United States: CFPB Watch

Director Richard Cordray continues to keep watchers of the Consumer Financial Protection Bureau ("CFPB" or "Bureau") guessing as to his departure from the agency. The unpredictability surrounding his specific departure date, however, obscures key aspects of the CFPB's activities that will have a predictable impact on the financial industry.

CFPB Leadership Uncertain

Rumors of Director Cordray's potential departure started at the beginning of the summer and reached fever pitch before his speech at the AFL-CIO Labor Day picnic in Cincinnati, Ohio, which was perceived as an ideal venue for his declaration of intent to enter the Ohio gubernatorial race. This event was preceded days earlier by his refusal to provide any information in response to House Financial Services Committee Chairman Jeb Hensarling's demand that he declare whether he will serve out his term at the CFPB or resign to run for Ohio governor. Indeed, Chairman Hensarling's demand well could have had the effect of causing Director Cordray to stick to his guns and his CFPB position longer, rather than encouraging his early departure. Moreover, there is little prospect of the President forcibly removing Director Cordray from his position, thereby potentially giving the Democrat valuable political capital for his gubernatorial run in Ohio – a crucial swing state wavering on the brink despite the 2016 vote to elect President Trump. Even so, it is most likely that Director Cordray will leave his post this Fall, well in advance of the natural expiration of his term in July 2018.

While Director Cordray continues to sidestep questions about his political intentions, he did deliver a campaign-style speech at the AFL-CIO Labor Day event, coupling discussion of his record of defending consumers at the CFPB with messages of unity to fight for financial equality and opportunity. We believe the speculation, around the specific date when Director Cordray will declare his gubernatorial run, to be more noise than substance. What is more important is the likelihood that he will leave this Fall – but only after attempting to stave off challenges to the arbitration rule, issuing a payday rule and proposed debt collection rule, and consolidating the groundwork for continued CFPB activism after his departure, as discussed below.

Of course, speculation is also rampant on the question of the CFPB's leadership following Director Cordray's departure. The nomination and confirmation of a new Director will be long in coming. Continuing political upheaval has delayed other Trump appointments, and the controversy that will accompany the confirmation hearings of any candidate for the position of CFPB Director will complicate the process still more. As in many other aspects of the agency's operations, novel legal questions surround the issue of who will hold the position of Acting Director in the long interval before the confirmation of a permanent new Director.

When an Executive Branch position covered by the 1998 Federal Vacancies Reform Act becomes vacant, it may be filled in one of three ways: (1) the first assistant automatically assumes the functions and duties of the office; (2) the President directs an officer who has been confirmed by the Senate for another position to perform that role; or (3) the President selects an officer or employee in the same agency who holds a senior rank and has been with the agency for at least 90 of the preceding 365 days. The President has little reason to choose a current CFPB employee to fill the Acting Director role. He would be more inclined to choose a confirmed official from another agency to fill the Acting Director role while continuing to hold their existing office. The most likely choice would be Treasury Secretary Steve Mnuchin. Alternatively, CFPB Acting Deputy Director David Silberman could move into the Acting Director position. That in fact is the outcome specified by the Dodd-Frank Act "in the absence or unavailability of the Director." Some might contend that this specific Dodd-Frank provision for succession at the CFPB would override the Vacancy Act's general provisions for the President to fill vacant positions. Others would argue that the resignation of the Director is not precisely equivalent to his "absence or unavailability," and that the Vacancy Act authorizes the President to appoint a different Acting Director in any case.

Accordingly, any action taken by David Silberman as Acting Director potentially would trigger legal challenges to his authority to act in such capacity. Further, if the President took the initiative to appoint a different Acting Director, his move is far less likely to face opposition at the CFPB than if Rich Cordray was still in residence. Until the President makes that move, however, David Silberman likely would assume the duties of Acting Director and maintain the CFPB on its current course. Yet the CFPB under an Acting Director Silberman potentially would be significantly less aggressive and less inclined to push novel legal positions, particularly in the enforcement and rulemaking arenas.

But CFPB Activism Most Certain

Before the installation of new leadership, however, much activity will ensue through the CFPB that will have major impact on the financial industry and will be challenging to reverse. We focus here on three key CFPB rulemaking priorities and related enforcement and supervision activities.

On the rulemaking front, the CFPB's issuance of the arbitration rule banning class action waivers in arbitration clauses has garnered wide-spread opposition. While the House has passed a resolution to undo the rule pursuant to the Congressional Review Act (CRA), it is still unclear whether there will be sufficient votes in the Senate, where Republicans have only a two-vote margin. Although the 60-legislative day clock for Congress to act likely will not have elapsed before his departure, Director Cordray might well remain at the CFPB until the arbitration rule has survived what is perceived to be the peak of the CRA threat in the coming weeks.

A CFPB Director or Acting Director appointed by the President could not undo the arbitration rule by fiat. An agency's elimination or amendment of a rule must be supported by notice and comment, similar to the adoption of a rule. New CFPB leadership potentially could delay the compliance date of the rule and possibly reopen the rulemaking for further review, however. Indeed, the President might sign an Executive Order demanding such a review. The outcome of course would remain uncertain, as in the case of the Fiduciary Rule, on which the President signed such an Executive Order, resulting in the Department of Labor delaying the compliance date on some but not all components of that rule. The arbitration rule also would be subject to court challenge, which new CFPB leadership might be less inclined to defend vigorously.

The challenge that opponents to the arbitration rule has encountered in obtaining the CRA vote to undo that rule has emboldened Director Cordray to push for issuance of a final rule on payday and small dollar lending in the next few weeks in advance of his departure. In a strategic shift from the earlier wide-ranging proposal, the final rule is expected to be limited to small dollar loans with a term of 45 days or less. Excluded will be installment loans, including potentially auto title loans, that have longer terms. This shift would be a great relief to installment lenders, which the CFPB's original proposal would have subjected to a range of highly prescriptive compliance options that would have been difficult for the CFPB to justify, and for the industry to interpret and implement. There also have been rumors that the final rule will make it attractive for banks to reenter small dollar lending – e.g., through "the 5% option" for lenders to make loans without detailed ability-to-repay underwriting requirements if the monthly payments are no more than 5% of borrower gross monthly income. As a practical matter, we do not think that the rule will cause banks to dramatically increase their small dollar lending. Nevertheless, the narrowed focus of the payday final rule (and the net positive impact for installment lenders facing fewer payday and bank competitors) also will narrow the base for a CRA push to undo the rule – despite the payday industry's continued vociferous opposition.

Finally, the third prong in Director Cordray's rulemaking push – the debt collection rulemaking for third-party collectors and the contemplated analogue for creditors – has little prospect of reaching the finish line before the installation of new Republican leadership at the CFPB. The CFPB still may issue a notice of proposed rulemaking before Director Cordray's departure, but there will be no time to adopt a final rule. In a move similar to the strategic narrowing of the payday rule, Director Cordray publicly committed this summer to focusing the proposed rule largely on the frequency and substance of third-party collectors' disclosures and communications with debtors. As in the case of the payday rule, this narrowing of the first stage of the proposed debt collection rulemaking promises a major reduction in the level of opposition from the industry. While the industry is united in opposing the original proposal's detailed requirements concerning the substantiation of debts and related consumer disputes, some segments are open to receiving additional guidance regarding the frequency and substance of debt collection communications. This groundwork to reduce industry opposition is crucial to the survival of any proposed rule, given the opportunity for new Bureau leadership to undo the rulemaking after Director Cordray's departure.

At the same time that it is narrowing its rulemaking focus, however, the CFPB is pushing on the enforcement and supervision fronts, including expanding and opening new investigations. As one example, the CFPB is driving more aggressively than ever on debt collection investigations, potentially increasing industry exposure even in the absence of new rules. Besides scrutinizing third-party debt collectors, it is investigating creditors – dissecting their use and oversight of third-parties, as well as pursuing potential claims of unfair, deceptive and abusive acts and practices (UDAAP) based on the creditor's own conduct that might be prohibited if undertaken by third-party collectors. Similarly, while the CFPB has narrowed the focus of the payday rulemaking, it is poised to increase scrutiny of providers of what the Bureau broadly categorizes as "open-use credit," to include installment loans, prepaid and credit cards, ancillary products, overdraft and other open lines of credit.

Companies should expect these supervision and enforcement activities to continue after the departure of Director Cordray, and thus should be vigilant in reviewing their practices in these areas for potential exposure. While an Acting Director, especially one appointed by the President, may put a halt to the issuance of new rules, the taming of the CFPB supervision and enforcement machine will take some time even under new leadership. And even with a permanent new Director firmly in control sometime in the future, CFPB staff likely will continue to look for ways to pursue the agency's current activist agenda – including seeding the efforts of State authorities already ramping up their own activities, as discussed in our prior bulletins.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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