Legal Insight: Treasury Report on U.S. Financial System Recommends Significant CFPB Reforms

The report issued earlier this week by the U.S. Treasury Department to President Trump in response to his February 2017 Executive Order 13772, “A Financial System That CreatesEconomic Opportunities-Banks and Credit Unions,”   recommends numerous CFPB changes. Entitled “Core Principles for Regulating the United States Financial System,” the Executive Order was a high-level policy statement consisting of a series of Core Principles designed to inform the manner in which the Trump Administration regulates the financial system. The Order directed the Treasury Secretary to identify, in a report to the President, any laws, regulations, guidance and other Government policies “that inhibit Federal regulation of the United States financial system in a manner consistent with the Core Principles.”

Treasury’s report, the first in a series of four reports to be issued in response to the Executive Order, covers the depository system, i.e. “banks, savings associations, and credit unions of all sizes, types and regulatory charters.” In addition to the recommendations directed at the CFPB, the report makes recommendations for addressing a wide range of issues such as market liquidity, capital requirements, and the supervisory and regulatory roles of the federal banking agencies.

Treasury’s CFPB recommendations are discussed in the section of the report entitled “Providing Credit to Fund Consumer and Commercial Needs to Drive Economic Growth,” with the CFPB viewed as the source of many of the “numerous regulatory factors [identified by Treasury] that are unnecessarily limiting the flow of credit to consumers and businesses and thereby constraining economic growth and vitality.” The CFPB recommendations are intended to address the CFPB’s “unaccountable structure and unduly broad regulatory powers [which] have led to predictable regulatory abuses and excesses” and its “approach to rulemaking and enforcement [which] has hindered consumer access to credit, limited innovation, and imposed unduly high compliance burdens, particularly on small institutions.”

Several of Treasury’s recommended CFPB changes are similar to the changes to the CFPB contained in the Financial CHOICE Act passed by the House last week. It is unclear how Treasury’s recommendations will impact the CHOICE Act’s prospects in the Senate or the Senate’s approach to Dodd-Frank reform.

In addition to recommendations for changes to the CFPB’s residential mortgage regulations that we will discuss in a separate blog post, the Treasury’s CFPB recommendations include the following:

• Structure and Funding. Amend Dodd-Frank to:
  • Make the Director removable at-will by the President or restructure the CFPB as an independent multi-member commission or board; fund the CFPB through the annual Congressional appropriations process
  • Allow the CFPB to only retain and use funds in the Consumer Financial Civil Penalty Fund for payments to victims of the activities for which civil money penalties were imposed and require the CFPB to remit any excess fund to the Treasury
    
    
• Regulatory Authority. Issue UDAAP regulations “that more clearly delineate [the CFPB’s] interpretation of the UDAAP standard” and change CFPB policy to only seek monetary damages “in cases in which a regulated party had reasonable notice—by virtue of a CFPB regulation, judicial precedent, or FTC precedent—that its conduct was unlawful.”
  
  
• Supervisory Authority. Repeal the CFPB’s supervisory authority, with bank supervisory authority limited to the prudential regulators and supervision of nonbanks limited to state regulators.
  
  
• Enforcement Authority.
  • Issue a CFPB rule barring enforcement actions “in areas in which clear guidance is lacking or the CFPB’s position departs from the historical interpretation of the law” unless the CFPB has issued “rules or clear guidance subject to public notice and comment procedures” before bringing the action
  • Change the requirements for no-action letters to make them less onerous by aligning CFPB policy with “the more effective policies of the SEC, CFTC, and FTC,” with specific changes to CFPB requirements to include expanding the scope of the CFPB’s policy beyond new products
  • Adopt a CFPB policy to bring enforcement actions in federal district court rather than use administrative proceedings but to the extent administrative proceedings continue to be used, issue a rule specifying the criteria the CFPB will use when deciding which forum to use
  • Reform the CID process, including by adopting procedures for allowing a confidential appeal of a CFPB decision on modifying or setting aside a CID appeal if requested and enacting a Dodd-Frank amendment to allow motions to modify or set aside CID to be directly filed in federal district court.
    
    
• Other. Make data in the Consumer Complaint Database available only to federal and state agencies and not to the general public.

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