By now, you may have heard that the U.S. Court of Appeals for the D.C. Circuit declared that Congress had taken unconstitutional action with the Consumer Financial Protection Bureau (CFPB) and introduced a swath of changes that stand to impact providers and consumers in numerous ways. The court's decision puts the CFPB directly under the control of the White House. Currently, the CFPB operates as an independent agency. There are arguments on both sides of that coin, some saying that the autonomy provides necessary stability for the U.S. economy and others saying that it offers a dangerous lack of checks and balances.
The Consumer Bankers Association has declared that the decision has broad and immediately impactful implications for the banking industry and consumers because it undermines the current stability of the agency. Our team has been watching these changes carefully. The following list highlights five significant and pressing changes.
Determining Product and Service Scope
Until last week, the CFPB held the ability to “regulate the offering and provision of consumer financial products or services” – along with the power to define what those financial products actually are. That meant it could:
- Regulate virtually anything finance related (loans, savings plans, financial advisors, etc.)
- Create new laws and standards
- Judge the validity of business practices
- Inflict penalties as they (themselves) deem warranted
Under this change, the CFPB loses much of this control over its scope of influence.
Loss of Self-Governance
The organization held the power to maintain a presidentially appointed director for a five-year term. Only an act of “inefficiency, neglect of duty or malfeasance,” would necessitate a replacement. Under the changes, the CFPB will no longer be allowed to operate with this level of self-governance, regardless of the fact that this is not the only agency with this structure.
Move to a Bipartisan Commission
The ruling could transition the CFPB into a five-member commission to satisfy the court's long-sought change to an independent agency. One side asserts that a five-member commission results in more reasoned and balanced decision-making, and greater stability in the long run. Others think that, particularly with the changes to how the director is appointed and removed, this change would introduce more instability into consumer finance regulation.
Revoked Funding Control
Under Dodd-Frank, CFPB funding is “determined by the director” and comes directly from the Federal Reserve. While some influencers assure that the CFPB is responsible and accountable to Congress, others argue that securing funding outside of the appropriations process gives the committee too much independence from Congressional control. Under that ruling, the CFPB would relinquish its ability to control funds.
Invalidating Enforcement Actions
The decision reverses the decision of the CFPB to impose an enhanced penalty of $109 million on nonbank mortgage lender PHH Mortgage for its use of a wholly-owned mortgage reinsurer – declaring it a violation of the Real Estate Settlement Procedures Act (RESPA). CFPB had stated it was illegal to steer customers to preferred mortgage insurance providers in exchange for having those providers purchase reinsurance from captive firms of the mortgage originator. The implication is that the court views CFPB decisions as questionable and sets potentially dangerous restrictions for how acts like RESPA are applied.
The CFPB has not yet declared whether or not it will appeal the D.C. Circuit's ruling. If they appeal and it is rejected, the CFPB could take the case to the Supreme Court. The timing poses another layer of challenge. The likelihood that the case could reach the Supreme Court depends largely on who wins the White House. A Clinton election is more likely to gain the appeal.
Particularly because the outcome of this ruling hinges on the election, it’s absolutely important that you remain informed. If you’re not already subscribed to the blog, please do so. We will be watching the progress of this ruling, and will keep our clients and readers informed.
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