CFPB's regulation by enforcement halts -- for now

Regulation by enforcement is over at the Consumer Financial Protection Bureau, at least while Acting Director Mick Mulvaney leads the bureau, he told members of Congress this month.

But in testimony to the Senate Committee on Banking, Housing, and Urban Affairs and the House Financial Services Committee in mid-April, Mulvaney said eliminating regulation by enforcement, a common practice of the former director, Richard Cordray, does not mean the bureau will cease to uphold consumer protection laws.

"Regulation by enforcement is where people find out that you accuse them of breaking the law after you file a lawsuit against them. That's what I stopped," Mulvaney said. "I believe you have a right to know what the law is before I sue you for breaking it."

Though he publicly criticized the CFPB before leading it, Mulvaney maintained throughout his testimony that he is going by "the book" with the bureau, continuing investigations and litigation cases initiated under Cordray.

The pipeline to enforcement action, according to Mulvaney, begins with an investigation into alleged wrongdoing. About 100 investigations are underway at any given time at the CFPB, with one or two cases dropping off or starting each month, he said.

When the investigation uncovers wrongdoing that requires enforcement action, Mulvaney said, the case moves to a category called sue or settle.

"We sit down with folks and say, 'Look, you've misbehaved. We think we've got you. And we're either going to file a suit or you're going to settle. And you're going to pay us like you would in any particular litigation,'" Mulvaney told the Senate committee on April 12.

If the matter is not resolved at that stage, the case moves to litigation. The CFPB had 25 litigation cases as of April 12, he said.

"The only thing that's been different -- or the only thing that's happened that seems to be noteworthy in my five months here -- is that we've never had anything move out of sue and settle into the actual litigation," Mulvaney said. "Once there's litigation, we actually pursue it to the end."

Mulvaney said Cordray did not pursue any enforcement actions during the first six months heading the bureau.

Sen. Elizabeth Warren, D-Mass., a longtime champion of the bureau who helped create it, told Mulvaney during the proceedings that Cordray returned more than $12 billion to consumers largely using regulation by enforcement. Despite the halt on regulation by enforcement actions, Mulvaney said the CFPB has returned $92.6 million to consumers so far during his tenure.

As director, Cordray maintained regulation by enforcement was the bureau's strongest option in setting auto lending standards. During his tenure, major auto lenders such as Ally Financial, Toyota Motor Credit, American Honda Finance and Fifth Third Bancorp settled with the CFPB and the Department of Justice for potentially discriminatory lending practices. The lenders agreed to pay between $18 million and $98 million to resolve the regulators' claims.

Part of the settlements reached with Honda Finance, Toyota Motor Credit and Fifth Third required the lenders to cap dealer reserve at 1.25 percentage points above the lender's wholesale buy rate for loans of 60 months or fewer and at 1 percentage point for loans longer than 60 months.

When Cordray sat in the hot seat in front of the Senate Committee on Banking, Housing and Urban Affairs in 2016, he said that enforcement actions allow the CFPB to send a signal to the entire marketplace.

The future of regulation by enforcement may change after June 22. Mulvaney will depart from the CFPB after that date unless President Donald Trump nominates a new candidate. If that's the case, Mulvaney will continue as acting director until that nomination has been confirmed.