CFPB and Innovation: Can the Mortgage Industry Expect a Shift?

I was recently asked why I keep saying that the CFPB’s new direction will likely bring fresh energy to financial innovation. The answer is simple: regulation and innovation have an odd relationship, one that’s exacerbated by the CFPB’s often unpredictable stance on regulatory interpretation and enforcement.

Innovation brings risk—especially regulatory risk—because it often moves faster than the law. The concern isn’t about companies deliberately breaking rules. It’s about the gray areas where the law is silent or ambiguous.

When regulators fail to provide clear guidance, businesses hesitate to innovate, unsure how their actions might be interpreted.

To innovate confidently, companies need to understand and quantify the risks. Without that, measuring and mitigating risk becomes nearly impossible. Unfortunately, the CFPB has not instilled confidence in this area based on its past actions.

Has the CFPB Stifled Consumer-Focused Innovation?

Over the years, I’ve had to tell clients—many with consumer-friendly ideas that reduced risk and improved customer experience—that the CFPB might challenge their innovations.

That’s not how regulation should work.

Why should companies fear regulatory backlash if an idea benefits consumers and doesn’t cause harm?

The reality is that the CFPB’s stance made it feel like any level of risk—even theoretical risk—was too much. Financial institutions couldn’t afford to operate in the gray areas, even when those areas were undefined.

The CFPB also failed to engage with the industry in a way that could have encouraged responsible innovation. Collaboration could have led to solutions that benefited both businesses and consumers.

Instead, many promising ideas never made it past the drawing board.

A Missed Collaboration Opportunity

In the past, we witnessed regulatory collaboration that improved the consumer environment.

Take HUD’s approach in 1996 with Section 8 of RESPA. When asked whether Computer Loan Origination (CLO) systems could receive compensation, HUD proactively issued Statement 96-2.

The agency clarified that CLOs could be paid to generate business, as they provided a legitimate service. That kind of regulatory guidance allowed companies to move forward with confidence.

Contrast that with the CFPB’s handling of Upstart Network, Inc. In 2017, the agency granted Upstart a No-Action Letter, signaling that it supported innovation. Then, in 2022, the CFPB effectively forced Upstart to withdraw the letter because the agency couldn’t keep pace with the company’s innovation.

Instead of adapting by working at the speed of innovation, the CFPB withdrew ongoing support and, once again, chilled the enthusiasm for innovation.

The Challenge of Applying AI in Compliance: An Example

Artificial intelligence has the potential to lower costs and improve consumer experiences. But can AI-driven solutions be compliant? They should be—if they provide clear benefits and do not harm consumers.

Yet, based on the CFPB’s actions, consumer benefits often seem secondary to regulatory enforcement. If AI improves decision-making, reduces bias, and enhances accessibility, why wouldn’t regulators encourage its use?

The lack of clear direction has made financial institutions hesitant to invest in technology, knowing it could face arbitrary or unreasonable regulatory challenges down the road.

The Need for a Smarter Regulation Approach

Let me be clear: consumer protection laws matter. They exist to ensure fairness and prevent harm. Regulators should play a role in holding bad actors accountable. But regulation must also be practical.

A sound regulatory approach should start by asking:

• What specific consumer risk are we trying to mitigate?

• Are we preventing actual harm or just enforcing rules for the sake of enforcement?

• Can our approach support both compliance and innovation?

A regulator that prioritizes these questions can create a system where financial institutions feel confident moving forward, knowing they are operating within a framework that makes sense.

What's Next for the CFPB?

The industry may see changes in the CFPB’s posture as leadership shifts. The goal isn’t to eliminate the agency—consumer protection must remain a priority. Without oversight, bad actors could gain an unfair advantage over institutions that follow the rules.

However, oversight should not come at the cost of progress. A more balanced CFPB that engages with the industry and provides clearer guidance could allow businesses to reduce the weight they place on regulatory unpredictability.

Not eliminate it. Just reduce it.

And that’s a win for consumers.

Navigating Compliance with Confidence

The right approach to compliance balances consumer protection with the freedom to develop solutions that improve financial services.

But without clear guidance, financial institutions are left questioning what’s possible.

At Loan Risk Advisors, we help mortgage lenders and financial institutions identify regulatory risks, mitigate compliance challenges, and develop strategies that align with evolving regulations.

Our team stays ahead of industry changes so you can focus on building innovative, consumer-friendly solutions—without unnecessary regulatory roadblocks.

Need expert guidance? Contact Loan Risk Advisors today to discuss how we can help you navigate risk, stay compliant, and move your business forward.