Jeffrey Alberts

Over the past two years, the Consumer Financial Protection Bureau (CFPB) has been aggressively seeking to expand the range of companies over which it has examination authority. These efforts included the CFPB’s announcement in 2022 of its intention to use a previously “dormant” authority to conduct regulatory examinations of nonbank financial companies when they pose risks to consumers and a rule the CFPB proposed in November 2023 that seeks to modify existing guidelines by adding provisions that specifically target “larger participants” within the digital wallet and payment application spheres, subjecting these nonbank companies to comprehensive examinations.

As the CFPB seeks to sweep fintechs and other nonbank financial companies into its regulatory ambit, the procedural rights it provides to these newly regulated entities have come under increasing scrutiny. Among the most critical of these rights is the ability of regulated entities to appeal the CFPB’s adverse determinations within the CFPB itself. This appeals process is known as an “intra-agency appeal,” and it promotes the fair use of supervisory authority by enabling regulated entities to appeal decisions to an independent decision-maker within the agency.

The CFPB adopted a new intra-agency appeals process on Feb. 22, 2024. While the CFPB described its new rules as resulting from its review of revisions that other regulators have made to their intra-agency appeals processes over the past decade, the CFPB’s new rules are most noteworthy for how they deny rights that other regulators of financial institutions provide.

Of particular concern are the CFPB’s refusals to grant regulated entities the ability to appeal what are known as “informal” enforcement action decisions and the CFPB’s refusal to publish its intra-agency appeal decisions. The CFPB’s refusal to grant these procedural protections to entities it regulates shields the CFPB’s regulatory actions from the view of these entities, which makes it more likely that they will be subject to the type of unfair treatment that intra-agency appeal procedures are intended to mitigate.

The CFPB Denies the Ability To Appeal ‘Informal’ Enforcement Decisions

Financial regulators, such as the Federal Deposit Insurance Corporation (FDIC) and other bank regulators—and now including the CFPB—have developed a shadowy set of enforcement procedures they refer to as “informal” enforcement actions. To understand the importance of the ability to appeal a regulator’s decision to pursue informal enforcement, it is critical to appreciate the distinction between formal and informal enforcement actions. In contrast to formal enforcement actions, which are enforceable and authorized by law, informal enforcement actions really are a set of practices that regulators use to exert pressure on regulated entities without using the enforcement powers that they are legally authorized to use.

Reflecting the approach of most financial regulators, the FDIC opines in its Formal and Informal Enforcement Manual that informal actions “should be used when discussions with management or findings and recommendations” in a report of examination are not enough to “accomplish the FDIC’s goal of attaining timely corrective action from management,” but the institution’s problems do not “present serious concerns and risks.” Regulators thus use informal enforcement actions when they do not like what an institution is doing, but they cannot justifiably conclude that these actions create any serious risks or concerns.

Of course, such “informal” forms of persuasion are the most prone to abuse by regulators. When a regulatory examiner wants to exert power over a regulated institution, but cannot come up with a “serious” basis for doing so, informal enforcement actions are an attractive option. Enabling examiners to make use of these informal actions creates a heightened risk that regulated institutions will be treated unfairly, either due to decisions based on an examiner’s improper motives such as personal animus or retaliation or decisions based on an examiner’s factual misunderstandings or fallacious reasoning.

To mitigate these risks of abuse and help ensure that different entities overseen by different examiners employed by the same regulator receive similar and fair treatment, it is important to allow an entity facing an informal enforcement action, such as a regulator’s decision to pursue a memorandum of understanding, to appeal that decision to an independent decision-maker. For this reason, the FDIC explicitly authorizes intra-agency appeal of “decisions to initiate informal enforcement actions (such as memoranda of understanding).”

In contrast, the CFPB’s newly adopted intra-agency appeal procedures, explicitly exclude “CFPB examiners’ decisions to initiate supervisory measures, such as memoranda of understanding” from the list of adverse actions subject to intra-agency appeal. This is concerning, because it means that entities regulated by the CFPB do not have the type of protection against abuses by CFPB examiners that are available to entities regulated by other financial regulators such as the FDIC. It also is worrying that the CFPB is setting a precedent of discouraging examined entities from raising concern about the “informal” actions that an examiner takes against them.

The CFPB Refuses to Publish Decisions

Another procedure that helps ensure that different regulated institutions are treated similarly by the same regulator is publishing that regulator’s decisions on intra-agency appeals. Publishing these decisions allows regulated entities to see how their regulator is treating other similar entities. For this reason, bank regulators, including the Federal Reserve and the FDIC, commit to publish intra-agency appeals decisions after redacting confidential information.

The CFPB’s new intra-agency appeal procedures do not include a commitment to publish redacted versions of its intra-agency appeal decisions. Instead, the CFPB merely notes that it “may in the future publish summaries of issues raised in appeals, and the outcomes of such appeals, in a manner that will protect from disclosure the identity of the appealing entity and any other confidential information.” For now, however, entities regulated by the CFPB will be kept in the dark about how the CFPB is deciding intra-agency appeals filed by other entities and can only hope that the CFPB will later choose to publish the decisions or summaries of the decisions.

It is worth noting that the CFPB’s denials of procedural protections afforded by other regulators not only individually heighten the risk of regulatory abuse, but also work together to compound these risks. For example, publishing intra-agency appeal decisions would be particularly useful in enhancing the fairness of informal enforcement decisions, because informal enforcement decisions generally are not otherwise public. The combination of maintaining the secrecy of informal enforcement decisions and barring intra-agency appeals of these decisions compounds the risk the informal enforcement process will be abused by CFPB examiners.

Of course, it is too early to know how the CFPB will make use of the regulatory powers that it has been aggressively seeking to expand. There are many ways for a regulator to help ensure that regulated companies are treated fairly. In theory, it is possible that no regulated entities will ever seek to use these newly adopted procedural rights, because every regulated entity will perceive that the CFPB treated them fairly; in practice, however, no lawyer familiar with the regulatory process would rely on such rosy assumptions. Procedural rights matter, and the nonbank financial institutions that now find themselves subject to regulation by the CFPB should be concerned that the CFPB decided to limit their procedural rights within the intra-agency appeals process.

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This article first appeared in the February 29, 2024 edition of the “New York Law Journal” © 2024 ALM Global Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-256-2472 or reprints@alm.com.