CFPB Year in Review and Outlook for 2023

The Senate confirmed Rohit Chopra as the Director of the Consumer Financial Protection Bureau (CFPB) in October 2021. Since that time the CFPB has been active on a number of fronts across the financial services ecosystem. The bureau relied heavily on guidance, circulars, speeches and other informal processes, while maintaining a healthy pace of enforcement actions and rulemaking. Tim Rood, Head of Government and Industry Relations, recently published a report about CFPB’s direction and what to expect in 2023. We spoke with Tim about the highlights.

Racial equity has been a bureau priority. What have been the key developments this year?

In March 2022, the Bureau announced that it was updating its exam manual procedures to more closely “scrutinize discriminatory conduct that violates the federal prohibition against unfair practices,” including “decision-making in advertising, pricing, and other areas.” While details were lacking, the Bureau suggested that it would find a practice unfair where it had a disparate impact, because consumers “can be harmed by discrimination regardless of whether it is intentional.” Disregard of intent to discriminate is the hallmark of a disparate impact regime, which looks to the impact or outcome a policy had, rather than the motivations that drove the implementation of the policy in the first place.

And, while the Bureau indicated that discrimination based on religion and race might fall within the prohibition on unfair practices, it did not identify any other protected classes. Nor did it indicate whether it would incorporate other parts of disparate impact doctrine, such as noting that disparate impact claims must be based on something more than statistical disparity alone, or a recognition that “business necessity” could lead to statistical disparities that might otherwise be evidence of a discriminatory policy.

What enforcement have we seen on this issue?

In July, the Bureau brought an enforcement action against Trident Mortgage Company, a now-defunct mortgage originator. Along with the Department of Justice (DOJ), the Bureau alleged intentional discrimination based on Trident’s failure to originate a sufficient number of mortgages in majority-minority census tracts compared to its peer institutions. The conclusion that Trident had intentionally discriminated was bolstered by the government’s analysis of where Trident located its offices and targeted its advertising material, as well as reference to a number of emails that the government described as “racist or discriminatory.”

Both agencies alleged violations of the Equal Credit Opportunity Act (ECOA), while DOJ also alleged that this conduct violated the Fair Housing Act (FHA). Importantly, since the case was a negotiated settlement and included violations of both ECOA and FHA, the government did not need to prove that the claimed conduct would have violated ECOA on its own. While nothing can be certain, it is possible that the government would have had difficulty proving a stand-alone ECOA claim. No specific victims of intentional discrimination were identified, and it is at best uncertain whether the aggregate loan data cited by the government would have been sufficient to show an ECOA violation.

What activity are you seeing outside of the litigation and rulemaking space?

The Bureau focused more on issuing reports, sub-regulatory guidance, and interpretive rules rather than the more traditional legislative rules and enforcement actions. There are good reasons for a regulator to do this: efficiency and speed being the most likely. But there are also bad ones, like wanting to avoid judicial scrutiny of a legal position. Regardless of motivation, this can put regulated entities in a bind. On the one hand, a regulator with the authority to write rules and bring enforcement actions is stating its view of what the law requires of regulated entities. On the other hand, sub-regulatory guidance does not have the force of law, so regulated entities are not required to follow it.

What are some issues the industry should anticipate in 2023?

The Bureau seems intent on undertaking at least two major rulemakings. First, the Bureau is pursuing a rulemaking that it hopes will make it easier for customers to switch banks. While this rulemaking was required by statute, Director Chopra may have undertaken the task even without the command from Congress. Though unlikely, the Bureau may try to bring the concept of customer exit to the mortgage servicing industry by attempting to beef up consumer rights or otherwise give the consumer some input into who services their mortgage.

The Bureau is also preparing for a rulemaking in the mortgage servicing space. It recently issued a request for information about potential ways to make refinancing easier and more affordable for certain borrowers, and whether the experience with forbearance and loss mitigation related to COVID-19 can be expanded or generalized to apply outside of the COVID context. In private conversations, Bureau staff has indicated that the rule will focus on procedural safeguards around the offering of these products, similar to the way that current loss mitigation rules apply only if the investor/lender offers loss mitigation in the first instance.

What challenges is the CFPB facing?

The Bureau is being challenged in court on many fronts. The Fifth Circuit Court of Appeals recently invalidated what was left of the Bureau’s Payday Rule because it found that the Bureau was unconstitutionally structured. The Bureau has asked the Supreme Court to reverse this ruling, but the ultimate resolution of this issue is unclear. Until the Supreme Court weighs in, the Bureau can expect to face challenges from any number of regulated parties making the same argument. Additionally, a coalition of banking trade groups is challenging the Bureau’s update to the exam manual, arguing that unfairness and discrimination are separate concepts and must be treated separately. The parties are currently briefing the issues. The court should issue a ruling sometime next year, which the losing party will almost surely appeal.

To obtain a copy of the entire report “CFPB Year in Review,” contact Tim Rood, Head of Government and Industry Relations, at timrood@situsamc.com.