[Senate Hearing 113-446]
[From the U.S. Government Publishing Office]
S. Hrg. 113-446
THE CONSUMER FINANCIAL PROTECTION BUREAU'S SEMI-ANNUAL REPORT TO
CONGRESS
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED THIRTEENTH CONGRESS
SECOND SESSION
ON
THE CONSUMER FINANCIAL PROTECTION BUREAU'S SEMI-ANNUAL REPORT TO
CONGRESS, DISCUSSING THE AGENCY'S BUDGET, REGULATORY, SUPERVISORY, AND
ENFORCEMENT ACTIVITIES, AND INFORMATION ABOUT CONSUMER COMPLAINTS
__________
JUNE 10, 2014
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
Available at: http: //www.fdsys.gov/
______
U.S. GOVERNMENT PUBLISHING OFFICE
90-951 PDF WASHINGTON : 2015
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
TIM JOHNSON, South Dakota, Chairman
JACK REED, Rhode Island MIKE CRAPO, Idaho
CHARLES E. SCHUMER, New York RICHARD C. SHELBY, Alabama
ROBERT MENENDEZ, New Jersey BOB CORKER, Tennessee
SHERROD BROWN, Ohio DAVID VITTER, Louisiana
JON TESTER, Montana MIKE JOHANNS, Nebraska
MARK R. WARNER, Virginia PATRICK J. TOOMEY, Pennsylvania
JEFF MERKLEY, Oregon MARK KIRK, Illinois
KAY HAGAN, North Carolina JERRY MORAN, Kansas
JOE MANCHIN III, West Virginia TOM COBURN, Oklahoma
ELIZABETH WARREN, Massachusetts DEAN HELLER, Nevada
HEIDI HEITKAMP, North Dakota
Charles Yi, Staff Director
Gregg Richard, Republican Staff Director
Laura Swanson, Deputy Staff Director
Glen Sears, Deputy Policy Director
Brian Filipowich, Professional Staff Member
Jeanette Quick, Counsel
Sabahat Qamar, CFPB Detailee
Greg Dean, Republican Chief Counsel
Jelena McWilliams, Republican Senior Counsel
Jared Sawyer, Republican Counsel
Dawn Ratliff, Chief Clerk
Taylor Reed, Hearing Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
(ii)
C O N T E N T S
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TUESDAY, JUNE 10, 2014
Page
Opening statement of Chairman Johnson............................ 1
Opening statements, comments, or prepared statements of:
Senator Crapo................................................ 2
Senator Menendez............................................. 3
Senator Toomey............................................... 4
Senator Brown................................................ 4
WITNESSES
Richard Cordray, Director, Consumer Financial Protection Bureau.. 5
Prepared statement........................................... 28
Responses to written questions of:
Chairman Johnson......................................... 31
Senator Crapo............................................ 31
Senator Reed............................................. 38
Senator Menendez......................................... 39
Senator Brown............................................ 40
Senator Toomey........................................... 41
Senator Moran............................................ 46
Additional Material Supplied for the Record
The Semi-Annual Report of the Consumer Financial Protection
Bureau......................................................... 50
(iii)
THE CONSUMER FINANCIAL PROTECTION BUREAU'S SEMI-ANNUAL REPORT TO
CONGRESS
----------
TUESDAY, JUNE 10, 2014
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:35 a.m., in room SD-538, Dirksen
Senate Office Building, Hon. Tim Johnson, Chairman of the
Committee, presiding.
OPENING STATEMENT OF CHAIRMAN TIM JOHNSON
Chairman Johnson. I call this hearing to order.
Director Cordray, welcome back to the Committee. Today, we
continue our regular oversight of the CFPB. In the 3 years
since the CFPB opened its doors, it has had a noticeable impact
on nearly every aspect of the consumer's experience with the
financial system, from student loans to credit cards,
mortgages, financial education, debt collection, prepaid cards,
and credit reports. The Bureau has conducted extensive outreach
to both industry and consumers and has proven itself to be a
careful regulator, in many cases over industries that
previously had no Federal supervision.
Importantly, the CFPB has also proven itself up to the task
Congress set out for it, which is to protect consumers. To
date, the Bureau has obtained nearly $900 million of refunds
and fielded over 375,000 consumer complaints.
During the crisis, we saw that mortgage lending, from
underwriting to servicing, had serious problems. Fittingly,
many of the CFPB's most significant actions relate to mortgage
lending. For example, the Bureau recently finalized its
mortgage disclosure rules to improve closings and provide key
loan terms and costs to consumers in clear, understandable
forms. While the consumer experience at the mortgage table is
an important aspect of mortgage lending, the ability of
consumers to access affordable mortgage credit in the first
place is critical. The CFPB's rules to strengthen mortgage
standards, including the QM and servicing rules, went into
effect this past January. Director Cordray, I look forward to
hearing how these rules impact mortgage lending, particularly
by small lenders or lenders in rural areas such as South
Dakota. While I support strong mortgage standards, it is also
important to ensure that lenders can continue to lend in all
communities.
Since Director Cordray testified last November, the Bureau
finalized its rule to supervise nonbank student loan servicers
who service over 49 million borrower accounts. For the first
time, the Nation's second largest consumer debt market will
have Federal supervision. I am encouraged by this action, but
remain concerned about the high level of student debt, which
stands at $1.2 trillion. This issue is particularly important
to me, as South Dakota has the highest proportion in the
country of residents with student loan debt. I am interested to
hear from Director Cordray about actions the Bureau plans to
take to address this growing problem.
According to Federal Reserve data released last Friday,
consumer credit growth jumped to its fastest pace in 3 years,
with credit card debt rising at a pace unseen since 2001. This
serves as a reminder that, as memories of the last crisis fade,
we need a diligent CFPB that guards against abusive practices
and ensures consumers are able to make responsible financial
decisions while having fair access to affordable credit. I
applaud the CFPB's work so far and look forward to your
testimony.
With that, I turn to Ranking Member Crapo.
STATEMENT OF SENATOR MIKE CRAPO
Senator Crapo. Thank you, Mr. Chairman. Today we welcome
back Director Cordray to discuss the most recent semi-annual
report of the Consumer Financial Protection Bureau.
In recent months, the CFPB has laid out a broad and
ambitious rulemaking agenda that will considerably affect many
consumer financial products and services. As the CFPB proceeds
with rules targeting short-term and small-dollar credit,
overdraft protection, auto financing, mortgage servicing, and
settlement and arbitration, it must fully understand how these
rules will affect the cost and availability of credit for
consumers.
The CFPB must also commit to take a balanced approach and
to performing a thorough qualitative and quantitative cost-
benefit analysis of each rule.
I am concerned that many of the CFPB's recent proposals and
actions will continue to push mainstream financial products
into unregulated areas, diminish consumer choice, and make
certain products unaffordable. Those outcomes could come at a
great cost to the consumer and should be prevented.
As the Director is aware, another initiative that is of
great concern to me is CFPB's big data collection. In the past,
I have asked simple questions regarding CFPB's data collection,
such as how many consumer accounts the CFPB is monitoring, and
how it intends to use the personal information it collects.
Unfortunately, my calls for transparency have been met with
ramped-up efforts by the bureau.
This April, I learned that the Federal Housing Finance
Agency and CFPB will expand the jointly run national mortgage
database to include a person's religion, Social Security
number, major life events, and link other lines of consumer
credit together on potentially hundreds of millions of loans.
This information is undoubtedly intrusive, unnecessary, and
contrary to the CFPB's public statements of not collecting and
using personally identifiable information. Adding concern is
the admission by FHFA's project manager for the database that
the information on it would be easy to reverse engineer.
Moreover, the FHFA and CFPB have already publicly indicated
that borrowers do not have the opportunity or right to opt out
of the database. Finally, the recent reports about employment
discrimination at the CFPB are also deeply troubling. Two CFPB-
commissioned independent external reports and testimony from a
whistleblower highlight the CFPB's failure of the employment
rating and compensation system and unacceptable conduct of
certain Bureau managers.
Today we will need to discuss how this occurred, why it
took months for CFPB to acknowledge and act upon these
independent reports, and what additional steps the CFPB is
taking to increase transparency and accountability.
Thank you, Mr. Chairman.
Chairman Johnson. Thank you, Senator Crapo.
Are there any other Members who would like to give brief
opening statements?
Senator Menendez. Sure.
Chairman Johnson. Senator Menendez.
STATEMENT OF SENATOR ROBERT MENENDEZ
Senator Menendez. Thank you, Mr. Chairman, and welcome
Director Cordray. The CFPB earlier this year released a report
on consumer protection issues involving student loans, and as I
look at hard-working middle-class New Jerseyans trying to get
ahead, I feel that they fall further behind.
A new class of college graduates is preparing to enter the
workforce, but the question is, at what cost to them and their
families? And at what cost if something should happen to them
before the loan is paid off?
The experience of the family of Christopher Bryski in my
State of New Jersey illustrates how challenging these issues
can sometimes be. In 2004, Christopher was a student at Rutgers
when he suffered a severe traumatic brain injury. It left him
in a vegetative state for 2 years before he tragically passed
away.
During this time of hardship, Christopher's parents were
shocked to learn that his student loan debt continued, that not
the injury nor Christopher's death was enough to stop the debt
from growing.
While some private lenders make clear that they will
discharge recent loans in the event of a borrower's death or
disability, others do not clearly communicate to co-signers
what their obligations will be, leaving families like
Christopher's to find out that they are on the hook for the
full cost of the loan, no matter what. We need to take a step
back and think about how we approach the student loan process,
especially in cases like Christopher's.
This month, new graduates will be starting their careers,
and before they collect their first paycheck, they will already
be burdened by massive student loan debt. Like Christopher, if
something happens to them, the burden in many cases will fall
to family members, many of whom are already struggling to make
ends meet.
According to the Federal Reserve Bank of New York, the
share of 25-year-olds with student loan debt continued to rise
last year, and the total outstanding balance now exceeds $1.1
trillion. That is nearly $30,000 for an average student loan
borrower in New Jersey. The burdens for families are real, and
the need for consumer protection I believe is critical.
That is why today, Mr. Chairman, with Senators Brown and
Booker, I am introducing Christopher's law, a simple and
commonsense bill that will require student loan providers to
clearly communicate to borrowers and their co-signers what
their obligations will be in the instance of death or
disability. By increasing transparency in this simple and small
way, the bill can save families like Christopher's years of
potential hardship down the road.
I also plan to introduce separate legislation in the coming
weeks to address two other related issues.
First, in the Bryski situation, when the lender ultimately
forgave Christopher's student loan debt, after 6 years, his
parents were then hit with a large tax bill on what is deemed
under the law to be ``income.'' The bill I will be introducing
will end that practice which unnecessarily burdens families and
the economy.
Second, if something unfortunate happens to the co-signer
of a student loan--death, disability, or bankruptcy--some
borrowers have gone into default despite never missing a
payment or doing anything wrong. That is simply unacceptable.
So I will look forward to discussing this issue with you
further today, Director Cordray, and I look forward to being
able to make a change so that death and disability is not a
continuing challenge to families.
Thank you, Mr. Chairman.
Chairman Johnson. Anybody else?
Senator Toomey. Mr. Chairman?
Chairman Johnson. Senator Toomey.
STATEMENT OF SENATOR PATRICK J. TOOMEY
Senator Toomey. Thank you, Mr. Chairman. I just want to say
briefly I will not be able to stay until the time when I would
be able to ask questions, but I am concerned about a process
that is underway by which the CFPB is collecting a vast amount
of information about credit card usage, you know, on the order
of--well, there is a staggering amount of data about individual
usage of credit cards. I have a series of questions. I will
submit them for the record and look forward to an opportunity
to have a follow-up discussion.
Thank you, Mr. Chairman, and thank you, Mr. Cordray.
Senator Brown. Mr. Chairman?
Chairman Johnson. Senator Brown.
STATEMENT OF SENATOR SHERROD BROWN
Senator Brown. I will be less than 30 seconds. I wanted to
echo the words of Senator Menendez. I am a cosponsor of his
legislation. I was on a call the other day speaking with the
sister of Andrew Katbi, who is a law student in western Ohio
who was killed right before he graduated from law school. His
sister, Olivia, spoke of some of the same kinds of behavior
that they experienced from their servicer similar to what
Senator Menendez talked about. So I am hopeful, Director
Cordray, that you can help us address those issues.
Thanks, Mr. Chairman.
Chairman Johnson. Anybody else?
[No response.]
Chairman Johnson. I would like to remind my colleagues that
the record will be open for the next 7 days for additional
statements and other materials.
Mr. Richard Cordray is the Director of the Consumer
Financial Protection Bureau. Director Cordray, you may begin
your testimony.
STATEMENT OF RICHARD CORDRAY, DIRECTOR, CONSUMER FINANCIAL
PROTECTION BUREAU
Mr. Cordray. Thank you, Chairman Johnson, Ranking Member
Crapo, and Members of the Committee, for inviting me to testify
again today about the latest Semi-Annual Report of the Consumer
Financial Protection Bureau.
The Bureau, as you know, is the Nation's first Federal
agency with the sole focus of protecting consumers in the
financial marketplace. Financial products like mortgages,
credit cards, and student loans involve some of the most
important financial transactions in people's lives. In the
Dodd-Frank Act, Congress created the Bureau to stand on the
side of consumers and ensure they are treated fairly in the
consumer financial marketplace. Those consumers are your
constituents. Since we opened our doors, we have been focused
on making consumer financial markets work better for the
American people, the honest businesses that serve them well,
and the economy as a whole.
My testimony today focuses on the Bureau's fifth Semi-
Annual Report to Congress and the President, which describes
the Bureau's efforts to achieve this vital mission. Through
fair rules, consistent oversight, appropriate enforcement of
the law, and broad-based consumer engagement, the Bureau is
helping to restore American families' trust in consumer
financial markets, protect American consumers from improper
conduct, and ensure access to fair, competitive, and
transparent markets.
Through our enforcement actions to date, we have aided in
efforts to refund more than $3.8 billion directly to consumers
who fell victim to various violations of consumer financial
protection laws. We have also fined wrongdoers more than $141
million, all of which has gone into our Civil Penalty Fund and
can be used to compensate wronged consumers--victims--and to
the extent compensating consumers is not practicable, to
support consumer education and financial literacy programs that
also will benefit the consumer public.
In the fall of 2013, for the first time, we took action, in
conjunction with multiple State Attorneys General, against an
online loan servicer for illegally collecting money that
consumers did not owe. We took action against a payday lender
for overcharging servicemembers in violation of the Military
Lending Act and robo-signing court documents. We took action
against an auto lender for discriminatory loan pricing. And we
partnered with 49 States to bring an action against the
Nation's largest nonbank mortgage loan servicer for misconduct
at every stage of the mortgage-servicing process.
CFPB supervisory work contributed to a recent enforcement
action resulting in a refund of approximately $727 million to
1.9 million consumers for illegal practices related to credit
card add-on products. In addition to this public enforcement
action, recent nonpublic supervisory actions and self-reported
violations--a great new development among many of these
financial institutions--have resulted in more than $70 million
being remediated to over 775,000 consumers.
In January, as the Chairman noted, mortgage rules that the
Bureau issued to implement provisions of the Dodd-Frank Act
took effect, establishing new protections for home buyers and
homeowners. During the reporting period, we also issued another
major mortgage rule mandated by the Dodd-Frank Act: a final
rule to consolidate and improve Federal mortgage disclosures
under the Truth in Lending Act and the Real Estate Settlement
Procedures Act, to simplify this process for individuals and
industry alike, which we call our ``Know Before You Owe''
project. We also issued an Advance Notice of Proposed
Rulemaking on debt collection, asking the public in-depth
questions about a range of issues relating to the debt
collection market, which is the Bureau's most frequent source
of consumer complaints.
To promote informed financial decisionmaking, we have
continued providing consumers with online resources, including
the AskCFPB section of our Web site, which I encourage you to
use on behalf of your constituents, where we have answers for
over 1,000 frequently asked questions.
A premise at the heart of our mission is that consumers
should be treated fairly in the financial marketplace, and they
deserve a place that will facilitate the resolution of their
complaints when that does not happen. To this end, the Bureau
has strengthened its Office of Consumer Response. As of June 1,
2014, we have received nearly 375,000 consumer complaints on
credit reporting, debt collection, money transfers, bank
accounts and services, credit cards, mortgages, vehicle loans,
payday loans, and student loans.
The progress we have made has been possible thanks to the
engagement of hundreds of thousands of Americans who have used
our consumer education tools, submitted complaints,
participated in rulemakings--actually, that should be
millions--and told us their stories through our Web site and at
numerous public meetings from coast to coast. We have also
benefited from an ongoing dialog and constructive engagement
with the institutions we supervise, as well as with community
banks and credit unions, with whom we regularly meet. Our
progress is also thanks to the extraordinary work of the
Bureau's own employees--dedicated public servants of the
highest caliber who are committed to promoting a healthy and
fair consumer financial marketplace. Each day, we work to
accomplish the goals of renewing people's trust in the
marketplace and ensuring that markets for consumer financial
products and services are fair, transparent, and competitive.
In the years to come, we look forward to continuing to
fulfill Congress's vision of an agency dedicated to cultivating
a consumer financial marketplace based on these principles.
Thank you for the opportunity to appear before you again
today. I appreciate the benefit of your active interest and
oversight, and I look forward to listening closely and
responding to your questions today.
Chairman Johnson. Thank you for your testimony.
As we begin questions, I will ask the clerk to put 5
minutes on the clock for each Member.
Director Cordray, the CFPB has now been up and running for
almost 3 years. What do you consider to be the most significant
accomplishment of the Bureau since 2011? And looking forward,
what actions can we expect either the Bureau over the next few
months?
Mr. Cordray. Thank you, Mr. Chairman. That is a broad
question, and I would say a number of things.
First of all, the challenge of building a Federal agency
from scratch has been significant. We have had some growing
pains, and we have been working through those. But at the same
time, we have gone from zero employees to now close to 1,400
employees, people who are very dedicated, as I said in my
opening statement, to protecting consumers and seeing that they
are treated fairly, and they are doing marvelous work to
accomplish that.
The mortgage rules that we put in place that Congress set
such a high priority on, both mandating that we do so and
putting it on a tight deadline, have been very significant.
That is the single biggest consumer financial market.
The enforcement activity that we have had to ensure that
institutions understand that people need to be treated fairly
and that money will go back to people's pockets when they are
treated unfairly have been important.
Our attempts to supervise and put in place now a
significant supervision program for nonbanks to put them on a
level with the banks and allow that we can now supervise and
oversee entire markets with an even hand and on an even playing
field have been very significant.
And I think increasingly not only our consumer response
function, which addresses individual complaints but also
reveals the pattern of complaints, but also our efforts to
provide public information that all of you can see and share
and that calls attention to various practices, some of which
were described in legislative proposals noted here today and
otherwise, I think do affect the market in meaningful ways.
Chairman Johnson. The QM rule has been in effect since
January. Would you discuss the rule's impact on the mortgage
market and on home buyers?
Mr. Cordray. The Qualified Mortgage rule, or ability to
repay rule, alternative names, has been one of the most
significant protections for the mortgage market to date, and it
is an important provision to recognize the need to prevent
similar financial crises from growing out of the mortgage
market in the future. And I think it has been widely
acknowledged that it will help to do so. I think the effort now
to potentially put the QRM rule on a level with the QM rule
acknowledges that fact. I think it has been a balanced
rulemaking, but it is something we are very attentive to and
closely monitoring. If we see unexpected consequences for the
mortgage market, we want to be ready to act, and we have been
close to the National Association of Realtors, mortgage
bankers, and others who are bringing us regular data to let us
see how this may be affecting the market.
In the rural areas, that is an area where we tried to be
very sensitive. We had an original proposal that was, I now
believe, not calibrated properly in terms of gauging what is
rural for purposes of this act. We backed that proposal off for
2 years while we can reconsider that further. We are taking a
lot of input on it, receiving a lot of comment, and I think we
will have a proposal that will be more satisfactory to people
within that 2-year timeframe.
Chairman Johnson. Director Cordray, the Bureau recently
proposed changes to the QM rule, including a change to the
points and fees limit to allow lenders an opportunity to cure a
loan that inadvertently exceeded the limit. Can you describe
why these changes were necessary and whether you think any
additional changes to the points and fees limit or QM generally
will be needed?
Mr. Cordray. The points and fees provision stems from the
Dodd-Frank Act and Congress' action there. We have heard from a
number of lenders about it, including the concern that was
stated--I think it was mortgage bankers in particular, but a
number of people have brought it to us--that although there is
a points and fees cap under the rule and people should be able
to go right up to the edge of that cap in making mortgages in
the market and we expect them to do so, that there was some
concern that if they got close to the cap, they would have to
stay away and create a gray area because of concern that they
might get it wrong. And a right to cure, at least on a certain
limited basis, would be a way to ease that concern.
We took that input to heart, and we have proposed a
provision to take account of that, which we have now had
comment on, and it is overwhelmingly supported by lenders.
There are some differences of opinion about what timeframe it
should cover and the like. Those are things we will work
through. But I think it is a reflection of our willingness to
listen to lenders about what is actually happening in the
market, how we can ease access to credit without lessening
consumer protections, and I think there may be a number of
places where we may have opportunities to do that.
Chairman Johnson. Senator Crapo.
Senator Crapo. Thank you, Mr. Chairman and Director
Cordray.
I want to start out with regard to the big data collection
issue, Director Cordray, and there are so many questions to ask
on that, I am just going to get into it briefly.
Mr. Cordray. OK.
Senator Crapo. But I want to remind you that we need to get
further answers from the agency with regard to literally the
scope of and the content of the big data project that is
underway to collect credit card information.
I just want to clarify one fact in these questions, and
that is, it is my understanding that the agency's goal is to
collect the credit card transaction information on 90 percent
of the credit card accounts in the United States. Is that
correct?
Mr. Cordray. I believe that is correct, although I would
not put it quite that way. We are not trying to collect
information on individual credit card accounts. We are trying
to collect information that would give us the pattern of credit
card activity in the marketplace so that we can protect
consumers against the kind of abuses that led to the CARD Act
and have been reined in considerably under the CARD Act. We are
also trying to collect information so that we can accomplish
our task that the Congress set for us of reporting to you every
year on the effects of the CARD Act, to help you understand how
it is affecting the marketplace, do you want to consider
further legislation to either go further or to reconsider what
was done? We cannot do that analysis if we do not have
information. This is----
Senator Crapo. I understand that, but if my math is correct
and understanding is correct, we are talking about
approximately 900 million accounts, and you are collecting data
on the 900 million accounts. Although I understand the purpose,
as you have stated the purpose, for your collection of this
data, I have significant concerns about the potential abuse and
misuse of that data and the loss of privacy that comes from it.
But I want to move to the more recent development which we
learned about in April, which is that the CFPB is joining with
the FHFA with regard to the national mortgage database. What we
learned then, just last April, is that the two agencies--the
FHFA and the CFPB--are going to jointly work to expand the
national mortgage database, and the information that came out
in the Federal Register with regard to this proposed expansion
is extremely alarming. And I am reading from the Federal
Register right now: ``The records in the new expanded system
may include, without limitation, borrower/co-borrower
information, name, address, zip code, telephone numbers, date
of birth, race, ethnicity, gender, language, religion, Social
Security number, education records, military status and
records, financial information, account information, including
life events of the last few years.'' And the list goes on and
on and on.
The question I have is: Does this mean that the assurances
that you have given us recently and, as we have discussed, the
big data projects that you will not collect personally
identifiable information on Americans is being changed? Is the
agency's intent changing in terms of its data collection?
Mr. Cordray. No, it is not, and I believe--without being
certain, I believe what you are reading from was a SORN, which
is a particular statement that is done for bureaucratic reasons
under the law as to what could conceivably be the case. The
national mortgage database, as it is conceived, will not
include personally identifiable information such as name,
address, Social Security number.
I also want to make a point to assure you and your
colleagues, because the question was raised, there are no plans
to include and we will not be including religion in the
national mortgage database.
So what I do want to say is the need for this information
is acute. Chairman Bernanke, when he testified here and when we
spoke personally, said that one of the problems before the
financial crisis was they did not know enough about the
mortgage market; they did not see coming what happened in the
mortgage market. And Chair Yellen has reiterated this since.
We have to know more about the mortgage market to prevent
this economy from cratering again on the same grounds it did
before.
Senator Crapo. Well, I understand, and this is a similar
rationale to your explanation----
Mr. Cordray. It is.
Senator Crapo.----of the need for information about credit
card transactions.
Mr. Cordray. Absolutely.
Senator Crapo. And I understand the rationale. But, again,
I have the concern that the Government collecting this
phenomenal amount of data about private citizens could be used
in an invasive way. And, frankly, my time is running out, but I
hope we will have another opportunity for additional rounds,
Mr. Chairman. I want to get into the questions about whether we
can reverse engineer this information and whether abuses of the
information could occur.
Mr. Cordray. And I recognize that this operates in 5-minute
segments. That is quite short. We are quite happy, as I have
said to you before, to have our staff continue with your staff
talk back and forth about your concerns about this. I share
those concerns. The GAO is conducting the study and report that
you asked for. It is extensive. It will get into all of these
concerns. We have had back-and-forth with them to considerable
length. They are conducting a very responsible and
comprehensive inquiry. And any way we can be helpful to you--it
is so critical that this Bureau and other agencies have
information to be able to oversee these markets and make sure
that things are not happening that we do not comprehend, while
at the same time recognizing the issues of security and privacy
that you are raising. I want to be sensitive to those and
recognize that as foundational for this agency as well. So I am
happy to spend as much time with you as you like personally
myself or through our staff on these issues.
Senator Crapo. Thank you.
Chairman Johnson. Senator Menendez.
Senator Menendez. Thank you, Mr. Chairman.
Director, in your mid-year update on student loan
complaints, you highlight a particularly egregious practice
where lenders automatically put a loan into default if the
loan's co-signer dies, becomes disabled, or declares
bankruptcy, even if the borrower has never missed a payment.
And that practice to me is unfair to borrowers who have been
making their payments on time and whose loans are current and
in good standing. And I am in the midst of drafting legislation
to fix that problem, but my question is: What are some steps
that can be taken under existing law to protect students from
this practice, students who might otherwise be able to qualify
for their existing loan either on their own or with a new co-
signer? And does the Bureau have the authority to remedy this
practice through rulemaking, or do you need additional
legislative authority?
Mr. Cordray. Thank you for raising that issue, Senator. It
was shocking to me--and I want to kind of describe the practice
so that people understand it, and tremendous work, I will say,
done by the student loan ombudsman in the CFPB who has been
just an outstanding advocate on behalf of the young people who
bear student loan debt burdens across this country in
significant measure.
The practice was that--nowadays many, many, the vast
majority--I think 90 percent plus--of student loans that people
take out have a co-signer on them, often a parent, maybe a
grandparent. And what will happen is the student then attends
school maybe for multiple years, ultimately graduates and
begins to repay student loans. They may well have a spotless
payment history, and yet suddenly something happens to the co-
signer--at this point the parent or grandparent is aging--and
eventually some of them pass away.
At a time when that young person is now affected by the
death of their parent or grandparent, we saw student loan
servicers calling in the account because the co-signer is no
longer available on it. Rather than considering this situation,
working with the borrower, working out a payment plan, or
recognizing that they have made spotless payments on time, that
was the way they heaped trouble on these poor affected people.
And it was not right.
I think the issuance of the report itself has sent people
scuttling throughout the industry to avoid a repeat of this. We
heard from one of the major servicers just the other day----
Senator Menendez. Short of--I do not mean to interrupt you
because my time is limited, but short of the report and public
shame, is there any regulatory ability to do anything about
this, or do you need additional authority?
Mr. Cordray. I would like to have our folks talk with your
staff about what additional authority we need.
Senator Menendez. All right. They would do that.
Mr. Cordray. But I do think that the shaming here is a
great example. I think it----
Senator Menendez. I am all for shaming, but I would like to
have a guarantee.
Many borrowers are having difficulty releasing co-signers
even though this was an option prominently advertised to the
borrower upon signing up. What is the feasibility of requiring
an automatic co-signer release in a situation where the
lender's conditions are met?
Mr. Cordray. I think that may be quite possible, and I am
not clear in my mind as I sit here now whether we need
legislation on that or not. Obviously, when things are written
in legislation, they are more lasting and more secure.
Senator Menendez. OK.
Mr. Cordray. But we would be happy to work with you on
that.
Senator Menendez. Would you make that part of the agenda
that we are going to follow up on?
Mr. Cordray. OK. Sure.
Senator Menendez. OK.
Mr. Cordray. Sure.
Senator Menendez. As you said, we are now at 90 percent--we
used to have 67 percent of private student loans were co-signed
in 2008. By 2011, that number jumped to 90 percent. So this
whole issue of co-signers, the whole issue of a young person
passing away or having a disability and then having their
parents now facing this debt, the whole issue of even if there
is forgiveness at the end of the day, getting a big tax
liability, these are issues that, you know, we would like to
work with you on, because I have serious concerns about where
we are at on those issues.
Mr. Cordray. I strongly agree with the issues you have
raised and the concern you are sharing about them. At a
minimum, even if something gets worked out, after 4 or 5 or 6
years of hassle and frustration and struggle, you know, it is
not a good situation for people.
Senator Menendez. Yes. You would think that death in and of
itself would have some finality.
Mr. Cordray. You would think.
Senator Menendez. Let me ask you one other quick question.
On prepaid cards, the last time you were here in November, we
discussed your upcoming rulemaking on prepaid cards. This is
something I have followed for some time. You can have products
that largely remain unregulated. Consumers can fall victim to
all types of hidden or abusive fees, being charged for customer
service or just to check your balance; or sometimes, if you
want to cancel the card because the fees are too high, you get
charged more fees to close the account, and we have legislation
dealing with that. Can you provide an update on the status of
the Bureau's work on prepaid cards? And what is your expected
timeline for a proposed rule?
Mr. Cordray. I can, and you and I have discussed this a
fair amount. This is a market where people do not realize it,
but they are subject to no consumer protections currently.
There are billions and billions of dollars being loaded onto
these cards, and that is a growing market. We had anticipated
that we would have a rulemaking proposal out in June, which is
this month. It is now taking us a bit longer. It will be into
the summer before that can happen. But it is a very high
priority for us right now. It does not indicate any particular
problems about the rulemaking, just that it is hard to work
through some of these issues. We are getting there and we will
have something fairly soon.
Senator Menendez. I will look forward to it. Thank you, Mr.
Chairman.
Chairman Johnson. Senator Johanns.
Senator Johanns. Thank you, Mr. Chairman.
Mr. Director, as you know, I am one of those Senators who
has taken the position and argued for some time that there
should be greater oversight over your budget process.
Mr. Cordray. Yes.
Senator Johanns. In fact, there is not much limitation
under the law. You can request up to 12 percent of the Federal
Reserve's operating budget, and the expenses must be reasonably
necessary to carry out your functions. So we do not get a lot
of oversight here, as you know, and I think that is very
problematic.
I want to focus on just a small piece of what you have been
doing with your spending. This relates to the building that you
are in, a leased building. It is a building not even owned by
your agency. Renovation costs started at 55; Washington
Examiner thinks it is up to 95 now. Now I think your own
acknowledgment is that it is probably $145 million.
There are some documents from Skidmore Owings & Merrill.
They are the architects, as you know, for this building. Here
is some of the money you are--or some of the things you are
spending money on. And I am quoting from the document:
At the western terminus of the skim fountain, a raised water
table spills over and down into a sunken garden below. The
water cascade creates an atmosphere of white noise as visitors
peer over the glass railings down into the sunken garden pools
and plantings below.
At the western side of the plaza is a calmer, informal seating
area under shady trees. Under the trees, the soft contrast of
the stone dust floor further implies a removed space of rest
and contemplation. Additional seating is provided along the
building edge at a lightly elevated timber-paved porch, which
is covered by a dark bronze color trellis, with a light bronze
color adorned with vines.
The southern side of the raised water table over a water wall
of naturally split granite. At this southern edge, a new water
source creates a cascade of water that flows down the wall into
the sunken garden, terminating in a raised splash pool. More
slabs of granite rest in the bottom of the pool.
Then it talks about a four-story interior glass staircase:
An all glass and stainless stair placed in the interior
vertical light wells connects levels 2 through 6 that allow
increased circulation while allowing daylight into the
interior.
It is nearly embarrassing, as I read through this stuff,
and that is about the oversight we have with you, is to just
raise these issues.
Do you think that kind of spending is really reasonably
necessary to carry out your functions on a building that is a
leased building? Would you make the case to us today that that
is reasonably necessary?
Mr. Cordray. So, if I may, several things in your
discussion I would like to address.
First of all, this has been out there and taken as gospel
in the public record for some time. It is a fiction of the
Washington Examiner's that this project started out at $55
million and now has ballooned to higher proportions. There was
never any expectation that this project could be completed for
$55 million. That is just--that is false.
Senator Johanns. How much will it cost? How much----
Mr. Cordray. What happened was, in the first budget where
we put anything in as a partial payment on the ultimate
project, $55 million was listed in that year's budget. That was
never considered to be the total cost--the notion this has
tripled in cost is just a fiction by the Washington Examiner.
That is all it is.
In fact, there was a review done of this building prior to
the CFPB being created when it was the OTS building, which is
what it was, in which they anticipated that even at that point
in time, baseline needs of the building, such as the HVAC
system, electrical problems, and other things, were going to
require at least triple figures' worth of construction work,
and that did not include a lot of the contingencies that go
along with a project like this.
As to the description you described, I find it
embarrassing. It is the kind of flowery statements that someone
will make when they are trolling for a bid, trying to get the
business and trying to make it sound as wonderful as they can.
Much of the flowery words there do not reflect any particular
cost. I would say that you could say the same thing about many
of the staircases and outer areas around the Capitol here.
There is nothing special about this in respect to other
Government buildings, and it is not a very special Government
building. It is actually a building that needs a great deal of
work. I wish it did not. I would rather not spend a single
penny on that. As you say, we do not own the building. So the
notion we are trying to create some palace that we do not even
own does not even make any sense to me. But we worked out with
the OCC----
Senator Johanns. We are out of time, and I do not want to
impose upon the Chairman's patience here. Would you be willing
to give us a thorough accounting of what is being spent and on
what in this building?
Mr. Cordray. Absolutely. I would be happy to do that, yes.
Senator Johanns. Thank you, Mr. Chairman.
Chairman Johnson. Senator Brown.
Senator Brown. Thank you, Mr. Chairman. And welcome back,
Director, and thank you for the--I am always--``amused'' is
probably not the right word, but when I hear a number of
colleagues, especially in the House, question the
accountability of your work and this Bureau, and I know that
you have appeared in front of the House and Senate close to 50
times now, and thanks for being as accountable as you have
been.
The Semi-Annual Report states that the CFPB will soon take
steps toward providing new protections for consumers in the
small-dollar credit markets. I appreciate the Bureau's
continued interest in providing oversight to this high-cost
market, but I am concerned that tailoring regulations to the
traditional payday loan market may still leave some consumers
vulnerable to harmful products. As we both saw with Ohio's
experience attempting in the legislature and the ballot to
prohibit high-cost, small-dollar loans targeting only
traditional payday loans allows lenders to move into other
products that trap consumers in a cycle of debt. As we have
seen in Ohio, lenders reorganized under the thrift lending law
and have moved into auto title lending, as you know.
As the Bureau considers new oversight for the high-cost
loan market, how do you ensure that new rules will protect
consumers through the whole range of products, including
obviously traditional payday loans, but online payday loans,
auto title loans, installment loans?
Mr. Cordray. So the issue you raise is of extreme
importance to the Bureau in addressing this market because, as
you say, I have seen the experience in Ohio where rules that
were meant to address concerns about debt traps and payday
lending were circumvented through migrations in the market. And
it is happening across the country in a number of States right
now.
We also have seen it, frankly, Senator, because the
Military Lending Act gave rise to similar problems. The first
set of rules that was adopted in the Military Lending Act about
7 or 8 years ago was narrow and allowed those rules to be
circumvented by high-cost lenders, who continued to operate
right outside of military bases or online with lots of
patriotic-looking flags and other things, and they are peddling
terrible products to our servicemembers.
We have been working with the Department of Defense for the
past year to revise those rules. Congress reopened that, and it
is exactly the same type of problem we are going to be dealing
with in the small-dollar lending market.
It is taking us somewhat longer as a result to address
this, but I think it is well worth a little additional time in
order to make sure that what we do will not be made a mockery
of by people circumventing it through just transforming their
products slightly.
Senator Brown. Thank you. I want to follow up and expand a
little bit on Senator Menendez's interesting questions about
student loan servicing. I chaired a Subcommittee hearing a week
or so ago about this issue. I am concerned that the problems
that we saw in mortgage servicing are being repeated in student
loan servicing, including flawed incentives, confusing loan
transfers, and nondisclosure of those, violations of
servicemembers' rights and inadequate and inconsistent
modifications and refinancing options. Three of our four
witnesses agreed we need comprehensive, consistent standards
for servicers, both Federal and private student loans.
Will you move forward with comprehensive student loan
servicer standards? And how can we better align servicers'
incentives with borrowers' needs as you move forward on this?
Mr. Cordray. I would agree that we see a lot of these same
problems that just absolutely bedeviled mortgage servicing--and
continues to do so, frankly--arising with student loan
servicing as well. There are different markets. There are some
different characteristics of the product. But poor customer
service, problems with transfers, lack of information, harm to
consumers, there is an eerie consistency there.
What we have done is, in this past period, we finalized the
rule that was necessary for us to be able to begin supervising
student loan servicers, nonbank student loan servicers on the
spot, and go in and actually see what they are doing to comply
with the law. And that insight is leading us to things like
recognizing the auto-default problem, which was not well known
before we called attention to it.
Whether that will lead to specific standards--and we do a
lot of work with the Department of Education on these issues--I
do not know yet, but we now have the ability to go in and
actually correct problems on the spot, which we did not have
before. And it is going to make a significant difference in
this market, I believe. And where it will all lead is hard to
say at this point, but happy to keep you posted as we go.
Senator Brown. Thank you, Director Cordray.
Chairman Johnson. Senator Coburn.
Senator Coburn. Thank you. Welcome. I have been watching on
television. I wanted to follow up a little bit with the line of
questioning that Senator Johanns had.
When you were here last, I asked you about this building,
and I believe the quote was the estimated cost to renovate was
$95 million at that time. That is your testimony back then. And
now the estimated total cost for the CFPB headquarters
renovation is $185 million.
So, first thing, how many square feet?
Mr. Cordray. I cannot give you exactly what the square
footage is, but what I know is that the building is
problematic. We are having to actually move out of it so it can
be renovated.
Senator Coburn. I understand that, but you do not know how
many square feet. So you do not know whether----
Mr. Cordray. I do not----
Senator Coburn.----$185 million is a good value for the
American taxpayers or not based on a per-square-foot
calculation of renovation costs.
Mr. Cordray. I know that we have been through these
numbers, and it is a--I believe it is an appropriate value. It
is something that was taken account of in the lease that we
negotiated with the OCC so that our lease payments were less
over the 30 years to take account of the fact that we, not the
landlord, would be making the improvements on the building.
It is a building that would be a white elephant if this
work is not done, and it is a Government asset owned by the
Treasury and the OCC. It is also a building that, when we
finish with it, will be populated more densely than it had been
before, so we need to be efficient about that.
Senator Coburn. I know, and that is a great sell job,
Administrator, but the point is we are $17 trillion in debt,
and when you hear--regardless of the flowery nature of what
Senator Johanns read to you, the fact is that this is going to
be opulent.
Mr. Cordray. It will not be opulent.
Senator Coburn. Well, if you have any of those waterfalls,
any of that stuff, that is the kind of stuff we cannot afford
right now in this country, because we are running a $600
billion-a-year deficit, the very thing you are trying to help
people with, in terms of fairness, in terms of the consumer
being treated fairly. We are going to take back from them in
terms of excess costs because we do not run things on a tight
ship.
So my point being to you is, you know, the structural
renovations, $139 million; the temporary lease is $22 million.
The securities, utilities, and other expense at the temporary
space for 3 years is $13.6 million. The cost of architectural
engineering and design contract was $9.2 million. That does not
include the IT, the apparent shuttle service that is going to
run back and forth. I mean, so there are a lot of costs in
this. And I am not saying what you did was wrong. I am just
saying we are buying top-dollar design and construction at a
time that we do not have the money to pay for it.
Now, you have an unlimited budget, and as Senator Johanns
made the point, we do not get any chance at oversight. I mean,
we do not get--and the fact is--who with you has the experience
outside of Washington of doing a rehab on a building? Who works
for you that actually has private-world experience in rehabbing
buildings?
Mr. Cordray. So, first of all, I would like to invite you
and your staff to come take a tour of that building that we are
now going to be out of for----
Senator Coburn. I am not saying that it is not----
Mr. Cordray. It is a dump. It is not opulent, and it will
not be opulent when it is finished either.
Senator Coburn. I am not saying that it does not need to be
done. One of my statements was it probably does need to be
done. The question is: Can it be done for less? Can it be done
under the realization that this country is in trouble
financially? And are spending money that we have to spend, or
could we spend less money? That is my only question.
Mr. Cordray. That is fair enough, and I am responsible to
you on that, and this is meaningful oversight that you have
with me. We also now are briefing the Appropriations
Subcommittee on these types of issues, both in the House and
the Senate. That is something I agreed to as I was confirmed by
the Senate, and I take this seriously.
We also do not have an unlimited budget. We have a budget
cap each year, and our spending has to come out of there. We
have no capital budget, and so every dollar that we spend on
something like this is a dollar taken away from other work that
we are doing. And I am feeling that and wanting to spend as
little as possible on this.
So I will be happy to continue to keep you and your staff
closely apprised. I know you care about these issues. We have
talked about them.
Senator Coburn. I just have a few seconds left. Who is the
expert on your side, on your staff, that has the knowledge to
make the decisions about a construction project like this? And
what is their experience outside of doing it for the
Government?
Mr. Cordray. OK. So we have people in the agency that are
working on this that are in charge of facilities, and we also
have brought GSA in because they are the expert in the Federal
Government on all of these types of projects. That is why we
brought them in, so that I could feel comfortable----
Senator Coburn. But you do not have anybody on staff that
has outside knowledge and outside experience to run a $180
million construction project?
Mr. Cordray. I do not know that I would agree with that,
but at the same time, that is part of why we brought GSA in. I
have----
Senator Coburn. So will you----
Mr. Cordray.----the same concerns that you have.
Senator Coburn.----answer for the record who on your staff
and what their experience is in terms of making the decisions
about this project?
Mr. Cordray. I would be happy to have you or your staff
meet with our facilities group and others and also meet with
the folks from GSA who are working with us on this. We brought
them in specifically because I share your concerns about this,
and every dollar spent on this is a dollar away----
Senator Coburn. Well, I----
Mr. Cordray.----from other work that we----
Senator Coburn. I would just tell you, I am not real
satisfied with the work GSA does on this. We are getting ready
to build a 190,000-square-foot VA facility in Muskogee that
ultimately we could own for about a third of the cost that we
are going to pay through rents, plus we have a 4-percent rider
in the lease that we have negotiated--GSA negotiated a 4-
percent rider on the lease, plus a $9 million or $8 million
design and construction budget for a facility that now is going
to be three times the size it was now, and we have a 5-percent
increase in veterans expected over the next 20 years in Tulsa.
So the point is GSA is not really great at this either.
Mr. Cordray. I do not really know about----
Senator Coburn. I know, but you are relying on experts----
Mr. Cordray. But I tell you, if you have other suggestions
for us, I am all ears. I do not want to----
Senator Coburn. Well, it is a little late----
Mr. Cordray.----spend more money than we need to either.
Senator Coburn.----right now. The deal is done, is it not?
Mr. Cordray. If you have further suggestions----
Senator Coburn. Yes, I will give you this suggestion: Go to
the outside of Washington, go into the middle of the country,
and find people like Manhattan Construction that knows how to
do this for a whole lot less money. They can design and build
it, that is adequate and built well, and do it in a way that
says we do not have an extra penny spend, now how can we get
what we need for the least amount of money? And that does not
happen at the GSA, and that does not happen in most Government
agencies. And you ought to set the example given the position
that you are in.
Mr. Cordray. OK. Happy to talk with you further about that,
and I know it is a concern for you. We have talked about it
before.
Senator Coburn. Thank you.
Chairman Johnson. Senator Merkley.
Senator Merkley. Thank you very much, Mr. Chair, and thank
you, Director, for your testimony.
I wanted to start and ask you to say a little bit about the
resolution of the Castle & Cooke place issue. I believe this is
where steering payments occurred to employees who were steering
customers into higher-interest loans and then getting bonuses
for it, these steering payments being banned under Dodd-Frank,
and now under your supervision, you have taken action against
their appearance. Can you just maybe summarize where this
action ended up?
Mr. Cordray. Sure, and, frankly, it is exactly as you just
described it. You have had steering going on that we believed
was in violation of the law. We were actually surprised that
the company did not recognize that what it was doing was in
violation of the law, because we thought it was--you know,
there are many areas where you could say it is somewhat
debatable, but this we thought was absolutely clear-cut. It
took awhile for that to sink in. Ultimately the matter was
resolved with significant payment and also penalty, and it is
indicative of the need to oversee the actual enforcement of
rules and laws, and not just to assume that once they are on
the books everybody understands them and abides by them,
particularly if there may be financial incentives not to do so.
So, you know, it is a great example of why you need an
agency to actually bulldog laws and rules and make sure that
they are actually occurring in the marketplace as they should.
Senator Merkley. I believe about $9 million was returned to
approximately 9,000 individual mortgage holders. Did the
mortgage holders also get, if you will, a permanent discount on
their interest rates since they had been steered into higher-
interest loans?
Mr. Cordray. I do not recall offhand. I would be happy to
fill you in further on that. I know that there was injunctive
relief going forward to make sure that what we saw happening
was not going to happen again. I do think also this signals the
market, as a public enforcement action does, that if other
people happen to continue to be engaging in this and somehow
thinking that it is appropriate or thinking that people will
not pay attention, that we will. And I think it is quite
important as a matter of principle.
Senator Merkley. Thank you. You anticipated my next
question, really the deterrence effect, because this type of
steering in which a mortgage originator poses as a financial
counselor and then steers people into high-interest loans when
they qualify for low-interest loans is just a huge predatory
practice, and I am delighted that you are patrolling against
that predatory practice, and I hope and anticipate that there
is a substantial deterrent effect from what you have done.
Mr. Cordray. Again, what was surprising to me here was
there has been so much visibility on this issue and it was so
remarked upon and explicitly dealt with by the Congress and by
us in the wake of the mortgage market meltdown that I was just
very surprised to see a company engaged in these practices and,
even upon engaging with them, did not seem to be aware that
these practices were illegal. Eventually that got through.
Senator Merkley. Well, millions of American homeowners,
mortgage holders, will benefit from that action, so thank you.
I want to turn to the issue of medical debt, and thank you
for this report you have all put out, ``Data Point: Medical
Debt and Credit Scores.'' This is something I have been very
concerned about because essentially when you get a bill on
health care activity, you normally get these papers that say
this is not a bill, and then you get something from the
laboratory and then you get something from the X-ray
technician, and meanwhile your insurance sends you something
and says this is what we think we are going to pay, but you are
not sure they are going to pay. And it becomes this whole
confusing matrix that often takes quite a while to sort out
whether the appropriate payments have been made by the
insurance company.
Often in the course of that, medical debt is reported to a
credit agency, putting a permanent scar on your credit record
that really has nothing to do with your--it is just the fact
that this type of debt takes a while to figure out. So I have
felt when those medical debts are paid off, they should be
cleared from the credit record because of the logic behind the
fact that they probably bear a little resemblance to the role
of other debts in anticipating whether or not you will make
payments. And your report indicates about a 20-point margin,
and just in other words, it is the first solid evidence I have
seen that this is, in fact, a miscalculation of the ability to
pay.
Do you want to comment on this at all?
Mr. Cordray. I do. I would like to reinforce what you said.
Medical debt is something I think we all can understand and
appreciate. We have all been to the doctor's office and then
either not been billed or later we are billed and we are not
sure whether the insurance company is paying for it or whether
we are supposed to double-pay that bill. It is very confusing
for people. It is often small amounts. And yet what we find is
it gets reported on people's credit reports, and it affects
their credit. And it may keep them from getting a mortgage or a
car loan, something significant, when it was 20 or 50 bucks and
they honestly thought it had been paid by the insurance
company.
This is a great example of--as you say, it is the first
time we have actually been able to have enough data and
information to really dig into this and point out to the credit
reporting companies that they are not scoring medical debt in
the credit scoring companies appropriately compared to other
debt. And, you know, if we did not have that data or
information, we could not do that analysis, and we could not
show that. And I think we are already beginning to see the
credit scoring companies are responding to this and recognizing
that they need to up their game and think more--think
differently about medical debt from the rest of debt, for all
the reasons I think you laid out so well.
Senator Merkley. My time is running out, so I will just
close by saying I appreciate the letter I received from the
CFPB yesterday in regard to payday loan practices and the
statement in that letter that if lenders are engaged in unfair,
deceptive, or abusive acts or practices, the Bureau will hold
these institutions accountable no matter how their products are
structured.
This certainly is a big concern to States like Oregon that
have tried to comprehensively protect against predatory,
triple-digit, 500-percent-interest payday loans, and then
lenders using online practices and remotely generated checks
are basically pulling--violating the law in a straightforward
way, but able to get away with it because they are at a
distance and they can pull money out of checking accounts. A
lot has to be done on this, and thank you for taking a look at
this, and I will continue to work with you on it.
Mr. Cordray. Thank you.
Senator Merkley. Thank you.
Chairman Johnson. Senator Heitkamp.
Senator Heitkamp. Thank you, Mr. Chairman.
You and I share, Administrator, a common experience, and
that is, running our own local consumer protection bureau when
we were both Attorneys General. And so when I look at this, I
kind of look at the broad scope of possibility for protection
of consumers not just laying at your shoulders.
And so one of the concerns that I have is the need to do
coordination with what is happening on a State level,
understand what is happening on a State level, understand what
is happening on a local level, and then broadly understanding
what is happening with all of your sister or brother agencies
that also have overlapping jurisdiction. And one of the
frustrations that I hear is, ``Here it comes again, yet another
agency to be talking to without any coordination.''
So I would just ask, as you look at each one of these
issues, that you look at coordinating with the State and
understanding better what State agencies are doing. A good
example was already today with prepaid cards. You said there is
no regulation. There is in the State of North Dakota. I made
sure there was regulation of these cards in the State of North
Dakota.
And so you cannot say with certainty that there is none
when I know that there are a number of activities that are
going on in States, and it is important for us to understand
those.
With that said, I would also say that we have referred
North Dakotans to your consumer complaint Web site and have
gotten really very favorable reviews back. And so it is yet
another avenue for people to raise concerns.
With that said, I would also say one of the issues that I
worked on when I was Attorney General was the issue of bank
privacy, and I share Senator Crapo's concern about the amount
of data that is being collected, and I understand the need to
have enough to do the analysis. But we need to be very, very
mindful of the sensitivities of consumers today about their
information. And I think there is a growing insecurity, and if
they look at the Federal Government, we have not exactly given
them reason to believe that we are going to be confidential
with it or that we are going to be straightforward. And so, you
know, I look forward to the GAO report. I look forward to other
enhanced discussions.
I want to just mention something on payday lending. I was
probably one of the first foolish people to weigh into that
area back in the day, and I will just tell you a quick little
story. The payday lending that was going on was just as
egregious as it is today. It has just taken different forms.
But why I was unsuccessful in getting appropriate regulation is
900 consumers signed a petition telling me to mind my own
business. And so we need to be aware that in that lane there is
a desperate need that is not being fulfilled for short-term
credit that, you know, whether it is to buy cars or diapers or
whatever it is. And so we need to be mindful that, as we look
at this, we do not close off the avenue for that kind of
credit. I listened to those 900 consumers, and, you know, where
I think that was done incorrectly, and I have a lot of concern
about what is happening with payday lending. Until we have a
country that has maybe more economic justice, we are going to
need to give people access to that kind of credit.
I want to just talk a little bit about student loans and
ask you your opinion. The administration I think recently said
that they are going to cap repayment at 10 percent. All that is
really going to do for a lot of the consumers in my State, a
lot of student borrowers in my State, is extend the time that
they are going to have. So they are never going to be out of
consumer debt.
Senator Warren and I have a bill, along with a number of
us, to restructure consumer debt. How do you see the
restructuring of consumer debt actually benefiting long term
the creditworthiness of Americans who currently have that level
of debt?
Mr. Cordray. It is obviously a complicated subject, and it
depends a lot on the individual circumstances, the individual
borrower. But it is certainly the case that what upsets
someone's credit most of all is ending up in default. And if
the payment levels are unrealistic, particularly a lot of young
people coming out of school today are not finding the jobs that
they hoped to find, particularly in the wake of this financial
crisis, and so the income-based repayment, as I understand it,
was an attempt to maintain some sort of balance there. Whether
it is the exact right balance, exactly what it should be, is
hard to say, and I am not an expert on it.
Senator Heitkamp. If we did an analysis of student debt and
we said restructuring it the way we have set up the ability to
restructure it, could we be at the 10 percent and shorten the
time period of repayment?
Mr. Cordray. It may be. Obviously it depends on the level
of rates, and I know that is one of the things your legislation
would try to address. I would say if you compared a mortgage--
and the comparison is not exact, but there are a lot of
parallels. It has been loan restructuring--and sensible loan
restructuring, not any old loan restructuring, because
sometimes you can have loan modifications and end up with
higher payments, which was not a formula for success--has been
the winning and the most optimal way of addressing some of the
mortgage problems that people are still digging out from, and
it could be that in the student loans the same type of approach
could be very beneficial to people.
Senator Heitkamp. Just one quick comment. We have obviously
a State-owned bank in North Dakota. We are quite proud of the
Bank of North Dakota.
Mr. Cordray. Yes. You are the only one.
Senator Heitkamp. Yes. And we have recently announced a
program at the bank for restructuring student debts, and in a
month there has been over a thousand applications. So it tells
you the absolute essential need for assisting people in
restructuring this debt.
Thank you, Mr. Chairman.
Chairman Johnson. Senator Warren.
Senator Warren. Thank you, Mr. Chairman, and thank you,
Director Cordray, for being with us once again.
When I taught contract law, I covered arbitration clauses
near the end of the term, and students usually came in thinking
arbitration sounded so friendly and so inexpensive. But after
studying the law, they discovered that arbitration stacks the
deck against customers in favor of large corporations.
Arbitrators often have a financial interest in remaining in the
good graces of the corporation that places lots of business
with them. Corporations usually hold all the key evidence in
the dispute but are under no obligation to turn it over. And an
arbitrator's ruling cannot be overturned even if it contains
clear legal mistakes or factual errors.
So the bottom line is that when a customer thinks he has
been cheated or that a bill is wrong, an arbitration clause in
his contract makes it nearly impossible for him to get any real
help. So it is no surprise that many big banks and other big
corporations force customers to agree to arbitration clauses to
get credit cards or open checking accounts, knowing that this
means that the customer will have no real remedy if things go
wrong.
So, Director Cordray, as you know, Dodd-Frank requires the
Bureau to conduct a study on these forced arbitration clauses
and authorizes the Bureau to prohibit or limit the use of such
clauses based on that study. The Bureau released the
preliminary reports last December, and they were damning.
Forced arbitration clauses are everywhere, particularly in
contracts with the largest banks, and these clauses
dramatically restrict the legal options available to consumers.
I know there are additional issues that the Bureau wants to
examine in its final study. When do you think the Bureau will
have that study?
Mr. Cordray. So I would say a number of things. You know,
this is an interesting area where if you look at what industry
says and then you look at what consumer groups say, sometimes
there is some relation between the two. Here there seems to be
almost none. And so as I understand it, Congress waded into
this area in Dodd-Frank in a way that is more interventionist
than Congress has been on arbitration in other areas,
particularly in business situations, where the Federal
Arbitration Act has been viewed by the courts as having a
policy in favor of arbitration.
Here, however, under Dodd-Frank, arbitration clauses have
been barred from mortgage contracts flat out by the Congress.
In terms of the other consumer finance contracts, as you noted,
what the Congress has said very specifically and carefully to
us at the Bureau is--you know, there seemed to be very
different views of this--we are going to direct you, not
suggest but mandate that you perform an appropriate study, a
comprehensive study, and make your best judgments about the
pros and cons of arbitration clauses, and based on the results
of that study, consider what policy interventions may be
appropriate.
The Bureau has been trying to carefully adhere to that,
and, frankly, if anything, we have erred on the side of a very
thorough process. But I think that ultimately that is the right
thing to do here. As you noted, we put out essentially an
interim progress report where we covered certain subjects. We
have more to come. I believe we have indicated that further
work on that, it is ongoing. It is very active, and I believe
it will be completed this year. And then we will be in a
position to make policy judgments based on that. And I
understand that some people think we should take forever on
this, and other people think we should have finished it
yesterday. I have my own views, but we are pushing along, and
we are trying to do the work as Congress set it out in that
framework, the two-step, just as they said.
Senator Warren. All right. But you anticipate it is going
to be this year?
Mr. Cordray. I do anticipate it is going to be this year.
Senator Warren. Good. I am very glad to hear that.
I have a second question. Now, I am sure you would tell me
that you will need to see the final study before deciding
whether to issue rules restricting or prohibiting forced
arbitration clauses. So let me ask the question this way: What
kind of evidence would lead you to believe that the Bureau
should issue rules on forced arbitration?
Mr. Cordray. You know, this is--it feels very much to me
sort of like a case that is under advisement in a court.
Clearly I should not prejudge the issue of policy interventions
before we have finished the study. We are well along, but we
are not yet complete.
Certainly in the end it is going to depend in part on
things like: How does arbitration work? Does it provide a
meaningful avenue for resolution for consumers? Does it not?
Why does it? Why doesn't it? Does it matter how an arbitration
proceeding is procedurally set up? You know, there are a
variety of things that we are considering. The other is: How
does it compare to alternatives in court?
I think we could all look at it and we would come to about
the same conclusions about what kind of evidence we think
matters, but I would really like today here, if I can, to stay
away from trying to prejudge that.
Senator Warren. All right. But I do want to be clear that
if the evidence supports it, the Bureau is willing to issue
rules regarding forced arbitration?
Mr. Cordray. I think Congress gave us a very specific task
here. They said look at this very carefully, study it, tell us
your results, and based on those results, you have an
obligation to engage in policymaking that appropriately
reflects the conclusions you reach.
Senator Warren. Excellent. I just want to say I realize
that arbitration can play a very important role in our legal
system as long as parties choose arbitration freely after the
dispute has arisen. But forcing customers into an arbitration
system that banks control is just another way to tilt the
playing field against consumers. The CFPB can help level the
playing field, and I look forward to seeing the final report.
Thank you very much.
Thank you, Mr. Chairman.
Chairman Johnson. Senator Crapo.
Senator Crapo. Thank you, Mr. Chairman.
Director Cordray, before we go back to data issues, I had
one question on Operation Choke Point. News reports tell us
that the Department of Justice and several Federal banking
regulators are pressuring banks to end relationships with
legally operating payday lenders and with gun stores,
retailers, and that this operation is known as Operation Choke
Point. Are you familiar with it?
Mr. Cordray. I have certainly read numerous press accounts
of it, and, therefore, I would say I am familiar with it.
Senator Crapo. Is the CFPB participating in Operation Choke
Point?
Mr. Cordray. I think the CFPB has a job to do as a law
enforcement agency to police illegal lending, whether it is
online or in person, and much of what we are talking about here
is online. There is now--the further issue that has been raised
is what about illegal lending that operates by piggybacking on
the existing banking payment system. That is not something the
banks like. It is not something--not a risk they want to be
exposed to. Some of this gets into areas of prudential
regulation, safety and soundness, and sort of risk, operational
risk, legal risk, reputational risk, that I am not an expert
on. So I want to----
Senator Crapo. But does this mean that you are
participating with Operation Choke Point?
Mr. Cordray. I am not sure what you mean by
``participating.'' I think that the agencies have all tried to
discuss what is the appropriate approach to Know Your Customer.
That is really, again, more of a prudential regulator term. But
our concern at the Consumer Bureau is we are supposed to be
policing nonbank lenders as well as the banks, and many of
those nonbank lenders that are riding along the payment system,
if they are acting illegally--and this is one of the
enforcement actions I described in my opening remarks--need to
be addressed.
But what I would say is it is about whether the activity is
legal or illegal. It should not be about whether it is
disfavored or favored.
Senator Crapo. The operation, what I understand from,
again--and we just get this in the news reports. But from what
I understand about it, there is an conscious effort to force
legally operating payday lenders and gun store retailers to
stop their business.
Mr. Cordray. I do not know if that is in the reports, and I
do not know if that is accurate or not. I do not know if that
is what anybody intends, and I do not know if that is what is,
in fact, happening. The Bureau's focus is on ferreting out
illegal activity, and it is hard enough to do, frankly----
Senator Crapo. Understood. But what advice have you given,
if any, to the Department of Justice on this project?
Mr. Cordray. I have not given advice to the Department of
Justice on this.
Senator Crapo. All right. And, again, because of time, let
me switch quickly back to the data issues. And, Mr. Chairman, I
have got a lot of questions on this and others that I am going
to have to just submit for the record. I would hope that we can
do that.
Senator Crapo. I just want to talk quickly back again about
this new project on the national mortgage database that you are
engaged with, with the FHFA. When I read to you that long list
of personal identifiers that the Federal record says are going
to be collected, you indicated that that was just a list that
was--I do not know what you called it. A SORN list?
Mr. Cordray. It is a term of art that, frankly, is the kind
of thing only bureaucrats can love, but, yes, it is called a
``SORN''--S-O-R-N. I do not even know what the acronym is, but
it is sort of statement of operational risk notice, something
like that.
Senator Crapo. Well, accepted, but it is also a statement
in the Federal record, Federal Register that says that this
data will be collected.
Mr. Cordray. But here is the difference. I believe that in
order to access data, we have to secure it from somewhere--
procure it, buy it, whatever. And it comes in whatever format
it starts out in, and it is already being bought and sold out
there by industry in that format.
Senator Crapo. Understood.
Mr. Cordray. For us, in order to create the kind of
database that I have pledged to you will meet the kind of
criteria I have laid out, which is the identifying, the
personally identifiable information, if it comes to us--comes
to someone in a different form, then it needs to be de-
identified before it can become part of the database. That is a
careful process----
Senator Crapo. So what I understand you to say is that you
are actually collecting all this information----
Mr. Cordray. I do not know----
Senator Crapo.----anonymizing it or de-identifying----
Mr. Cordray. I do not want to jump to that conclusion. They
are collecting information, and I think they are identifying
what may be in it, depending on the original data set, which is
out there in the marketplace----
Senator Crapo. Understood.
Mr. Cordray.----being freely passed around. And for our
purposes, if it contains that kind of information, then that
would be de-identified before it comes into our database and
cannot----
Senator Crapo. Well, then what the----
Mr. Cordray.----be used by any of my employees.
Senator Crapo. Then what the FHFA notice says is that it
will include that information, and then they in this notice
also say that they are going to de-identify it for some
purposes. So the question then comes back to: Is this an
unnecessary invasion of the privacy of citizens? When you look
at that list of identifying information that is contained----
Mr. Cordray. That could be.
Senator Crapo.----it is scary. But here is the question: At
a 2013 Urban Institute conference, prior to the issuance of
this notice in the Federal Register, the FHFA's own project
manager for the database said that the information in it would
be ``easy to reverse engineer.'' And I have been told that by
many, many other experts whom we have talked to. Is that not
correct?
Mr. Cordray. I would like to address that. My understanding
is that quote that is being quoted is a truncated quote. It is
a cutoff quote. There is more to the quote. And I believe that
the individual went on to say that is the risk, it is very
important that we handle this properly, that we de-identify
information, et cetera, et cetera. That quote was part of a
longer passage, and the full passage needs to be quoted in
order to put that in context. Taken out of context, it
certainly sounds worse than I believe it actually was.
Senator Crapo. Well, I think folks can actually watch that
quote on YouTube if they would like to, but the fact is----
Mr. Cordray. They can, yes.
Senator Crapo. The fact is, though, I mean, the core
question here is: Isn't it possible to reverse engineer--every
expert I have talked to about this issue as we have started
looking into it has said yes, that you can reverse engineer and
obtain the de-identified data.
Mr. Cordray. So this is----
Senator Crapo. Are you telling me that that is not
possible?
Mr. Cordray. This is a fair question, and particularly in
the real estate market with HMDA data that has been on the
books for, you know, decades. There is a lot of information
available in the real estate market and the mortgage market. I
recall, when I taught at law school back in the 1990s, my
students coming to me and saying, ``Here is the kind of
information that is out there''--I was kind of pooh-poohing
this at the time, and they said, ``Here is the kind of
information out there on you.'' And they had my mortgage, they
had my purchase price, they had all kinds of things about me.
That is out there. That has nothing to do with whether the CFPB
exists or does not exist.
Senator Crapo. I understand and my time----
Mr. Cordray. And it is a robust market, so----
Senator Crapo. My time is up, and so let me just say I do
understand that. In fact, it is quite concerning to me that
this information is so broadly available in the private sector
as well.
Mr. Cordray. Yes.
Senator Crapo. And I do have grave concerns about that. But
the concern I am expressing to you today is the concern that
the Government is collecting it.
Mr. Cordray. Yes. I understand.
Senator Crapo. I think that is a different thing. And I
think that the rationale for the Government to collect this
information does not necessarily justify the level of potential
invasion of privacy that is involved here. This is a much
longer discussion, and----
Mr. Cordray. It is.
Senator Crapo.----the Chairman has already let me go a few
minutes over.
Mr. Cordray. And let me just again state my attitude toward
this because I think it is important. I know you know it, but I
will say it again. This is an area where--it is a classic area
where congressional oversight is extremely important. You are
very concerned about this. The public should be concerned about
this. We are concerned about it. Your work is making us be on
our toes to make sure that we are doing things as right as we
can. The GAO inquiry has been significant and exhaustive, and
it is going to result in a report, and we are working with
them, and whatever findings they have or concerns they raise we
will take to heart.
I am happy to have our staff spend as much time with you
and your staff as you like on this, because it is not just
something you are interested in and I am just trying to fend
you off. I am interested in it, too. And it is important to
this agency to be getting it as right as we can. But we also
have to have information in order to do our work other than
just throwing darts against a wall, which neither you nor
anybody else would like. And information about medical debt or
information about the mortgage market or information about the
credit card market is very critical for you to engage in good
policymaking and for us to engage in good policymaking, and to
even know whether we are getting it good or bad. You cannot
even criticized us very well unless you have information as to
whether what we have done is good or bad.
Senator Crapo. Well, we will have, I am sure, a lot more
discussions about this.
Mr. Cordray. OK.
Senator Crapo. We both look forward to the GAO report, and
we will continue to engage on this until we get it right.
Mr. Cordray. OK. Good.
Senator Crapo. Thank you.
Mr. Cordray. Thank you.
Chairman Johnson. Director Cordray, I thank you for your
testimony today and your leadership of this important agency.
This hearing is adjourned.
[Whereupon, at 11:58 a.m., the hearing was adjourned.]
[Prepared statements, responses to written questions, and
additional material supplied for the record follow:]
PREPARED STATEMENT OF RICHARD CORDRAY
Director, Consumer Financial Protection Bureau
June 10, 2014
Chairman Johnson, Ranking Member Crapo, and Members of the
Committee, thank you for inviting me to testify today about the Semi-
Annual Report of the Consumer Financial Protection Bureau.
The Consumer Financial Protection Bureau is the Nation's first
Federal agency with the sole focus of protecting consumers in the
financial marketplace. Financial products like mortgages, credit cards,
and student loans involve some of the most important financial
transactions in people's lives. In the Dodd-Frank Act, Congress created
the Bureau to stand on the side of consumers and ensure they are
treated fairly in the consumer financial marketplace. Since we opened
our doors, we have been focused on making consumer financial markets
work better for the American people, the honest businesses that serve
them, and the economy as a whole.
My testimony today focuses on the Bureau's fifth Semi-Annual Report
to Congress and the President, which describes the Bureau's efforts to
achieve this vital mission. Through fair rules, consistent oversight,
appropriate enforcement of the law, and broad-based consumer
engagement, the Bureau is helping to restore American families' trust
in consumer financial markets, to protect American consumers from
improper conduct, and to ensure access to fair, competitive, and
transparent markets.
Through our enforcement actions to date, we have aided in efforts
to refund more than $3.8 billion to consumers who fell victim to
various violations of consumer financial protection laws. We have also
fined wrongdoers more than $141 million, all of which has gone into our
Civil Penalty Fund and can be used to compensate wronged consumers and,
to the extent compensating consumers is not practicable, to pay for
consumer education and financial literacy programs.
In the fall of 2013, for the first time, we took action, in
conjunction with multiple State Attorneys General, against an online
loan servicer for illegally collecting money that consumers did not
owe. We took action against a payday lender for overcharging
servicemembers in violation of the Military Lending Act, and robo-
signing court documents. We took action against an auto lender for
discriminatory loan pricing. And we partnered with 49 States in
bringing an action against the Nation's largest nonbank mortgage loan
servicer for misconduct at every stage of the mortgage servicing
process.
CFPB supervisory work contributed to a recent enforcement action
resulting in a refund of approximately $727 million to 1.9 million
consumers for illegal practices related to credit card add-on products.
In addition to this public enforcement action, recent nonpublic
supervisory actions and self-reported violations have resulted in more
than $70 million in remediation for over 775,000 consumers.
In January, mortgage rules that the Bureau issued to implement
provisions of the Dodd-Frank Act took effect, establishing new
protections for home buyers and homeowners. During the reporting
period, we also issued another major mortgage rule mandated by the
Dodd-Frank Act: a final rule to consolidate and improve Federal
mortgage disclosures under the Truth in Lending Act and the Real Estate
Settlement Procedures Act, which we have called ``Know Before You
Owe.'' We also issued an Advance Notice of Proposed Rulemaking on debt
collection, asking the public in-depth questions about a range of
issues relating to the debt collection market, which is the Bureau's
most frequent source of consumer complaints.
To promote informed financial decisionmaking, we have continued
providing consumers with online resources, including the AskCFPB
section of our Web site, where we have answers for over 1,000
frequently asked questions.
A premise at the heart of our mission is that consumers should be
treated fairly in the financial marketplace, and that they deserve a
place that will facilitate the resolution of their complaints when that
does not happen. To this end, the Bureau has strengthened its Office of
Consumer Response. As of June 1, 2014, we have received nearly 375,000
consumer complaints on credit reporting, debt collection, money
transfers, bank accounts and services, credit cards, mortgages, vehicle
loans, payday loans, and student loans.
The progress we have made has been possible thanks to the
engagement of hundreds of thousands of Americans who have used our
consumer education tools, submitted complaints, participated in
rulemakings, and told us their stories through our Web site and at
numerous public meetings from coast to coast. We have also benefited
from an ongoing dialog and constructive engagement with the
institutions we supervise, as well as with community banks and credit
unions, with whom we regularly meet. Our progress is also thanks to the
extraordinary work of the Bureau's employees--dedicated public servants
of the highest caliber who are committed to promoting a healthy and
fair consumer financial marketplace. Each day, we work to accomplish
the goals of renewing people's trust in the marketplace and ensuring
that markets for consumer financial products and services are fair,
transparent, and competitive. These goals not only support consumers in
all financial circumstances, but also help responsible businesses
compete on a level playing field, and reinforce the stability of our
economy as a whole.
In the years to come, we look forward to continuing to fulfill
Congress's vision of an agency dedicated to cultivating a consumer
financial marketplace based on transparency, responsible practices,
sound innovation, and excellent customer service.
Thank you for the opportunity to appear before you. I appreciate
the benefit of your active interest and oversight. And I look forward
to your questions today.
RESPONSE TO WRITTEN QUESTION OF CHAIRMAN JOHNSON FROM RICHARD
CORDRAY
Q.1. Many have raised concerns about the mortgage rules'
definitions of rural and underserved. Director Cordray, you
have stated that you will revisit these definitions over the
next 2 years. Can you provide an update on this process,
including when you think your review may be complete and what
information or existing definitions you may be reviewing or
plan to review to determine how to define a rural area?
A.1. As you know, initially, the Consumer Financial Protection
Bureau's (Bureau) Ability-to-Repay rule provided a general
definition of ``rural'' using the Department of Agriculture's
Urban Influence Codes. Those codes, in turn, are based on
definitions developed by the Office of Management and Budget,
in particular ``metropolitan statistical area'' and
``micropolitan statistical area.''
As we have subsequently discussed, the Bureau amended its
rule to provide a 2-year transition period during which small
creditors can originate balloon payment qualified mortgages
even if they do not operate predominantly in rural or
underserved areas. In addition to providing time for small
creditors to further develop their capacity to offer adjustable
rate mortgages, the Bureau expects to re-examine the
definitions of rural or underserved during this time to
determine, among other things, whether these definitions
accurately identify communities in which there are limitations
on access to credit and whether it is feasible to develop
definitions that are more accurate or more precise.
The Bureau is in the process of research and analysis to
deepen our understanding of small creditors' origination of
both balloon and adjustable rate mortgages and the implications
of the Dodd-Frank Wall Street Reform and Consumer Protection
Act provisions on access to credit. The Bureau is taking a
holistic approach to better understand the issues regarding
consumer protection, State regulation, technical systems,
compliance processes, credit risk management, and other
considerations that prompt small creditors to offer balloon
loan products, and the potential transition issues in
converting to other loan offerings. These efforts are being
undertaken for the purpose of ensuring access to markets for
consumer financial products and services for all consumers,
while seeking to minimize burdens on financial institutions. We
will complete this process in time for providers to have the
benefit of our work before the 2-year transition period
expires.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO FROM RICHARD
CORDRAY
Q.1. As I have raised on several occasions, many basic
questions concerning the CFPB's data collection activities
remain unanswered. Using its supervisory authority, how many
credit card accounts does the Bureau collect data about on a
monthly basis?
A.1. The Dodd-Frank Wall Street Reform and Consumer Protection
Act authorized the Consumer Financial Protection Bureau
(Bureau) to gather information from a variety of sources in
order to monitor for risks to consumers in the offering or
provision of consumer financial products or services, including
developments in markets for such products or services. In the
exercise of its supervisory authority, the Bureau obtains data
stripped of direct personal identifiers with respect to all
credit card accounts maintained by a number of large card
issuers. Through a Memorandum of Understanding, the Bureau is
also able to access data that is collected by the Office of the
Comptroller of the Currency from an additional set of credit
card issuers. The combined data represent approximately 85-90
percent of the outstanding card balances. The precise number of
accounts varies on a monthly basis.
Q.2. In 2013, the U.S. Department of Justice (DOJ) announced a
consumer protection initiative called ``Operation Choke
Point''. Its stated mission is to stop fraudulently operating
merchants from accessing the payments and banking system. DOJ
is using the Financial Institutions, Reform, Recovery and
Enforcement Act of 1989 (FIRREA) as its principle tool to stop
fraudulent activity. News reports suggest Federal banking
regulators are making referrals to DOJ when a bank is believed
to have violated FIRREA. Has the Bureau made any referrals to
DOJ to enforce FIRREA? If so, how many referrals have been
made?
A.2. The Consumer Financial Protection Bureau has not made any
referrals to the Department of Justice to enforce the Financial
Institutions Reform, Recovery and Enforcement Act of 1989.
Q.3. The CFPB has noted in several publications that it uses
its Consumer Complaint Database to help identify concerning
consumer financial products and services, which should be
addressed through rulemaking. Rulemaking for payday loans is a
high priority for the Bureau, but only accounts for 1 percent
of total consumer complaints. Please explain how the CFPB
reconciles low consumer complaints and high consumer demand for
this product with the Bureau's goal of taking regulatory action
in this market.
A.3. The Consumer Financial Protection Bureau (Bureau) began
accepting complaints for payday loans on November 6, 2013. As
of June 1, 2014, the Bureau has received approximately 3,400
payday lending and deposit advance complaints. The Bureau used
a phased approach to accepting complaints to ensure that our
systems, processes, and people are prepared to handle this
important role. This phased approach means we have been
accepting complaints about other products for longer periods of
time and partially explains why payday complaints represent a
smaller percentage of cumulative complaints.
Consumers also submit debt collection complaints related to
payday loans and deposit advances. In addition to the 3,400
payday complaints handled since November 6, 2013, the Bureau
has also handled 9,700 debt collection complaints related to
payday loans or deposit advances. These payday-related debt
collection complaints account for nearly 12 percent of all debt
collection complaints handled by the Bureau.
The most common type of payday loan or deposit advance
complaint is about being charged unexpected fees or interest.
Consumers also report a number of other issues including not
receiving the money after applying for the loan, problems
contacting the lender, and receiving loans for which they did
not apply. As well, consumers report issues with payments,
including confusion about loan repayment using automatic
withdrawal features on a bank card or prepaid card, and issues
disputing the lender when the consumer believes the loan has
been repaid in full. Consumers raise concerns about the high
cost of the loans, difficulty repaying the loan and having
enough money to pay for basic household expenses, and the
aggressive debt collection practices in the case of delinquency
or default.
In addition to the knowledge gained through consumer
complaints received, the Bureau also continues to independently
research and monitor the short-term lending market as we
develop an appropriate regulatory response to address practices
that may cause harm to consumers. We plan to seek feedback from
a Small Business Advocacy Review panel as part of our
rulemaking activities. We welcome stakeholders' input and
communication about how to most effectively protect consumers
in this market.
Q.4. The CFPB uses the concept of ``behavioral economics'' to
guide its market monitoring and rulemaking activities. At its
core, this philosophy says policymakers should make certain
choices for consumers because they can't be expected to make
rational decisions. That is concerning because it places
decisionmaking in the hands of the Government and not every day
citizens. Under behavioral economics theory, please explain how
the CFPB balances its view that a consumer financial product or
service is harmful to consumers with a product or service that
has high consumer demand and low consumer complaints.
A.4. Behavioral economics involves studying how various factors
affect economic decisionmaking. Understanding consumers'
decisionmaking process in the financial marketplace helps the
Bureau assess the market and the possible impacts of market
changes. As noted by the Government Accountability Office (GAO)
in its June 2011 report on financial literacy, behavioral
economics and other interdisciplinary insights may also be
useful in developing financial education strategies ``to assist
consumers in reaching goals without compromising their ability
to choose approaches or products.'' The Bureau's focus is on
ensuring that consumers have access to fair, competitive, and
transparent markets and on helping consumers to achieve their
own financial goals and improve their financial lives, not on
placing decisionmaking in the hands of the Government.
Q.5. At a 2013 Urban Institute conference, the Federal Housing
Finance Agency's project manager for the National Mortgage
Database, Bob Avery, stated the information contained in the
Database would be ``easy to reverse engineer''.\1\ \2\ Does the
CFPB share the assessment of the FHFA? Additionally, what steps
is the CFPB taking to assist the FHFA in preventing the reverse
engineering of information in the National Mortgage Database?
---------------------------------------------------------------------------
\1\ https://www.youtube.com/watch?v=xeHuSwb7bG8.
\2\ http://www.urban.org/events/Lunchtime-Data-Talk-National-
Mortgage-Database.cfm.
A.5. The Dodd-Frank Wall Street Reform and Consumer Protection
Act (the Dodd-Frank Act) established the Consumer Financial
Protection Bureau (Bureau) in response to the most severe
financial crisis since the Great Depression. Widespread
failures in consumer protection and rapid growth in
irresponsible lending practices in the mortgage market were at
the epicenter of the collapse, which cost our economy and
American families trillions of dollars. Congress created the
Bureau to protect consumers; ensure access to fair,
competitive, and transparent consumer financial markets; and to
help prevent future financial crises.
The Bureau plans to use the National Mortgage Database
(NMDB) in support of the market monitoring called for in the
Dodd-Frank Act, which includes understanding how mortgage debt
affects consumers and assessing risks to consumers and mortgage
markets. This type of market monitoring is critical to staying
ahead of trends like those that caused the financial crisis.
The NMDB will also help the Bureau to fulfill various statutory
mandates for reporting on these markets to Congress. When
gathering information necessary to perform our regulatory
functions, the Bureau seeks to limit to the greatest extent
possible any burdens on market participants and take all
necessary precautions to protect individuals' privacy.
The NMDB is currently in development and only limited staff
within the Federal Housing Finance Agency (FHFA) and only two
staff members at the Bureau have access to the data on a secure
server. Before being granted access to the data, users must
sign an agreement that prohibits them from attempting to
identify any of the consumers in the sample. FHFA also prevents
users from downloading any individual-level data from the
server or from uploading any data containing direct identifiers
that might be used to re-identify consumers. Access to the data
is controlled by the FHFA, which can provide additional details
regarding that process.
With ever advancing technology, it is not possible to
categorically determine that re-identification of certain
information is impossible, which is why the Bureau is committed
to strong controls as this project develops. The Bureau
understands that with most mortgage datasets including
commercially available sources of de-identified data on
mortgage performance, having strong security measures and
technical, physical, and administrative controls in place helps
to reduce the risk that records could be re-identified. The
Bureau is acutely aware of the importance of reducing this risk
to the greatest extent possible in constructing the NMDB. We
will continue to be sensitive to privacy concerns and committed
to the security of these data, as the Bureau works with FHFA to
construct this important market monitoring tool. Finally, the
quote from Mr. Avery was truncated and does not reflect his
fuller discussion of these same points.
Q.6. The April 2014 FHFA System of Records Notice (SORN) states
the information in the National Mortgage Database may be
sourced from ``other Federal Government systems of records''.
Will the CFPB populate the database with any information it
obtained through its supervisory and/or examination
authorities?
A.6. The Consumer Financial Protection Bureau does not plan to
use data obtained through the Bureau's supervisory or
examination authorities to construct the National Mortgage
Database.
Q.7. In March, the Federal Reserve/CFPB Inspector General
issued a report concerning the effectiveness and efficiency of
the CFPB's supervision programs. Specifically, the report found
the CFPB needs to improve its reporting timeliness and reduce
the number of backlogged, open exams. The Inspector General
made 12 recommendations to improve supervision. Please describe
the progress the Bureau has made in implementing these
recommendations and an estimated timeframe for full
implementation of all 12 recommendations. Additionally, please
include a current assessment of the average number of days to
complete a CFPB examination.
A.7. On March 27, 2014, the Office of the Inspector General
(OIG) issued a report \3\ after conducting an initial
evaluation of the Consumer Financial Protection Bureau's
(Bureau) Supervision program. Of note, the report relies on
data as of July 31, 2013, and fieldwork the OIG completed in
October 2013. Thus, the report did not reflect many of the
Bureau's efforts since those dates to enhance the Supervision
program. The Bureau indicated this to the OIG, and the OIG
noted in the report that assessing these efforts will be part
of its follow-up activities.
---------------------------------------------------------------------------
\3\ Office of Inspector General, Board of Governors of the Federal
Reserve System, Consumer Financial Protection Bureau, CFPB Report:
2014-AE-C-005, ``The CFPB Can Improve the Efficiency and Effectiveness
of its Supervisory Activities,'' March 27, 2014 available at: http://
www.federalreserve.gov/oig/files/CFPB-Supervisory-Activities-
Mar2014.pdf.
---------------------------------------------------------------------------
The OIG's findings begin by acknowledging in the Executive
Summary the Bureau's ``considerable efforts'' and its
``significant progress toward developing and implementing a
comprehensive supervision program for depository and
nondepository institutions.'' In this regard, the Bureau has
recruited hundreds of employees, launched examinations and
investigations, and settled a number of actions that have
brought significant monetary and other relief to millions of
Americans. As well, the Bureau has continued to expand our
nonbank supervision program, adding to the initial larger
participant rules for the consumer reporting and debt
collection markets with a rule in the student loan servicing
market and a proposed rule in the remittances market. The
Bureau has also continued to implement a risk-based
prioritization framework that ensures we allocate our
examination resources across charters and markets, focusing our
resources on those business lines that pose the greatest risk
to consumers.
Since July 2013, the Bureau has substantially enhanced its
existing processes and systems for tracking examiner time spent
on specific examinations. We continue to develop and refine an
associated policy, and we will evaluate the current processes
for coordinating examination staff scheduling across regions,
as recommended by the OIG. More generally, we have undertaken a
large effort to build a custom electronic Supervision and
Examination System (SES) tailored to the Bureau's operations
and information needs. As recommended by the OIG, we are in the
process of revising the June 2012, CFPB Process for Reviewing
Supervisory Letters, Examination Reports, and Supervisory
Actions, as necessary to reflect the earlier reorganization of
the Bureau's supervision offices as well as relevant changes
underway to the Bureau's internal processes for examination
report review.
The Bureau's efforts to enhance the supervision program
have resulted in steady progress on our supervisory goals,
including the timeframe in which we issue exam reports. At the
outset, the Bureau made a purposeful decision to have a strong
quality control function to ensure consistency in our
examinations findings across the country, and across banks and
nonbanks. This is particularly important and challenging at the
Bureau where, as the OIG recognized in its report, we must
address a multitude of novel issues in our exams. We are
integrating a work force drawn from a wide variety of
backgrounds who are conducting examinations at many entities
that have never before been subject to compliance supervision.
Initially, we sacrificed some timeliness for the sake of
careful deliberation and consistency.
We have been focused for some time on the timeliness of our
reports. This effort includes weekly meetings among Supervision
management to identify and address potential sources of delay.
We have conducted internal process reviews and retained a third
party to support a longer-term project to comprehensively
address the report review process. It is important to note that
the Bureau does a wide range of examinations--from targeted
reviews of a particular product line to larger reviews of
multiple product lines. As a result, we have focused particular
attention on ensuring that we draft and issue our reports as
expeditiously as possible after completing our analysis of the
information gathered by the examination teams. The median
number of days onsite is 53. Half of our exams take between 44
and 81 days, and we have outliers on either side of that range.
The Bureau has made several advancements in our examiner
training. The Bureau is introducing a robust and unique
examiner commissioning program, which will consist of on-the-
job and classroom training, and ultimately a capstone course,
so that within 5 years of working at the Bureau, an examiner
can be prepared to lead reviews of the complex entities we
oversee. The comprehensive examination that will be required to
become a commissioned examiner is undergoing multiple rounds of
content validation and is scheduled to be finalized during the
fall of 2014. The Bureau is also developing training that
focuses on specific product areas so our examiners are well-
prepared to conduct work in both banks and nonbanks. Also, as
the OIG report notes, the Bureau has implemented an interim
commissioning program.
Our ongoing enhancement of the Supervision and Examination
System (SES) used to track exams will increase the
effectiveness of our supervisory work. Improved guidelines for
its use will address two of the OIG's findings. These efforts
will establish standards for recording exam milestones, and
ensure accurate documentation of communications with the
prudential regulators, which have occurred as required.
The Bureau shares the OIG's conviction that full and timely
exchange of information between Federal banking regulators
improves the effectiveness of supervisory activity for all of
the agencies, enhances protections for American consumers, and
is consistent with the cooperative relationship between the
agencies envisioned in the Dodd-Frank Wall Street Reform and
Consumer Protection Act. As noted in the report, the Bureau has
acted in this spirit of cooperation and complied with all of
the requirements and arrangements outlined in the Interagency
MOU on Supervisory Coordination dated May 16, 2012 (Interagency
MOU)--an agreement that resulted from a multi-agency
decisionmaking process including the Bureau, the Federal
Reserve Board of Governors, the Federal Deposit Insurance
Corporation, the National Credit Union Administration, and the
Office of the Comptroller of the Currency. The Bureau has
already begun discussions with the other agencies that are
party to the Interagency MOU in order to explore potential
opportunities to enhance information-sharing, and will pursue
the specific discussions suggested in the report. We have also
complemented the Federal coordination with a State Supervisory
Framework to coordinate our efforts with State regulators. In
short, the timeframe addressed in the report does not reflect
the current realities of the Bureau's supervision program.
Q.8. Last year, the National Automobile Dealers Association
(NADA) developed a comprehensive fair credit compliance program
for its members. The NADA Program is based on a fair credit
compliance program that the Department of Justice (DOJ)
developed to resolve disparate impact allegations against two
dealers in 2007. More recently, DOJ has described the approach
taken in the program as an effective way to manage the risk of
a fair credit violation. Do you see the release of the NADA
program as a positive development?
A.8. The Consumer Financial Protection Bureau (Bureau) welcomes
proactive proposals that demonstrate a commitment to fair
lending. However, lenders should be careful about assuming that
individual dealer-level actions will fully address their own
fair lending risks. As you note, in general, the National
Automobile Dealer's Association's (NADA) Fair Credit Compliance
Policy and Program is based on two Department of Justice cases
from 2007, where that model was negotiated in settlements
involving dealers, whereas the Bureau's focus is on indirect
auto lenders. We remain concerned about indirect lending
programs built around discretion and financial incentives that
create fair lending risks. Our March 2013 bulletin, Indirect
Auto Lending and Compliance with the Equal Credit Opportunity
Act, was issued to provide clarity and guidance for
institutions regarding the application of Equal Credit
Opportunity Act and Regulation B, and our attendant supervisory
and enforcement approach in this area. It provided examples of
internal controls, program features, and compliance management
systems that institutions might use to mitigate legal risk. It
also indicated that lenders may choose to adopt
nondiscretionary pricing policies as an alternative method of
mitigating fair lending risks.
Q.9. In February, the CFPB sent a letter to 18 card issuing
banks ``strongly encouraging'' them to adopt the practice of
offering their consumer's free credit scores with each
statement. Unfortunately, the CFPB did not solicit public input
before the letter was sent. It did not perform any cost-benefit
analysis. Finally, it did not provide guidance on how a company
may legally adopt this practice. During examinations of these
18 card issuing banks, will the CFPB examine for adoption of
this ``best practice''?
A.9. In addition to ensuring that financial service providers
comply with consumer protection law, Congress gave the Consumer
Financial Protection Bureau (Bureau) the mandate of fostering
greater financial literacy and capability among consumers. We
believe the initiative taken by a few issuers to share the
scores they purchase with their cardholders has provided those
cardholders with a significant benefit that will improve their
awareness of their credit scores and the impact their credit
histories might have on the cost and availability of credit to
them. My February letter to the other issuers encouraging them
to disclose the consumer scores they already purchase was
intended to foster greater financial literacy and to enlist the
issuers as stakeholders in our financial literacy efforts,
which is likely to benefit the issuers as well by strengthening
the creditworthiness of their customers and reducing defaults.
Today, only one-fifth of consumers view their credit scores in
a given year through a combination of purchases through
AnnualCreditReport.com, paid credit monitoring subscriptions,
or adverse action notices.
Absent any rulemaking that would declare such regular score
disclosures a requirement of issuers (something that is not
under consideration), the Bureau views making these disclosures
as voluntary. While the letter strongly encouraged the
practice, the Bureau will not be examining issuers to determine
whether or how they have adopted it.
------
RESPONSE TO WRITTEN QUESTION OF SENATOR REED FROM RICHARD
CORDRAY
Q.1. Could you explain why it is so important for the
Department of Defense to finalize its update of the Military
Lending Act rules and how these updated rules would protect our
servicemembers and their families?
A.1. Military families make enormous sacrifices for our Nation
and deserve to be protected from those who would take advantage
of them. Congress passed the Military Lending Act (MLA) to
protect servicemembers from predatory lending. The MLA
prohibits interest rates above 36 percent on consumer credit
offered to active-duty servicemembers and their dependents. In
its initial implementing regulations, the Department of Defense
defined ``consumer credit'' to include three specific types of
closed-end credit including: certain payday loans, certain
vehicle title loans, and tax refund anticipation loans.
However, the implementing regulations did not cover high-
cost loans structured as open-end lines of credit, loans with
longer durations (more than 91 days for payday loans or more
than 181 days for vehicle title loans), or loans with larger
balances (more than $2,000 for payday loans). Military advisors
such as Judge Advocates General and Personal Financial Managers
have shared with us examples that indicate that servicemembers
are taking out loan products which fall outside the current
parameters of ``consumer credit'' as defined in the MLA
implementing regulations. For example, some creditors have
offered open-end lines of credit with triple-digit interest
rates to active duty servicemembers. Other creditors have
extended triple-digit interest rate loans to servicemembers
with durations longer than 91 or 181 days for unsecured credit.
Moreover, in the MLA, Congress attempted to limit the extent to
which creditors could use expensive ancillary credit products
to impose costs exceeding 36 percent per annum on
servicemembers.\1\
---------------------------------------------------------------------------
\1\ 10 USC 987(b), (i)(3)(b).
---------------------------------------------------------------------------
The Department of Defense recently submitted a proposal to
the Office of Management and Budget to revise the MLA
regulations. The MLA requires the Department of Defense to
consult with the Consumer Financial Protection Bureau (Bureau)
and other specified Federal agencies on implementation of the
law and such consultation is underway. The Bureau will continue
to use its supervision and enforcement, consumer education and
engagement, and interagency consultation tools to provide
servicemembers the protections Congress intended.
Servicemembers deserve the full benefit of general consumer
protections as well as the military-specific consumer
protections provided to them by the law. The Bureau is fully
committed to ensuring that servicemembers benefit from the
protections of the MLA and all Federal consumer financial laws.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR MENENDEZ FROM RICHARD
CORDRAY
Improving access for unbanked and underbanked households:
Q.1. According to a 2011 report from the FDIC, about 1 in 12
American households is ``unbanked,'' meaning they do not have a
checking or savings account at an insured depository
institution. One in 5 American households is considered
``underbanked,'' meaning they have access to a deposit account,
but also rely on alternative financial services such as nonbank
check cashing or lending. Together, these groups account for
about 34 million households.
I raised concerns at a hearing a few weeks ago on short-
term consumer lending about the need for real, meaningful
efforts to help these households who lack access to traditional
banking services access credit when they need it and build
credit histories.
Can you please provide an update on what the CFPB plans to
propose in terms of new regulations for short-term lending?
A.1. The Consumer Financial Protection Bureau (Bureau) has been
studying the market for short-term lending and is now in the
process of developing an appropriate regulatory response to
address practices that may cause harm to consumers. In
particular, we are concerned about products and practices that
turn a demand for short-term credit into a long-term debt. We
also want to ensure that consumers can access the credit they
require without jeopardizing or undermining their finances. We
welcome continued input and communication about how to most
effectively protect consumers in this market. As we proceed
with our pre-rule activities, the Bureau will seek feedback
from a Small Business Advocacy Review panel. We also are
proceeding toward a rulemaking on general purpose, reloadable
prepaid cards.
Q.2. When families with lower incomes have credit needs, what
are some of the solutions available to them that are most
effective? What should we be looking to as successful models?
A.2. The Consumer Financial Protection Bureau's Office of
Financial Empowerment (OFE) focuses on the needs of
traditionally underserved consumers, which includes those with
limited or no access to credit. The OFE leads several
initiatives designed to help lower income consumers know how to
build their credit. For example, Your Money, Your Goals, is a
toolkit for frontline caseworkers who work with consumers that
have limited access to credit. The OFE is also planning to
study a credit builder loan product designed for lower-income
consumers. As well, the OFE is working to ensure that lower
income consumers know how to access and understand their credit
reports and scores, and learn strategies for managing money to
build credit.
Q.3. In looking to develop credit products for lower-income
consumers, can mission-driven lenders alone achieve sufficient
scale to fully serve the market? Or do we also need profit-
seeking capital for the market to be self-sustaining--and if
so, how do we achieve that goal in a way that meets consumer
demand with effective loan structures and consumer protections?
A.3. The Consumer Financial Protection Bureau recognizes the
demand for credit by low-income and credit impaired consumers.
In order to achieve scale to fully serve the market, many types
of institutions, including those in the for-profit sector, are
likely needed to develop appropriate products to meet the
credit demand of lower-income and credit-impaired consumers
with products that offer effective loan structures and consumer
protections. Particular attention would need to be paid to
consumers who, as a result of having little to no existing
credit files or poor credit, are prevented from accessing lower
cost credit options. The amount of capital available for
lending to consumers from the for-profit sector is far greater
than that available to nonprofit organizations, so safe lending
products that are widely available to lower-income consumers
will likely include involvement from banks or other for-profit
businesses. While new technology and innovative credit products
may help reach these goals, we recognize this is a complex area
that we are continuing to research.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR BROWN FROM RICHARD
CORDRAY
Q.1. In January, the Consumer Financial Protection Bureau
(CFPB) implemented new high-cost mortgage loan provisions of
the Home Ownership and Equity Protection Act (HOEPA) that
expand the types of loans covered by HOEPA and further defined
the interest rate and ``points and fees'' triggers for HOEPA's
protections.
I have heard concerns that this is having a particularly
detrimental effect on the manufactured housing industry, where
home prices are lower and fixed fees make up a larger
percentage of the overall loan amount.
What steps has CFPB taken to monitor the effects of new
high-cost mortgage loan provisions on the manufactured housing
market?
A.1. The Consumer Financial Protection Bureau (Bureau) analyzed
various datasets (Home Mortgage Disclosure Act, and population
surveys such as the Survey of Consumer Finances) to deepen our
understanding of the manufactured housing market. The Bureau
also conducted phone calls and in-person conversations with
creditors, manufacturers, dealers, consumer advocates, and
other government entities operating in this space, including
attending a manufactured housing industry conference. The
Bureau will also publish a white paper on the manufactured
housing market later this year.
Q.2. Have these new provisions restricted access to credit and,
if so, what steps with the CFPB take to protect consumer access
to affordable mortgage loans, including manufactured home
loans?
A.2. The Consumer Financial Protection Bureau has not
encountered evidence of systematic access to credit concerns,
though we welcome input from all sources on market trends, will
continue to carefully examine potential concerns, and will
publish a white paper on the manufactured housing market later
this year.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR TOOMEY FROM RICHARD
CORDRAY
Q.1. According to the RFP put out by the CFPB, the 9 issuers
you intend to collect data from are different from the 9
issuers the OCC is collecting data from. My understanding is
that gathering data from 10 issuers would trigger an OMB review
and a period for public comment. With a data mining exercise of
this size and scope, shouldn't it be reviewed and shouldn't the
public have the opportunity to express their opinions on what
is happening with their data?
A.1. The Dodd-Frank Wall Street Reform and Consumer Protection
Act (the Dodd-Frank Act) authorized the Consumer Financial
Protection Bureau (Bureau) to gather information from a variety
of sources in order to monitor for risks to consumers in the
offering or provision of consumer financial products or
services, including developments in markets for such products
or services. In the exercise of its supervisory authority, the
Bureau obtains data on credit card accounts maintained by a
number of credit card issuers. The data is stripped of direct
personal identifiers and does not include information about
individuals' purchases.
The Office of Management and Budget review and public
comment period to which you refer is a requirement of the
Paperwork Reduction Act (PRA). This requirement is triggered
by:
Identical questions posed to, or identical reporting,
recordkeeping, or disclosure requirements imposed on, ten or
more persons . . . where `ten or more persons' refers to the
persons to whom a collection of information is addressed by the
agency within any 12-month period.\1\
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\1\ 5 CFR 1320.3 (c).
The Office of the Comptroller of the Currency (OCC)
initially requested information from nine credit card issuers
in 2009. The Bureau sent similar information requests to nine
different credit card issuers beginning in September 2012. The
Bureau made the determination that the PRA does not apply to
---------------------------------------------------------------------------
the Bureau's credit card collections.
Q.2. Why does the Bureau think that it needs access to data on
over 900 million credit card accounts?
a. LIf your goal is to study trends and usage behavior, why
not just sample anonymously rather than collect
information on every account?
b. LWill the CFPB commit to dumping or deleting data that it
doesn't need to conduct a meaningful analysis?
A.2. The Dodd-Frank Wall Street Reform and Consumer Protection
Act (the Dodd-Frank Act) authorized the Consumer Financial
Protection Bureau (Bureau) to gather information from a variety
of sources in order to monitor for risks to consumers in the
offering or provision of consumer financial products or
services, including developments in markets for such products
or services.
In our monitoring activity of the credit card market, a
number of large credit card issuers provide a full list of
accounts to the Bureau's contractor. Credit card issuers
provide a full list rather than a random sample because this is
the same format in which issuers provide data to the same
contractor for benchmarking services that they purchase from
the contractor pursuant to private agreements. This reduces
costs and burden for the issuers supplying the data as it
avoids the need to draw a random sample, to provide data with
respect to those accounts on an ongoing basis, and to add to
the sample each time the data is provided to ensure that the
sample remains representative of all accounts, including newly
originated accounts.
The Bureau will maintain and ultimately destroy records in
accordance with the Federal Records Act and Bureau record
schedules once they are approved by the National Archives and
Records Administration (``NARA''). The Bureau is in the process
of drafting a records schedule for this data that will be
submitted to NARA for approval.
Q.3. Given the number of fields this database will have, what's
to stop a contractor or the Government itself from matching up
supposedly ``anonymized accounts'' with individual consumers?
A.3. As previously stated, in the exercise of its supervisory
authority, the Bureau obtains data on credit card accounts
maintained by a number of credit card issuers. The data is
stripped of direct personal identifiers. The data does not
contain information that directly identifies individual
consumers such as names, street addresses, social security
numbers or account numbers. The Bureau also implements strong
controls to protect the data security including requiring its
vendors to use data only for proper Bureau purposes,
prohibiting attempts at re-identification, restricting access
to those whose work requires it, and providing privacy and
security training to Bureau personnel on how to handle and
protect data appropriately.
Q.4. In an answer to one of my questions at your last
appearance before this Committee, you stated that it was your
understanding that ``bulletins'' are merely restatement of
existing law. If you recall, we respectfully disagreed. In
hearing from regulated entities, many do not believe they have
sufficient clarity in knowing who these bulletins apply to, and
what they must do to avoid an enforcement action.
a. LDo you still maintain that these are not substantive in
nature?
b. LHave you received requests from regulated entities asking
for additional clarity with regards to the application
and substance of previously published bulletins?
A.4. The Administrative Procedure Act (APA) sets out the
principles by which Federal agencies engage in regulatory
activity and in applicable cases calls for comments from
affected parties and the general public concerning an agency's
activity. The APA does not impose a notice and comment
requirement for a general statement of policy, a nonbinding
informational guideline, or interpretive memoranda. The
bulletins to which you refer would fall into one of these
categories. From time to time the Bureau does receive and
respond to requests for clarification on various topics,
including the rules we administer and guidance we publish in
the form of bulletins.
Q.5. When the Bureau decides to publish a Bulletin, does it
follow an established process?
a. LWhat process (either established, or ad-hoc) does the
CFPB go through when putting out a bulletin?
b. LDoes the CFPB solicit or otherwise receive input from
stakeholders prior to publishing them?
A.5. As noted in our immediately preceding response, the
Administrative Procedure Act (APA) sets out the principles by
which Federal agencies engage in regulatory activity and in
applicable cases calls for comments from affected parties and
the general public concerning an agency's activity. The APA
does not impose a notice and comment requirement for a general
statement of policy, a nonbinding informational guideline, or
interpretive memoranda. We value public input in our
formulation of policy, and the Bureau engages stakeholders
using a variety of mechanisms, ranging from informal
consultations between industry and market specialists in the
Bureau to published notice with a specified comment period.
Q.6. A recent report issued by the Philadelphia Federal Reserve
Bank under its ``Working Paper Series'' found that tighter
regulation of third-party collectors is associated with
creditors extending less credit to consumers and at higher
interest rates. The report concluded that ``financial
regulation that institutes strong consumer protection must be
balanced with creditor rights in order for the latter to extend
consumer credit in the first place.''
a. LGiven the research on the economic implications, why
shouldn't the CFPB consider addressing specific
concerns rather than an expansive rule that may
ultimately hamper a consumer's access to credit?
b. LAs the Bureau engages in its debt collection rulemaking,
how will you ensure that there is balance between
strong consumer protection and creditor rights?
A.6. The Consumer Financial Protection Bureau (Bureau) is
considering additional requirements to protect consumers with
respect to debt collection. At the same time, we recognize that
the process of debt collection may benefit consumers through
keeping down the cost of credit. As a result, we are
considering the burdens that additional requirements may place
on collectors, and our goal is to develop rules that protect
consumers without imposing undue burdens on the collection
industry.
Specifically, in November 2013, the Bureau took the first
step toward considering consumer protection rules for the debt
collection market with the publication of an Advanced Notice of
Proposed Rulemaking (ANPR). To identify subjects that proposed
rules may address, the Bureau is reviewing the more than 23,000
public comments received in response to the ANPR to evaluate
the nature and extent of consumer protection problems as well
as the advantages and disadvantages of various solutions to
those problems. In addition to these comments, Cornell
University also submitted a report based on nearly 1,000
responses received on RegulationRoom.org, its Web site that
provides the public with an interactive and intuitive way to
participate in discussions about rulemaking proposals. As
needed, the Bureau may meet with commenters to clarify the
information and views expressed in their comments as well as to
understand differences in information and views in comments.
In addition to considering existing research and data on
debt collection, the Bureau plans to conduct its own research
as part of the rulemaking process. Drawing from a nationally
representative sample of consumer credit records from one of
the three nationwide credit reporting agencies, the Bureau
plans to conduct a mail survey to learn about consumer
experiences with debt and debt collection. The Bureau also is
considering conducting consumer testing of any model
disclosures it may develop.
Also, pursuant to the Dodd-Frank Wall Street Reform and
Consumer Protection Act, Section 1022(b)(2) and in deference to
Section 814(b) of the Fair Debt Collection Practices Act, the
Bureau expects to consult with relevant Federal agencies
regarding any proposed regulations it may issue, including the
Federal Trade Commission, prudential regulators (Office of the
Comptroller of the Currency, Federal Reserve Board, Federal
Deposit Insurance Corporation, National Credit Union
Association) and Federal Communications Commission. The Bureau
also expects to consult with relevant State law enforcement and
regulatory agencies. Additionally, prior to issuing any notice
of proposed rule, the Bureau may convene a panel pursuant to
the Small Business Regulatory Enforcement Fairness Act composed
of the Bureau, Small Business Administration, and the Office of
Management and Budget to get input from small businesses in the
debt collection industry on the possible effects on them of any
debt collection rule under consideration, and ideas for
possible lower-cost alternatives that accomplish the objectives
of applicable statutes.
Throughout this process, the Bureau will carefully consider
its approach to rulemaking. The volume of comments in response
to the ANPR speaks to a high level of interest in regulations
from consumers, industry, and other interested parties. We will
continue to consider the appropriate approach to take in a
rulemaking as we move through the steps in our process. We seek
to develop rules that protect consumers without imposing undue
burdens on the collection industry.
Q.7. In its report to Congress, the CFPB purports that it is
using debt collection complaint data to shape its public policy
direction. At the same time, the CFPB clearly states that
complaints received are not reviewed or investigated to
determine whether actual wrongdoing or illegal activity has
occurred. If that's the case, how is it that this inherently
subjective data you are collecting can be credibly used to
shape meaningful public policy decisions?
A.7. Collecting, investigating, and responding to consumer
complaints are integral parts of the Consumer Financial
Protection Bureau's (Bureau) work, as Congress set forth in the
Dodd-Frank Wall Street Reform and Consumer Protection Act.\1\
The report you reference states that the Bureau screens all
complaints submitted by consumers and, when appropriate,
forwards complaints via a secure web portal to companies for
response. Once the company responds to the consumer and the
Bureau, including verifying a commercial relationship with the
consumer, the Bureau invites the consumer to provide feedback
about the response. The Bureau reviews the complaint, including
the feedback consumers provide, to help prioritize complaints
for investigation into regulatory compliance. Some complaints
are investigated, the results of which provide more information
as to the nature of the complaints, as well as to suggest
whether possible violations of law or regulation may have
occurred.
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\1\ See Dodd-Frank Act, Pub. L. No. 111-203, Sec. 1021(c)(2).
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The report indicates that since the Bureau began handling
debt collection complaints on July 10, 2013, we have received
55,200 debt collection complaints from consumers. The report
also references that debt collection issues generate more
complaints to the Federal Government each year than any other
financial services market. In terms of the Bureau's direction
with respect to the debt collection market, the report
indicates that the Bureau issued an Advanced Noticed of
Proposed Rulemaking in November 2013, to seek a wide array of
feedback and guide next steps with respect to proposed rules.
Q.8. How would a provider of a consumer financial product or
service go about determining whether a new product or the
business process they use complies with Federal consumer
financial law? Does the Bureau have a procedure to receive
questions from regulated institutions and provide participants
in the market with some certainty that they're following the
law?
A.8. The Consumer Financial Protection Bureau (Bureau) provides
a variety of helpful resources and compliance aids to assist
regulated entities with understanding and complying with
consumer financial laws and regulations. For example, for the
rules recently issued under Title XIV of the Dodd-Frank Wall
Street Reform and Consumer Protection Act, the Bureau developed
implementation aids such as compliance guides, guidance
bulletins, reference charts, Webinar presentations and videos,
and other materials. The Bureau also took feedback and
questions regarding its rules from regulated entities by email
and telephone as well as at in-person meetings, conferences,
and other events.
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RESPONSE TO WRITTEN QUESTIONS OF SENATOR MORAN FROM RICHARD
CORDRAY
Q.1. The National Automobile Dealers Association (NADA)
recently brought to my attention a comprehensive fair credit
compliance program it developed for its members. The NADA
Program is based on a fair credit compliance program that the
Department of Justice (DOJ) developed to resolve disparate
impact allegations against two auto dealers in 2007. It is my
understanding that the DOJ has been complimentary of the
program as an effective way to manage the risk of a fair credit
violation. Do you see the release of the NADA program as a
positive development?
A.1. The Consumer Financial Protection Bureau (Bureau) welcomes
proactive proposals that demonstrate a commitment to fair
lending. However, lenders should be careful about assuming that
individual dealer-level actions will fully address their own
fair lending risks. As you note, in general, the National
Automobile Dealers Association's (NADA) Fair Credit Compliance
Policy and Program is based on two Department of Justice cases
from 2007, where that model was negotiated in settlements
involving dealers, whereas the Bureau's focus is on indirect
auto lenders. We remain concerned about indirect lending
programs built around discretion and financial incentives that
create fair lending risks. Our March 2013 bulletin, Indirect
Auto Lending and Compliance with the Equal Credit Opportunity
Act, was issued to provide clarity and guidance for
institutions regarding the application of Equal Credit
Opportunity Act and Regulation B, and our attendant supervisory
and enforcement approach in this area. It provided examples of
internal controls, program features, and compliance management
systems that institutions might use to mitigate legal risk. It
also indicated that lenders may choose to adopt
nondiscretionary pricing policies as an alternative method of
mitigating fair lending risks.
Q.2. As I understand the issue, retailers typically set their
retail margin based on cost and competition considerations in
their local market. Retailers also serve different demographic
populations. This means that the portfolio of an auto lender
that buys credit contracts from dealers around the country
could reflect a pricing difference between various groups of
consumers for no other reason than the fact that different
dealers set different retail margins and they each serve
different groups of consumers. If dealers broadly and
faithfully adopt an approach to managing the risk of fair
credit violations at the retail level, what is the policy
justification for holding lenders accountable for any pricing
imbalances that exist solely at the portfolio level?
A.2. As explained in the Consumer Financial Protection Bureau's
(Bureau) Indirect Auto Lending and Compliance with Equal Credit
Opportunity Act, which cites existing provisions of the Equal
Credit Opportunity Act (ECOA), Regulation B, and the Official
Staff Commentary to Regulation B, the standard practices of
indirect auto lenders likely make them ``creditors'' under
ECOA, which fall within the Bureau's jurisdiction. When an auto
lender's policies for dealer compensation and pricing result in
disparities within the lender's portfolio on a prohibited
basis, such as race, national origin, or sex, a lender may be
liable under ECOA if those policies are not supported by a
legitimate business need that cannot reasonably be achieved as
well by means that are less disparate in their impact. However,
when lenders share the nature and results of their own
analyses, in connection with a particular supervisory review or
enforcement investigation, the Bureau is open to hearing
specific explanations of the decisions the lender has made to
include particular analytical controls or relevant factors that
reflect a legitimate business need. As part of the Bureau's
overall analysis of auto lender pricing, we carefully consider
the specifics of each individual case, including factors such
as individual dealer retail margin and regional pricing
differences, in addition to a number of other factors, such as
consumers' credit scores and debt to income ratios;
characteristics of the collateral; and terms of the deal, such
as the amount financed, down payments, the existence of a
manufacturer discounted rate, and loan term.
Q.3. In previous responses to my questions on indirect auto
lending, you have repeatedly mentioned that auto lenders may
eliminate their fair credit risk by compensating dealers for
originating the credit contract with a flat fee or a fee based
on some other ``nondiscretionary'' pricing formula. Even if
every lender were to adopt such a compensation approach, is it
the CFPB's conclusion that this would ``eliminate'' dealer
pricing discretion when multiple auto lenders would continue to
compete for the dealer's business by offering different payment
amounts and the dealer would still select the lender to which
it would sell the credit contract? And if getting auto lenders
to adopt fixed payment formulas fails to eliminate the dealer's
pricing discretion, then how would the CFPB's flat fee solution
offer consumers any more protection from a fair credit
violation than the present system of compensation for dealers?
A.3. The Consumer Financial Protection Bureau (Bureau) is not
mandating that indirect auto lenders compensate dealers through
any specific compensation structure. Historically, the failure
to properly or consistently monitor discretionary policies and
practices for compliance with anti-discrimination laws has been
a contributing factor in discrimination in auto lending and in
other product markets, like mortgages. This historical
experience has been documented by scholars,\1\ and is reflected
in relevant case law \2\ and Department of Justice and Bureau
enforcement actions;\3\ we remain concerned about indirect
lending programs built around discretion and financial
incentives that create fair lending risks. Our March 2013
bulletin, Indirect Auto Lending and Compliance with the Equal
Credit Opportunity Act, was issued to provide clarity and
guidance for institutions regarding the application of the
Equal Credit Opportunity Act and Regulation B, and our
attendant supervisory and enforcement approach in this area. It
provided examples of internal controls, program features, and
compliance management systems that institutions might use to
mitigate legal risk. It also indicated that lenders may choose
to adopt nondiscretionary pricing policies as an alternative
method of mitigating fair lending risks.
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\1\ For example, see Cohen, Mark A. (2012). ``Imperfect Competition
in Auto Lending: Subjective Markups, Racial Disparity, and Class Action
Litigation.'' Review of Law and Economics vol. 8, no. I (21-58).
Working Paper available at http://papers.ssrn.com/sol3/papers.cfm?
abstract_id=951827.
\2\ See, Coleman v. Gen. Motors Acceptance Corp., 196 F.R.D. 315
(M.D. Tenn. 2000), vacated and remanded on unrelated grounds, 296 F.3d
443 (6th Cir. 2002); Jones v. Ford Motor Credit Co., 2002 WL 88431
(S.D.N.Y. Jan. 22, 2002); Smith v. Chrysler Fin. Co., 2003 WL 3287 I 9
(D.N.J. Jan. 15, 2003); Osborne v. Bank of America Nat' I Ass'n, 234
F.Supp.2d 804 (M.D. Tenn. 2002); Wise v. Union Acceptance Corp., 2002
WL 31730920 (S.D. Ind. Nov. 19, 2002).
\3\ See, e.g., United States v. Springfield Ford, Inc., No. 2:07-
cv-03469-PBT (E.D. Pa. Aug. 21, 2007); United States v. Pacifico Ford,
Inc., No. 2:07-cv-03470-PBT (E.D. Pa. Aug. 18, 2007); United States v.
NARA Bank, et al., No. 2:09-cv-07124-RGK-JC (C.D. Cal. Nov. 18, 2009);
see also United States v. Countrywide Fin. Corp. No. 2:11-cv-10540-PCG-
AJW (C.D. Cal. Dec. 28, 2011); United States v. AIG Fed. Sav. Bank, No.
1:99-mc-0999 (D. Del. Mar. 4, 2010); United States v. Ally Financial
Inc., 2:13-cv-15180 (Dec. 23, 2013).
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Lenders should determine the type of dealer compensation
that will best suit their business needs and meet their legal
obligations. Moreover, the use of nondiscretionary compensation
structures significantly reduces, but does not eliminate, fair
lending risk. It is also not possible to predict with certainty
how market-wide adoption of a single nondiscretionary
compensation program or multiple such programs would affect the
market, nor is it possible to anticipate all the potential
actions lenders may take to eliminate discrimination from their
indirect auto lending programs. The specifics of any particular
structure will be taken into account when we consider such
proposals in light of lender-specific data and implementation.
Q.4. Auto lenders and dealers have been asking for additional
information and clarification from the CFPB's guidance issued
last year. As you well know, I have been seeking additional
information regarding the statistical accuracy of the data the
CFPB used to arrive at the conclusion that this guidance was
necessary. Do you intend to provide clarifications so that
lenders (1) more clearly understand what is expected of them
and (2) can more effectively comply?
A.4. The Consumer Financial Protection Bureau (Bureau) has
provided detailed explanations to Congress on topics such as
the Bureau's proxy methodology, the methods we use to identify
statistically significant disparities in lending outcomes, and
how the Bureau analyzes neutral factors, such as credit scores
and debt-to-income ratios. We have explained how, consistent
with the approach of other regulators, the Bureau employs a
case-specific analysis that considers appropriate controls
based upon the particular lender's policies, practices, and
legitimate business needs. In an effort to be responsive to
congressional requests, we have provided thorough responses to
questions from Members of Congress while being mindful of the
need to protect the confidential business information of third
parties as well as confidential supervisory and investigative
information. In addition, as I noted during my testimony, the
Bureau is working on a white paper on the proxy methodology the
Bureau uses in our statistical analyses in our supervisory and
enforcement work in the indirect auto lending area.
Lenders seeking additional information on compliance should
consult the Bureau's Fall 2012 edition of Supervisory
Highlights \4\ as well as the Bureau's March 2013, Indirect
Auto Lending and Compliance with Equal Credit Opportunity Act
bulletin, which describes several steps lenders can take to
ensure that they are operating in compliance with the Equal
Credit Opportunity Act and Regulation B as applied to dealer
markup and compensation policies.
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\4\ Consumer Financial Protection Bureau, Supervisory Highlights:
Fall 2012 (Oct. 31, 2012), available at http://www.consumerfinance.gov/
reports/supervisory-highlights-fall-2012.
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Finally, lenders also may review the Bureau's Responsible
Business Conduct: Self-Policing, Self-Reporting, Remediation,
and Cooperation\5\ bulletin, which serves to inform market
participants that they may proactively self-police for
potential violations, promptly self-report to the Bureau when
they identify potential violations, quickly and completely
remediate the harm resulting from violations, and affirmatively
cooperate with any Bureau investigation above and beyond what
is required. If a party meaningfully engages in these
activities, which this bulletin refers to collectively as
``responsible conduct,'' it may favorably affect the ultimate
resolution of a Bureau enforcement investigation.
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\5\ Consumer Financial Protection Bureau, CFPB Bulletin 2013-06
(Jun. 25, 2013), available at http://files.consumerfinance.gov/f/
201306_cfpb_bulletin_responsible-conduct.pdf.
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