CFPB Director Kathy Kraninger testifies before the House Financial Services Committee. Photo: Diego M. Radzinschi 

The Consumer Financial Protection Bureau's leader came under criticism Thursday from U.S. House Democrats over recent enforcement guidance that some critics said would undercut the regulator's ability to crack down on abusive industry practices.

Appearing before the House Financial Services Committee, CFPB Director Kathy Kraninger was scolded by Democratic lawmakers over the guidance, in which the bureau said it was aiming to bring clarity to an enforcement area that financial industry advocates have described as poorly defined.

Indeed, in the decade since the Dodd-Frank Act created the CFPB, the financial industry has broadly bemoaned the agency's power to police "abusive" practices, authority that came in addition to long-established standards for pursuing "unfair or deceptive" conduct.

U.S. Rep. Maxine Waters, chairwoman of the House financial services committee, described Kraninger's leadership of the bureau as "misguided" and said the new guidance "undercuts" its enforcement abilities.

"I am appalled by your decision to issue a policy statement that undercuts the Dodd-Frank Act's prohibition on unfair, deceptive or abusive acts or practices. You've made it harder for your own agency to crack down on abusive acts by financial institutions," Waters said. "With this policy statement, you have made it clear that under your watch bad actors will come first and consumers will come last."

Kraninger's appearance came two weeks after the CFPB released the guidance. The new policy said the agency would only challenge conduct as "abusive" if the harm to consumers outweighed the benefit. The CFPB also said it would generally avoid labeling conduct "abusive" in addition to "deceptive" or "unfair," instead bringing standalone cases that would more clearly demonstrate how the agency defines "abusive."

The bureau said it would impose fines only in cases where there has been a "lack of a good-faith effort to comply with the law," although the agency plans to continue seeking restitution for harmed consumers.

Defending the guidance, Kraninger said it provides a "common sense framework on how we intend to apply the abusiveness standard in supervision and enforcement matters."

"For too long," she said, "this has been a gray area, creating uncertainty and hampering consumer-beneficial innovation."

Congresswoman Maxine Waters (D-CA) chairs a House Financial Services Committee in 2019. Photo: Diego M. Radzinschi

Questioned by Waters, Kraninger appeared reluctant to concede the CFPB was a necessary creation in the aftermath of the financial crisis. Kraninger said only that Congress saw a need for a new financial regulator—and that she viewed her job as carrying out the law that birthed the agency.

"I would say it is very clear that Congress determined that [there was a need for the CFPB], and my job is to carry out the law, and to carry out the important responsibilities that Congress gave to this agency in addition to overseeing the many staff that are dedicated to this mission," she said.

Later in the hearing, Kraninger said, "I absolutely believe in the mission of the CFPB."

On March 3, the Supreme Court will hear arguments in a constitutional challenge to the CFPB. Kannon Shanmugam, a partner at Paul, Weiss, Rifkind, Wharton & Garrison, is leading arguments contesting the CFPB's independent, single-director design. Paul Clement, a conservative appellate legend, was appointed by the high court to defend the CFPB in light of the Trump-era Justice Department's decision to abandon the bureau's defense.

The financial industry applauded the CFPB's guidance, even as defense lawyers for banks questioned what impact it would have. Some defense lawyers pondered how the CFPB could call conduct "abusive" without also labeling it also as unfair or deceptive.

"It's guidance," said Venable partner Allyson Baker, a former CFPB enforcement attorney, in an interview. "The thing that struck me the most was the fact that they were willing to do it. The fact that they took a stab at putting out policy, just to give people some guidance, is helpful."

During Thursday's hearing, Rep. Andy Barr, R-Kentucky, presented what he said was "just a friendly suggestion" for more clearly defining abusive conduct.

"I think the concern is we still don't know what 'abusive' means, even with the guidance," Barr said.

"'Unfair and deceptive,' that standard is well-defined in the law. Wells Fargo's conduct was prohibited under that standard," Barr added, referring to the bank's sham accounts scandal. "'Abusive' … we still don't know what that means. I would argue that what abusive should mean is if that conduct persists, even after they violated unfair and deceptive. That would remove the ambiguity."

In issuing guidance, the bureau stopped short of taking up a rulemaking that would have involved a formal comment process.

"The policy statement leaves open the ability, certainly, to enter into a rulemaking action around this topic," Kraninger said. "I would say at this point the bureau really needs some more engagement on the topic to get to a rule-making."

 

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