New Director Could Wield Budget Ax at Consumer Finance Watchdog

Dec. 6, 2018, 7:26 PM

Now that Kathleen Kraninger has been confirmed to lead the Consumer Financial Protection Bureau, the budget wonk will have untethered authority to use spending to reshape the agency’s priorities.

Kraninger avoided discussing her policy prerogatives during her July confirmation hearing, but voiced support for acting CFPB Director Mick Mulvaney’s moves to dial back CFPB enforcement and draw no new money from the Federal Reserve to fund agency operations last January. Mulvaney asked for a combined $271.4 million in funding in subsequent draws from the Fed in March and September under the agency’s independent budget powers established by the Dodd-Frank Act.

Consumer advocates and Democratic lawmakers fear that Kraninger will go farther than periodically skipping funding draws from the Fed. They worry that Kraninger will attempt to enact a proposed Trump administration fiscal 2019 budget that she helped write while an official at the Office of Management and Budget. As the CFPB’s director, Kraninger would be able to enact a proposed $147 million cut, about 23 percent of the the bureau’s budget, on her own and without any input from Congress.

That dramatic cut could further limit the CFPB’s regulatory and enforcement efforts against banks and other financial services providers after Mulvaney already reined in many of the bureau’s activities.

“Even the narrowed scope of what the bureau can do for consumers is compromised by this lack of funding,” Scott Astrada, the Center for Responsible Lending’s director of federal advocacy, said in a Nov. 29 phone interview.

Budget Wizard

Kraninger comes to an agency that has already seen its enforcement pace slowed; its supervision of the Military Lending Act curtailed; and its fair lending office downgraded. The bureau is also rewriting payday lending rules and is set to undertake a mandatory review of its mortgage regulations.

The budget is the tool that would allow the director to have the most immediate impact.

Kraninger, who was confirmed to lead the CFPB in a 50-49 vote on Dec. 6, has little experience in overseeing financial markets, but plenty of history with writing budgets.

She worked under Mulvaney as he split time leading the OMB and the CFPB where she in part oversaw the budgets for the Treasury Department, the Justice Department and the Department of Homeland Security. That included putting together budgets for the Trump administration’s zero-tolerance immigration policy, including family separations.

The Trump administration touted Kraninger’s budget prowess when it announced her nomination to lead the CFPB.

Kraninger and another Mulvaney aide at CFPB, Deputy Director Brian Johnson, can use the CFPB director’s immense power to curtail much of the bureau’s activities. The director has the power to set a budget since the bureau is not subject to the congressional appropriations process and gets its funding through the Fed.

Tense Hearing

To date, Kraninger has not said what she intends to do with the CFPB’s budget.

Lawmakers have cited the proposed $147 million cut in the bureau’s projected $630.4 million budget for fiscal 2018 as a potential benchmark.

Sen. Elizabeth Warren (D-Mass.) pressed Kraninger on the budget question at a July 19 confirmation hearing, seeking to understand how the new CFPB director will make the math work.

Kraninger did not fully respond to Warren’s questions, saying only that she would look at the bureau’s travel budget to see if there were better ways to spend the bureau’s money.

That will only get Kraninger so far.

The CFPB’s fiscal 2018 budget projected only $19.1 million in travel costs, or around 3 percent of its $630.4 million budget. Of that $19.1 million, 86 percent or $16.4 million was set aside to pay for travel by examiners to oversee banks, payday lenders, nonbank mortgage lenders, debt collectors and other companies.

The Massachusetts senator noted that the proposal only had a top line cut but few details on how it would be achieved.

Warren questioned if Kraninger would fire civil service employees at the bureau since compensation and benefits take up the largest portion of the CFPB’s budget at $359.7 million, or around 57 percent, according to the bureau’s 2018 budget.

Even without firing employees, Kraninger could cut the budget through attrition by simply not replacing staff that depart.

Warren criticized Kraninger for proposing a budget where the numbers don’t add up if the CFPB is to continue its oversight of consumer finance markets.

“I know that will make bank lenders happy, payday lenders happy, but it doesn’t represent any knowledge of the CFPB or any commitment to the CFPB’s central mission, of trying to protect consumers and level the playing field,” Warren said.

Banks Lose Out

The CFPB’s nonbank supervision would likely take the hardest hit, since other federal and state regulators will be able to keep an eye on banks’ compliance with consumer protection laws if the CFPB steps back.

States may be able to fill a void in supervising payday lending, nonbank mortgage companies and debt collectors, among other companies. But they each have different laws to enforce and differing funding and experience levels, according to Nanci Weissgold, the co-leader of Alston & Bird LLP’s consumer financial services team.

“What I think it will lead to is inconsistent enforcement as well as multiple and varying interpretations of the legal requirements,” she said in a Nov. 30 phone interview.

That may lead to an environment similar to what existed prior to the CFPB, and which led some bank industry groups to favor the bureau’s creation in the 2010 Dodd-Frank Act, Weissgold said.

Ultimate Goal

Beyond unleveling the playing field, the biggest effect of slashing the CFPB’s budget would be to curb its ability to police consumer financial markets without legislation or court decisions destroying the bureau, Astrada said.

“It is the penultimate step before trying to render it incapable of doing its mission,” he said.

And that, Astrada and others fear, may be Kraninger’s top priority.

To contact the reporter on this story: Evan Weinberger in New York at eweinberger@bloomberglaw.com

To contact the editor responsible for this story: Michael Ferullo at mferullo@bloomberglaw.com

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