An enforcement-first approach.

Author:Levy, Brian S.

In just a few years since its creation, the Consumer Financial Protection Bureau (CFPB) has radically transformed the way in which the mortgage and financial services industry is regulated and policed. Already, the CFPB has promulgated several strikingly transformative rules, as well as aggressively wielded its unprecedented punitive powers in the name of consumer protection. [paragraph] As a result, the leading narrative in the mortgage industry over the past two years has not been market trends, new products or thought leadership. Instead, it has dwelled on answering the question "What does the CFPB think about that?" Or perhaps, "What will the CFPB do next?" [paragraph] More than just an aggressive posture toward industry, what is unique about this agency is the way it uses enforcement to articulate and implement new policy objectives on existing regulations.


CFPB in perspective

Created by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, CFPB is the most powerful consumer regulatory and enforcement agency in U.S. history.

Given the perceived role of the residential mortgage industry during the genesis of Dodd-Frank, it is no surprise that mortgage lenders and servicers have been squarely in the crosshairs of CFPB's new enforcers.

CFPB was charged with implementing many Dodd-Frank provisions through formal rulemaking--including the Truth in Lending Act (TILA)-Real Estate Settlement Procedures Act (RESPA) Integrated Disclosure rule (TRID), the Qualified Mortgage (QM) rule and the loan originator compensation rule. The bureau also was given enforcement and interpretative authority over nearly all existing federal consumer financial-related statutes.

Through Dodd-Frank, Congress also empowered CFPB with authority to impose massive penalties and strong administrative enforcement mechanisms, including comprehensive abilities to investigate and punish wrongdoing.

In its five-year history, in addition to filling the Federal Register with thousands of pages of regulations for the seminal Dodd-Frank mortgage rules of TRID, QM and loan officer compensation, the CFPB has also proven itself a fierce enforcer against perceived consumer financial abuses. The bureau's record to date provides an immediate contrast to past consumer and provider complaints that bad actors in the financial services world would too often escape accountability.

CFPB enforcement as interpretative guidance

Despite laudable enforcement advocacy for consumers, since promulgating the Dodd-Frank-mandated mortgage rules, the CFPB has hindered its regulatory role for the mortgage industry and inspired constitutional challenges to the limits of its power by using enforcement as its primary regulatory tool to provide interpretative guidance.

Ironically, if challenges to its authority are upheld, CFPB's aggressive use of enforcement-focused tactics may ultimately weaken the important consumer-protection role the agency was intended to play.

CFPB's guidance-through-enforcement approach has been challenged as being both substantively and procedurally defective from a constitutional perspective. For a federal government agency to provide interpretative guidance through enforcement, or to blatantly change existing interpretation or regulation, is inconsistent with the constitutionally mandated "notice and opportunity to be heard" principles of due process embedded in administrative law decisions over the past 50 years.

An enforcement action, on the other hand, is immune from due process and transparency because it is necessarily confidential and limited to the facts and circumstances of the defendant investigated. Moreover, settlement of a private disputed matter may not yield generalizable principles--particularly in the case of defendants who are unable to fund the costs of a defense against CFPB's massive penalty regime. For example, Dodd-Frank also gave CFPB the power (which it doesn't seem shy about exercising) to impose penalties equal to $5,000 per day per violation, which rises to $1 million per day per violation for "knowing"...

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