Facts Matter: “Dead Fish” Changes to CFPB Innovation Policies Disregard Fundamental Legal Ethics and Due Process of Law

A few months after his confirmation, Consumer Financial Protection Bureau (CFPB) Director Rohit Chopra gave a speech at his alma mater that was strikingly revealing. Director Chopra explained that, as a young student:

“I viewed financial regulators as clueless and often corrupt lawyers and economists. Government officials were often seen as auditioning for a future job in finance to exploit their inside knowledge to help dominant financial firms extract special favors and evade accountability for wrongdoing, even when they violate the law repeatedly.”

What Happened

Today, the CFPB issued a release that showed the CFPB Director’s views of government officials have changed very little, notwithstanding his tenure leading the agency’s over 1,600 employees. In a quiet release in the Federal Register with less than 10 days remaining in the Biden Administration, the Federal Register published two policy statements by the CFPB updating its innovation policies: (1) the No-Action Letter Policy and (2) the Compliance Assistance Sandbox Policy. 

Why It Matters

These changes reflect longstanding problems in the CFPB’s approach to policymaking, its relationship with the general public, and the way the CFPB appears to value its own experts. Among other concerns: 

• The CFPB modified these policies without seeking public comment or even issuing a press release, during a period where the CFPB should be, as Director Chopra colorfully described in recent testimony, a “dead fish.”

• The changes to the policies are fundamentally antithetical to the CFPB’s mandate under the Dodd-Frank Act to facilitate and encourage innovation. They demonstrate a concerning approach to open access, civil service, and appear to ignore the longstanding ethics obligations applicable to any attorney practicing in the United States. 

• Perhaps most importantly, the changes to the policy violate the fundamental due process protections of CFPB covered persons by making applicants guilty when accused by the CFPB or any regulator, as opposed to guilty when proven in court. 

As discussed below, we hope the incoming Administration’s CFPB prioritizes reconsideration of these 11th hour policies and, more broadly, the way the CFPB has conducted itself in recent years.

The Public’s Input in Policymaking Matters: The CFPB cut procedural corners by unilaterally changing a notice-and-comment policymaking without so much as a press release.

Today, the Federal Register shows the CFPB has made critical changes to these two important policies. Despite the policies’ bipartisan roots and the fact that, at each prior stage of their evolution, they were created with the benefit of notice and comment – the CFPB now acts without even issuing a press release to make the public aware of its actions, much less seeking public comment on the changes. 

As the CFPB explained in 2019, “the Bureau’s statutory mission of protecting consumers is not limited to vigorously enforcing the law. It includes facilitating innovation in markets for consumer financial products and services, as innovation drives competition, which in turn lowers prices and promotes access to more and better products and services.” The Bureau continued, observing that “[a] primary means of facilitating innovation is removing barriers to innovation. This can be accomplished in a variety of ways. As noted, Congress expressly identified one of these: reducing unwarranted regulatory burdens. Another consists in reducing uncertainty regarding the meaning or application of statutory and regulatory provisions.” 

Under the No-Action Letter Policy, the CFPB would advise recipients that the agency would not make supervisory findings or bring a supervisory or enforcement action against the company with respect to certain matters. No-Action Letters have long been offered by other federal agencies like the Securities Exchange Commission and Federal Energy Regulatory Commission. 

Under the Compliance Assistance Sandbox, the CFPB would help “regulated entities better understand, in conditions of regulatory uncertainty, how Federal consumer financial law applies to specific aspects of particular products or services.”

Before the CFPB finalized its original version of its Policy on No Action Letters under Director Richard Cordray in 2014, it sought and responded to comments from the general public. After issuing only one No-Action Letter in nearly three years, the CFPB, then under Director Kathy Kraninger, again sought input from the public on how to tailor changes to the innovation policies. Only after obtaining and considering comments from the public, the CFPB revised its Policies on No Action Letters and the Compliance Assistance Sandbox in September 2019. After revising these Policies, the CFPB provided much needed regulatory relief to a number of marketplace challenges, including in its first No-Action Letter under the new policy to the Department of Housing and Urban Development for the funding of housing counseling. 

Legal Ethics Matter: The CFPB should think more highly of its own staff.

Among other changes, today’s changes to the innovation policies explain that “[t]he CFPB will generally not consider applications from former CFPB attorneys representing companies as outside counsel, to avoid ethical conflict and to maintain the highest integrity in the No-Action Letter program.”

In other words, the CFPB has taken the remarkable step of imposing a lifetime ban for its own alumni on filing No-Action Letters or Compliance Assistance Sandbox Applications. The CFPB did not provide any justification or explanation beyond concerns about “ethical conflicts” and “integrity.”  Nor did it solicit public comment on this sweeping change. 

All former CFPB attorneys are bound by government ethics rules in their representation of clients before the CFPB. Since 2012, CFPB employees are subject to additional “Supplemental Standards of Ethical Conduct for Employees of the Bureau of Consumer Financial Protection.” Since 2012, CFPB employees are subject to additional “Supplemental Standards of Ethical Conduct for Employees of the Bureau of Consumer Financial Protection.” Further, CFPB attorneys are subject to ethics rules in the jurisdictions they are licensed (many such jurisdictions require that attorneys regularly take Continuing Legal Education specifically on Legal Ethics). 

Government workers are increasingly scrutinized by the general public – but it is remarkable that the CFPB appears to go out of its way to view the glass as half-empty regarding its own attorneys. Setting aside what this says about the way the CFPB values its own experts, the CFPB’s recent policy changes may run afoul of its own circulars warning that “[c]ompanies using illegal or unenforceable terms and conditions risk breaking the law.” At the very least, the restrictions are surprising given how strongly the CFPB has criticized non-compete agreements.

Due Process Protections Matter: The CFPB should not penalize covered persons without affording them basic due process of law.

Today’s changes to the No Action Letter and Compliance Assistance Sandbox Policies go further, stating: “[t]he CFPB will not consider applications from companies that have been the subject of an enforcement action involving violations of Federal consumer financial law in the last five years, or who are subject to a pending enforcement investigation by federal or state authorities.”

To be clear, the CFPB isn’t imposing this prohibition on companies that have been found culpable for violations of law – or even stipulated to having violated such laws. This new prohibition applies simply to companies that have been “subject of an enforcement action” or “who are subject to a pending enforcement investigation.” In other words, without citing any clear legal authority, the CFPB penalizes entities simply accused of wrongdoing. 

Removing important regulatory options for parties that are simply accused of bad acts is fundamentally inconsistent with basic protections of due process, including fair and equitable treatment under the law. It is also subject to potential abuse by any enforcement agency at the federal, state, or even municipal level. It’s particularly surprising, given that the CFPB’s innovation policies are ostensibly designed to inform companies of when they might be running afoul of the CFPB’s increasingly broad and opaque interpretations of its authorities. 

Despite the recent CFPB’s troubling disregard for process, rule of law, and even facts, it's not too late to fix the Bureau.

Over the last year, the Consumer Bankers Association’s Facts Matter campaign has called out the CFPB over a dozen times for its seemingly cavalier approach to basic procedural protections; legal authorities; and its own data. The CFPB has regularly reached for politicized headlines and personal reputation-building over the expertise and even data generated by its staff. As a result, the CFPB has burned through its credibility, strained many Americans’ faith in government, and resulted in calls for its defunding from surprisingly broad audiences. 

Notwithstanding repeated calls by President-elect Trump and Congress to respect the results of the November election, the CFPB has stubbornly pushed out a steady cadence of media-focused new enforcement actions, rulemakings, and unofficial “rules” that take aggressive legal interpretations and circumvent the public notice and comment process, like today’s changes to the innovation policies. 

The good news, however, is that change is coming. 

In 10 days, the Trump Administration has the opportunity to right the ship. In the many cases where the CFPB has issued policies without consulting the public, new leadership at the CFPB can cut away hundreds of pages of unnecessary regulation with the stroke of a pen on day one. 

In the case of the CFPB’s innovation policies, the new CFPB can correct these misguided changes, while retaining some of its more helpful pieces (for instance, making applications for No Action Letters and Compliance Assistance Sandboxes open to the public for feedback).  

With other regulations, new leadership can pause pending effective dates and then work with industry, consumers, and other public stakeholders to roll back rules that, as the Wall Street Journal recently explained were “hatched based on a foregone conclusion.” 

The incoming Administration has a unique and important opportunity to institute meaningful reforms to the CFPB, in both the immediate and long-term, that can help transform the agency into the credible and durable regulator Americans deserve.