Banks Wanted Curbs on CFPB. They Got Chaos and Confusion Instead

Banks and other financial companies were seeking a lighter touch and more certainty from the Consumer Financial Protection Bureau.

What they’re getting is a sudden evisceration of the agency. And it’s starting to cause industry jitters.

“Having this much uncertainty in the regulatory arena is of concern here at America’s Credit Unions,” Carrie Hunt, the credit union trade association’s chief advocacy officer, said on a Monday call with reporters.

The CFPB’s supervision, enforcement, rulemaking, and other operations are on hold while a team from Elon Musk’s Department of Government Efficiency pores over the agency’s internal documents—including confidential supervisory information from companies the CFPB oversees and customer information.

That might provide a “sugar high” for companies facing enforcement actions, examinations, and other CFPB requirements, said Laurel Loomis Rimon, a Jenner & Block LLP partner and a former CFPB enforcement attorney.

“In the short-term, it’s going to feel good to a lot of companies,” she said.

But like a sugar high, that good feeling is likely to fade for companies that want to abide by the law. “What you’re going to see in more of the medium term is the effects of the chaos and the uncertainty,” said Rimon, a former federal prosecutor.

The chaos at the CFPB has the potential to throw sand into the workings of the nearly $12 trillion mortgage market as well as banks with $10 billion in assets or more and other nonbank companies.

Vought at the Helm

Russell Vought, the CFPB’s acting director and the Senate-confirmed director of the Office of Management and Budget, told all agency employees Monday to do nothing while the agency’s Washington headquarters is shut for the week.

Vought, installed in his post at the CFPB on Feb. 7, also announced that he would draw no funds from the Federal Reserve in the coming quarter in a post on the X social media platform on Feb. 8.

The agency has $711 million in reserves and is funded through disbursements from the Fed, not Congressional appropriations.

The CFPB didn’t respond to a request for comment. Vought’s order blocked the agency’s external communications.

‘What’s the Plan?’

Banks and other companies had been hoping for new leadership to roll back Chopra’s more aggressive guidance and regulations, do basic supervision and enforcement, and provide a level playing field where nonbanks get similar oversight on consumer issues as banks do, according to an industry source who was granted anonymity to discuss private conversations with financial institutions and trade groups.

With Vought and Musk seemingly following the playbook deployed to hobble USAID, companies may not get what they’re hoping for.

“What’s the plan? The plan just seems to be tear it down and there we go,” said Brendan McKay, the owner of McKay Mortgage Co. LLC in Bethesda, Md., and the chief advocacy officer at the Broker Action Coalition, a mortgage broker industry group.

Lost Flexibility

Freezing the CFPB poses problems on the regulatory front, according to David Silberman, a lecturer at Yale Law School and the CFPB’s former assistant director for research, markets, and regulations during the Obama and first Trump administrations.

The CFPB has authority over about 10 regulations that get adjusted annually for inflation. One exempts small banks from a requirement to create escrow accounts for high-priced mortgages.

If that rule isn’t adjusted for inflation, the number of covered community banks will expand each year, Silberman said.

The CFPB’s rule writers are also necessary in an emergency. During the Covid-19 pandemic, Congress made several changes to consumer finance laws, such as making it easier to get student loan and mortgage forbearance agreements.

But the CFPB had to implement them, Silberman said.

And where consumer finance is rapidly evolving, particularly outside the banking system, the CFPB can adapt old rules to new products, he said.

“You lose all that capacity for flexibility and adjustment, but also a source for clarity” if the CFPB isn’t functioning and Congress doesn’t assign those responsibilities to other agencies, Silberman said.

Force Multiplier

Companies may also rejoice at the idea of a CFPB enforcement unit cut off at the knees.

But enforcement would persist among state regulators, private attorneys, and prudential banking regulators.

“The idea that there is no regulation in consumer financial services is wrong,” said Cathy Brennan, a Hudson Cook LLP partner whose practice focuses on fintech.

Unless Congress eliminates the CFPB through legislation, a future Democratic administration could go back and conduct retroactive enforcement, attorneys say.

Companies that want to follow the law may also be at a competitive disadvantage to those that don’t.

“Without the CFPB being the big bad wolf out there, those companies could cause a great deal of harm in a very short period of time to consumers,” said Mercedes Tunstall, a partner at Cadwalader Wickersham & Taft LLP who counsels companies overseen by the CFPB.

The cryptocurrency industry, such as Coinbase CEO Brian Armstrong, has been particularly vocal in applauding the Trump administration’s moves against the CFPB.

“When you have industry cheering on the demise of a consumer protection agency, you have to wonder why are they cheering on a lack of enforcement,” said Richard Horn, the co-managing partner of Garris Horn LLP and a former top CFPB attorney.

Rule of Law

The wholesale hobbling of the CFPB is part of a broader question about the rule of law in the US.

On Feb. 9, Vice President JD Vance mused on X about not following court orders, and there are indications the administration is entertaining similar thoughts.

Vought’s order seeks to block actions otherwise mandated by the 2010 Dodd-Frank Act.

If the rule of law is in question, the US financial system might fall apart, said Brennan, who has been critical of many CFPB policies, such as an interpretive rule applying some credit card regulations to buy now, pay later products.

“This is really not about defending the CFPB and its right to exist, it’s more about defending the rule of law,” she said.