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US banks and other financial companies are preparing for a lightening of their compliance burden in areas from payday lending to mortgages as President Donald Trump tightens his grip on a powerful regulator set up to protect consumers.
Mick Mulvaney, installed by the White House as acting director of the Consumer Financial Protection Bureau, has signalled his readiness to reverse much of the work of an agency established under former President Barack Obama in the wake of the financial crisis.
“Virtually the entire range of regulations previously adopted by the CFPB could be subject to review,” says Quyen Truong, a former senior figure at the agency who is now a partner at law firm Stroock & Stroock & Lavan. “There’s no particular set of rules that would be considered sacrosanct.”
The CFPB’s unusual leadership structure — unlike most US independent government agencies it has no bipartisan commission to run it — makes its director among the most influential officials in Washington.
Mr Mulvaney, who once voted to abolish the regulator, told reporters last week that it would “frighten most of you how little oversight Congress has over me”.
Those same unchecked powers that he has criticised give him the means to unpick the legacy of his predecessor, Richard Cordray, whose actions against the financial sector were attacked by Republicans as overzealous and anti-business.
Although Mr Mulvaney, who is also the president’s budget director, still faces a legal battle with a CFPB executive who argues she has the right to take charge before Congress approves a permanent head, he remains in control for now. His opponent, Mr Cordray’s chosen successor Leandra English, failed in an initial courtroom attempt to block the White House appointee.
While saying he does not intend to “set the place on fire”, Mr Mulvaney has pledged to take a “dramatically different” approach from Mr Cordray. In an early sign of his intent, Mr Mulvaney instituted a 30-day freeze on new initiatives within hours of assuming office.
Reforms that Mr Cordray had yet to introduce that would extend the CFPB’s reach into new areas, including mooted restrictions on small business lending, are now unlikely to see the light of day.
Lobbyists have also set their sights on upending rules that the CFPB had already completed. Among the highest profile are restrictions on payday lenders, which Mr Cordray maintained target vulnerable consumers knowing they will struggle to repay their debts.
The rules, finalised before Mr Cordray left office but not due to kick in until 2019, require lenders to assess whether prospective borrowers can afford repayments before making a loan. The changes are forecast to have a devastating effect on the industry. More than two-thirds of its estimated $7bn in annual revenue would be wiped out by the reforms unless the companies changed their business models, according to the CFPB.
Barney Frank, the Democrat who co-sponsored the Dodd-Frank Act that established the CFPB, says the payday lending restrictions would be “high on the list of vulnerable rules” under Mr Mulvaney.
The industry is eagerly anticipating a relaxation. Curo Group, a payday lender that is gearing up for a stock market launch, highlighted the change at the top of the regulator in a prospectus it filed last week, noting the potential for the new CFPB head to “suspend, delay, modify or withdraw” the restrictions.
The payday lending rules are seen as a test of how far the new acting director is willing to go. Yet mainstream banks already have limited exposure to such loans. For the wider financial industry other changes would be more consequential.
High on the industry’s wish list is a relaxation of “qualified mortgage” requirements, which the CFPB brought in to help avoid a repeat of the subprime crisis. Designed to cut down on risky lending, they require banks to cap borrowers’ mortgage outgoings at 43 per cent of their income.
Industry lobbyists complain the rules have put home ownership beyond the reach of the less well off. Lenders also complain that disclosure requirements aimed at making the process smoother have simply burdened them with unnecessary paperwork.
“The mortgage industry would welcome a liberalisation,” says Joseph Lynyak, partner at Dorsey & Whitney, a law firm. “The new mortgage disclosure rules are very, very complicated and people are still working out the technical glitches.”
Lawyers also expect the CFPB’s enforcement division to become less fierce under Mr Mulvaney. His predecessor extracted $12bn worth of consumer relief from the financial industry. In his final week he ordered Citibank to pay $6.5m for breaching rules on student loans.
However, Lucy Morris, a former deputy enforcement director at the bureau who is now a partner at law firm Hudson Cook, says it will be harder for the incoming CFPB head to reverse enforcement actions already in train than those not yet in the public domain.
“There’s two different types of enforcement: things that are public, which are harder to pull back, and those that are pending. It’s easier to press the pause button on those because they haven’t yet led to public action.”
On rulemaking, too, Mr Mulvaney may struggle to make wholesale changes unilaterally. To reverse the payday lending reforms, for instance, he will need to follow the requirements of the Administrative Procedure Act.
Ms English, meanwhile, is pressing ahead with her fight in the courts, and Mr Mulvaney’s opponents have scope to make life difficult for him by lodging other legal challenges. “The changes, I think, are going to be dramatic,” says Alan Kaplinsky, co-practice leader of the consumer financial services group at law firm Ballard Spahr. “But it’s not going to happen overnight.”