The Regulatory Philosophy of Rohit Chopra

Also, Freddie Mac second mortgage plan approved as limited pilot; FDIC to open new offices for workplace complaints; living wills critiqued

Jun 21, 2024

Friday Q and A: Few officials have made as deep an imprint on the Biden administration’s regulatory policies as Rohit Chopra – much to the frustration of the business community. Just ask the U.S. Chamber of Commerce, which has been an eager courtroom adversary of the CFPB director and even launched an ad campaign to highlight his “radical agenda and reckless approach.”

None of the controversy has caused Chopra to shy away from his vast agenda at the consumer bureau, where he seemingly makes weekly announcements (often with the White House) of new initiatives and enforcement actions. The flurry of activity has carried over to his role as an FDIC board member. Chopra has taken a more activist posture than his predecessors, leveraging a typically sleepy seat to shape merger oversight and prudential banking rules.

The influence also extends to the FTC, where Chopra was previously a commissioner and hired Lina Khan. She is now running that agency much as Chopra would if he held the post. And more broadly, he’s exported a few of his ideas across the government, as exemplified by the multi-agency attack on “junk fees.”

We sat down with Chopra recently to get a better sense of how he wields his power – and how he responds to the flood of industry criticism. Read on to learn about his penchant for parsing every line of statute and regulation his agency enforces, his views on the pushback and the emerging financial trends that have captured his attention. What follows is our (lightly edited and condensed) conversation.

Capitol Account: The Supreme Court recently affirmed the constitutionality of the CFPB’s funding. How are you feeling after that victory?

Rohit Chopra: It is a relief. The uncertainty regarding our funding structure had enormous costs. We had so many enforcement litigations on hold. Many entities decided to just hit pause, and really delay facing their day in court. Ultimately that means a lot of their victims have not gotten the restitution that we believe they deserve.

CA: The election is coming up, and all of Biden's regulators are starting to think about this. What are your plans? Are you worried about the Congressional Review Act deadline?

RC: I'm not worried. We have really been executing pretty steadily across a number of fronts…One of the most important places is trying to assure that we are also doing our part when it comes to novel uses of data. People typically think of the CFPB as addressing things like subprime mortgages. But we also administer one of the country's only privacy laws that cuts across sectors of the economy. We're taking that responsibility very seriously when it comes to updating rules under the Fair Credit Reporting Act.

CA: The way you approach the job has been influential in this administration, but it has also provoked a lot of complaints that the CFPB routinely exceeds its authority. How would you sum up your philosophy as a regulator?

RC: I think it's deeply inappropriate when regulators believe they can veto laws. Once Congress has passed a law, we have a responsibility to faithfully administer and enforce it…When I was at the FTC, I was really gobsmacked to see how commissioners spanning both parties sometimes decided that they just didn't like a law and determined that they simply wouldn't enforce it at all.

CA: What about in financial services?

RC: It's important to judge regulators in the banking context of who has been able to curb potential crises and potential widespread harm. I really take a prophylactic view when we are starting to see predatory practices emerge in new products. We like to make sure that we're on top of it before it metastasizes throughout the whole economy.

CA: In some ways your approach could be described as maximalist – you want to use all the powers at your disposal. Sometimes from the outside it can feel like you are doing everything, everywhere and all at once.

RC: I wouldn't use that term because in many cases we have decided to use different tools, including non-public tools to resolve things early without much fanfare…I have frustrations when agencies pretend that their powers don't exist, and they take on a sense of ‘there's nothing we can do about it.’ When in reality, the answer is in plain sight. There have been a number of issues where we have had clear authority to pursue and we just haven't exercised it.

CA: Like what?

RC: We had an old authority with respect to open banking and personal financial data rights that just was not completed. We are looking to complete that. We have old rules on the books that had not been even looked at. We inherited those from the Federal Reserve and others…We're just looking at a broader palette and using the appropriate type of authority, tailored to the right circumstance.

CA: Some of your critics would say that the power of government is awesome, and that those who are wielding it have a responsibility to use it judiciously, with humility. They would take a more conservative approach.

RC: I think there is something to that. When I was at the FTC, I observed that there was a culture of strong-arming small businesses into settlements. The purpose of it would be to create a set of small cases to establish some sort of precedent. I found it really inappropriate. For me, I really think that when we do pursue our work, we're looking at the largest actors engaged in significant market-wide harm. And boy, are they willing to defend themselves.

CA: Let’s talk about junk fees. Did you personally come up with that term?

RC: I think it's fair to say we started using that term and others really followed.

CA: How did the idea originate?

RC: What I think you see is a constellation of consultants and other professionals who are coaching financial firms and other companies across the economy about how to extract more margin without losing market share. That has really come through in the context of highly complex pricing that isn't really upfront. As a general matter, I do think markets will work best when there is real clarity about what a product is and how much it costs. And I think we do see that there's all sorts of ways in which junk fees distort that.

CA: Explain that.

RC: If you take some of the fees that are being charged, a consumer cannot even explain what the service is sometimes. We found not so long ago a `paper statement fee,’ where the bank neither printed nor mailed the statement. What that is about is just hoping that some percentage of consumers are not going to take the time to dispute it, or they won't notice it. I just think that really borders on fraud.

CA: There are a lot of businesses that loathe the term, especially banks.

RC: The financial services industry is often the one coming to us to complain about junk fees. I was just talking to a lot of mortgage lenders recently, and they were complaining about the junk fees they're paying to Equifax, Experian, TransUnion and FICO. They're experiencing massive price hikes for really questionable value add. All of this is about: what is the way that every part of the market can be better off? And I'm not sure an economy that focuses on how to manufacture strange junk fees is one that we want.

CA: Do you think that overdraft is a strange junk fee? Banks argue that it is a service that customers want.

RC: When we really looked at this…there were a few instances that really caught us. One is that there was a practice where the way in which a charge was authorized, and when it was settled, it actually led to sometimes people paying three or four overdraft fees rather than just one…The other thing is that those charges were essentially being used like any other type of loan. But instead of it being clearly disclosed with an [annual percentage rate], it was occurring in ways that many people would not really want to pay.

CA: Junk fees have become a talking point in the Biden campaign. How do you respond to critics who say you are playing politics?

RC: We're doing our work using our own independent judgment, and I welcome anyone, regardless of their party, who wants to be on board to help articulate why it's needed.

CA: What about all these lawsuits that are challenging your rules? Many are coming in the Fifth Circuit, which has been a pretty hostile court to regulators.

RC: I don't think the CFPB is in any way unique. There is significant concern about judge shopping when it comes to challenges to agency actions. I think there's worries that sometimes there are tenuous connections to particular judicial districts. But we'll defend our rules no matter what judicial district they are in.

CA: As you say, you're not the only agency that this is happening to. Is there a downside to this trend of companies suing to overturn rules?

RC: In many cases you had criticisms of agencies in the past for developing the law primarily through enforcement, and often there is a request to pursue it through rulemaking. Then if you pursue it through rulemaking, sometimes it's also an extremely long process. So I'm not really sure this is always in the best interest of the business community. I think many honest businesses simply want some clarity about what the rules of the road are.

CA:. Much of your work seems to follow a pattern, where the agency leverages a relatively obscure provision of law or regulation – something hiding ‘in plain sight’ to use your words. How do you come up with this stuff? Are you spending your Friday nights reading the Code of Federal Regulations?

RC: It is true that I have been known to read every statute and regulation in every agency I've worked in.

CA: Why?

RC: I take an oath to administer those laws fairly…Certainly at the FTC, certainly at the CFPB, certainly at every agency, there becomes a sense of forgetting about the words. And often one needs to take a look at the words that a constitutional process delivered – and really give it the due respect it deserves.

CA: What did you see when you looked at the laws the CFPB enforces?

RC: We inherited almost all of our laws from the Federal Reserve Board, the Federal Trade Commission and the Department of Housing and Urban Development. What we have done is actually look at those laws and [asked]: how do we make sure they're fit for the times? In many cases, it was clear they weren't.

CA: What’s an example?

RC: As it relates to artificial intelligence, there's all sorts of ways in which we need to make sure it's clear how those laws apply. We've issued a series of guidance and policy statements on that.

CA: What about the Fair Credit Reporting Act? You’re taking that law in a direction some might not have expected.

RC: We've opened up the rules when it comes to modern-day data brokers. People really do forget that in the 1950s and the 1960s, people were worried about companies assembling reports about them, including rumors, and then selling those reports to others. The Fair Credit Reporting Act was specifically designed to deal with that. It's not just about lending, it's about all sorts of issues. I like to think a lot about: ‘What was the problem that they were trying to solve?’

CA: What questions should policy makers – or reporters – be asking about the future of finance?

RC: An enormous part of what is going to occur in the next ten years is different uses of personal data through the financial system. So we have proposed the first stage of open banking. That's going to use people's transaction data on their bank account or digital wallet. But then we are going to have to think about, what are the new ways in which this could be used for particular products, like mortgages? Mortgage lenders may have access now, after this first stage, to your transaction data. But what about other types of information, including your credit history and other indicia that may support their ability to assess your creditworthiness?

CA: What else is on your radar?

RC: The future of the payment system is probably one of our biggest items that we have to face. In some ways, I could imagine that the CFPB’s rules will facilitate all sorts of new companies that will move payments, perhaps outside of the existing rails today.

CA: What about the giant tech companies?

RC: I was, as you might remember, quite critical of Facebook's Libra gambit. I'm really glad that that didn't come to fruition, but I do foresee a strong desire by the big tech companies to mint their own currency. That will have huge implications for the U.S. banking system.

Thanks for reading today. Follow us on X @CapitolAccount and on LinkedIn by clicking here. We’re always looking for stories, and if you have suggestions on what we should cover (or comments about Capitol Account), shoot us a note. Rob can be reached at: rschmidt@capitolaccountdc.com, Ryan at: rtracy@capitolaccountdc.com and Jessica at: jholzer@capitolaccountdc.com. Forwarding the newsletter to non-subscribers is prohibited (and hurts our small business). Please email for our special group rates: subscriptions@capitolaccountdc.com.

Friday Night News Dump: The FHFA tonight signed off on a controversial plan for Freddie Mac to buy second mortgages – but limited it to a pilot program that will be reassessed after 18 months. The government sponsored enterprise’s request to move into the new area drew widespread opposition from banks, mortgage firms and lawmakers of both parties concerned that it could disrupt the private markets and encourage Americans to take on more debt.

In a press release, FHFA Director Sandra Thompson said the feedback “informed the parameters of the conditional approval.” She added: “The limited pilot will allow FHFA to explore whether this closed-end second mortgage product effectively advances Freddie Mac’s statutory purposes and benefits borrowers, particularly in rural and underserved communities.”

Freddie Mac has billed its move as a limited way to help people who, thanks to higher interest rates, haven’t been able to tap the equity in their houses via the traditional routes like refinancing or taking out a home equity loan. The company estimates its “closed-end second mortgage” product could save homeowners hundreds of dollars per month compared to the alternatives.

Here are some of the limitations the agency placed on the program:

A maximum volume of $2.5 billion in purchases
A maximum duration of 18 months
A maximum loan amount of $78,277
Eligibility only for primary residences

Thompson also issued a long statement stressing that the product is authorized by Freddie’s charter and would be in the public interest, given that it would lower consumers’ costs. She said the $2.5 billion cap, in particular, is intended to address concerns about the broader economic impact of Freddie’s move, including “potential inflationary impacts…or the ‘crowding out’ of private capital.”

The FHFA also emphasized that if the program is set to be extended or revised, the public will once again be given an opportunity to comment ahead of final approval.

Moving Forward: The FDIC said today it plans to open two new offices to review employee complaints – a restructuring spurred by the outside investigation that uncovered flagrant incidents of discrimination and boorish behavior at the agency.

The Office of Professional Conduct will handle reports of harassment and personal misconduct, while the Office of Equal Employment Opportunity will deal with discrimination claims. Both will have the authority to mete out discipline, including for retaliation against workers that report potential wrongdoing.

The units are designed to be independent of management, and their leaders will be appointed and overseen by the FDIC board. It unanimously approved the set-up yesterday in a closed-door session. Previously the agency's legal and human resources divisions were charged with investigating misbehavior – but the heads of those departments report to the chairman.

“The creation of these two new offices will be an important step forward to deliver on that commitment to improve the FDIC’s workplace culture,” Chairman Martin Gruenberg said in a statement.

FDIC Republican Director Jonathan McKernan tells Capitol Account: “My hope is that building a new disciplinary process that is independent of management will ensure that we promptly identify bad actors and deliver swift justice for misconduct.”

Living Wills: Also today, the Fed and the FDIC released the results of their review of the eight largest banks’ plans that detail how each firm can be dismantled in a crisis.

The regulators concluded there were weaknesses in the blueprints from four lenders – Bank of America, Citigroup, Goldman Sachs and JPMorgan Chase. The issues all related to derivatives portfolios.

In Citi’s case, the agencies said, the bank struggled to accurately forecast its capital and liquidity needs due in part to unreliable derivatives data, leading to “materially inaccurate calculations.”

As expected, the regulators diverged in their assessment of Citi’s living will. The FDIC declared it “deficient,” a finding that would come with substantial sanctions if it wasn’t rectified. But the Fed identified the issue as a mere shortcoming. Since both must agree when judging a plan deficient, Citi’s was deemed only to have a shortcoming.

The feedback can be found here and here.

Next Week:

On Monday at 9:30 a.m., the CFTC has a public meeting to consider final capital and financial reporting comparability orders for non-bank swap dealers in several foreign jurisdictions.
On Tuesday at 7:00 a.m., Fed governor Michelle Bowman will speak on monetary policy and bank capital reform at a Policy Exchange event in London.
On Tuesday at 8:00 a.m., former SEC Chairman Jay Clayton discusses the commission’s rulemaking agenda at a U.S. Chamber of Commerce event.
On Tuesday at 2:05 p.m., SEC Chair Gary Gensler will be interviewed at the Bloomberg Investor Summit.
On Wednesday at 10 a.m., the House Financial Services housing subcommittee holds a hearing with the HUD and FHFA inspectors general.
On Wednesday at 2:00 p.m., the House Financial Services financial institutions subcommittee holds a hearing on stress testing.
On Thursday at 10:00 a.m., the House Financial Services national security subcommittee holds a hearing on the Ex-Im bank and economic competition with China.
On Thursday at 2:00 p.m., the House Financial Services capital markets subcommittee holds a hearing on the SEC’s market structure overhaul.