The Consumer Financial Protection Agency (CFPB) does not provide guidance to the financial institutions it regulates.   Instead it has evolved into a regime of "regulation by enforcement."  At least that is the conclusion of a white paper written for the Mortgage Bankers Association by its counsel at the law firm of Covington & Burling, LLP.

The paper, titled CFPB 2.0: Advancing Consumer Protection, looks at the performance of the agency during its first five years and takes a particularly jaundiced view of Director Richard Cordray's promises for the agency versus its perceived performance.

"The CFPB has done well where it's developed rules that focus on the worst excesses of the pre-crisis market," said David H. Stevens, President and CEO of MBA.  "However, the Bureau has too-often opted for a 'regulation by enforcement' approach that uses enforcement actions, rather than written guidance, to communicate to the industry about practices it finds problematic.  The CFPB can better protect consumers by publishing clear, consistent regulations and bright-line guidance like other regulators."

Stevens continued, "The Bureau's reluctance to issue clear guidance on the laws it inherited, such as the Real Estate Settlement Procedures Act, has resulted in a confused, uneven market that actually narrows consumers' access to sustainable credit.  Now is the time to look back at what has been learned over the past five years and make some key changes that will help consumers and the industry alike."

CFPB has the authority under the Administrative Procedure Act (APA) to provide both binding regulations and guidance on the 18 consumer protection laws transferred to it by the Dodd-Frank Act.  But, MBA says it has been too hesitant to use that tool.  What little guidance the Bureau has made available "often explains what practices violate the law without providing a path to compliance and is accompanies by disclaimers that undermine its usefulness."

Instead of issuing positive guidance, Cordray has embraced the idea that enforcement itself should be a valuable source as well as an economical use of Bureau resources.  Consent order, he says, "provide detailed guidance for compliance officers" and are "intended as guides to all participants in the marketplace."  In light of this guidance, "it would be compliance malpractice for executives not to take careful bearings from the content of these orders about how to comply with the law and treat consumers fairly."

MBA says this is not true. First, consent orders necessarily relate to a single and specific fact pattern and thus identifies discrete illegal practices rather than a pathway to compliance.  Second, the guidance arising from consent orders may be incorrect.  The PHH case is cited as one in which the consent order, had it not been appealed and ruled by the courts as a not reasonable interpretation of RESPA, would have provided substantial misguidance to compliance officers.  The outcome of one matter, MBA says, is not necessarily dispositive to the outcome of another.

Cordray argues that articulating rules can be a hopeless endeavor because it will not stop the "ingenuity of the dishonest schemer." That may be true, MBA says, but that overlooks the need of the honest financial services provider to find a safe path through a minefield of regulations and ignores the benefits of clear interpretations to consumers, regulators, and enforcement officials.

The association takes a bit of umbrage at criticism Cordray has leveled at "others" for insisting that the Bureau should articulate rules for every eventuality, claiming that, for their part, they had merely sought guidance for significant practical questions arising out of the normal course of business.

The paper states that where the Bureau has occasionally exercised its authority to issue guidance, it has included the following language: "This Compliance Bulletin and Policy Guidance is a non-binding general statement of policy articulating considerations relevant to the Bureau's exercise of its supervisory and enforcement authority." This disclaimer, MBA says, undermines the value of the guidance it accompanies.

The Bureau has explicitly resisted expanding the way it provides guidance, on one occasion noting that "many regulated entities have access to resources, counsel, advice, and processes of their own...that they may use to assist in the interpretation of regulatory requirements and achieve regulatory compliance." This misses the mark, the paper says, in several respects. 

As the statement itself concedes, while many have the resources to achieve compliance, others, probably smaller entities, do not.  This argument also ignores the potential for confusion and inconsistency that arises from each regulated entity choosing its own interpretation of complicated ambiguities and Cordray himself has warned that regulated institutions should "shrug off the naysaying consultants and lawyers who breed a culture of fear and hypothesized problems to hype their services."  Finally, the assertion that institutions can forge their own path to compliance is belied by the Bureaus enforcement actions which have targeted companies that were advised by counsel they were in compliance with the law.

The paper calls for a new CFPB - a version 2.0 - saying the time is ripe for this.  The Bureau has worked through its intense period of formulating regulations, and its regulations staff can now be redeployed to developing guidance and to reviewing and modernizing regulations to reflect the "rising tide of financial innovation." It, of course, has several recommendations for creating this reimagined agency.

The Bureau should place a priority on issuing appropriate guidance to facilitate compliance with federal law.  It should shift its emphasis to protecting consumers by providing guidance rather than bringing enforcement cases. The Bureau recently stated it does not want to play "gotcha" with industry, merely to see industry follow the rules. This approach, however, works best when the Bureau informs industry what it believes those rules require. 

The guidance should be provided in a host of forms including bulletins, advisory opinions, policy statements, and responses to frequently asked questions. Among the guidelines that should be established are some that define how and when the Bureau will issue and revise its rules and guidance; the criteria it will use for selecting each type of rule, and a reasonable timeline for public comment.

The Bureau should stand by the guidelines it issues, without the disclaimers that undermine their effectiveness.

The Bureau should listen more closely to other viewpoints, especially from those it regulates. Its mission of consumer protection is effectuated by shaping industry practices and this can be significantly furthered through constructive dialogue with those who provide financial services and have expertise (that the Bureau may lack) in the time and costs involved in implementing regulations.  There should be regular industry forums with appropriate representatives from independent mortgage bankers, banks, credit unions, and community banks and regular meetings with stakeholder groups.  The Bureau should also invite questions from the public after publication of each regulation and should be required to respond publicly to such questions with authoritative guidance.

The enforcement process should be reformed.  First and foremost, CFPB should commit to establishing legal standards through written guidance rather than enforcement and should apply those changes prospectively.  It should not revoke, amend, or issue rules or guidance without providing sufficient notice in the same form as the initial rule or guidance.

It should also review its enforcement processes to ensure they provide due process to the investigated. It should respect the statues of limitations in administrative proceedings, create a Civil Money Penalty matrix that rationalizes and explains the Bureau's approach to penalties and examine its processes to determine whether a particular issue is handled by supervision or enforcement. 

We await, with interest, CFPB's response.