What will the new CFPB chief do with a consumer aid fund of $ 570 million?
As Democrats take control of the Consumer Financial Protection Bureau, observers wonder how a new director will use a multi-million dollar fund to further orient consumers.
By the end of September, the agency had amassed $ 576 million in its civil sanctions fund – a 6% increase from the previous year – after collecting more than $ 34 million in fines from companies over the course of exercise.
Former CFPB director Kathy Kraninger praised efforts to provide fund redress to consumers aggrieved by companies who could not pay large sums. Still, some experts are hoping that Rohit Chopra’s agency, if confirmed as President Biden’s CFPB director, will be more aggressive.
Attempts by the Trump administration to use the fund as a lifeline have run into challenges related to the difficulty of finding aggrieved consumers and concerns about the perspective of the consumer office spending federal resources. It is also unclear how much Kraninger used the fund for financial education efforts, as the office’s financial statements do not mention any money from the fund going to education last year.
“Even though the CFPB under… Kraninger had identified education as a priority, there is much more commitment to be made, especially in the aftermath of the pandemic and the need to support vulnerable populations,” said Quyen Truong, partner at Stroock & Stroock & Levan and a former deputy director of CFPB and deputy general counsel.
The fund grew steadily under the Trump administration, suggesting the agency was not making full use of its resources. The fund had $ 542.9 million at the end of fiscal 2019, up from $ 522.7 million in 2018, according to CFPB financial statements.
While GOP officials are generally more cautious than Democrats about the use of federal coffers, some observers point out that the agency’s use of the fund is limited to certain activities.
“It’s a huge amount of money,” said Allyson Baker, president of the financial services practice at Venable. “There is a very narrow set of requirements regarding the use of money. “
Under Kraninger, the CFPB used the fund to pay out $ 11.4 million to consumers in 2020 and $ 119.8 million in 2019. Between fiscal years 2013 and 2018, in which the CFPB was primarily led by Richard Cordray, a person named by Obama, the CFPB used the fund. to return $ 551.8 to consumers, according to financial statements.
Some Republican lawmakers, concerned that the fund gives the agency too much leeway to spend federal money, had urged Kraninger to return the unused balance to the US Treasury. However, this is not allowed under the Dodd-Frank Act.
The Civil Sanctions Fund can only be used for two purposes: to compensate consumers who have suffered harm or for consumer education and financial literacy programs. Fines and penalties imposed on violators for violating consumer financial laws are deposited into the fund.
“There is a lot of confusion about the penalty fund,” said Lucy Morris, partner at Hudson Cook and former deputy director of enforcement at CFPB. “It’s not a slush fund. It can only be used for two purposes and the office uses it extensively to provide relief to consumers who otherwise would not have it. “
Financial firms and some Republican lawmakers have complained for years that the CFPB has too much power to impose hefty fines compared to other regulators.
“From the early days of office, Republicans in Congress have expressed concerns about the potential uses of the civil financial penalty fund,” said Mike Gordon, partner at the Bradley law firm and former senior CFPB official.
Some experts believe that Chopra, a commissioner at the Federal Trade Commission who was appointed by Biden to be the permanent director of the CFPB, will find many uses for the money. Chopra was unanimously confirmed by the Senate in 2018 and is expected to be widely confirmed for the CFPB post in the coming weeks.
“The priority of the fund is to compensate qualified victims who have not been fully compensated for the harm they have suffered,” Truong said. “In addition to meeting these needs, consumer education and financial literacy programs will be under very careful review. “
Kraninger and Cordray were critical for fining only $ 1 to some companies accused of wrongdoing. But such small fines are more than symbolic. Businesses that don’t have the financial resources to reimburse aggrieved customers must legally pay at least a nominal amount for the agency to tap into the civil penalties fund to provide more relief.
“A fine of $ 1 is actually what is needed to access this civil sanctions fund where we can get redress for consumers,” Kraninger said in a radio interview earlier this month. “You can’t get blood from a stone.”
Civilian monetary penalties also serve to send a message of deterrence.
“One of the things Kraninger pointed out in defending his case was that the CFPB was able to obtain relief for consumers through the use of the penalty fund even when companies were unable to pay ” Morris said. “It is not the bureau’s job to bankrupt companies and they are supposed to take a company’s financial resources and other factors into account in assessing penalties.”
Many observers predict that Chopra will revive the enforcement activities practiced under Cordray, and that the $ 1 penalties will be rare.
“Under a Chopra director, I would expect the CFPB to take a more aggressive enforcement stance, and that includes seeking tougher civil monetary penalties, if any,” Gordon said.
Still, the fund grew in large part because of the hefty fines imposed on individual banks.
More than half of the sums deposited in the last fiscal year came from a penalty of $ 25 million imposed on TD Bank due to overdraft practices. In 2018, the CFPB fined Wells Fargo $ 1 billion for auto loan and mortgage abuse. (The office raised $ 500 million, while the Office of the Comptroller of the Currency deposited the other half into the treasury.)
And significant penalties can be imposed even when little harm has been observed to the consumer. For example, the CFPB fined Wells $ 100 million in 2016 after employees opened millions of fake accounts, although the San Francisco bank said the damage to consumers was limited.
Because the civil sanctions fund has so much money, some experts have suggested that the CFPB’s sanctions should be weaker since the agency is unable to pay as much as it collects.
“Maybe this benchmarking needs to be reduced,” said Baker, a former CFPB enforcement attorney. “Maybe they need to assign a smaller amount of civil penalties to certain behaviors if there is so much money left that is not being distributed to consumers.”
Unlike bank prudential regulators who generally publish their fine assessment formulas in the Federal Register, the CFPB can decide at will what penalties to impose on bad actors.
“Dodd-Frank has given the CFPB wide discretion to set the amounts of civil fines, and we have seen a great variation in the amounts collected,” Gordon said. “As with any regulatory activity, the industry prefers certainty and predictability. Other federal bank regulators use a matrix to promote a more consistent approach to setting penalty amounts, but the CFPB has never taken this approach. “