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With a newly quiet CFPB, banks may find opportunity

The Consumer Financial Protection Bureau appears to have hit pause on all enforcement actions, and banks could be taking advantage in short order.

The CFPB's first director, Richard Cordray, resigned Nov. 24, 2017, and President Donald Trump appointed Mick Mulvaney, director of the Office of Management and Budget, as acting director of the CFPB. Under Cordray's leadership, the CFPB had prosecuted nearly 200 enforcement actions, angering industry groups and corporations with new types of cases. Since Mulvaney has taken over, the CFPB has not announced a single enforcement action and reports have emerged that the regulator has dropped several active lawsuits.

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With a less active CFPB and a notable court decision against the regulator, lawyers said banks and nonbank financial companies would likely make changes in mortgage offerings, payday loans and indirect auto lending.

The CFPB, created by the Dodd-Frank Act, brought charges of "abusive" acts, a controversial new legal term introduced by the Dodd-Frank Act. The CFPB also broke new ground with discrimination cases against indirect auto lenders, alleging that the ways finance companies pay auto dealers contributed to discriminatory pricing in auto loans. Further, the CFPB applied a new interpretation of laws governing mortgages, alleging payment agreements amounted to illegal kickbacks.

PHH Corp. challenged the CFPB on a mortgage kickback enforcement action, and the nonbank mortgage company won decidedly. Lawyers said banks might reinstate partnerships with service providers in the mortgage business in response to the ruling. Paul Hancock, a partner for K&L Gates, said banks might reconsider mortgage marketing services agreements. The agreements generally represent relationships among various parties to a mortgage closing whereby a real estate broker might market the service of a mortgage broker or title company in return for a fee. In 2015, the CFPB issued guidance suggesting such marketing services agreements pose "substantial risks," but Hancock said the partnerships are often helpful for borrowers and can improve credit access for vulnerable communities.

"Companies gave up arrangements that were beneficial to consumers, including ones that enabled more loans to minorities because of fears they might be challenged," Hancock said. "I think those will come back, and they will be beneficial to consumers if they do."

Payday lending has started to emerge as a flashpoint in the ideological battle over the CFPB's future. Mulvaney put a freeze on hiring and any new regulations soon after his appointment as acting director. Sen. Elizabeth Warren, D-Mass., challenged the decision to freeze rulemaking on payday lending, in particular. Mulvaney shot back by challenging Warren's defense of forced arbitration. Whatever the motivation, payday loan rulemaking appears to be frozen for the time being, and financial companies have likely taken note, said James Kim, of counsel for Ballard Spahr.

"I think a year ago some companies in the payday space were preparing to gravitate away from small dollar payday lending in favor of high-interest installment loans because the rule made it pretty much impossible to make a payday loan," Kim said.

And at least one bank appears ready to make a change on indirect auto lending due to the CFPB's leadership change. BB&T Corp. management said Jan. 18 it would return to dealer-markup pricing, an incentive structure that Cordray had tried to discourage by charging finance companies with discrimination charges. The CFPB initiative particularly rankled Republicans — and some Democrats — because it did not require proof that the lender had discriminated, only that some minorities had paid more. Brian Davis, director of corporate communications for BB&T, wrote that the bank had some success with the flat-fee structure but experienced a drop in volume and would return to the more traditional pricing program by mid-March.

With Mulvaney in charge, the CFPB appears unlikely to continue prosecuting cases alleging unfair, deceptive or abusive acts or practices, or UDAAP. The agency has issued a strategic plan pledging to "go no further" than its statutory responsibilities, and Mulvaney has issued several requests for information regarding how the CFPB operates, including how it handles enforcement actions.

"I expect they'll enforce UDAAP the way it has been enforced and that's with a strong emphasis on practices that are deceptive, and we'd see more cautious use of the unfairness prong and abusive prong," Hancock said.

But consumer advocates think the CFPB could go even further, dropping UDAAP cases altogether. Before Mulvaney joined the White House's administration as budget director, he was a congressman who supported the Financial Choice Act, a piece of legislation that would strip the CFPB of its authority to pursue any and all UDAAP cases, among other reforms for the agency. Christopher Peterson, a law professor for University of Utah and a former prosecutor for the CFPB, published a study that found the Choice Act would have eliminated 93% of the compensation the CFPB won in its enforcement actions.