Episode #36: What’s Next for the CFPB: Prioritized Assessments, Fair Lending and More (Brian Montgomery)

Joel Simon: Brian, we've waited very patiently for today's topic to become real. After months of posturing, delays and speculation—it's been 10 months—finally we have a Senate-confirmed director of the Consumer Financial Protection Bureau, popularly known by its acronym, CFPB. Can you give us a brief background of the CFPB, how we got to where we are today, and why it's a big deal that there’s finally a new director?

Montgomery: I'd be happy to do that. Congress established the CFPB as a key plank of the Dodd-Frank Act and gave the CFPB very broad rulemaking enforcement and adjudicatory powers in the consumer finance sector. The CFPB has now been operating since 2011, and under its first director, Richard Cordray, it applied the powers Congress gave it aggressively, especially in bringing investigations and enforcement action. That changed to some extent under the directors appointed during the Trump administration. Although the CFPB continued its work, it did not bring the same number of major public enforcement actions that did under Director Cordray, and it also revised some of the consumer-focused rulemaking that had been established. With the change in presidential administration this year, former Director Kathy Kraninger resigned, and, since January, the CFPB has been led by an acting director, Dave Waigeo. At the same time that Acting Director Waigeo took office, President Biden nominated Rohit Chopra to be the permanent director. However, as you mentioned, there was a lengthy period before Senate confirmation on September 30 in a vote that was entirely along party lines.

His nomination was unpopular with some because he has made clear throughout his career, which included a five-year stint at the CFPB where he was one of the key early staffers that set up the Bureau, that he has a very broad view of the scope of the CFPB’s authority. Our expectation is that, as director, he will actively use that authority to write rules and to bring enforcement actions. We expect to see a return to rulemaking that is more consumer focused and to enforcement actions that involve much more significant monetary relief than we’ve seen from the CFPB in recent years.

Joel Simon: One interesting thing—Mr. Chopra did receive significant bipartisan support when he served on the FTC, and that was very recent, so to see it be so partisan this time around, at least to me, came as little bit of a surprise. Now I know the CFPB has a wide remit. What financial products do you see being in the regulatory spotlight going forward now that we have our new director?

Montgomery: One thing the bureau’s wide scope of authority allows it to do is to examine an issue across the many different consumer finance markets where it has jurisdiction. We’re now seeing that play out in how the CFPB is increasingly focused on the consumer impacts of the COVID-19 pandemic on a number of core financial products and services.

Last year, the CFPB began doing high-level assessments to obtain real-time information about the impact of COVID-19, which it called prioritized assessments. It published a summary of the findings from those assessments earlier this year, and based on that report and some statements from both Chopra and Waigeo, we're likely to see a major focus on several areas.

One in particular will be mortgage servicing and how mortgage servicers handle the many forbearance programs that were put in place in response to COVID-19. Those programs are now beginning to expire, and we expect the CFPB to take a hard look at how servicers transition borrowers who have been on forbearance back into making their mortgage payments. Related to that, Chopra is also likely to closely review the consumer reporting market with a focus on the accuracy of information reported to consumer reporting agencies. Under Acting Director Waigeo, the CFPB has already published several reports and guidance documents that relate to credit reporting, so institutions that furnish information and consumer reporting agencies should be preparing for heightened CFPB scrutiny. One other area that we will likely see the CFPB focus on is debt collection, especially because there’s a new CFPB rule covering debt collection that becomes effective at the end of November.

Simon: I know directors always seem to leave their own imprint on the agencies they serve. If you had to pick two things that you’re expecting Director Chopra focus on, that would fit into the category of him leaving an imprint, what do you think they would be?

Montgomery: One issue, which applies broadly across consumer finance markets, is fair lending supervision and enforcement in the very specific market of student lending and student loan servicing. For fair lending, I think we’re likely to see the CFPB increase its focus on fair lending compliance both through its authority to conduct examinations and to conduct investigations. In particular, the CFPB is very likely to more aggressively attempt to employ the disparate impact theory of fair lending liability through which facially neutral policies and practices can nevertheless lead to fair lending liability if those policies or practices result in disproportionate outcomes for protected classes. In its early years, the CFPB brought several enforcement actions involving disparate impact in the auto lending market.

It’s noteworthy, that as an FTC Commissioner, as you mentioned, he served there for approximately 2 1/2 years prior to his nomination as the CFPB Director, Director Chopra strongly supported the use of discrete impact in an FTC enforcement action that very closely tracked those prior CFPB enforcement actions in the auto lending market. Moving to student lending, Director Chopra served as a CFPB Student Loan Ombudsman during his prior time at the CFPB, so this is an area that he has long focused on. It’s important to recognize in student lending that in addition to the CFPB, there are a number of other agencies and regulators that share authority, including the Department of Education and some state regulators. While serving as Student Loan Ombudsman, Director Chopra prioritized collaboration among those many agencies and often spoke about the importance of collaboration while an FTC Commissioner. Very important here, I think—former director Cordray is now in a leadership position himself at the Department of Education, overseeing student lending, and has already been active there. We’re likely to see close collaboration between the CFPB and Department of Education on student loans. As we were talking about earlier with the mortgage market, there were a variety of forbearance programs for student loans that were put in place response to COVID-19, and similarly I think you will see a major focus from the CFPB and other regulators in how student loan servicers transition borrowers back to making their student loan payments.

Simon: For my last question, in light of these new expected activities coming from the CFPB, what advice do you have for companies that provide consumer finance products to the market?

Montgomery: There are number of steps companies can take to head off these kinds of problems before they develop. First, and really always, it’s important for companies to be regularly reviewing their compliance management systems and policy procedures to make sure that they’re up to date and that they reflect recent changes in law and recent enforcement actions, and, to the extent that weaknesses are identified, to then make appropriate updates.

One area I think is very important highlight here is that with the CFPB likely returning to a more aggressive enforcement action posture, companies should be monitoring those enforcement actions and updating policies and procedures to reflect the positions of CFPB is taking in those enforcement actions. It’s likely to CFPB will have that expectation. It’s also important to make sure that companies policies and procedures are tailored to both their individual business model and their individual risk. I think that company should be particularly focused on updating and reviewing their fair lending compliance program when they are conducting these reviews.

Two other things that I think are important are, number one, to verify that Consumer Complaint Systems function properly and to be monitoring consumer complaints for risk and potential trends because consumer complaints have often served as a starting point for CFPB examinations, investigations and enforcements. In a similar vein, it’s also important to review companies’ disclosures advertisements and other external consumer-facing materials for potential risks because those materials also often serve as an entry point for CFPB investigation.

Simon: It certainly sounds to me like financial compliance officers and the lawyers who assist them are looking at a few busy years ahead of them. Thanks for joining us today, Brian. It's really been an interesting discussion.

Montgomery: Thanks, Joel. I agree, and it's been a pleasure to be here today.