Election Impact: The future of the CFPB [Feature]

On the evening of Aug. 20, former Vice President Joe Biden accepted the nomination for president on the last day of the Democratic National Convention . During the four days of the convention, representatives for the party — from constituents to elected officials and everything in between — echoed a common theme: The 2020 election is shaping up to the be most important of the modern era. And for good reason. Politics and personal opinions aside, the country, which has been in the grips of the worst pandemic in a century, is also battling the deepest recession since the 2008 credit crisis. Unemployment remains north of 10%, and total coronavirus cases and deaths in the United States are the highest in the world as of Aug. 23 at 5.57 million and 174,290, respectively, according to Johns Hopkins University . Historically, the auto finance industry has been largely insulated from the ripples caused by elections. Monetary policy, which is decided by the Federal Reserve and its Board of Governors , is largely a nonpartisan endeavor, despite the fact that the Fed chairperson is nominated by the sitting president. Elections also traditionally have had little effect on vehicle demand, Jonathan Smoke , chief economist at Cox Automotive , told Auto Finance News . “People really don't make decisions based on who they think is going to be sitting in the White House a few months from now,” Smoke said. “This year, though, I think is a little bit different. With consumer sentiment being depressed relative to what it was before [the pandemic] and what it would be in a strong economy, and people thinking positively about the future. I think it adds another level of uncertainty. That's probably going to pull sentiment down over the next 11 weeks until we get through that election. “I also worry that maybe the election is not going to be over in one night of reporting. So, we may have that uncertainty linger. Now, [the election] comes at a time when the industry’s biggest problem is supply,” Smoke explained. “All things considered, yes, [uncertainty] reduces the strength of sales activity, but that really doesn’t cause a collapse.” Still, consumer finance protection, specifically as it relates to the Consumer Financial Protection Bureau , has experienced a substantial change in its operational approach since the Trump administration took office in 2016, and is poised to see further change that could directly affect auto lenders, regardless of which party takes Capitol Hill in January. Forty-five In 2016, the CFPB witnessed its first change in administration since its inception in summer 2011 and saw its first subsequent leadership change after Richard Cordray stepped down as its director in 2017. “From the Obama administration, we had an environment where the CFPB was very active,” said Kelly Lipinski, member at McGlinchey . “It was the new kid on the block. And they were prolific with bulletin-guided enforcement action.” “With the change to the Trump administration, there certainly was a slowing of the pace, both in public actions, less guidance, etc. The industry was regulated differently and, some would say, less,” Lipinski said, noting that state Attorneys General Offices in California, New York and elsewhere have stepped in to fill the gap. According to Gerald Sachs , a partner at Venable LLP who has served on the CFPB, the Federal Trade Commission and in the U.S. Attorney’s Office , the industry has seen a decrease in enforcement, with significant regulation writing aimed at reducing certain regulatory burdens. “For example, there have been no disparate impact fair lending auto finance cases, and a significant rewriting of the small dollar lending rule,” Sachs told Auto Finance News in an email, noting, however, that there has been a significant amount of rule writing related to innovation. In fact, fair lending and disparate impact are prime examples of how the Trump administration has rolled back Cordray-era approaches to regulating financial institutions, McGlinchey’s Lipinski said. Under Cordray’s leadership, the CFPB published a bulletin that “basically stated that in the auto indirect space disparate impact was a viable legal theory under fair lending and the Equal Credit Opportunity Act ,” Lipinski said. “They followed suit by entering into enforcement actions against auto finance companies based on dealer markup.” Disparate impact is a labor law that refers to practices in employment, housing and auto that adversely affect one group of people under a protected characteristic more than another. “The Trump administration under then-acting Director Mick Mulvaney took action through the Congressional Review Act (CRA) to withdraw that bulletin and effectively eliminate the applicability of disparate impact legal theories on the auto finance space,” Lipinski explained. To be fair, it’s not that the CFPB under Director Kathleen Kraninger ’s leadership has been “sleeping on the job,” Patty Covington , partner at Hudson Cook , told AFN . In fact, the CFPB on Aug. 19 extended the comment period for its request to Dec. 1 from Oct. 2 for information on “how best to create a regulatory environment that expands access to credit and ensures that all consumers and communities are protected from discrimination in all aspects of a credit transaction,” according to a Bureau statement. “The CFPB is still pretty assertive,” Covington said. “Maybe not as aggressive, but they’re certainly assertive. And they’ve taken some assertive positions in [civil investigative demands] that we’ve seen. They’re not as public about it, but I think they’re still scrutinizing financial institutions. I think they’re very focused on consumer education,” she said. During a second Trump presidency, the industry can expect more of the same, according to Sachs, who highlighted increased selective enforcement, continued supervision and more deregulatory policy or regulatory reduction as possible outcomes. While the Trump campaign didn’t respond to requests for comment by press time and did not release an official platform for a second term, according to its website, the president has “withdrawn or removed” 860 regulatory actions from active status, and further rolled back regulations with 15 CRA bills. A blue wave? Yet, perhaps the most visible change the Trump administration has made to the way the CFPB operates resulted from the U.S. Supreme Court case in July that challenged the Bureau’s constitutionality. Under the Dodd-Frank Act — the legislation that created the CFPB and its structure after the financial crisis — the director of the Bureau could not be removed by the president without cause. Proponents of the structure argued that the autonomy of the director discouraged partisan influence, but critics said it gave a single organization too much unchecked regulatory power and infringed on the president’s executive authority. And so, the Justice Department took the CFPB to court. In a split 5-4 decision, the U.S. Supreme Court this year held that, while the Bureau could remain intact and continue to operate, the Dodd-Frank Act’s restrictions on the president’s authority to remove the director were unconstitutional. Simply put, experts agree that a change in administration will likely result in a new CFPB director and, by proxy, changes to the way the Bureau operates, especially if Democrats are able to secure a majority in the U.S. Senate. “I would expect the director would be replaced by someone that is more like Cordray,” Hudson Cook’s Covington said. “I think [U.S. Sen.] Elizabeth Warren still has a pretty strong voice in that party. She will absolutely be giving Biden suggestions on who to install as director or to nominate and have the senate confirm.” Warren, D-Mass., was one of the driving forces behind the CFPB’s creation in the wake of the credit crisis and has been a vocal critic of Kraninger’s leadership at the Bureau. “The CFPB is a very political animal and it takes its directive from one person at the top,” Covington explained. “It could very easily shift into a much more aggressive posture with a different director, which is what I would expect to happen if Biden were elected.” Under a Biden-Harris administration, Venable’s Sachs expects the Bureau to receive the full support of the White House, especially considering that the CFPB was created during Biden’s term as vice president, he said. “I would expect there to be increased enforcement in the fair lending, auto finance, mortgage, and small dollar lending areas,” Sachs said, noting that an uptick in CFPB activity could surpass the volumes witnessed after the Great Recession, and place an added focus on pandemic-related activity. The Biden campaign did not respond to requests for information on its plan for consumer finance protections. Still, McGlinchey’s Lipinski anticipates a more robust federal response and oversight of the financial services space, which could increase the regulatory burden on lenders if prominent states, such as California and New York, maintain their enforcement action. “Do we think truly that some of these high-profile state agencies would be willing to take a step back? Or would they continue a very aggressive and active examination — and enforcement and rulemaking pace — that they’ve been on the last several years?” Lipinksi said. “One added dynamic here that we can’t minimize is not just whether the administration changes,” Lipinksi noted. “We are set for economic challenges that will directly affect consumers. We should anticipate an increase in repos and foreclosures, and those were the exact issues in 2008 that led to the formation of the CFPB. “Whoever is in leadership at the CFPB, or even the president … will be forced to address an economic environment where consumer accounts are not performing. We’re going to have a lot of behavior and defaults that are reminiscent of 2008. So, eyes will be on the federal agencies or President Trump or President Biden — whoever it is — to avoid and minimize the repetitions of the economic collapse in 2008.” Auto Finance Summit, the premier industry event, returns October 20-22, 2020, as a virtual experience. The virtual experience will offer the quality networking and education of past events, all through an online platform. To learn more about the 2020 event and register, visit www.AutoFinanceSummit.com .

Election Impact: The future of the CFPB [Feature]

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