When some politicians accused the Consumer Financial Protection Bureau of regulation by enforcement in the spring, many auto insiders wondered why the regulator wouldn’t make a rule that auto lenders would know they would have to follow.
At least part of the answer? Speed and staffing.
The CFPB aims to act quickly and address what it sees as urgent issues in the consumer finance markets, said Jennifer Lee, a partner at Dorsey & Whitney in Washington and a former CFPB enforcement attorney.
“It’s easier to act decisively through enforcement rather than public rulemaking,” she said.
Rulemaking requires a public notice and comment period, which could take awhile. Enforcement does not require those things, so it’s faster.
The rulemaking staff, which is also smaller than the enforcement team, has to follow the strict deadlines in the Dodd-Frank Act for regulations to be issued on other topics, “leaving a clear opening for enforcement” in the auto industry, Lee said.
In March, CFPB Director Richard Cordray told some members of the U.S. House Financial Services Committee that the bureau attempts to “give guidance to the entire market by very specific orders that are issued” in auto lending cases with lenders such as Ally Financial Inc., Fifth Third Bank, American Honda Finance Corp. and Toyota Motor Credit Corp. With enforcement actions, the regulator is sending a signal to the entire marketplace, he told senators on the Committee on Banking, Housing and Urban Affairs in April.
“It is compliance malpractice for other institutions not to look carefully at our orders in these cases and not to think, ‘Am I doing the same thing? Am I violating the law? And therefore should I clean that up?’” Cordray said.
He added: “That’s a basic of consistent law enforcement. People can call it regulation by enforcement. I call it good, solid law enforcement.”
So it looks like what many auto insiders call regulation by enforcement is here to stay. As Lee said, it’s the CFPB’s solution to swifter, easier consumer lending changes.
