Banks and other consumer lending institutions are finding it easier these days to score a passing grade from Consumer Financial Protection Bureau (CFPB) examiners amid an ongoing battle over the agency’s funding and structure.
According to Reuters, more than half the institutions examined earlier this year went through an “expedited review,” which means supervisors identified at most only minor lapses with little risk of harm to consumers, making penalties unlikely. Three people familiar with the matter told Reuters examinations in the expedited track are more lenient than standard reviews and historically were rare.
The lighter touch comes as the Trump administration and Republicans on Capitol Hill seek to scale back the agency’s power and resources, claiming the bureau’s industry oversight has become overly onerous, hurting lending and the broader economy.
The White House Office of Management and Budget last year sought to abolish the agency, which was established by Congress in the wake of the 2008-2009 financial crisis. Failing that, the administration sought to slash the bureau’s workforce by two-thirds, per Reuters, including most of the examiners. Those plans are currently on hold awaiting Senate confirmation of a new CFPB director.
The agency also now requires examiners to recite a “humility pledge” during reviews to work collaboratively with the institution being examined. Reuters reported in August that a top CFPB examiner reminded staff of that pledge and warned of “most unpleasant” consequences if they were too aggressive.
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Last month, the House Financial Services Committee voted 28-21 to advance a bill that would substantially restructure the bureau along with its enforcement capabilities and funding mechanism, according to a client alert from Goodwin. Under the existing law, CFPB is funded by earnings from the Federal Reserve System rather than by Congress to try to shield the agency from political interference. Under the bill that passed the committee last month, its funding would be subject to the regular appropriations process and unused funds could not be carried over from one fiscal year to the next. The bill would also raise the threshold for institutions subject to CFPB oversight from $10 million in assets to $30 million.
Days later, however, a federal district court in Oregon granted partial summary judgment to 22 states and the District of Columbia, ruling the acting CFPB director violated the Administrative Procedures Act by refusing to request funding from the Fed. According to Orrick’s InfoBytes blog, it was the third court to rule against the agency over its funding requests. The other two cases are on appeal.
For banks and lending institutions, the potential stakes in the battle over CFPB’s future are high. Currently, those institutions devote substantial resources to examination preparation, documentation and remediation. Banks also spend heavily on maintaining compliance programs, responding to regulatory requests, monitoring customer complaints and demonstrating that lending and servicing practices meet consumer-protection requirements.
Under a lighter touch regime, many of those costs could be reduced or eliminated.
Even so, internal risk management would remain a high priority. Financial institutions would still face customer lawsuits, reputational damage, operational losses and obligations under applicable consumer laws regardless of how frequently they’re examined.
A lighter touch supervisory approach could also tilt the competitive playing field away from banks. If the CFPB were to reduce the compliance burden on non-bank institutions, banks could still face a higher bar under non-CFPB regulations.
CFPB’s future is a long way from being settled, however. The House Financial Services Committee bill did not make it to the floor for a vote by the whole chamber before Congress recessed ahead of the November midterms. Nor was it taken up in the Senate.
Should Democrats take control of one or both sides of the Capitol in January, the make up and leadership of the committees would change. In the Senate, Sen. Elizabeth Warren, the driving force behind CFPB’s creation, is poised to assume the chair of the Banking Committee should Democrats win a majority. That could stop the reform efforts in their tracks.
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