November 17, 2016
Authored by: Dan Wheeler
Eight bold regulatory predictions on the direction of U.S. Banking and Fintech regulation in light of the election results.
1. The era of “outside the law” Federal regulation is over. Critics of the CFPB (exclusively Republicans) have criticized and challenged the agency’s structure and tactics. These challenges include criticism of the agency’s broad jurisdiction and rulemaking power as an unconstitutional delegation by Congress of its legislative power. Members of Congress and private litigants have assailed the CFPB’s reliance on enforcement actions instead of true rulemaking as undercutting due process and basic fairness. Republicans have been united in believing that the agency’s existence and actions violated the Constitution, the agency’s grant of power under Dodd-Frank and the Administrative Procedures Act. Increasingly, the courts have dealt the agency significant setbacks. This author believes that Director Cordray only persisted in his aggressive pursuit of policy goals because he believed that pursuit was blessed by the Obama Administration and the Democratic Party. Whatever one thinks of President-Elect Trump and his incoming administration, we can be certain that it will not support or defend an aggressive pursuit of policy goals even when that pursuit is perceived to exceed the scope of the law. If a CFPB official decides to pursue such an enforcement action will be doing so without political cover. As a result, I believe the CFPB will not bring enforcement actions unless the law and the facts clearly support that decision. This is a major change of direction for the agency. Once the agency is limited to strictly enforcing the law and promulgating only regulations that comply with the Administrative Procedures Act, it will be able to obtain many fewer settlements (and for much lower amounts) than it was able to do before when it enforced standards that it essentially made up on the spot.
2. Director Cordray will either resign or be fired by the President. The extent of the anger and resentment towards Director Cordray by Republicans in Congress cannot be overstated. I suspect President Trump does not have a strong personal opinion on the matter, but his advisors are close to Congressional leaders and I think there is zero chance that Republicans will not give the Director what they see as his long-overdue comeuppance. A recent District Court opinion supports the Constitutional authority of the President to fire the Director, but I think President Trump will not hesitate to articulate a “for cause” basis to fire the Director under Dodd-Frank if the Director were to contest the President’s power to fire him at will.
3. The CFPB will likely continue in existence with a commission and Congressional appropriations. I think the appearance of wholesale destruction of consumer protection that would result from abolishing the CFPB is too great a political risk to take, even for President Trump. Instead, I think changing to a multi-member commission instead of a single director will be perceived as a “good government” reform, as will making the agency subject to annual appropriations. The agency has exposed itself to very bad publicity as a result of grossly overspending on its headquarters construction, spending large sums on advertising and public relations campaigns and paying itself on its own unique and inflated pay scale that exceeds all other Federal agencies. Overall, I think there will be ample political cover for basic reforms.
4. The CFPB will downsize. As a result of actions 1-3 above, the agency will no longer be able to extort large settlements, its power and influence will diminish markedly and it will be a much less interesting place to work. Also, it will be subject to the same budget pressures as other agencies and likely have to move to the lower prevailing Federal pay scale. Headcount will decrease and the best and the brightest will leave the agency. In short, I think the CFPB will suffer a significant institutional humiliation, second only to the abolishment of the OTS.
5. State regulators will become much more aggressive. I firmly believe that state regulators will feel it is their duty to fill the perceived void left by a deflated and humiliated CFPB. This trend will be especially pronounced in “blue” states like California, Illinois and New York that perceive themselves as alienated from a Republican administration and Congress. Certainly the regulators will feel tremendous support and even pressure from their home state executive and legislative branches to fill the perceived vacuum in consumer protection. However, state laws generally lack the broad scope of authority that Dodd-Frank gave to the CFPB and state laws are frequently poorly drafted and poorly understood by the regulators themselves. Thus, because the laws themselves make poor tools, I think the regulators will attempt to expand their power by being obstinate, making demands unsupported by the law and generally being difficult to work with. Look for states to be creative and very aggressive in expanding their jurisdiction, bringing enforcement actions and demanding penalties. The financial industry will have to be prepared to invest substantial resources in litigation and regulatory defense to survive. I think there will be a scramble to change to a Federal charter where it is possible to do so.
6. The FSOC is dead. I expect little resistance to the idea of abolishing the Financial Stability Oversight Council, given its disastrous decision to designate MetLife as systemically important and the court’s repudiation of that mistake. No Democrat is going to stick their neck out to rescue this secretive and poorly-managed Dodd-Frank relic.
7. The Fed will get a slap on the wrist. Pretty much no one, from the Occupy activists, to Rand Paul libertarians, to President Trump likes the Federal Reserve right now. I don’t know what form the spanking will take, but some form of minor humiliation is coming. I suspect it will be more rigorous disclosure and accounting standards that likely will have little substantive effect (we really don’t want to meddle with the Fed after all) but will be publicly perceived as a much-needed reform.
8. The OCC will smell like a rose. The OCC’s timing and strategic focus on innovation over the past year will prove brilliant in terms of enhancing their power, prestige and influence. They are the logical chartering authority for a range of much-needed Federal specialty charters for non-bank lenders and payments companies. And the toxic regulatory climate that the states will create will create a white-hot demand for these charters. I think Republicans in Congress will embrace the idea of specialty charters, particularly if Jeb Hensarling is the new Treasury Secretary, and Democrats will either join the effort or be divided in their opposition. And, if the OCC is going to be the prudential regulator for fintech, why not give them a say in shaping the related consumer regulation? The abolishment of FSOC and the smack-down of the Fed will only enhance the OCC’s power and prestige as the regulator of largest banks and the new regulator of choice for fintech. Overall, the OCC has positioned itself as the new power center for financial regulators. They’re probably getting resumes from CFPB staffers already.
Dan Wheeler is a banking and regulatory fintech partner at the Bryan Cave LLP law firm.