Removing Barriers Blog

Exploring the Disagreement over the CFPB’s Exemption Authority
Posted February 26, 2016 by dyi

This is the world we live in:  credit unions are financial cooperatives with a history of providing safe and affordable financial services to their member-owners. The CFPB was established to provide consumer financial protection regulation in the aftermath of a financial crisis perpetrated by mega-banks and nonbank financial services providers. The Bureau acknowledges the good work credit unions do, but throws up its hands when confronted with the suggestion that its rules ought to be tailored to the institutions that abuse consumers. 

In Director Cordray’s recent speech at our GAC, he expressed his belief that Congress has not given the Bureau the authority to exempt credit unions from its rulemaking stating, 

“The U.S. Congress had all of these suggestions in front of it when the Dodd-Frank Act was being written.  But Congress did not do that, and though it gave us some amount of exemption authority, it is not plausible to me that we could use such authority to override Congress’s own judgment on such a broad-based policy matter.  Instead, Congress said that all financial institutions have to play by the rules, and we have to enforce them.  That is our charge.”

We are not certain which Dodd-Frank Act the Director is reading but a plain reading of the statute enacted by Congress in 2010 contradicts his statement. 

Section 1022 specifically says, 

“The Bureau, by rule, may conditionally or unconditionally exempt any class of covered persons, service providers or consumer financial products or services from any provision of this title, or from any rule issued under this title…”

Leonard Chanin, a lawyer at Morrison Foerster and the former Assistant Director of the Office of Regulations at the CFPB, drafted a memo outlining exactly why the CFPB has the authority to exempt credit unions. He stated that in addition to the language in the statute specifically allowing the exemption, 11 of 18 enumerated consumer laws provide the Bureau with specific exemption authority. 

Chanin also notes that a CFPB rulemaking that causes a credit union to abandon a product or service may also provide a reason for an exemption:

“The stated "objectives" of Title X, as described in Section 1029A, are that the Bureau’s authority under the Federal consumer financial laws is "for the purposes of ensuring" that: (1) consumers are provided with timely and understandable information to make responsible decisions about financial transactions; (2) consumers are protected from unfair, deceptive, or abusive acts and practices and from discrimination; (3) outdated, unnecessary, or unduly burdensome regulations are regularly identified and addressed in order to reduce unwarranted regulatory burdens; (4) federal consumer financial law is enforced consistently, without regard to the status of a person as a depository institution, in order to promote fair competition; and (5) markets for consumer financial products and services operate transparently and efficiently to facilitate access and innovation.10 For example, the Bureau may find it appropriate to rely on the "burden" objective (3) or the "markets" objective (5) to take the position that an exemption is appropriate where credit unions were not able to provide their members with access to certain financial products or services because of compliance burdens or cost challenges.”

Since it has been established that past CFPB rulemakings have forced credit unions out of certain markets, it is particularly important that the CFPB considers argument. Overall, Chanin outlines why it is not only permissible for the CFPB to exempt credit unions from rulemakings, but that it has several ways to do this.

Sometimes in life the best course of action is to agree to disagree.  This is not one of those times.  The consequences of the Bureau’s misreading of its authority are far too significant for us to suspend our advocacy on credit unions’ behalf.  Regulations that reduce the availability of safe and affordable financial products from credit unions don’t protect consumers--they harm them.

In addition to legal scholars, past CFPB officials, and those adhering to the general principles of statutory construction, members of the United States Congress have also said the law provides an ability to exempt credit unions. In fact, Rep. Ed Royce (R-CA) stated this week at our GAC that it is indeed what Congress meant when it drafted the law. “We are going to remind the CFPB the regulations designed for JPMorgan do not make sense for Schools First,” he said. “Republicans and Democrats did not want to make community financial institutions run like Wall Street banks…that was not the intent.” 

Fortunately, there are multiple members of Congress willing to help clarify the authority in Section 1022.  This week Representative Adam Schiff (D-CA) and Steve Stivers (R-OH) are circulating a CUNA-supported letter urging the Bureau to use its exemption authority to protect credit unions. The letter already has several dozen signatures from other Members of Congress, and we are urging CUNA members to continue to seek help from their own representatives. This letter states: “With major rules already being implemented and new regulations on the horizon, our letter reminds the CFPB that Congress intentionally provided for regulatory flexibility to mitigate collateral damage on smaller financial institutions.”

With so much Congressional support and the clear legal authority to allow for exemptions, Director Cordray's stance on this issue remains puzzling. We will continue to forcefully urge the CFPB to reconsider its harmful position.