[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]



 
   KNOW BEFORE YOU REGULATE: THE IMPACT OF CFPB REGULATIONS ON SMALL 
                                BUSINESS

=======================================================================

                                HEARING

                               before the

                      COMMITTEE ON SMALL BUSINESS
                             UNITED STATES
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                              HEARING HELD
                             AUGUST 1, 2012

                               __________



                               [GRAPHIC] [TIFF OMITTED] TONGRESS.#13
                               


            Small Business Committee Document Number 112-083
              Available via the GPO Website: www.fdsys.gov


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                   HOUSE COMMITTEE ON SMALL BUSINESS

                     SAM GRAVES, Missouri, Chairman
                       ROSCOE BARTLETT, Maryland
                           STEVE CHABOT, Ohio
                            STEVE KING, Iowa
                         MIKE COFFMAN, Colorado
                     MICK MULVANEY, South Carolina
                         SCOTT TIPTON, Colorado
                         JEFF LANDRY, Louisiana
                   JAIME HERRERA BEUTLER, Washington
                          ALLEN WEST, Florida
                     RENEE ELLMERS, North Carolina
                          JOE WALSH, Illinois
                       LOU BARLETTA, Pennsylvania
                        RICHARD HANNA, New York
                       ROBERT SCHILLING, Illinois
               NYDIA VELAZQUEZ, New York, Ranking Member
                         KURT SCHRADER, Oregon
                        MARK CRITZ, Pennsylvania
                      JASON ALTMIRE, Pennsylvania
                        YVETTE CLARKE, New York
                          JUDY CHU, California
                     DAVID CICILLINE, Rhode Island
                       CEDRIC RICHMOND, Louisiana
                        JANICE HAHN, California
                         GARY PETERS, Michigan
                          BILL OWENS, New York
                      BILL KEATING, Massachusetts

                      Lori Salley, Staff Director
                    Paul Sass, Deputy Staff Director
                      Barry Pineles, Chief Counsel
                  Michael Day, Minority Staff Director


                            C O N T E N T S

                              ----------                              

                           Opening Statements

                                                                   Page
Hon. Sam Graves..................................................     1
Hon. Nydia Velazquez.............................................     2

                                WITNESS

The Honorable Richard Cordray, Director, Consumer Financial 
  Protection Bureau, Washington, DC..............................     3

                                APPENDIX

Prepared Statements:
    The Honorable Richard Cordray, Director, Consumer Financial 
      Protection Bureau, Washington, DC..........................    18
Questions for the Record:
    Graves Questions for the Record..............................    26
Answers for the Record:
    Cordray Answers for the Record...............................    32
Additional Materials for the Record:
    American Escrow Corporation Letter for the Record............    48
    American Land Title Association Letter for the Record........    52
    National Association of Realtors Letter for the Record.......    56
    Independent Community Bankers of America Letter for the 
      Record.....................................................    58
    American Bankers Association Statement for the Record........    61
    Credit Union National Association Letter for the Record......    69


   KNOW BEFORE YOU REGULATE: THE IMPACT OF CFPB REGULATIONS ON SMALL 
                                BUSINESS

                              ----------                              


                       WEDNESDAY, AUGUST 1, 2012

                          House of Representatives,
                               Committee on Small Business,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 1:00 p.m., in Room 
2360, Rayburn House Office Building. Hon. Sam Graves (chairman 
of the Committee) presiding.
    Present: Representatives Graves, Chabot, Tipton, West, 
Walsh, Hanna, Schilling, Velazquez, Owens, Chu, and Hahn.
    Chairman Graves. Good afternoon, everyone. This hearing 
will come to order. And I want to thank our witness, Richard 
Cordray, the director of Consumer Finance Protection Bureau for 
appearing before our Committee today. We very much look forward 
to your testimony.
    Today marks the Committee's first official look at the work 
of the CFPB, specifically as it affects small businesses. CFPB 
is drafting a number of regulations that will impose new 
requirements and compliance costs on broad segments of the U.S. 
economy. One of those regulations seeks to bring simplicity and 
transparency to real estate transactions.
    For many years, consumers, industry, and regulators have 
recognized that the mortgage disclosure forms required by the 
Truth and Lending Act and the Real Estate Settlement Procedures 
Act overlap and are a source of confusion. The proposed rule, 
which is required by Dodd-Frank or the Dodd-Frank Act, will 
integrate those disclosure forms. Integrating and simplifying 
the disclosures is a laudable goal but these changes are going 
to affect small businesses.
    Many of my colleagues here today, including myself, 
question the wisdom of the Dodd-Frank Act and many of the 
provisions within it, including the creation of the CFPB. 
However, those issues are not the subject of this hearing, but 
rather we are seeking to determine the extent to which the CFPB 
is complying with another law meant to protect small 
businesses, and that is the Regulatory Flexibility Act.
    Much of the public attention on this rulemaking has been 
focused on the disclosure forms that consumers will see when 
they are taking out home mortgage loans. Our Committee is 
interested in how the regulations will affect small firms--
those community banks, credit unions, mortgage brokers, 
mortgage companies, and settlement agents that will need to 
change business operations so they are going to have to upgrade 
software, retrain their employees to comply. Furthermore, the 
Committee is looking at the quality of the CFPB's assessment of 
the likely impacts of the rule, as well as the alternatives 
being considered to lower costs for small firms.
    As the CFPB began developing this regulation, it determined 
that the changes would likely have a significant economic 
impact on a substantial number of small firms under the RFA. As 
a result, the CFPB convened a Small Business Advocacy Review 
Panel to receive input from affected small businesses and 
completed an initial regulatory flexibility analysis, which was 
required by the RFA.
    On July 9, 2012, the CFPB posted the 1,100 page proposed 
rule on their website. And while the CFPB has followed the 
steps the RFA requires, there appears to be holes in the 
agency's assessment of the economic impact of the rule on small 
businesses and very little discussion of how the alternatives 
may reduce economic burdens.
    Even with the sluggish economy, the CFPB is expected to 
issue many more rules, some as a direct mandate from the Dodd-
Frank Act and others at its discretion. Despite our concerns 
with the latitude the CFPB has been granted, we hope they will 
honor the spirit and the letter of the RFA, and become a model 
actor with respect to this law that seeks to protect small 
business firms so they can thrive, which is something our 
economy sorely needs.
    We appreciate the director's participation today on this 
oversight hearing. I now yield to Ranking Member Velazquez for 
her opening statement.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Since its enactment two years ago, Dodd-Frank has attracted 
significant attention from both critics and supporters. Of all 
the act's provisions, it has been Title X, which creates the 
Consumer Financial Protection Bureau that has attracted the 
greatest amount of scrutiny. This new agency is responsible for 
protecting consumers from unfair, deceptive, and abusive 
financial products. Last July, the CFPB started operations, 
making this an opportune time to review how it is affecting 
American small businesses.
    Although the CFPB's primary role is to regulate financial 
products marketed to consumers, this rule also impacts small 
business owners. Small firms are major consumers of financial 
products, too. Nearly half use personal credit cards to finance 
their enterprises, while one in five utilize home equity loans 
for business purposes. It is clear that CFPB rules will 
influence small businesses seeking capital and credit. With the 
agency's broad responsibility, it is important that it balance 
the need to prevent abusive practices without adversely 
affecting the credit conditions facing small firms.
    It was for this very reason that meaningful safeguards were 
incorporated into CFPB's enacting legislation. These efforts 
were designed to mitigate the potentially negative effects of 
this new agency on the small business community. For this 
reason, small community banks with assets of less than $10 
billion were excluded from the reach of the agency as were 
retailers and merchants. So, too, were businesses that are 
already subject to insurance or securities regulation at the 
state level. Some entire industries dominated by smaller 
entities are also excluded from CFPB authority, such as 
realtors and auto dealers. Clearly, lawmakers recognize that 
small businesses were not the cause of the financial crisis and 
should not bear the burden of new regulations.
    Beyond these exclusions, small businesses were given 
additional protections. CFPB must conduct small business 
advocacy review panels for certain rules, becoming only the 
third agency required to do so. Along with the Regulatory 
Flexibility Act safeguards, this will allow small firms 
concerns about CFPB's regulation to be heard. Doing so can help 
reduce the impact on small firms while minimizing any 
additional costs of credit to them.
    The real issue before this Committee is one of oversight. 
Our responsibility today is not to exhume all arguments of 
ancient political battles, but to examine whether the agency is 
carrying out its mission in a way that safeguards consumers 
without overburdening small businesses. If done properly, this 
agency can make the entire financial system and economy more 
stable without constricting our nation's entrepreneurs.
    With this in mind, it is not only the lingering memories of 
the financial crisis that make us remember why we created the 
CFPB in the first place. Almost every day we hear from a 
constituent about an erroneous credit report, pressure tactics 
from credit card companies, abusive payday loans, or coercive 
financing scams. As long as financial products are laden with 
fine print, scare tactics, and incoherent penalties, consumers 
will be unable to truly drive our economy forward.
    I want to thank Director Cordray for being here and I look 
forward to his testimony. I yield back, Mr. Chairman.
    Chairman Graves. Thank you, Nydia.
    Our witness, Richard Cordray, is the first director of the 
Consumer Financial Protection Bureau and he was appointed to 
the position in January 2012. Prior to becoming director, he 
led the CFPB's Enforcement Division. He is a native of Ohio, 
and Director Cordray has served the state of Ohio in several 
elected positions, which included attorney general, treasurer, 
the Franklin County treasurer, and state representative for the 
33rd Ohio House District. Director Cordray has also appointed 
the first solicitor general in Ohio's history. We are very 
pleased to have you today and your entire written testimony 
will be entered in the record. So, please.

  STATEMENT OF RICHARD CORDRAY, DIRECTOR, CONSUMER FINANCIAL 
                       PROTECTION BUREAU

    Mr. Cordray. Thank you, Chairman Graves, Ranking Member 
Velazquez, and members of this Committee for having me here 
today. I look forward to talking with you about the Consumer 
Financial Protection Bureau's work and how it does and does not 
affect small businesses.
    When I served as the Ohio Treasurer, I revived a small 
business lending program that pumped hundreds of millions of 
dollars into buying down the interest rate on small business 
loans to encourage job creation. From this experience of 
working closely with small businesses in Ohio, alongside the 
National Federation of Independent Businesses, I came to learn 
a great deal about how small businesses work, what conditions 
they need in order to grow, and their vital importance to local 
economies. I personally visited many small businesses, which 
are an important engine for our economy, as you know. It is 
critical for everyone in government to understand what is 
necessary for small businesses to grow and prosper in today's 
economy.
    The Consumer Bureau is responsible for administering and 
enforcing the laws that relate to the provision of financial 
products and services to consumers for personal or household 
use. Small community banks and credit unions, and certain other 
small providers, are an essential source of financing for many 
of these consumers.
    Since the Bureau was launched just over a year ago, we have 
designed a number of ways to invite small businesses to provide 
their opinions about our work. We believe good public policy 
means getting as much feedback as we can, and that is exactly 
what we do with owners and representatives of small providers 
from across the country.
    To this end, we are setting up advisory councils to help us 
focus on how our work affects community banks and credit unions 
in particular. We have also created an Office of Community 
Banks and Credit Unions within our Office of External Affairs. 
And we have had hundreds of meetings and discussions thus far 
with small banks and credit unions, reaching every state in the 
country.
    We have also been holding small business review panels 
during our rulemaking process. So far, we have convened three 
such panels, along with the Office for Advocacy of the SBA and 
the Office of Information and Regulatory Affairs within OMB as 
required by law. These meetings consist of intensive, in-depth 
discussions about our upcoming rulemakings with small providers 
early in the process to help us shape our proposals around 
their specific input.
    This process makes us unique among the banking agencies as 
the only one that holds such panels. Fifteen to 20 people from 
small businesses and small nonprofit organizations may join us 
for each of these panels. They come from urban and rural areas, 
different segments of the market, and different parts of the 
country. We purposely seek this diversity to better inform the 
whole picture of the relevant marketplace throughout the United 
States. They get advance notice about the early shape of our 
proposed rules, and they come prepared to discuss with us how 
these proposals would affect their businesses, both 
substantively and operationally. We come prepared to listen to 
their input, address their questions, and learn.
    During the panel meetings, our staff discusses the 
background, objectives, and elements of the proposed rule under 
consideration. The small businesses usually talk about the 
costs, operational changes, and other impacts from their 
perspective. They give their frank opinions--positive and 
negative--about the proposal and offer suggestions on how to 
improve it. It is a collaborative effort all around, and the 
participants have told us that they appreciate the care and 
effort involved.
    These small business review sessions, which typically last 
a full day, have proven to be valuable to us. From the panel we 
held on proposed changes to the federally required mortgage 
disclosure forms, we learned, for example, that we needed to 
provide more detailed guidance to accompany the rule, which 
smaller providers viewed as helpful for their compliance 
efforts. Indeed, the small businesses told us that smaller 
settlement agents can lose a half-hour per closing because they 
struggle to understand various issues with the current rules. 
And that is multiplied across millions of real estate closings.
    So we took that insight in drafting our proposal, which now 
contains extensive commentary that details precisely how to 
complete the proposed forms; it also includes samples of 
completed forms. This extra material has become more specific 
in order to make it easier to implement the rules once they are 
adopted.
    These panels and the detailed reports they write afterward 
have played an important part in these rulemakings. As in 
everything we do, we are open to feedback and will continue to 
refine our processes as we gain more experience. The bottom-
line is we are committed to include small businesses in our 
rulemaking and to shape our proposals based on their input.
    Let me close by saying that at the Consumer Bureau we 
believe in smart regulation. Although we are seeking to 
streamline and simplify rules, when we are told it would be 
helpful to provide more detail and more specifics--which is a 
suggestion we hear often from industry--we take that into 
account. We recognize that while we are issuing regulations to 
protect consumers, we are also issuing regulations to provide 
certainty to financial providers. Because we believe in the 
free enterprise system, we want to see honest, fair consumer 
financial businesses compete and thrive. Clear rules of the 
road that reflect the input of small providers help achieve 
that goal. That is good for consumers and for the overall 
economy.
    Thank you. I look forward to your questions.
    [The statement of Mr. Cordray appears in the Appendix.]
    Chairman Graves. Thank you very much. I appreciate the 
testimony. We will start out, Alan.
    Mr. West. Thank you, Mr. Chairman and Madam Ranking Member. 
Thank you, Mr. Cordray for being here today.
    And you are right. I was not here when Dodd-Frank was 
passed, so we are not going back to do a history lesson. We are 
going to look at the law of unintended consequences.
    One of the things and your written testimony talks about 
tight statutory deadlines. And I guess that is part of the law 
that was written in there. But my concern is that when I look 
at these small business advocacy panels that you have, review 
panels, that some of the individuals, these small entity 
representatives were only notified, you know, a couple weeks 
before and then yet we are asking for written input back a week 
later. Do you really feel when you look at the economic impact 
of some of these rules and regulations that that really is 
enough time for them to operate? And do you think that you can 
come back to us and ask for, you know, extended times if that 
does constrain you?
    Mr. Cordray. Thank you, Congressman. It is actually a very 
good question. It is----
    Mr.  Well, thank you.
    Mr. Cordray [continuing]. Part of the landscape that we are 
dealing with over this first year in particular. We have some 
very tight statutory deadlines. We have a number of mortgage 
rules that are required to be in place by January. If they are 
not in place, I would note that there are statutory provisions 
that kick in of their own accord. So whether we write the rules 
or not, things are going to change according to what Congress 
has done. But writing the rules allows us to get a lot of input 
from people and perhaps soften or change or modify some of the 
provisions. So I think for the most part, a lot of the industry 
is very supportive of us meeting our deadlines and being tight 
on that.
    Mr. West. But do you think the one--the one week gives them 
really enough time----
    Mr. Cordray. Yes.
    Mr. West [continuing]. To look at this?
    Mr. Cordray. So as to the balance of your question, in 
retrospect, we would have preferred to have had more time to 
prepare the panels. And we will in the future have more time to 
prepare the panels. I will say it is a self-selected group. 
This 15 or 20 people from around the country, who very much 
wanted to participate in this process, were picked out in part 
by themselves and organizations that sponsored them. So they 
had a real incentive to be involved in the process. They did 
comment that it was a very quick timeframe and that is what we 
are living under. In the future, it will be nice to have more 
time for that and we expect to allow more time.
    Mr. West. So is there a way that we can come back and say 
if we do not get this thing right we need more time to get it 
right instead of rushing into it? You know, one of the things 
in the military we say you are always trying to a standard, not 
to a time. So I want to make sure that we get the standard 
correct and not just worry about the time. I mean, do you feel 
that you have the flexibility to come back and ask for more 
time if the industry members ask for that?
    Mr. Cordray. By the way, I noticed your Army background. We 
have some real leaders at the Bureau who have an Army 
background and they keep us pretty straight.
    Mr. West. Good. That is better than the Navy.
    Mr. Cordray. But what I would say is we will always be 
subject to any dictates that Congress lays down for us. If 
Congress decides we should have more time, we will be glad to 
take more time. If Congress wants us to be faster, we will be 
faster. We are a law enforcement agency and what you tell us to 
do is what we will do.
    Mr. West. Okay. The second question. If there are other 
agencies outside of CFPB that provide rules or regulations, are 
those rules and regulations also going to go through the same 
type of advocacy review panels or will they be able to slip 
under the radar screen and get implemented without having that 
process?
    Mr. Cordray. In the law as it currently stands, the small 
business review panels, which we have actually found to be 
quite valuable, only apply in the federal government to the 
EPA, OSHA, and now to the CFPB. They do not apply to other 
financial regulators. That was the wisdom of Congress and that 
is the statute that we are enforcing. So the answer to your 
question is other than us, the EPA, and OSHA, that process does 
not apply to the rest of the federal government.
    Mr. West. Do you think that that is something where we 
should go back and look at amending in case you have the 
Federal Reserve or someone else that tries to, you know, send 
in a rule and regulation that we need to make sure that they 
have to go through the exact same process?
    Mr. Cordray. I find that I have my hands full trying to run 
my own new agency. I typically do not go out of my way to offer 
suggestions to Congress about how other agencies can be 
governed. They can certainly offer that perspective themselves. 
I do not really have a position on that.
    Mr. West. But I guess the question that I am asking in the 
last 40 seconds is do you want to make sure that other federal 
government agencies cannot slip under the radar screen and 
implement rules and regulations that do not end up going 
through your small business advocacy review panels? And the 
next thing you know this is, you know, surprise, surprise. Here 
is something else. And again, the unintended consequences, the 
economic impact is exacerbated even more.
    Mr. Cordray. Again, I would defer to Congress. I would 
leave it to them. I would say that we are working hard to 
collaborate closely with our fellow banking agencies and other 
agencies and departments of the federal government and state 
and local government. We think that we will do our work better 
if we are in partnership with others and that we are on the 
same page so that the kind of small businesses you all are 
looking out for are not confused because different people come 
at them from different perspectives. I do think that is quite 
important.
    Mr. West. Thank you, Mr. Chairman. I yield back.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Mr. Cordray, in the last Congress, the House passed the 
Medical Debt Relief Act requiring paid or settled medical debt 
to be removed from credit reports within 45 days. That bill 
directly addressed the negative impacts such information has on 
a consumer's credit score. With your recent announcement that 
the CFPB would regulate credit bureaus, do you plan to address 
how medical debt is created on credit reports?
    Mr. Cordray. That is a very interesting question and 
something that we have been grappling with at the Bureau. Not 
only as medical debt affects credit reporting bureaus as your 
question goes to, but also as it affects debt collection, which 
intersects obviously with credit bureaus. That is often the way 
things end up getting reported to credit bureaus.
    We have found medical debt is a particularly difficult 
challenge because it is hard at times to define when a debt 
begins in the medical debt realm. You know, you will go to your 
doctor and you will receive services and it may be understood 
by the doctor's office that you do not necessarily pay on the 
spot. They will bill you later. When do you actually owe the 
debt? Is it as soon as services are rendered or is it after the 
first round of billing is done? There are often disputes 
between insurance companies as to what they cover and do not 
cover. I know from my family we may not know for a period of 
months exactly whether we owe a $10 co-pay or whether we owe 
$250 or whatever it is. So whether you would consider that debt 
or whether it is still a disputed item not yet firmed up, it is 
a hard issue.
    So what I would say is this. We have announced recently the 
finalization of our Larger Participant Role. This is the 
special process that is laid upon us if we are going to be 
overseeing financial providers that are not banks in new realms 
such as credit reporting. We are going to be overseeing and 
supervising the larger participants in the credit reporting 
industry. That will cover about 30 or so credit reporting 
companies, including the three very largest that are the ones 
that people are most familiar with, which keep consumer files 
on millions and millions of Americans. We will be overseeing 
all of their approach to this, including medical debt.
    We are in the process of working through issues of medical 
debt as it relates to what will soon be our supervisory 
coverage of debt collectors. We will continue to work through 
those issues. It is a sensitive spot. I know from my experience 
at the local level, where I collected real estate taxes at one 
time that one of the big issues that created delinquency for 
people was illness, injury, or death in the family. The debts 
that piled up around that often put people into default or 
foreclosure. So it is an issue we are very concerned about. We 
will be looking at the credit reporting bureaus with respect to 
that debt and all debt.
    Ms. Velazquez. Thank you.
    One of the key responsibilities given to the CFPB is the 
supervision of nonbanks. What role can these nonbank entities 
play in providing alternative sources of capital for consumers 
and small businesses?
    Mr. Cordray. We have seen in a number of markets that 
nonbank firms have been providing significant access to capital 
for individual and family consumers. We saw that in the 
mortgage market significantly before the mortgage breakdown and 
financial meltdown of 2007-2008, a tremendous amount of 
financed mortgages that did not go through any kind of bank or 
credit union or thrift or any kind of chartered institution. 
One of the problems in that market was that some parts of it 
were regulated and some parts of it were not regulated. And, 
you know, whatever your regime is, whether you think regulation 
can be a good thing or a bad thing, whether it is good in these 
circumstances and not in those circumstances, whatever your 
view is, the notion you would regulate part of a market and 
leave part of it unregulated, that does not work. I mean, that 
just does not work.
    Ms. Velazquez. You put at a disadvantage----
    Mr. Cordray. It is unfair advantages for some and 
disadvantages for others. It tends to reward the irresponsible 
who do not bear the same costs as the responsible. That was 
part of the problem in the mortgage market and it is part of 
what was changed, and I think much for the better, under Dodd-
Frank. So we are now, for example, overseeing and enforcing the 
law against both bank and nonbank mortgage originators and 
mortgage servicers, which has been a significant source of 
problems for individuals in districts across this country.
    In other markets as well, you know, the market for short-
term small dollar loans, which is a difficult market, one that 
is supplied often these days by payday lenders or other 
providers, maybe pawn brokers, maybe rent-to-own, other things. 
It is a market where there is a lot of concern about how 
consumers are treated. On the other hand, it is a market where 
consumers have a demand for that credit. So that is another 
area where we will cover both bank and nonbank sides of that, 
and I think that is helpful.
    But there is no question that the banking system alone has 
not provided access to credit that satisfies the needs of the 
American public. We have estimates of 80 to 90 million people 
who are either not banked at all or who have a bank account but 
use many other services outside the banking system to meet 
their needs. This Bureau cares about all of those consumers as 
well. It is not just if you are in the banking system or get 
yourself into the banking system; it is also how can we meet 
your needs in that space with the prepaid cards and other 
things? And it is very fast evolving, so it is hard for us to 
keep up with it.
    Ms. Velazquez. Can you talk to us about the memorandum of 
understanding that the CFPB signed with the STC to deal with 
jurisdiction or overlap between the agencies? Will these be 
enough to limit bureaucratic duplication or do you think that 
there might be something else that needs to happen?
    Mr. Cordray. What you are inquiring about is the fact that 
we now have authority over many nonbank providers of financial 
products and services, but Congress decided to retain 
overlapping jurisdiction with the Federal Trade Commission in 
many of these areas. They typically do not have jurisdiction 
over banks, but they do over nonbanks.
    Congress specified that we needed to work out a memorandum 
of understanding between us and the FTC as to how we would 
jointly use our combined resources to address problems in that 
space. We have worked very closely with the FTC. They have been 
a great partner, unusual among federal agencies from what I 
know from over the years. They have really reached out and 
worked with us. We did reach a memorandum of understanding in 
July, which was the deadline for us doing so. And we have been 
working with them very productively on a number of different 
issues.
    The other actors that have some role in the same space are 
state regulators and state attorneys general.
    We have also been trying to forge a constructive 
partnership with them. Ultimately, what you would want, I 
think, is for all of us in this space who do have the ability 
to oversee and crack down on illegal practices by nonbank 
providers, to coordinate our efforts and resources, to create 
the best bang for the buck for consumers. And also in ways that 
do not do stupid things by double teaming or duplicating. There 
is plenty enough for us to do without us trying to do the same 
things as one another. But that requires a lot of communication 
and coordination.
    Ms. Velazquez. My last question. Because, you know, we 
basically, this is the Small Business Committee and a lot of 
concerns have been raised by small firms who are concerned that 
they will be subject to the CFPB oversight for financial 
transactions. So my question to you is will your agency attempt 
to exercise oversight over financial products when no consumer 
is involved?
    Mr. Cordray. I do not think that we have the authority to 
be involved in a financial product where no consumer is 
involved. Our statutes are pretty clear that we are supposed to 
be--as a general matter, there may be some specific provisions 
in the statute that are different from that--but as a general 
matter, our authority is over consumer financial products and 
services defined as credit and financial products for 
individuals, households, for their families, for their personal 
purposes, not business credit, not business-to-business 
dealings. Again, there are a few odds and ends in our statute 
where that somehow relates, but that is in general not our 
field.
    Ms. Velazquez. Thank you. Thank you, Mr. Chairman.
    Chairman Graves. Scott.
    Mr. Tipton. Thank you, Mr. Chairman. Thank you, Mr. 
Cordray, for being here today.
    I would like to be able to explore just a couple issues 
with you. Recently, you were testifying today that the CFPB is 
taking some steps to be able to mitigate some of the criticism 
that you regard in some of the--is it the Tell a RESPA Rule? Is 
that how it is referred to?
    Mr. Cordray. Yes.
    Mr. Tipton. And it being 1,099 pages and you put up a blog 
post that said it was actually only 400 and some odd pages and 
the rest was regulatory just to be able to get some definitions 
out. Did you get feedback? And can you understand that for 
small businesses, when we start issuing 400 new pages of 
regulatory requirements that this actually becomes a burden?
    Mr. Cordray. Let me say several things. First of all, to 
sort of correct the record, there is about 200 pages of that 
that is the rule. There are about 200 pages of guidance that we 
included; particularly in response to input from small 
providers who told us that absent guidance and clarification on 
things they found that they lost time trying to figure things 
out, trying to interpret it. That is what I referred to up to 
half an hour per real estate closing multiplied by millions of 
closings.
    So that is what they told us, and it is kind of 
counterintuitive for me. I mean, I would prefer to have short, 
simple rules, but these are complicated matters. They have 
asked for more detail, more specificity, which ultimately means 
more pages in order that they will not have lots of questions 
afterwards. And by the way, if we issued a short rule, simple 
rule, but left things vague, what happens is everything still 
has to be figured out. It gets worked out on the back end. It 
often involves litigation. It involves going into court to get 
a court to tell you what it actually means. That is expensive 
for businesses. It obviously takes time. There is uncertainty 
all during that time.
    You know, a comparison I would make is the U.S. 
Constitution. It is a simple, very elegant document. For 200 
years, courts have been construing what it means, and there is 
a huge amount of pages now that have been generated by that. 
What industry has told us--again, it was contrary to my initial 
instinct on this--was if they can have more specificity and 
clarity up front, then there will be less to argue about 
afterwards, less litigation, and also more certainty for them 
on how to proceed. So again, optically, I do not like the look 
of a longer rule, but they have told us in some respects that 
makes their work easier.
    Mr. Tipton. And with respect to your statements, did you do 
a cost benefit analysis on this?
    Mr. Cordray. We are required by our statute to do an 
analysis of the burdens, impacts, and benefits of any rule.
    Mr. Tipton. What did that show?
    Mr. Cordray. I beg your pardon?
    Mr. Tipton. Are you doing that now?
    Mr. Cordray. We have been doing that. We have to do that at 
the proposal stage, so we have done that. We have to do that as 
we go.
    Mr. Tipton. Just out of curiosity, what are those costs 
going to be?
    Mr. Cordray. Well, I think the costs are the ones that 
people told us about. First of all, there is always a 
transitional cost with any change. Even when you streamline.
    Mr. Tipton. Do you have a dollar amount?
    Mr. Cordray. Well, there is a lot of analysis provided in 
the rule. I would hesitate to summarize, you know, what is, as 
you know----
    Mr. Tipton. Ballpark?
    Mr. Cordray [continuing]. Hundreds of pages. Well, there 
are costs that are implementation costs of making a transition.
    Mr. Tipton. Right.
    Mr. Cordray. And then as we go----
    Mr. Tipton. I just want a ballpark figure.
    Mr. Cordray. It is important to recognize here, as we go, 
since we will have integrated these two forms as Congress has 
been wanting to do for 20 years and nobody has succeeded in 
doing it yet, that will mean less cost per individual real 
estate closing.
    Mr. Tipton. So you do not have an actual dollar number? A 
vague dollar number?
    Mr. Cordray. There are dollar numbers provided. Again----
    Mr. Tipton. That is what I was asking.
    Mr. Cordray. Okay. I can refer you to our rule and you 
can--your staff--there are different dollar figures for 
different kinds of providers.
    Mr. Tipton. Did you give us dollar figures?
    Mr. Cordray. I beg your pardon?
    Mr. Tipton. Did you give us--just curious.
    Mr. Cordray. Sure. What I wanted to note was over time this 
is going to save money.
    Mr. Tipton. You are 101 million. Does that sound familiar?
    Mr. Cordray. That is a potential figure, depending on what 
assumptions you are making about who uses vendors and who does 
things on their own. But again, there is going to be a savings, 
sir. It is important to realize.
    Mr. Tipton. I would like to be able to--we are running out 
of time here. At the beginning of your statement you had 
noted--made the statement ``critical for people in government 
to know what makes small business grow.''
    Mr. Cordray. Yes.
    Mr. Tipton. And you talked about access to capital. If 
those dollars are being spent more and more on regulatory 
compliance, $101 million, is that draining money out of 
resources that can be applied to be able to grow jobs, to be 
able to get people back to work and get this economy moving?
    Mr. Cordray. Okay. So we are talking here about a multi-
trillion dollar market for real estate transactions.
    Mr. Tipton. My world $100 million is big dollars.
    Mr. Cordray. I understand. But it is not like there are a 
million dollars falling on each business. That is not what we 
are talking about here. And there is going to be savings in 
each real estate settlement closing. Each one over time that 
will pile up year by year by millions of transactions. And that 
needs to be taken into account as well.
    Mr. Tipton. Actually, we received comment, and I believe 
you probably have the written testimony as well from the 
realtors that they are concerned about this rule. Who is going 
to have to be filling out the forms? What some of those costs 
are actually going to be, and I think they are deeply 
questioning a lot of those actual cost estimates that are being 
taken so for granted by the administration.
    Mr. Cordray. We met with them and we welcomed their input. 
At this point, this is at a proposal stage. It is not yet a 
final rule. And so everybody is going to have a chance, 
including what I hear today, but also as we go through the 
notice and comment process, to give us their input and we will 
take that into account on the final rule, including from the 
realtors, settlement agents, all of the people involved with 
these transactions. Yes. Yes, sir.
    Mr. Tipton. You know, with your permission, Mr. Chairman.
    Chairman Graves. We are short on time.
    Mr. Tipton. Okay. I apologize. I yield back. Thank you.
    Chairman Graves. Before I turn to Bill, we do have a series 
of votes coming up. And we are going to stay--we will stay here 
for the first 10 minutes after they are called, but I hate to 
keep you through that series, so we may--if anybody has got 
questions that can be submitted and then you give us answers, 
because I know I do, we will make that a part of the record.
    Mr. Cordray. I am at your service.
    Chairman Graves. Phil.
    Mr. Owens. Thank you, Mr. Chairman. Thanks, Mr. Cordray, 
for coming over to testify today.
    When you talk about small business, how do you define that 
term for purposes of inclusion in the Small Business Advisory 
Groups?
    Mr. Cordray. So, again, that is another interesting 
question. The term ``small business'' is somewhat in the eye of 
the beholder. It is defined differently often market by market. 
So what is a small business in the aerospace industry would 
look very different from what is a small business in the 
hardware business, for example. The Small Business 
Administration has a working definition that they apply as a 
rough cut for many markets that if you have revenues of $7 
million or less, that is a small business. I can imagine 
markets where that would be a very large business, but that is 
one cut on it.
    It is likely for us going to be something that we will have 
to define, taking into account the size of markets. I think the 
assets of a bank, for example, would be larger than the assets 
of many retail businesses. So it is very contextual. But that 
is one definition to begin from and think about and then work 
from that. So that is one of the things that we have taken into 
account.
    Mr. Owens. How did you define it for purposes of the groups 
that you assembled?
    Mr. Cordray. So, for us, it is as laid out in the 
Regulatory Flexibility Act and the small business review 
panels, which as I have said have been used previously by the 
EPA and by OSHA, who are required by law to use them. We are 
the first banking agency of any kind that has been required to 
use this process.
    And the other thing for us is we do have this other hurdle 
we jump through before we can supervise nonbank firms in some 
of these other markets besides the mortgage, student loan, and 
payday lending markets. We have to define who are larger 
participants. And thereto, we started off by taking as one of 
the factors--we considered the SBA definition of a small 
business. It is $7 million or less. That definition is under 
review, by the way, by them right now. But there are some 
industries where that makes sense and some industries where 
that is probably well off the mark.
    Mr. Owens. It has been my experience that settlement agents 
tend to be relatively small businesses, a couple of people. 
Mortgage brokers in small communities tend to be a couple of 
people.
    Mr. Cordray. Yes.
    Mr. Owens. So that puts, I think as some of my colleagues 
were pointing out--some real burden on them in terms of 
compliance.
    I see in your testimony that you are considering 
potentially not requiring electronic retention of records and 
allowing paper retention for smaller businesses. Are you seeing 
any development by other entrepreneurs of software for this 
industry that is graded, if you will, from the couple of person 
business up to the 50-person business?
    Mr. Cordray. That is happening. That is obviously a 
tremendous business opportunity. Part of it is that 30 years 
ago there was very little computer involvement. Going back to 
my undergraduate days where to do anything on the computer you 
went across campus. It was a garage-size thing and you put in 
your cards and it took several hours. But now computers 
obviously are more and more integrating workplaces everywhere. 
And this is a vendor opportunity. So that is developing. But we 
have, in response to the input we got from small providers, 
some of whom have not gotten to that point and may never get to 
that point. They have been in business 20, 25 years. It is 
working for them. They do not really see the need to do the 
expensive upgrade in computer services. We have put into our 
proposal to consider exempting them from this electronic 
standard format which we otherwise prefer because it is going 
to make things very comparable. But that may not make sense for 
all providers and it is something we have listened to them on, 
heard from them on, and we are going to consider that as we 
finalize a proposal.
    Mr. Owens. I also noted that you said that in some of the 
instances the small businesses requested that you expand on the 
regulatory statements.
    Mr. Cordray. Yes. Yes.
    Mr. Owens. And that was because they felt that with greater 
clarity there would be less litigation and less confusion. 
After you did the expansion, what was the response of those 
small businesses to the additional information you provided?
    Mr. Cordray. I think in general there was appreciation that 
we heard from them, listened to them, and responded to them. 
Now, of course, people have various disagreements about the 
substance of what is in there, you know, whether we took their 
proposal or the escrow association's proposal or the credit 
union's proposal or something else. There is obviously always 
room for substantive disagreements. But I think they like the 
fact that we heard their suggestion to include more guidance.
    Again, every problem we can solve for them without making 
them sort of solve it on their own, which not only involves 
uncertainty about whether they are getting it right. You know, 
they can be sued under the Truth and Lending Act if they do not 
get things right. That can involve expense, or they may feel 
the need to consult lawyers, which is expensive. Not something 
small businesses want to have to do if they can avoid it.
    So everything we can do to clarify that up front, again, it 
feels perhaps to some, boy, all these pages. Why all these 
pages? Every one of those pages is trying to help solve 
problems that people have told us about and we are going to try 
to do it as best we can.
    Mr. Owens. Thank you very much. I appreciate your answers. 
I yield back, Mr. Chairman. Thank you.
    Chairman Graves. Joe.
    Mr. Walsh. Thank you. Thank you, Mr. Chairman. There we go. 
Thank you, Mr. Chairman. Mr. Cordray, welcome.
    We have heard recently about CFPB's examination 
notification process, and it has raised some questions. From 
what I understand, financial regulators usually will contact 
the entity to be examined by letter to make them aware that an 
examination has been planned and send that entity a pre-
examination checklist. I have been told recently that CFPB has 
been contacting these entities and on very short notice asking 
them to come to Washington, D.C. and meet directly with you. 
Why are you calling these entities--you, not yourself--but why 
are you calling these entities to Washington, D.C. to simply 
notify them of an examination? Or do I have that wrong?
    Mr. Cordray. To be frank, Congressman, I am not sure where 
that is coming from. That is not, in fact, our practice. I am 
not calling people in to meet with me. I do not really see what 
the point of that would be.
    Mr. Walsh. Are people being--Mr. Cordray, are people being 
called to Washington to notify them of a pending examination?
    Mr. Cordray. No, they are not. Let me say this. We are a 
new agency, so when we notify someone of a pending exam, it is 
the first time they have ever heard from us. So what we 
typically try to do is set up a meet and greet, but I believe 
that we almost always go on site. We do not put the people out. 
We go there. And I do not mean me. I mean, our examination 
staff. And meet with them and have an initial meeting.
    For the other agencies where typically they have been 
regulating and supervising and examining those people for 
years, you know, they just were there three years ago. Now they 
are coming again. It is very common that they would send a 
letter. We are trying to do a meeting but we are not calling 
them to Washington for that.
    Mr. Walsh. You do not know of any instances where you are 
calling people to Washington where people are having to come to 
Washington to be notified of an examination?
    Mr. Cordray. No. What we are doing is there are times when 
we are having people come to Washington, or if it is more 
convenient we can go to them. Or they may be coming to 
Washington anyway and want to come in to see us where we are 
talking to them about specific issues of concern.
    But in terms of the normal examination process, no, we are 
not dragging people to Washington just to tell them we are 
going to come to see you in three weeks. That seems kind of 
stupid.
    Mr. Walsh. Did you simply notify them of an examination?
    Mr. Cordray. Yeah. Yeah.
    Mr. Walsh. Because you concur that makes no sense?
    Mr. Cordray. That would be pretty dumb. We are not doing 
that.
    Mr. Walsh. Do you have to be present when you are notifying 
any small banks or mortgage companies of a pending examination?
    Mr. Cordray. No.
    Mr. Walsh. You, yourself.
    Mr. Cordray. And, in fact, you know, I am running an agency 
that is growing and is doing work all across the 50 states. I 
could not possibly do that. That would not make any sense for 
me. That would be a very poor delegation of authority on my 
part.
    Ms. Velazquez. Would the gentleman yield?
    Mr. Walsh. Yes, I would be happy to.
    Ms. Velazquez. I just would like for Mr. Cordray to correct 
for the record the question itself when he asked small banks 
are cold. They are exempted.
    Mr. Cordray. Well, small banks, anything under $10 billion 
in assets, we do not even examine. So none of them would be 
called anywhere. But it is also not our practice to call people 
to Washington to inform them of an upcoming exam.
    Mr. Walsh. And you have made that clear. And I thank----
    Mr. Cordray. Yeah. Although there are some special issues 
where we need to talk to someone about a particular issue that 
might or might not warrant a meeting.
    Mr. Walsh. So banks and mortgage lenders, you have made 
that clear that you do not know of any instances. And again, it 
is not at all a requirement that you or your deputy director, 
Mr. Dante, needs to be present or is present during any of 
these meetings.
    Mr. Cordray. Frankly, our examiners are much better 
equipped to manage and handle all aspects of the exams than I 
would be.
    Mr. Walsh. Thank you. I yield back, Mr. Chairman.
    Chairman Graves. Janice.
    Ms. Hahn. Thank you, Chairman, and ranking member for 
holding this hearing.
    You know, look, our economy is still reeling and recovering 
from what I believe was the damage that was caused by this 
housing crisis. And I know my small businesses, their biggest 
complaint is they have lost customers. So they are really 
concerned when folks are losing their homes and surrounding 
cities are contemplating bankruptcy as a result of it. So my 
small businesses want their customers to stay in their homes. 
So I, for one, am grateful that you are going to be able to do 
anything you can to make sure that folks really understand what 
they are getting into when they are getting into a mortgage.
    You know, before, even--we now know that before the housing 
crisis, several banks were participating in predatory lending 
and were in some cases blatantly targeting minorities. And we 
know that even after controlling for income differences, the 
Center for Responsible Lending found that African American and 
Latino borrowers were about 30 percent more likely to get 
higher rate subprime loans than white borrowers with similar 
risk characteristics.
    Can you tell me how the proposed rule will help to end this 
discrimination? And anything else that you can share that the 
CFPB is doing to protect minority borrowers from these, what I 
consider shameful predatory lending practices.
    Chairman Graves. Quickly.
    Mr. Cordray. Thank you Congresswoman. There have been, as 
you have probably seen, several enforcement actions in recent 
months taken by our fellow regulators. We work closely with 
them. We now have the authority to enforce the Equal Credit 
Opportunity Act, which will govern a lot of this kind of 
discrimination. We take that responsibility very seriously. We 
have an Office of Fair Lending in the Bureau. It is, I would 
say at this point, superbly staffed by high quality people who 
are very dedicated to this work. We are working closely with 
the Department of Justice as well, and there are times where we 
will coordinate with them on actions. And we are working with 
state attorneys general where that is appropriate.
    But we feel that everybody in the United States is entitled 
to access credit on the same terms as one another. It should 
certainly not be affected by gender or by race or by ethnic 
background. Too often that has occurred in the past. The laws 
are now meant to prevent that. They have to be enforced 
effectively if we are going to accomplish that. That is part of 
our mission.
    Chairman Graves. Thank you. I do not want to keep you, so I 
am going to ask the members that have questions, including 
myself, to submit them to you and get--in fact, my question is 
just about you said in your statement that the panels are a 
very valuable component of our rulemaking process. And I am 
very curious as to if you think that other federal agencies 
should incorporate the panel process to their rulemaking? And I 
would like an answer. Just submit it back. You do not have to 
answer now but I want an honest answer.
    Mr. Cordray. We will be happy to address anything anybody 
wants to submit to us in writing, Mr. Chairman.
    Chairman Graves. And that way we do not have to keep you. I 
know you are a very busy director.
    Mr. Cordray. Okay.
    Chairman Graves. This Committee is going to continue to be 
very active in watching how you move through the Reg Flex Act.
    Mr. Cordray. I am at your service any time.
    Chairman Graves. We appreciate it. And in fact, and I would 
ask unanimous consent, too, before I finish with the ranking 
member, unanimous consent that we have 10 legislative days for 
members to support materials and questions, whatever the case 
may be. And without objection, so ordered. Go ahead.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Two questions. Can you state for the record how much--did 
the housing collapse cause this nation?
    Mr. Cordray. It was trillions of dollars in household 
wealth, let alone trying to assess people who lost jobs and how 
much, you know, the downturn affected our broader economy.
    Ms. Velazquez. And I am interested in knowing when the 
agency is going to comply with section 1071. That is aimed at 
helping regulators understand credit conditions for small 
women-owned businesses and minority-owned businesses. It is 
important that you implement the rule requiring the collection 
of that data.
    Mr. Cordray. Yes, we are mindful of that. We also, as you 
may know, we have a separate window on this through our Office 
of Minority and Women Inclusion. And that gives us some ability 
to work with the financial industry on diversity in the 
industry which we take seriously as well. So I think all those 
things fit together.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Chairman Graves. Again, thank you very much Director 
Cordray. We appreciate you coming in. And with that, the 
hearing is adjourned.
    [Whereupon, at 1:53 p.m., the Committee was adjourned.]

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