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Trade group criticizes CFPB reliance on enforcement and informal guidance

Posted in CFPB Enforcement, Credit Cards, Fair Lending

The U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness has sent a detailed letter to Director Cordray in which it criticizes the CFPB’s approach of “regulation by enforcement settlement combined with issuance of brief guidance statements” in lieu of engaging in rulemaking or otherwise soliciting public input. 

In the letter, the Chamber expresses its strong belief that “if the Bureau identifies areas in which it wants to fundamentally alter the rules, it should take the time to write new standards rather than rely on one-off enforcement and press release “warnings” to other regulated companies.” 

The letter discuss three areas “in which the Bureau’s approach has led to uncertainty and adverse consequences for both businesses and consumers—the test for disparate impact liability in the context of indirect auto lending; the definition of “abusive” acts and practices; and the standards for companies’ liability for the actions of service providers.” 

With regard to indirect auto finance, the Chamber’s letter describes various important questions left unanswered by the CFPB’s March 2013 bulletin in which the CFPB described its plans to use a disparate impact theory to impose ECOA liability on purchasers of auto retail installment sale contracts.  Among the unanswered questions are how financial institutions can reliably determine whether a dealer’s practices have resulted in an impermissible disparate impact and what is the CFPB’s methodology for calculating disparate impact. 

The Chamber notes the CFPB’s failure to solicit comment on or to publicly assess the effect of
flat-fee pricing on credit availability, commenting that if adoption of a flat-fee standard is the CFPB’s “goal,” the CFPB should “pursue that goal through a rulemaking that fully considers any resulting consumer harm or benefit.”  It further comments that if that is not the CFPB’s goal, the CFPB should provide “meaningful guidance, whether through rulemaking or less formal means, that allows indirect auto lenders to build effective compliance regimes.” 

As to “abusive” acts or practices, the Chamber notes that the CFPB’s “guidance” so far has “simply recite[d] the statutory language” and asks the CFPB to “issue formal guidance in this area, including examples of the types of practices that would be considered abusive but are not otherwise unfair or deceptive.”  The Chamber also discusses the difficulty faced by industry in attempting to derive a legal standard from the CFPB’s use of its authority to prohibit abusive practices in its enforcement actions against American Debt Settlement Solutions and CashCall

With regard to the scope of a financial service company’s liability for actions of a service provider, the Chamber observes that the absence of any statutory guidance in Dodd-Frank argues strongly for the CFPB to undertake a rulemaking, or at least issue clear guidance, before imposing such liability on a company.  The Chamber states that the CFPB’s April 2012 bulletin fails to provide any meaningful guidance and contrasts it with the more detailed guidance issued by the Fed and OCC.  

When the CFPB issued its July 2012 bulletin on marketing credit card add-on products, we expressed concern as to whether it portended a trend by the CFPB to use its enforcement authority as a method for imposing  industry-wide standards that instead should be established through the rulemaking process required by Dodd-Frank and the Administrative Procedure Act.  Unfortunately, our concerns have turned out to be well-founded.  Due to the tremendous uncertainty that exists as to the CFPB’s expectations regarding the marketing of credit card add-on products, most card issuers have stopped offering these products altogether.  Since many of these products (e.g, debt cancellation coverage, identity theft) are very valuable to certain consumers, this is not a result that benefits consumers and, according to the CFPB, not the result it was trying to achieve.

We agree with the Chamber’s statement that in the three areas identified in its letter, as well as with regard to add-on products, industry and consumers would benefit from more clarity, “either through rulemaking or a more informal interpretative process that incorporates meaningful engagement and input from affected stakeholders, clear standards, and a public explanation of the justification for those standards.”