With the November election weeks away, crucial questions await about the leadership of the Consumer Financial Protection Bureau — regardless of who wins.
Under a Joe Biden presidency, Director Kathy Kraninger would be on shaky ground after a court decision enabling presidents to fire sitting CFPB chiefs. But if President Trump is reelected, observers disagree over the direction Kraninger would take the agency through the end her term in 2023.
One theory is she will continue rolling back Obama-era regulations with a business-friendly focus to help mortgage lenders, fintechs and others. But some argue she will hone a more centrist approach, balancing deregulatory moves with tough enforcement actions against predatory companies. Indeed, the persistent effects of the pandemic could force the agency to strengthen its focus on consumers.
“The strategic priorities will be around addressing the issues related to the pandemic and having to fix the economy,” said Tony Alexis, a partner in the consumer financial services enforcement practice at Goodwin and a former CFPB official.
Banks and financial firms stand to benefit from Kraninger’s continued pro-free-market, limited government approach to regulation including a vow to provide companies with clearer rules of the road through advisory opinions and interpretive rules.
But the financial fallout from COVID-19 is likely to take center stage in the next year as more consumers face financial trouble, as mortgage forbearance plans expire and servicers face the prospect of higher delinquencies. Many experts say Kraninger will be forced to increase scrutiny of servicers for their handling of deferments and forbearance requests, and of auto lenders for their debt collection practices during the pandemic crisis.
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“The CFPB is going to have to take a look at the mortgage market because there will be tremendous amount of people with financial problems,” said Alexis.
Some note a stronger consumer-focused bent may come naturally to Kraninger, who has appeared less political than her predecessor, former White House Chief of Staff Mick Mulvaney, who was CFPB director on an acting basis. After Mulvaney essentially ceased all enforcement activity at the agency, enforcement actions have steadily risen under Kraninger. Most recently, the bureau under her watch announced a nationwide crackdown on abusive debt collectors in coordination with other agencies.
“When you contrast her complete record with Mick Mulvaney's, she has truly set a middle ground on everything,” said Richard Gottlieb, a partner at Manatt, Phelps & Phillips. "She’s made nobody happy, which is exactly what you’d want in a bureau chief; it means she’s doing it pretty damn well."
Yet critics of Kraninger worry she would continue focusing on deregulation in a second Trump term, which they say would harm consumers. Under her watch, some observer say, the CFPB has eliminated underwriting requirements for payday lenders, failed to focus on fair-lending issues, pledged to provide fintech innovators with regulatory relief and proposed a weaker "Qualified Mortgage" standard.
“Under Director Kraninger, the CFPB has overwhelmingly focused on relieving industry of the need to comply with consumer protections,” said Lauren Saunders, associate director at the National Consumer Law Center. “She’s got a moderate personality but not a moderate approach."
Democratic lawmakers and advocates have already assailed Kraninger for not doing enough to help consumers during the pandemic.
“We don’t see any signs that the CFPB is going to be aggressive in protecting people from losing their homes and dealing with debt," Saunders said. "It’s all about how can they give industry a pass from complying with the laws.”
Through the remainder of this year and into a second Trump term, if the president is reelected, Kraninger is expected to advance more rulemakings favorable to the industry. They include a proposal to scale back Home Mortgage Disclosure Act data collection, a revamp of the Qualified Mortgage rule, a proposal to create a new category of “seasoned QM” loans, and a small-business data collection that is one of the last rules required under the Dodd-Frank Act.
"The focus is entirely on what rules ... [to] gut, reverse or limit,” said Saunders.
Some suggest the possibility that Kranginger could move into a different role in the Trump administration given that she spent most of her career in the Department of Homeland Security.
“She would be capable of being confirmed in a wide array of roles in the president's administration,” Alexis said.
More enforcement actions
However, if she stays on, some speculate that Kraninger's business-friendly rulemakings could be accompanied by a ratcheting up of enforcement actions.
When Kraninger took over the bureau in December 2018, she listed education first among her priorities, followed by prevention, then supervision. Enforcement was last on the list.
But Kraninger has issued roughly 30 public enforcement actions a year, which is close to the roughly 40 a year issued under another one of her predecessors, Richard Cordray, an Obama appointee, said Ori Lev, a partner at Mayer Brown and a former CFPB official.
“I find the Kraninger CFPB somewhat enigmatic, in that, on the one hand it’s this dramatic change from Cordray. On the other hand, it’s business as usual," Lev said at a recent banking conference.
“Part of what we’re seeing right now is a focus on the fraud end of the market, the easier wins and less controversial cases,” Lev said.
Kraninger has not been afraid to litigate against banks, Lev said, noting recent lawsuits against the $203 billion-asset Fifth Third in Cincinnati for allegedly opening fake accounts, and against the $180 billion-asset Citizens Bank in Providence, R.I., for its handling of credit card fraud claims.
However, the amounts of fines and penalties have plummeted under Kraninger, prompting a group of Democratic senators to ask earlier this year for the CFPB’s inspector general to investigate the sharp drop in restitution provided to borrowers.
Financial firms continue to monitor consumer complaints because they play a role in which institutions are investigated.
“The volume and nature of complaints are playing a bigger role in deciding what cases [the CFPB is] going to bring,” said Scott Pearson, another partner at Manatt Phelps. “The view is that if consumers are complaining about it, it’s something the CFPB should look at.”
The CFPB also faces competition from the California’s Department of Financial Protection and Innovation, a revamped state regulator with expanded authority to bring both administrative and civil actions against a slew of industries that previously were not regulated.
“The new DFPI is going to put pressure on the CFPB post-January,” said Gottlieb.
Kraninger could also face heightened pressure to focus on fair-lending issues during a second Trump term.
Despite the national focus on racial inequality and redlining, Kraninger has pulled back on enforcing fair-lending laws. She has been criticized by Democratic lawmakers for making only one referral to the Department of Justice and experts say she missed an opportunity to address a pattern of discrimination the CFPB recently identified in the HMDA data.
Banks and mortgage lenders lobbied heavily for exemptions from HMDA data submission, though lenders continue to collect the data for examinations by prudential regulators.
Innovation legacy
Kraninger continues to point to CFPB efforts to inform consumers.
Speaking at a recent fintech conference this week, she touted the bureau’s response to the pandemic by highlighting the launch of a housing website, blogs and videos aimed at helping consumers understand their rights under the Coronavirus Aid, Relief, and Economic Security Act.
“We reacted right away to start pulling together, particularly from our education mission, the best information possible to make sure that people understood what their rights are and also to provide clarity around responsibilities that institutions have,” Kraninger said.
She also has addressed flexibility for fintech startups. The CFPB's no-action-letter and "sandbox" policies developed by the Office of Innovation are meant to ease the regulatory burden of companies trying to launch new products.
Kraninger said at the conference that the CFPB wants to provide regulatory relief to companies that have new products or policies that can offer some benefit or access to credit particularly for unbanked consumers.
“Frankly, we are trying to encourage anyone with an interpretation challenge, a regulatory or perceived barrier to a great idea that is going to be consumer-beneficial out there in the marketplace,” she said. “We can’t promise we will approve things — there are very clear statutory responsibilities — but for new entrants, for those who are looking to try something different particularly around access, I would love to talk about the opportunity for innovation to ... help [consumers] on their path to financial well-being.”
The push to educate consumers and bring the unbanked into the financial fold would likely gain more traction at the CFPB in a second Trump term.
“I think the main change under Kraninger is there’s been much more of a focus on consumer education and research, the other missions of the CFPB created by Dodd-Frank that didn’t get much of the attention in the past,” said Pearson. “People don’t get financial education in school, there aren’t classes teaching people how to manage their money and be smart consumers, and that’s one of the really positive things about her legacy."
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