[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
THE SEMI-ANNUAL REPORT OF THE CONSUMER
FINANCIAL PROTECTION BUREAU
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
SECOND SESSION
__________
MARCH 29, 2012
__________
Printed for the use of the Committee on Financial Services
Serial No. 112-114
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75-086 WASHINGTON : 2012
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HOUSE COMMITTEE ON FINANCIAL SERVICES
SPENCER BACHUS, Alabama, Chairman
JEB HENSARLING, Texas, Vice BARNEY FRANK, Massachusetts,
Chairman Ranking Member
PETER T. KING, New York MAXINE WATERS, California
EDWARD R. ROYCE, California CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois BRAD SHERMAN, California
GARY G. MILLER, California GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina CAROLYN McCARTHY, New York
JOHN CAMPBELL, California JOE BACA, California
MICHELE BACHMANN, Minnesota STEPHEN F. LYNCH, Massachusetts
THADDEUS G. McCOTTER, Michigan BRAD MILLER, North Carolina
KEVIN McCARTHY, California DAVID SCOTT, Georgia
STEVAN PEARCE, New Mexico AL GREEN, Texas
BILL POSEY, Florida EMANUEL CLEAVER, Missouri
MICHAEL G. FITZPATRICK, GWEN MOORE, Wisconsin
Pennsylvania KEITH ELLISON, Minnesota
LYNN A. WESTMORELAND, Georgia ED PERLMUTTER, Colorado
BLAINE LUETKEMEYER, Missouri JOE DONNELLY, Indiana
BILL HUIZENGA, Michigan ANDRE CARSON, Indiana
SEAN P. DUFFY, Wisconsin JAMES A. HIMES, Connecticut
NAN A. S. HAYWORTH, New York GARY C. PETERS, Michigan
JAMES B. RENACCI, Ohio JOHN C. CARNEY, Jr., Delaware
ROBERT HURT, Virginia
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO ``QUICO'' CANSECO, Texas
STEVE STIVERS, Ohio
STEPHEN LEE FINCHER, Tennessee
James H. Clinger, Staff Director and Chief Counsel
C O N T E N T S
----------
Page
Hearing held on:
March 29, 2012............................................... 1
Appendix:
March 29, 2012............................................... 49
WITNESSES
Thursday, March 29, 2012
Cordray, Hon. Richard, Director, the Consumer Financial
Protection Bureau (CFPB)....................................... 12
APPENDIX
Prepared statements:
Cordray, Hon. Richard........................................ 50
Additional Material Submitted for the Record
Cordray, Hon. Richard:
``Semi-Annual Report of the Consumer Financial Protection
Bureau,'' dated January 30, 2012........................... 53
THE SEMI-ANNUAL REPORT OF
THE CONSUMER FINANCIAL
PROTECTION BUREAU
----------
Thursday, March 29, 2012
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 9:38 a.m., in
room 2128, Rayburn House Office Building, Hon. Spencer Bachus
[chairman of the committee] presiding.
Members present: Representatives Bachus, Hensarling, Royce,
Biggert, Miller of California, Capito, Garrett, Neugebauer,
McHenry, Posey, Westmoreland, Luetkemeyer, Huizenga, Duffy,
Renacci, Hurt, Dold, Canseco, Stivers; Frank, Waters, Maloney,
Gutierrez, Velazquez, Sherman, Miller of North Carolina, Scott,
Green, Cleaver, Donnelly, Carson, and Carney.
Chairman Bachus. The committee will come to order.
Mr. Cordray, as you know, we are going to have some vote
interruptions and I would like everyone to know, the Members as
well as anyone listening, that Mr. Cordray has agreed to stay
until 2 p.m., which is a very nice accommodation. We very much
appreciate that.
And we thank you for your attendance today to deliver the
semi-annual report of the Consumer Financial Protection Bureau
(CFPB). The CFPB is an independent Federal agency whose
authority, as many of us have said, is ``far-reaching;'' some
have said ``unprecedented.''
Title X of the Dodd-Frank Act confers virtually unfettered
discretion to the Director to identify financial products and
services deemed to be unfair, deceptive or abusive and to ban
them under what has been described as a highly subjective
standard that has no legally defined content.
All of us agree on the need to protect consumers. All of us
also agree that every government bureaucracy needs transparency
and oversight.
The simple truth is that there is no reason we cannot have
both robust consumer protection and an agency that is
accountable for the action it takes and the resources it uses.
The cause of greater accountability was not well-served by
the President's decision to circumvent the advice and the
consent of the Senate and install the CFPB's Director in a
constitutionally questionable maneuver.
As I have told you previously, Mr. Cordray, I believe
neither you nor the agency you head were well-served by that
decision since it cast a legal cloud over the legitimacy of the
Bureau's regulatory and enforcement activity.
And I have also previously stated that this dispute has
nothing to do with you personally, but with the structure and
lack of accountability surrounding the agency you have been
asked to lead.
The House has passed two bills this Congress, H.R. 1315 and
H.R. 4014, that make the CFPB more accountable without in any
way hampering its ability to protect consumers.
H.R. 1315 includes provisions placing the CFPB under the
management of a five-member bipartisan commission, an idea
originally proposed by and supported by House Democrats. H.R.
4014, which passed the House just this week with strong
bipartisan support and the support of Mr. Cordray, fixes a
critical omission in the Dodd-Frank Act that could have
resulted in a regulated institution waiving their attorney-
client privilege when sharing confidential information with the
CFPB.
Given that the CFPB is not subject to the annual
congressional budget process, hearings like this are essential
to the oversight process. In fact, hearings like this are the
only opportunity currently available to Congress to exercise
any oversight of the CFPB at all.
Again, Mr. Cordray, I thank you for your appearance.
And I now recognize Mrs. Maloney.
Mrs. Maloney. Okay. Is Mr. Frank coming, or should we wait
for him?
Chairman Bachus. We are going to--
Mrs. Maloney. First of all, I would like to--should I wait
for Mr. Frank or--
Chairman Bachus. I will allow Mr. Frank to come in and make
an opening statement.
Or would you like Mr. Hensarling--
Mrs. Maloney. Okay. I will just go ahead, in the interest
of time.
First of all, I would like to welcome Director Cordray and
really thank you for your impressive accomplishments so far. I
know that when we were doing the markup on Dodd-Frank, I
offered an amendment that called for an annual report and
oversight by this committee of the CFPB.
That was later amended to make it a semi-annual report to
Congress. But if I had known that you would be before this
body, or someone as senior as yourself would be before this
body 15 times so far this year alone, I would not have offered
that amendment, because you have been very accountable to us
and to this Congress.
And I would like to say it was great to have you in my
district in New York, where you discussed and launched an
inquiry into overdraft practices. I know that you have had
similar meetings across this country with various concerns from
student loans to mortgages to just general concerns of
consumers.
And as we reach the 3-month anniversary of the CFPB as a
fully operational agency, I would like to note some of the
Bureau's outstanding work.
While some will undoubtedly continue to define the CFPB as
an unchecked agency, I believe that the Bureau's
accomplishments and oversight have been extraordinary.
The Bureau has initiated an examination into the growing
level of student loan debt and its ramifications on our
economic recovery. It is tirelessly helping consumers
understand financial products and services through the ``Know
Before You Owe'' Program.
The Bureau has taken great steps to curtail deceptive,
unfair, and abusive debt collection practices. They have
modified and put forward a simplified mortgage application that
people can actually understand.
And the Bureau is resolving consumer complaints, launching
bank and nonbank supervision programs, developing simple
disclosures for credit cards and other financial products,
targeting specific abuses aimed at older Americans and
servicemembers, and creating offices just to address these
concerns.
I think this is a great list of accomplishments for a new
agency. And from what I can see in your report, it is just the
beginning.
I hope that during this hearing we can focus on what the
CFPB has laid out in its report rather than constant complaints
that there is not enough oversight or accountability.
The Bureau's structure, the positive GAO report, the very
fact that Director Cordray is appearing today before us in his
15th appearance, or of other senior staff, is a testimonial to
the number of checks placed on the Bureau.
I would say it is very accountable, given the number of
times you have been here. And I congratulate you on your fine
record so far.
I look forward to your testimony and to hearing about the
plans for the future to work for safety and soundness and the
protection of our consumers.
Thank you.
Chairman Bachus. Mr. Hensarling is recognized for 2\1/2\
minutes.
Mr. Hensarling. Thank you, Mr. Chairman.
On January 4th of this year, the President made an alleged
recess appointment of our witness, Richard Cordray, to head the
newly created CFPB.
The problem was that the Senate was not in recess at the
time. In fact, it was in pro forma session. The Senate has the
constitutional authority to determine the rules of its
proceedings, not the President.
Under a similar set of circumstances in 2007 when,
inconveniently for Democrat Senate Majority Leader Harry Reid,
a Republican was in the White House, he was quoted as saying,
``The Senate will be coming in for pro forma sessions to
prevent recess appointments.''
Now, one may not like the policy, but it is a pretty
convincing confirmation that a pro forma session is not a
recess. So it is fairly clear the Senate did not believe that
they were in recess on January 4th; and under the Constitution,
they could not have been in recess because the House did not
consent.
Therefore, there can be no recess appointment.
But had there been a recess appointment, this doesn't solve
the President's problem. Section 1066 of Title X of Dodd-Frank
clearly states that the Director must be ``confirmed by the
Senate.''
A recess appointment is not a Senate confirmation.
In 2005, then-Senator Barack Obama indicated recess
appointees lose credibility because they cannot make it through
the confirmation process.
Mr. Cordray, we just met for the first time about 15
minutes ago. And although we don't know each other, those whom
I know from Ohio say you enjoy a good professional reputation.
They respect you. They respect your judgment and your fairness,
so this is not personal. But in my humble opinion, I believe
you sit before us as an unconstitutional appointee, an unlawful
appointee in using the President's characterization, and you
suffer from a loss of credibility from the outset.
So for as long as you may occupy this office, you have been
given an incredibly, incredibly important charge to protect
consumers. But you have also been granted unprecedented,
unaccountable, unilateral powers to ban and ration consumer
credit products, restrict the fundamental economic freedoms of
our citizens, and effectively control huge swaths of our
economy. So obviously, I look forward to hearing your views.
I yield back the balance of my time.
Chairman Bachus. Thank you.
Mr. Green is recognized for 3 minutes.
Mr. Green. Thank you, Mr. Chairman.
And I thank the ranking member as well.
Mr. Director, I thank you for appearing today. And I am
excited about some of the things that are happening, especially
this Office of Servicemember Affairs that you are working on. I
think that this is an initiative that all of us will be proud
of, helping our servicemembers, which is an opportunity for me
to extend a word of gratitude to all of the members of the
committee for helping with the Homes for Heroes Initiative that
we passed, the legislation.
And my colleague, Mr. Hensarling, yesterday gave an
expression of appreciation and I thank him for using a little
bit of his time to give his expressions.
I did not mention Mr. Grimm when I talked about this other
initiative, the Homes for Heroes, and this is not something
that you are associated with, Mr. Cordray, but Mr. Grimm was
the cosponsor and I want to make sure that I mention him.
With reference to your appearance today, you also have an
Office of Older Americans that I think is important. I
understand that Mr. Skip Humphrey is the person who will lead
this agency or office, and I am eager to hear more about this.
I have some of the accomplishments. You have been there a
short time, but your list of accomplishments has become very
impressive over a very short period of time.
This test pilot program, ``Know before You Owe''--I think
that is something that consumers with credit cards will be
excited about. You have initiated an examination into the
student loan debt. I think it is something that college kids,
especially, are going to be excited about. You have an ``Ask
the CFPB'' Q&A opportunity for members of the public so that
they can increase their financial literacy.
You have initiated an overdraft exploration program and you
are going to look at the harmful effects on consumers. You have
created a first-of-its-kind program, a database, the Repeat
Offenders Against Military Database (ROAM). And this is to
combat the fraud that targets our veterans and their families.
I think it is an important program as well. There are many
others that you have initiated and I am looking forward to
working with you.
I do want to just call to your attention something I think
is important to you. A lot of the small banks are still having
a good deal of consternation. And I look forward to working
with you so we might do some things to allay their concerns.
I am confident that there are ways by which we can make
sure that they have a greater understanding of what we are
attempting to do with this agency. So I thank you for being
here today. I am eager to hear more from you. And I yield back
the balance of my time.
Chairman Bachus. Mrs. Capito, for 2 minutes?
Mrs. Capito. Thank you, Mr. Chairman.
And I want to welcome Mr. Cordray from the neighboring
State of Ohio to this morning's hearing, which is the first
statutorily mandated hearing to discuss the CFPB and to discuss
the report.
A little over a year ago, Professor Warren visited my
office to update me on the progress of standing up the CFPB.
She said at the time that the CFPB provided an opportunity to
knock down the silos that existed between Federal financial
regulatory agencies and to provide clarity to consumers and
institutions in consumer supervision.
Unfortunately, from all of the interviews and testimony
that we received, this is not what is occurring. I fear that
the CFPB has just created a new silo. Although the prudential
regulators transferred some personnel to the CFPB, some of
these agencies have not eliminated FTE positions and they were
not transferred.
So rather than using this opportunity to ensure there is no
duplication among the agencies, we have just added another
bureaucracy to the equation. It is my hope, Mr. Cordray, that
you and your team will be judicious in assessing the staffing
needs going forward and will work with the prudential
regulators to eliminate these duplicative divisions and
positions.
It does add an unnecessary and added burden, I think to
particularly the community banks, as they are moving forward
trying to unlock and create jobs and get lending in small
businesses going again.
I do have questions, like my colleague from Texas, on the
nature of the appointment of Mr. Cordray as the Director. I do
believe it could lead to some legal challenges of the CFPB
actions and create some more ambiguity. So I hope that this
becomes more clarified. But I would like to thank you for
appearing before the committee and I look forward to your
testimony.
Chairman Bachus. Ms. Waters is recognized for 1\1/2\
minutes.
Ms. Waters. Thank you.
Mr. Chairman, I thank you for holding this hearing this
morning.
And Director Cordray, I am pleased that you have another
opportunity to testify before our committee. In fact, we have
been seeing a lot of you. As I understand it, you have been
before the Congress 5 times since you were appointed CFPB
Director back in January. That is once every few weeks. And
that is not to mention all of the times other employees of the
CFPB who have come up to Congress to testify since the Bureau
opened its doors. Your agency has been before Congress 16 times
over the short course of its life.
It is clear that this agency is setting the gold standard
in terms of transparency and accountability. The CFPB has gone
out of its way to solicit public and industry feedback on
mortgage disclosure forms as well as a student loan disclosure
sheet.
Moreover, the CFPB is governed by budget caps, veto by the
Financial Stability Oversight Council, and an annual GAO audit,
to name just a few of the provisions to which the Bureau is
uniquely subject. So I am pleased to hear from you what is
included in your semi-annual report to Congress and your plans
for what you will undertake in the coming months.
Thank you and I yield the balance of my time to Mr.
Gutierrez.
Chairman Bachus. So you will reserve 10 seconds for Mr.
Gutierrez?
I recognize Mr. Royce.
Mr. Royce. We have expressed our concern from time to time
about this arrangement, but this legislation that set up the
CFPB is going to add to the regulatory costs that are growing
at a rapid clip.
It has few checks and balances, but broad, largely
undefined authority. And here is the main point: It separates
safety and soundness regulation from consumer protection
regulation.
Prior to her departure, this is what FDIC Chairman Sheila
Bair had to say about this problem: ``Banking agencies'
assessments of risks to consumers are closely linked with and
informed by a broader understanding of other risks in financial
institutions. Placing consumer protection policy-setting
activities in a separate organization, apart from existing
expertise and examination infrastructure, could ultimately
result in less effective protections for the consumer.''
If we are not able to mandate coordination between the CFPB
and the prudential regulators through changes in law, my hope
is that this semi-annual hearing before Congress can at least
serve as a platform for a discussion of the key concerns that
so many prudential regulators have on this issue, and which we
by past experience have learned the hard way is a big problem
with bifurcated regulation.
I yield back, Mr. Chairman.
Chairman Bachus. Thank you.
Mr. Baca is recognized for 1 minute and 15 seconds.
Mr. Baca. Thank you very much, Mr. Chairman and Mr. Ranking
Member.
I also want to thank Mr. Cordray for being here today. One
of the biggest accomplishments contained in the Dodd-Frank Act
was the creation of the Consumer Financial Protection Bureau.
I say, finally we have a cop on the beat whose sole purpose
is to ensure that the American consumers are getting a fair
shake in the marketplace. In the past 4 years, it has been
dominated by efforts to clean up the mess created by the
previous structure which left enforcement and regulation based
solely on financial industries' bottom line.
If we are to accept the notion that the financial sector
was created and exists and depends on the activity of the
American consumer, then I think it is imperative that we do all
that we can do to protect the well-being of the American
consumer.
In just a few short months since Mr. Cordray took his post,
the CFPB has taken on a number of issues including the Know
Before You Owe Program, which is great, and ensuring that
consumers know what they are getting into with mortgages,
student loans or credit cards.
I hope that this good work will continue and I hope that we
can discuss the next steps that we can do to work with the CFPB
to ensure accountability and transparency.
But at the same time, as Ed Royce indicated, we need
mandates. But remember that we need mandates with funding, as
well. You can't just have a mandate without giving the
additional funding to make sure that we have the accountability
and the transparency. That has to come hand-in-hand together.
And I look forward to your testimony. Thank you very much.
Chairman Bachus. Thank you.
Mrs. Biggert, for 1 minute?
Mrs. Biggert. Thank you, Mr. Chairman.
And welcome, Director Cordray.
I would like to echo a number of concerns expressed by my
colleagues on this side of the aisle. I am particularly
concerned about reports that the CFPB is engaging in regulatory
activity that could jeopardize the safety and soundness of
financial institutions.
I am also concerned about attempts to regulate forced
placed insurance. And finally, I am told that the simplified
Real Estate Settlement Procedures Act/Truth in Lending Act
(RESPA/TILA) mortgage disclosures that the CFPB is developing
may, in fact, be more complicated than previous disclosures. I
welcome your comments on these matters and thank you very much
for being here.
And I yield back.
Chairman Bachus. Mr. Gutierrez is recognized for 2 minutes
and 15 seconds.
Mr. Gutierrez. Thank you, Mr. Chairman, I appreciate that.
First of all, welcome. And, second, I would love to see how
we went from 7 pages to 3 pages and made it more complicated,
because that is what we have done in terms of disclosure of
transactions and key terms and something easier to understand.
I agree.
I know you are currently testing the document and I
congratulate you. I think that is what we should be doing. But,
maybe--Democrats--I am sorry--not a partisan party, just
appointed by a Democratic President. Maybe we did find a way to
take 7 pages and reduce it to 3 pages and make it more
complicated.
But I want to tell you that credit cards companies, you
have to stay on top of them. They are getting trickier and
trickier every day in terms of trying to figure out how it is
they hoodwink the American public.
Student debt, I think, should be a nonpartisan issue. One
trillion dollars, more than all the credit card debt in America
and all--that is the youth; that is--those are the ones being--
they are not going to be able to buy a home. We have to figure
out a way to make sure, as they engage in student debt, that
they are not getting ripped off also. And that the terms and
the agreements are such that they are going to let the next
generation of great America, our children, to be able--so I am
happy you are looking into that.
You have done so many things, and I would like to say that,
you have been--I think it has been 5 times, you have had the
job a short time--and 5 times--let me see that would make like
16 times since last year.
It looks like we are going to get--what the best thing
about you is that people just want to see you on Capitol Hill.
And I have to tell you, every time one of those bankers
come knocking on my door and asking if we are going to talk
about this, I think next year at Halloween, they are going to
have like, a Cordray costume for all the bankers and all their
things because you are just a scary man when it comes to them.
But, you know what? I don't think that is so bad. I think
that they need to have a little bit of the fear of the Lord in
them as they move forward.
And, lastly, we have to stay on top of them. Because last
week I opened up my account and I said, ``Huh, Banco
Popolare?'' I keep $250 there at Banco Popolare because that is
the minimum for their savings account, so they won't charge you
every month.
They raised it to $500 and charged me $4 because I was
under the $500 in order to keep my money. They are continuing
to do these little tricky, tricky things. They continue to put
their hands in the consumers' pockets. Keep up the good work.
Thank you.
Chairman Bachus. Thank you.
I will go in with you. We will get a copyright on a Richard
Cordray Halloween outfit.
Mr. Miller is recognized for 1 minute.
Mr. Miller of California. Thank you.
Mr. Cordray, mortgage origination is a critical function of
our housing finance system reforms directed by Dodd-Frank, and
must be implemented with considerable care and caution.
The CFPB has been quite active in this area, working on the
ability to repay regulations for residential mortgage loans,
working on integrated mortgage disclosure requirements under
RESPA and the Truth in Lending Act, and working on new
requirements for mortgage origination.
But, sir, if not well-crafted, these rules will harm, not
help, consumers by drying up liquidity in the mortgage market,
driving up costs, and limiting access to mortgage credit.
We have already seen the rule implemented in the name of
the Consumer Protection Act saying the impact of limiting
consumer access to lower-cost loans. Some cases' rules said in
the name of the Consumer Protection--prevented borrowers from
closing on their own home purchases because of legitimate
discrepancy in the closing table.
There are rules that are implemented in the name of
consumer protection that have forced mortgage originators to
offer loans where consumers ultimately pay more for their
closing costs. While we must protect the consumer, we must make
sure that costs to increase the name of consumer protection are
not implemented.
We must not inappropriately restrict liquidity or consumer
protection in the name of consumer protection. In your
testimony, I hope you will address the ways you will make sure
that access to credit and preserve consumer closing costs will
not increase or formulate these new rules are done properly.
I yield back.
Chairman Bachus. Thank you.
Mr. Carney, for 1 minute.
Mr. Carney. Thank you, Mr. Chairman. I want to thank you
for having this hearing today.
And I thank Director Cordray for coming in again. It is
good to see you.
My colleagues on the other side of the aisle are concerned
about how you were appointed. I am just happy that you were
appointed and that we have a good man directing this agency,
doing a difficult job at a very challenging and important time.
I look forward to following up on the conversations that we
have started in my office when you were the enforcement
director, I think at the time, about nonbank lending payday-
loan making, short-term lending and, in particular, practices
on the online lending environment. I appreciate the fact that
you have had field hearings on this issue in Alabama and I look
forward to continuing our conversation on that.
Thanks again for the great work that you are doing and I
look forward to our conversation today.
Chairman Bachus. Mr. Dold?
Mr. Dold. Thank you, Mr. Chairman, and I am--
Chairman Bachus. For 1 minute, I am sorry.
Mr. Dold. Thank you, Mr. Chairman, and I am one of those on
the other side who are concerned about how the appointment was
made and I think that just goes down to the basic structure of
the law.
We all know there is an ongoing discussion about the CFPB's
organizational structure. It is also a big concern that I have.
Should the CFPB structure be the same structure that the House,
under Democrat control, passed in the 111th Congress, which is
also the structure that we have been advocating in this
committee during this Congress? Or should the CFPB structure
remain as it is today with few checks and balances, I believe,
for the American public?
While the structure discussion continues, I think that we
all should be able to agree on some fundamental principles.
First, strong consumer protection is important, necessary, and
good for consumers and private sector businesses.
Second, the CFPB's rulemaking and other processes should be
constructive and transparent while thoroughly and objectively
considering all viewpoints from interested parties.
Third, regulations that stifle legitimate product
availability, innovation, competition, and growth would be
inefficient and ineffective while unnecessarily harming
consumers, employment and our economy.
As we move forward, I hope that the CFPB and Congress will
use common ground as a basis for analyzing existing and future
proposals.
Mr. Cordray, I appreciate your time and your being here
today.
Chairman Bachus. Thank you.
Mr. Frank, for 2 minutes.
Mr. Frank. Thank you, Mr. Chairman.
Mr. Cordray, welcome to one of the longest running series
in Washington, the hearings on oversight over your agency in
which my colleagues complain that there is no oversight.
I look forward to the reruns going forward.
They complain that the CFPB is not being oversighted, and
we have oversight hearings and hearings about the structure,
because they have nothing firm to complain about.
The agency has been in existence now for a considerable
period of time and there are no problems, none of the horrors
and abuses that we were threatened were going to happen have
happened.
So, in the absence of that, let me talk about an important
issue which was our addition of the word ``abusive'' to the
practices you were to protect people against, and unfair and
deceptive definitions.
People say, ``What do you mean by abusive?'' We defined it.
We defined it in the statute to say it is abusive if it
materially interferes with the ability of a consumer to
understand the term or a condition; or takes unreasonable
advantage of a lack of understanding on the part of the
consumer--the risks, costs or conditions; the inability of the
consumer to protect the interest.
In other words, it may depend on the consumer. And if
people think that is some farfetched notion, remember that one
of the problems we had with the subprime loans was they were
going to an 80-year-old and urging her to refinance when she
had nearly paid off her mortgage. Now, refinancing for some
people might be a good idea. When it is sold to an 80-year-old,
it is probably not such a good idea.
This allows you to deal with ignorance. And there are
people who said, why are you getting involved in ignorance? And
I quoted before, and I misplaced the book, and I wish I had the
book for a very distinguished economist who said, ``Of course
there needs to be a capacity in the government to protect
people, not just against deception and not just against
unfairness, but against people who would take advantage of
their ignorance.''
That is what ``abusive'' does. And we, in acting on that,
and in giving you the authority to protect people against
abuse, so defined, we are following the instruction of that
particular economist whose name is Friedrich Hayek.
And I urge my colleagues, who quote Hayek more than they
read it, to look specifically at what he said and there will be
great support for dealing with efforts to exploit the ignorance
of individuals.
Thank you, Mr. Chairman.
Chairman Bachus. Thank you.
We have one, and possibly two, votes on the House Floor, so
Members may want to do that. We will come back and hear your
testimony.
I recognize Mr. Canseco for 1 minute.
Mr. Canseco. Thank you, Mr. Chairman.
This week, just across the street from the Capitol, we have
been reminded about the constitutional limits of our Federal
Government as the President's health care law appears to be in
serious jeopardy.
Unfortunately, I believe it won't be very long before
matters involving the CFPB end up in the very same place. We
must be ever so mindful today that President Obama gave a
recess appointment to Mr. Cordray, despite the fact that the
Senate was in session at the time, a black-and-white matter,
despite the Administration's spin that there is some gray
there.
This political maneuver by the President has set up a
constitutional crisis at a time of already heightened
uncertainty in our economy. In other words, at a time when we
can least afford it.
With that, Mr. Chairman, I yield back.
Chairman Bachus. Thank you.
Mr. Garrett will close out the opening statements, and then
we will go vote. We will come back as soon as we can. So, I
would encourage the Members to make your way to the Floor.
Mr. Frank. Mr. Chairman, with your indulgence, I have
another committee I have to go testify at, so I won't be back
right away. It is not a sign of my lack of interest in the
oversight of this agency.
Chairman Bachus. Thank you.
Mr. Garrett, for 1 minute.
Mr. Garrett. Thank you.
Mr. Cordray, the fact that you are here today is quite
troubling, in yet another display of this Administration's
arrogance and flagrant disregard of the Constitution.
The only check in Dodd-Frank of the CFPB is the position of
the Director requires Senate confirmation, and this President
ignored it. The only way this President gets around the
confirmation process is to rely on the constitutional power to
fill the vacancies that may arise during a recess.
But the problem is that this constitutional authority
depends on the Senate being in recess. I suppose this President
is an impatient man, but instead of waiting for a
constitutionally significant recess of at least 3 days, this
President declared the Senate in recess and this was a
unilateral infringement on the constitutional powers of this
Congress to determine for himself when it is in recess.
The recess appointment clause was adopted to ensure
unfettered continuation of the government. It is not here to
provide an escape hatch for this President when he wants to
avoid the Senate confirmation process.
History tells us this, the founding fathers said so:
``Nothing more than a supplement for the purpose of
establishing an auxiliary method of reappointment,'' they said,
``in cases in which the general method was inadequate.''
This position was illegitimately occupied and has not only
been granted broad indefinable powers that will affect almost
every aspect of American business; it also has been insulated
from the congressional appropriations process and oversight.
I say all that, Mr. Cordray, with nothing ill against you
personally. But as a Member of this Congress, who has sworn an
oath to support and to defend the Constitution, I find the
method in which you were appointed extremely offensive and a
violation of the highest law of this land, the Constitution of
the United States.
With that, I yield back.
Chairman Bachus. Thank you.
At this time, we will stand in a brief recess.
[recess]
Chairman Bachus. The committee will come to order. Are we
ready to proceed?
Mr. Cordray, you are recognized for a 5-minute opening
statement. And if you wish to go over, that won't be a problem.
We won't be interrupting you.
STATEMENT OF THE HONORABLE RICHARD CORDRAY, DIRECTOR, THE
CONSUMER FINANCIAL PROTECTION BUREAU (CFPB)
Mr. Cordray. Thank you. Chairman Bachus, Ranking Member
Frank, and members of the committee, I want to thank you for
this opportunity to testify on the first semi-annual report of
the Consumer Financial Protection Bureau detailing the Bureau's
accomplishments in its first 6 months.
In January, I presented this information to your colleagues
in the Senate, and I look forward to presenting it to you
today.
Before I became Director, I promised Members of Congress in
both Chambers and on both sides of the aisle that I would be
accountable to you for how the Consumer Bureau carries out the
laws you enact.
I said that I would always welcome your thoughts about our
work and I stand by that commitment. I am pleased to be here
with you today to tell you about our work and to answer your
questions.
The people who work at the Consumer Bureau are always happy
to discuss our work with the Congress. This is the 15th time,
maybe the 16th time, I learned this morning, that we have
testified before either the House or the Senate.
And my colleagues and I look forward to working closely
with you, with the businesses who serve their customers in the
consumer finance markets, and with the millions of American
consumers themselves.
I am honored to serve as the first Director of this new
Consumer Bureau. I am energized and inspired by the many
talented people who work at the CFPB, and I am driven by the
challenges and responsibilities of our mission to protect
American consumers.
Our mission is of critical importance to making life better
for Americans. Consumer finance is a big part of all our lives.
Mortgages allow people to buy a home and spread the payments
over many years. Student loans give young people with talent
and ambition access to an education. Credit cards give us
immediate and convenient access to money when we need it.
These products enable people to achieve their dreams. But
as we have all seen in recent years, they can also create
dangers and pitfalls if they are misused or not properly
understood.
During my years in State and local government, I became
deeply engaged in consumer finance issues. I saw good people
struggling with debt they could not afford. Sometimes, those
people had made bad decisions they came to regret. Sometimes,
an unexpected event like a loved one getting sick or a family
member losing a job overwhelmed even their most careful
planning.
Still other times, I saw unscrupulous businesses which
obscured the terms of loans or engaged in outright fraud,
causing substantial harm to unsuspecting consumers and even
ruining their lives and devastating their communities.
I am certain that each one of you hears every day from your
friends, your neighbors, and constituents in your district who
have these kinds of stories to tell. These people do not want
or expect any special favors. They just ask for a fair shake
and a chance to get back on track toward the American dream.
One of our primary objectives at the Consumer Bureau is to
make sure that the costs and risks of these financial products
are made clear. People can make their own decisions and nobody
can or should try to do that for them. But it is the American
way for responsible businesses to be straightforward and
upfront with their customers, giving them all the information
they need to make informed decisions. That is good for honest
businesses and it is good for the overall economy.
Another key objective is making sure that both banks and
their nonbank competitors receive the evenhanded oversight
necessary to promote a fair and open marketplace.
Our supervisors are going onsite to examine their books,
ask tough questions and fix the problems we uncover. Under the
laws enacted by you, the Congress, and with a Director now in
place, we have the ability to make sure this is true across all
financial products and services.
The Consumer Bureau will also make clear that violating the
law has consequences. Through our field examiners, our direct
contact with consumers and businesses, and our highly skilled
researchers, we have multiple channels to know the facts about
what is happening in the marketplace.
We plan to use all of the tools available to us to ensure
that everyone respects and follows the rules of the road. Where
we can cooperate with financial institutions to do that, we
will. When necessary, however, we will not hesitate to use
enforcement actions to right a wrong.
As we move forward with our work, we need to hear directly
from the consumers we protect and the businesses who serve
them. We do this on our Web site, consumerfinance.gov, where
consumers are able to tell us their personal stories.
We also make it a point to get out of Washington regularly
and hear from people firsthand. Thus far, we have held town
hall meetings in Philadelphia, Minneapolis, Cleveland, and New
York City. And we held a field hearing in Birmingham, Alabama.
We are hearing from thousands of Americans about what works
and what does not. We are listening closely. And we hope that
many of you will join us at these events when we come to your
communities.
Accomplishing our mission will take time. But as you can
see from our semi-annual report, we are already taking
important steps to improve the lives of consumers.
Thank you. I look forward to answering your questions.
[The prepared statement of Director Cordray can be found on
page 50 of the appendix.]
Chairman Bachus. Thank you, Director.
Director, you have probably heard Ranking Member Frank talk
about ``abusive'' as being a new term but he said it was
defined in the Act. There has been a lot of focus by both sides
on what is abusive, how that would be determined by your
agency, and also by the lender, how they would know whether it
was abusive or not.
I am looking at the definition of ``abusive,'' and one of
the things is it ``takes unreasonable advantage of a lack of
understanding on the part of the consumer.''
Now, whether they understood something or not, would that
not depend on maybe their ability to think and understand and
reason? To a certain extent, would that be based on their,
either what we call commonsense or I.Q.?
Mr. Cordray. I think that prong of the abusive definition
is, in fact, situational and somewhat subjective. I think some
of the prongs of the definition that Congress enacted, and
which, of course, is the law that we must follow and carry out,
are firmer. And some of them are a bit less firm.
So we have been trying to puzzle through exactly how that
pretty straightforward and very explicit definition of the term
that is in the law--it is the law that we are supposed to
enforce--should be applied in the facts and circumstances of
individual situations.
And that is something that we are just trying to assess
very carefully as we go.
Chairman Bachus. In fact, you would almost have to go
situation by situation, would you not?
Mr. Cordray. With some of the prongs, I think that may be
more true than with others, yes.
Chairman Bachus. And that could be a problem for an
institution or a lender, in that the same agreement in some
cases, depending on just the ability of the consumer to
understand or focus on the agreement, could determine whether
it is abusive or not.
For instance, under the definition and under the law, a
financial institution could be liable any time a consumer
simply doesn't understand the product or service. Is that not
correct?
Mr. Cordray. No, I don't think that is quite what the law
says. It does speak of taking unreasonable advantage of the
consumer.
Chairman Bachus. Of their lack of understanding.
Mr. Cordray. That is right. So I think that for an
institution, if they are in a situation, they should be
thinking carefully about whether they are taking unreasonable
advantage of their consumer. And I think you often have a
pretty good sense of whether you are doing that or not; maybe
not always.
Chairman Bachus. No.
Mr. Cordray. And if so, you should hesitate and think
again, and be careful that you are treating your customers
fairly. I think it is something good businesses think about
every day.
Chairman Bachus. Okay. There was an article in ``American
Banker'' that talked about an interview with you in which you
indicated you didn't anticipate the agency writing a rule
around--you were asked in a follow-up question whether your
statement meant that people will mostly have to look at your
actions as a model for how the new term ``abusive'' is defined.
And you are reported to have responded, ``I think that is
probably right.'' Was that a correct reporting of your
response?
Mr. Cordray. It was.
Chairman Bachus. Okay. Does that mean that you are going to
sort of use your enforcement authority, rather than rulemaking
authority, to set the standard on what is abusive?
Mr. Cordray. I think it meant several things. Number one,
it meant that for us to define what abusive means feels a
little presumptive, given that Congress defines what abusive
means. Our job is to carry out what Congress says, given us as
the law that finds us, not to make up that law ourselves.
Having said that, we have to go in and supervise
institutions. So there is some guidance that we have provided
around that set of terms--unfair, deceptive and abusive acts or
practices--in our examination manual, which is public and
available on our Web site. And institutions have every
opportunity to look carefully at that and to inquire with us
and ask questions about anything that is unclear to them.
But I do think that how the law that Congress has defined
applies in particular situations is something that we are going
to have to measure on a facts and circumstances basis as we go.
But Congress defined it, not us. And it is our job to try
to apply it on its terms.
Chairman Bachus. But I think you are acknowledging some
difficulty with being able to at least write a rule and tell
institutions when they would be and when they may not be
violating the law, it seems.
Mr. Cordray. No, I don't think so. I just don't think that
is probably the preferred approach, when Congress has defined
the term already. We could further define the term, but are we
going to define it differently from what Congress defined? I
don't think so.
We could perhaps clarify how it applies in particular facts
and circumstances. But I think we ought to take some time with
it, rather than up and just pontificating about it at the
beginning.
So that is what we are going to try to do. We are trying to
be careful here, measured and thoughtful. Sometimes, that means
you don't have all the answers in the first instance. I think
that is where we are.
Chairman Bachus. All right. Thank you.
Ms. Waters?
Ms. Waters. Thank you very much, Mr. Chairman.
Mr. Cordray, the State and Federal Mortgage Services
Settlement unveiled in February set forth new mortgage
servicing standards that address issues such as pre-foreclosure
referral notices to borrowers, third-party provider oversight,
loss mitigation requirements, single point of contact
standards, and other measures.
However, the settlement only covers five of our major
mortgage services. And the servicing standards will only be in
place for the life of the settlement. That is 3 years.
I know you have a lot on your plate. But does CFPB have any
plans to develop permanent servicing standards that cover the
entire servicing industry? If so, will CFPB use the servicing
standards in the State/Federal settlement as a template for
whatever you develop?
Mr. Cordray. Thank you, Congresswoman, for the question.
It is a very timely question.
And the answer is, we do have the intention of developing
servicing standards that would apply across the industry. One
of the things we want is for all servicers to be put on a level
playing field. As you noted, the servicing settlement was a
partial step.
It was an important step forward, but it is a partial step.
It only applies to certain institutions, and only applies to
certain loans in their portfolio. We are working with an
interagency group of other Federal agencies to develop
standards. That was true before the servicing settlement was
reached, and it remains true after the settlement was reached.
There is no question that the provisions in the settlement,
which were worked over very carefully on a Federal/State basis
with those institutions, are going to be the basis for trying
to provide broader guidance to the market.
But as you noted, there are many servicers out there that
have not been touched by this settlement. They have not been
affected in any way. Some of them, nonbank servicers, have
never been overseen by anyone. And we need to bring them under
the umbrella, so that everybody is playing by the same rules,
as quickly as possible.
So we are going to move forward on this. We have certain
mortgage servicing rules we are required to adopt by January.
We are looking at what else should be part of that. And we are
consulting closely with our fellow agencies.
But we see that as a high priority. For me, I saw mortgage
servicing problems in Ohio going back to when I was a local
treasurer, then State treasurer, then State attorney general,
and now have found them to be national in scope.
Ms. Waters. Thank you very much. That is great. I really
appreciate that.
I have been following very closely the mortgage servicing
consent, or the process initiated by the OCC and the Federal
Reserve Board for the five largest mortgage servicers. This
process allows the servicers to hire their own auditors to
investigate their foreclosure practices during 2009 and 2010.
I fail to see why they didn't include the CFPB in this
process. And we didn't get a really good answer. Given CFPB's
new jurisdiction over servicing, what do you think? Do you have
any desire to be involved in this process?
Mr. Cordray. Congresswoman, we are taking complaints now on
our Web site, and in calls from people about mortgage issues.
Quite a few of those complaints deal with foreclosure
situations and other servicing issues.
I think the Congress is well-served on any kind of
initiative like this, that the OCC has embarked on, to exert
oversight, just as you exert oversight over our efforts and
processes. I think it ought to be kept in mind that the OCC was
the very first of the Federal agencies to step up and document
the extent of the abuses in the mortgage servicing sector.
They issued the first report on that. It demonstrated the
seriousness in this. As they saw it, it was so serious that it
affected the safety and soundness of institutions. That allowed
everyone to build and move forward toward the servicing
settlement.
And now, as you say, it is very important for us to broaden
that across the industry and make sure all these other
processes are working as well as possible. It is a complicated
space, but the Consumer Bureau has very significant authority
here, both to examine institutions, banks and nonbanks, to
enforce the law going forward, and to write rules.
We will do that very carefully. And we are glad to consult
with you as we go.
Ms. Waters. Thank you very much.
And I will yield back the balance of my time.
Mrs. Capito [presiding]. Thank you.
Mr. Hensarling is recognized for 5 minutes for questions.
Mr. Hensarling. Thank you, Madam Chairwoman.
Mr. Cordray, I want to follow up on the line of questioning
that Chairman Spencer Bachus had. I think what I heard you say
with respect to the term ``abusive'' was that the law was clear
in this area. But I thought I also heard you say it was
situational and subjective.
I know that at least the co-author of Dodd/Frank, Senator
Dodd, during the Senate debate on the creation of the Act, said
on the Senate Floor, ``I have never claimed our proposal of
consumer protection is perfect. I acknowledge the word abusive
does need to be defined, and we are talking about striking that
or making it better.''
The language never changed after that. So for the record, I
want to say at least the co-author of the Act doesn't find it
too clear. And I am just wondering, is it clear or is it
subjective? Is it clearly subjective?
Are those competing or complementary terms? I don't
understand your point of view.
Mr. Cordray. Congressman, what I was saying, which is I
think undeniable, is that this is not an undefined term in the
law. Some people have mistakenly said that the term ``abusive''
is vague or that it is not defined.
Congress explicitly defined the term. They laid out several
specific prongs that would have to--
Mr. Hensarling. So it can be defined, but it is subjective?
Mr. Cordray. It is very expressly defined in the law. There
are criteria that people are supposed to use in determining
whether--
Mr. Hensarling. But did you not earlier say it was
subjective, in your testimony just a few minutes ago?
Mr. Cordray. What I said was if you look at those prongs,
they have to be applied in facts and circumstances, common to
many legal definitions that Congress has adopted. And some of
the prongs are situational to the individual consumer.
I think that is true.
Mr. Hensarling. Can a consumer product be both fair and
abusive?
Mr. Cordray. I think Congress has made a judgment. And
again, it is not for me to just make up terms and go forward on
any basis I please. I am supposed to enforce the law that you
all have enacted and we intend to do that. Congress has--
Mr. Hensarling. --case law surrounding and greater
statutory specificity with respect to ``unfair.'' The question
is, is the term ``abusive'' redundant of ``unfair'' or is this
something that is completely separate. So, the question is: Can
you have a fair product which is still yet an abusive product?
Mr. Cordray. Yes.
Mr. Hensarling. So the answer is yes?
Mr. Cordray. I would be glad to answer your question.
The answer to your question is Congress has put together
three different terms in that passage. They have talked about
``unfair,'' ``deceptive,'' or ``abusive'' acts or practices.
Congress has seemed to indicate that there is a distinction
among each of those categories. That isn't to say there can't
be some overlap. There may be significant overlap. But I think
the answer to your question is Congress has pretty clearly
spoken and said there could be a practice that would not be
unfair, but that would be abusive.
Mr. Hensarling. Mr. Cordray when you--
Mr. Cordray. --lawyers who are arguing back and forth and
trying to understand exactly the parameters of that and it may
be some time before everybody comes--
Mr. Hensarling. In interpreting the term, ``abusive,'' you
said it could be situational. Is situational consumer-specific;
atomistic, down to the individual consumer? Could it be?
Mr. Cordray. The chairman asked me specifically about a
particular prong, which was the consumer's understanding. That
seems unavoidably situational, meaning consumer by consumer.
Mr. Hensarling. So a product could be abusive to one
individual consumer, yet not abusive to another consumer? Is
this correct?
Mr. Cordray. I think the law seems to pretty clearly
contemplate that, yes. Then there are other prongs that are--
that is not necessarily true of.
Mr. Hensarling. So if I am the financial institution, if I
am the First State Bank of Mineola, Texas, and I want to roll
out a product, in order to avoid litigation or enforcement
action, am I going to foresee the day where I have to impose a
financial literacy test on each and every one of my customers
to avoid an enforcement action from your agency?
Mr. Cordray. No, I think it merely reflects the kind of
careful practices that good businesses engage in all the time.
And to go back to the ranking member's comments, if you are
offering a refinancing to an elderly customer that you know
full well may be having some difficulty understanding the
terms--
Mr. Hensarling. But you did say it could be consumer-
dependent, down to the individual consumer, correct?
Mr. Cordray. So, again, I think good businesses and good
banks are mindful of this. They would not approach certain
customers with certain products that they would approach
other--
Mr. Hensarling. My time is almost up, Mr. Cordray.
Just one other quick question--you said at one point,
``Fraud is fraud.'' But you have also been on the record as
saying, ``Frankly, there is a lot of fraud that is committed in
the marketplace that is not on its face necessarily technically
illegal.'' So is fraud, fraud? Or is there legal fraud and
illegal fraud; or the mere fact that your agency determines
that you don't like the fraud, then it becomes illegal?
Mr. Cordray. I appreciate you asking about that. The
subcommittee chair of a different committee asked me about the
same quote. That was an unfortunate either misquote or perhaps
out-of-context quote of mine.
I didn't mean to imply that something that is in compliance
with the law would be illegal. That is obviously not
definitionally correct. But you can have fraudulent acts and
practices that may or may not rise to an actual illegality. It
depends on whether there is materiality, whether there is
reliance, whether there is damage. That is a standard matter in
securities laws.
But our job will be to protect consumers against fraud,
against unfair, deceptive acts and practices and abusive to the
extent that definition is relevant and adds to the other
definitions, which remains kind of a matter under debate.
Mr. Hensarling. Thank you, Mr. Cordray.
My time--
Mrs. Capito. Mrs. Maloney, for 5 minutes?
Mrs. Maloney. Thank you.
Director Cordray, yesterday, I read in one of the papers
that you have a new feature on the CFPB Web site called, ``Ask
Us Anything.'' I wanted to call it to the attention of my
colleagues and others because financial literacy is something
that I care deeply about and I firmly believe that when people
have the best information, they can make the best decisions for
their financial lives.
Can you report on the usage of this function? And how will
these questions inform your work going forward?
Mr. Cordray. Thank you, Congresswoman.
It is something that we think will be an important
foundation that we will build on going forward. As we prepared
the Bureau to receive and to handle and to resolve consumer
complaints in the credit card area and in the mortgage area,
and now we are into other areas as well, we inevitably
developed training materials for our folks who would be
receiving those complaints to be able to address different
questions, to be knowledgeable about the products they would be
talking about and the like.
And it occurred to us that rather than limit that
information only to our own employees who would be dealing with
these complaints, if we could put it out on our Web site and
make it more available to the public at large, maybe they could
answer a lot of questions for themselves. They could go to it
and get that information when it is most pertinent and
convenient for them.
We will continue to build on this. This will be an
iterative process. People can add questions that they would
like to have us answer. They can offer their thoughts about the
answers that we are providing to the questions that are raised.
We expect we will build this out across the whole range of
products and services. We hope to become a trusted resource for
people out in the marketplace who need to know more. They know
they need to know more. They aren't sure where to go to get it.
Sometimes, they will go to Web sites now that are self-
interested Web sites where somebody is trying to sell them a
product, and therefore, the information may be distorted by
that self-interest.
We don't have any of that. So we hope to promote this and
we would be glad if you would promote it among your
constituents and others as well. It is intended to help muscle
up consumers so that they can protect themselves.
Mrs. Maloney. Director Cordray, most of us hear quite a few
complaints from our constituents about student loans. In fact
recently it has been reported that student loan debt reached $1
trillion and that it is even higher, which is hard to believe,
than credit card debt.
I know that you have released a shopping sheet for student
loans so that parents and students can make a comparison about
what the terms are. What steps are you taking to further
educate students and parents about the merits and drawbacks of
the various options they have in student loans? And are you
including the deferred interest and all those other aspects?
Mr. Cordray. Those are good questions. This is obviously a
subject of growing importance to a number of Americans and
should be for the country as a whole. Because, as was mentioned
earlier, the population we are talking about here are young
people who have the ability to make something of themselves.
They are the kinds of young people we would like to see rise
towards success in our society. They are held back only by
lacking the means they need to be able to finance an education.
This becomes a momentous decision for a young person and
their family. Do they get on the right financial track? Or do
they get on the wrong financial track? And if they end up on
the wrong financial track, they are not going to achieve what
they could achieve.
We are going to be deprived of their talents in our
society. And they are going to end up in a financial mess that
will last them for years. It is one of the very few big
decisions people will make in the course of their lives that
has lasting repercussions; like the mortgage decision; like
certain retirement decisions.
We have the financial aid shopping sheet that you mentioned
because we want to make the prices and risks and comparisons
clear for young people and their families who are not familiar
with this. They have not done it before or maybe they have done
it once. Maybe they didn't get it right then either.
We also have a student debt calculator so that people can
understand what their rights are; what the repayment
alternatives may be. So that once they are in situations of
having significant student loan debt, they can best plan their
path forward to getting out from under that debt and relieving
that cloud over their future.
We are working closely with the Department of Education on
initiatives around that. And I am sure we will have many more
ideas as we go. There are a lot of areas of concern.
Holly Petraeus, who heads our Office of Servicemember
Affairs, has indicated that the 90/10 rule for financial
institutions creates some perverse incentives for them to offer
loans to students that they know full well are going to default
at high levels because that gives them access to the 90 percent
of Federal funding, especially from the G.I. Bill.
I know it is something Congress is starting to look at. We
do urge you all to look carefully at this and what the
unintended consequences have been.
We have many young people, some of whom serve their
country, and many others as well who need the opportunity to
succeed and they are foundering because of bad financial
decisions.
Mrs. Maloney. Thank you.
Mrs. Capito. The gentlelady's time has expired.
Mr. Miller, for 5 minutes?
Mr. Miller of California. Thank you. I am sure you are
aware, to address the alleged abuses of mortgage origination,
Congress passed the SAFE Act, which was a significant
achievement at its time but it is potentially, I believe, being
jeopardized.
We are hearing of reports of lenders training their own
loan origination staffs. That was not our intent. This is
inconsistent with the Act's principles that we should be
independent-training these individuals with respect to pre-
licensing and continuing education requirements. Mortgage
origination training should be independent; the best regulatory
tool we have to ensure all loans are originated are licensed
and qualified. And that is important.
And it is a three-part question. I am going to try to give
you time to answer it. Do you share my concern about lenders
training their own personnel? And what do you plan to do to
address this development? Do you plan to include language to
address this issue in the CFPB's mortgage origination rule?
Mr. Cordray. Thank you, Congressman, for that question. It
is a thoughtful question because I would agree with you that
training your own staff, although that, I suppose, can be cost-
effective, there are real questions about whether that is
sufficient and adequate to achieve what we want.
And you can imagine that when you train your own staff, the
training might be distorted a bit by the potential self-
interest of the organization which, again, I think is
inconsistent with the congressional intent.
I will take that comment back with me, and I will have my
staff get back to you on how we see it and what we are planning
to do about it. The SAFE Act is, as you know a statute that did
come over to us now to enforce.
There are a number of questions that have come up about it
including--the chairman had raised the question with us about
transitional licensing, which is another new issue for us. But
we will be glad to look at that and think carefully about that.
My sense is you are--
Mr. Miller of California. --problematic and you plan on
addressing it in a fashion?
Mr. Cordray. I will have my staff get back to you on that.
Yes.
Mr. Miller of California. Great. Thank you.
In your testimony, you say that the CFPB will be proposing
a new Loan Origination Compensation Rule within the next 6
months, I believe you said. And in April of last year, the
Federal Reserve implemented a loan origination compensation
rule aimed to protect consumers from unscrupulous lending
practices, which we are all concerned about.
But we think the provisions actually went too far. While
intended to prevent steering, the Fed rule actually causes
consumer to multiply pay more in their closing cost, this
because the Federal rule has forced mortgage originators to
only offer loans with the closing costs rolled into the loan.
I introduced a bill that would ensure consumers have the
ability to pay their closing costs upfront, if they so choose,
no matter how the mortgage company pay their employees. I don't
think those two are connected.
While the Fed rule is intended to protect consumers from
mortgage originators that would try to overcharge buyers, it is
causing buyers to lose their home purchases and deposits
because of legitimate discrepancies in closing costs. My bill
would allow the mortgage originator to reduce their
compensation at closing to cover differences in costs that are
beyond the control of the originator.
This provision is narrowly tailored to protect borrowers
from bad actors while still allowing the necessary ability at
closing so borrowers are prevented from not closing their home.
My concern is if there is a discrepancy at closing such
that the originator cannot even modify their compensation to
the benefit of the buyer. Can you please tell me how you plan
on addressing that; this problem, so it doesn't continue?
Mr. Cordray. Okay. Thank you, Congressman. I want to be
kind of careful in my response to that. That is an open,
pending rulemaking for us.
We were, as you said, given the mortgage loan originator
compensation rule that the Federal Reserve enacted and
finalized last year. But we were given authority under the law
and, in fact, are required to do some work in that area as
well, by January of this coming year.
This is an issue that we are looking at. There are other
issues we are looking at such as the perhaps unintended effects
on pension arrangements and bonus arrangements, especially at
some of the smaller institutions.
We have a whole process on that. We have comments that we
are digesting. We will be glad to speak further with you.
I am not sure how much I can say publicly, however.
Mr. Miller of California. I am sure you have seen
situations where you get ready to close.
Mr. Cordray. Yes.
Mr. Miller of California. You pre-stated your costs
upfront. The rule they have applied doesn't allow any leeway at
all in that.
And you have had situations where everybody who sits around
the table and is saying, ``Well, this is occurring. We need
this type of a reduction.'' And many times, your mortgage
originator will make those allowances rather than lose the
closing.
And now, they can't even do that. And that is just a--there
are some bad actors out there who would raise costs at closing,
and the buyers at the last minute say, ``Well, I either do this
or I don't get my home.''
My bill doesn't allow for that. But to modify the closings
and let the person roll those costs that they have in the
closing into their loan rather than paying upfront--if it is
not in some way impacting them in a negative way, I think it is
something you really need to look at.
And I am not in any way asking you to do something that
puts the individual at risk due to some unscrupulous
individual. But we need to allow some leeway on the part of the
buyer, I believe.
Mr. Cordray. I hear you on that. We will take that back,
and I appreciate that. On its face, it sounds fairly sensible,
I would have to say.
Mr. Miller of California. Thank you, sir.
Mr. Cordray. Yes.
Mrs. Capito. Ms. Velazquez, for 5 minutes for questions.
Ms. Velazquez. Thank you, Madam Chairwoman.
Director Cordray, in the Small Business Committee, we have
heard a great deal of concern among merchant and retail
businesses who fear that their financial transactions with
other businesses could be subject to CFPB oversight.
What can you say to rest the worries that new regulations
will affect purely commercial transactions?
Mr. Cordray. The authority that is given to us under the
law has to do with consumer financial products and services. It
is defined in the law to only really affect matters involving
household credit used for personal purposes. And, it is a broad
array of products--mortgages, credit cards, student loans, and
payday loans. It goes on into debt collection, debt settlement,
credit reporting, and other areas.
Contrary to views about the breadth of our authority, we do
not have authority over commercial transactions between
businesses that don't involve credit to consumers. So I would
simply reiterate that is what our law is, and that is not
within our purview.
Ms. Velazquez. Okay.
Some policymakers have expressed concerns that the new
Bureau will extend its reach to include businesses that
previously were not subject to a Federal financial regulator,
like equipment leasing, factory firms or money service
businesses.
Should small businesses that previously didn't offer
consumer financial products be concerned about a new layer of
regulations?
Mr. Cordray. If a business does not offer consumer
financial products or services, they would not be subject to
our oversight. If they do, they would. So money service
companies previously were not subject to any Federal oversight,
arguably, there are some laws that may have applied to them.
They now are potentially subject to oversight by us.
This is a big shift that the law represents, which is that
there are plenty of consumer markets where you have chartered
institutions, banks, credit unions, and thrifts competing
against nonchartered institutions that were not subject to any
oversight whatsoever.
And we want to make sure that they are held to the same
sorts of standards and principles and people are put on a level
with one another.
That is the big part of our job. It is a big challenge for
us to do it, but we are working hard to do that as we go over
the first few years of our existence.
Ms. Velazquez. And despite efforts to establish a single
regulator for consumer financial protection, the Federal
regulators have nonetheless retained enforcement powers for the
overwhelming majority of banks. Is there a risk that this will
weaken protections for consumers or lead to confusion for
financial institutions?
Mr. Cordray. I don't know that there should be confusion. I
think for the vast majority of banks, as you indicated, and it
is my understanding as well, they remain subject to the same
regulators they have always had.
For the 110 largest institutions, those with assets over
$10 billion, they will now be overseen by us for consumer
protection purposes and by their prudential regulator for
safety and soundness purposes. So there is some overlap there.
But for all of these reasons, it really behooves us to
collaborate closely with our fellow agencies to make sure that
we are approaching problems in common, to make sure that we are
on the same page, to make sure we are consulting carefully and
getting their perspective as we act, and we give them whatever
perspective we may be developing as they act.
That is something we are working toward among my fellow
heads of the agencies and among the staffs. It takes a little
time for everybody to adjust to one another.
Ms. Velazquez. If I may--
Mr. Cordray. Yes.
Ms. Velazquez. I am the ranking member on the Small
Business Committee.
Mr. Cordray. Yes.
Ms. Velazquez. It is quite frustrating for me to, time and
time again, when we have community banks coming before the
committee to discuss why it is so difficult for them to
continue to lend to small businesses, they are saying because
of the Dodd-Frank regulations.
And if they have assets of less than $10 billion, those
regulations and oversight will not have any direct impact on
those community financial institutions.
Mr. Cordray. We won't be enforcing the law with respect to
them. We won't be examining them, except possibly pursuant to
ride-along authority that we don't anticipate utilizing in the
immediate future.
Our regulations will affect them. And that is why I have
said time and again in front of this and other panels that we
need to think carefully about what the effect of our
regulations may be on smaller institutions.
That is why we are utilizing the Small Business Regulatory
Fairness Act (SBREFA) panels that are provided in law to make
sure small providers have the ability to inform us directly
about their concerns and their operations and how they work.
That is something we are taking very seriously. We have
one, and soon a couple of more, of those panels at work. And so
we are listening carefully to them. I am creating an advisory
council for community banks and a special advisory council for
credit unions so that their perspectives do not get lost in the
shuffle for us.
It is important for us. And I agree with you. We need them
to be able to lend to small businesses, because small
businesses create the vast majority of jobs in this country.
And some of the encouraging recent economic news seems linked
to the fact that small business lending is up and small
businesses are being created at a faster pace. That is a very
good thing for us.
Mrs. Capito. The gentlewoman's time has expired.
I will recognize myself for 5 minutes for questioning.
In your report, you talk about streamlining inherited
regulations and the law ``is to address outdated, unnecessary
and unduly burdensome regulation.''
The President talked about this in his State of the Union;
how he wants to eliminate old or antiquated regulations. I
guess my question is, what steps are you taking to work with
him to eliminate these overly burdensome or repetitive or
inherited regulations?
Can you give me specifics--except I don't want to hear
about the one-page mortgage, because the last time I asked that
question I got a 3-minute answer on the one-page mortgage so--
not from you, I will say that. We are all well aware of that,
and that is a good thing. We are very happy about that.
So if you could help me with that because the Treasury
Secretary pointed to the CFPB as one of the ways to eliminate
these old regulations.
Mr. Cordray. I appreciate the question. I have also been
known to give some long answers from time to time; I am trying
to shorten them.
On this, though--I was over at the U.S. Chamber of Commerce
yesterday, speaking with them. And one of the things that they
praised us for, and I think it is a very common-sense thing for
us to do, is our initiative on streamlining the regulations
that we have inherited from other agencies.
We didn't write those rules. We are not personally invested
in them. They were adopted by different agencies at different
times for different purposes. There is often not a lot of
careful thought about the aggregate impact of those.
So, we have had a request for information outstanding,
published in the Federal Register for a couple of months now
asking anyone to bring us their ideas as to how we can cut back
and streamline regulations and show that we are a different
sort of agency, that we are interested in doing this.
And in the consumer realm, we think there is room to do
this, because there has been such a sort of mania for
disclosure over the years that those disclosures piled up,
piled up, piled up and became very dense and unreadable.
Consumers were deriving very little value from them; they were
often confused even if they did read them. And we think we can
cut that back in some areas pretty substantially.
So this is something we are taking very seriously. The
Chamber has given us some thoughtful comments. Hundreds of
others have as well. We are going to be digesting those.
Mrs. Capito. I would like to follow up with you on that as
time moves on.
If you look at it from a community bank perspective, you
are having to divert your resources to a compliance officer, an
accountant or an attorney to keep up with the vast majority of
regulations, not just the new but the old as well. And that
diverts resources from the job creation or small business
lending that we want to see our financial institutions do.
The Federal Reserve initially proposed the qualified
mortgage rule before it was transferred to the CFPB. And it
offered two different alternative proposals, with differing
protections for liability for lenders.
We have had a lot of discussion about this.
Mr. Cordray. Yes.
Mrs. Capito. One would give a total safe harbor and one
would have a rebuttable presumption protection. Which
alternative would you prefer? And will the CFPB draft a
different proposal?
Mr. Cordray. So, again, I want to be a little bit careful
how I answer this question. It is a pending rulemaking. We have
been getting quite a bit of input, both from industry and from
consumer groups, and also from our fellow agencies.
As you know, it was the Fed who proposed the rule. And then
it has come over to us to finalize. It is also a very important
rule because providing guardrails around lenders, paying
attention to the borrower's ability to repay is something that
is very important for cleaning up the mess we have in the
mortgage markets.
What we have found as we have been working on this is you
can have a sort of definitional safe harbor; a definitional
rebuttable presumption. If you leave the standards vague and
mushy, there is not a lot of difference between the two,
because you can still litigate over whether you comply with the
qualifications to get into the safe harbor.
What is very important in this area, though, is that we try
to create bright lines, so there will not be a lot of
litigation. We don't want this to be punted into the courts and
people not to be sure for years to come. And we are going to
work to do that.
We want to get this right. This also intersects with the
Qualified Residential Mortgage (QRM) rule on risk retention
that other agencies are going to be adopting. So we are taking
a lot of close inputs from a lot of groups who have competing
but, in some ways, converging perspectives on some of these
issues.
Mrs. Capito. I would urge caution in this area, simply
because, as we know, to really get the economy moving again, we
have to get this right.
And we have to get first-time home buyers into the market.
We have to get people being able to move in order to get our
economy moving again.
So I would like to again follow up with you on that. My
time has expired. I did want to ask you about the complaint
line. And I also wanted to get into the silos.
But I will save that for another day.
And, our next questioner is Mr. Miller.
Mr. Miller of North Carolina. Thank you, Madam Chairwoman.
I have been puzzled by some of the complaints about the use
of subjective terms in the statute and whether that will lead
to results that are just snatched out of thin air, because my
knowledge actually is that subjective terms are used throughout
the law to so that the law applies differently in different
circumstances.
And that has, in fact, been viewed as a strength of our
legal system. There was an 18th or 17th Century English judge
who wrote--and this is probably not exact, but it is close--
``There shall be no fixed definition of fraud, lest devious men
contrive ways to evade it.''
We all see the value in clarity, but clarity can also lead
to inflexibility. And there needs to be some subjective
standard to reach new circumstances.
The idea that reasonableness is somehow a new thing,
snatched out of the air to be applied in the law is very
peculiar. The ``reasonable man standard,'' the proximate cause,
is not exactly the clearest standard. It obviously depends on
circumstance.
Mr. Cordray, do you think you will have any difficulty
applying standards of fair, unfair, unreasonable and/or
abusive?
Mr. Cordray. I think that with standards like that,
Congressman, there is a gray area and then there is a core. And
within the core, there is really no question that the people
who are perpetrating acts that are within that core, they know
that what they are doing is probably wrong, and yet they do it
anyway.
In the gray area, it is a little harder to judge. And I
think we should tread more cautiously in the gray area. But as
you say, these are terms that have been defined over decades.
Mr. Miller of North Carolina. Actually, over centuries.
Mr. Cordray. That is true. And it goes back to the common
law in many instances, and when they were codified into
statutory law. There are still a lot of years of courts
interpreting them further.
But for some of them, it is very well-plowed ground at this
point. And I think that the main outlines of how people
mistreat their customers are pretty well-defined.
When they see that is happening, or they see that is very
likely happening, they should be hesitating. They should be
rethinking. And I think that is entirely appropriate.
Mr. Miller of North Carolina. You said there are gray areas
and core areas. You have enforcement powers and you have
regulatory powers. In the gray areas, would you probably
proceed straight to enforcement or would you probably turn to
rulemaking and apply that rule prospectively, so everyone would
know what the rules were?
Mr. Cordray. I think that there could be situations where
we might do either. But I also think that there is enough
misconduct that occurs in the core areas that we would be well-
served to focus on that at the outset, in the first period of
our Bureau.
We want to get that cleaned up. Then, we can work on trying
to define around the edges a little more clearly.
Mr. Miller of North Carolina. There have also been concerns
today and in the past about whether your rules, the
prohibitions on unfair and deceptive and abusive practices,
would threaten the solvency of the financial system or
financial institutions.
The legislation, as first proposed by the Obama
Administration, including a requirement that a plain vanilla
product be offered side-by-side with any other product offered
by a financial institution; and that was shot down--there were
gales of protest.
And there was a sentence or two placed in the law that
bears no requirement to offer any given financial product. So
it is only your authority, then, to prohibit unfair practices,
like you are not allowed to require any financial institutions
who offer a product that might be unprofitable for them?
Mr. Cordray. One of the mandates in the law is that we are
supposed to promote innovation in financial services, which
means, let 1,000 flowers bloom, as long as they are not beyond
the pale, exploiting or treating their customers unfairly or
being deceptive.
We do want there to be innovation and vigorous competition
in the financial realm. There will be times when an array of
choices is better for consumers. There may be times where, for
example in the mortgage market in the lead up to the financial
crisis, where there were a lot of exotic products being offered
to customers where they were a very poor fit, and the default
rate showed that very quickly.
It is something that we are going to have to think
carefully about as we go. But again, in general, we want to
encourage innovation and we want to encourage competition. But
we want it to be fair competition. And we want it to be
competition that respects the consumers.
Mrs. Capito. The gentleman's time has expired.
Mr. Posey, for 5 minutes.
Mr. Posey. Thank you, Madam Chairwoman.
It is good to see you again, Mr. Cordray. When you were
here previously, you stated, and you also told the chairman
earlier today that you promise to be accountable and answerable
to Congress and you are eager to work with Congress.
But apparently some of the people in your agency haven't
gotten the memo yet. I have heard occasions where--this is from
another office, not mine. It remains nameless only so they have
no need to fear retribution--but, ``Our district is unable to
close out certain cases that get referred to them because CFPB
states it doesn't have to respond to them, because it reports
directly to the Fed.''
That was the second day of this month. I pursued that a
little bit further when I saw it, and I found a litany of
unreturned phone calls and messages that they have.
And so maybe, there are some people who just need to be
briefed on your philosophy in the agency.
Mr. Cordray. I am not entirely following your question. Are
you talking about a financial institution that feels that they
couldn't get answers from our agency or someone else?
Mr. Posey. Congressional offices.
Mr. Cordray. Okay.
Mr. Posey. Members of Congress.
Mr. Cordray. That is very different from what I have heard,
although I am happy to--and my staff will be happy to take up
any particular situations that need to be addressed.
I have heard a lot of compliments from different
congressional offices, on both sides of the aisle, in terms of
how we are handling consumer complaints. And we are beginning
to see on our consumer complaint line lots of post mortems from
consumers who are very pleased with the fact that after months
of problems--
Mr. Posey. I don't want to spend all my time on this.
Mr. Cordray. I am sure it is a mixed bag.
Mr. Posey. Yes, I am sure it is.
And there is something called the Victims Relief Fund,
wherein your agency hangs on to the money instead of returning
it to the Treasury. And it is supposed to be used to compensate
victims of wrongful activity.
There is no requirement that I can see that the penalty
must be paid to the victims of a specific wrongdoing for which
the penalty was collected. What happens to the money if the
victim can't be located or there is more money collected than
there is due compensation? Are you allowed to keep the money
and commingle it with other agency funds?
Mr. Cordray. This is something that we have been looking at
carefully. It is a provision of the Act, as you said. The first
thing that happens in any matter of that sort is we are
supposed to make a vigorous effort to find the victims who were
wronged and make sure that they are recompensed as fully as
possible.
If there is a penalty that is assessed, that doesn't
necessarily tie specifically to compensation. But if we can
compensate victims, that is our first priority.
If not, the law provides that money can be used to
facilitate and aid financial literacy and education efforts
around the country for consumers. So, that is a possible
disposition of funds as well.
Beyond that, I think we are just trying to be mindful of
carrying out the law as Congress enacted it. And that is what
it seems to say to us.
Mr. Posey. Would you anticipate being involved in
stipulated settlements?
Mr. Cordray. Do you mean settlements that don't go to a
final court resolution?
Mr. Posey. Yes, sir.
Mr. Cordray. I imagine that will happen frequently just as
it does for every government agency and every private litigator
as well.
Mr. Posey. But you don't anticipate that money will just be
unbudgeted revenue to the agency? That the money would be
transparent and it would be going to victims or to education as
you indicated?
Mr. Cordray. I see what you are saying.
When we arrive at a settlement, I think it will typically
be our practice to enter that settlement agreement in accord as
a consent decree, which creates more enforceability and more
transparency.
And then the nature of that document is that the court will
specify in the court order how any funds are to be allocated
and how they are to be used. And that creates binding law that
we have to follow.
So that is what I would expect would typically be the case
in our matters that don't go to some final judgment in a court.
Mr. Posey. That is what I wanted to hear. Thank you very
much.
I yield back, Madam Chairwoman.
Mrs. Capito. Thank you.
Mr. Scott, for 5 minutes?
Mr. Scott. Thank you very much, Madam Chairwoman.
Mr. Cordray, how long have you been on the job?
Mr. Cordray. I have been on the job for 3 months, minus 5
days.
Mr. Scott. 3 months. And could you tell the committee what
areas have raised the greatest number of complaints, the
greatest areas of concern; if you had to prioritize on where
there is the greatest area of problem and abusive practice
lending and carrying out your mission? What would that be?
Would it be mortgage servicers? Would it be student loans,
credit cards? What would it be?
Mr. Cordray. It is a little hard to determine trends yet
because it has been a short time and we have been receiving
complaints in stages. But I think there is very little question
that the pace of complaints has been fastest in the mortgage
area, especially around foreclosures and around servicer
practices and the frustration that people feel.
In fact, my guess is that the pattern of complaints we are
receiving mirrors the pattern of complaints each of your
offices receive from your constituents because I think most of
these problems are pretty common nationally.
We have also received a lot of complaints around credit
cards, typically for smaller dollar issues, but still very
frustrating to people. And we have begun receiving complaints
about student loans. We expect we will have a significant
volume of those and others.
Mr. Scott. I am glad that you volunteered that answer; the
priority of--area of concerns and complaints have been in the
mortgage area.
And I commend you. I think January 20, 2012, you put out in
your annual report, a greater emphasis on dealing with the
mortgage service area; and certainly commend you on that.
Let me ask you how your Bureau responds to developments
that happened and may be a little bit outside, but impact the
mortgage area?
For example, recently during this period, I think about a
few months ago, there was a settlement made of billions and
billions of dollars apportioned out to the States that was
designed to go back to help struggling homeowners with their
mortgages.
One of the major areas of concern--this difficulty with
mortgage holders is having the ability to write down the
principal. We have been after that for a long time. The
Secretary of the Treasury was before the committee last week
and I asked him pointedly about that: ``Could that money be
used to assist homeowners in their greatest area of need in
terms of lowering the cost of their monthly payment, writing
down the principal?''
And he said, ``Yes.'' And you are aware of this, are you
not?
Mr. Cordray. Yes.
Mr. Scott. So how are you getting this information out to
mortgage holders who are very confused, and do not understand?
Are you working to get out to each of the States, the
communities, how the mortgage holders who are struggling can
take advantage of this?
For example, my State of Georgia's share in this is $816
million. One of the concerns we have had, for example, is that
the Governor of Georgia has decided that $110 million of this
would not be used. Those funds will be diverted; they wouldn't
go to the struggling homeowners.
What I am trying to get at--it seems something like this,
where you are really talking about consumer protection, is an
area where you ought to weigh in as well.
What has been your response? How have you gotten
information out? Where is there a clear understanding of how
this money can get into the hands of the consumer to help them
for what it was designed to do, to get that principal down and
help these people save their homes? And that these States
cannot just willy-nilly use this money for a rainy day fund or
whatever? And that is a problem. How are you all helping us
with that?
Mr. Cordray. The mortgage servicing settlement was
organized around the principle that there was significant money
that was allocated on a State-by-State basis. And State
attorneys general would have a significant say in whether that
was used, for example, for homeowner counseling, or for razing
abandoned houses in cities, which is another big problem, or
any of a number of other uses.
There is also money in the settlement, though that is not
subject to control at the State level, that will go toward
homeowner relief, some of which will be in the form of
principal writedowns, others of which will take different
forms. Principal writedowns are one tool in the toolbox of
addressing an upside down mortgage situation. And the--
Mr. Scott. I know my time is short, but could you just tell
us quickly what your Bureau is doing to get this vital
information out to the consumer?
Mrs. Capito. If you could do this quickly, because I want
to get one more questioner in before we have to go?
Mr. Cordray. That is fine. We are working with these other
agencies that reached the settlement which we were not integral
to, to make sure that we help publicize what is available to
homeowners. But I think the lion's share of that is falling on
the backs of the State attorneys general, the HUD Secretary,
and the Justice and perhaps Treasury Departments.
Mr. Scott. Thank you.
Mrs. Capito. Mr. Luetkemeyer, for 5 minutes?
My intention is, after Mr. Luetkemeyer's questions, to put
us in a recess, and then come back after the votes. We have two
votes.
Mr. Cordray. Okay.
Mr. Luetkemeyer. Thank you, Madam Chairwoman.
Mr. Cordray, in reading your report, I am noticing here
that the positions you are filling and have a breakdown of all
the different groups that you are hiring--there is nothing
there that indicates the breakout of people who actually have
some real-world experience with regards to financial services.
Can you tell me, are you hiring people who have some real-
world experience, who have ctually worked in a bank or in a
credit union, or some sort of a payday-loan place and who
actually know the unintended consequences of a rule or law that
if proposed by you and the enforcement of it, how that all fits
together?
Mr. Cordray. Congressman, it is a good question. It would
be a pretty poor performance by me if the answer to the
question was, ``No, we are not.'' In fact, we are. We have a
number of people who have come to the Bureau, I am pleased to
say, who have come not from other Federal agencies or not from
State government or not from the public sector at all, but from
private sector entities; often from banks or other financial
institutions.
Mr. Luetkemeyer. Do you have a number off the top of your
head, percentage-wise what it would--
Mr. Cordray. I don't have a number, but it is many.
Mr. Luetkemeyer. Could I get that number, please?
Mr. Cordray. --including the Deputy Director of the Bureau
who worked in various capacities at Deutsche Bank, at McKenzie,
for Capital One, and has intimate knowledge of the financial
markets.
Mr. Luetkemeyer. Could I get that number from you at--
Mr. Cordray. Sure, we would be happy to provide that.
Mr. Luetkemeyer. I appreciate it.
With regards to that, I know there is a movement I have
seen that some folks are trying to have Mr. Martin Eakes, who
is chief executive officer for the Center for Responsible
Lending--do you know Mr. Eakes by any chance?
Mr. Cordray. I have not met him, but I have heard quite a
bit about him.
Mr. Luetkemeyer. Okay. They are trying to recommend him, I
believe, for a position with your agency. Are you considering
that at all?
Mr. Cordray. That is news to me, sir.
Mr. Luetkemeyer. Okay. I was just curious.
The reason I ask is because he has been rather outspoken
with his opinion of oversight in regard to the financial
services industry. In fact, in 2010 at Duke University's Fuqua
School of Business, he made a statement that says, ``We have
hired 40 lawyers, Ph.D.s and MBAs to basically terrorize the
financial services industry.'' That gives me great pause
whenever somebody like that is being recommended to your
agency.
If they have the attitude going in that they are there to
terrorize the industry that they have oversight over, I am--
what is your reaction to that quote?
Mr. Cordray. I don't have any particular reaction. I am not
familiar with the quote.
Mr. Luetkemeyer. Does that sound like somebody you would be
interested in hiring?
Mr. Cordray. With everybody we think about hiring, we would
want to look at the full picture. We want a range of
viewpoints. But, look, we are looking for a responsible,
balanced perspective on the problems we are facing. And,
frankly, whether we hire someone or not--and again, this
particular situation that you raise is news to me--we are
getting input on a broad basis from people who have a lot of
different perspectives; some of whom dislike the banks, and
some of whom love the banks.
And we want to get all that perspective and filter that in
as we figure out how to proceed on some of these hard issues.
Mr. Luetkemeyer. In your opening testimony, you made the
comment that you believed that everybody needs evenhanded
oversight. And I think that if you are true to your words
there, I would think that Mr. Eakes would have a little
difficult trying to gain employment with your agency. But we
will--
Mr. Cordray. Again, I think the premise of the question is
mistaken, but--
Mr. Luetkemeyer. Another question for you--basically, you
have rulemaking authority as well as enforcement authority. And
with regards to rulemaking, do you do any cost/benefit analysis
of the rules you propose?
Mr. Cordray. We make strenuous efforts to, as our statute
tells us, assess the benefits, costs, and impacts of each and
every rule that we would consider adopting, yes.
Mr. Luetkemeyer. Is that information public? Is that
something we can get our hands on if--
Mr. Cordray. It is part of every rulemaking and it is
typically published as part of the rulemaking. So, there is
nothing hidden about it. And it is something that courts will
review carefully when they look at the finished product by us.
And so, it is something that, not only do we have every reason
to do and do carefully, but also it makes common sense. So--
Mr. Luetkemeyer. This is, for instance, a rule of thumb or
maybe you--can I get your thoughts on it? When you propose a
rule and you get a cost/benefit analysis showing that it is
going to cost 10 times more than the benefit it is going to
return, is that something that alarms you? Is that something
that you believe probably is not worthwhile pursuing?
Mr. Cordray. That would be of concern to me. And it should
be, yes.
Mr. Luetkemeyer. Okay.
Just give me a quick overview. In your notes and also in
your statement, you said that you have been hearing from
thousands of Americans about what works and what does not work.
What has worked and what is not working from things you
have heard from them?
Mr. Cordray. I think there are a lot of Americans who still
feel that they have trouble making their voices heard when they
are on the other side of the table in some of these
transactions, or if the transaction doesn't work out and they
are now dealing with a mortgage servicer or a debt collector,
someone down the road.
Again, I am sure it is not anything different than what you
hear every day from your constituents who sometimes are at
their wits' end and coping with situations where they just
would like to know that somebody is standing on their side and
helping them.
I know you do that. We try to do that as well. And we are
happy to work with you to do that together.
Mr. Luetkemeyer. I appreciate your testimony, Mr. Cordray.
Thank you, Madam Chairwoman.
Mrs. Capito. Thank you. The committee will stand in recess.
We will have two votes. We will get back as quickly as we can.
Thank you for your patience.
[recess]
Mrs. Capito. In the interest of everybody who is here, we
are going to go ahead and start, if that is okay.
Mr. Green, for 5 minutes.
Mr. Green. Thank you, Madam Chairwoman.
Again, Mr. Director, thank you for being here. I would like
to visit with you quickly on several issues. I would like to
start, if we may, with the small banks and credit unions.
As I have indicated, I have been meeting with them. And
they have expressed some concerns and I would like to give you
an opportunity to share with us some of the outreach efforts
that you have in place to allay some of their concerns.
Mr. Cordray. Thank you, Congressman.
It is something that I have indicated is a point of
emphasis for the Bureau. And this goes back to my personal
background. I served, as I mentioned before, as the elected
State treasurer in Ohio and also as attorney general.
As State treasurer, I worked a great deal with smaller
banks in the State because we had a small business lending
program that we made available to them and a number of them
participated in it.
And out of that work, we created a community bankers'
council that advised me about all aspects of the work we were
doing at the Treasury and really improved our work.
When I became attorney general, I continued that, and had a
bankers' advisory council on the kind of financial issues that
we touched on in the attorney general's office.
And so, I have said I am going to do the same as the
Director of this Bureau. We are going to have both a community
banks' advisory council and a credit union advisory council.
We just met earlier this week to work out how we are going
to select members for that, and the frequency of meetings and
the like. They are going to have very direct input to me.
The other thing is that we are required by the law in a
number of our rulemakings to have special panels that give
small providers and small banks the opportunity to give us very
direct input about rule proposals and how those would affect
their operations and whether there should be adjustments made
and the like. That is something we are going to consider with
each of our proposals.
We have issued one final rule thus far, on remittance
transfers, which are the international transfers of money that
many people engage in. And we have issued a supplemental
proposal to consider whether there should be a threshold of
institutions that don't do these transactions as a regular
matter which should arguably be exempt or on a relaxed footing
with some of the requirements.
Mr. Green. With reference to our servicemembers, I see that
you have the Office of Servicemember Affairs.
I am eager to hear what you say about this. I am amazed at
how important this has become to our country, the veterans as
well as those on active duty.
So could you share a few thoughts, and then I will have one
more question for you?
Mr. Cordray. Sure. I think you are exactly right. It is of
increasing importance to our country because we have a whole
new crop of veterans who are, or will be, returning from active
duty.
Many of them were activated from National Guard status. And
we should be making sure that they are protected both during
their active duty, for which they have very special provisions
in the law, and after they come back. There is a lot of
emphasis right now on hiring veterans and making job
opportunities available. But similarly, we want to protect them
because many of them have benefits coming under the G.I. Bill.
And whenever you have money coming, there are people who have
different ideas for you, and many of them are not looking out
for your own best interest.
I have been very impressed with Holly Petraeus, both as a
colleague of mine and then since becoming Director, as I work
with her; she has been a strong voice for our military. She
spends a lot of time going across the country visiting military
bases and bringing back the insights that she gleans from those
trips about the needs and struggles not only of servicemembers,
but their families, and making sure that we give voice to those
concerns, whether they are within the narrow jurisdiction of
the Bureau or whether it means working with the Department of
Defense or the Department of Education or others.
There is much that she is getting done. And we want to
protect servicemembers every way we can because it feels like
the appropriate way to repay our debt to people who have risked
so much, and sacrificed so much, for the liberties of the rest
of us.
Mr. Green. Thank you.
And finally, my district is quite diverse. We have the
ballot in my district printed in four languages: English;
Spanish; Vietnamese; and Chinese. So I would like to know what
you are doing in terms of language translation to make sure
that we are communicating with all persons in the country,
lawfully here, I might add.
Mr. Cordray. First of all, that is fascinating. Second of
all, at the Bureau, maybe the most direct way we hear from
people is on our consumer complaint line. And this is very
important to us; we created this capacity; we are able to field
inquiries from people in 187 languages, which pretty much
covers the waterfront in this country, as best we can tell.
And we don't want anybody to be blocked from being treated
fairly as a consumer by the fact that there is some sort of
language barrier that means they can't make their voice heard.
We also know that in many communities where there is a
language barrier, they can be the targets of predatory schemes
and plans because there is an assumption, often sadly correct,
that they will not pursue law enforcement remedies or complain
to the government. They will just take their lumps.
We don't want that to be the case. We want those
communities to be just as protected as the majority community.
And if that means breaking down language barriers to do it,
that is something that feels like it is appropriate for us.
Mr. Green. Thank you, Madam Chairwoman. I owe you 1 minute
and 15 seconds.
Mrs. Capito. Thank you.
Mr. Renacci, for 5 minutes.
Mr. Renacci. Thank you, Madam Chairwoman.
And I want to welcome a fellow Buckeye. No matter what we
agree or disagree on, I am sure Saturday night, we will be
agreeing on which team should be winning.
Mr. Cordray. We sure will.
Mr. Renacci. But Mr. Cordray, I have heard serious concerns
being raised about the CFPB examination policy under which one
or more CFPB enforcement attorneys accompany CFPB examiners on
all CFPB exams.
Some have pointed out that none of the Federal banking
agencies has ever done this, and that having enforcement
attorneys participate in exams has a chilling effect on the
examination process. I am afraid that the CFPB practice is
intimidating and does not foster the openness that you
characterize that you would characterize a relationship between
the CFPB and the institutions it examines.
Indeed, this practice feeds the institutional fear that the
CFPB's main purpose or object during an exam is to obtain
documents and information that later can be used to launch an
enforcement action. Are you concerned about this as far as the
institution's perception of the CFPB?
Mr. Cordray. It is something I have had discussions on with
a number of bank CEO's. I make it a point--I frequently am
calling through the list of the different financial
institutions that we are now working with to make sure that
they know there is an open line of communication to me. Some of
them have raised the issue.
And I have taken pains to explain that we are trying to
integrate our supervision and enforcement teams. We want the
supervision teams to understand where enforcement works and why
and how. And we want the enforcement team to understand how
supervision and examinations work, and how; and that often may
be a preferable way to address and resolve problems, which is a
new thing for a lot of enforcement attorneys who have come from
different contexts; like it was new to me coming from an
attorney general's office where we didn't have any kind of
examination capacity.
So I have indicated it is not an attempt to create some
sort of macho message that we are sending. We don't have
regional counsels and so this is one way to ensure that our
examination teams have proper support. People shouldn't read
any message into that and none is intended.
Mr. Renacci. Okay.
On enforcement also, according to some reports--you may be
able to confirm this--the CFPB enforcement staff now has over
100 attorneys, which is more than twice as many as are
currently employed by the OCC. This disparity is striking
since, unlike the OCC, the CFPB has no 150-year track record of
supervision and regulation on which to judge its reasonably
anticipated enforcement needs.
Will enforcement be a principal, or what will be a
principal focus of these examinations?
Mr. Cordray. First of all, I think that number is above
where we are at the Bureau. I don't think it is accurate that
we have 100 enforcement attorneys at the moment.
But what people need to keep in mind is that we are
supposed to enforce the law not only against the banks, the
large bank institutions like the OCC does, but also a very
significant densely populated nonbank realm as well. And we are
going to need enforcement attorneys to address a lot of
problems in that area.
We are talking about debt collection. We are talking about
mortgage issues, both servicers and brokers. There are a lot of
areas that people have a lot of dissatisfaction with; and we
need to make sure that the laws are being respected, that they
are being followed, that they are being enforced.
So enforcement is one of a number of tools, all of which
are essential to doing our job well. And I think particularly
given the fact that we are dealing with both banks and nonbanks
and no Federal oversight of nonbanks has previously existed,
this is appropriate.
But we will continue to calibrate that as we go. We are
learning as we go every month, as you can imagine.
Mr. Renacci. Based on the consumer testimony, the CFPB's
overdraft protection and payday-advance field hearing, it is
apparent that there exists in the marketplace a growing need
for short-term credit options. I believe that it is critical
that we identify and address the small number of lenders who
operate illegally, whether they are insured depositories or
nonbanks.
My concern, however, is that overregulation by the CFPB of
the vast majority of regulated bank and nonbank lenders will
limit innovative products and access consumers need to
legitimate short term credit. Can you provide some assurances
that will not be the case?
Mr. Cordray. That is a great question. It is an issue that
we are thinking a lot about at the Bureau. We had our first
field hearing on the issue of short-term low-dollar loans.
We recognized that is an area where consumers have a real
demand. They need that product. But we are concerned that
products in that area need to be products that help consumers
rather than harm them.
There are some banks that are now coming into that sphere
and competing. We would like to see there be robust competition
with good products and good customer service for consumers who
have short-term needs; and many do, no question about it. Not
everybody has a rich family member who is always there to
provide $500 or $700 when they need it.
So we want to foster competition in that area. But it is
something we are thinking carefully about because there are
some predatory products as well, and we want to encourage the
good products and we want to discourage the bad products
frankly.
Mr. Renacci. Thank you, Mr. Cordray. I yield back.
Mrs. Capito. Mr. Sherman, for 5 minutes?
Mr. Sherman. Thank you, Director Cordray.
In a world of the darkness of the filibuster, a recess
appointment offers one little glimmer of light. And if a series
of pro forma sessions constitute real sessions of the Senate,
then cartoons are real people.
I welcome you to this committee. I have one long question
dealing with mortgage finance and then a whole bunch of
questions that are probably so numerous that, for those, you
will probably want to just respond for the record.
The Bureau is currently working on the ability to pay
qualified mortgage regulation. This is going to shape the
future of the mortgage market and people's ability to buy
homes. Congress created this ``Ability to Pay'' rule to ensure,
in fact, that creditors were determining the consumer's ability
to repay the loan before making the mortgage. Everybody agrees
you make a mortgage to someone who can afford to repay it.
However, we have heard from consumer groups--I have heard
from industry, I have heard from others--that the Bureau's
current thinking might give us a regulation that is so
stringent that it could reduce access to mortgage credit in
what is already a tight mortgage lending environment.
So I would like your comments on this qualified mortgage
rule; specifically whether you intend it to be a broad measure
based on ability to pay or a narrower measure that might deny
creditworthy buyers access to credit.
You have indicated a desire to finish the rule by the
middle of this year. So when finalized, will it require lenders
to determine that the borrower has a reasonable ability to pay?
Under Dodd-Frank, the lenders can satisfy this requirement by
originating a qualifying mortgage which is a safer, more
sustainable product. How will that definition of a qualifying
mortgage relate to the rules that you are putting together on
``Ability to Pay?''
Mr. Cordray. Okay.
Mr. Sherman. I told you it was a long question.
Mr. Cordray. It is a long question, but I have long answers
typically, so maybe they match up.
As I said earlier on this subject, I want to be a little
careful because it is a pending rulemaking. There was the
proposed rule that the Federal Reserve put out, and it has now
fallen to us to finalize that rule. We are consulting with
other agencies and we have received extensive input on the rule
from consumer groups, from industry groups, and from people
across the spectrum, all of whom are interested in the mortgage
market, the real estate market, and we all feel the same way;
we want to see it come back to life and to vibrancy. It is
going to be important to the economic recovery.
So this is an important statute. We want to get the rule in
the right place. We are trying to be careful as we think about
it. And we are looking closely at the alternatives that the
Federal Reserve Board proposed.
We are considering how best to give effect to the language
of the statute. And as you indicated, congressional intent in
this regard is a salient point to us. Ensuring access to credit
in the market broadly is important to us. One of the
difficulties here is it is not so easy to predict the path
forward of the mortgage market.
We had a very overheated mortgage market leading up to the
financial crisis. There were a lot of lenders that,
astonishingly, were making loans without considering the
ability to repay of the borrower--completely ignoring that.
They were able, surprisingly, to sell those loans on the
secondary market.
Mr. Sherman. I am going to have to interrupt you at this
point--
Mr. Cordray. Yes.
Mr. Sherman. --and I will have a number of questions for
the record.
Mr. Cordray. Okay.
Mr. Sherman. One of them will relate to ATM disclosures,
which, as you know, have to be a physical disclosure on the
machine, as well as a screen that pops up as you are operating
the ATM.
What has come to my attention is that there are people who
will rip off the external physical disclosure and then somebody
will come sue for the fact that it is not on the machine.
Now that we have a more technological world in which every
machine also has the screen warning, which is far more
noticeable and far more important, one would hope that you
would write regulation so that you either didn't have to have
the physical one, or that you had the physical one when you
installed the machine, but you are not responsible for the fact
that somebody comes by and rips it off, and then,
coincidentally, somebody comes by and sues you. So that will be
one of my questions for the record.
Others will relate to whether to establish an Office of
Regulatory Burden Monitoring; whether to have credit unions and
community banks involved on your consumer advisory board; the
fact that you have a 400-page regulation on remittances, and we
hope that, at least for credit unions and other smaller
financial institutions, you would be able to put out something
a little more streamlined.
Mrs. Capito. The gentleman's time has expired.
Mr. Sherman. I will ask you also when we expect a larger
market participants rule to be finalized.
Mr. Cordray. Okay.
Mr. Sherman. And we will get all those submitted as
questions for the record. I thank you for your appearance.
Mr. Cordray. All right. Thank you.
Mrs. Capito. Thank you. I am trying to squeeze it in so we
can get this before the next vote.
Mr. Royce?
Mr. Royce. I would like Director Cordray to return to that
quote that I mentioned earlier in this hearing:
``I feel it bears observation that banking agencies'
assessments of risks to consumers are closely linked with and
informed by a broader understanding of other risks in financial
institutions, placing consumer protection policy-setting
activities in a separate organization,'' she said, ``apart from
existing expertise in examination infrastructure could
ultimately result in less effective protections for
consumers.''
I would just ask you if you agree in concept with her
concern there?
Mr. Cordray. I hadn't heard that quote before, and I found
it curious because the FDIC, in fact, has reorganized their own
staff to separate consumer protection staff from other staff so
that they can make sure they have a more direct focus on these
same issues. So, they have kind of mirrored Dodd-Frank.
Mr. Royce. But remember, the quote here is a separate
organization.
Mr. Cordray. Yes. Okay.
Mr. Royce. And that is your point?
Mr. Cordray. Yes.
I actually think that the two issues go hand-in-hand. I
don't think that you can have a safe-and-sound financial
institution that is not treating its customers in a sustainable
basis for the long term.
If they are eating their customer base by exploiting them
in the short run, which is the kind of things that raise
consumer protection concerns, they will not be a safe-and-sound
institution in the long run. So I think there is much more
harmony between these concepts than people have recognized.
I also think, though--and I would agree with you--that it
behooves us to correlate closely with our fellow regulators to
make sure that we aren't inadvertently--we certainly don't
intend to--undermining anything about the safety and soundness
of the financial system, which would also disserve consumers.
Mr. Royce. However, since we have lost the argument for
inclusion in one organization or in one entity, as she pointed
out, you could share that information and have a broader
understanding of other risks and financial institutions in
terms of your decision-making. Would you agree that the authors
of this bill went to great lengths during deliberations to
ensure that you were not required to consider safety and
soundness?
Mr. Cordray. I am not sure I would agree with that.
Under the new law, I sit as part of the Financial Stability
Oversight Council (FSCO), along with my fellow regulators. FSOC
has the ability to override our rules if they threaten the
safety and soundness of the system. I think that means that we
will have to, and should want to, take that into account as we
write rules and also seek out and hear their perspective and
have that inform us.
Mr. Royce. Right, with a supermajority vote.
I would point out that perhaps the reason I am focused on
that issue of not considering safety and soundness is because I
tried during the markups, during Dodd-Frank, to have that
included, but I failed in that endeavor.
But let me go to another concern that I have here. The CFPB
will now have the authority to rule whether a State law is
inconsistent with Federal consumer protection laws. What
standards will the CFPB use when exercising this authority,
because if little is done in terms of keeping the States on the
same page, then we could end up with a patchwork of varying
consumer protection laws? And would you agree that would be bad
for consumers and businesses?
Mr. Cordray. I think we have had a patchwork of consumer
laws in this country for decades and another term for it is
Federalism, though--
Mr. Royce. Or maybe the Articles of Confederation would
actually be the term for it, because there are exceptions, like
in the insurance industry, where we do have 50 different
regulators, 50 sets of rules, 50 separate markets, and a
consequence to loss for the consumers and businesses as a
result.
But the real reason we gave up on the Articles of
Confederation and tried to go to one national market was to
avoid such a comeuppance because that is what was so costly
pre-Federalist system.
The idea under the Federalist system was that we were going
to have at least one national market. That is not where we
ended up. And that is where I hope that rather than compound
this problem, which I think Dodd-Frank will do, you might work
in the other direction to create one national market.
Mrs. Capito. The gentleman's time has expired.
Mr. Westmoreland?
Mr. Cordray. Could I respond to the Congressman or--
Mrs. Capito. Quickly.
Mr. Cordray. One of the things that we are supposed to do
is ensure coordinated enforcement of the Federal law here.
Dodd-Frank was unusual in allowing States to enforce the
Federal law. We want to make sure that we aren't going in 50
different directions on Federal law.
As for State law, we are inclined to be respectful of the
States. As we have situations, or if they come to your
attention and you want to bring them to our attention, we will
be very interested in hearing about concerns in that regard.
Mr. Royce. Thank you, Director.
Mrs. Capito. Mr. Westmoreland, for 5 minutes.
Mr. Westmoreland. Thank you, Madam Chairwoman.
Mr. Cordray, what would be your personal--right over here.
Mr. Cordray. Yes, thank you.
Mr. Westmoreland. I know it is hard to get the direction
from down there but what would be your personal definition of
``fair''; F-A-I-R?
Mr. Cordray. Congressman, I don't know that my personal
definition is relevant here because ``unfair'' is a defined
term in the law. And my job as Director of this Bureau is to
enforce the law that Congress has enacted. Therefore, we will
apply the terms that Congress specified as to what ``unfair''
means.
But I do think it is likely that you and I and most people
would have a fairly common-sense, probably consensus view of
what is fair and unfair. It is not to say we would agree in
every circumstance. There probably would be a significant
number of circumstances where we would all agree that something
was unfair.
And then, there would be areas that are gray areas where we
should, as a Bureau, I think tread cautiously and be a little
careful. You don't want to come down hard on people when things
are not clear.
Mr. Westmoreland. Okay. That is fine.
What is the definition of ``fair'' that you are going by?
Mr. Cordray. It is the definition in the Dodd-Frank Act
which, itself, builds on years of case law and interpretation--
Mr. Westmoreland. Okay.
Mr. Cordray. --by the Federal Trade Commission--
Mr. Westmoreland. What is the definition that you go by
that Dodd-Frank lays out?
Mr. Cordray. I don't have it in front of me, but it is a
defined term. And the term is defined on the basis of decades
of case law that have been very carefully worked out. And this
is not an area of controversy, I think, for financial
institutions under our purview.
They understand that law. Their concern to us that they
have expressed is that we not go deviating from that in some
unexpected direction, which we do not intend to do.
Mr. Westmoreland. Do you have a definition of ``personal
responsibility?''
Mr. Cordray. That is not a defined term under the law, so I
could give you my own view of it.
Mr. Westmoreland. Okay.
Mr. Cordray. And I will.
I think that consumers have a responsibility to make their
own decisions and to be responsible and accountable for their
own decisions. They are the ones who have to live with those
decisions.
But I do think there is much that we can do as a Bureau and
as a country to make sure that consumers are better informed
about the choices that they may be making. And we have a
responsibility to try to make those choices more accessible to
consumers so that they are not confused by back-end pricing; by
dense fine print that doesn't specify terms very clearly, and
that sometimes fosters and takes advantage of that customer
confusion.
Mr. Westmoreland. So you are admitting that there is some
personal responsibility involved when people make financial
decisions and that there are certain consequences to those
decisions. Correct?
Mr. Cordray. I would acknowledge that, absolutely. Yes.
Mr. Westmoreland. Do you or the CFPB--do you all ever
recommend products or push a certain product for somebody such
as 30-year loan versus an ARM? Do you promote those type of
things or is that a personal decision?
Mr. Cordray. I don't think that, as a Bureau, it is our
role to promote or hawk particular products. That is not what
we are doing. But it is our role to enforce and to implement
the law.
Congress has made some judgments here about some of the
exotic mortgage products, for example, that led to the mortgage
crisis, the financial meltdown, the credit crunch that
destroyed many businesses in this country and cost a lot of
people jobs and homes. We will implement those decisions.
To the extent we have judgments to make, we will try to
make them very carefully in this realm.
Mr. Westmoreland. But you are not trying to go to a plain
vanilla or ``everybody gets the same thing'' type loans?
Mr. Cordray. I don't think we are trying to mandate
products for individuals. I think if people are presented with
an array of choices that are responsible choices that are
clearly explained, then ultimately, they have to make their own
decisions. I would agree with you, I think, on that.
Mr. Westmoreland. Do you think it enters into the fact
that--I think your report was disappointing, to say the least.
And do you think that has anything to do with there not being--
that you don't have any accountability to Congress as far as
funding is concerned?
Mr. Cordray. I think we have more accountability to
Congress on funding than any of the other banking agencies
because all of them are independent of the appropriations
process. And I don't hear any strong move here to put them
under the appropriations process. The OCC has been around for
100 years; the Federal Reserve has been around for 100 years.
In fact, we have a statutory cap on our budget, which none of
the rest of them have.
We are subject to multiple audits and testimonies and
oversight by Congress. I welcome your active oversight. I am
always pleased to come up here and talk to you about the work
we are doing and hear from you about your concerns.
If there was anything you were disappointed about in our
semi-annual report, as you just indicated, I would be happy to
have my staff work with yours to understand how we could do
better, because we want to improve as we go.
Mrs. Capito. The gentleman's time has expired.
Mr. Duffy?
Mr. Duffy. Thank you, Madam Chairwoman.
Mr. Cordray, just to be clear--I was in here for a pretty
decent part of the hearing, but not all of it. Is it fair to
say that the rules that come out of the CFPB that apply to big
banks will also apply to smaller banks as well, but just
implemented by a different regulator? Is that fair to say?
Mr. Cordray. They will apply to all banks. And that is one
of the reasons why I have said that we should consider
carefully whether they perhaps should apply in a different way
to smaller banks that don't have an army of compliance
officers, and may have different, simpler processes and cannot
afford to bear some of the same transitional and other costs.
Mr. Duffy. And that has been one of my concerns.
Mr. Cordray. Yes.
Mr. Duffy. I have a lot of small community banks in my
district. The way it seems today is that the rules are still
going to apply to them. And they don't have the resources to
hire new compliance officers and new attorneys. Even though you
may not be enforcing them, someone else will be enforcing those
rules on them.
Is it also fair to say that we could have a consumer who is
seeking out a certain product, and you could deem the product
fair; but it could also be deemed abusive as well, is that
correct; could be fair but also abusive?
Mr. Cordray. Yes. We were having this discussion earlier.
Congress used 3 terms in that passage--unfair, deceptive
and abusive acts or practices--which seems to be an indication
that Congress believed and it defined the terms to some degree
that each of them is distinct, although there may well be some
considerable overlap among them.
Mr. Duffy. And in regard to the term ``abusive,'' was it
your testimony that you believe that the definition as set out
by Congress is sufficient and there is no further definition
that needs to be made by the CFPB?
Mr. Cordray. It was my testimony that sometimes people have
referred to ``abusive'' as not a defined term.
It, in fact, is defined, and was defined very explicitly by
Congress. Our role as an independent Federal agency is to
enforce and implement the law that Congress has enacted. So
that is the term. That is the way they have defined it. Our job
is to try to apply that to the specific facts and
circumstances.
Mr. Duffy. And I think the--
Mr. Cordray. If the Congress at some point is going to
rewrite that law, we will implement whatever law Congress
writes.
Mr. Duffy. And so to look at the phrase ``abusive,'' the
term ``abusive,'' it does give--if you want to call it a
definition or it lays out some guidelines for what abusive is--
and at one point it says it ``takes unreasonable advantage
of.''
Do you have an idea of what unreasonable advantage means?
Do you have a definition of what unreasonable advantage means?
And how would that be implemented? How, if you are a small
bank in Wisconsin, would you go to see if CFPB is going to be
looking at us taking unreasonable advantage?
Mr. Cordray. I think the term ``reasonable'' is a common
term in the law. It is a common term in tort law. The
``reasonable man'' is the test that courts have used for
centuries to try to define behavior. And it becomes more
carefully defined over time.
I think that if banks are in a position where they fear
they may be deemed to be taking unreasonable advantage of their
customers--we had the example earlier of peddling an exotic
mortgage product to an elderly widow, that probably would be
something where the bank should take a slightly different
approach than if they are peddling it to a more sophisticated
consumer.
Mr. Duffy. And so you would agree, though, that it is a
subjective standard. There is no bright-line standard on how
this can be implemented for the phrase ``abusive.'' It is
subjective to the Director or to your staff on what that means.
Mr. Cordray. I wouldn't agree with that characterization. I
think it is a facts-and-circumstances test. I think that most
good businesses know it when they see it. They know when they
are walking a line and they know when they are far beyond the
line.
They also can communicate with us to get more guidance as
we know--
Mr. Duffy. But humans view facts differently. And if there
is no bright-line test, what you might find abusive someone
else might not find abusive. What is abusive in Alabama may not
be abusive in Wisconsin. Isn't that fair to say?
Mr. Cordray. I think it is the case that what is abusive
and takes unreasonable advantage can differ from circumstance
to circumstance so--
Mr. Duffy. And I only have 30 seconds left.
I want to have you talk to me about this, because also,
when we talk about an unreasonable standard, it talks about ``a
lack of understanding on the part of the consumer of the
material risk, cost or conditions of the product or service.''
And you had referenced, in our case law, we will reference
a reasonable man. What would a reasonable person know or should
know when they engage into that agreement? But this standard
isn't the reasonable person. This is the individual standard.
So you are a small bank in Wisconsin and you have one
person come in, and the standard that you use with them may not
be abusive. But the next person who comes in, the same standard
would be used. But because of their background, because of
their education, because of their experience, it could be
abusive for the second customer who comes in.
How do you comply with this law?
Mr. Cordray. I think good businesses do this all the time,
sir. I think they think carefully about which customer they are
dealing with. Most of the community bankers I speak to, and
credit unions, tout the fact that they know their customers.
They know them well. They tailor their dealings with the
customer to the situation of that customer. It is not one-size-
fits-all. I think that is part of their strength.
I would also point out there are other prongs of that
definition that are much more objective, such as taking
unreasonable advantage of the fact that the consumer is not
able to choose their provider. That is true of debt collectors
and others. And in that setting, there is really nothing that
is subjective at all about that.
So the fact that some of this definition--which Congress
has laid down, and we are required to implement--may be firmer
and some of it may be softer, I think it is not surprising.
If you all decide at some point to rewrite this, we will
implement whatever law you write.
Mr. Duffy. Thank you.
Mrs. Capito. Mr. Stivers, for 5 minutes.
Mr. Stivers. Thank you, Madam Chairwoman.
And I would like to thank Rich for being here. The problem
with having such low seniority on the committee is I don't get
a chance to tell all my friends and colleagues who have left
that Rich is one of my constituents. I have known him for
years. And I have found him to be a great public servant who
cares deeply about this country and tries to do the right
thing. And he also listens.
So I appreciate him coming to testify before us today.
While some of us on this side of the aisle are unhappy about
the process under which you were appointed, I do want to assure
my colleagues on the record that the President picked someone
whom I think can carry out this job very well, and do it in the
right way, ensuring we try to protect consumers while still
looking out for the safety and soundness as well as
competitiveness of our financial services industry.
I would urge you to continue to look out for both
competitiveness and safety and soundness while you are
protecting consumers, because they are interrelated. And if we
put our financial services institutions out of business in the
name of consumer protection, we haven't really protected
anyone.
So I appreciate you being here.
And I did have a thought for the gentleman from California,
who has left, who did compare pro forma sessions to cartoon
sessions. And I am just curious if the gentleman believes that
the payroll tax cut that was passed during a pro forma session
is a cartoon tax cut. I am not sure if he does and he has left,
so I won't get my question answered today.
But I would like to turn to more serious business and talk
to you about Section 1100G of Dodd-Frank, which requires you to
put safeguards in place to ensure that new regulations don't
lead to further reduction in the availability or affordability
of credit for small businesses and consumers.
And I am just curious what kind of safeguards you are
putting in place to make sure that happens? Because obviously
we all believe in consumer protection, and I know Mr. Royce
from California talked about how he believes it should be
integrated.
I hope we can integrate it well. And I hope that you will
work with the other regulators to integrate consumer protection
into everything, but I do want to make sure that we keep
affordable, available credit for our small business and
consumers.
Mr. Cordray. Thank you, Congressman.
First of all, to go back to a point you made a moment ago,
which I very much agree with, it does not help protect
consumers if we undermine the safety and soundness of the
financial system. Consumers depend on the availability of
credit to be able to do things like buy homes, access
education, and be able to manage and control their spending.
And if the system does not provide those opportunities to
people, then their lives are stultified as a result.
And I also very much agree that having a competitive,
vibrant financial sector is good for consumers for all those
same reasons, lots of availability of choice and the like.
As you point out, our governing law, which is the only
thing that gives us authority to do anything, does tell us that
access to credit is one of the chief objectives that we are
supposed to serve. We will try to be mindful of that as we go
about our different tasks.
One of the tasks I have talked a little bit about today is
this ability to repay rule in the mortgage market. And there
are other mortgage rules that we are required to develop.
In the end, we want a mortgage market where credit is
available to people. In the lead-up to the financial crisis,
the mortgage market was a market in which credit was available
in some of the most bizarre terms; nonunderwritten loans that
paid no attention to people's income; to their ability to
repay; to their assets; and lots of falsification. It was a
very broken market.
And one of the things we need to keep in mind is, as a
result of that we had the credit crunch, which has hurt small
businesses.
Mr. Stivers. I only have 1 minute left so--
Mr. Cordray. I am sorry.
Mr. Stivers. --if you could give me the answer, what you
are doing to safeguard affordability and availability in
writing, that would be great.
And I do want to quickly--
Mr. Cordray. Okay. That is fine. You got it.
Mr. Stivers. --just mention one other thing. The Bureau is
working on a two-page prototype credit card agreement, is my
understanding. I understand that the printed portion in the
contract with definitions comes in at about 4,431 words. And
that doesn't include definitional terms that are housed on
other pages.
So we are talking about a two-page agreement, a one-page
summary, and somewhere between two to seven pages of
definitions with other untold information tacked on too.
And I am just curious if the goal is to make sure that
people understand and read these contracts, why we aren't
building on the one-page agreement summary that is now
available under the Truth in Lending Act, rather than
developing a government-designed contract?
Mr. Cordray. It is a good question, and it is one that we
are trying to carefully consider.
We are not in this, at this point, trying to operate in
this area by putting out a dictate or a single rule that
everybody has to follow. We have come out with a prototype
agreement. Several institutions have been interested in
piloting that agreement. We are seeing lots of other
institutions come out with their own, shorter agreements.
I think what we are all moving toward, and there seems to
be a lot of interest in the industry on this, too, is a shorter
summary agreement that people can read and understand that
pulls out the key points.
And then there is lots of other information that maybe
would be good for them to have; maybe it protects the
institution against liability; that maybe could be presented on
the Internet. It is available if they want to go and look at it
there. They can be referenced to it.
But it doesn't necessarily have to pollute the short, clear
agreement in ways that cause customers not to read anything,
which is what we have seen a lot.
So I think that is what we are working toward. And a lot of
institutions are interested in working toward that. And I think
we will end up with some pretty good consensus around this.
Mr. Stivers. I yield back my nonexistent time, Madam
Chairwoman.
Mrs. Capito. The gentleman's time has expired. So it is
just the two of us. And you said you would stay till 2:00, so--
[laughter]
It will you and me for another hour. That is a joke.
Anyway, the Chair notes that some Members may have
additional questions--I think Mr. Sherman mentioned he was
going to have some--for this witness which they may wish to
submit in writing. Without objection, the hearing record will
remain open for 30 days for Members to submit written questions
to this witness and to place his responses in the record.
I would like to thank you for your patience.
Mr. Cordray. Thank you.
Mrs. Capito. I know it has been kind of a herky-jerky day.
And I appreciate your honesty and your response in responding
to all of the questions.
Mr. Cordray. It gives me a better appreciation for all the
schedules you have to keep.
Mrs. Capito. With that, the hearing is adjourned.
[Whereupon, at 12:49 p.m., the hearing was adjourned.]
A P P E N D I X
March 29, 2012
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