By refocusing the Consumer Financial Protection Bureau on supervision instead of enforcement, Director Kathy Kraninger says she wants to prevent consumer harm. But skeptics say the new approach could have the opposite effect.
In an April speech laying out her priorities, Kraninger demonstrated how the agency continues to move away from the enforcement actions, large fines and public shaming that were the hallmark of her Obama-appointed predecessor, Richard Cordray.
Instead, Kraninger said, the agency is emphasizing preventive measures. “Supervision is the heart of this agency,” she said.
Observers say while a stronger focus on supervision could benefit consumers more than enforcement in certain cases, civil fines will continue to plummet and a more private process to resolve regulatory matters instead of public disclosure of transgressions may let companies off the hook.
“You might see change come about more quickly through supervision than years of litigation,” said Gerry Sachs, a partner at Venable, and a former CFPB senior counsel for enforcement policy and strategy. “The question is, will the CFPB be able to focus on confidential supervisory processes and procedures while also avoiding the pitfalls of regulatory capture. That has yet to be determined.”
To many CFPB watchers, a less adversarial approach would be just another example of regulatory relief. Under Kraninger's watch, the CFPB already has proposed revamping a tough payday lending rule. During the combined tenures of Kraninger and former acting Director Mick Mulvaney, the volume of CFPB enforcement actions has fallen by 80%, according to a recent Consumer Federation of America study.
Some suggest her approach goes against the bureau's mandate.
"So how is she going to show the effectiveness of the bureau when most actions of their actions are done confidentially?” said Arthur E. Wilmarth Jr., a professor at George Washington University Law School. "Congress made a very deliberate decision that all the other regulatory agencies had fallen down on consumer protection leading up to the financial crisis. That was the whole point of the CFPB. They were the cop on the beat."
The priorities Kraninger laid out in her speech in April echoed those of Mulvaney, who repeatedly disparaged Cordray for having supported "regulation by enforcement."
Although the CFPB under Kraninger has resumed issuing civil investigative demands against financial firms, she has indicated there will be fewer enforcement actions going forward.
“I hope that our emphasis on prevention will mean that we need our enforcement tool less often,” Kraninger said in the speech, at an event hosted by the Bipartisan Policy Center. “To ensure a culture of compliance means working confidentially in a back-and-forth process with a financial institution to prevent consumer harm until the institution demonstrates that process won’t work for them."
“If we succeed in fostering a culture of compliance and preventing harm, we would expect the number of complaints and the number of meritorious complaints to decline,” she said.
To be sure, Kraninger said she intends to hold “bad actors” accountable through enforcement actions. But given her comments, many attorneys defending companies in investigations will likely push for confidential supervisory actions, believing that only the most egregious violations will be announced publicly.
"Absent fraud or some egregious consumer harm, companies should be able to fix issues going forward and provide remediation without having a potpourri of state regulators also examining,” said Stephen Ornstein, co-leader of Alston & Bird’s consumer financial services team.
Some said consumers might even benefit from the change toward supervision if financial firms move quickly to fix problems rather than tying up resources fighting the bureau over allegations of wrongdoing.
“Most companies out there just want to get it right, and a supervisory action without a huge penalty and public-shaming press release can often mean more of a company’s money and resources will be available for restitution and corrective action,” said Richard Horn, managing member of Garris Horn and a former senior counsel and special adviser at the CFPB.
The focus on supervision also will benefit banks and financial firms if there is less litigation overall.
“If I’m a servicer or an originator, I’m dealing with a vast panoply of federal or state laws, and there could be a number of things that have to be corrected in a nonpublic way without having a state AG or a class action and everyone involved,” Ornstein said. "This isn’t necessarily anti-consumer. It would enable the lender or the [mortgage] servicer to cure the errors going forward without facing what could be a multistate examination or remediation with many governmental actors.”
Kraninger also plans to assess the CFPB's supervisory exam process, including how long exams take and how violations are investigated and passed on to the enforcement staff. Some consumer advocates said that could mean examiners face pressure to resolve issues in private rather than refer cases to enforcement.
"What happens when investigators bring in new cases? Will those be pushed back to supervision, to exams?" said Chris Peterson, director of financial services and a senior fellow at the Consumer Federation of America and a former CFPB special adviser.
Tony Alexis, head of Goodwin Procter’s consumer financial services enforcement practice, said Kraninger likely wants to make sure the bureau completes exams on time, which also can benefit financial firms.
“Institutions rely on those reports of exams because examination outcomes could cause [a company] to change practices, either in its operations or compliance,” said Alexis, a former CFPB assistant director and head of enforcement. “It could have a financial impact if a company has to change the way it offers a product, and on the compliance side it could have an expense attached to it and may be a matter requiring attention or a memorandum of understanding.”
He also said the CFPB’s focus on compliance upfront, rather than following up after the fact through enforcement, places a premium on preventing potential consumer-based violations.
“If you let the institutions draw the line on their interpretation of the legal standards, with compliance monitoring for law compliance and potential fixes, institutions should be able to mitigate a lot of the riskiest behaviors,” Alexis said.