Consumer Financial Protection Bureau Director Richard Cordray defended his agency’s use of enforcement actions rather than rulemaking to affect industry behavior, arguing it is an essential tool.
In a speech to the Consumer Bankers Association on Wednesday, Cordray said the agency has limited resources and uses consent orders to go after bad actors for deception or fraud, which helps shape industry practices.
“Our public enforcement actions have been marked by orders, whether entered by our agency or by a court, which specify the facts and the resulting legal conclusions,” Cordray said. “Some have criticized this approach as regulation by enforcement, but I think that criticism is badly misplaced. Certainly any responsible official or agency charged with enforcing the law is bound to recognize that they should develop a thoughtful strategy for how to deploy their limited resources most efficiently to protect the public.”
The bureau is heavily criticized by the industry and even former agency officials for creating uncertainty in its use of consent orders as a means of crafting policy. But Cordray defended their use as a way to signal to companies what practices should be avoided or changed.
“The alternative is just a random series of actions that takes a few wild swipes at the bad actors without systematically cleaning up the practices that harm consumers,” he said.
Cordray went so far as to suggest that financial industry executives would be engaging in “compliance malpractice” if they did not glean information from consent orders and respond by cleaning up their own practices.
He added it would be impossible and time-consuming to develop specific rules to root out every fraud while also protecting consumers.
“Others have framed this criticism as a suggestion that law enforcement officials should think through and explicitly articulate rules for every eventuality before taking any enforcement actions at all,” he said. “But that aspiration would lead to paralysis because it simply sets the bar too high.”
One frequently cited case in which a consent order changed an existing rule is the action taken last year against PHH Corp., a Mount Laurel, N.J., mortgage services provider that the CFPB accused of illegally taking kickbacks for customer referrals.
The CFPB interpreted the Real Estate Settlement Procedures Act differently from how the Department of Housing and Urban Development had previously applied the law. Moreover, Cordray overruled an administrative judge’s decision and raised the fine against PHH to $109 million from $6.4 million. The case is on appeal.
Before the PHH case, the CFPB issued an order against a Michigan title agent that appeared to ban marketing services agreements. That order caused many in the industry to stop using those broad marketing contracts.
Cordray also told bankers at a conference in Phoenix that the CFPB’s regulations of credit cards and mortgages have had the intended effect of creating more robust markets. Regulations of both credit cards and mortgages have led to “a trifecta” of improved industry practices, more cautious consumer behavior and an expansion of credit, he said.
“There is no reason to be surprised at this outcome, because our rules merely imposed the kind of common-sense requirements that lie at the heart of all responsible lending,” he said. “Reasonable regulation of financial markets, which includes evenhanded oversight and enforcement of the law, should always tend to benefit the most responsible providers.”