Shortly after his inauguration as president, Barack Obama quipped before Republicans in Congress that "elections have consequences."
One of the consequences of Obama's election was the passing of the 2010 Dodd-Frank Act, which, among other things, created a new federal agency called the Consumer Financial Protection Bureau. Developed by then Harvard Law Professor Elizabeth Warren, the bureau had extensive powers to define which consumer credit practices are unfair and to penalize companies who offered them.
Rohit Chopra, 39, has served as the Democratic Commissioner for the Federal Trade Commission for the past three years and has made a name for himself as a vocal critic of tech companies and clusters of power who enjoys criticizing bad corporate behavior.
A lot has changed since the CFPB opened in 2011. The director of the office, originally protected from presidential dismissal, now serves the president following a landmark decision by the Supreme Court last year. Elizabeth Warren is now the senior Massachusetts Senator and a force in the progressive wing of the Democratic Party. And the office itself was run by both Democratic and Republican governments, pursuing both Democratic and Republican visions of what consumer financial protection should mean.
But one thing will be the same: the presence of Rohit Chopra.
Chopra, 39, has served as the Democratic commissioner of the Federal Trade Commission for the past three years and has made a name for himself as a vocal critic of tech companies and concentrated power who enjoys criticizing bad corporate behavior.
Before that, however, at the start of the CFPB's establishment, he was the Office's Student Loans Ombudsman for five years. And with his Senate confirmation to lead the CFPB – which is expected shortly, albeit with limited bipartisan approval – he is ready to return to the office and move it in a more aggressive, consumer-friendly direction.
"What everyone is expecting is more enforcement and, when it happens, bigger dollars," said Christopher Willis, partner at Ballard Spahr and co-head of the company's Consumer Financial Services Group. “His FTC comments also suggest an interest in blaming individual members of management more often for enforcement actions. The message we are conveying to the industry is to prepare for high levels of control with higher risks. "
Chopra's long paper path at the FTC, where he has submitted more than 120 statements, gives an insight into his priorities. People who have worked with Chopra describe him as a close reader of laws and rules who is often the only high-level decision maker in the room who is not a lawyer.
He has long advocated tougher agreements and more compensation for consumers who have been victims of wrongdoing. He has also written that breaking the law must be riskier than following – and that the repercussions should be severe for individual leaders.
Although it is a relatively small agency, the CFPB embodies the diverse political visions of the role of government in the lives of its citizens. With 18 separate consumer finance laws under its jurisdiction, the CFPB is poised to put in place policies that affect millions of consumers and a wide range of products and services, from student loans to credit cards, collections to mortgage services, small business loans to Online banking.
"There has been a decade-long debate about what role government should play in consumer protection," said Jenny Lee, partner at Arent Fox. “Chopra is not afraid to think outside the box. So the agency is matched with a leader who is not afraid to find the legal provisions to justify the authority of the office. "
Connections to the White House
Although the CFPB was established as an independent agency, the Supreme Court changed the game.
In Seila Law v. CFPB, the plaintiffs contested the constitutionality of the office in its entirety, as well as the constitutionality of the delegation of the agency's full powers to a single director whom the president could not immediately dismiss. Other independent agencies, whose leaders were protected “for good reason”, were structured as multi-member commissions – such as the FTC and the Federal Reserve Board of Governors. Alternatively, federal agencies that had sole directors have largely determined that those directors serve at the President's discretion. The CFPB, the plaintiffs argued, broke the constitutional spirit of separation of powers by having both.
The Supreme Court ruled in 2020 that the CFPB's existence was constitutional but its single director structure was not, and its remedy – that its director could be fired by the President – changed the agency's character from an independent watchdog to a formal one Poor of the administration.
But while the CFPB was theoretically independent, in practice it has always been very partisan. The office didn't even have a permanent director for more than two years until Richard Cordray was finally ratified by the Senate in 2013, a delay resulting from the political deadlock over the agency's power and legitimacy. Following Cordray's resignation in 2017, the Trump administration appointed then White House budget director Mick Mulvaney as deputy director.
After a brief but fierce legal battle between the White House and then CFPB Deputy Director Leandra English (who argued that after Cordray's resignation she should be automatically promoted to the position of Deputy Director), Mulvaney held both positions at the same time for more than a year year.
It was an eventful year. Mulvaney changed the course of many of Cordray's policies, including (but not limited to) revising the definition of “qualifying mortgages” that can be sold to Fannie Mae and Freddie Mac, dismissing the board of directors of the CFPB, and even attempting to change the name of the office to change.
"We'll do what the law says but not what the law doesn't," said Mulvaney of his vision for the agency in 2018.
Kathy Kraninger, a veteran officer and agent of Trump, was sworn in in December 2018 and largely continued in Mulvaney's form. She resigned as president on the day of Joe Biden's inauguration.
Dave Uejio – who joined the office in 2012 and served as chief strategy officer when Biden was inaugurated – was named assistant director after Kraninger's resignation. He spent his months at the helm of the agency reversing the course of the Trump administration. He has advised financial firms that the CFPB will address the economic fallout from the pandemic and press for more clarity and enforcement of fair lending laws, particularly those related to housing. Many of these “low hanging” reversals were recommended by the head of the CFPB transition team in the Biden administration – English, now with the White House Economic Advisor and a close friend of Chopra.
"The overarching priorities of the Biden administration were very clear on issues that are now directly in the consumer finance arena, such as combating systemic racism through fair lending laws," said Lee.
Chopra, who also worked briefly with the Consumer Federation of America before becoming FTC commissioner, is expected to have a substantive and creative political agenda.
"He will take concrete steps to use government to improve the lives of working Americans," said Chris Peterson, law professor at S.J. Quinney College of Law and former special advisor to the CFPB.
But while keeping up with government priorities and sharing its values of social justice, Chopra also holds an MBA from the University of Pennsylvania's Wharton School and was an associate at McKinsey & Co. for two years.
"He doesn't really have a left-wing consumer advocate background, so it's not an honest battle cry for companies to say," They don't understand our business or our industry, "said Nate Viebrock, Partner at Viebrock & DeNittis. "He will understand all the problems that arise on his desk."
Partly because of the frequent changes in leadership over the past five years – and because those changes brought such drastic changes to the rules of the office – banks and financial firms have struggled to gain a foothold in the CFPB over the past 10 years. Many fear Chopra will simply revert to the shape Cordray first poured, which valued more than $ 13 billion in fines and settlements.
This fear may be well founded. Regulated companies are already experiencing a spate of enforcement activity under Uejio, who moved quickly in January by promising to expedite enforcement investigations related to the Military Lending Act and the Coronavirus Aid, Relief and Economic Security Act.
"The CFPB has been extremely active under Acting Director Dave Uejio, who is not acting like a typical acting director," said Jeff Naimon, a partner at Buckley law firm. "He knows how things work and how the administration wants him to work." He's very effective. "
Uejio has delayed the regulation of collections and qualifying mortgages, overturned the Trump administration's Anti-Abusive Policies aimed at reducing the fines imposed on malicious actors, and issued numerous warnings about responding to the pandemic.
He also recently restored oversight of the Military Lending Act, which caps interest rates for service members to 36% and places other restrictions on products such as payday and car loans, causing Mulvaney to overturn a 2017 decision not to enforce the law, because the office did not have express authority to do so. How far the agency can go in pursuing such enforcement actions is unclear.
"Ultimately, everyone agrees that the office can monitor compliance with the MLA," said Brian Johnson, partner at Alston & Bird and former deputy director of CFPB, the number 2 agency under Kraninger. “The question is about the means. Is the authority legally obliged to grant itself additional powers? The final solution has to come from either Congress or the courts. "
A potentially more contentious battle is brewing over fair lending, with the CFPB stepping up enforcement procedures, regulatory reviews and recruitment.
The CFPB recently hired Carol Evans, a 15-year-old Federal Reserve veteran who serves as a temporary senior advisor to Patrice Ficklin, director of the CFPB's Office of Fair Lending.
"The CFPB will place a special emphasis on racial justice, addressing issues ranging from redlining to peer-to-peer discrimination," said Richard Horn, co-managing director of the law firm Garris Horn and former senior counsel and special advisor to the CFPB. "There will be a lot more fair lending enforcement and more enforcement against senior business owners. That is the new way of thinking."
The CFPB website clearly shows its focus. Adorned with the words "We're on your side," the agency now has a Racial Justice page with multiple graphs showing a breakdown of borrowers who are most likely to be in forbearance or default. The website also features personal stories from employees highlighting their experience of discrimination. Racial justice issues are such a focus that Uejio claims financial firms have been reluctant to respond to consumer complaints, including those from minorities.
"Chopra joins an agency full of missionaries in an agency that is unwaveringly committed to equity," said Allyson Baker, partner at Venable law firm, chairman of the financial services practice, and former CFPB lawyer.
By reviving CFPB's use of "disparate impact," Chopra is expected to revive a legal standard that will allow federal agencies to punish lenders who display a pattern of discrimination with no demonstrable intent. And he's not alone – Department of Housing and Urban Development Secretary Marcia Fudge reintroduced various impacts as a guideline in April as part of the Biden government's efforts to address discriminatory housing policies.
Banks had a complicated relationship with the differential standard of action, claiming to support the goal of ending racial discrimination in lending, but argued that legal theory wrongly targets lenders for neutral actions that can lead to unintended discrimination.
At the FTC, Chopra supported a mixed-impact case in which a Bronx Honda car dealer was charged with illegal racial discrimination for charging black and Hispanic families higher interest rates than their white counterparts. Chopra wrote that "the analysis of the different effects is a crucial tool to uncover hidden forms of discrimination".
Additional investigations by the CFPB have been launched into credit discrimination in the form of redlining, underwriting, credit pricing, and directing minority and low-income borrowers to high-priced loans. Willis said Chopra is also likely to drive fair lending testing of automated and algorithmic lending decisions.
"The CFPB under Chopra will now pay much more attention to examining model tests and the development of (artificial intelligence) models," said Willis.
"Push the envelope"
One of the powers Dodd-Frank gave the CFPB was to prohibit “Unfair, Fraudulent and Abusive Acts and Practices” or UDAAP, and it is expected that Chopra will use UDAAP to take aggressive action against debt collection agencies and payday lenders Other. Financial institutions have long complained that the term "abusive" should be narrowly defined, but Chopra likely won't, experts said.
"You will definitely see how he builds on the UDAAP doctrine," said Baker.
Critics raise similar questions about whether the CFPB has "interpretative" power to impose a moratorium on enforcement under the Real Estate Settlement Procedures Act, known as RESPA.
"If you have a political agency that pursues White House political objectives, you will have an agency that pushes the envelope in this way," said Horn, who worked in the CFPB's Office of Regulations and ran the final rule Integrate Truth in Lending Act and RESPA mortgage disclosure.
The Consumer Protection Act is relatively new and really starts with TILA, a law passed in 1968 that required lenders to provide consumers with standard information about the costs involved in taking out a home loan.
"Looking back decades, the prevailing economic theory was that markets worked well for the most part, and dealing with asymmetric information was to provide disclosures to consumers," said Jeff Sovern, law professor at St. John's University School The Law. "Republicans and Conservatives tend to focus on the classic view."
But while the CFPB is stuck in a political carousel – making rules only for the next government to reverse, only to be brought back by the next government – a new field of behavioral economics has since emerged and taken root in 2008. Scientists have begun to rethink the conventional belief that adequate consumer protection equals adequate disclosure to consumers.
“The law of conduct and economics say that consumers cannot protect themselves because they do not read disclosures,” Sovern said.
Zywicki, who led a CFPB task force under Kraninger that made more than 100 recommendations on changes to CFPB policy, said it was unclear where Chopra would get into the debate between these competing views.
"If Chopra wanted, he could try to push the boundaries of behavioral economics that appeared in the payday loan rule at the very end of the Cordray era," said Zywicki. "It's the idea that consumers think they understand the risks of a product and the risks are fully disclosed, but they don't."
The battle over the CFPB's payday loan rule embodies the intersection of the two schools of thought on consumer finance.
The CFPB's last payday rule, issued in 2017, urged lenders to make short-term loans because they were using "an unfair and abusive practice" in not reasonably determining a consumer's ability to repay the loans according to the terms. The rule also found that repeat borrowers underestimated the likelihood of a payday loan revolving. The bureau said it would limit repetitive borrowing to six loans in a given period to protect consumers.
Last year, Kraninger lifted the 2017 payday rule, abolishing the repayment ability requirements, but the rule has not yet been implemented and remains stuck in legal challenges. Chopra is expected to reverse course and possibly reintroduce Cordray's payday rule.
But whatever Chopra does, he will do it in an environment where the question of what it means to protect consumers is inherently partisan, with no popular consensus or academia.
"There has never been a single definition of consumer protection," said Johnson of Alston & Bird. “It will always be caught up in these controversies. Should the state design financial products by saying what features can or cannot be offered? The real disagreement is how much government should be empowered to make choices for consumers. This is the real fight. "