CFPB’s Next Phase

Kraninger emphasized the Bureau’s mission of preventing harm to consumers in her speech. She cited education as a major tool for doing so. Financial literacy can help consumers avoid predatory products and practices, while making choices that are in their best long-term interest. CFPB has played a role in promoting financial literacy in the past, and Kraninger plans to expand on these efforts with a “Start Small, Save Up” initiative. The Bureau is particularly focused on emergency savings and the fact that 40 percent of Americans say they would need to turn to credit to cover a $400 emergency. CFPB’s educational efforts can complement its rulemaking, supervision, and enforcement roles, but it can also distract from them. Kraninger will be judged in this area by her ability to strike the right balance.

Payday lenders offer short-term small dollar loans to consumers. The payday lending industry has faced criticism from consumer advocates, who have called for increased regulation of the industry. Consumer advocates are concerned that payday borrowers are falling into a cycle of debt that they cannot pay back, while the industry argues that payday lending serves a valuable role in helping potential borrowers facing an emergency.

Under CFPB Director Richard Cordray, the Bureau finalized rules that required payday lenders to assess a potential borrower’s ability to repay, before making a loan, and restricted a lender’s ability to debit a consumer’s bank account for loan repayment. Under Kraninger, the ability-to-repay requirement was revisited and then rescinded in a proposed rule, due to concerns about restricting credit. The restrictions on debiting a borrower’s bank account remain in place, but Kraninger signaled she may revisit this issue in the future.

The Fair Debt Collection Practices Act was passed in 1977 to regulate debt collection. The regulations put in place by the act include restrictions on the use of abusive or profane languages, limits to the place and time a debt collector can contact a debtor, and the use of misrepresentation and deceit to collect debt. In her speech, Kraninger said that CFPB will soon release a proposed rule for implementing the act to account for technological changes, such as the rise of the internet and text messaging. A new rule could bring clarity about debt collection in the digital age and reduce uncertainty for the debt collection industry, but many consumer advocates are worried that the new rule might weaken existing consumer protections.

In the aftermath of the 2008 financial crisis, Congress authorized CFPB to collect data on small business lending. This data is supposed to include a range of information about the small business loan itself, but also information about the race, sex, and ethnicity of the business owner. According to the statute, “the purpose of this [provision] is to facilitate enforcement of fair lending laws and enable communities, governmental entities, and creditors to identify business and community development needs and opportunities of women-owned, minority-owned, and small businesses.” The implementation of this data collection so far has been slow, with concerns raised about compliance costs and privacy. Kraninger can prioritize this data collection to speed up the process, and has stated that she is “looking at what the next steps may be to explore [the] issue.”

CFPB enforces federal fair lending rules designed to prevent discrimination based on protected demographic characteristics, such as race, religion, or gender. The doctrine of disparate impact, which is used in many fair lending cases, has received considerable attention in recent years. It holds that certain practices are discriminatory and cause harm to protected groups, even if these practices are applied neutrally to everyone. Cordray was a proponent of using the doctrine when enforcing fair lending laws, but his actions drew criticism, including from the then chair of the House Financial Services Committee, for the underlying methodology used by the Bureau. Kraninger has yet to voice strong public views about CFPB’s use of disparate impact, but has stated she will look into the matter in the coming months.

 

The London Interbank Offered Rate (LIBOR) is a benchmark that is used to set interest rates for various financial products, including many adjustable-rate mortgages and student loans. This benchmark has become increasingly fragile over the years and is at risk of disappearing without a suitable replacement; this would create great uncertainty for many consumers with financial contracts pegged to LIBOR. CFPB can play an important role in ensuring a smooth transition away from LIBOR and keeping consumers well informed about this process.

Fintech and financial innovation have great potential to help consumers and small businesses, but they also pose challenges and can have unintended consequences (as was seen during the 2008 financial crisis). CFPB’s Office of Innovation is designed to nurture and manage innovation in the financial sector for consumers. CFPB has proposed a regulatory sandbox, which is designed to help spur innovation by temporarily easing some regulations on select companies testing a new product or idea. However, its critics are concerned that it will place consumers in harm’s way, by relaxing consumer protections designed to promote transparency and prevent fraud. Kraninger will have to think through how to best regulate and nurture financial innovation while protecting consumers.

CFPB recently announced a symposia series to discuss many of these issues with experts representing a variety of viewpoints. This is a positive sign. Echoing an earlier BPC report, the Bureau does best when it operates in a “transparent, open, and iterative manner seeking input from all stakeholders” on an issue.

However, there is a need to depoliticize CFPB, so the Bureau can focus on protecting consumers rather than fighting constant political battles. A symposia series by itself will not be sufficient. Kraninger will have to work hard to forge acceptable compromise solutions on the different issues she confronts. She will also have to strike the right balance between the educational, rulemaking, supervision, and enforcement roles of CFPB. Kraninger can further try to depoliticize the agency by highlighting issues that don’t have clear battle lines and are more prone to bipartisanship, such as figuring out how to nurture responsible financial innovation and ensuring a smooth transition from LIBOR.

CFPB is still a young agency and will further mature in the coming years. The issues facing the Bureau are critical to Main Street consumers and business, so the public would benefit from an effective agency that is not at the center of partisan controversy. Kraninger’s approach at the Bureau will play a large role in whether this happens.