Would CFPB nominee hamstring the agency by slashing its budget?
If Kathy Kraninger ultimately gets confirmed as the next permanent director of the Consumer Financial Protection Bureau, many experts expect the agency will undergo a major cost-cutting effort.
Kraninger, a senior official at the Office of Management and Budget, was mostly tight-lipped about her plans for the agency at her July nomination hearing. But watchers saw clear signals of her interest in the agency's budget as a focus, as well as in conducting cost-benefit analyses of all rulemakings.
“Being from OMB, I think [Kraninger’s] going to really go through the agency and determine what value is being had for the money being spent,” said Keith Noreika, a partner at Simpson Thacher and the former acting comptroller of the currency.
The Senate Banking Committee approved Kraninger's nomination last month along strictly party lines. Observers say the odds favor her confirmation in the full Senate, but she faces a tight congressional calendar and strong Democratic opposition over her lack of a consumer protection background. A floor vote may not happen until after the midterm elections.
But assuming she takes the agency's reins, many expect her to continue the same pro-business deregulatory agenda put in place by Mick Mulvaney, her boss as OMB director and the CFPB's current acting director.
“Mulvaney’s vision — or at least its broad outlines and direction — will be the new status quo,” said Leslie Parrish, a senior analyst at Aite Group’s retail banking practice, who was one of the CFPB’s initial employees.
No one knows yet how deep Kraninger would cut the CFPB’s budget, but President Trump’s proposed budget called for a 23% drop in the bureau’s funding in 2019.
Although the CFPB sets its own actual budget, Democrats questioning Kraninger at her hearing zeroed in on the administration's proposed spending cut for the CFPB and the nominee's work on the Trump budget. Sen. Elizabeth Warren, D-Mass., the CFPB's architect, grilled Kraninger on where the agency would focus its budget reduction.
"Other than the director and the dozen new political appointees that Mick Mulvaney has brought to the agency, every other CFPB employee's a civil servant," Warren said. "So in order to achieve the 23% cut you've proposed, would you fire civil servants?"
Kraninger resisted answering but sounded open to cuts in travel costs and other areas related to on-site examinations of firms. In her opening statement, she said the bureau "must be accountable for its actions, including its expenditure of resources."
"I think looking at the travel and looking at the efficient distribution of staff is certainly something that is appropriate inside the budget," Kraninger said in response to Warren's questions.
Observers said CFPB spending reductions under a Trump-appointed director would make sense in light of Mulvaney's moves.
“Budget cuts would be consistent with the game plan, which is to restrain the agency,” said Chris Willis, a partner at Ballard Spahr. “The idea is to decrease the headcount at the agency, decreasing its capability so that even if there is an administrative change in the future, it hinders the bureau’s capacity for a slightly longer period.”
Willis said even if a future permanent director succeeding Kraninger wanted to reestablish positions that had been cut, it would take six to nine months for the CFPB “to reconstitute itself.”
The changes put in place by Kraninger would have the potential to be more permanent than the agenda under Mulvaney, who lacks Senate approval. She would be the second permanent director in the CFPB's history, after Richard Cordray, and could reinvent much of the agency's operations following its nascence.
Observers said the "CFPB 2.0" is likely to be a slower-moving agency, one heavily involved in implementing the dozen "requests for information" as part of a public review of the agency’s operations that Mulvaney launched in January.
Still, consumer advocates, law professors and many attorneys general are deeply concerned about what the CFPB would look like under Kraninger.
“To have a director who seems fundamentally opposed to the core consumer-protection mission of the bureau is deeply troubling,” said Jim Hawkins, the George Butler research professor at the University of Houston Law Center.
He added, however, that new leadership for the agency in and of itself could be a good thing.
“Different political views shouldn't necessarily mean bad policies," Hawkins said. "If Kraninger focuses on the mission to regulate markets based on real-world evidence, her tenure could inject new perspectives into the bureau.”
In her opening statement at the hearing, Kraninger expressed interest in analyzing the costs of regulations.
"The bureau should make robust use of cost-benefit analysis as required by Congress to facilitate competition and provide clear rules of the road," she said.
Some experts suggest that the CFPB's enforcement division, long favored by Cordray, is in the crosshairs with budget cuts looming.
“This will impact enforcement,” said Stephen Ornstein, a partner at Alston & Bird. “[Kraninger] absolutely needs to have the background or have the people who have the background, because you have to know what you’re cutting.”
Because it is tough to fire federal unionized workers, the CFPB is looking for other cuts to travel, outsourced vendors and areas considered flexible budget line items.
Still, Mulvaney’s pullback on enforcement has led many attorneys to speculate that the bureau’s enforcement division may have less work to do, which would justify major cuts ahead.
“There is a view among the folks in the administration and probably the incoming director, that because the bureau’s mission crept beyond its statutory authority and took a more robust view of its jurisdiction than the current administration has, then naturally if you have a more limited organization, you will not need such a broad budget,” said Travis Norton, of counsel at Brownstein Hyatt Farber Schreck.
Kraninger also is expected to rely heavily on the dozen political appointees that Mulvaney named to run the bureau in his absence. By contrast, under Cordray, he was technically the bureau’s only political appointee.
As Kraninger and the political appointees delve into the RFI process, they are expected to upend how the bureau conducted business under Cordray.
The RFI process was designed to give a wide range of stakeholders — from industry trade groups to think tanks to academics — input into what consumer financial protection policy should look like.
The CFPB under Mulvaney initially cut back dramatically on enforcement actions, but has ramped up enforcement actions in the last few months. Still, Mulvaney has said that enforcement should be used as a last resort, and that the CFPB is focusing on criminal actions and fraud, targeting the worst bad actors.
Still, others think the CFPB 2.0 will more closely mirror the Federal Trade Commission’s approach to enforcement.
“We’re in a phase where the bureau wants to understand itself and firm up its own structural flaws before ramping up enforcement,” said Joe Jacquot, a partner at Foley & Lardner and a former deputy attorney general of Florida.
“I see the CFPB looking at the structural issues and trying to get a sense of what is their statutory mandate.”
Kraninger has expressed support for a free-market agenda, so many think the CFPB will go the extra mile to give financial firms more clarity on rules.
“Look for more workable and functioning regulatory regimes where industries will fully comprehend their regulatory expectations rather than playing a game of 'gotcha,' " said Joann Needleman, an attorney at Clark Hill.