RegFi Episode 54: Imagining the Future of the CFPB and Consumer Financial Regulation
30 min listen
At no time in recent memory has consumer finance regulation faced more prospects for change. RegFi co-hosts Jerry Buckley, Sasha Leonhardt, Sherry Safchuk and Caroline Stapleton discuss what could be in play for consumer finance in 2025, including the future of the CFPB, artificial intelligence, increased activity at the state-level, and a potential rethink of consumer finance regulation.
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Jerry Buckley: |
Hello, this is Jerry Buckley, and I am here with RegFi co-hosts Sasha Leonhardt, Sherry Safchuk, and Caroline Stapleton. As we begin the new year and our 54th RegFi podcast episode, we thought it might be interesting for our listeners to join with us in imagining potential legislative and regulatory developments in the year ahead. There’s probably been no time in recent memory when consumer financial services regulation has faced more uncertainty. As our listeners know, the premise of our RegFi podcast series is that financial regulation will change more in the next ten years than in the last 50, driven by technology. And it does seem that the prospect for change has increased quite a bit considering two developments: the advance of artificial intelligence, and the election results. Elon Musk, the co-leader of the new president’s Department of Government Efficiency, has called for the elimination of the Consumer Financial Protection Bureau. But even if that were to happen, what then? So, we’ve decided to engage in a thought experiment. What actions could the new Congress or the new administration take to change the regulatory landscape for financial services for the better? Abolishing or cutting funding for the CFPB, as I have mentioned, is a suggestion that has been floated, but it isn’t clear what would follow. Interestingly, when Congress passed the Dodd-Frank Act in 2010, it swept a series of consumer protection laws, including the Truth in Lending Act, RESPA, the Fair Credit Reporting Act, Equal Credit Opportunity Act, and other laws, under the CFPB’s rulemaking and enforcement jurisdiction. But it also left supervisory and enforcement authority for these laws at the Federal Reserve, the Office of the Control of the Currency, and the FDIC, and granted enforcement authority to the state attorneys general very significantly. Curtailing the CFPB without addressing these other statutes and regulatory authorities, it seems, would do little to reduce the regulatory burden or improve the consumer experience. Sasha, what’s your take on this? |
Sasha Leonhardt: | Thanks, Jerry. And happy New Year and happy 54th episode. It’s a great milestone to celebrate at the beginning of the year. In part, I agree with you. I think even if the CFPB receives less funding or is curtailed in other, perhaps more dramatic ways, these laws will remain in place and others can very well take up enforcement. These laws existed prior to the CFPB’s existence, and they were enforced at that time. So, even without the Bureau in place, I think there will be someone there to push them forward. And just to loop back, as you noted, just about all financial institutions are not solely subject to the CFPB’s supervision. Banks are subject to the Fed, the OCC, and the FDIC supervising them. Credit unions are subject to the NCUA. And all of these entities have supervision authority as well as enforcement authority. So, while it may not be a team of CFPB examiners on site combing through files, others will appear and have the right to examine and to exercise those rights. One thought I do have, though, is it’s hard to imagine a world where the CFPB is dramatically limited, but these other agencies go on as they currently are and as they have been in the last four years. For example, I’ll note Michael Barr recently announced his resignation as the head of the Fed’s banking supervision, and others are pushing for someone with a lighter regulatory and supervisory touch to take over in that role. And I’m sure we’re going to see the same pressure at some of the other financial regulators. But still, even if these calls to “delete the CFPB” are met by the new administration and the new Congress, there are going to be others in place who will supervise these depository institutions to some extent. Now, outside of supervision and those agencies I just named, there are other checks on financial institutions that exist as well. You didn’t mention the FTC, but they do have enforcement authority over non-depository financial institutions. And while it doesn’t have the same supervisory powers as the CFPB or its traditional depth in the consumer financial space, it nevertheless retains its pre-Dodd-Frank enforcement authority. The DOJ also remains in place for fair lending matters. And again, that will have new leadership, but it remains an entity there that potentially could take action. And finally, we shouldn’t forget the states. State banks are subject to state supervision, state attorneys general are in play, and state financial regulators are still out there. In 2017, we saw many of these groups say that they’re going to take up the mantle if the federal government doesn’t move forward. And we’re hearing the same thing again in 2024-2025. But one thing I do want to note is that even if the CFPB is weakened, it may change how some view the regulatory landscape. True, there will be enforcement agencies. The laws will still be in place. But some may see a weakened CFPB as a reason to rethink their appetite for risk in an otherwise highly regulated industry. Now, everyone has their own view on this, and I’d welcome the rest of you to disagree with me, but I think this comes with a lot of risk. As I noted, states make clear they’re going to take up action, and they have enforcement authority under state laws and these federal laws as well. We have statutes of limitations that go back, you know, one year for TILA, but five years for ACOA and different periods between. We’ve got UDAP statutes of limitations that look back under the FTC Act, Dodd-Frank Act, and state laws. Those may allow, if a new administration comes into place in four years, them to reach back to practices during this upcoming administration and take enforcement action, litigation, and so forth on that basis. Finally, there’s no guarantee that even a weakened go-forward CFPB will not take action against obvious or blatant violations of consumer financial law. Under Director Kraninger, for example, the CFPB’s enforcement focus likely was viewed as having shifted but it continued to take enforcement actions. It continued to litigate cases, and it maintained an active docket in these spaces. So, we may see a change in focus with new people. We may see less enforcement. But as one of my former partners said, if someone is hired to do a job, they’re likely to do it, just maybe with a different focus and different intensity. |
Jerry: | That’s an interesting take. And, you know, you did mention the states and over the last 15 years, the states since the CFPB was established have been taking a lead in some areas. They’ve actually moved ahead of the federal authorities in some areas. And Sherry, you’re very familiar with privacy, data protection. What’s your take? |
Sherry Safchuk: | Yeah, I think the states are very active and I don’t see the states plan to stop anytime soon. States have been increasing their oversight over financial institutions, whether it’s a state financial regulator or the attorney general. And we saw this begin to accelerate with the first Trump administration with several states taking the leads like California, New York, and so forth. We will see states continue to pass legislation that they think that the federal government is not doing quickly. For example, we have seen states focus on privacy and cybersecurity, with more and more states passing laws and regulations addressing consumer privacy rights, privacy notices, service provider relationships, and information security. And I’m seeing more and more state regulators and attorney generals asking about a financial institution’s cybersecurity practices and processes. That’s only one area. Another area is small business lending, which I think became more prominent with the COVID pandemic. We’re seeing several more states passing laws to regulate small business lending and other commercial financing. And they’re requiring certain disclosures, prohibiting unfair and deceptive practices, prohibiting certain fees. And this is a shift from the small business lending in the past ten years. Another area is earned wage access. That has been getting a lot of focus on the state level. It’s been mentioned at the federal level, but states are actually passing legislation. And earned wage access are financial products that allow employees to access their earned pay before payday. We’re seeing a lot of activity there, and I don’t foresee it slowing down. And then states will always maintain focus on your traditional lending products like mortgage, your loan secured by personal properties, unsecured loans. I can see a focus on loans secured by unique types of personal property, securities, crypto — I think states will be actively focused on that. And I know I focused on the states, but I would be remiss if I didn’t mention that these issues are also ones that the federal regulators are looking at. And so, I just don’t want to take away from that. |
Jerry: | Well, Sherry, that’s a helpful look at the state side. And Caroline, you know, you worked at the Office of the Control of the Currency, and perhaps you could share your perception of how supervisory enforcement works for national banks. And am I right in suggesting that even if the CFPB were taken out of the picture, national banks would still have to comply with a whole series of consumer protection statutes subject to OCC supervision? |
Caroline Stapleton: | Thanks, Jerry. Yes, absolutely. For national banks, they will still be subject to supervision and enforcement by the Office of the Comptroller of the Currency. Even in the absence of the CFPB, the agency would be ready to step up and fill that void with respect to the largest institutions. And even so, similarly, when it comes to state-chartered banks, they also have, like Sasha said, federal and state-level prudential regulators that are well equipped to exercise consumer protection oversight authority. So, I don’t expect that it would take long for the federal and the state level, those regulators that Sasha was mentioning, to step in and fill any void left by the CFPB. And in fact, I would expect that if the CFPB were to vanish overnight, that many of its former employees at that point would seek employment with those other agencies because there would still be a lot of work to be done. And so, it might just be reallocated amongst the agencies. And in fact, when I was at the OCC, we saw post-Dodd-Frank, the elimination of an agency, the Office of Thrift Supervision, kind of the combination of the work that that agency had been doing with respect to overseeing federal savings associations combined in with the OCC’s supervisory and enforcement objectives. And a lot of those former employees just were combined in with the OCC. And so, the expanded arena that the OCC was covering really just absorbed another agency rather than eliminating regulation of an entire space. So, I think to answer your question in short, absolutely the supervision and enforcement responsibilities would just be elsewhere. And I think also, I mean, we’d be remiss not to mention the private rights of action for a number of the consumer protection statutes. You might continue to see these types of claims play out in the courts with judges and juries making these decisions. And Sasha made such an interesting point about the statute of limitations. You know, looking backwards is something that we can look forward and project will happen. And that’s something that we talk to clients about all the time as we face potential change in the short term. I think also, I was recently talking to some law students about consumer financial protection generally. And we were thinking about the election and changes that might be happening in the next couple of months and years. And I asked them, you know, raise your hand if you think consumer protection is a Republican issue. And very few hands were raised, actually. And then I said, well, what about a Democrat issue? And a lot of hands were raised. And I said, well, it’s a bit of a trick question, especially at the state level. It’s an everyone issue. All parties like to be associated with protecting consumers, particularly at the state level, because it can also be a political win to take action against a company that’s perceived as taking advantage of or breaking consumer protection statutes. So, politics does matter. The change in parties and leadership at the federal level is certainly important. But I think the fundamentals will remain. It might just be a question of who’s doing the looking and the enforcing. |
Jerry: | Well, thank you, Caroline. And, you know, I think that what our listeners can take away from this is that, while there is concern in a number of quarters about over-regulation, there is going to be in an area like financial services, there historically always has been and there will be a significant focus on safety and soundness and consumer protection. But I thought as part of our thought experiment, I’d throw out a radical idea that when Congress created the CFPB, it swept, as I mentioned, most of the laws that protect consumers under the jurisdiction of that agency. But it never looked really deeply at how effective those laws are. Maybe it’s time to rethink the premises on which those laws were based. Most of our current consumer protection laws were put on the books 40 or 50 years ago. Much of the rationale for them was developed by the National Commission on Consumer Finance, which was launched in 1969. The resulting laws called for paper-based disclosures that consumers would use to shop for credit or understand the reasons why they’ve been denied credit or charged more than others. These laws were enacted at a time when the mainframe computers in the Defense Department didn’t have as much power as a handheld phone today. The disclosures provided to consumers pursuant to these laws are often difficult to understand, and as a result, they wind up in the circular file in many cases. Seriously? How helpful did you find the disclosures you got when applying for a mortgage or a credit card or an auto loan? And yet, you know, our audience is a sophisticated audience. Think of the average consumer and trying to wade through the extensive data that they’re provided and often dense disclosures. So, I ask, can we do better? Can we harness the power of large language models and generative AI to help consumers shop in ways that were beyond the contemplation of the drafters of those 50 year-old paper-based laws that are now on the books? How can AI-enabled financial agents, perhaps with the guidance of a human financial advisor, help a consumer search for all products available, make a recommendation, handle the application for the loan, and perhaps even handle the closing at a faster pace and at less cost than at present? Can AI be used to provide understandable explanations of underwriting results to consumers when they’re denied credit and also provide actionable information that they can use to improve their credit profiles? Can we eliminate the costs associated with providing outdated disclosures and replace these requirements with tools that actually help consumers? The consumer financial services laws now in the books were perhaps the best that could be crafted 40 or 50 years ago. And I hate to admit it, but I was on the Senate Banking Committee staff when most of those laws were written. It’s tragic to admit it — time flies by. I knew Senator Proxmire, the lead proponent of these laws, along with my boss, Republican Senator Ed Brook of Massachusetts. And I believe that if they were alive today, they would be looking for better ways to empower consumers. There would be challenges associated with empowering consumers in the way I’ve suggested, using AI. These include the dangers of hallucination, privacy concerns, the perpetuation of biases in existing data. But these are hurdles which are recognized and not insurmountable and, with more refinement and testing of technology and proper regulatory oversight, can probably be overcome. Those in the Congress on both sides of the aisle who are interested in regulatory reform might consider convening a new advisory group made up of data scientists, consumers, financial services providers, regulators, and legal experts to rethink our 50 year-old consumer protection laws and recommend new tech-driven solutions that can empower consumers in ways that were until now impossible, and certainly not possible when the National Consumer Commission on Consumer Finance made its recommendations over 50 years ago. Of course, the provisions in existing laws outlined discrimination, fraud, and abuse of private consumer data would remain in the books. As noted, this is a thought experiment, and in that spirit, I’d be interested in the thoughts of my colleagues. So, Sasha, what are your views? |
Sasha: | Jerry, this is a great thought experiment, and I think this is a great time for it. We’re at a point where AI and technology are at an inflection point. As we come up on 40 to 50 years of the same laws in place, this moment, I think, merits some reflection. I think part of this is going to be about whether consumers can or will trust AI with these sorts of decisions. After all, this involves consumers letting go of control and handling it over to AI with their money, and that’s a big ask. AI is still evolving, and asking someone who’s seen a gen AI model make up completely inaccurate facts with an almost shocking degree of confidence, or draw a person with eight fingers on one hand, they can be forgiven for hesitating to trust their life savings to the same technology. Undergirding the use of these models, however, is going to be the ability of these models to get consumer data in a way that both the models can use and in a way that consumers trust. And I think that the timing is particularly poignant because just recently the CFPB finalized the rulemaking under 1033 of the Dodd-Frank Act. We’ve spoken about this a number of times. It’s not worth revisiting all that we’ve said and all the ink that’s been spilled on that. But under machine learning and for Gen AI models, the sort of things that you’re thinking about here, Jerry, data is essential both to train these models and improve them generally and to feed into them on an individual consumer basis so they can make meaningful decisions. If 1033 goes into effect under the new administration, it’s going to require financial institutions to provide information in a standard format. And that’s going to be critical for these sort of models to work. And we’re actually speaking on January 9th, the day after the CFPB recognized FDX as the first standard setting body under 1033, which itself is a significant step closer to creating this sort of consumer permissioned data-driven model going forward. Now, obviously, there’s a lot of uncertainty around 1033. We’ll see what happens with the pending court challenge, with the new administration, whether they push it forward or try and limit it. So, there’s a lot kind of up in the air. But I think all of this to say we’re at an inflection point where we have an increased availability of data, major advances in machine learning and AI, and a growing focus on privacy rights at the international, federal, state, and consumer level. I agree that it’s worth taking a moment to consider how all of these factors will come together and how regulators could revisit existing laws and regulations to meet this moment. |
Jerry: | Thank you. And, Sasha, as I noted, there’s going to be an awful lot of testing needed to make sure these tools, if they are developed, are not hallucinating and are protecting the consumer in a way that gives the consumer confidence in using them. Sherry, what are your thoughts? |
Sherry: | Thanks, Jerry. I think this is a great question, just like Sasha mentioned. But I want to talk about this from a different perspective. I think that any time improvements can be made to help consumers, we should seriously consider the changes. And we have such great tools that we can use now to help us come up with alternatives and solutions. And as you all know, I’m a huge fan of artificial intelligence, and I believe the sky is the limit. And I think we can use generative AI in a whole host of ways to improve the customer experience with respect to financial products. Let me give you a few examples, Jerry. For example, AI could be used to help individuals monitor their privacy or receive immediate alerts if there’s any suspicious activity negatively impacting the individual across the board, as opposed to now where we get alerts from our individual banks on a one-off basis. AI could also improve disclosures. As you mentioned, all of these paper disclosures, individuals receive pages and pages of information and terms related to a significant financial decision. And I’m not sure how most folks are able to absorb the information in the documents and understand every component of their transaction. And I think it’s because a bit of information overload. And I understand this because the CFPB wants to provide consumers with as much information as possible but there’s also, on the other side, having too much information can cause that information overload. AI may be able to help individuals synthesize all this material so that they understand what they are about to agree to, maybe highlighting those things that they should focus on. And I think more broadly, AI may be able to help individuals navigate the internet with more efficiency. For example, individuals are bombarded hourly, daily, by the minute with numerous advertisements anytime they are on the internet. What if AI could help individuals identify the products and services that best suit them, or flag the important aspects of a terms of use, or help them locate restrictions and requirements that apply to a financial product that today we may gloss over, but that it may be significantly important down the line? I think AI could help individuals decipher these types of deceptive patterns to make better informed decisions. And I think there’s so much we can do to improve the consumer experience. But the laws enacted over 40-50 years ago to oversee the financial services industry are creating complexities because technology is significantly outpacing how quickly the U.S. and states can react to address these challenges with technologies. We’re always going to be reacting to these new technologies, Jerry, unless we figure out a way to be proactive and use it to our benefit. |
Jerry: | Well said, Sherry. And Caroline, your thoughts? |
Caroline: | I think it’s such an interesting idea. And I also think Sasha and Sherry are completely right when they talk about the number of things to think about when it comes to full-scale adoption of AI technology in a consumer-facing function. But I think, you know, while technology is not perfect, and it certainly needs to get better, humans aren’t perfect. And we have gotten better, but there’s a limit to what the human brain can do in terms of data ingestion and output, we are physical beings, and AI has the ability to take what we have developed from our own knowledge and just replicate it, multiply it, expand it. And I think that that’s exactly the advantages that you’re proposing in this idea. And like everyone here has said, all of you have said, it’s absolutely worth taking the proposal seriously. I mean, think about what it could do. It could empower consumers to be able to use their own AI-driven financial agents to help even the balance of knowledge between the providers of financial services and their target consumers so that they better understand how to shop around and see what the advantages and disadvantages of various products are. I know that it’s hard enough for me to compare two or three different items. Imagine if a consumer could leverage the AI technology in a way that is easily accessible and understandable to them to accurately compare products. In the same way, employees of financial institutions could use generative AI to enhance their own role as trusted advisors, particularly in a fiduciary responsibility, but even just in a customer service role to help give consumers of financial products and services better guidance about what a product does and whether, depending on the role, it might be the right product for them. I think all of like — one thing that’s really encouraging is that all of this could be explored with government involvement. And just this week, we’ve seen the CFPB, you know, reviving the no action letter process that previously was available underutilized, in my opinion. But still, I mean, this is an encouraging sign that the government is not only holding up a stop sign or a yield sign, maybe is a better way to characterize it when it comes to AI and technology. What’s interesting about the policy statement that came out recently from the CFPB is that one of the requirements would be that the applicant for that no action letter would have to prove that their product or service is meeting an untapped consumer need. It’s not just enough to say that it would increase access to that product or service. It has to meet an untapped need. I think what you’ve proposed is exactly the kind of untapped need that’s worth exploring in a sandbox, no action letter type space. So, and I think it’s really interesting. |
Jerry: | Well, thank you, Caroline. You know, I’m encouraged because I didn’t ask everybody before this, we started this podcast to ... |
Caroline: | But that’s what made this episode fun. |
Jerry: | Yeah. But anyway, well, you know, it’s true that our American economy is a consumption economy, the largest in the world. And consumer financial products, whether they’re a form of mortgages or auto loans or credit cards or student loans, provide trillions of dollars to help keep our economy going. And it gives consumers the ability to acquire homes and cars and tools they need and skills they need to advance economically. So, we lead the world, but we can’t be complacent. We have to be thinking, how can we make it better? And, you know, the types of consumer empowerment tools that we’ve been discussing here today leave us with some very interesting regulatory questions, which of course is where we focus a lot of our attention. Now, who would be empowered to create these products? What entities would be authorized to offer them? What role would human agents play? What fiduciary or other level of duty would providers of these services have to consumers? How would these providers be regulated? These and a lot more questions need to be answered if the new financial regulatory model is to be developed. But science is moving faster than many of us realize. And it seems to me that we need to give these issues forethought. So, I hope that our listeners will give us their reactions and thoughts on this. And I hope that the policymakers who are coming into office or are in office will give some thought to how to shape a regulatory environment that is conducive to promoting change and advancement for American consumers. So, we invite any comments on this from our listeners. And thank you all for joining us on this first episode of 2025. |
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