WASHINGTON — Credit unions can't afford to ignore the potential ramifications of the Consumer Financial Protection Bureau's (CFPB) recent decision to pull back on new investigations in order to clear out a slew of pending cases.
While CFPB only directly examines the handful of credit unions with more than $10 billion in assets, industry observers suggested the regulator's move may be more political than practical, and could have an impact on CUs.
Multiple current and former officials at CFPB say the agency essentially bit off more than it could chew when it began ramping up investigatory efforts three years ago, and has struggled to clear through the backlog of investigations as hundreds of referrals are also coming in. As a result, the agency is slowing the opening of new cases within enforcement while it works through its existing caseload.
In 2014, "they started slowing down in a sense that they're trying to bring down the cases to a more manageable level," said one former CFPB employee who, like others for this story, declined to speak on the record for fear of alienating the agency. "And it's good that they're trying to recalibrate that. They took on too much in the beginning and it became difficult to get through those investigations in a reasonable amount of time. They overestimated what the staff was capable of handling."
Some cases are now more than two years old, which can be problematic both for the agency and the financial institutions involved.
For the agency, there is a political dimension to prolonged delays. Unresolved cases that go past two years must be reported to Congress under the Government Performance Results Act. Some lawmakers are more likely to criticize the agency if it appears it cannot handle the cases it opens.
As a result, current and former employees said there has been added pressure for enforcement attorneys to quickly resolve outstanding investigations, effectively clearing the decks
"There's definitely pressure from the top to move these cases along and resolve them faster," said one source familiar with the matter.
The slowdown of new cases is already evident in the CFPB's most recent strategic report, which was released in February. The number of new supervision activities that were opened in fiscal year 2013 jumped 7% to 160, but fell 21% in fiscal year 2014 to 127.
Sources said the CFPB had more than 100 investigations still open, a figure that the CFPB's Gilford confirmed.
The CFPB has made public more than 80 enforcement actions in the past three years, an aggressive pace for most financial regulators. In its latest strategic report, the CFPB said it had either settled or filed a case on 75% of the investigations it opened in the last two years. It expects to settle or file a case on 65% of its investigations within two years for the 2015 and 2016 fiscal years.
"The CFPB started out with guns blazing and they didn't wait around to create a lot of architecture before they began the functions of rulemaking, supervision and enforcement," said an outside source familiar with the matter. "They were aggressive from the start in sending out hundreds of CIDs [Civil Investigative Demand] that sometimes targeted whole industries."
Staffing has also contributed to the problem as the agency is still building out its supervision, enforcement and fair lending groups while simultaneously facing turnover. The CFPB added more than 100 people in fiscal year 2014 within those three groups, reaching 633 full-time employees. But that's down from the agency's original 742 target figure for that time period. The agency is now hoping to reach 691 employees within those groups by the end of fiscal year 2015, according to its strategic review.
The CFPB said it has 130 employees in the office of enforcement, which some current and former officials characterized as a low number considering the hundreds of referrals and investigative inquiries that have gone out in recent years. Each attorney can only take on about 3 to 5 cases at one time since a case can easily take at least a year to be resolved, they said.
To some degree, some of the backlog now is due to difficulties in establishing formal processes in its early years, sources said. The agency had an enforcement process in place early on, but its internal reporting systems for supervision and enforcement were still being finalized last year. For example, the CFPB said that in the fourth quarter 2014 that it issued a new policy for supervision to accurately enter data "on a timely basis" as well as new fields into the system, according to its latest strategy plan.
The CFPB's push to settle or sue investigatory targets on a dual-track process also meant that the attorneys had to first get approval from CFPB Director Richard Cordray before they could proceed in either direction, even if a company was already willing to settle, which inevitably prolonged the process.
"The managers did not allow the enforcement attorneys to have any authority and that's terrible for morale. They really neutered the line attorneys," said a third former employee. "Because of the approval process, some cases were dragging on for years and every step of back and forth could take a month or two. The approval process did create a bottleneck."
While it would be easy for the credit union movement to assume this has little impact on all but the few CUs that come under CFPB's direct purview, CU consultant Dennis Dollar said credit unions can't afford to ignore what might actually be driving the bureau's actions.
"This isn't about the backlog," Dollar asserted. "It is about a desire by [the] CFPB to further increase its budget and hire more staff — a tough sell with a GOP Congress, so they are claiming a backlog that they themselves have created with their overreach and their unnecessarily low examination threshold of $10 billion in assets."
Similarly, John McKechnie, a partner at Total Spectrum in Washington and a former Director of Public and Congressional Affairs at NCUA, also expressed some skepticism over the CFPB's claims of a heavy backlog and scaling back of investigations.
"My natural cynicism takes over when I hear this kind of news," McKechnie told Credit Union Journal. "The heavy backlog' CFPB describes may lead to a temporary breather, but it will likely also lead to more hiring, expanded mission, and a continually aggressive approach to enforcement."
Separately, Dollar noted the CFPB budget is going to be a major bone of contention with the Republican-controlled Congress.
"It will remain under assault, as will there be a continuation of efforts to move toward a board — rather than a single administrator — at CFPB," Dollar said. "I don't think [CFPB] will get much sympathy from Congress by complaining about a backlog in their overreaching regulation and supervision."
However, the apparent backlog at CFPB could conceivably strengthen the case for increasing the trigger for CFPB exam authority from $10 billion-asset institutions to $50 or $100 billion in assets, Dollar noted.
"While the typical Washington agency approach will, of course, be to seek a larger budget with hundreds of additional staff to catch up on their self-created backlog, the better approach would be to refine their authority and remove those financial institutions below $50 or $100 million in assets so the CFPB can focus on what Congress intended when they created the Bureau: [focus on] the huge Wall Street-type mega banks and the non-traditional lenders such as check cashiers and payday lenders," he said.
"With the right-sized focus, they could both eliminate their backlog and get out of the way of credit unions and community banks that did not cause the financial crisis that was the justification for the CFPB at its inception."
In contrast, Ben Rogers, research director of the Filene Research Institute, believes any scaling back of CFPB activities would be a "positive" from credit unions.
"Credit unions have are always concerned about CFPB's rulemaking, but they've also always had less to worry about from the enforcement arm," Rogers told Credit Union Journal. "There are plenty of shady players out there that will attract enforcements before almost any credit union.
But, Rogers warned, credit unions should still keep their ears open.
"An easy way to track CFPB's enforcement without needing a law degree is to monitor their blog," he suggested. "It usually announces any public actions or settlements while detailing the activity that led to such. You can learn a lot about what not to do from the bad apples in those announcements."
Ryan Donovan, chief advocacy officer at CUNA, commented that the backlog and the CFPB's reduction in investigation and enforcement actions "reinforces our view [that] Congress ought to relieve the CFPB from its obligation to examine credit unions of all sizes so that it can focus on the institutions causing consumers the greatest problem."
NAFCU noted that keeping an eye on such regulatory efforts can offer a sense of what the agency’s priorities are.
“Monitoring enforcement actions are always instructive and provide an insight to what regulators are concerned about whether or not the institution is under the direct examination authority of the CFPB,” said NAFCU’s Senior Vice President of Government Affairs and General Counsel Carrie Hunt.