President Biden made his intent to enhance oversight of the financial services industry clear during his 2020 campaign, and he seems intent on keeping that promise.
As banking institutions of all types continue to grapple with the fallout from the Covid-19 pandemic and its impact on employees, customers and communities, they’re also preparing for what is expected to be a return to “supervision by enforcement” by the federal banking regulators.
This is more than just speculation, as key regulatory agencies such as the Consumer Financial Protection Bureau (CFPB) are making no secret of their intent to enhance their focus on consumer protection laws and other areas of regulatory risk. Among other things, CFPB is hiring a significant number of new enforcement attorneys. While that may be a positive sign for overall unemployment, it’s a terrifying prospect for banks, thrifts and credit unions subject to CFPB supervision and organizations potentially subject to it. That’s especially true for neobanks, who may be relatively new to bank supervision, and may be particularly unprepared for supervision by enforcement.
Biden Administration is Setting CFPB Loose Again
Born out of the Dodd-Frank Act following the financial crisis of 2008, CFPB plays an essential role in the oversight of large banks, with a keen focus on consumer protection and ensuring financial markets are fair and equitable. During the Trump administration, CFPB adopted a less aggressive disposition toward the institutions it supervises, and issued both fewer enforcement actions and lower civil money penalties (CMPs) than it did during the Obama administration.
Federal Trade Commissioner Rohit Chopra, who was the bureau’s first Student Loan Ombudsman under former CFPB Director Richard Cordray, has been nominated by President Biden to lead CFPB, and will likely be confirmed any day. With the expectation that Chopra will return the bureau to its former place at the forefront of consumer protection in financial services, neobanks should be taking steps now to prepare for a more hawkish supervisory approach — whether they’re regulated directly by CFPB and other federal agencies, or regulated indirectly by virtue of their partner bank relationships.
Preparing for examination by CFPB is no trivial matter. First, CFPB-supervised institutions should be prepared to be examined on the litany of consumer protection laws and regulations that have been on the books for years. Second, they should also be prepared for CFPB to apply existing laws and regulations to previously unexplored operational areas, and possibly in novel ways not previously contemplated.
For example, CFPB has signaled it will seek to apply fair lending/fair banking principles, such as the disparate impact theory of liability, to non-traditional (non-origination) activities, notably including the loan servicing activities of institutions with large mortgage, auto and consumer portfolios.
Sample of Things to Come:
The controversial disparate impact theory of liability allows the government to establish discrimination based on the outcome of banking policies that are neutral on the surface.
Disparate impact is distinct from disparate treatment because the government can establish liability for discrimination against a protected class without having to prove discriminatory intent.
In addition to enhancing its bench of enforcement attorneys, anecdotal reports suggest CFPB has already begun to cite more Matters Requiring Attention, with higher CMPs than was common in the last administration.
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Bureau’s Agenda Follows Administration’s Philosophy
Under the leadership of Acting Director Dave Uejio, the bureau has already initiated several interesting enforcement actions, with a heavy focus on debt collection, and other activities seemingly exacerbated by Covid-19 and its economic aftermath.
The bureau seems to be embracing the administration’s broader focus on racial justice and economic equality, and will undoubtedly underpin its approach to supervision with those important considerations in mind, particularly as it assesses institutions’ conformance with the servicing requirements of the CARES Act.
As in the past, the bureau will leverage media attention to maximize pressure on large financial institutions it finds in violation of consumer protection laws and regulations, and will likely take increased numbers of enforcement actions jointly with the Department of Justice, the Department of Housing and Urban Development and other federal agencies.
Neobanks Booming as Tide Turns:
Neobanks have gained prominence and market share by providing an enhanced customer experience as well as access to banking products and services for previously underserved consumers.
Most have combined aspirations to change the way we bank with respect for the responsibility to comply with the law. At the same time, most neobanks are relatively new and may not have experienced or been prepared for the significant change in regulatory focus and expectations that can accompany an administration change.
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Partnerships Should Partner for Compliance as Well
Navigating the emerging regulatory environment will present both challenges and opportunities.
Regulated entities of all shapes and sizes (and those who partner with them) should start thinking now about a comprehensive approach to CFPB readiness to identify potential risks of noncompliance. This should include an ongoing analysis of real-time consumer complaint data, which is the “canary in the coal mine” for potential deficiencies in consumer protections. They should also work toward a modernization of the institutional approach to risk management to encompass operational areas newly subject to scrutiny, and to anticipate that existing laws and regulations may be applied in new ways.