The new administration should reset federal consumer protection rules

Over the past few months, the Consumer Financial Protection Bureau has been a tale of two extremes. The Biden administration’s CFPB, under Director Rohit Chopra — who was fired on Feb. 1 — aggressively imposed an activist agenda, disregarding its long-term consequences. 

Several days later, President Trump appointed Russell Vought to serve as acting director of the CFPB, and he quickly reduced it to a nonfunctioning agency, ordering a cessation of operations indefinitely. Supporters of smaller government cheered these efforts, while lawsuits were filed by government employee unions and consumer groups to block them.

The Trump administration has an opportunity to pull the bureau back from the brink, ending regulatory overreach while ensuring a well-functioning financial services market and protecting consumers.

Under the Biden administration, the CFPB repeatedly stretched its authorities, catching law-abiding companies in the crosshairs in Chopra’s take-no-prisoners approach. It used an exam manual update to declare discrimination to be an unfair practice; issued a barrage of “guidance” while bypassing rulemaking through notice and public comment; and utilized “bully pulpit” tactics to jawbone regulated parties.

Moreover, in the midst of the Trump transition, the CFPB refused to be what Chopra called a “dead fish.” While other federal agencies “powered down,” the CFPB did the exact opposite — it proposed regulating digital assets, declared certain terms in form contracts illegal, and published a “playbook” for states to carry forward the CFPB’s aggressive agenda, including model state laws for abusiveness and “junk fee” prohibitions, all while continuing to pursue potential regulation by enforcement.

Regulation by enforcement under former CFPB Directors Richard Cordray, from 2012 to 2017, and Chopra failed to provide regulated entities with proper notice of what practices the CFPB would declare a legal violation, leading to uncertainty as to whether following long-settled state and federal law was sufficient. 

Under Chopra’s leadership, the agency targeted conduct by well-regulated businesses, claiming to protect American consumers from “unfair” or “abusive” conduct. In December, for example, the CFPB sued Zelle and three of the large banks that own Zelle. The suit alleged not that Zelle and the banks committed bad acts, but rather failed to protect consumers from fraudsters, asserting novel theories under the federal laws the CFPB enforces. 

Extending legal protections by filing a lawsuit is a quintessential case of regulation by enforcement. Zelle allows millions of Americans to pay bills and make peer-to-peer financial transfers. That consumers are not reimbursed for fraud on the platform is a legitimate policy issue, but one appropriately addressed by rulemaking to set clear rules that are stress tested under the Administrative Procedure Act. 

The Zelle case is just one of many examples of the CFPB attempting to expand its authority through enforcement, rather than filing cases under clearly settled authority. In the past several years, CFPB lawsuits asserted jurisdiction under the Dodd-Frank Act over rent-to-own companies, CFPB v. Acima; characterized commonplace and well-disclosed auto finance transactions as abusive, CFPB v. Credit Acceptance; and attempted to assert that practices allowed under the Real Estate Settlement Procedures Act, or RESPA, by federal regulators nevertheless violated RESPA, PHH v. CFPB.

Now, however, Vought (and Director-nominee Jonathan McKernan, if confirmed) have a unique opportunity to course-correct. This would provide much-needed clarity to market participants. Consumers and industry will both suffer if the interpretation of federal consumer law merely shifts to the states without the CFPB offering a reasonable and stabilizing voice. 

Businesses operate within a dual regulatory regime at the state and federal level. The numerous overlapping state and federal laws apply regardless of whether the CFPB is hyper-functioning or whether its functions are significantly reduced. Without a CFPB or other agency ensuring responsible regulation at the federal level, there would be no helpful counter to the voices of emboldened states and plaintiffs’ attorneys armed with Chopra’s playbook and seeking the opportunity to own the interpretation and enforcement of federal consumer finance law. This would further harm consumers and businesses alike.

The Trump administration has an opportunity to clear the slate and, working with Congress, set clear guardrails for the CFPB. As directed by the administration’s Feb. 19 executive order, Vought and CFPB-Director nominee Jonathan McKernan should withdraw the aforementioned and similar lawsuits as inconsistent with law and as an agency overreach. At the same time, they should also provide clear guidance that reflects that the underlying practices are not violations of law, including the Dodd-Frank abusiveness prohibition.

Consumers deserve a fair-minded federal consumer financial regulator with the resources and talent to solve the biggest problems they face. At the same time, that agency must heed its statutory authorities, ensure due process for regulated parties, and strike a healthy balance between consumer protection and innovation, credit access and competition.