By Courtney Dankworth, Alexandra Mogul and David Imamura

Law360 (November 16, 2020, 4:44 PM EST )

Courtney Dankworth

Alexandra Mogul

David Imamura

The Biden administration is prepared to fundamentally reform the Consumer Financial Protection Bureau beginning in 2021. Since 2017, directors appointed by President Donald Trump have reduced funding for the bureau and stalled its rulemaking and enforcement activities.

The Biden administration will likely pursue diametrically opposed priorities for the agency, although a Republican-controlled U.S. Senate is likely to curtail efforts to expand the bureau's authority into new markets.

Because of the U.S. Supreme Court's June decision in Seila Law LLC v. CFPB, President-elect Joe Biden will be able to appoint immediately a new CFPB director to pursue a more pro-consumer stance for the bureau, leading to a substantially more active bureau both in rulemaking and enforcement.

Bureau Leadership

The Seila Law Decision

Unlike most federal agencies, Congress designed the CFPB to be insulated from changes in presidential administrations by requiring that a director be removable by the president only for cause. This insulation ended earlier this year.[1] In Seila Law v. CFPB, the Supreme Court struck down the for-cause limitation, finding that it violated separation of powers.

Before Seila Law, Trump appointee Kathy Kraninger would have remained at the helm of the CFPB until 2023. Because of the Seila Law decision, Biden will now be able to choose his own director.

Biden's Nominee for CFPB Director

The foremost question is whom Biden will select as CFPB director. Assuming Republicans retain control of the Senate following Georgia runoff elections in January, Biden may be forced to select a more moderate nominee.

Potential candidates for director, many from the orbits of Democratic Sens. Elizabeth Warren, D-Mass., and Sherrod Brown, D-Ohio, include:

• Patrice Ficklin, the founding director of the CFPB's Office of Fair Lending and Equal Opportunity;

• Rep. Katie Porter, D-Calif., formerly California's independent monitor of banks as part of a nationwide mortgage settlement; and

• Rohit Chopra, a commissioner at the Federal Trade Commission, former CFPB official and close Warren ally.[2]

Biden Transition Team

Biden has announced the formation of an agency review team for the CFPB.[3] The team's head is Leandra English, who was appointed acting director of the CFPB by departing Director Richard Cordray, but was ultimately replaced by Trump. Her appointment indicates a planned shift back to Cordray priorities.

Potential Expansions to CFPB Power

If Democrats gain control of the Senate in addition to the presidency, they will likely try to enact expansions to the bureau's power and jurisdiction. For example, the Biden campaign indicated an intention to establish a public credit-reporting agency under the CFPB as an alternative to current consumer reporting agencies to minimize racial disparities. Use of the public agency would be required for all federal lending programs.[4]

The Biden campaign also indicated that it would empower the CFPB to take action against exploitative student debt lenders as part of its broader effort to allow student debt to be discharged during bankruptcy.[5]

Assuming Republicans maintain control of the Senate, these types of broad jurisdictional changes are unlikely to be enacted.

Structure of the CFPB

Recent directors made major structural changes to the bureau, which effectively disempowered it. For example, Acting Director Mick Mulvaney submitted several requests to Congress to dramatically decrease agency funding and dismantled the bureau's advisory boards.[6] This was followed by removal of fair lending enforcement to the director's office, resulting in a slowdown in fair lending cases.[7]

In October, the CFPB stripped the Enforcement Office of its power to initiate its own investigations, leaving it to rely on agency supervisors for referrals and approval.[8] As a result, smaller nonbank firms, which are not supervised by the bureau, may escape enforcement investigations.

These changes will likely be reversed by a Biden-appointed director.

Enforcement

Enforcement Volume and Priorities

Under Biden, CFPB enforcement actions will almost certainly increase in number and breadth.[9] In addition, the focus of these actions will shift. Many of the enforcement actions brought by the Trump CFPB were against smaller companies, such as mortgage servicing companies and debt collectors, rather than larger banks.[10] Some speculated that the Trump CFPB was targeting extremely bad actors instead of pursuing more ambiguous cases.[11]

A Biden CFPB will likely focus on areas that have been lower enforcement priorities under the Trump administration. For example, the Biden campaign pledged to "[h]old financial institutions accountable for discriminatory practices," and Democrats have pushed for additional actions to protect minority and women borrowers.[12]

Similarly, a Biden CFPB is likely to focus on payday lenders and student loan servicers after Democrats accused Kraninger of neglecting these areas.[13] And the CFPB will likely focus on issues arising from COVID-19, including investigating financial institutions for Payment Protection Program fraud and lack of compliance or controls in the application process.

Anecdotally, entities with pending investigations were attempting to settle even before the election, on the assumption that a Biden bureau may push for greater penalties.[14] These efforts will accelerate in the transition period now that Biden is the president-elect.

Regulation by Enforcement

Immediately after the bureau's establishment, it was accused of regulation by enforcement, or bringing enforcement actions in the absence of clear rules against the alleged behavior. The Trump CFPB changed course, with Mulvaney stating: "Regulation by enforcement is done," and "financial service providers should be allowed to know what the law is before they are accused of breaking it."[15]

Kraninger likewise emphasized the need for clear rules before bringing enforcement actions.

Regulation by enforcement was likely an artifact of the founding of the bureau, which pursued a broad enforcement mandate before it was able to issue many regulations. Consumer finance companies should nevertheless remain vigilant about enforcement actions in their industry, particularly in new and developing areas in which regulations have not yet been formulated or crystallized, such as data privacy and artificial intelligence.

Consumer Harm

During her tenure, Kraninger focused on customer harm in determining the CFPB's enforcement priorities. A Biden CFPB may be more expansive in its priorities, looking not just at customer harm but also harm to markets for consumer capital, which had been a top concern under Cordray,[16] or even anti-competition issues.

Regulatory Changes

Addressing Trump-Era Changes

Over the past few years, the bureau has shifted away from the more aggressive approach undertaken by Cordray. The Trump administration resurrected the Congressional Review Act to eliminate bureau regulations and guidance unless and until they are reauthorized by Congress.[17]

Accordingly, if Republicans retain control of the Senate, a Biden bureau may not be able to re-implement the rules invalidated pursuant to the CRA. If Democrats take control of the Senate, however, rules finalized as early as May or June may be subject to congressional review by the new Congress.[18]

Below are some regulatory areas that, pursuant to the CRA or otherwise, a Biden bureau may seek to reverse or amend.

Indirect Auto Lending

In May 2018, Congress invalidated the CFPB's 2013 indirect auto lending bulletin,[19] which stated that certain discretionary pricing practices by auto dealers and auto lenders resulted in a disparate impact under the Equal Credit Opportunity Act. Pursuant to the CRA, congressional authorization would be required before the bureau could issue a new rule substantially the same as that invalidated.

The bureau could nevertheless attempt to adopt a variation of the previous guidance, or undertake enforcement actions based on a disparate impact theory. In March, Brown and Warren highlighted concerns that the structure of the auto loan market allows for consumers to be exploited, and criticized the bureau for not having "taken meaningful action to combat these trends during [Kraninger's] tenure as Director."[20]

Arbitration

The CRA was also used to disapprove the bureau's arbitration rule, which would have prohibited covered entities from requiring arbitration of future disputes with consumers.[21] Accordingly, congressional authorization would be required before the bureau could issue new regulations that are substantially the same as the revoked Arbitration Rule.

Payday Lending

In July, the CFPB revoked aspects of the Cordray-era Payday Lending Rule that had deemed it an unfair and abusive practice to make certain payday and vehicle title loans without determining a borrower's ability to repay.

This revocation was executed by regulation after the bureau "re-evaluat[ed] the legal and evidentiary bases for [those] provisions and [found] them to be insufficient."[22] Accordingly, the bureau could enact similar regulations without the need for congressional action under the CRA.

Debt Collection

Earlier this month, the bureau finalized its debt collection practices rule, limiting debt collectors' attempts to reach consumers, and allowing debtors to opt out of allowing collectors to contact them via e-mail, text messages, or other media. The rule failed to address many of the calls for increased regulation that were outlined under Cordray.[23]

The bureau could revise the final rule before it takes effect, including by reopening the rule for comment or revocation by regulation.

Mortgages

The bureau has proposed to amend the general qualified mortgage loan definition to replace the debt-to-income-based approach with a price-based approach.[24]

Critics of the proposal view the price-based approach as imposing an arbitrary price cap, and argue that using pricing as a cutoff point will have a discriminatory impact on access to credit unconnected to ability to repay.[25] The bureau may reevaluate this approach to better reflect the views of consumer protection stakeholders.

Consumer Access to Information

Continuing an initiative started in 2016,[26] the bureau recently requested additional comments in developing regulations to implement Section 1033 of the Dodd-Frank Act, which establishes a consumer's right to access financial information.[27] The Biden CFPB will likely take up this potential rule and attempt to expand consumer rights in this area.

Potential Areas of Focus

COVID-19 continues to put stress on consumers. According to the CFPB's consumer complaint database, complaints from March through November increased by over 50% from the same time last year.[28] A Biden bureau may seek to provide consumers with urgent regulatory relief. Below, we outline topical areas that are likely to see some traction.

Mortgages

Democrats have criticized the bureau for failing to ensure that mortgage borrowers were aware of available relief under the Coronavirus Aid, Relief and Economic Security, or CARES, Act, and Brown has called on the CFPB to revise its mortgage servicing rules to better protect consumers from foreclosure during COVID-19.

Fair Lending

Biden has made it clear that fair lending — whether for mortgages, small businesses or consumer loans — is on his radar.[29] The bureau could continue development of rules implementing ECOA, including disparate impact, accessibility for limited-English-proficiency speakers, advertising to disadvantaged groups, discrimination based on sexual orientation and gender identity, and small-business lending.[30]

Credit Reporting

Democrats have long been critical of the consumer credit reporting system, citing the broad usage of consumer credit reports and consumers' lack of recourse regarding false or misleading information. Biden has echoed these criticisms, calling for the creation of a more transparent public credit reporting agency.[31]

Additionally, in January, the U.S. House of Representatives passed legislation calling for several reforms to the credit reporting industry, including an appeals process for disputed items on reports, limits regarding the use of credit reports for employment purposes, and bureau oversight of the predictive value of credit scoring models.[32]

Though this legislation stalled in the Senate, it indicates Democrats' priorities, some of which may not require legislative action for the bureau to effectuate.

Student Loans

Biden campaigned on the promise to empower the CFPB "to take action against private lenders who are misleading students about their options and do not provide an affordable payment plan when individuals are experiencing acute periods of financial hardship."[33]

Proposed legislation would provide a credit rehabilitation process for certain student borrowers who have missed some payments on their private student loans.[34] Again, while this legislation is unlikely to make headway in a Republican-controlled Senate, the bureau could pursue similar goals by rulemaking or enforcement.

Conclusion

The election of Biden combined with the Supreme Court's decision in Seila Law mean that consumer finance companies can expect a significant change in the focus and tenacity of the CFPB. Biden will be able to set the bureau on a new path immediately.

As long as the Senate remains Republican-controlled, however, his ability to effectuate more substantial structural change will likely remain limited.

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Courtney M. Dankworth is a partner, and Alexandra N. Mogul and David Imamura are associates, at Debevoise & Plimpton LLP.

Eric Carlson, a law clerk at the firm, contributed to this article.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] Debevoise & Plimpton LLP, Client Update: Insulated No More: The Seila Decision and the End of the Independent CFPB Director (Jun. 30, 2020), https://www.debevoise.com/insights/publications/2020/06/insulated-no-more-the-seila-decision.

[2] Zachary Warmbrodt, Progressives Press Biden to Recruit Warren Allies, Setting up Conflict in Party, Politico (Oct. 12, 2020, 4:30 AM), https://www.politico.com/news/2020/10/12/biden-administration-elizabeth-warren-allies-428439.

[3] Agency Review Teams, Biden-Harris Transition, https://buildbackbetter.com/the-transition/agency-review-teams/ (last visited Nov. 10, 2020).

[4] Press Release, Biden for President, Biden-Sanders Unity Task Force Recommendations (Jul. 8, 2020), https://joebiden.com/wp-content/uploads/2020/08/UNITY-TASK-FORCE-RECOMMENDATIONS.pdf.

[5] Id.

[6] Michael Grunwald, Mulvaney Requests No Funding for Consumer Financial Protection Bureau, Politico (Jan. 18, 2018, 9:00 AM), https://www.politico.com/story/2018/01/18/mulvaney-funding-consumer-bureau-cordray-345495; Chris Arnold & Avie Schneider, Mick Mulvaney Effectively Fires CFPB Advisory Council, NPR (Jun. 6, 2018, 5:30 PM), https://www.npr.org/2018/06/06/617612219/mick-mulvaney-effectively-fires-cfpb-advisory-council.

[7] Renae Merle, Trump Administration Strips Consumer Watchdog Office of Enforcement Powers in Lending Discrimination Cases, Wash. Post (Feb 1. 2018, 5:40 PM), https://www.washingtonpost.com/news/business/wp/2018/02/01/trump-administration-strips-consumer-watchdog-office-of-enforcement-powers-against-financial-firms-in-lending-discrimination-cases.

[8] Evan Weinberger, Smaller Firms Could Escape Scrutiny in CFPB Enforcement Shakeup, Bloomberg Law (Oct. 22, 2020, 5:31 AM), https://news.bloomberglaw.com/banking-law/smaller-firms-could-escape-scrutiny-in-cfpb-enforcement-shakeup.

[9] Katanga Johnson, Biden Election Win Could Decide Fate of Consumer Financial Protection Bureau, Fox Business (Oct. 20, 2020), https://www.foxbusiness.com/economy/biden-election-win-could-decide-fate-of-consumer-financial-protection-bureau; Christopher L. Peterson, Dormant: The Consumer Financial Protection Bureau's Law Enforcement Program in Decline (Consumer Fed'n of Am., 2019), https://consumerfed.org/wp-content/uploads/2019/03/CFPB-Enforcement-in-Decline.pdf; Jon Hill, CFPB Enforcement Sees Highest New Case Volume in 5 Years, Law360 (Oct. 14, 2020, 8:24 PM), https://www.law360.com/articles/1317407/cfpb-enforcement-sees-highest-new-case-volume-in-5-years.

[10] Hill, supra note 9.

[11] Evan Weinberger, CFPB Penalties Decline as Enforcement Actions Go Small, Bloomberg Law (Aug. 14, 2020, 5:30 AM), https://news.bloomberglaw.com/banking-law/cfpb-penalties-decline-as-enforcement-actions-go-small.

[12] Lift Every Voice: The Biden Plan for Black America, https://joebiden.com/blackamerica/ (last visited Nov. 9, 2020).

[13] Min. Staff Rep. of S. Comm. on Banking, Housing, and Urban Affairs, 116th Cong., Consumers Under Attack: The Consumer Financial Protection Bureau under Director Kraninger (2020), https://www.brown.senate.gov/imo/media/doc/March%202020%20CFPB%20Minority%20Report.pdf; Kate Berry, Where Have All the CFPB Fair-Lending Cases Gone?, American Banker (Dec. 16, 2019, 9:30 PM), https://www.americanbanker.com/news/where-have-all-the-cfpb-fair-lending-cases-gone; Press Release, Senator Sherrod Brown, Brown, Warren, and Harris Call on CFPB to Protect Borrowers From Discrimination (Jul. 31, 2020), https://www.brown.senate.gov/newsroom/press/release/brown-cfpb-protect-borrowers-from-discrimination; Jillian Berman, 'Consumer Harm' Could Happen When Government Starts Collecting Student Loan Payments Again, CFPB Warns, MarketWatch (Oct. 29, 2020, 1:23 PM), https://www.marketwatch.com/story/consumer-harm-could-happen-when-government-starts-collecting-student-loan-payments-again-cfpb-warns-11603992186; Orla McCaffrey & AnnaMaria Andriotis, Financial Firms Gear Up for Biden and an Emboldened Consumer Watchdog, Wall St. J. (Oct. 21, 2020, 6:10 AM), https://www.wsj.com/articles/financial-firms-gear-up-for-biden-and-an-emboldened-consumer-watchdog-11603272600.

[14] McCaffrey & Andriotis, supra note 13.

[15] Sylvan Lane, Mulvaney Urges Congress to Strip Agency's Powers, The Hill (Apr. 11, 2018, 4:38 PM), http://thehill.com/policy/finance/382728-mulvaney-urges-congress-to-strip-agencys-powers; see also Caroline Basile, Leaked Mulvaney Memo: CFPB Must End Regulation by Enforcement, HousingWire (Jan. 23, 2018, 6:42 PM), https://www.housingwire.com/articles/42357-mulvaney-memo-cfpb-to-end-regulation-by-enforcement?eid=311690031&bid=1982914.

[16] Richard Cordray, Prepared Remarks of CFPB Director Richard Cordray at the American Bar Association (Apr. 3, 2014), https://www.consumerfinance.gov/about-us/newsroom/prepared-remarks-of-cfpb-director-richard-cordray-at-the-american-bar-association.

[17] See 5 U.S.C. §§ 801-808. Specifically, no rule invalidated pursuant to the CRA may be "reissued in substantially the same form, and a new rule that is substantially the same as [the invalidated rule] may not be issued, unless the reissued or new rule is specifically authorized by a law enacted after the date of the joint resolution disapproving the original rule." Id. § 801(b)(2).

[18] Under the CRA's "lookback" provision, a subsequent session of Congress can disapprove any rule issued by agencies during the last 60 legislative days of either house of the previous Congress. Given the variable nature of congressional scheduling, it is currently difficult to pinpoint exactly which rules fall within this timeframe. Id. § 801(d).

[19] CFPB Bulletin 2013-02, Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act (Mar. 21, 2013), http://files.consumerfinance.gov/f/201303_cfpb_march_-Auto-Finance-Bulletin.pdf.

[20] Letter from Sens. Sherrod Brown and Elizabeth Warren, to Hon. Kathleen Kraninger, Dir. CFPB, at 4 (Mar. 12, 2020), https://www.warren.senate.gov/imo/media/doc/2020.03.12%20Letter%20to%20CFPB%20Re%20Auto%20Lending.pdf at 4 (stating that "the CFPB has not issued a comprehensive report on this issue since 2017, and has not taken a single enforcement action against any auto lenders since 2018").

[21] Arbitration Agreements, 82 Fed. Reg. 55,500 (Nov. 22, 2017) ("Under the Congressional Review Act, Congress has passed and the president has signed a joint resolution disapproving a final rule published by the Bureau of Consumer Financial Protection (Bureau) on July 19, 2017, to regulate arbitration agreements in contracts for specified consumer financial products and services. Under the joint resolution and by operation of the Congressional Review Act, the arbitration agreements rule has no force or effect. The Bureau is hereby removing it from the Code of Federal Regulations (CFR)."); see also Arbitration Agreements, 82 Fed. Reg. 33,210 (Jul. 19, 2017). Interestingly, though the CRA resolution had no issue passing the House of Representatives, the resolution required a tiebreaking vote by Vice President Pence before heading to the President's desk.

[22] Press Release, CFPB, Consumer Financial Protection Bureau Issues Final Rule on Small Dollar Lending (Jul. 7, 2020), https://www.consumerfinance.gov/about-us/newsroom/cfpb-issues-final-rule-small-dollar-lending/; Payday, Vehicle Title, and Certain High-Cost Installment Loans, 85 Fed. Reg. 44,382 (Jul. 22, 2020) (to be codified at 12 CFR pt. 1041).

[23] Debt Collection Practices (Regulation F), Final Rule, https://www.consumerfinance.gov/documents/9275/cfpb_debt-collection_final-rule_2020-10.pdf (to be codified at 12 CFR pt. 1006); see also 84 Fed. Reg. 23,274 (proposed May 21, 2019); CFPB, Small Business Review Panel for Debt Collector and Debt Buyer Rulemaking, Outline of Proposals Under Consideration and Alternatives Considered (July 28, 2016), http://www.consumerfinance.gov/f/documents/20160727_cfpb_Outline_of_proposals.pdf; Debevoise & Plimpton LLP, Client Update: Consumer Financial Protection Bureau Releases Rules for Comprehensive Reform of Debt Collection Industry (Jun. 3, 2019), https://www.debevoise.com/-/media/files/insights/publications/2019/05/20190603_consumer_financial_protection.pdf.

[24] Qualified Mortgage Definition Under the Truth in Lending Act (Regulation Z): General QM Loan Definition, 85 Fed. Reg. 41716 (to be codified at 12 CFR pt. 1026); Press Release, CFPB, Consumer Financial Protection Bureau Takes Steps to Address GSE Patch (Jun. 22, 2020), https://www.consumerfinance.gov/about-us/newsroom/cfpb-takes-steps-address-gse-patch/.

[25] Press Release, National Consumer Law Center, CFPB Proposal Would Encourage Unaffordable Mortgage Lending and Threaten Access to Credit (Jun. 22, 2020), https://www.nclc.org/media-center/cfpb-proposal-would-encourage-unaffordable-mortgage-lending-and-threaten-access-to-credit.html?print=pdf.

[26] Request for Information Regarding Consumer Access to Financial Records, Notice, 81 Fed. Reg. 83,806 (Nov. 22, 2016).

[27] Debevoise & Plimpton LLP, Client Update: CFPB Seeks Public Comment in Implementing Dodd-Frank's Consumer Right of Access to Financial Records (Nov. 2, 2020), https://www.debevoise.com/insights/publications/2020/11/cfpb-seeks-public-comment-in-implementing-dodd; Consumer Access to Financial Records (Advance Notice of Proposed Rulemaking), 85 Fed. Reg. 71003 (Nov. 6, 2020).

[28] CFPB Consumer Complaint Database, https://www.consumerfinance.gov/data-research/consumer-complaints/ (last visited Nov. 9, 2020). The number of complaints for the same period in 2019 increased by just over 11% as compared to the same months in 2018.

[29] Highlights From the Biden-Harris Plan to Rescue and Revitalize Main Street, https://joebiden.com/main-street/ (last visited Nov. 10, 2020); The Biden Plan to Build Back Better by Advancing Racial Equity Across the American Economy, https://joebiden.com/racial-economic-equity/ (last visited Nov. 10, 2020); The Biden Plan For Investing in Our Communities Through Housing, https://joebiden.com/housing/ (last visited Nov. 9, 2020).

[30] Request for Information on the Equal Credit Opportunity Act and Regulation B, Notice, 85 Fed. Reg. 46,600 (Aug. 3, 2020).

[31] The Biden Plan for Investing in Our Communities Through Housing, https://joebiden.com/housing/ (last visited Nov. 9, 2020).

[32] Comprehensive CREDIT Act of 2020, H.R.3621, 116th Cong. (2020) (as passed by House, Jan. 29, 2020).

[33] The Biden Plan for Education Beyond High School, https://joebiden.com/beyondhs/ (last visited Nov. 9, 2020); The Biden Plan to Build Back Better by Advancing Racial Equity Across the American Economy, https://joebiden.com/racial-economic-equity/ (last visited Nov. 10, 2020).

[34] Comprehensive CREDIT Act of 2020, tit. III, H.R.3621, 116th Cong. (2020) (as passed by House, Jan. 29, 2020) ("Student Borrower Credit Improvement Act").

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