After four years of hibernation during Donald Trump’s administration, the US financial regulator charged with protecting consumers was always going to get a new lease of life under President Joe Biden.
But this week’s nomination of Rohit Chopra to run it was a signal that the new administration wants it to quickly roar back into action — and Wall Street’s lobbyists have taken note.
Mr Chopra, a member of the Federal Trade Commission, is a longtime ally of the fierce finance industry critic Senator Elizabeth Warren, who was instrumental in the creation of the Consumer Financial Protection Bureau in the first place.
“Chopra is the salute to the progressive left,” said one law partner specialising in banking at a major New York firm. “They want more say in financial regulation and they want it at the CFPB in particular — and now they’ve got it.”
The CFPB’s first priority this year, Washington insiders predict, will be making sure that lenders honour both the letter and the spirit of the Cares Act, the Covid relief legislation last year that requires financial institutions to offer borrowers extended periods of repayment forbearance, among other rights.
“You can’t talk about any policy topic [at the CFPB] without talking about Covid,” said Linda Jun, senior policy counsel at Americans for Financial Reform, a consumer advocacy group.
“Are institutions complying with the spirit and letter of the Cares Act? Are they giving the [required] six months of forbearance? Are they getting the word out?”
In his first stint at the CFPB during Barack Obama’s administration, Mr Chopra was the student loan ombudsman and had a reputation for challenging industry that exceeded even the activist style of the agency’s then-boss Richard Cordray, another Warren ally.
Student loan servicers, the companies that collect payments from borrowers and manage loans that have fallen delinquent, could be in the crosshairs, often failing to make borrowers aware of their rights and attempting to collect debts that borrowers are not legally required to pay, Mr Chopra has argued. Servicers should “face real consequences for their violations, just as borrowers do”, he has said.
“Education finance firms such as Navient, Sallie Mae and Discover Financial will almost certainly face heightened supervisory scrutiny and greater enforcement risk,” said Isaac Boltansky of Compass Point Research in a note to clients.
Payday lending and bank fees
Unscrupulous lending practices and the high fees charged to customers, especially poorer ones, will also be back on the agenda at the revived agency.
Under the Obama administration, the CFPB imposed a rule that payday lenders — typically used by poorer borrowers for small advances — must determine if borrowers can actually pay back a loan before granting it. The Trump-era CFPB withdrew it.
Shares in payday and instalment lenders such as World Acceptance and Enova rallied when Mr Cordray said he would leave the CFPB in 2017. Mr Chopra will aim to “finish Cordray’s work on the small dollar rule”, Mr Boltansky said.
Meanwhile, for many Americans living pay cheque to pay cheque, bank overdraft fees amount to a high-cost form of credit. If the CFPB were to impose limits on them, it could have a significant impact on some banks’ profits.
Overdraft fees contributed some $12bn to US banks’ revenue in 2019, according to data from S&P Market Intelligence. At some smaller banks it represents as much as 10 per cent of total revenue.
Mr Chopra’s CFPB could prove a new force in financial technology where, according to Ed Mills, policy analyst at Raymond James, “there is a battle brewing” as various agencies engage in a “turf war” over who will supervise emerging non-bank finance companies, many of which specialise in payments.
Another regulator, the Office of the Comptroller of the Currency, recently proposed a specialised, less burdensome banking licence specifically for payments companies. Critics of the idea said that it would invite technology giants from Apple to Google to exert their dominance in finance. At the FTC, Mr Chopra has spoken out against tech companies’ competitive dominance.
New rules, more enforcement, bigger fines
Even before Mr Chopra’s nomination, some finance companies were warning their shareholders to prepare for a more aggressive CFPB. “The Biden administration could expand enforcement priorities and increase the level of enforcement activity at certain federal agencies, such as the CFPB,” AmeriHome, a mortgage service provider, said in a January 4 regulatory filing.
Affirm, a San Francisco-based digital commerce company, warned investors in a regulatory filing that Mr Biden’s CFPB director could impose rules and enforcement actions “that materially impact our business”.
Lobbyists and lawyers believe the biggest companies should be the most concerned. The Cordray-era CFPB extracted large penalties from Bank of America and Citibank, hit for $727m and $700m, respectively, for illegal credit card practices.
“The old CFPB had a huge preference for larger targets and larger dollar amounts because they wanted a household name attached to the consent orders,” said Chris Willis, head of the consumer financial services litigation group at Ballard Spahr. “We will see a return to that.”
But not all finance companies are so worried. Mat Ishbia, chief executive of United Wholesale Mortgage, said the Cordray regime had been good for the mortgage industry, and he expected the new leadership of the CFPB to be beneficial, too.
“If you make things better for consumers, you help brokers,” he said. “Rules focused on the consumer, and on making the industry as transparent as possible . . . in the long run, that’s a winning combination.”