CFPB Director Rohit Chopra has signaled that he is ready to take on corporate recidivism in the financial services industry. He gave the University of Pennsylvania Program on Regulation's 11th Annual Distinguished Lecture, "Reining in Repeat Offenders," on March 28, 2022. Chopra offered his thoughts about the measures CFPB and other agencies could take to curb repeat violations of financial services laws.

A recurring theme in Director Chopra's lecture was the perceived two-tier system of enforcement directed at financial services. Smaller firms that are repeat offenders often are subject to ruinous monetary and non-monetary penalties for their transgressions, while larger firms that are considered "too big to fail" or "too big to jail" receive little more than a slap on the wrist – even when they continue to violate the same laws or consent orders. Chopra maintained that this two-tier system undermines confidence in the rule of law and disadvantages honest players and new market entrants.

Chopra also offered this context from his time as a student at Penn's business school: "I viewed financial regulators as clueless and often corrupt lawyers and economists. Government officials were often seen as auditioning for a future job in finance to exploit their inside knowledge to help dominant financial firms evade accountability for wrongdoing and extract special favors, even when they violate the law repeatedly."

Although Chopra conceded that established financial services players are sometimes ordered to pay multi-million-dollar penalties or consumer redress, he argued that these headline-grabbing sums are insufficient incentives to stop repeat violations. To that end, Chopra previewed several enforcement mechanisms that, according to him, would go a long way toward curbing corporate recidivism in the financial services industry:

• Dedicated units to enhance detection of repeat offenses – Director Chopra announced that the CFPB would be establishing dedicated units within its supervision and enforcement divisions to better detect when companies that are subject to consent orders have violated provisions of those orders.
• Structural changes for serial offenders – Chopra emphasized that section 1165 of the CFPA (12 U.S.C. § 5565), which allows the Bureau to seek "limits on activities or functions of [a] person" in court or administrative proceedings, could be used to make any number of structural changes to financial services firms to forestall future violations.
• Caps on size or growth – Chopra suggested that limiting company growth or the acquisition of assets could eliminate incentives that lead to widespread consumer harm.
• Bans on business practices or lines of business – Limiting certain lines of businesses or business practices theoretically could stop immediate harm and future violations. Chopra specifically mentioned LendUp Loans, which had violated a 2016 consent order prohibiting LendUp from misleading borrowers about the benefits of its loans. As a result, the CFPB sued LendUp in September of 2021 and sought redress, including prohibiting LendUp from offering new loans or collecting on outstanding loans to harmed consumers. LendUp has announced that it is no longer making or servicing loans.
• Divestiture of product lines – Chopra explained that in some circumstances, it would make sense to spin off certain products, to place them under new management with sufficient administrative acumen to prevent further harm, rather than ban them completely.
• Limits on leverage or requirements to raise equity capital – Guardrails on how companies are funded, Chopra said, would make leveraging less likely.
• Revocation of government privileges – Chopra suggested that recidivist firms should lose any number of government-granted privileges when facts and circumstances warrant, such as:
  • FDIC insurance – Chopra claimed that depository institutions determined to be unsafe and unsound can lose their deposit insurance with the FDIC. He intimated that repeat consent order violations by depository institutions might indicate that those institutions are unsafe and unsound.
  • Placement into receivership – Chopra stated that if senior management of a company cannot remedy legal violations, it might be appropriate to shut down the institution to prevent further violations. He further stated that the institution's assets could be transferred to a law-abiding institution or management that is willing to follow the law.
  • Termination of charters and licenses – Such a remedy, recognized as an option since the founding of the United States, is routinely sought for small firms, but Chopra advocated this remedy for larger firms as well, when facts and circumstances warrant.
• Individual liability for officers and directors – We have noted previously that the CFPB has been stepping up enforcement actions against individuals, rather than limiting such actions to firms. Director Chopra highlighted that, when dealing with small firms, agencies quickly target the top brass; not so for larger firms. He argued that it is inappropriate and unfair not to subject individuals at larger firms to the same treatment when those individuals play a key role in repeat and consent order violations and when the facts and circumstances so warrant. To that end, Chopra suggested pursuing monetary penalties against individuals, as well as lifetime occupational bans.
• Executive compensation strategies – Chopra maintained that bringing executive compensation into play would be a powerful tool for ensuring that companies play by the rules. For example, compensation clawbacks, forfeitures, and dipping into executive compensation first (rather than corporate treasuries) to satisfy monetary penalties were suggested as more likely to curb corporate behavior.

Ultimately, Director Chopra emphasized the importance of subjecting larger financial services firms to the same consequences as faced by smaller firms, since the same laws apply to both. He suggested that the CFPB will, and other regulators should, pivot away from monetary penalties and consider all of the weapons in its regulatory arsenal to discourage repeat offenses.

Director Chopra also responded to questions from the audience about these issues. When asked what regulators like the CFPB need in terms of resources to address repeat offenders, Chopra acknowledged the importance of human capital and interdisciplinary talent. In particular, Director Chopra announced that, in response to the growth and perceived opacity of algorithmic decision-making in the financial services sector, the CFPB would be hiring technologists who understand these issues to ensure that new developments in the market adhere to financial services laws. In that vein, he mentioned that the CFPB would also implement more rigorous UX/UI testing of regulated entities' websites to better understand consumers' online experiences.

Asked whether there is a role in which private actors could supplement public enforcement actions, Chopra suggested that enforcement of the CFPB's consent orders by private actors – which is not currently allowed under the CFPA – could be a future method of deterring recidivism. Chopra drew an analogy to a provision of the Packers and Stockyards Act, which allows private actors to sue for injunctive relief in cases where agricultural sector businesses violate USDA orders.

Director Chopra's remarks provide yet another window into the workings of a reinvigorated CFPB and are in line with other avant garde strategies to maximize its enforcement power, such as the use of the CFPB's UDAAP authority to address discrimination. Moreover, his announcement of possible discrete actions – such as his interpretation of section 1165 to force structural changes to businesses, establishing dedicated units to detect repeat offenses, and the Bureau's ongoing effort to hire personnel who understand technological developments in the financial services sector – suggests that the CFPB can and will employ many of these nonmonetary penalties in its future encounters with established industry players. The unmistakable message is that larger financial services firms will no longer be able to throw their weight around.

Director Chopra's lecture will be available on the University of Pennsylvania Carey Law School YouTube channel.