Unpacking the Enforcement Shakeup at the CFPB – A (Former) Insider’s View

News broke last week of a major reorganization at the Consumer Financial Protection Bureau (CFPB or Bureau), with headlines focusing on how the shakeup will hamper investigations and limit the Office of Enforcement’s autonomy. To better understand what happened, it’s helpful to have a little bit of perspective on the CFPB’s authorities and organization. While it’s too soon to know how the reorganization will impact the agency’s enforcement docket, it is not at all clear that it will have the limiting impact that some expect.

The CFPB was created as a somewhat unique regulator, combining the traditional tools of prudential regulators like the Federal Reserve or Office of the Comptroller of the Currency (supervision and examination) and those of law enforcement agencies like the Federal Trade Commission (investigation and litigation). While the prudential regulators also have enforcement authority, that authority is generally limited to entities over which the agency has supervisory authority (and related individuals and service providers). And that enforcement authority is exercised only after an examination by supervisory personnel; that is, it is the culmination of the supervisory process, not an independent process. By contrast, the CFPB’s enforcement jurisdiction is much broader than the defined set of covered persons over whom it has supervisory jurisdiction, extending to any company or individual that is subject to one of eighteen different statutes or who offers or provides a consumer financial product or service. While some CFPB enforcement actions arise out of examinations, the vast majority to date have been outgrowths of organic enforcement investigations that were not tied to examinations.

At bottom, these two tools—supervision and enforcement—are just different legal authorities by which the agency can gather information from institutions subject to its jurisdiction to determine if legal violations occurred. For a brand new agency, that raises a difficult question – which of these tools do you use in any given circumstance to determine if a particular institution is violating the law? Do you send in examiners or enforcement attorneys?

That question wasn’t answered immediately at the agency’s creation. Instead, the offices of Supervision and Enforcement each focused on hiring staff and building out processes for the exercise of their respective functions. The Bureau adopted a structure, the Division of Supervision, Enforcement and Fair Lending (SEFL), that was supposed to allow for the integration of the agency’s supervision and enforcement functions and allow for strategic “tool choice” decisions—when to use supervisory tools and when to use law enforcement tools, both for gathering information (examinations versus civil investigative demands) and resolving matters (non-public supervisory resolutions that cannot involve civil money penalties versus public enforcement resolutions that almost always did involve civil money penalties). But while the structure envisioned an Associate Director for all of SEFL, as a compromise to Enforcement’s hard-fought insistence that it report directly to the Director of the agency, that position was initially left vacant. And even after it was first filled, it was with the understanding that the SEFL Associate Director would not exert substantive authority over enforcement matters – he would have no role in the decision to open investigations, and would play no substantive role in the decision to settle or sue at the end of an investigation. Those settle-or-sue decisions belonged to the Director, and while the memos seeking such authority passed through SEFL leadership, SEFL leadership had little if any role in crafting the memos.

The Bureau did eventually develop a “tool choice” process by which it decided whether a particular issue should be reviewed in the first instance by Supervision (examination) or Enforcement (investigation). But that process boiled down to this: Supervision created its examination schedule for the year (through its strategic planning process), and any institution/issue not on the exam schedule was fair game for an enforcement investigation (the opening of which would be guided by Enforcement’s strategic planning process). The Bureau also developed a process by which SEFL collectively decided if certain legal violations identified in the course of an examination should be resolved through supervision or enforcement (the “ARC process”). (The agency has not yet developed a reverse process, by which issues uncovered in an enforcement investigation can be referred to Supervision for resolution.) But Enforcement and Supervision otherwise remained separate offices, and SEFL leadership was focused much more heavily on management of the Supervision side of the house, given Enforcement’s historical direct line to the Director.

That brings us to today and the recent re-organization. In sum, the re-organization appears intended to truly integrate SEFL and empower SEFL leadership. In that regard, it has correctly been described as disempowering the traditional independence of the CFPB’s Enforcement office. But it is not clear whether the motivations are to disempower Enforcement as opposed to empowering SEFL and further rationalizing and integrating the CFPB’s use of its two primary tools—supervision and enforcement.

The key part of the reorganization combines what had been the Office of Supervision Policy (OSP) and the Enforcement Policy and Strategy Team (PST) into the Office of SEFL Policy and Strategy (OSPS). OSP had been the office charged with ensuring consistency of approach within the Bureau’s supervision program. It was intended to ensure that a particular set of facts was treated consistently whether uncovered by an examiner in the Northeast, or the West. But its remit did not extend to Enforcement. The PST, in turn, was tasked with helping ensure consistency of approach within Enforcement (e.g., that Enforcement take consistent approaches in similar cases). But no other process existed to ensure consistent Bureau approaches across Supervision and Enforcement. The result, as we’ve written about before, was occasional disparate outcomes that depended not on the underlying facts but on whether CFPB Supervision or Enforcement was involved. The creation of OSPS should help mitigate that, as a single office, organized by industry issues (e.g., origination, servicing, debt collection, etc.), will be involved in reviewing both supervisory and enforcement resolutions.

OSPS will also play an integrative role on the strategic planning front. As noted above, Supervision and Enforcement previously had separate strategic planning processes (though both processes were integrated within the Bureau’s broader strategic planning process). OSPS will take over the role for both parts of SEFL. It is not entirely clear how that will play out, given the historically differing approaches to strategic planning, but the goal appears to be to ensure a more integrated approach to the Bureau’s “tool choice” decisions.

One other particular aspect of the reorganization has drawn fire: the fact that OSPS—and not Enforcement—will now have to sign off on the approval of new enforcement investigations. While this decision can be seen as part of the integration of the tool choice approach discussed above—for the opening of such an investigation is making a tool choice decision in a particular case—this is a significant shift of authority away from Enforcement, which previously retained the authority to open new investigations (with notice to Supervision). As with many things, the true impact of this change will be in the details. A truly empowered OSPS that carefully scrutinizes and second guesses proposed investigations would represent a significant change for Enforcement. On the other hand, an OSPS that generally defers to Enforcement’s judgment and only rarely turns down a proposed investigation would represent much less of a change. In this regard, we note that the CFPB recently released data about the number of new investigations it has opened in each fiscal year (through FY 2019). Those figures show a precipitous drop in the number of new investigations from 70 and 63, respectively, in the last two years of Richard Cordray’s tenure as Director, to 15 and 20, respectively, in Mick Mulvaney’s tenure and Kathleen Kraninger’s first year in office. If those numbers stayed constant in FY2020, it appears that the change in enforcement has already occurred, and the reorganization may have less immediate impact.

It is also important to remember that personnel matter. While there is no doubt that organizational decisions such as these have real impacts on how agencies operate (indeed, Acting Director Mulvaney’s decision to move the Office of Fair Lending out of SEFL has coincided with a precipitous decline in CFPB fair lending activity), the personnel who fill the roles at issue also play an important role in how things shake out. The new OSPS will be headed by the former head of OSP, Peggy Twohig. Some may view this as Supervision winning the battle between Supervision and Enforcement. But it’s important to remember that although Ms. Twohig (who hired me into the CFPB in its early days) helped build the Supervision program at the CFPB and headed up OSP, she first spent many years as an enforcement attorney and supervisor at the FTC. She is neither a lifelong examiner nor a die-hard enforcement attorney; rather, she has experienced the benefits and limitations of each of these tools. She therefore brings a unique blend of experience to a role that is intended to integrate these two different tools in the service of the agency’s ultimate goals, and appears uniquely situated to do so.

Much of what the CFPB’s current leadership does is (understandably) viewed with suspicion by consumer advocates and supporters of the agency. And it may be that this re-organization is intended to further weaken the Office of Enforcement. But on its face, it appears to be a reasonable next step in the evolution of SEFL into a truly integrated Division of the agency, allowing for more thoughtful tool choice decisions and a more consistent approach to enforcing the law.