Banks Accuse Consumer Regulator of Abuse of Power

Author: Yuvi September 29, 2022

Banks Accuse Consumer Regulator of Abuse of Power


Since George Floyd’s murder by the police in 2020 refocused public attention on racism in the United States, regulators — including those appointed by President Biden to oversee financial institutions — have vowed to prioritize the task of rooting out discrimination. But banks are now accusing one of them of going too far.

On Wednesday, a powerful alliance of bank trade groups sued the Consumer Financial Protection Bureau and its director, Rohit Chopra, in federal court in Texas, claiming Mr. Chopra is abusing his power by forcing banks to submit to regular tests of how their treatment of customers may inadvertently disadvantage certain groups, including racial minorities. The suit argues that the law Chopra is using to do so was devised only to ensure lenders are treating customers with transparency and fairness.

The groups say they have no problem with regulators enforcing existing anti-discrimination laws. Their beef is with Mr. Chopra’s decision to expand the application of a law that did not specifically include anti-discrimination protections, then failing to use the normal process for writing and implementing new regulations to make the change.

“This is a step we did not want to take, but it was a necessary step given the extraordinary actions of the CFPB,” the president of the American Bankers Association, Rob Nichols, said in a statement emailed to reporters.

The trade groups are claiming that the CFPB overstepped the bounds of its duties when it added “discrimination” and “disparate impact” as categories to its regular exams of banks and other lenders under a provision in the Dodd-Frank financial regulation law that bars banks from engaging in “unfair, deceptive or abusive acts or practices.” The law was not supposed to cover discrimination, they say, and the newly added categories are raising the costs of complying with it by forcing banks to document in new ways the effects of their products are having on different groups and, in some cases, pay for lawyers to deal with CFPB officials asking questions about their products.

On top of that, the groups say, Mr. Chopra made the change without first proposing it publicly and listening to feedback, as is the norm. He simply updated the examination manual that banks and their regulators use as a rubric for assessing their compliance with the law. And Mr. Chopra has strictly prohibited the banks from talking publicly about their run-ins with the CFPB on the matter, a gag order they say is doubly unfair.

“The CFPB treats the entire process as producing confidential information that belongs to the agency,” the banking groups said in the lawsuit, filed in federal court in Tyler, Texas. Banks can’t discuss the regulator’s action against them “without the prior written permission of the Director,” according to the lawsuit.

Updated

Sept. 28, 2022, 1:50 pm ET

“By any name, this is regulation without any opportunity for public scrutiny and typifies the CFPB’s transparency and accountability problems,” the lawsuit said.

Allison Preiss, a spokeswoman for the bureau, said in an email that “the CFPB is one of the most transparent regulatory agencies, and voluntarily publishes exam manuals laying out how it will assess banks’ compliance with the federal laws Congress charged the Bureau with enforcing “

Ms. Preiss declined to comment on the lawsuit.

Banks’ lobbying groups don’t often engage in this kind of combat with regulators. The last time the ABA sued a federal bank regulator was in 2013, over another provision of Dodd-Frank known as the Volcker Rule. The trade group dropped the lawsuit after regulators made the changes it was seeking.

“It’s unusual for the industry to feel a need to file a lawsuit like this,” said Paul Hancock, a partner at K&L Gates in Miami who has defended financial institutions against that they violated fair lending laws.

Mr. Hancock said making such a significant change to a rule simply by updating an exam manual deprived banks of information they needed to determine what kinds of behaviors would violate the rule.

“It’s more as if they’re applying a ‘gotcha’ approach rather than a guidance approach,” he said.

29 September, 2022, 1:24 am

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