The Consumer Financial Protection Bureau (CFPB) released its long-awaited two-volume Taskforce Report on Consumer Financial Law (the Report) as expected last week, following a yearlong effort. While advisory in nature, it is written with an intent to influence consumer finance law for decades to come. And while the Taskforce was criticized for lacking any consumer advocates among its members, the Report more often than not generally expands in detail on themes that could have fit just as well in Obama-era reports or views we expect to see expressed in a CFPB led by a Biden administration appointee. We explain in detail below.
Although the Kathy Kraninger-led CFPB officially commissioned the effort in October 2019, the Report is inspired by a similar 1972 taskforce report and recommendation (the 1972 Report) following the 1968 enactment of the original federal Consumer Credit Protection Act. The 1972 Report was influential in guiding the enactment and/or material enhancement of many of the core consumer financial statutes still in robust use today (e.g., TILA, RESPA, FDCPA). The right to cure after acceleration, the prohibition on confessions of judgment, exemptions from garnishment and levy, the right to cancel within 72 hours after certain transactions, and the general regulatory apparatus for disclosures and complaint resolution all have roots in recommendations contained in the 1972 Report.
There was certainly controversy when the Taskforce was established in 2019. The 1972 taskforce was large, and included members from interest groups across the political spectrum. This time around, Kraninger appointed a far smaller group led by a libertarian, Professor Todd Zywicki of George Mason University, as Taskforce chair. Other Taskforce members were George Washington University professor Howard Beales, retired Federal Reserve Board economist Thomas Durkin, William MacLeod, partner at the Kelley Drye law firm (and former Federal Trade Commission (FTC) bureau chief), and Hudson Cook partner Jean Noonan (who formerly headed the Farm Credit Administration). MacLeod joined after the initial formation. Notably absent? Representatives from consumer advocacy groups. In June 2020, consumer advocacy groups sued the CFPB on the grounds the Taskforce was illegally constituted.
Notwithstanding these legitimate criticisms, what the Taskforce generated appears to be a far more balanced set of recommendations than consumer advocates feared.
The new Report spans almost 900 pages across two volumes and offers dozens of recommendations for statutory and regulatory changes to existing law, including grand high-level thoughts and commentary regarding the next few decades of consumer financial law.
While Volume I provides useful background, and mini-treatises on various aspects of consumer financial law (including practical and interesting empirical analyses), time can be saved by skipping to the more digestible 100-page Volume II, which summarizes policy recommendations in organization of the CFPB, supervision, regulatory coordination, privacy, fintech, equal access to credit, electronic documents and other important areas of consumer financial services.
The Report presents the recommendations in alphabetical order without signaling priority.
Alternative Data—This topic concerns the use of algorithms, artificial intelligence, predictive coding and social media to estimate a consumer’s creditworthiness as distinct from more traditional factors such as on-time payment history. The Report recommends that the CFPB implement regulatory changes under its rulemaking authority pursuant to the Fair Credit Reporting Act (FCRA) to bring such nontraditional credit evaluations under the same regulatory umbrella as furnishing traditional credit reports is today. The Report recommends maximum aggressiveness in deployment of these new technologies to modernize evaluation of creditworthiness tempered by traditional fair lending analyses to ensure that nontraditional factors are not used as proxies to discriminate against protected classes.
CFPB Organization—The Report criticizes past CFPB policy as inconsistent across the rulemaking, examination and enforcement divisions. Under current CFPB structure, each power of the CFPB (the Report calls them “tools”) functions as its own department, thus creating institutional biases as to the tool—distracting, in the Report’s view, from substance. The 2021 Report therefore recommends reorganizing the CFPB by market segment or industry so that, for example, all mortgage policy—whether it be look-forward rulemaking, everyday examination or enforcement—can be crafted with the mortgage market as a whole in mind. The Report recommends a similar financial product-based structure to the bureaucracy as a reform to the current tool-based approach as to all other major products, such as auto finance, payments and small dollar lending.
Competition—At a high level, the Report calls generally for a greater research interest in evaluating the competitiveness of the consumer financial services marketplace and for enhanced monitoring and analytics on the impact the exercise of its powers has on the cost of credit. Those broad principles feed into more concrete recommendations, including study of “open banking” concepts prominent in the European Union and elsewhere internationally, streamlining state licensing regimes, and enabling the sale of all-inclusive mortgage closing packages under RESPA.
Credit Reporting—As the FTC’s interpretations of the FCRA have not been formally adopted by the CFPB, the Taskforce calls upon the CFPB to review such interpretations and formally reissue rules it agrees with or at least provide informal guidance as to what FTC interpretations are viewed favorably by the CFPB. The Report also recommends that Congress revisit FCRA to make it more consistent with newer consumer financial statutes such as ECOA and the FDCPA by, among other things, adding a $500,000 or $1 million damages cap for class action suits.
Consumer Empowerment—This topic addresses consumer education and financial literacy. The Report recommends study of past educational outreach programs for efficacy, funding of more regional or local pilot programs with expansion only of those that demonstrably succeed, and a Presidential Youth Financial Fitness Program modeled on the Presidential Physical Fitness regime.
Cost-Benefit Culture—The Taskforce calls for an independent cost-benefit function within or outside of CFPB, retroactive cost-benefit analyses of prior rulemaking, comparison of historic results with expectations from cost-benefit analyses performed when the rule was enacted, and involving the cost-benefit personnel and mindset early in the rulemaking process rather than merely performing a post hoc analysis.
Deposit Accounts—The Taskforce calls for applying Regulation E (governing electronic funds transfers) to prepaid and debit cards, which sounds like an additional regulatory burden but is in fact intended to reduce the existing regulatory burden, which regulates such cards in a similar manner to credit cards even though no credit is generally extended in their use. The Report also calls for studying ways, potentially by amendment of Regulation CC, to bring parity to the time from deposit to fund availability as between mobile and traditional physical check deposits, and for elimination of the six-transactions-per-month limit on savings accounts.
Disclosures—The Taskforce notes that disclosures are “a more attractive approach to consumer protection than is substantive regulation” because they allow for broader consumer responsibility and choice. “On the other hand, information provision through disclosures should not be viewed as a solution for all possible market failures or as a uniform ‘good’ to promote multiple different ends.” Based on these overarching considerations, the recommendations include a focus on reducing the cost of credit, keeping the disclosures pared down to the essentials the consumer needs to make an informed decision, and marshaling the CFPB’s data-gathering and analytics to make reports to Congress on legislative changes that may be appropriate for disclosures. The Taskforce also suggests revising Regulation B to clarify that a “specific reason” for denial of credit is effectively given if the creditor provides the handful of “key factors” that guided the credit determination, and to provide that notification of adverse action is not required when a retail seller makes no underwriting decision and denies credit solely because no third party would purchase the debt (but placing the duty to send the notification on the third-party potential lender rather than the retailer).
Electronic Signatures—While the regulatory changes facilitating electronic signatures since the late 1990s have in many ways been a regulatory success story, the Taskforce nonetheless calls for Congress to “replace or revise substantially” the E-Sign Act. Though E-Sign is only 20 years old, passed in 2000, the Taskforce notes the rapid pace of technological change in recent years and argues that parts of E-Sign are already obsolete. The consumer’s consent, for example, must be given again if the hardware or software used to facilitate the signature changes in even minor ways, a relic of a time when there were competing document formats and consumers did not have universal access to, for example, the PDF format. The Report still considers some disclosure to be an important component of a valid electronic signature, but finds that the majority of electronic signature disclosures are far too long to be read and appreciated by consumers and would disclose more if they were shorter and limited to essentials. The Report also calls for other modernizations and technical revisions to ensure that statutes and regulations consistently facilitate electronic signatures even where they refer to, for example, the need for a writing.
Emergency Authority—Especially in light of lessons learned from the COVID-19 pandemic, the Taskforce urges a wholesale review and revision of the CFPB’s emergency plans, scope of its emergency authority, and method of keeping the public fully apprised of the same. More controversially, the Taskforce also calls for the CFPB to have the emergency power to pre-empt state regulations during an emergency; this seems unlikely to take hold. Some changes due to COVID-19 lessons learned are inevitable, however, and we expect to see CFPB movement on that topic in 2021.
Enforcement—“No company can expect to comply perfectly with every aspect of the myriad and often complex rules that govern consumer transactions,” the Report notes. “[C]onsumer harm, both frequency and severity, should be the lodestar of every enforcement decision.” Accordingly, the Taskforce calls for the CFPB to issue a public statement as to the meaning of consumer harm and how such harm translates into civil penalties and restitution formulas, harmonize and reconcile the disparate enforcement powers of the CFPB and FTC, issue an “Enforcement Highlights” modeled on the popular “Supervisory Highlights” publication, avoid rulemaking by settlement terms, and publicly disclose metrics on how it calculates penalty and restitution amounts in relation to consumer harm.
Equal Access to Credit—The Taskforce opines that the regulatory framework introduced in the 1960s and 1970s was designed in part to prohibit the then-common practice of discrimination against women and minorities in credit. Since then, while the Report acknowledges discrimination has not “entirely disappeared,” it argues that “the advances are hard to deny.” It therefore calls for revision of various equal protection laws under a fresh look based on present market conditions. Without elaborating on what an appropriate policy would be, the Report nonetheless asks for some statement of CFPB’s view of disparate impact “and how it will apply that standard” in the future. Finally, the Report suggests participation in voluntary government fair lending programs should provide some form of limited safe harbor from fair lending violations.
Financial Inclusion—The Report expresses myriad high-level calls urging financial inclusion for consumers presently excluded from financial markets. The Report suggests the CFPB consider, for example, lowering the age of permissible consumers for credit card marketing from 21 to 18 to allow young people to build credit, and removing subprime interest rate caps for persons without a credit history.
Fintech Regulation—The reasons are complex, but the ultimate action item called for is simple: The CFPB should assist Congress in creating a CFPB licensing framework for nonbank fintechs to provide lending, money transmission and payment services, or grant the OCC the power to supervise such fintechs like banks. This Recommendation finds broad support across the political spectrum, but the devil will be in the details, which still appear to be murky and will undoubtedly be informed by a variety of stakeholders in or likely to be impacted by this emerging industry.
Privacy—The Taskforce calls for prioritizing avoidance of consumer harm, arguing that “[t]here is little evidence that the current, disclosure-based approach to privacy regulation has worked.” It also calls for national privacy standards, citing the significant costs and, it argues, few benefits of inconsistent state regulation in this area.
Regulatory Coordination—The Taskforce urges further dialogue between the CFPB, other federal regulators and their state counterparts to reduce inconsistencies and inefficiencies where appropriate.
Regulatory Principles—Citing general concepts of good regulatory hygiene, the Taskforce solicits “plain language,” elimination of obsolete regulations, reserving major guidance to notice-and-comment rulemaking, and further expansion of the No-Action Letter and Sandbox programs.
Small Dollar Credit—Here the Taskforce uncontroversially calls for greater speed in mobile and other electronic payments, especially where small dollar amounts are involved, but also more controversially suggests fewer interest rate caps to facilitate a wider availability of financial products. We do not see the latter as likely to become conventional wisdom, but we do expect to see CFPB efforts to bring regulatory parity to mobile platforms with a particular emphasis on the small transaction space.
Supervision—According to the Taskforce, an institution’s exam rating “should be based not on the quality of its [Compliance Management System, or CMS] but on the outcome of its CMS.” Relatedly, it says, appeal rights should be expanded and should involve representatives from each regional office.
Why It Matters
Consumer advocacy groups will doubtless attack the Report because of the makeup of the Taskforce itself. But whether or not the Taskforce Report achieves anything like its lofty intentions, this is a significant report for industry and consumers alike. Readers should not assume that because the Report was released during the last days of the Trump administration it will be entirely discarded as a political document per se. The CFPB is an independent agency, and much of the Report reads as though it was written by career regulators, albeit with some exceptions as discussed above. Its influence will certainly extend into the Biden years, especially in those areas consistent with pre-Trump CFPB priorities.
While none of the above is binding or an enactment of a new rule or statute, if past experience is any indication of future results, the Taskforce Report is likely to be at least influential in forming the CFPB’s upcoming agenda and areas of focus. The more technical or mundane the recommendation, the more likely it will be strongly considered in years to come. And the more controversial items are likely to be championed as hobbyhorses of political lobbies on both sides for years to come, thus perhaps not forecasting the future regulatory structure but giving definition to the Overton Window and foreshadowing discussions likely to occur in the years ahead.