Sent by the AFSA, this interesting article should put our industry into the “very cautious” mode in regards to how we will get brought under the control of the CFPB.
Whether the Consumer Financial Protection Bureau (CFPB) will be a rules-based or enforcement-based agency will impact its relationship with the entities it regulates and its role in the marketplace. Financial institutions are accustomed to the rules-based policies that are common among federal banking agencies, which consist of formal administrative rulemaking with the opportunity for public comment and strict standards regarding how the agency analyzes and evaluates public input. In the final regulation, the agency is required to explain their final positions in a statement of basis and purpose. Final regulations are then subject to a challenge in federal court, which can be brought by a wide array of parties, such as trade associations. On the other hand, enforcement-based agencies create de facto rules through targeted enforcement actions or litigation actions that do not need to be based on previously publicized rules. While they are also subject to challenge in federal court, mounting a challenge can be more complex because of the continuing impact they may have on the reputation of the financial institution involved, the greater legal hurdles that must be met to set aside formal enforcement and litigation actions, and the fact that legal challenges may only be brought by the financial institution that is the target of the enforcement action. This results in most cases being settled before a court decision is made and in effect establishing the agency’s view of the law as the standard.
The approach the CFPB takes to defining “unfair, deceptive or abusive practices” under the Dodd-Frank Act will be particularly important. If the CFPB promulgates formal administrative rules to define such practices, it will be subject to limitations not generally imposed on other federal bank regulatory agencies. For example, the CFPB is required to balance the costs and benefits to financial service providers and consumers, “including the potential reduction of access by customers to consumer financial services,” and is also required to consult with the appropriate prudential federal regulators. However, taking the enforcement route, which does not require these checks and balances, could create an internal agency bias in certain circumstances.