To no one’s surprise, Bureau of Consumer Financial Protection (CFPB or Bureau) acting director Mick Mulvaney declared regulation by enforcement dead. In a speech to the Mortgage Bankers Association (MBA), he also hinted the Bureau may craft regulations to define “abusive” practices under the Dodd-Frank Wall Street Reform and Consumer Protection Act.
In other news, consumer groups pushed back on the CFPB’s proposed “Disclosure Sandbox,” and the New York attorney general (AG) filed its appeal in the battle over the constitutionality of the Bureau.
What happened
Answering the call of industry members and lawmakers, Mulvaney declared in a speech before MBA members that “regulation by enforcement is done.”
“It’s not fair,” he told attendees. “I used to be involved in small business. I’m okay if the government is coming after me if I break the law. Regulation by enforcement and regulation by guidance is something I don’t get.” This means not playing favorites, he added. “Our time is better spent getting those folks who are actually hurting consumers than spending part of our time going after those folks and part of our time going after folks [who] we just don’t like but who aren’t necessarily breaking the law,” he said.
Among a range of other topics, Mulvaney also addressed the Bureau’s work with regard to unfair, deceptive, or abusive acts or practices (UDAAP) and the potential for rulemaking. The Dodd-Frank Act added the term “abusive” and granted the Bureau (and state AGs) enforcement power over UDAAP. While the terms “unfair” and “deceptive” are well-established in the law, “abusive,” although somewhat defined by the limits set forth in the act, remains ambiguous, Mulvaney said.
The CFPB has issued enforcement actions alleging “abusive” acts or practices but has yet to clearly define the standard, Mulvaney said. Under his leadership, the Bureau’s enforcement of UDAAP violations has dropped considerably. However, Mulvaney said he will continue to consider UDAAP cases.
“You have a right to know what the law is,” the acting director said. “That being said, UDAAP is the law.”
Disclosure Sandbox—Is the new Disclosure Sandbox an excuse to violate federal disclosure laws? The proposed policy would allow the CFPB to deem a covered person conducting a trial disclosure program to be in compliance with or exempt from a requirement of a Bureau rule or certain federal laws. Consumer groups argue that this allows companies to evade federal disclosure laws with the full blessing of the Bureau’s Office of Innovation.
Under the proposal, the Bureau would allow a two-year time frame for the testing of disclosures, with procedures in place to permit companies to continue to use disclosures that test successfully. Coordination with state regulators would allow entities within a state regulatory sandbox to participate in the Bureau’s Disclosure Sandbox without a separate application process.
The CFPB asked for public comment on the proposed policy and heard from several concerned consumer groups in response. “We strongly oppose the proposed policy, which would potentially permit entire industries to ignore consumer protection disclosure laws indefinitely with no showing that the trials would result in improved or even equivalent consumer understanding,” the National Consumer Law Center (NCLC) wrote. The NCLC was joined by ten other organizations.
As a preliminary matter, the consumer groups said the policy oversteps the Bureau’s authority. Section 1032(e)(1) of the Dodd-Frank Act provides that the CFPB “may permit a covered person to conduct a trial program that is limited in time and scope, subject to specified standards and procedures, for the purpose of providing trial disclosures to consumers that are designed to improve upon any model form.”
This statutory authority is limited to the improvement of model forms; it does not give the power to waive the requirements of consumer protection law or to deviate from other substantive requirements of Dodd-Frank, the NCLC wrote.
“[I]f the Bureau wishes to experiment with more substantive changes to disclosure requirements before proposing a rule amendment, it may do so through consumer testing or focus groups that do not involve real consumers risking real money,” said the organizations. “But the Bureau does not have the authority to give individual companies—let alone entire industries—the authority to sell products or services in the real world in a way that violates the law.”
Further, Section 1032(e)(1) states that a trial program be “limited in time,” but the CFPB’s proposed policy permits an extension beyond the initial two-year trial period, the groups pointed out, for a potentially unlimited amount of time. The policy also fails to satisfy Section 1032(e)(1)’s requirement that a trial program be “limited in … scope,” because the Bureau set no limits on the number of consumers who may be exposed to the trial or the range of different products and services.
“The Bureau should not allow trials that involve thousands of consumers or scope beyond a limited, specific product or service identified in the trial application,” the NCLC wrote.
With “wholly insufficient safeguards to protect consumers,” the organizations urged the CFPB not to adopt the proposed policy, stating, “The Bureau’s failure to ensure that the strict requirements of the statutory authorization for trial programs are followed, along with its expressions of purposes for this program that run counter to its required statutory mandates to protect consumers, indicate[s] that the entire proposal is wholly beyond its statutory authority.”
More Appeals in RD Legal Funding Matter—Finally, the battle over the constitutionality of the CFPB continues. In June, U.S. District Court Judge Loretta A. Preska ruled in the RD Legal Funding case that the structure of the Bureau—with a single director removable only for cause—rendered it unconstitutional. As a remedy, the court held that Title X of Dodd-Frank should be struck in its entirety.
Brought by the CFPB together with the New York attorney general, the case alleged violations of both the Consumer Financial Protection Act (CFPA) and New York state law. In September, Judge Preska dismissed the New York AG’s state and federal law claims (with prejudice for the attorney general’s federal UDAAP claims).
The Bureau has already appealed the constitutionality decision to the U.S. Court of Appeals for the Second Circuit, and the New York AG has followed suit.
An opinion from the Second Circuit could further muddy the CFPB constitutionality waters. Last year, the D.C. Circuit found the Bureau’s structure to be constitutional, and the Fifth Circuit is also considering the issue.
To read the New York AG’s Notice of Appeal, click here.
Why it matters
The death of “regulation by enforcement” is not news in itself, nor is the move toward substantive regulation on “abusive” practices, but these changes are very much welcomed by industry. Acting Director Mick Mulvaney continues to distinguish expressly his leadership style from that of his predecessor Richard Cordray, declaring death to regulation by enforcement and promising clarity on the term “abusive” as it appears in Dodd-Frank’s UDAAP prohibition.
Contrast these comments with the Disclosure Sandbox. Industry desires a level playing field. The Bureau should ensure that whatever emerges from the proposal preserves a level playing field. While consumer groups are perhaps understandably concerned about allowing entities to evade disclosure laws, the bigger potential harm is in allowing some to do so while other segments of the same market are unable to do so. And the ongoing battle over the constitutionality of the CFPB may create a potential circuit split, setting up the opportunity for new Justice Brett Kavanaugh to be the deciding vote on CFPB constitutionality. His dissenting opinion in PHH Corp. v. CFPB, in which he argued that the Bureau’s independent director structure is unconstitutional, could be the end result here.