Biden has the power to make the Consumer Financial Protection Bureau more aggressive – he has President Trump to thank

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Over the past four years, the Trump administration has significantly curtailed the activities of the Consumer Financial Protection Bureau, the agency created in the wake of the 2008 financial crisis that was meant to protect Americans from potential wrongdoing by the majority. financial institution of the country. firms.

But thanks to a recent Supreme Court decision, regulatory experts expect the CFPB to be much more aggressive over the next four years.

Yet it is ironic that Biden has this opportunity, said Prentiss Cox, a law professor at the University of Minnesota. “Biden’s authority to appoint a new CFPB director is courtesy of an industry lawsuit that challenges the agency’s authority,” Cox said.

Earlier this year, the Supreme Court ruled that the CFPB’s structure was unconstitutional, giving President Trump the authority to remove the agency’s director. The plaintiffs in the case had tried to shut down the regulatory body, which was the brainchild of the now Sen. Elizabeth Warren (D., Massachusetts).

As a result, when Biden takes office in January, he will have the ability to fire the agency’s current head, Kathy Kraninger, who was confirmed in December 2018. Consumer advocates argue that under Kraninger, and before her, Mick Mulvaney, who served as the agency’s lead actor for the previous year – the CFPB has strayed from its intended mission.

Richard Cordray, who served as CFPB director during the administration before leaving office to run for governor of Ohio in 2017, said the agency has undergone a major change under Trump’s appointments.

“It was a change that, in general, became less aggressive in protecting consumers and more solicitous of the interests of financial institutions,” Cordray told MarketWatch.

Under Trump, the CFPB has penalized financial firms less

One of the main ways that the CFPB ensures that bad actors do not take advantage of consumers is through enforcement actions.

Through these actions, the agency will claim that the company in question violated financial regulations. In some cases, the CFPB will impose a fine or order the company to pay restitution to affected customers.

The CFPB claims that the agency has continued these efforts while Trump was in office. “The CFPB has worked tirelessly under the leadership of Director Kraninger to ensure that consumers are protected in the financial marketplace,” said a CFPB spokesperson. “When harm has occurred, it has used the Office’s enforcement tool vigorously to go after bad actors on behalf of consumers.”

That in itself is a change from its immediate predecessor Mulvaney, according to Cox. “Enforcement actions were more or less stopped under Mulvaney, unless there was a specific push to bring one to fruition,” as in the 2018 case against Wells Fargo WFC,
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related to auto loans and mortgages, Cox said.

While Kraninger had resumed enforcement efforts, they looked very different from how the agency carried out these actions during the Obama years. Cordray emphasized suing primarily very large institutions and generally sought large civil penalties plus consumer restitution, experts said.

With Kraninger, “the size of the target was reduced, a lot more action against smaller companies follows,” Cox said. Additionally, these cases rarely featured civil penalties and restitution.

Consumers recovered $ 777 million in fiscal 2019 through compliance actions and CFPB settlements, which was the largest amount in four years, according to The Wall Street Journal. But many of these cases were holdovers from the Obama years that had yet to be resolved, and as the Journal noted, the CFPB has filed far fewer cases under Kraninger and Mulvaney than under Cordray’s leadership.

Under Biden, the CFPB will be more tenacious in going after companies

Consumer advocates argue that hefty civil penalties and restitution are important to ensure that other financial firms do not engage in predatory behavior.

“You don’t want a company to say this is just the cost of doing business,” said Ashley Harrington, director of federal advocacy and senior adviser at the Center for Responsible Lending. “That is not deterrence, that is not responsibility, and that does not make our system fairer or work better for consumers.”

Analysts expect the CFPB under Biden to follow a model similar to the one the agency pursued under Obama and Cordray in terms of denouncing predatory practices and assessing heavy sanctions.

“I would probably expect law enforcement to not only be stronger, but also a little more aggressive in terms of the types of remedies they seek,” said Leslie Parrish, senior analyst at Aite Group and former expert and program manager. . at the Consumer Financial Protection Office. “So not just having fines, but also how much are those fines and the proceeds going to restoring integrity to consumers who have been harmed?”

In addition, the Biden administration is expected to revive fair loan investigations based on the “disparate impact” principle. Under this concept, regulators could use data to see if there are disparities in who was receiving loans by race or ethnicity, for example, even if there is no evidence of direct and explicit discrimination. The Obama administration had used this principle in its regulatory efforts, but the Trump administration has backed away from it.

These changes could even lead to a lot of activity in the weeks ahead of the grand opening, several experts told MarketWatch. “I think you’re going to see a series of deals during the fourth quarter where companies in dispute with the CFPB will just be resolved,” said Karen Shaw Petrou, co-founder and managing partner of Federal Financial Analytics, a consulting firm on regulatory affairs. matters for financial services companies.

“They’d rather get something they don’t like from a Trump administration appointee than the odds of something they really, really, really don’t like, under Biden,” he said.

Biden’s CFPB will aim to strengthen consumer protection in many areas

Beyond seeking settlements with companies that violated the law, the CFPB also plays an important role in drafting new rules and regulations regarding financial services. A new CFPB director will be able to make his mark on the agency by drafting new rules and reversing changes introduced during the Trump administration.

“All the markets that the Office deals with, given that there has been so much neglect under the Trump administration, they will have to be reviewed quite carefully to find out what old problems persist, with new problems that have arisen, etc.,” he said Cordray. .

Here are some of the issues the CFPB will likely address under Biden, according to analysts and observers:

Payday Loans:
One major change the CFPB has made under Trump came with payday loans, also known as small dollar loans. Last year, the agency removed a rule written during the Obama administration that required payday lenders to verify a person’s ability to repay the loan before giving it to them.

Payday loans generally carry very high interest rates, in many cases around 100%, and many borrowers end up getting another loan to pay off the original. This creates a debt cycle that can be very difficult to break, consumer advocates say. Under Biden, analysts hope the CFPB will revive the Obama-era rule to introduce more protections for consumers.

Overdraft fees: Last year, the CFPB published a request for comment regarding the overdraft rule, which prohibits banks from assessing an overdraft fee for a debit card or ATM transaction without first obtaining consumer consent. The rule was created by the Federal Reserve Board in 2009, but was placed under the jurisdiction of the CFPB through the Dodd-Frank Act. Some experts believe that Biden may seek to expand the rule. “It is not clear whether consumers know or are getting the correct information to choose to participate or not participate,” said Parrish.

Credit reports: During the presidential campaign, the task force formed between Biden and the former Democratic presidential candidate, Senator Bernie Sanders of Vermont, proposed the creation of a public credit reporting agency. They suggested that this agency would “provide a nondiscriminatory credit reporting alternative to private agencies” and that its use would be required by all federal loan programs, including home loans and student loans.

Such an effort would likely require congressional action, since the CFPB would likely not be able to create this credit reporting agency on its own. However, the CFPB could take steps to promote this cause.

“They could start investigating the viability of this credit reporting agency,” Parrish said. “That’s a kind of long-term business that would probably last more than four years of an administration, but it could serve to shed light on some of the problems related to the for-profit credit reporting structure right now.”

Consumer data: Last month, the Office issued an advance notice of the proposed rulemaking regarding information related to consumer access to financial records. This is the first step in the rulemaking process, suggesting that the CFPB seeks to codify what companies can and cannot do with consumer data.

“Cordray issued a statement in 2017, establishing a principle of ownership of personal data, but never defining it or ever stating what that actually meant in practice,” said Petrou. “It is still a hot topic of dispute.”

The debate is whether consumers have the right to tell companies what they can or cannot do with financial transaction data, which could mean everything from credit card records to information about how people interact with credit card applications. Mobile banking. As people’s financial lives unfold online, setting standards here becomes more and more important. And it’s a priority shared by Democrats and Republicans.

“If the federal government doesn’t set some rules of the road, I’m afraid we could have 50 states with their own versions,” Parrish said. “That would make it much more difficult for financial institutions and probably consumers to understand their rights.”

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