to Director Kraninger, long gone are the days of aggressive enforcement actions and dubious rulemakings. Instead, the Bureau’s new mission is twofold: 1) execute the law as written, and 2) base agency action on rigorous analytical standards, such as cost-benefit analyses. Where the enforcement of a statute allows for discretion, the Bureau’s focus will be on actions that reinforce market processes, rather than replace them.

While these changes may seem to be commonsense, best practices that all regulatory agencies should follow, it actually reflects a significant departure from how the Bureau previously operated. Despite this strong leadershiop, significant challenges still face the Bureau in its transition to becoming a more measured regulator, with the House Financial Services Committee being taken over by Rep. Maxine Waters (D-CA) and the new Democratic majority, who have vowed to “undo the damage that Mulvaney has done.” It should be fair to expect that in 2019, therefore, there will be many more hearings and investigations into the Bureau’s policies and operations. The Democrats’ plan, undoubtedly, will be to try and grind the Bureau’s deregulatory work to a halt.

Previous posts in the Year in Review 2018 series: