CFPB Bypasses Act of Congress and Renders FCRA Essentially Impotent – Two Likely Results: A Rise of Risky Lending or Difficulties in Obtaining Loans
INTRODUCTIONRecently, the Consumer Financial Protection Bureau (“CFPB”) issued an interpretive rule that came as a blow to the entire lending community. The interpretive rule effectively made a large portion of the Fair Credit Reporting Act (“FCRA”) useless, as it significantly narrowed the scope of the federal law and gave states a vast amount of leeway to pass whatever laws they see fit with regard to credit reporting. The rule was passed to enable states to respond to and remedy unique lending issues that occur at a local level. In a perfect world, this autonomy given to the states would be great for all stakeholders. However, this is a major issue for many reasons, and the future of some states credit reporting laws are likely to take a dramatic turn towards more regulation.DISCUSSIONOne of the major problems with this interpretive rule issued by the CFPB is that states can now pass extreme laws in order to “protect” consumers. Examples of laws that states could pass pursuant to this interpretive rule include prohibiting credit reporting agencies from reporting things such as medical debts, defaults on rental properties, eviction histories, arrest records, etc. Further, if a state chose to double down, they could also prohibit lenders or landlords from reporting defaults or delinquent payments to credit reporting agencies. Perhaps some states might see the value in having this information on credit reports not only to protect the lender, but also the consumer. However, there will likely be some states that take things to the extreme, which will hurt all stakeholders in the lending community. The CFPB backs this drastic move by proclaiming that giving states control will protect consumers from data abuse, however that conclusion seems unfounded. Passing extreme state consumer “protection” laws will inevitably result in some consumers gaining access to credit far beyond their financial capacity, defaulting on payments, and ultimately being financially worse off than before.

Another problem in the wake of the interpretive rule is that states economies, and possibly the national economy, could suffer due to high default rates or low lending rates. The CFPB was created for the primary purpose of preventing another recession due to a broken lending system. The CFPB’s function is supposed to give rise to informed and safe lending to prevent lenders and debtors from being in risky positions. It follows that this interpretive rule passed by the CFPB is counterproductive to the CFPB’s sole purpose. This interpretive rule is going to result in one of two situations in states that decide to pass copious amounts of consumer/debtor “protection” laws. Situation #1 is that lenders are going to be skeptical to lend to anyone given the uncertainty of a prospective debtor’s credit, causing a lack of economic stimulation. Situation #2 is that lenders are going to feel as though they must issue loans and assume the risk, irresponsible consumers will take out loans, and then default. In both situations, the likely result does not appear to look great for any stakeholders and the consumers appear to be less protected than legislatures might want you to think.

CONCLUSION

Although the outlook following the issuance of the interpretive rule is not great, lenders must begin strategically planning to adjust to foreseeable changes in state legislation. First, lenders must begin to familiarize themselves with the consumer protection laws of the states in which they do business, and frequently monitor any new bills passed, as they will likely be passed in the near future. Second, it would be valuable to perform research on particular states to predict ways in which legislatures might react to their newfound power with regard to consumer protection laws, and structuring future business plans to more lender-friendly jurisdictions. Lastly, be prepared for some relatively substantial changes in consumer protection law in order to stay compliant. The best-case-scenario is that many states will begin to slowly pass laws geared towards protecting consumers and if some states do go to the extreme, that they see the negative consequences quickly before it is too late. Regardless, a patchwork of over-the-top consumer protection laws is not economically sustainable, so it is possible that the CFPB will strip the excessive authority just given to the states.

** Many thanks to Gunner Walkers for his research and contributions to this article.  Gunner is an accomplished 2nd year law student at the University of Cincinnati College of Law.  **