CFPB shifts enforcement to states, stops nonbank oversight

The Consumer Financial Protection Bureau plans to dramatically scale back its operations by shifting enforcement and supervisory work to the states and halting oversight of all nonbanks and Big Tech firms, according to an internal memo.

On Wednesday, the CFPB’s Chief Legal Officer Mark Paoletta sent a sweeping memo to the bureau’s staff listing 11 priorities for the year ahead. The memo states that the bureau will refocus its efforts on supervising large banks over nonbank competitors, some of which offer nearly identical products and services, noting that in 2012, 70% of the bureau’s supervisory efforts were directed at banks.

“To focus on tangible harms to consumers, the bureau will shift resources away from enforcement and supervision that can be done by the states,” according to the memo, which was posted on X, formerly known as Twitter. 

The new priorities under acting CFPB Director Russell Vought also place severe restrictions on fair lending investigations. The memo states that the CFPB will only pursue claims of intentional discrimination and not bring enforcement actions based on significant “disparate impact” — meaning negative outcomes for minority consumers unaccompanied by proof of discriminatory intent. 

“The bureau will not engage in redlining or bias assessment supervisions or enforcement based solely on statistical evidence and/or stray remarks that may be susceptible to adverse inferences,” the memo states.

Critics say that discrimination cases rarely include direct evidence of discriminatory intent, which is why statistical evidence showing disparities has long been recognized as a legitimate means of proving a prima facie case of intentional discrimination. 

“I’m not sure what is left of fair lending supervision or enforcement under this policy,” said David Silberman, senior advisor to the Financial Health Network and a former associate director at the CFPB. 

The sweeping three-page memo represents a significant victory for Big Tech, with the CFPB saying it will “deprioritize” oversight of seven specific areas, including consumer data, digital payments and peer-to-peer platforms and lending. In addition, under the Trump administration, no fines or penalties will be imposed on financial institutions, the memo states.

Some former CFPB officials said Vought may be flouting the rule of law by not conducting supervision of nonbanks. The Dodd-Frank Act states specifically that the bureau “shall require reports and conduct examinations on a periodic basis” of non-depositories within its jurisdiction. Dodd-Frank has much stronger language governing nonbanks than banks.  

“This is a weak and unambitious set of priorities, designed to put our nation’s consumer watchdog to sleep,” said Christopher Peterson, the John J. Flynn endowed professor of law at the University of Utah’s S.J. Quinney College of Law. 

The changes come as the Senate is poised to confirm Jonathan McKernan, a former Republican board member on the Federal Deposit Insurance Corp., as the bureau’s permanent director. It is unclear if McKernan had a say in outlining the agency’s priorities. 

Vought is expected to use the list of priorities to justify reductions in force at the agency, many current and former CFPB employees said.  Vought, who is also serving as Director of the Office of Management and Budget, is an architect of Project 2025, the Republican blueprint for slashing the federal government. 

Last week, an appeals court panel sided with the Trump administration in allowing job cuts to resume at the CFPB but barred the agency from mass firings. Vought and his team were permitted by the U.S. Court of Appeals for the District of Columbia Circuit to make a “particularized assessment” of the number of employees the CFPB needs to carry out its statutory duties and pursue a reduction in force terminating any excess headcount. Court documents showed that Vought had planned in February to cut nearly the entire CFPB staff but was kept from doing so by a lawsuit filed by the National Treasury Employees Union.

“Setting a negative quota intentionally reducing the bureau’s productivity is a step in the wrong direction,” said Peterson.

Nonbanks get a pass

The memo goes so far as to claim that supervisory exams are responsible for raising consumer prices and for the cost of running a business. The new deregulatory, pro-business stance envisions a 50% drop in supervisory exams.  

“Supervision should focus on collaborative efforts with the supervised entities to resolve problems so that there are measurable benefits to consumers,” the memo states. “The focus should be on conciliation, correction and remediation of harms subject to consumers’ complaints.”

Consumer finance lawyers said they were having a hard time understanding why the CFPB would refuse to exercise supervisory authority over nonbanks. 

Nonbank mortgage lenders were among those who issued mortgages to borrowers who couldn’t repay the loans, creating toxic assets that led to the 2008 financial crisis, which in turn led to the creation of the CFPB. Shifting supervision back to only depositories would create an uneven playing field, critics say.

“The decision to deprioritize supervision of non-depositories seems to me inconsistent with the statute and the history leading to the enactment of the Dodd-Frank Act,” Silberman said. 

Adam Rust, director of financial services at the Consumer Federation of America, said the financial crisis revealed how “inconsistent supervision created blind spots that permitted risk-taking to flourish.”

Some observers said that regressing the bureau’s supervisory strategy to focus on banks ignores the growing role that fintechs and other nonbanks have come to play in offering consumer financial services.

“If the plan’s goal of efficiency was genuine, it would prioritize supervision and enforcement for institutions that do not have another federal regulator,” Rust said. “But this plan does the opposite: it prioritizes supervision of prudentially regulated depositories but reduces scrutiny of non-banks.”

The CFPB has jurisdiction over between 100 to 200 banks with more than $10 billion in assets. By contrast, there are at least several thousand nonbanks that fall within the CFPB’s supervisory jurisdiction. They include all independent mortgage lenders, servicers and brokers; all payday lenders, and larger participants in the credit reporting, debt collection, auto lending, student servicing and remittances industries, Silberman said. 

The CFPB, which opened its doors in 2011, was heavily weighted toward bank supervision in its early days in part because the bureau had to build its non-bank supervisory program from the ground up. The bureau also had to promulgate rules defining larger participants in various markets, such as credit reporting and debt collection, before it could exercise supervisory authority.

While state banking regulators do examine nonbanks licensed in their states, they generally cannot assess for compliance with federal statutes. Several legal experts also noted that the memo claims to prioritize issues around mortgages, consumer reporting and debt collection, which is inconsistent with deemphasizing supervision of nonbanks. 

Big Tech wins

Another theme of the memo involves addressing “actual fraud against consumers,” which some experts said was impossible to do while deprioritizing supervision of Big Tech payment apps and the security of personal data.

“Fighting fraud cannot occur if Big Tech is not held accountable,” said Rust. “You can’t prevent fraud by ignoring how it occurs. Criminals are using data stolen from security breaches to train generative AI models to convince people to send them money using payment apps.”

Some experts said the directive not to supervise nonbanks reflects an effort by Musk — the erstwhile head of the Department of Government Efficiency and owner of social media platform X — to forestall any attempt by the CFPB to investigate or supervise the new payments partnership between X and Visa. The deal is part of Musk’s goal of turning X into an “everything app” that will allow users to store money and make payments on the platform

“It’s good news for Elon Musk if he goes through with the plan to make X a payments platform because the memo deprioritizes peer-to-peer platforms,” said Jeff Sovern, the Michael Millemann Professor of Consumer Protection Law at the University of Maryland’s Francis King Carey School of Law.

Several other statements in the memo came as a surprise given the CFPB’s broad authority to enforce 18 consumer protection laws. 

The memo states that it will focus on protecting servicemembers and veterans. But Sovern noted that the Bureau was not created to protect one set of consumers. Congress specifically provided in Dodd-Frank that the CFPB have an office to protect older Americans, who are not mentioned in the memo.