Ed. #44: (P)raising Chopra?

Raising Arizona

Dealing with financial regulators and regulations can often put you “between a rock and hard place”[1]. An example of this that I have used for the mortgage industry is being required to enforce credit score and income limits while simultaneously being responsible for the disparate minority lending patterns those limits create. This bank robbery scene from my favorite Coan Brothers film, Raising Arizona (1987), perfectly illustrates my point.

Recidivist! Repeat O-fender!

Raising Arizona is about a small-time convenience store robber (played by a young Nicholas Cage) named H.I. McDunnaugh who kidnaps a baby from a family with quintuplets for his infertile former policewoman wife so they can become parents.[2]Another, among many, of my favorite scenes in the movie is when H.I. meets with the Parole Board and is forced to acknowledge that he is a “recidivist” and a “repeat offender”[3].

Ok, then.[4] Speaking of repeat offenders, on March 28, 2022, CFPB Director Rohit Chopra gave a (virtual) speech with prepared remarks[5]at the University of Pennsylvania titled “Reining in Repeat Offenders” that seemed to speak very clearly about Chopra’s views on the CFPB’s enforcement direction and focus. I’m not sure the industry really heard what Chopra was saying or recognized the huge shift in emphasis that it represents from past CFPB practice, but if the agency is true to his word(s), it will be a welcome development from my perspective.

Chopra’s speech was billed as an initiative to go after repeat offenders, but he didn’t just talk about any recidivist company. Rather, Chopra specifically and repeatedly references large and/or dominant companies. In fact, he makes that large/small distinction consistently throughout the speech.

Another Levy Musing criticizing the CFPB?

Musing readers know that I’ve been a frequent critic of the CFPB’s penchant for going hard after the “little guys” and soft on the “big guys” despite specifically being set up by Elizabeth Warren as the federal agency with the power to go after the “Big Banks”. My contention has been that enforcement against a smaller player isn’t a fair fight, especially when the CFPB is seeking to push new regulatory interpretations through settlements.[6]Yet, when faced with obvious violations by the bigger players that don’t require extension of law or regulation,[7]CFPB seemed to let those larger players off easy (in relative terms). For example, see Musings Ed. #28’s comparison of CFPB’s treatment of Wells Fargo’s account opening scandal against how the agency treated a former Wells mortgage originator[8], or see also the last paragraph of Musings Ed. #33.

Chopra’s Musings?

Based on his speech at Penn, however, Chopra and I are in complete agreement. For example, Chopra amplifies my fair fight complaints in Musings Ed. 28 by saying,

“While small firms can get hit hard with penalties that threaten their viability and their operators fear imprisonment, many large institutions see the law as mere expenses on their income statements …. Of course, small players also violate the law. But when they do, they often face punishing sanctions that fundamentally question whether they can remain viable. Dominant firms seem to know that law enforcement will not have that kind of impact on their viability,…

But, for me, this next paragraph was the pièce de résistance,

“Some would argue that these large financial institutions have simply become too big to supervise and that is part of the problem. Government supervisors can’t keep up with the convoluted, behemoth financial products. And government lawyers are never adequately staffed to go up against corporate lawyers trained to spin wheels and run out clocks[9]. Some litigate for years with the hope of the regulator giving up or a new, more forgiving administration coming in. The smaller companies become the low-hanging fruit with cases that are easier to quantify, qualify, and take to court. Whatever the reasons, regulators are willing to lay down the hammer on little guys but settle for press headlines with the big guys.” [emphasis added]

That is a truly amazing admission and revealing criticism of how the agency he now runs has operated.[10]

Chopra’s view of consumer protection

I view Chopra’s speech (also noting his disdain for Facebook and other tech giants) coupled with other statements and actions such as the lack of “comity” dustup over the FDIC Board referenced in Musings # 39 [11], as remarkable windows into Chopra’s consumer protection mindset. Of course, all of this is also quite consistent with Chopra’s focus on antitrust issues and competition that he demonstrated during his FTC tenure, but looking deeper, I think it illustrates his philosophy towards consumer protection and the role of enforcement in much greater detail.

Chopra appears to be coming at consumer protection issues from a very different perspective than how regulators have traditionally viewed compliance from an enforcement perspective. More than simply enforcing the law and compliance violations where found, or stretching the law through consent orders to signal undesirable behaviors to the market[12], Chopra seems to believe that his role as regulator is to also ensure that the market operates best with robust options so consumers are not abused[13]by large or dominant players.[14] Chopra probably would appreciate the economics lesson offered by Raising Arizona’s bounty hunter “motorcycle rider of the Apocalypse” who says a “fair price” is whatever the market will bear. Of course, what the bounty hunter really articulates are the effects of abusive monopolistic pricing power. [15]

So, at least on paper, Director Chopra and I appear to be in agreement on these issues. While it would also would have been nice if Chopra also recognized the complexity subsidy that regulation creates for large dominant firms that I discussed in Musings Ed. # 14, one shouldn’t argue with success in this arena. That said, however, CFPB hasn’t dropped the Townstone Financial fair lending case based on this speech, so we'll have to see if the Bureau acts consistent with his words.

[1] My other favorite synonyms for a predicament such as this include, “between Scylla and Charybdis” and “Catch-22”.

[2] I know from personal experience that there are a lot more ways than one to become a parent, but this idea is a very bad plan.

[3]Yes, these words mean the same thing. In fact, they’re synonyms.

[4] If you watch both movie clips, this is the obvious segue.

[5]Chopra’s prepared remarks had 25 footnotes. Most of the footnotes are just references to source materials. But, see my footnote #11 infra about his footnote #24. Also, how does that work when you verbally give a speech, but relegate some of your discussion to footnotes? Should you interrupt your speech to say, “I would footnote that last comment with…” or just rely on the prepared remarks to further instruct the listener? If the speaker just relies on the prepared remarks to include the footnoted comments, doesn’t that seem a little, well, deceptive? I mean, if you heard the speech would you also go back and read the footnoted prepared remarks? Of course, I’ve been known to use a lot of footnotes in these Musings, but I never footnoted a speech. That said, I did try to use sound bites in an MBA presentation once. Rob Chrisman saw that presentation, and he reminds me of that debacle every chance he gets.

[6] Historically, CFPB has frequently sought to push the regulatory interpretation envelope in enforcement when they don’t expect to face a big fight from a smaller defendant.

[7]Uh, did anyone at Wells Fargo really need to be told that opening unauthorized consumer accounts was an unfair or deceptive practice?

[8] I have heard that former Wells originator has made a remarkable come-back, but he (and his family) was devastated for years by the CFPB’s relatively heavy-handed actions while his former employer continued its recidivist ways.

[9] My note: I don’t think Chopra likes corporate lawyers much, but I can say with 100% certainty that there is no class in law school called “How to spin wheels and run out clocks”. [not in original]

[10] I realize Chopra said “regulators” without mentioning anyone in particular, but he certainly didn’t put the CFPB above that concern and, as I have noted, there are numerous examples of this exact behavior by the CFPB over the past decade. In fact, CFPB has been quite the “repeat offender” in this regard. Chopra did say his speech represents the position of the CFPB but he doesn’t speak for other regulators.

[11] Chopra is still seems to be feuding with FDIC and its emphasis on safety and soundness rather than focusing on the consumer and community interests he champions. In his footnoted comments (fn#24) to the speech’s assertion that repeat offenses reflected a lack of safety and soundness, Chopra footnoted, “Some might argue that enforcing the law as written in the Federal Deposit Insurance Act would lead to collateral consequences on the financial system and the economy. Of course, this would not be the case if no insured depository institution is too big to fail. In addition, the FDIC’s Board of Directors can also negotiate alternative provisions in lieu of revocation to achieve the appropriate remedial goals.”

[12]See Footnote #3 of Musings Edition #13

[13] See e.g., Chopra’s statement about the JPay Consent Order where he noted (in a footnote), “[I]n some cases, the misuse of a dominant position in the offering of consumer financial services, where consumers cannot easily switch, is unlawful under the Consumer Financial Protection Act’s prohibition on abusive practices.”

[14] This is as much a theory of antitrust as consumer protection. If I have truly understood his view, then we are in complete agreement. Of course, there are important nuances to our views that I am sure we could disagree on.

[15] The bounty hunter, Leonard Smalls, even provides a reference to inflation adjusted costs.