Watchdog head: Bad actors should face more than big fines

The head of the nation's financial watchdog is having second thoughts about how useful fines are in deterring illegal behavior in the financial industry, saying some companies have gotten so big that the money makes little difference.

In an interview with The Associated Press, Rohit Chopra signaled that the Consumer Financial Protection Bureau plans to deploy an array of tools that could limit the ability of a bank or financial firm to conduct business if they violate the law.

In less than a year at the helm of the CFPB, Chopra has moved to turn the agency back into the assertive regulator it was under President Obama. The bureau took far fewer enforcement actions during the Trump administration.

Some staff that had left the CFPB under President Trump have returned. The bureau has been adding enforcement staff and has reprioritized issues such fair lending that were set aside during the previous administration.

Chopra, in a video interview with The Associated Press, said that the changes at the bureau have been necessary because the financial services industry has been transformed dramatically. Apple is now one of the biggest payment processors and has a credit card, Facebook tried to launch its own digital currency, and Amazon acts a financial middle man between merchants and customers in a way unthinkable a few years ago.

There's also been the rapid growth of buy now, pay later companies, which offer ways for borrowers to split up a purchase into a small number of equal installments. It's a product that effectively did not exist in the U.S. even three or four years ago.

In some of his earliest moves, Chopra directed the bureau to investigate whether technology companies such as Apple, Amazon, PayPal, Square and others may be violating privacy laws when it comes to payments. The bureau is also investigating whether buy now, pay later companies are causing consumers to take on too much debt as well as how those loans should be reported on consumers' credit reports.

“We are trying to make sure that we have a real-world understanding of today's markets, not in light of what happened in the pandemic, but in light of banking has really changed in the past few years,” he said.

Banks and other businesses have taken notice of the bureau's shift. The U.S. Chamber of Commerce launched an advertising campaign this summer deliberately targeting Chopra, who the business lobbying group has alleged is trying to “radically change” the financially services industry.

Chopra is re-evaluating some of the traditional tools at regulators' disposal. Because of the size of some of these companies, he said that tools such as fines may no longer be sufficient to punish bad actors.

The CFPB is exploring other ways to rein in illegal practices, ranging from limitations on a firm's growth or banning a company from opening new accounts, as well as imposing fines and liability on individuals instead of just the company.

One option now being considered for repeat gross violations would be to revoke a bank's deposit insurance, under the premise it is operating in an unsafe and unsound manner. Revoking bank deposit insurance would be a crippling blow for any financial company.

In April, the CFPB sued TransUnion for allegedly engaging in deceptive marketing of credit products, in violation of a 2017 enforcement order. The bureau also sued one of TransUnion's executives as part of its lawsuit, which is seeking monetary fines as well as an injunction to stop the practices.

“We’re shifting our enforcement focus to these larger actors who knew something was a violation of the law but made a calculated decision to violate that law,” Chopra said.

TransUnion has denied it violated the 2017 order and is fighting the CFPB's lawsuit.

Chopra's comments partly reflect his experience as one of the Democratic seats on the Federal Trade Commission under President Trump. During his tenure, Chopra was openly critical of the regulator's history of big investigations into anticompetitive behavior that ultimately ended in an inconsequential fine against a large company.

In 2019, the FTC fined Facebook $5 billion for the social media company's extensive privacy violations. While the fine was the largest ever imposed by the agency, it represented less than 10% of the company's total sales that year, and less than one-third of the company's annual profits. In the interview, Chopra reiterated that he believes the FTC's actions did little to stem Facebook's bad practices.

“It felt like there were two standards at the FTC: hammer the little guy when they break the law, but when a big firm engaged in repeat offenses, it felt like nothing happened," he said.

Chopra publicly referenced the need for more forms of enforcement than just a fine Wednesday after a company owned by Warren Buffett's Berkshire Hathaway was found to have illegally discriminated against potential Black and Latino home owners.

“We will continue to seek new remedies to ensure all lenders meet and fulfill their responsibilities and obligations,” Chopra said.

Other financial regulators have also taken a multifaceted approach. Regulators have fined Wells Fargo billions of dollars for various bad practices, including pressuring its employees to illegally open millions of fake accounts in order to meet unrealistic sales goals.

But the Federal Reserve went further. Wells has remained under constraints set by the Fed since 2018, unable to grow its business until the central bank deems its culture problems to be resolved.