CFPB’s Vought Seeks To Limit Use Of Civil Penalty Fund

Law360 — Consumer Financial Protection Bureau acting Director Russell Vought is proposing to restrict the agency’s ability to tap its civil penalty fund for consumer education and financial literacy initiatives as part of a trio of draft regulatory changes posted online Tuesday.

The notice, signed by Vought and slated to be formally published Wednesday, calls for rescinding parts of a 2013 CFPB rule that governs how the agency uses the fund, which pools fines that the agency collects in enforcement actions.

Although the CFPB relies on the fund primarily as a source of compensation for harmed consumers, it may also earmark money from the fund for financial education if payments to consumers aren’t feasible.

But Tuesday’s notice cites concerns that the CFPB has too much discretion to make those education allocations. It accordingly proposes stripping down the 2013 rule to remove references to this alternative use of the fund.

“The bureau now believes that the 2013 rule provides neither adequate guardrails for the agency’s exercise of its discretion nor adequate transparency to the public regarding a potentially significant expenditure,” the notice said.

“In the absence of adequate guardrails, there could be incentives to bring enforcement actions for the purpose of aggrandizing the operational scope of the agency,” it added.

The CFPB also said that while it isn’t planning to set aside any fund money for education programs, it does plan to “consider whether revised procedures would be appropriate to address these concerns with respect to any future exercises of this discretionary authority.”

The notice was posted on the Federal Register website along with two other draft CFPB rulemaking notices: one that would codify a delay of compliance deadlines for the CFPB’s small-business loan reporting requirements, and another that would tweak how rule issuance dates are defined. Those are also set to be published Wednesday.

The 2010 Dodd-Frank Act ordered the creation of the CFPB’s civil penalty fund and authorized the agency to draw from it for victim compensation, including in cases where defendants may be bankrupt or defunct and incapable of providing redress.

But Dodd-Frank also gave the CFPB permission to spend the fund’s money on financial education and literacy programs “to the extent such victims cannot be located or such payments are otherwise not practicable.”

Since it finalized a 2013 rule to implement these authorities, the CFPB has paid out more than $3.6 billion in victim compensation from the fund, according to Tuesday’s notice.

By contrast, the CFPB has allocated just $28.8 million for education purposes in this time, less than 1% of the amount taken from the fund for consumer relief. In fact, according to the agency’s financial reports, it has made education-related allocations in only two fiscal years — once in 2013 and once in 2016.

This money, the CFPB has said, went toward a financial coaching program for returning servicemembers and other “economically vulnerable” consumers.

Tuesday’s notice did not identify any specific allocations that Vought, a Trump appointee, or his leadership team at the CFPB object to, but the penalty fund’s built-in flexibility has fueled suspicion from the agency’s conservative critics over the years.

More recently, Project 2025, the conservative policy blueprint that Vought helped co-author, portrayed the fund as a potential source of dark money for “leftist nonprofits” and called for restricting its use to direct victim compensation only, with the added requirement that any leftover penalty money be remitted to the U.S. Treasury.

House Republicans have proposed implementing this idea as part of their “One Big Beautiful” budget bill, but it has so far not been included in the Senate’s version of the legislation. GOP lawmakers are also mulling slashing the CFPB’s budget more broadly, potentially even eliminating its funding from the Federal Reserve.

Comments on Vought’s proposed penalty fund rollback will be due 30 days after formal publication, while the other two CFPB rulemaking notices released Tuesday are slated to become effective as final rules.

The first, which will go into effect right away, scraps a 2012 rule that let the CFPB treat regulations as officially issued once posted online, reverting instead to the traditional standard of Federal Register publication.

The other notice, which will go into effect next month, provides roughly one-year extensions on the compliance deadlines for banks and other lenders subject to the CFPB’s small-business loan reporting requirements.

Those requirements, which Vought has signaled plans to reopen, were originally supposed to start taking effect this summer but have been put on hold amid court challenges from lender trade groups.

The CFPB said Tuesday that its proposed extension would cover all lenders, not just those included in the court-ordered stays. This length of time also “should be sufficient” for the agency to initiate a reproposal of the reporting requirements, it said.

To that end, the CFPB “anticipates issuing a notice of proposed rulemaking as expeditiously as reasonably possible,” it added.

–Editing by Adam LoBelia.

Read more at: https://www.law360.com/articles/2354387/cfpb-s-vought-seeks-to-limit-use-of-civil-penalty-fund?copied=1