[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]
EXAMINING REGULATORY BURDENS ON
NON-DEPOSITORY FINANCIAL INSTITUTIONS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
AND CONSUMER CREDIT
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTEENTH CONGRESS
FIRST SESSION
__________
APRIL 15, 2015
__________
Printed for the use of the Committee on Financial Services
Serial No. 114-13
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
U.S. GOVERNMENT PUBLISHING OFFICE
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HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
PATRICK T. McHENRY, North Carolina, MAXINE WATERS, California, Ranking
Vice Chairman Member
PETER T. KING, New York CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma BRAD SHERMAN, California
SCOTT GARRETT, New Jersey GREGORY W. MEEKS, New York
RANDY NEUGEBAUER, Texas MICHAEL E. CAPUANO, Massachusetts
STEVAN PEARCE, New Mexico RUBEN HINOJOSA, Texas
BILL POSEY, Florida WM. LACY CLAY, Missouri
MICHAEL G. FITZPATRICK, STEPHEN F. LYNCH, Massachusetts
Pennsylvania DAVID SCOTT, Georgia
LYNN A. WESTMORELAND, Georgia AL GREEN, Texas
BLAINE LUETKEMEYER, Missouri EMANUEL CLEAVER, Missouri
BILL HUIZENGA, Michigan GWEN MOORE, Wisconsin
SEAN P. DUFFY, Wisconsin KEITH ELLISON, Minnesota
ROBERT HURT, Virginia ED PERLMUTTER, Colorado
STEVE STIVERS, Ohio JAMES A. HIMES, Connecticut
STEPHEN LEE FINCHER, Tennessee JOHN C. CARNEY, Jr., Delaware
MARLIN A. STUTZMAN, Indiana TERRI A. SEWELL, Alabama
MICK MULVANEY, South Carolina BILL FOSTER, Illinois
RANDY HULTGREN, Illinois DANIEL T. KILDEE, Michigan
DENNIS A. ROSS, Florida PATRICK MURPHY, Florida
ROBERT PITTENGER, North Carolina JOHN K. DELANEY, Maryland
ANN WAGNER, Missouri KYRSTEN SINEMA, Arizona
ANDY BARR, Kentucky JOYCE BEATTY, Ohio
KEITH J. ROTHFUS, Pennsylvania DENNY HECK, Washington
LUKE MESSER, Indiana JUAN VARGAS, California
DAVID SCHWEIKERT, Arizona
ROBERT DOLD, Illinois
FRANK GUINTA, New Hampshire
SCOTT TIPTON, Colorado
ROGER WILLIAMS, Texas
BRUCE POLIQUIN, Maine
MIA LOVE, Utah
FRENCH HILL, Arkansas
Shannon McGahn, Staff Director
James H. Clinger, Chief Counsel
Subcommittee on Financial Institutions and Consumer Credit
RANDY NEUGEBAUER, Texas, Chairman
STEVAN PEARCE, New Mexico, Vice WM. LACY CLAY, Missouri, Ranking
Chairman Member
FRANK D. LUCAS, Oklahoma GREGORY W. MEEKS, New York
BILL POSEY, Florida RUBEN HINOJOSA, Texas
MICHAEL G. FITZPATRICK, DAVID SCOTT, Georgia
Pennsylvania CAROLYN B. MALONEY, New York
LYNN A. WESTMORELAND, Georgia NYDIA M. VELAZQUEZ, New York
BLAINE LUETKEMEYER, Missouri BRAD SHERMAN, California
MARLIN A. STUTZMAN, Indiana STEPHEN F. LYNCH, Massachusetts
MICK MULVANEY, South Carolina MICHAEL E. CAPUANO, Massachusetts
ROBERT PITTENGER, North Carolina JOHN K. DELANEY, Maryland
ANDY BARR, Kentucky DENNY HECK, Washington
KEITH J. ROTHFUS, Pennsylvania KYRSTEN SINEMA, Arizona
ROBERT DOLD, Illinois JUAN VARGAS, California
FRANK GUINTA, New Hampshire
SCOTT TIPTON, Colorado
ROGER WILLIAMS, Texas
MIA LOVE, Utah
C O N T E N T S
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Page
Hearing held on:
April 15, 2015............................................... 1
Appendix:
April 15, 2015............................................... 49
WITNESSES
Wednesday, April 15, 2015
Evans, Diane, President, American Land Title Association (ALTA).. 9
Friedman, Justin G., Director, Government Affairs, American
Financial Services Association (AFSA).......................... 7
McGrath, Paulina Sepulveda, Chair, Community Mortgage Lenders of
America (CMLA)................................................. 6
Shaul, W. Dennis, Chief Executive Officer, Community Financial
Services Association of America (CFSA)......................... 11
Wilson, Mitria, Vice President, Government Affairs, and Senior
Counsel, Center for Responsible Lending (CRL).................. 13
APPENDIX
Prepared statements:
Hinojosa, Hon. Ruben......................................... 50
Evans, Diane................................................. 55
Friedman, Justin G........................................... 66
McGrath, Paulina Sepulveda................................... 74
Shaul, W. Dennis............................................. 81
Wilson, Mitria............................................... 94
Additional Material Submitted for the Record
Neugebauer, Hon. Randy:
Written statement of the Community Home Lenders Association
(CHLA)..................................................... 113
Written statement of the Mortgage Bankers Association (MBA).. 117
.............................................................
Written statement of the National Association of Mortgage
Brokers (NAMB)............................................. 130
Sherman, Hon. Brad:
Written statement of the African American Credit Union
Coalition (AACUC).......................................... 135
Written statement of the Consumer Federation of America (CFA) 142
Written statement of the National Council of La Raza (NCLR).. 148
EXAMINING REGULATORY BURDENS
ON NON-DEPOSITORY FINANCIAL
INSTITUTIONS
----------
Wednesday, April 15, 2015
U.S. House of Representatives,
Subcommittee on Financial Institutions
and Consumer Credit,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 1:01 p.m., in
room 2175, Rayburn House Office Building, Hon. Randy Neugebauer
[chairman of the subcommittee] presiding.
Members present: Representatives Neugebauer, Pearce, Lucas,
Posey, Fitzpatrick, Luetkemeyer, Stutzman, Mulvaney, Pittenger,
Barr, Rothfus, Dold, Guinta, Tipton, Williams, Love; Clay,
Scott, Maloney, Sherman, Lynch, Delaney, Heck, Sinema, and
Vargas.
Ex officio present: Representative Waters.
Chairman Neugebauer. The Subcommittee on Financial
Institutions and Consumer Credit will come to order. The Chair
is authorized to declare a recess of the subcommittee at any
time.
Today's hearing is entitled, ``Examining Regulatory Burdens
on Non-Depository Financial Institutions.''
Before I begin, I would like to thank our witnesses for
being here today, and for traveling all the way over here to
room 2175. As you know, our regular committee room is under
construction for a little remodeling, making sure that it is
ADA-compliant, and upgrading the sound system so that when the
Federal Reserve Chair is here, we don't have to adjourn for 10
minutes while we try to get the sound back on.
And so, we are very happy that you are here today. This is
a very important hearing, and I look forward to hearing from
our witnesses this afternoon.
At this time, I will recognize myself for 5 minutes for an
opening statement.
Good afternoon. This month, we got some very bad economic
news: The U.S. economy only created 126,000 jobs in the month
of March, far below our expectations. The Government also
revised the numbers downward for the first quarter.
I see these numbers, and I continue to be concerned with
the direction that our economy is headed. According to the
Brookings Institute, last year, for the first time in 30 years,
business deaths exceeded business births.
And on this day, tax day, we are reminded just how
burdensome and complex our Tax Code is; according to the
National Taxpayers Union Foundation, compliance with Federal
income tax cost the economy $233 billion in productivity last
year. This is only making it harder to get our economy back on
track.
This committee has already heard testimony on and explored
the significant regulatory onslaught and resulting market
consolidation facing our depository institutions, our Nation's
community banks and credit unions.
Today, I am pleased to welcome our witnesses, who represent
many small businesses and community-based financial
institutions, to hear their perspective on ever-increasing
regulatory burdens.
As many of you know, the full Financial Services Committee
and this subcommittee are undertaking a comprehensive
examination of regulatory burdens facing our Main Street
lenders and businesses. Today's hearing provides the committee
with an opportunity to hear about the impact that these
regulatory burdens have on our non-depository financial
institutions.
Non-bank financial institutions are a diverse and important
faction of our financial sector. Many of these institutions
provide short-term, small-dollar lending.
They enable families to purchase automobiles to take their
kids to school. They provide the title insurance for those
looking to purchase a home and move closer to the American
dream. And they are often the lenders and service providers for
basic consumer loans.
Yet, they are very different from community banks and
credit unions: They don't use deposits to fund their
operations.
As a result of this unique structure, they face operational
challenges with which many on this committee may not be
familiar. Today, I hope to explore a few of the more pressing
regulatory issues facing these institutions.
First, the Consumer Financial Protection Bureau (CFPB) is
in the process of integrating the Truth in Lending Act and the
Real Estate Settlement Procedures Act into what will be known
as TRID. This is a major endeavor that will significantly alter
the mortgage closing processes for consumers, lenders, and
title insurance companies. It is important for this committee
to understand how the industry is working to comply with this
August 1st effective date, and if there are issues the
committee can help to address.
Second, the CFPB is in the process of promulgating rules
addressing the short-term, small-dollar credit market. This
market is widely used by the American consumer and is highly
regulated and enforced at the State level. It is important for
this committee to examine the regulatory structure of these
products and to understand how the Federal regulators impact
credit access and product choices for our consumers.
Third, the CFPB has taken significant regulatory action
impacting the auto industry. While the Dodd-Frank Act exempted
auto dealers from the CFPB's jurisdiction, the Bureau has tried
to bypass that exemption by regulating the indirect auto
lenders. The CFPB's actions have the ability to disrupt the
automobile-buying experience for consumers, and we have
received bipartisan criticism that we will examine further.
Finally, it is important for this committee to better
understand what the impact of Federal regulation and
supervision means for industries historically regulated at the
State level. While we often talk about regulatory burdens in
compliance terms, burdensome, duplicative, and unnecessary
supervision and examination can also be a burden to community-
based lenders.
I am hopeful that the Members will leave this hearing with
a better understanding of the current regulatory environment
for non-depository institutions and areas of concern that the
committee can address. We must push forward in our bipartisan
efforts to provide regulatory relief for our Main Street
financial institutions and protect the financial independence
of the individuals and the families that they serve.
Now, I will recognize the ranking member of the
subcommittee, Mr. Clay from Missouri, for 2 minutes.
Mr. Clay. Thank you so much, Mr. Chairman.
And I also thank the ranking member of the full Financial
Services Committee, Ranking Member Waters, for being here.
And to our witnesses, thank you for your participation
today.
While the title of today's hearing sounds harmless enough,
anyone who follows the work of our committee knows what this
hearing is actually about: providing a venue to bolster the
Majority's narrative that the Consumer Financial Protection
Bureau is actually harming consumers by limiting their choices
and freedom.
Prior to Dodd-Frank, consumers had ample freedom and
choice. They had the freedom to choose risky mortgages with
exotic products that eventually ravaged the economy.
For many of my constituents in St. Louis, they had the
choice to support payday lenders that charge rates in the
neighborhood of 455 percent. Or, as former Missouri Attorney
General Nixon uncovered in Operation Taken for a Ride,
thousands of Missourians were free to be misled into paying for
extended service contracts on their vehicles that were
deceptively marketed.
As so many of my constituents have come to learn, this kind
of freedom is costly and serves as a constant reminder that the
marketplace for consumer financial services can be treacherous
for low-and moderate-income consumers.
This is particularly true in my home State of Missouri.
With respect to payday lending, according to ProPublica,
Missouri has about one payday or car title lender for every
4,100 residents, with short-term loans averaging 455 percent
APR.
Statewide, a broad-based coalition of consumers' advocacy
groups and community-based organizations tried to cap interest
rates at 36 percent, but their efforts failed. And similar
efforts around the country to regulate unaffordable short-term
lending and abusive collection practices have fallen short
until now.
I applaud the CFPB--is that 3 minutes or 5, Mr. Chairman?
I yield to the ranking member. I was just getting started.
Ms. Waters. I will yield to the gentleman to complete his
statement.
Mr. Clay. Oh, thank you.
Only in Washington could a requirement that seeks to ensure
that borrowers can actually pay back the money they borrow be
considered a burden or controversial instead of sound
underwriting. I find it odd that so often this committee only
considers the cost of the CFPB's initiatives to industry
without a fair and honest assessment of the benefits of the
CFPB's work to consumers and to the economy.
Dollars not spent on unaffordable payday loans can often be
spent on other goods and services that can spark economic
activity, a consideration that rarely informs our discussion of
the costs and benefits of Federal consumer protection laws.
Part of our job is to ensure that we strike the appropriate
balance between the interests of industry and those of
consumers. And the fact that this hearing is solely about the
burdens on businesses, and only one witness is here to provide
the perspective of consumers, speaks volumes on the Majority's
imbalanced approach.
My concerns about the intentions notwithstanding, I remain
committed to doing the difficult work of developing a
regulatory approach that is properly calibrated to a firm's
business model and risk profile. But this work of narrowly
tailoring our regulatory approaches must be weighed against the
very real risk that the business practices of non-banks pose to
consumers.
I look forward to hearing from each of the witnesses.
Chairman Neugebauer. And I thank the gentleman.
The distinguished ranking member of the full Financial
Services Committee, the gentlewoman from California, Ms.
Waters, is recognized for 1 minute.
Ms. Waters. Thank you very much, Mr. Chairman.
And, Mr. Clay, I really appreciate the fact that we are
having this hearing today.
While I have a prepared statement, I am going to deviate
from that statement and simply say I am so pleased that we are
going to talk about payday lending today. I am so pleased that
we are going to talk about it because it is discussed
everywhere throughout our communities, Members of Congress are
talking about it, and we all talk about it in the way that Mr.
Clay just described it.
We have constituents who, no fault of their own, don't earn
very much money, don't have money for food or for their bills
prior to their next payday, and they go to a payday lender and
then they get hooked. They get hooked with 400-plus percent
interest rates and, of course, they can't pay off the loan and
so they resign them up, and it goes on and on and on. Once they
get into debt with payday lenders, it is very hard to get out.
We have to change this. We have to do something about it.
But I am very appreciative that the Consumer Financial
Protection Bureau has finally announced its long-anticipated
proposal to regulate the payday lending industry.
So I look forward to this hearing, and I thank you very
much.
Chairman Neugebauer. I thank the gentlewoman.
And I am now going to introduce our panel.
First, Ms. Paulina Sepulveda McGrath. Ms. McGrath is
president and co-owner of Republic State Mortgage in Texas. She
also serves as the Chair of the Community Mortgage Lenders of
America, which primarily advocates for non-bank mortgage
lenders.
Ms. McGrath has led Republic since 1999, and during that
time, Republic has grown from 2 to 22 locations in 7 States.
Notably, Republic is the past recipient of the Inc 500 Award
from Inc. Magazine. She also serves on the board of the Texas
Mortgage Bankers Association and is vice president of the board
of trustees of the Women's Fund, a nonprofit organization that
provides Houston area women and girls with tools they need to--
that can be advocates for their health.
I would like to now turn to the gentleman from California,
Mr. Sherman, to introduce our second witness, Mr. Friedman.
Mr. Sherman. Yes. Justin Friedman is here from the American
Financial Services Association. He served as my Legislative
Advisor on the issues before this committee just a few years
ago. When he left I told him, ``You don't stop working for me;
I just stop paying you.''
But Justin's real genius was to give me advice on how to
really make a witness squirm, how to make sure that their 5
minutes with me was one of the worst experiences of their life.
And I hope that I have not lost those skills even though he has
departed, and in a few minutes, we will find out.
I yield back.
Chairman Neugebauer. I thank the gentleman.
Third, Ms. Diane Evans is vice president of Land Title
Guarantee Company and serves as the president of the American
Land Title Association, which advocates on behalf of the title
insurance industry. Ms. Evans is active in the title industry
both nationally as well as in her home State of Colorado. She
has served on many State panels, including the State insurance
title advisory panel; the State board of land commissioners,
and in 2002 she was selected as Castle Rock, Colorado's Chamber
of Commerce businessperson of the year.
Fourth, Mr. W. Dennis Shaul is CEO of the Community
Financial Services Association, which is a national
organization representing short-term, small-dollar lenders.
Before joining CFSA, Mr. Shaul had a distinguished career on
Capitol Hill as Senior Advisor to former Financial Services
Committee Chairman Barney Frank.
Additionally, Mr. Shaul has served as the State of Ohio's
chief financial regulator. Mr. Shaul earned his J.D. from
Harvard Law School, and his Master's from Oxford University. He
is a graduate of the University of Notre Dame, and he is also a
Rhodes Scholar.
And fifth, Ms. Mitria Wilson is vice president of
government affairs and senior counsel at the Center for
Responsible Lending. Prior to joining the Center for
Responsible Lending, she worked as the director of legislative
and policy advocacy at the National Community Reinvestment
Coalition.
Ms. Wilson specializes in the analysis of financial
services issues, which focus on housing finance, student loans,
consumer lending, and employment issues. In 2014 she was named
as Woman of Influence by HousingWire Magazine.
Each of you will be recognized for 5 minutes to make your
oral presentation. And without objection, your written
testimony will be made a part of the record.
Ms. McGrath, you are recognized for 5 minutes.
STATEMENT OF PAULINA SEPULVEDA MCGRATH, CHAIR, COMMUNITY
MORTGAGE LENDERS OF AMERICA (CMLA)
Ms. McGrath. Chairman Neugebauer and Ranking Member Clay, I
am Paulina Sepulveda McGrath, president of Republic State
Mortgage Company, based in Houston, Texas. I am here today as a
chairperson of the Community Mortgage Lenders of America, a
trade group representing both small mortgage bankers and
community banks with mortgage lending experience.
CMLA supports the regulatory streamlining that Congress is
moving ahead with for community banks. However, if the effort
does not provide the same streamlining for all community-based
mortgage lenders, including those that are not banks or bank
affiliates, it will fail consumers and small businesses in
every community in our country.
These unaffiliated lenders originated approximately 40
percent of all conventional loans and roughly 50 percent of all
loans insured by the Federal Housing Administration and the
Department of Veterans Affairs in 2014. We are a key piece of
the mortgage market, especially for the first-time homebuyer
and for those borrowers looking for or needing more
personalized service.
Unfortunately, the current regulatory burden is driving
consolidation among both community banks and small,
unaffiliated mortgage lenders. If this consolidation continues,
the resulting reduction in competition will lead to even higher
costs and fewer choices for consumers.
As a Nation, we need to find a way to serve, with careful
and safe underwriting, more families in their homeownership
needs, particularly first-time homebuyers. If we cannot, these
families will continue to pay ever-increasing rents that are
outstripping income gains.
Remember, Dodd-Frank's goal was certainly to make lending
safer for consumers. However, as we were told in 2009, the law
was intended to regulate most closely the largest lenders and
the bad actors.
Experience with this statute shows it lacks the flexibility
to distinguish the level of regulation necessary for lenders of
different sizes, business models, and performance records.
Consequently, it levies the regulatory burden on everyone,
including small lenders that operate in a prudent manner.
Importantly, these small lenders simply cannot amortize large
fixed costs onto a relatively modest volume of mortgage
lending.
The CMLA would like to introduce a concept that will spur
more community-based lending while not diminishing consumer
protections. Why not provide some targeted relief for small
lenders which have no recent enforcement actions and which
originate primarily loans that meet the Qualified Mortgage
standard contained in the truth-in-lending statute? Why not
streamline certain regulations for these lenders, which
recognizes their unique role in the lending market and benefits
the borrowers whose home financing needs they serve?
We propose that lenders receive specified regulatory relief
so long as they remain: one, small; two, with most of their
annual loan volume composed of QM loans; and three, only as
long as they continue their excellent lending records.
If Congress adopted a framework like this, it would spur
more community lending while maintaining the consumer focus
intended by policymakers. This is most crucial for our
country's underserved areas and communities, from the rural
areas to the inner city.
CMLA recommends to Congress five steps to streamline
current regulations. The first four steps are also supported by
the Community Home Lenders Association (CHLA) a group of small
lenders, all of which are unaffiliated with banks, that are
working closely with us on these issues.
First: Eliminate the current 3-day waiting period between a
revised disclosure and the closing of the loan if the revised
disclosure has an APR for the consumer that is lower than the
original disclosure.
Second: Exempt small lenders from the vendor oversight
requirements.
Third: Direct the CFPB to concentrate their examinations on
large lenders and those small lenders for which the CFPB has
received a referral from another regulator, and exempt those
small lenders that have no such referral.
Fourth: Refine the definition of ``small servicer'' to
include those small lenders that subcontract part or all of the
servicing function to a subservicer.
And fifth: Amend the SAFE Act to direct the issuance of a
180-day transitional license to registered bank-employed loan
originators who were hired by an unaffiliated lender, which
will permit these loan originators to continue to work while
completing State licensing requirements.
The rationale for each of these proposals is set out in my
written testimony. And of course, I will be happy to answer any
questions you may have.
Thank you very much for this opportunity.
[The prepared statement of Ms. McGrath can be found on page
74 of the appendix.]
Chairman Neugebauer. Thank you.
Mr. Friedman, you are recognized for 5 minutes.
STATEMENT OF JUSTIN G. FRIEDMAN, DIRECTOR, GOVERNMENT AFFAIRS,
AMERICAN FINANCIAL SERVICES ASSOCIATION (AFSA)
Mr. Friedman. Mr. Chairman, Ranking Member Clay, and
members of the subcommittee, good afternoon.
My name is Justin Friedman, and I am here on behalf of the
American Financial Services Association. I am pleased to
provide testimony as you examine regulatory relief for non-
depository financial institutions and to discuss proposals to
improve the structure of the Consumer Financial Protection
Bureau.
I wish to thank the subcommittee for holding a hearing on
this issue, which is of keen importance to the consumer credit
industry and the households that we serve.
Founded in 1916, AFSA is the national trade association for
consumer credit. Our 390 members include consumer finance
companies, commercial banks, industrial banks, and other
financial services companies that make credit available to
consumers and small businesses.
AFSA members offer a broad array of financial products
including personal installment loans, retail and commercial
sales finance, credit and payment cards, residential mortgages,
vehicle loans and leases, and floorplan finance for dealers.
Our members provide approximately 80 percent of the Nation's
vehicle financing. In general, finance companies are
responsible for one of every five dollars of consumer credit in
America.
While depository institutions play a vital role in the
economy, Federal Reserve statistics show that a substantial
share of consumer credit is provided by non-depository finance
companies. In fact, for non-revolving lines of credit, finance
companies and banks hold roughly equal shares of the pie--about
one quarter each. Both are smaller than the share held by the
Federal Government, which, of course, dominates the student
loan market.
Finance companies have a long history of meeting the needs
of consumers, such as buying or maintaining a car to get to
work, or paying for higher education. Finance companies are
licensed by each and every State where they do business. The
CFPB has added a complex new layer of Federal oversight to the
existing regime.
The principal types of credit offered by consumer finance
companies are motor vehicle finance and traditional installment
loans.
Lately, much has been said about the abuses found in
certain forms of short-term, small-dollar lending. Policymakers
should recognize that traditional installment loans are a time-
tested and beneficial form of credit for working Americans, and
they are based upon sound underwriting.
I am talking about fixed-rate, fully-amortizing personal
loans, which are repaid in equal monthly installments of
principal and interest. Traditional installment loans are the
safest, most responsible form of small-dollar lending, and they
have been for many decades.
AFSA members also offer motor vehicle financing: directly,
through branch-based lending; and indirectly, through
dealerships. Eight out of 10 consumers who finance their
purchase of an automobile choose to do so at the dealer.
This financing is ultimately facilitated by the captive
finance companies of the auto makers, independent finance
companies, banks, and credit unions. Their provision of credit
helps keep the auto market a strong, competitive, and integral
part of the American economy.
While our industry is focused on providing a positive
experience for the consumer, it also ensures a reliable source
of liquidity for auto dealers. Specialized auto lenders do not
withdraw from the market during economic downturns, unlike
banks, that have safety and soundness concerns which may compel
them to curb auto lending during times of turbulence.
The trope that non-depository lenders are unregulated is
simply untrue. The creation of the CFPB imposes new, often
duplicative Federal burdens on these State-regulated entities.
State regulators have a familiarity with local and regional
circumstances. This knowledge, along with geographic proximity,
means that a State regulator will often be the first to
identify emerging issues, practices, or products that pose
risks to consumers.
On behalf of AFSA's member companies, I wish to thank the
committee for its help in enacting H.R. 5062, the Examination
and Supervisory Privilege Parity Act last year. The Act
clarified the law governing the sharing of information between
Federal and State agencies that license, supervise, or examine
non-banks offering consumer financial services.
This legislation resolved a regulatory disparity between
depository and non-depository institutions, recognizing the
unique situation of non-depositories and their relationships
with State regulators. We are pleased that the legislation was
passed in a bipartisan fashion, becoming the very first
amendment to the CFPB statute that was enacted into law. AFSA
hopes that this effort can serve as a model for future reforms
to Dodd-Frank.
The CFPB's current governance structure is flawed, and it
should be replaced by a bipartisan, multimember commission, as
is the norm for virtually all independent regulatory agencies
of the Federal Government. Unlike most of these agencies, the
CFPB is headed by a single political appointee.
AFSA welcomes Chairman Neugebauer's introduction of H.R.
1266, the Financial Product Safety Commission Act, which alters
the CFPB structure to be a five-member commission appointed by
the President. While this is a step forward, the previous bills
did not address State-licensed entities and the substantial
portion of the consumer credit market that they serve.
As I noted previously, State regulators possess important
insight into the practices and products of the lenders that
they license. State regulators are best positioned to
investigate issues that may pose risks to local consumers.
AFSA recommends that at least one member of the new board
should have State bank or consumer credit supervisory
experience. A similar approach has worked effectively at the
FDIC, and it would be appropriate for the consumer regulator.
Some fear that any structural reform would harm the mission of
the CFPB, but AFSA believes an agency directed by a commission
with staggered terms is better insulated from electoral
politics and most likely to produce sustainable policy that
will protect consumers while promoting access to credit.
Thank you.
[The prepared statement of Mr. Friedman can be found on
page 66 of the appendix.]
Chairman Neugebauer. Ms. Evans, you are recognized for 5
minutes.
STATEMENT OF DIANE EVANS, PRESIDENT, AMERICAN LAND TITLE
ASSOCIATION (ALTA)
Ms. Evans. Thank you, sir.
Chairman Neugebauer, Ranking Member Clay, and members of
the subcommittee, thank you for inviting me here today. My name
is Diane Evans and I am vice president of Land Title Guarantee
Company in Denver, Colorado. Along with my day job, I serve as
the president of the American Land Title Association.
ALTA is a national trade association that represents the
abstractors, settlement service providers, and title industry
across this United States. ALTA has more than 5,500 member
companies ranging from small, one-person operations to large,
publicly traded companies. Our industry employs more than
108,000 professionals, and we have offices in every county in
this United States.
I am happy to be here today to discuss how overregulation
is affecting our industry, our members, and our consumers. As
you know, the Dodd-Frank Act required the CFPB to combine the
disclosures required under the Truth in Lending Act (TILA) and
the Real Estate Settlement Procedures Act (RESPA) into a single
TILA-RESPA form, which we commonly call TRID.
The Bureau started this process back in 2011, and we
implement these new disclosures on August 1st, 107 days from
today. We know that the ultimate purpose of TRID is to help
consumers better understand their real estate transaction, and
that is extremely important to our members, who are sitting
across from homebuyers while we are sitting here today.
We have three primary concerns. First, our experience in
implementing regulation tells us that there will be unforeseen
issues once we start using these forms in actual, real
transactions. To assist with this process, ALTA requests that
the CFPB publicly commit to a hold-harmless period of
enforcement from August 1st through the end of the year.
I thank Chairman Neugebauer and Congressman Luetkemeyer for
their leadership in asking CFPB Director Cordray for that hold-
harmless period, and I request that the rest of the
subcommittee follow that lead. A hold-harmless period in the
first few months allows industry to adapt their business
processes to comply with the regulation without fear of
enforcement action or potential class action lawsuits. It
allows us to focus on our business, our customer, and the
consumer.
Second, this new regulation prohibits the industry from
disclosing the actual cost of a title insurance policy
purchased by the consumer at the closing. Consumers will be
confused because the government-mandated form will disclose
different prices than the actual cost that consumer will pay at
the closing table. They will be unable to shop using accurate
cost analysis.
The Bureau should resolve this issue by requiring us to
disclose what the actual title insurance premium is on each
transaction as required in each individual State.
Finally, a 2012 service provider bulletin, which was issued
by the CFPB, continues to cause uncertainty in the marketplace
for our members. Unlike the CFPB, other Federal regulators have
provided helpful guidance so that businesses understand how to
manage the risks associated with third-party service providers.
Lenders are left without this clear guidance on the appropriate
risk management procedures that they need for their title and
settlement service providers in this industry.
In 2012, due to the lack of that additional guidance, ALTA
developed the title insurance and settlement company best
practices. These were created to help our members highlight
policies and procedures that our industry exercises to protect
lenders and consumers while ensuring a positive and compliant
real estate transaction.
To improve the way the CFPB works with and provides
information to businesses, I urge Congress to pass H.R. 1195,
the Bureau of Consumer Financial Protection Advisory Boards
Act, as soon as possible. Thank you to Congressmen Pittenger
and Heck for their leadership in sponsoring this bipartisan
legislation that establishes a small business advisory board at
the CFPB. It provides those open and formal channels of
communication from CFPB staff in this industry.
I appreciate the opportunity to be here and I look forward
to serving as a resource and answering questions for you all.
Thank you.
[The prepared statement of Ms. Evans can be found on page
55 of the appendix.]
Chairman Neugebauer. Thank you.
Mr. Shaul, you are recognized for 5 minutes.
STATEMENT OF W. DENNIS SHAUL, CHIEF EXECUTIVE OFFICER,
COMMUNITY FINANCIAL SERVICES ASSOCIATION OF AMERICA (CFSA)
Mr. Shaul. Chairman Neugebauer, Ranking Member Clay, thank
you for inviting me to testify, and I look forward to questions
that you may have.
I am the chief executive officer of the Community Financial
Services Association of America, an entity which represents
non-depository financial institutions and includes more than
half of the storefront payday loan entities across the country.
We are particularly interested in CFPB's recent proposals
with regard to our industry and companion industries that are
in the short-term, small-dollar market. I look forward to these
with particular interest because, as was mentioned a while ago,
I was here as a staff member during the drafting of Dodd-Frank
and participated in that capacity and I have looked forward to
working with the CFPB.
That has not always been easy, and it is in part what draws
me here today.
It is important, I think, to note at the outset that the
concept was, for me, one that was laudatory. The practices may
not meet the measure that I had hoped, and I think others had
hoped, they would meet.
So it was with some real anxiety that we began to look at
the paper that was propounded approximately 2 weeks ago by CFPB
relative to our industry and companion industries. That raised
several questions for us.
In terms of the immediate future, that document goes to the
Small Business Regulatory Enforcement Fairness Act (SBREFA).
And it is important because the Bureau describes it as the
entry point for regulation of large and small entities.
The reason I am discouraged is that as I read that paper,
and by the admission of CFPB, it would put out of business
approximately 60 percent of those in the small business area.
Now, CFPB uses the language that so often accompanies the
closing of plants and the displacement of jobs. They speak
about it as--in the bloodless way of saying that there is going
to be consolidation within the industry.
Make no mistake. It isn't consolidation we are talking
about; it is job loss, and 50 percent of those jobs have
medical benefits, et cetera.
So we are concerned about that. And we are concerned
whether this isn't an entree to throw the baby out with the
bath water.
As we look at the statistics propounded by CFPB, we
understand that they have a particular concern for people who
are in the product payday too long, but it is not necessary to
throw out the product itself to get at those who need consumer
protection. And I think it is instructive to remember that two
Federal banks--the New York Reserve and the Kansas City
Reserve--have spoken about the indirect and unintended
consequences of restricting payday lending.
I am not at all sure that the research that the CFPB has
done on this topic is meritorious in two senses. First, it may
not have begun with the proper question, which I believe was,
given a sample of people who use payday loans, how many of them
benefit from them? How many are neutrally affected? And how
many are worse off?
And clearly, the task is to work with those who are worse
off and make certain that they either do not acquire payday
loans, or make certain that they are given ample consumer
protection if they do.
This is a complicated area, and you must recognize that
every entity that we represent is State-licensed and must also
undergo the test of our own better business--better practices.
That means, in effect, something that was not taken into
account by CFPB: There are distinguishing characteristics in
this area between those online, between those in storefront,
between those in title lending, between those who are large and
those who are small, between what applies in Florida and what
applies in California.
The Federal system was once described by Justice Brandeis
as providing a laboratory for experimentation. What the CFPB is
about to do is close the laboratory and make a one-size-fits-
all set of demands on all those who are participating as
operators for this product and for the customers.
I speak today as much for the customers as I do for our
operators, and I would encourage any of you who have doubts
about the efficacy of what we do to visit our stores and see
how the customer comes out of our place.
It seems to me that it is important to provide consumer
protections. It seems to me also that regulating payday is not
a path to annihilation, as it apparently is to the Bureau at
this point.
[The prepared statement of Mr. Shaul can be found on page
81 of the appendix.]
Chairman Neugebauer. I thank the gentleman.
And now, Ms. Wilson, you are recognized for 5 minutes.
STATEMENT OF MITRIA WILSON, VICE PRESIDENT, GOVERNMENT AFFAIRS,
AND SENIOR COUNSEL, CENTER FOR RESPONSIBLE LENDING (CRL)
Ms. Wilson. Good afternoon, and thank you, Chairman
Neugebauer and Ranking Member Clay, for this opportunity to
testify today.
I have had the opportunity to benefit from hearing all of
the other panelists who went before me, and one of the things
that I thought was really striking about the invitation to
testify today was that the request itself asked us to focus on
community financial institutions. And there is something
special about community financial institutions, and that is a
fact that the Center for Responsible Lending patently
recognizes.
Community financial institutions are actually based on a
business model that recognizes relationships and the importance
of relationships with consumers. So it is with that being
understood that I have to tell you that today I actually came
to be a counterpoint to most of the assertions that are being
made by the prior panelists.
We value community financial institutions because we
believe that they create choice, opportunity, and access, and
they proliferate the ability to generate competition that
drives down prices for consumers.
I have to tell you that most of the proposals that are
being advanced today have little to do with either of these
objectives and principles, and for that reason they should be
opposed.
For example, one of the points that we have talked about
today was the importance of auto lenders and indirect auto
financing. And people suggest that this is a question of
opportunity, that financiers should be able to actually charge
an increased commission based on the interest rate without any
consideration and that should be okay.
But the reality is that evidence shows that the way in
which auto financiers do that, dealers, lends itself to a
result that actually shows discriminatory practices--that is
that people of color, people of low- and moderate-income
backgrounds, are those who are most likely to actually receive
an interest rate markup.
That kind of opportunity is not an opportunity at all. It
is discrimination and it is illegal under the Equal Credit
Opportunity Act.
So to the extent that the Consumer Financial Protection
Bureau's bulletin actually recommended that auto financers and
lenders who had an indirect relationship stray away from that
kind of practice and policy, we believe that was actually a
responsible recommendation by a Bureau that has been charged
with enforcing the Equal Credit Opportunity Act.
And now to choice. One of the most fascinating things about
our conversation around expanding access to credit has been an
argument that non-depository mortgage lenders are somehow in a
position of being disadvantaged by the regulations that--
created by the ability to repay rule.
We think it is a simple concept that is basic to business
that, in fact, if you are going to underwrite a loan you should
make sure that the individual to whom you give that loan has
the ability to repay it. There is nothing novel about that; it
is a common-sense approach.
So then the question becomes, are there other ways that
non-depositories or smaller financial institutions can satisfy
that burden without having the same in costs? The reality is
for non-depository financial institutions, they have adapted
and accepted a business model that far more parallels larger
financial institutions than what we think of as traditional
community banks.
I would suggest to you that a non-depository institution
does not, in fact, have a long-term relationship with the
consumer. Why? Because a mortgage lender who is a non-
depository doesn't have interactions with the consumer on
multiple bases. They are making a one-time loan to that
consumer.
And interestingly enough, unlike what we think of as
traditional community banks, non-depository mortgage lenders
are not located in communities, by and large. A great example
of that is Freedom Mortgage, which, although being located in 8
different States, actually offers mortgages in 50 States across
the country.
I think that most Americans listening to this conversation
today would be hard-pressed to agree that an institution making
a loan in the State of Texas that is based in New Jersey
somehow understands community banking and relationship lending.
Thank you for the opportunity to testify, and I am happy to
answer any questions that you may have.
[The prepared statement of Ms. Wilson can be found on page
94 of the appendix.]
Chairman Neugebauer. I thank the gentlelady.
And now, each Member will be recognized for 5 minutes for a
question-and-answer period.
I will begin by recognizing myself for 5 minutes.
As has been mentioned, the CFPB finalized rules that
combined the disclosures that consumers receive both at
applying for and closing their residential loans, the Truth in
Lending Act and the Real Estate Settlement Procedures Act. Now,
I am quite honestly supportive of simplifying the forms. As a
former--I have been in the real estate business for a long time
and the forms have increased dramatically, and so somehow
harmonizing that I think is a good process.
But I have heard from the industry representatives that
with the rules that came along with this new form--I think it
was over 1,000 pages, if I am not mistaken--there are a lot of
other details that go with using that form together.
Ms. Evans, can you kind of describe some of the challenges
that you are facing as you approach this August 1st deadline
for complying with the new rules, at the same time implementing
the new form?
Ms. Evans. Thank you, Chairman Neugebauer.
Yes. There is much more to this process than just forms; it
is about a whole paradigm shift on how transactions are going
to be closed. And we absolutely agree that a better-informed
consumer is far more educated to make good, solid decisions
about their financial obligations.
The new forms are very costly to title insurance companies
large and small. It requires a total new process. In fact, many
of our companies are having to upgrade and redesign their
entire systems to accommodate the rule that was put forward,
and to a very small operation across the Nation that we have,
it could be a matter of whether they are going to make money or
lose money this year.
We are committed to making sure that consumers are able to
close their loans, that real estate transactions go forward.
But the one big issue still looming is the calculation or the
miscalculation, as the rule requires, of the title insurance
costs for consumers.
Chairman Neugebauer. Ms. McGrath, on your side of the
process, how is this impacting you?
Ms. McGrath. We completely agree that it has been a very
confusing and challenging process for companies of all sizes,
but in particular for smaller lenders. We are absolutely having
to change all of our systems, and in many instances we are at
the mercy of our loan origination system providers, who are
having to put together this information and haven't yet
completed the process.
So we absolutely agree that a non-enforcement period
through the end of the year would be incredibly beneficial. We
are doing everything we can to educate our employees and work
together with our partners at the title companies and our
REALTOR partners to help to educate the consumer and prepare
for what is coming, but at the end of the day, this is going to
be a very challenging process and it is just going to hurt
consumers who are trying to buy their homes.
Chairman Neugebauer. Yes, as I think was mentioned, Mr.
Luetkemeyer and I sent a letter requesting that kind of a hold-
harmless period here beginning August 1st, and one of the
reasons I agreed to do that was that from my days in the
homebuilding business and the real estate business, August was
a big month. In other words, families were trying to close
their new home purchase so that they were changing school
districts and so it was important to do that.
What I began to worry about when we--because really the
purpose of this hearing is to talk about how this is impacting
the American families and consumers, and what I am worried
about is that we come up to that August period of time and
people are trying to work out the glitches in their system, and
then a last-minute charge comes in and that closing may have to
be delayed because now the title company, for example, or the
lender is afraid to give authorization to close that loan until
they have gone back and double checked.
Is that a reality?
Ms. Wilson. Chairman Neugebauer?
Chairman Neugebauer. Just a second. I was--Ms. Evans?
Ms. Evans. Thank you, sir. Yes.
And one of the most challenging aspects with a hard start
period or a hard stop, however you would like to couch it, is
the fact that we are going to be faced with closing loans under
the current process as well as those loans that will close
under the new process, because the rule very specifically
defines applications made on or before August 1st will close
under the current process; applications made or closed after
August 1st and thereafter will close under the other process.
And so both title entities and lenders are forced to
maintain dual operating systems for who knows how long in order
to make sure that consumer is well-served and those
transactions can close during a most busy time of the year.
Chairman Neugebauer. My time has expired.
The gentleman from Missouri, Mr. Clay, is recognized for 5
minutes.
Mr. Clay. Thank you, Mr. Chairman.
Let me start with Ms. Wilson. In addition to serving as a
consumer advocacy organization, the Center for Responsible
Lending also provides alternatives to payday lending.
In CRL's experience, have your alternative products been
profitable?
Ms. Wilson. They have. One of the benefits of being an
employee of the Center for Responsible Lending is that not only
do we advocate or do research on financial services, but we are
an affiliate of Self-Help, a credit union based in North
Carolina, Illinois, and California. We actually provide
products and services to consumers across the country, and so
we understand the business model of community bank lending.
The Center for Responsible Lending, through our
relationship with Self-Help, has been able to determine that
you don't have to charge 300 percent or 400 percent interest
rates to do business with working-class individuals across the
country in order to do short-term loans. In reality--
Mr. Clay. And you can still be profitable.
Ms. Wilson. Right, and be profitable. In reality, you can
charge interest rates that are well below proposals like those
existing in the Senate that suggest a 36 percent rate cap. In
fact, for the Center for Responsible Lender's affiliate, Self-
Help, our interest rate on short-term loans is approximately 25
percent.
Mr. Clay. Thank you for that response.
Mr. Shaul, Federal law establishes an ability-to-repay
standard for credit cards and mortgages. Should payday lenders
have to abide by a similar standard?
Mr. Shaul. They certainly should have to abide by an
ability-to-repay standard, no question. When we were present at
the CFPB for interviews and discussions, I think the staff was
generally amazed that there was in place already a lot of the
standards necessary for ability to repay.
This is an ongoing discussion of what would constitute
exactly the criteria for ability to repay, but I think it is an
unassailable proposition that everyone should be given criteria
by which we would assess whether or not they can repay a loan.
Mr. Clay. So you think your industry will come up with a
bright line that says, ``Okay, these are the standards, this is
what a person has the ability to repay us on a monthly or
weekly basis,'' and then it will be accepted universally by the
industry?
Mr. Shaul. Congressman Clay, I have learned the hard way
that this is a very diverse industry, and I would never attempt
to speak for everyone within it. I would say that our members,
who are, I think, committed to a higher standard and to reform,
are completely willing to take up the issue of ability to
repay, work with the Bureau on it, and come to a conclusion
that I think could be accepted by everyone within our
membership.
Mr. Clay. Okay. That is a fair response.
Let me ask you about--in light of CFPB's enforcement
actions and supervisory highlights of the payday lending
industry, why do you still believe that State regulation
provides adequate protection for consumers nationally?
Mr. Shaul. In part because when Director Cordray appeared
before the Financial Services Committee and gave testimony, he
was pressed on the question of which States had fallen down in
providing adequate safeguards for consumers, and he did not
really reply to that. It is hard to convey exactly all of the
differences that exist State by State within the payday empire.
There are some 15 States that do not have payday at all.
There are States that have what they denominate as strict
regulation. California really has a payday loan that amounts to
$270, $273. Florida has a very different situation from that.
The analysis that should be done and that we recommend to
the Bureau is to take each of the States that have a payday
component and determine what needs to be preempted by the
Bureau because there is a specific weakness or specific problem
within it.
I am concerned about preemption because one of the models
that is being put forward as an exhibit--a good exhibit--is
Colorado, but there doesn't seem to be an appreciation that you
don't get to the Colorado model unless you have the ability
within the States to experiment, make determinations on their
own, and out of the best of that we can come up with a
comprehensive set of norms that I think would serve the
industry well.
Mr. Clay. Thank you for that response.
Okay, my time--
Chairman Neugebauer. I thank the gentleman.
And now the gentleman from New Mexico, the co-chairman of
the subcmmittee, Mr. Pearce, is recognized for 5 minutes.
Mr. Pearce. Thank you, Mr. Chairman.
And thanks to each one of you for your presentations.
Ms. McGrath, you may have heard Ms. Wilson. She said that
the mortgage lenders basically don't have relationships or, she
leaned that way--she may not have said that exactly. Is that
true? Mortgage lenders don't have relationships with their
customers?
Ms. McGrath. I don't believe that is true at all. As a
matter of fact, our company is built on the relationships that
we have built with REALTORS and our customers. That is how we
receive our loans.
Mr. Pearce. Your customers come back and finance--
Ms. McGrath. Absolutely. We--
Mr. Pearce. --a different house--this is not one time out?
Ms. McGrath. Yes, sir. We regularly see customers come back
and then refer their friends to us. We actually spend very
little relative to our overall expenses on advertising because
we get referrals from our existing customers time and time
again.
Mr. Pearce. Okay. If the coming regulations are going to
put pressure on the industry, will that pressure be greater on
the smaller, local institutions or greater on the large,
international, national mortgage banks?
Ms. McGrath. Sir, at the end of the day, the regulations
that are in place right now have had a tremendous impact in
terms of fixed costs and per-loan costs. The larger banks--
Mr. Pearce. So it would be tougher on the smaller--
Ms. McGrath. It is much tougher on the smaller--
Mr. Pearce. So what Ms. Wilson is recommending, that we go
along with CFPB and just act like it is all good, actually will
ensure that what she says is already happening would actually
happen. It will force the small people out of the market and
you will just be left with the big guys that can afford to come
in with the cost.
Ms. Wilson, have you all studied the payday lending--your
center?
Ms. Wilson. Definitely. The Center for Responsible Lending
has--
Mr. Pearce. What would be a fair percentage rate--you said
we don't have to charge the high rates, and I understand the
ranking member and Mr. Clay both have pointed out shortcomings
of the system, and we would acknowledge that those shouldn't
exist, but what would be a fair percentage to charge? You said
you studied it and you said you researched it, so--
Ms. Wilson. Right. One of the things that I would point you
to is actually--
Mr. Pearce. Ten percent? Twenty percent?
Ms. Wilson. There is legislation, actually, in the Senate,
introduced by Senators Durbin and Merkley that set the rate cap
of 36 percent.
Mr. Pearce. No, I mean, what is your opinion? What is your
group's opinion that a fair rate is? Ten percent?
Ms. Wilson. I think we support the 36 percent rate cap that
Senators Durbin and Merkley--
Mr. Pearce. So, 36 percent. We will just call it 40
percent. Fair enough?
Ms. Wilson. I think a 36 percent rate cap is--
Mr. Pearce. Okay. Call it 30 percent. We will go low then--
30 percent.
So the average guy in the oil field whom I represent comes
to me and asks me, ``What business is it of yours, the
government, if I want to borrow $100 today and pay back $120 at
the end of the week? What business is it of yours?''
But if we apply your standard of 30 percent, basically for
that $100 the lender is going to get 36--yes, basically 30
cents. So you loan $100 for a week, you get 30 cents back. That
is 10 percent is $10 over a year and then just divide by 52.
That is not exactly scientific, it is not exactly perfect, but
it is close enough for the discussion.
So would you loan $100 for a week for 30 cents?
Ms. Wilson. Well, Congressman--
Mr. Pearce. No, I am just asking a straight question. It is
easy. It is either yes or no, and I don't think you would. And
I don't think you could make any money at it.
And so what you are going to do is you are going to force
these people out of business by putting these caps on here, and
at the end of the day the guy borrowing the money asks, ``What
business is it of the government if I want to borrow $100 to
get me through to the next payday?'' But you would choke that
opportunity off.
And I am not trying to attack you, because it is not you.
But it is people who declare what is and what isn't and the
whole circumstance of loaning money.
So, Ms. Evans, I get complaints from the community banks a
lot that this has made life very difficult for them--the CFPB,
the QM rule, all that. Have you noticed any change in the
offerings from community banks as far as the lending to real
estate purchases?
Ms. Evans. What we have noticed is conversations about, I
don't know whether I am going to be able to offer mortgages in
my small markets. What is the consequence going to be, and can
I afford either the implementation or the risk of--
Mr. Pearce. And so if that is the case, if people choke
that off, who are going to be the losers? Who cannot go find a
different market?
Ms. Evans. The small community--
Mr. Pearce. The small communities, the poor people, the
people who are at the bottom end of the economic spectrum will
have no other choices. And so we are--we have people of good
will--Ms. Wilson I consider to be of tremendously good will--
but they are suggesting things which are going to choke off
access to the poor, to the people who are not in large markets
because no bank in New York is ever going to come into the 2nd
District of New Mexico and loan for a $30,000 house. I will
guarantee it. And so, you will choke off those people.
So I appreciate your good heart in the deal, Ms. Wilson,
but I really see a different side of the argument.
Thank you very much. I yield back.
Chairman Neugebauer. I thank the gentleman.
And now the gentleman from Georgia, Mr. Scott, is
recognized for 5 minutes.
Mr. Scott. Yes. I would like to direct my question to Mr.
Friedman.
There has been much discussion about the CFPB's governance
model, whether we should have a single director or a multi-
commission for its governance. Can you explain to the committee
what would be the shortcomings of the CFPB's current governance
that could be cured by replacing a single director with a
multimember commission?
Mr. Friedman. Thanks for that question, Congressman.
Most Federal regulators, independent regulators, are headed
by a bipartisan, multimember commission, and what we find is in
those cases they are more deliberative about the policy they
put forward. It is not just about approving rulemaking, but
also which enforcement actions they take up.
By having a multimember commission you set up a process by
which staff at the agency has to put forward a proposal and the
members consider it and often take a vote on whether to
proceed. In the case of a single political appointee, it is
really just a matter of a memo to the boss and he will sign off
on whether to move forward or not, and there is no public
record or transparency in how that decision is made.
Mr. Scott. So in your opinion, what would be the best
method? Which way should we go--single director or multimember
commission?
Mr. Friedman. AFSA would recommend a multi-member,
bipartisan commission with staggered terms, allowing a new
President, as he came in, to appoint the chairman, and having
that institutional memory holdover. It also provides an avenue
for stakeholders like our industry and like consumer advocates
and like Congress, to approach the various commissioners and
bring their issues to the fore.
Mr. Scott. And what benefits would this bring to our
financial services industry?
Mr. Friedman. Ultimately, I think that it would promote
better policymaking that carefully weighs consumer protections
against the need to ensure access to credit, particularly for
financially underserved Americans, who are the ones who are
more commonly served by non-banks.
Mr. Scott. Let me ask you another question, if I may.
Consumer finance companies differ from banks and from credit
unions, which is why they have been regulated differently.
Finance companies, for example, do not accept deposits, so they
are not supervised for safety and soundness.
So why is it important for a consumer regulator to concern
himself or herself with this distinction?
Mr. Friedman. Sir, safety and soundness concerns for banks
and credit unions are very real. Consumers put deposits at
those institutions and the government has a stake in ensuring
that they are not lost if the institution fails.
In the case of a consumer finance company, they are lending
out of their own capital, and if the institution were to fail
then the portfolio of loans would be bought up by some other
institution which would continue to collect the payments. But
no consumers would lose their nest egg.
As a result, consumer finance companies are able to take
risks that depository institutions are not, and that means that
consumers who are lower down on the credit spectrum, perhaps
have dings on their credit histories, are able to find loans
from consumer finance companies that they might not get from a
depository institution.
Mr. Scott. Thank you.
Ms. Wilson, you are with the neighborhood lending group, is
that correct? Is that the group out of North Carolina? I'm
sorry.
Ms. Wilson. The Center for Responsible Lending?
Mr. Scott. The Center for Responsible Lending. Is that the
one out of North Carolina? Are you based out of North Carolina,
or--
Ms. Wilson. CRL is actually the national headquarters in
Washington, D.C., but we are affiliated with Self-Help, which
is, in fact, based in North Carolina.
Mr. Scott. Okay. Tell me what your assessment is. You have
followed our work here. We had a program on mortgage lending.
It was called the Hardest Hit program.
Are you familiar with that, where we put that into the Wall
Street bailout--and I hate to use the word ``bailout''--
program? But it was able to go down and help struggling
homeowners in the hardest-hit States with unemployment and
mortgage foreclosures.
And I wanted to just get your assessment on how you feel
that program has helped in the lending area, particularly for
those behind on their mortgages.
Ms. Wilson. Certainly. The Hardest Hit Fund was actually
intended for very good reasons, to direct capital to stem the
challenges that were facing communities that were really
burdened by the impact of the housing crisis and the market's
implosion.
There have been challenges with the program, and there is
no denying that. Mostly those challenges have actually related
to the restrictions that exist on the ability to release those
funds. So there are remaining funds that we hope that we can
actually get released.
Chairman Neugebauer. The time of the gentleman has expired.
The gentleman from North Carolina, Mr. Pittenger, is
recognized for 5 minutes.
Mr. Pittenger. Thank you, Mr. Chairman.
Ms. Wilson, I think it is fair to say that you have a
strong aversion against payday lending. You don't like payday
lending. You think it harms people. Is that right?
Ms. Wilson. Let me say this: I think short-term lending can
be a very beneficial product and a necessary product, but I do
take exception to payday lending to the extent--
Mr. Pittenger. Payday lending, as it is today, harms
people.
Ms. Wilson. --that it has a 400 percent or 300 percent
interest rate.
Mr. Pittenger. Reclaiming my time, yes or no: Payday
lending, as you see it today, harms people, is that right?
Ms. Wilson. Short-term lending can be very beneficial.
Mr. Pittenger. Payday lending harms people. Okay. I
understand.
Ms. Wilson. 400 percent interest rates harm people. I would
agree with that.
Mr. Pittenger. I appreciate that. Now, you are moved by a
personal concern, is that right? You care about people. And I
value that. I respect that.
Ms. Wilson, I would ask you, do you smoke?
Ms. Wilson. I don't.
Mr. Pittenger. There are people who smoke.
Ms. Wilson. I know.
Mr. Pittenger. There are warning labels on smoking
cigarettes that warn people they could die. Isn't that right?
We allow people freedom to make a choice. Is that correct?
Ms. Wilson. That is correct.
Mr. Pittenger. Ms. Wilson, do you drink alcohol?
Ms. Wilson. I do occasionally.
Mr. Pittenger. Okay. The ranking member mentioned that
people get hooked on payday lending. Some people get hooked on
alcohol, don't they? Do we allow alcohol?
Ms. Wilson. We do.
Mr. Pittenger. We do.
Ms. Wilson, do you eat products with sugar?
Ms. Wilson. That is a really personal question.
Mr. Pittenger. I know.
Ms. Wilson. I am going to tell you right now--
Mr. Pittenger. I know, and if a--
Ms. Wilson. --that I do.
Mr. Pittenger. My doctor--
Ms. Wilson. I will admit it today before you.
Mr. Pittenger. And we are hearing the stats all the time
that diabetes is the number one health problem we have right
behind heart problems. A lot of people get hooked on sugar.
You know, Ms. Wilson, people marry who they want to marry.
And sometimes, they marry bad people. I have met some of those,
maybe you have, but they made that choice. People make choices.
Do you believe in Big Brother?
Ms. Wilson. Do I believe in--
Mr. Pittenger. Do you believe in Big Brother--should Big
Brother determine what choices people can make?
Ms. Wilson. Representative, what I would say to you is that
when it comes to financial services, the Federal Government and
State governments have recognized that usury is a problem--
Mr. Pittenger. And we recognize--
Ms. Wilson. --and the question that we are asking about--
Mr. Pittenger. Reclaiming my time--
Ms. Wilson. --payday lending is whether or not usurious
rates should be something that is acceptable. And the law has a
longstanding--
Mr. Pittenger. Ms. Wilson, with all due respect--
Ms. Wilson. --of rejecting that.
Mr. Pittenger. --is smoking not a problem? Is alcohol not a
problem? And for many people, sugar? Do people get hooked on
these?
Ms. Wilson. They do, but it is regulated by the Federal
Government--
Mr. Pittenger. And they make choices. And we have given
warnings. There are disclaimers.
I think we have made our point, haven't we?
Ms. Evans, you made a wonderful statement about the
legislation that my colleague, Mr. Heck, and I have introduced
on a small business advisory board for CFPB, to ensure that
small businesses who work with financial services products have
a voice at the table. What would you say to your critics--maybe
those with the Center for Responsible Lending here today--who
claim H.R. 1195 is redundant and not needed?
Do you feel like we need to have that voice? Is there
pressure on small businesses that they need to be able to have
that forum?
Are there compliance problems that maybe the CFPB needs to
know about? Give me some of your responses to that.
Ms. Evans. Sir, thank you for asking. Yes, absolutely.
Small businesses, medium-sized businesses all need a voice
with the CFPB and a way to communicate about the consequence of
overregulation to the cost of business and their ability to
engage with consumers in their local market. And H.R. 1195
gives that voice to small business.
Mr. Pittenger. Thank you.
I reserve the balance of my time.
Chairman Neugebauer. I thank the gentleman.
The gentleman from Washington, Mr. Heck, is recognized for
5 minutes.
Mr. Heck. Thank you, Mr. Chairman.
I worked long and hard with Mr. Pittenger on the non-bank
advisory board. I had hoped it would pass. I worked long and
hard with Mr. Posey on the advisory opinion board.
But, as Mr. Pittenger knows full well--and I compliment him
again for introducing the bill--an amendment was added
yesterday that kills the bill. It is dead.
It may pass the House, I don't know, but it is dead. It is
dead, of course, because the bill was used as a vehicle after
it got out of committee for another purpose, and that is to
harm the CFPB.
I suppose my question for those of you who want to and seek
increased collaboration between the regulated parties and the
regulator would be, how can those of us who think that is
appropriate work and proceed in order to have the same outcome?
Because let me repeat--Ms. Evans, I think I would like to
start with you--that bill is dead. And it is my bill, so please
understand--along with Mr. Pittenger, the lead--I take
absolutely no pleasure. In fact, it grieves me deeply that this
has occurred.
What do you want us to do when we are confronted with this?
We are trying to be helpful and constructive. How can we do
that?
Ms. Evans. My response would be that we all, as businesses,
work together in order to make sure that consumers are able to
obtain mortgage loans, they are able to buy homes for their
families. And I would urge each and every one of you,
irregardless of the side of the aisle that you are on, to work
together to make sure that we as small businesses--my members,
my company in Colorado, and each of us that employ citizens in
our communities and help drive healthy and successful
communities, you need to come together and find a solution.
You need to help us out. We are the bedrock of this United
States and we are depending on you to come up with a solution
to keep us in business.
Mr. Heck. Hear, hear, Ms. Evans.
Please note the bill came out of committee 53 to 5, and
after it got out of committee, without consultation across the
aisle, the amendment was proposed. So we collaborated--for
months we collaborated. And we are deeply frustrated.
And if I am conveying the depth of my frustration to you--
and all of you who wanted this bill to pass, including myself--
please understand how deep my frustration is that after months
of working on this, we were bushwhacked.
Ms. Wilson, I have, admittedly, a lot of sympathy for the
concerns that have been expressed about the difficulties in
implementing the August 1st deadline and the integration of
TILA and RESPA. I frankly think they are right, that it is a
deadline that may be problematic.
But I am interested in your response. Please know that we
may have a little bit of a disagreement if you are going to
come from where I think you are, but I do want to know what
your point of view is.
Ms. Wilson. I am so glad that you asked me that question. I
wanted to have the opportunity to speak to that, because I
think this is actually a really fascinating issue for one
particular reason.
The integrated disclosure requirements were actually
implemented by a final rulemaking by the CFPB in 2013. So the
rules that were actually supposed to guide this process the
industry has had notice of for almost 2 years.
In the timeframe between that, the Consumer Financial
Protection Bureau has done four webinars, has released seven
different consumer guides, business guides, small business
compliance guides. They have actually done eight forms specific
to the different types of mortgage loans that could take place
to show the disclosures.
And at the end of the day, the rule itself is not a rule
that actually assesses a different burden, but is intended to
actually decrease the number of forms that the industry has to
provide.
Why am I saying this? I am saying this because just less
than a year ago the very same industry associations that are
coming to you today and asking you for an extension testified
before this very same subcommittee that the very rulemaking
that the CFPB engaged in with respect to the integrated
disclosure should be hailed as a classic example of how the
industry can work with the CFPB to get the rule and the process
right.
Mr. Heck. Okay. I see the yellow light is on so I don't
mean to rudely interrupt, but--
Ms. Wilson. Yes.
Mr. Heck. --frankly, you haven't swayed me. But in my
limited time left I would be interested in hearing a rebuttal
from industry as to why, given that context, you think we just
all didn't--Mr. Chairman, I want to register my objection to
the absence of clocks in our temporary hearing room, which did
not enable me to calibrate my question. Thank you.
Chairman Neugebauer. The gentleman's comment is noted. I
can't do anything about it, but it is noted.
The Chair now recognizes the gentleman from Texas, Mr.
Williams, for 5 minutes.
Mr. Williams. Thank you, Mr. Chairman.
And I thank the witnesses for being here today.
In full disclosure, I must say the following: I am from
Texas. I am a small business owner, 45 years--family 76 years.
I have enjoyed this testimony.
And I am a car dealer, new and used. And I think Dodd-Frank
is just about the worst legislation we could ever have.
Now, with that being said, I want to direct my first set of
questions to Mr. Friedman.
The first is almost the same question I asked Dr. Cordray a
few weeks back when he testified before our committee, but
hopefully--and I feel like I will--I will get a more detailed
answer from you. Under the Dodd-Frank Act, does the CFPB have
statutory authority to regulate auto dealers?
Mr. Friedman. No, sir.
Mr. Williams. Elizabeth Warren is out there today saying
they do, so we will have some interesting debate.
Second, is it your opinion that CFPB is indirectly
regulating auto dealers' behavior by holding lenders
accountable for dealers' actions, something they cannot
control?
Mr. Friedman. Yes, sir.
Mr. Williams. Okay. Now, Director Cordray has insinuated
that auto dealers base financing rates on eyeballing a customer
and that this practice was regrettable. Basically, he is saying
that in my industry and in my business we charge different
rates based on someone's ethnicity, skin color, gender, and so
forth.
I know that AFSA commissioned a study that studied the
methodology used by CFPB to determine disparate impact and it
has significant error rates. So the question is, is the CFPB
putting dealers in an impossible position here by saying that
their lending policies may be discriminatory, yet not giving
them any guidance on how to avoid potential liability?
Mr. Friedman. Yes, I would agree with that, sir. And I
would add that our industry has zero tolerance for
discrimination, and we are eager to work with the CFPB and the
Department of Justice and any other stakeholder who cares about
fair lending.
We simply disagree with their methodology and the approach
they have taken, and we also disagree with the Bureau's belief
that it should use financial institutions as an arm of the law
to regulate auto dealers.
Mr. Williams. There is a thing called reputation that we
all deal with. At the end of the day, that is all we go home
with is our reputation with our customer, something the Federal
Government does not understand. So thank you for your
testimony.
My next question is to Ms. McGrath.
Last month you wrote an article for the American Banker
that indicated that Congress might be inadvertently ignoring
the regulation burden on small and mid-sized community-based
non-depository mortgage lenders. Would you help me and others
understand how and to what degree the non-CFPB regulators audit
and oversee your business?
Ms. McGrath. Yes. Thank you very much for the question.
Every single one of the non-depositories that is a licensed
mortgage lender is being regularly audited by every single
State in which we conduct business. So in all of the seven
States in which I operate, we have an audit.
In addition to that, we are also audited by the FHA, the
VA, and the USDA. My company has recently become Fannie Mae-
approved, so soon we will also be audited by Fannie Mae.
All of these States in addition to our warehouse providers.
Bear in mind that as a non-depository we have to borrow money
in order to lend it to consumers, and so our warehouse
providers will also audit us as well and do all sorts of checks
to make sure that we have the financial wherewithal and that
our policies and procedures are in place.
I would also like to add that in addition to that, just
back to the non-depository point, is that all of us that are
non-depositories, in order to conduct--in order to close these
loans, we usually have to put our own personal guarantees on
the line for these transactions. So the thought that we are
trying to avoid the ability to repay because we want to do
riskier loans is simply not true. I have no desire, and my
business partner has no desire, to buy back a loan because we
have not done a good check to make sure that the borrower has
the ability to repay.
Mr. Williams. Next question: How does this affect the types
of products you might or will offer a customer?
Ms. McGrath. At the end of the day, the products are the
products that are out there that we are able to sell into the
secondary market, so we applaud the ability to do those loans
but we have to stay within the QM parameters because we have to
be able to sell these loans in the secondary market.
So the bulk of our loans are QM lending. Again, we are
small non-depository lenders with good track records who are
trying to provide consumers with the loans that they need.
Chairman Neugebauer. The gentleman's time has expired.
Mr. Williams. I yield back. Thank you.
Chairman Neugebauer. Based on the question from the
gentleman from Washington, I just want to let you know that
when the yellow light comes on, you have 1 minute remaining.
You can look at the lights on the table there.
The Chair now recognizes the gentleman from Massachusetts,
Mr. Lynch, for 5 minutes.
Mr. Lynch. Thank you, Mr. Chairman.
I want to thank all the witnesses. I think you have all
been very, very helpful, each of you, in helping us grapple
with this issue.
But, Ms. Wilson, I wanted to focus on you. I know the
comparison was made earlier to alcohol and smoking, I guess,
regarding choices that could be made.
And I know that we in the legislature have put limits on
those who sell alcohol and we say, ``Look, young people are not
able to really make that choice so we are going to put a
limit.'' You have to be 18 to buy alcohol.
We also put limits on people buying cigarettes because
young people--I remember for years when I was younger during
spring break the cigarette companies would be down there in
Florida and elsewhere giving free samples of cigarettes out,
and young people were unable to--well, I think they were
exploited. There was an information asymmetry where they just
didn't have the wherewithal, and that circumstances weren't
good for them making a decision in that circumstance. So we did
away with that pretty much.
I have some areas in my district that are underbanked,
including Brockton, Massachusetts. We were hit pretty hard by
subprime lenders and there was an informational asymmetry, and
also there was--the community is underbanked.
We have convinced some credit unions to go in there and try
to help people out, but mortgages were not available so the
folks who were selling subprime had a field day down there. And
then when the crisis hit, boy, it really hit Brockton very,
very badly, and they are just recovering now.
Unlike some of the--I also represent Boston. They are well-
banked and it is not a problem.
But for the folks that we are talking about who are
exploited by payday lenders, do they really have a choice? Do
they really have--is it as simple as that--they can either go
to the payday lender or they have another institution that will
lend to them at a better rate?
Ms. Wilson. Representative Lynch, I actually thank you for
making those points because I think you bring out an important
perspective that takes us back to the title of this hearing and
the initial question.
One of the things that the Center for Responsible Lending
has been very public and adamant about is the importance of
actually making sure that community-based banking institutions
have an opportunity to compete. And the reality is because most
of the conversation has focused not on actually granting
legitimate relief to community bank financial institutions, and
instead addressing topics like payday lenders and those other
institutions, we haven't been able to do that.
So the reality is that one of the things we would like to
see is that this conversation should focus on how do we get
credit unions and community banks to offer legitimate
alternatives at lower interest rates for consumers in
traditionally underserved areas? That is a conversation worth
engaging in. That is a conversation that Congress can do great
benefit to American consumers for addressing.
But that is a very separate thing than saying that it
should be acceptable to charge 300 percent or 400 percent
interest rates.
Mr. Lynch. All right.
I traveled a lot as an iron worker before I came to
Congress and oftentimes I would only be in a place maybe 6
months, 8 months, and many times shorter times than that, and
you would have to go to a payday lender to cash a check because
you didn't have--you are actually sort of a traveling worker,
so you wouldn't have a connection to that neighborhood or that
city. And so without an established residence, you had to rely
on payday lenders. And they typically take 2 percent of your
check plus a fee--plus a fat fee.
So, you see where people don't have that--and many can't go
to a regular bank. You have to get an account, and you might be
leaving there, so to set that all up was just not practical.
So I have seen firsthand how some people can be taken
advantage of if they don't have all the advantages that other
people might have.
So anyway, I will yield back the balance of my time.
And thank you all for your testimony.
Chairman Neugebauer. I thank the gentleman.
And now the gentleman from Missouri, the chairman of our
Housing and Insurance Subcommittee, Mr. Luetkemeyer, is
recognized for 5 minutes.
Mr. Luetkemeyer. Thank you, Mr. Chairman.
I have a quick question for Ms. Wilson.
Your testimony, apparently, with the RESPA-TILA situation,
the TILA-RESPA integration situation, leads me to believe that
you are not supportive of the 6-month hold-harmless period. Is
that what I will read you--
Ms. Wilson. You mean a delay by the Consumer Financial
Protection Bureau--
Mr. Luetkemeyer. Right.
Ms. Wilson. --in enforcement?
Mr. Luetkemeyer. Right.
Ms. Wilson. As a general matter, I made that testimony to--
Mr. Luetkemeyer. Either you are or you aren't. Yes or no?
Ms. Wilson. So what I would say is this: I think that it is
perfectly consistent with what the CFPB has done before to
allow some delayed enforcement. My point was to suggest that
unlike other instances--
Mr. Luetkemeyer. My point, Ms. Wilson, is that CRL signed a
letter 3/18, a trade letter that asked CFPB to consider a hold-
harmless period of 6 months. Do you change your position?
Ms. Wilson. It is not a change in position. What I wanted
to--
Mr. Luetkemeyer. Okay. So you agree with the chairman and I
in our position, and agree with the industry to try and have a
hold-harmless period here where we can sort of find a way to
make this thing all work. You agree with that, then, I take it.
Yes or no?
Ms. Wilson. That is easy. Yes.
Mr. Luetkemeyer. Okay. Thank you very much.
Ms. McGrath and Ms. Evans, along that same line, I am just
kind of curious, before CFPB came out with their rules, were
your industries, your associations working with CFPB at all to
try and help form some rules and regulations that would
actually be workable? Were you working with--were they working
with you?
Ms. McGrath. Excuse me. Thank you for the question.
We have certainly reached out to them through our
organization and tried to start a dialogue and tried to become
involved in the process, but for the most part we were told
that we just would have to wait until it came out.
Mr. Luetkemeyer. Okay.
Ms. Evans?
Ms. Evans. Thank you for asking the question. Yes, most
certainly, we were very actively engaged in the comment period
when the proposed rules were put forward. And actually, the
CFPB did consider many of our comments.
But the remaining outstanding issues are critical to the--
to actually the goal of the CFPB to make sure consumers are
better informed.
Mr. Luetkemeyer. Ms. Evans, I think you were the one who
made mention of the fact that you were--you had some--or maybe
it was--I think it was you--made mention of the fact that you
had an issuance of best practices. Did CFPB put any of those
into place in their regulation?
Ms. Evans. No, sir. They did not. In fact, the best
practices standards that we put forward were in response of the
lack of direction that the CFPB has not done.
Thank you
Mr. Luetkemeyer. Thank you. Thank you very much.
Mr. Shaul, I am kind of curious--I am someone who is sort
of very involved in the Operation Choke Point discussions and
trying to push back the DOJ and the FDIC with their actions,
and I know that payday lending is in the crosshairs of
Operation Choke Point.
So I am sure at this point all the different storefronts
and individual businesses that have been affected by this, can
you--there is bound to be some sort of access to credit problem
that we have gotten. Can you determine, give us an idea of just
how much it has affected the access to credit by Choke Point
actions?
Mr. Shaul. It has affected access to credit indirectly and
directly. Some smaller entities have been forced out of
business, notably in States like California.
It is also true that entities across the country have borne
increased costs because the issue here is not one that is
commonly understood. It goes to the ability to bank proceeds on
a daily basis in banks that are close to the institutions. So
many members, for example, have had to hire armored trucks to
take cash from point to point.
The beauty of this, from our point of view--or the irony of
it--is at the same time that this is occurring to our members
and to others, the Justice Department has struggled to find a
way to put marijuana proceeds in banks. It is curious that we
are State-licensed, in business for more than 15 years, and
constitute, in my judgment, little if any reputational risk to
a bank, and yet our position is inferior to that of a
marijuana--
Mr. Luetkemeyer. I have one quick question. I see the
yellow light has come up on me.
With regards to CFPB's new rulings that have come out with
regards to payday lending, how much did they study this? Are
you aware of the length and breadth of the studies that they
did before they issued these rules or did they do it at all?
Mr. Shaul. I am not fully aware--they say they have been at
this for 3 years, but our judgment is that there are two
problems: they have not asked the proper questions in regard to
research; and their research is incomplete.
For example, in SBREFA they have not done product-by-
product research. They have not done research that is on small
entities, even though SBREFA is meant to address small entities
as a proposition.
Mr. Luetkemeyer. Thank you very much.
Thank you, Mr. Chairman.
Chairman Neugebauer. I thank the gentleman.
The gentlewoman from California, Ms. Waters, the ranking
member of the full Financial Services Committee, is recognized
for 5 minutes.
Ms. Waters. Thank you very much.
For full disclosure, I am very supportive of the Consumer
Financial Protection Bureau. I think Mr. Cordray has done a
wonderful job. I served on the conference committee for Dodd-
Frank reform, and I made sure that I did everything that I
could to make sure that the CFPB was--became a part of the
reforms that we were doing.
For further disclosure, Ms. Wilson was asked a lot of
things. She was asked whether or not she liked the CFPB, I
believe. She was asked about smoking. She was asked about
liquor. She was asked about a lot of stuff. Let me be clear--I
think she was asked about payday loans, not the CFPB.
And you weren't given a chance to answer many of the
questions that were put to you because you have been
interrupted by Mr. Luetkemeyer, Mr. Pearce, and Mr. Neugebauer
here today. But let me just say, even though you haven't had a
chance to say it, I don't like payday loans. So I want
everybody to be clear about that.
Let me ask you, Ms. Wilson, you said some banks and credit
unions make loans at rates much less than 28 percent. Are these
charity loans or can short-term loans be profitable and
affordable?
Ms. Wilson. Congresswoman Waters, thank you for asking me
that question, because the reality in the experience of Self-
Help, CRL's affiliate, is that they are profitable. And it is
not charity; we are in business to make money.
And our experience is that you can make short-term loans to
consumers who are of low- and moderate-income backgrounds, or
in minority neighborhoods, and they can be profitable and
successful. The key is to actually make sure that they have an
ability to repay that loan and that the loan is designed in a
way where they can actually meet the terms.
So no, they are profitable, and yes, we are in the business
of making money.
Ms. Waters. Thank you.
Let me ask our gentleman here today who is representing
payday loans--I think it is Mr. Shaul--there has been a lot of
criticism about the 400 percent interest, 455 I think Mr. Clay
said. You have been criticized about the cost of your loans.
Why do you charge 400 to 455 percent for your loans? Why do
you do that?
Mr. Shaul. Ms. Waters, it actually stems from the fact that
it is necessary as a proposition to stay in business to have a
larger interest rate for a short-term loan, especially if it is
in conjunction with a storefront--less from the standpoint of
the number of defaults, more from the underlying cost of
servicing those loans.
Ms. Waters. I understand that it--I believe you get capital
from some of the larger banks. For example, you are able to
obtain capital to run your businesses and to make loans, et
cetera, from some of the larger banks. Is that right?
Mr. Shaul. I think that would be a minority point of view.
I do not think that is--
Ms. Waters. You have not received capital from Chase Bank?
Mr. Shaul. I do not believe that Chase Bank is supplying
lines of credit to anyone in our industry--in our--
Ms. Waters. What is the cost of your capital--the money
that you get from wherever you get it from?
Mr. Shaul. I'm sorry, I missed the question.
Ms. Waters. The capital that you use to make loans with, to
run your business with--I don't know where you get it from, but
what does it cost you?
Mr. Shaul. It would vary from institution to institution.
Some is through private placements; some is through
partnerships and so forth. So I could not give you a complete
answer to that.
What I could tell you is that our return on capital is less
than banks' return--large banks' return.
Ms. Waters. Thank you.
Let me just say something about the automobile industry
here. There are a lot of people who are watching what is
happening in the industry, and we find that we are afraid that
what happened in the housing market with subprime lending is
now what is happening with automobile lending, and we are
worried about that.
We see people--and I know people, and I have constituents
even who are walking into these automobile places and they are
getting cars without their credit being vetted, but they are
paying 40 percent interest on the loans that they are getting.
What is going on and why is this happening?
Mr. Friedman, I am speaking to you.
Chairman Neugebauer. The time of the gentlewoman has
expired.
Ms. Waters. Would you allow Mr. Friedman to answer the
question, Mr. Neugebauer?
Chairman Neugebauer. Briefly.
Mr. Friedman. Ma'am, as far as the rates that you are
talking about, I wonder if you are referring to buy-here-pay-
here dealers, which is not the industry that I represent. We
represent indirect auto lenders, captive finance companies,
independent finance companies, and banks that offer credit that
is transacted by dealers to purchasers of new and used
automobiles.
Ms. Waters. I am talking about the industries you
represent, yes.
Chairman Neugebauer. I hate to do this, but we are going to
have to vote here in a little bit and I would like to get as
many Members in as possible, so I am going to have to--if you
want to get one of your staff members to reach out to the
Member to answer that question.
I am now going to recognize the gentleman from
Pennsylvania, Mr. Fitzpatrick, for 5 minutes.
Mr. Fitzpatrick. I thank the chairman for calling the
hearing. This is a really important subject, and I have found
the testimony of all the witnesses to be really helpful.
I keep in close contact with my constituents back in Bucks
County, Pennsylvania, those who represent consumers and
represent buyers and sellers at the real estate settlement
table--lenders, title agents. And, you know, while I think we
all can agree that consolidation of all these procedures and
all the forms, all of which were designed to help consumers and
that is good, but the consolidation is a good thing.
As was pointed out by Ms. Evans, we are 107 days away from
implementation, and as hard as they are trying--buying
software, trying to coordinate things--they are concerned about
that hard-and-fast deadline. And so I want to associate myself
with the letter that Chairman Neugebauer and Chairman
Luetkemeyer have written to the CFPB asking for a responsible,
reasonable deferral so that everybody can sort of get things in
order.
I asked some of my constituents what their concerns were
specifically, in preparing for the hearing today, and one
particular constituent was talking about the Real Estate
Settlement Procedures Act, I guess the HUD-1 settlement form.
And he wrote that the new closing disclosure set to go into
effect as of August 1, 2015, has to be delivered to purchasers
3 days prior to closing receipt. Receipt has to be confirmed
via email or certified mail or hand delivery, and no changes
can happen once received.
Is that an accurate recitation of what we are looking at as
of August 1st?
Ms. Evans or Ms. McGrath?
Ms. McGrath. Yes, absolutely. That is very true and it is
going to be incredibly cumbersome.
And one of the concerns that we didn't really talk about
during this hearing is that when you think about the multiple
transactions that can sometimes go back to back with different
sales of homes, a delay in any one of those transactions in the
chain will cause a delay in all of them. So it could be
devastating.
Mr. Fitzpatrick. Ms. Evans, I assume you have done
thousands of real estate settlements?
Ms. Evans. Yes, you are exactly right.
And the bigger issue is the rule is so specific that even
email delivery isn't acceptable; it has to be--meet an esign
standard that for the most part most consumers aren't familiar
with, so it requires the extra burden of educating the consumer
about what deems acceptance.
Mr. Fitzpatrick. What happens if a consumer is not
represented by a REALTOR or just literally go into the
settlement on their own?
Ms. Evans. They are subject to the same rules, same
obligations--
Mr. Fitzpatrick. Can I just, by show of hands, the
panelists--the five panelists here--who have actually
represented a buyer or a seller or a lender at the settlement
table when these kinds of rules actually have to be
implemented? Which of the five of you have represented people--
have actually gone to real estate settlement other than for
yourselves?
Just the two of you?
So what happens when, 3 days, 2 days before a settlement,
there are adjustments? There is oil in the oil tank that needs
to be reimbursed, maybe people, families are moving out of a
home and maybe there is debris left that somebody needs to
remove and pay for.
In my experience, these things are minor adjustments at the
settlement table that happen in just about every real estate
transaction--they are small but they are important, especially
to a buyer who is putting out a lot of money for a home. What
happens to those minor adjustments under these new HUD-1
regulations?
Ms. Evans. Actually, those minor adjustments may cause a
delay and a total reset of the transaction, which in most
instances does nothing but cause harm to that consumer.
When a consumer approaches closing, they are in--they are
wanting to close on that home. They perhaps have the moving van
sitting in our parking lot. They may have their children being
entertained in our conference rooms. And they are wanting to
close the loan, move into their new home so they can get on
with their life.
We may have a seller getting ready to take those proceeds
and go on and purchase another home, and exactly as Ms. McGrath
said, a delay in one transaction will cause tremendous
consequence for the subsequent transactions following.
Ms. McGrath. And I would add to that, I just want to
reiterate something I said in my verbal statement is that this
is currently--some of this is in effect now already because of
changes in the APR and what can happen, and in many instances,
again, it is a change that can--not to the borrower's--it is
not going to negatively impact the borrower. It is actually in
their benefit.
But because it is a change in the APR we have to re-
disclose and the clock has to start ticking again.
Mr. Fitzpatrick. Right. And that causes, yes, other--in my
experience of representing real families, including at the
settlement table, August 1st is probably the most difficult
time because everybody is trying to get the settlement done
before the new school year starts. It seems January 1st, if you
are going to enact these and put these changes into effect, is
a better time.
It is a responsible deferral, still putting the rules into
effect, and I would hope that the Center for Responsible
Lending would continue to advocate for that reasonable
extension.
Thank you, Mr. Chairman.
Chairman Neugebauer. I thank the gentleman.
Another gentleman from Pennsylvania, Mr. Rothfus, is
recognized for 5 minutes.
Mr. Rothfus. Thank you, Mr. Chairman.
Mr. Friedman, I wanted to ask you about the Charles River
Associates report.
During a hearing on March 4th, I questioned Director
Cordray about the Charles River Associates study that examined
the Bureau's disparate impact methodology for indirect auto
lending. I pointed out that the Bureau had yet to publicly
acknowledge the study and I questioned the Director on whether
he could commit to correcting any errors or bias in the
methodology before pursuing any further disparate impact claims
under the Equal Credit Opportunity Act.
Unfortunately, the Director could only say that the Bureau
had looked at the study. He didn't agree with the conclusions
and didn't find any obligation to respond. He also stated that
the Bureau was still thinking about the study and what it might
mean.
Personally, I think it is pretty troubling that the Bureau
was attempting to further expand its unaccountable authority by
attempting to regulate businesses that are specifically exempt
from Bureau supervision under the Dodd-Frank Act, and I also
think it is pretty troubling that Director Cordray couldn't or
wouldn't commit to making necessary corrections to fix the
methodology in order to improve the accuracy of the Bureau's
findings.
I would like to give you the opportunity to respond as
well. What do the results of the Charles River Associates study
mean for your members?
Mr. Friedman. Thank you for that question, sir.
I will say that based on the findings of this independent
report, when appropriately considering the relevant market
complexities and adjusting for a proxy bias and error, the
CFPB's observed variations in dealer reserve based on race are
largely explained by business factors.
And so for the companies under the CFPB's jurisdiction,
they are struggling to get to the bottom of this. The CFPB has
alleged disparate impact, which means statistical unintentional
discrimination based on neutral lending factors, and these
companies want to work with the Bureau, but under the Equal
Credit Opportunity Act we don't collect or maintain demographic
information on borrowers and proxying is necessary.
Unfortunately, the methodology put forward by the Bureau gets
it wrong two out of five times.
Mr. Rothfus. Two out of five, that is 41 percent.
Mr. Friedman. That is right, sir.
Mr. Rothfus. How do you respond to the fact that the Bureau
is attempting to hold vendors liable when their methodology is
off by 41 percent?
Mr. Friedman. I would say that if you are trying to market
a product to a particular community then you might be satisfied
with guessing their race or ethnicity by a 59 percent accuracy
rate, but from a law enforcement perspective, I don't think
that is appropriate.
Mr. Rothfus. This question is for everybody on the panel.
In a hearing last month on regulatory burdens for depository
institutions, I spent my time questioning--focusing on problems
that come about when you have a one-size-fits-all, Washington-
knows-best approach to regulating community banking.
I made the point that this mindset has a direct impact on
the ability of financial institutions to serve their local
communities, particularly those people in need, and the
witnesses discussed the products and services that are no
longer offered today, such as free checking. I would like to
give you the same opportunity today.
Are there any specific rules or proposals that you believe
will have a significantly detrimental impact on access to
credit for financially underserved Americans?
Ms. McGrath, we can start with you and go down the line.
Ms. McGrath. Thank you very much for the question. I think
that the statistics have shown that the regulatory burden on
lenders has caused a dramatic decrease in first-time
homebuyers, and the numbers are out there and it is very
obvious, and you can see it in the sales as well in specific
areas. For example, in Houston the sales show that loans under
$100,000 have decreased, whereas loans--or, excuse me, home
sales under $100,000 have decreased whereas home sales above
$500,000 and above have increased dramatically.
So I think that it is important to note that one size does
not fit all, because the regulatory burden is a fixed cost on
many of these institutions, and the large banks can absolutely
shoulder that burden, whereas the smaller lenders--the smaller
depositories and non-depositories alike cannot. And that is
what is leading to all of the consolidation and the lack of
choice.
Mr. Rothfus. Mr. Friedman?
Mr. Friedman. I would just add that I represent consumer
finance companies that make personal loans, traditional and
installment loans to consumers. And in the past they often
would make real estate loans, particularly home equity loans,
to good customers, and they have all but exited that
marketplace due to just sort of the sum total of the regulatory
changes in the mortgage space.
It was an incremental part of their business, but it was an
important part to their customers, and now they don't do it
anymore, and their consumers find fewer options in that space.
Mr. Rothfus. Ms. Evans?
Ms. Evans. Thank you. The issue with our industry is the
fact that the cost of meeting the standard set forth under the
new regulation is cost-prohibitive for many of our small
members and eliminates competition and choice in our small
markets for those consumers who reside in those rural and
smaller areas.
Mr. Rothfus. I see my time has expired, Mr. Chairman. Thank
you.
Chairman Neugebauer. The gentleman's time has expired.
The gentleman from South Carolina, Mr. Mulvaney, is
recognized for 5 minutes.
Mr. Mulvaney. Thank you, Mr. Chairman.
I would like to start with Mr. Shaul and ask some general
questions about your opening testimony, and then also follow up
a little bit on what Mr. Luetkemeyer asked you about the SBREFA
process.
You said in your opening testimony that as well-intentioned
as you thought Dodd-Frank was and the concept of the CFPB was,
it has sort of gotten astray from its original intention. Why
do you think that is?
Mr. Shaul. I think there is a natural tendency in
Bureaucracies, whether they are governmental or not, to
continue to expand their territory, and in this case I think we
all would have been better served if there had been limited
objectives for the CFPB and limited problems solved before they
launched into areas that are dubious at best. Auto lending is
one such area.
I think that their look at our industry ought to be
disturbing to everyone who envisions rules being made for them,
because the research that they have done in our industry fails
to take into account the Federal structure, and it also, I
think, fails to take into account what Dodd-Frank really said.
What Dodd-Frank really said was that we were to be regulated.
The proposals in front of us don't regulate us; they
virtually drive us out of business. And in addition to that,
they are saddling us with a set of comparabilities, in terms of
other products to be regulated, that make it almost impossible
to have a straight dialogue on payday lending.
Mr. Mulvaney. Let me ask you, following up on Mr.
Luetkemeyer's comments regarding the outline of proposals under
consideration, the alternatives to consider to the March 26th
document you mentioned in your opening testimony that I think
identifies on--I think it is page 45 specifically--says about
60 percent of the small lenders are going to go out of
business, they are going to close. That is the CFPB's own
admission that is the impact here.
Did I hear you say that is not the intent of--when you
worked on drafting Dodd-Frank and CFPB, that was never the
intent of what you worked on?
Mr. Shaul. No. I don't think that the intent of Dodd-Frank
was to annihilate businesses, and I also do not think that
there is a full understanding of the consequences--the indirect
consequences that follow from the acts that the CFPB will take.
And by that, specifically, I mean that if you look at non-
prejudiced research done by the Federal Bank in New York and
done in Kansas City, you see consequences that are not readily
seen at the moment the prohibition is made or the restriction
is made.
So I think the error here is the belief that a relatively
inexperienced agency with very little as a track record has the
stature to look forward for an industry as a whole and predict
what the consequences of its rules will be. A measure of
caution, humility, and a greater willingness to have a full
discussion would serve the CFPB well.
Mr. Mulvaney. And there is another aspect to it here that I
am hearing from back home that we won't have time to explore
today, which is one of the ways the CFPB, it strikes me, could
get that sort of insight and that fuller understanding of the
impact, is to work closely with the industry that they are
seeking to regulate or to oversee. But what I am hearing from
back home is a perfectly reasonable question, which is, why
should we work with somebody who has come out on public record
and said they want to put 60 percent of us out of business?
That is a very difficult and adversarial relationship in
which to build that type of understanding, but if--given that
is the stated purpose, Ms. Wilson, of the CFPB, I will ask you
to follow up, as well, on something you said during your
opening statement: that consolidation was bad for the consumer,
that choice was good for the consumer. Would you agree with me,
ma'am, that driving 60 percent of the small lenders in this
country out of business is bad for the consumer?
Mr. Shaul. It is bad for consumers. The closing of cash
advance at banks was bad for consumers, even though it is a
competitor of ours.
When I am asked questions about rates, the first thing I
think people ought to understand is the rate is largely because
it is a short-term loan. But the second part of that is it will
only become lower as there is real competition--not subsidized
competition, not competition that doesn't tell the whole story.
When we get into these questions of other comparables, add
the fee, add the byproducts that are included in this and you
will see that almost none of the experiments, including Sheila
Bair's experiments through the FDIC, to give a counter to
payday lending works because they don't turn a profit.
Mr. Mulvaney. Ms. Wilson, let me close with this: Mr.
Pearce asked you a question that I think he offered you in a
rhetorical fashion, which is, what do you say to that person
working in the oil fields in New Mexico who wants to borrow
$100 today and pay it back on Friday at $120?
You support, I think, based upon what we have heard today,
getting rid of that particular industry. What do you say to
that person? It is not a rhetorical question.
What do you say to that person who calls you up on the
phone and says, ``What gives you the authority to take this
choice away from me?'' What is your answer?
Chairman Neugebauer. Briefly, please.
Turn your microphone--
Mr. Mulvaney. Brief, but not that quiet.
Ms. Wilson. I'm sorry about that.
So briefly, my answer would be that the law has
longstanding recognition of the fact that usurious rates are
bad. And so it is not a question of actually taking away the
option; it is a question of making sure that the option is
actually a legitimate choice.
Mr. Mulvaney. And I will put it to you, Mr. Chairman, that
when the law has the effect of hurting individuals, maybe the
law should change.
Chairman Neugebauer. I appreciate the gentleman's comments.
Now, Mr. Friedman, I just want you to know I am about to
recognize your former boss for 5 minutes of questions, so you
might want to fasten your seatbelt.
Mr. Friedman. Uh-oh.
Chairman Neugebauer. I now recognize the gentleman from
California, Mr. Sherman, for 5 minutes.
Mr. Sherman. I would point out that there is a lot of usury
that isn't called usury. It is when you can't get your car out
of the shop and you have to go rent a car or use a bus because
you can't get a $400 loan. It is when your lights are turned
off, and there is no usury there except it costs $100 to get
them turned back on, not to mention what you pay for candles in
between.
But that doesn't mean that every payday practice ought to
be allowed.
Ms. Wilson, you talk about ability to pay, and I hope that
you will help us develop a more sophisticated phraseology of
that because in every 100 borrowers there is somebody who isn't
going to pay, and I don't want to go back and have a class
action lawsuit against the lender.
The only reason they are making the loan is because they
know 90 percent of the people are going to repay eventually.
Every payday lender would be out of business if nobody--if 20,
30 percent didn't pay him back.
So it really comes down to whether a substantial majority
of those borrowing are going to repay substantially according
to the terms of the agreement. So the one problem--the
character of payday lending is yes, people repay, but the
original agreement is they are borrowing the money for 2 weeks
and they end up paying back 26 weeks later.
So I hope we can work with a more sophisticated standard
that would look in terms of does a substantial majority of the
borrowers repay with only a few late fees or a few extensions?
If we were to say that a substantial majority had to repay
a loan without any deviation from the terms of the loan, I
couldn't get a mortgage. I had a late payment. Everybody I know
had a late payment once.
So I guess the point I am making is it can't be ability to
repay eventually, and it can't be ability to repay exactly
according to the terms with no late payments. It has to be a
way of looking at the--what loans are being made and whether
the majority can substantially comply with the loan agreement.
I think this question has come up a bit, but the issue is
whether we should have a commission rather than a single
commissioner over at the consumer protection agency. When you
have just one commissioner it is of the President's party, and
so I strongly believe in having one commissioner right until
the end of 2016. But I don't know who the President is going to
be in 2017, and neither do the gentlemen over there, so this
might be a good time to be bipartisan effective 2017, which has
a 50 percent chance of being adverse to one of the other of us.
Chairman Neugebauer. Is that an offer?
Mr. Sherman. That is an offer.
Chairman Neugebauer. We will talk--
Mr. Sherman. I will start with Justin because I promised to
torture him a little bit, but--and also anybody else--what are
the advantages and disadvantages of going with a commission
rather than a commissioner, knowing that a commissioner is a
little cheaper--a tiny bit cheaper and a little bit faster?
Justin?
Mr. Friedman. As I discussed with Mr. Scott earlier, I
think that a multimember commission provides a process by which
issues are considered carefully and staff has to make a case to
the commission before they go forward with a rule or an
enforcement action, and it is a more deliberative process that
produces better policy that offsets consumer protections
against the need to ensure affordable access to credit.
Mr. Shaul. May I--
Mr. Sherman. Yes. Go on--
Mr. Shaul. Let me give you an example. When the CFPB
presented its paper on where they intended to go with short-
term, small-dollar lending, essentially a payday story and a
media event, it was entitled, ``Debt Traps.''
If you had a commission, I believe that there would have
been a dissent, which would go along these lines: Before you
say ``debt trap,'' prove it. Before you say, ``debt trap,''
remember that you are the arbiter and you are giving the sense
that you are not partisan.
Mr. Sherman. I get it. And I would like to propose that for
this committee instead of having a chairman we have a
commission decide, because I have seen titles of hearings such
as, ``Examining the Regulatory Burdens But Not Any Benefits to
the Consumer on Non-Depository Financial Institutions.'' So the
title of the hearing can be very important, and the
desirability of a commission to make all decisions is duly
noted.
Chairman Neugebauer. Maybe we can discuss that in 2017, as
well.
I now recognize the gentleman from Colorado, Mr. Tipton,
for 5 minutes.
Mr. Tipton. Thank you, Mr. Chairman.
And thank you, panel, for taking time to be here. I would
like to start with Mr. Friedman.
Your members include credit card issuers that make credit
available to consumers, which is especially important to the 68
million underbanked consumers in the United States, including
those in my district. The CFPB released an 870-page proposed
rule to regulate those prepaid card products, and my
constituents have reached out to both myself and the CFPB to
let it be known that they are not in favor of this proposal.
As comments from customers in Grand Junction to Montrose to
Pueblo, in my district, my constituents want the opportunity to
have overdraft protection on their prepaid cards. How do you
believe the CFPB's proposal on prepaid cards will impact the
ability of the underbanked to access these important features
like overdraft protection?
Mr. Friedman. Traditional installment lenders don't
generally offer stored value cards. That is something that they
are looking at in the future as technology changes and
consumers are demanding cards instead of cash or checks or
deposits. They are popular among the underbanked community, and
there is certainly a lot of very interesting innovation going
on in issuing general use prepaid cards.
As far as the CFPB's proposal, we would just say that we
hope that the government won't stand in the way of lenders
using stored value cards to make loans and to extend credit to
consumers.
Mr. Tipton. Just for the point of clarity, overdraft--you
opt in, you are not forced. Is that correct?
Mr. Friedman. I am less familiar with this rule since our
members generally don't--
Mr. Tipton. I believe that is pretty accurate. It is
something that you have the choice to be able to do.
And I see Mr. Shaul nodding his head--
Mr. Shaul. That is right, I believe, yes.
Mr. Tipton. It is. It is in opt-in fashion, so if we keep
the government out of the way we are going to be able to help
underbanked people actually have access to credit. Thanks.
I would like to follow up--and by the way, it is great to
see a fellow Coloradan here in Ms. Evans.
Several things in your written testimony did catch my eye,
and it is basically to the title of this hearing, ``Examining
Regulatory Burdens on Non-Depository Financial Institutions.''
You cited an example in your written testimony, and it was
a Nancy McNealy, a small business owner, small real estate
title company. Because of regulatory compliance under TRID, she
is seeing a 5 percent increase in the cost of her business. No
increased revenue coming in, but because of government
regulation, an additional 5 percent in cost.
Is this a common pattern that we are seeing as regulations
continue to compound out of this Administration?
Ms. Evans. Absolutely. Our industry is a highly regulated
industry at the State level, which is where real estate
transactions take place, in local markets. And for a Federal
regulator to create a one-size-fits-all burden on our
businesses across the Nation, large or small, we are facing
huge financial costs in order to implement those standards.
Mr. Tipton. Huge financial costs. You just described a tier
of regulatory requirements at the State level, now a compounded
tier of regulatory requirements--and they aren't all still
written yet, by the way; they are still to come--coming out of
the Federal Government.
I assume in your position and others on the panel, all of
your businesses are so profitable that you can afford whatever
costs that the government wants to pile onto you. Is that
accurate?
Ms. Evans. No, sir. Not at all.
Mr. Tipton. It is not. It is not accurate that you can
continue--who is going to ultimately pay those costs? Do you
have to pass those on?
Ms. Evans. Ultimately, if you were going to remain
profitable, yes. That consumer--
Mr. Tipton. You are going to pass those on.
In your written testimony, you cited a young family just
getting started with a child on the way, Brianna and Emina were
their names. Here were their comments: Throughout the process,
because of regulatory requirements they had on their loan, the
couple was frustrated because they continually had to resubmit,
resign, and re-date every line. Every request was repetitive
and last-minute.
How is this helping the consumer?
Ms. Evans. It is not.
Mr. Tipton. It is not helping the consumer. So the Federal
Government saying it is here to help has become a hindrance.
Ms. Evans. That is correct.
Mr. Tipton. That is correct.
So are you challenged like I am--and maybe, Ms. McGrath,
you have had some experience with this. When I think of a young
family, Brian and Emina, with a child on the way, they are
trying to get this structured so that they would be able to be
in the home, as the chairman had noted in his first comments,
trying to close before August, get that family set and to be
able to move.
Does this kind of break your heart like it does mine? That
we are seeing the government saying, ``You can afford to pay
more. We will take more out of your pocket because we need
another regulation,'' when we apparently have a system that has
worked pretty well?
Ms. McGrath. No, absolutely. Thank you for the question. I
think you are absolutely right.
The ones who are being hurt the most are those who have
less to work with, there is no doubt, and also those who
perhaps don't necessarily have the experience with home-buying,
so the first-time homebuyer, in particular.
They may not be technologically savvy in some instances.
They may not have--how are we going to get these disclosures to
them? Some of them don't have email.
How exactly are we going to tell them, ``You have to take a
day off work so that you can come in and physically sign this
disclosure 3 days in advance so that we have proof that you
read it and signed it?''
Chairman Neugebauer. The time of the gentleman has expired.
And now the gentleman from Kentucky, Mr. Barr, is
recognized for 5 minutes.
Mr. Barr. Thank you, Mr. Chairman.
Mr. Shaul, I was impressed with your testimony, given your
background working on the Dodd-Frank Act and describing what
was the original intent of the law, certainly not to annihilate
businesses--maybe to regulate businesses, but not annihilate
businesses such as the industry that you represent.
I represent constituent businesses that are members of your
organization, and I have one payday lending business that told
me if these rules go into effect--they are a small two-store
outfit--they will, in fact, go out of business. And so that
corroborates that anecdotal response, corroborates the
estimates of a large portion of the industry just simply going
away.
So my question to you is this: What do you expect will
happen to customers of those businesses who will no longer be
able to access the payday lending option? What other options
will they have and what will happen to those consumers?
Mr. Shaul. Thank you for the question. The first thing that
research shows that happens is a rise in the number of bounced
checks. It is a fee and it is, in fact, a kind of loan, and it
is a way by which people can access credit, but it is a costly
way to access credit.
The second thing that happens is many people find
themselves going online. If they go online to an established,
reputable lender, they will not have a problem.
But our hope with the CFPB, as business people, was that
the CFPB would spend particular time on those entities offshore
that are nonregulated, unlicensed, unscrupulous, and don't meet
a moral standard. That has not fully occurred.
Mr. Barr. So, Mr. Shaul, that doesn't sound like consumer
protection to me.
Let me ask you this question: Do you believe that most of
the complaints about the payday lending industry--do they come
from the customers of payday lenders or do they typically come
from consumer advocates who feel that these borrowers are
taking advantage of an--I would note in the back of your
testimony some of the testimonials from customers--very
satisfied customers--of payday loans.
Mr. Shaul. The customer complaint, whether it is through
the portal at CFPB or through the States or through the FTC, is
minimal on payday lending, far below that of other
institutions.
Now, part of the problem here, I truly believe--and I
impugn nobody's motives--is the sense that some class of
individuals knows better what to do for another class of
individuals than they themselves know. That being true, that
being a suggestion that is put forward by many consumer
advocates, I would submit that they really don't know either
the customer or the customer's needs or patterns.
This year we did a Harris Interactive Poll and we were
amazed not just that there were very few complaints, but that
the number of--women are 60 percent of our customer base--women
who carefully planned out their budget for the month and, when
necessary, chose payday lending as a lender--as a softener to
their accounts going month by month as they might go up or
down.
A fact that is commonly misunderstood with payday lending
is for 89 percent of our borrowers it is not new debt; it is a
transference. The money that comes in goes to pay something
that is already owed. So, so much of this criticism really is
not well-founded.
Are there portions of the critique that are right? Of
course there are. Are there things that we could do better? Of
course there are.
But in the main, this is a question of choice. And frankly,
I would not be honest with you if I didn't say that what is
really at issue here is the CFPB's attempt to credit ration and
their attempt to decide who will be winners and losers in both
the depository and non-depository institutions.
Mr. Barr. Thank you. Thank you, sir.
And I don't have much time left so let me just--quickly to
Mr. Friedman, has the Bureau presented, to your knowledge, any
evidence whatsoever of any particular instances of deliberate
discrimination by any auto dealer or any bank in the country?
Mr. Friedman. No, sir. And I don't expect they will because
the CFPB, under statute, doesn't have jurisdiction over auto
dealers.
Mr. Barr. I know about the Ally settlement and some others,
but have they distributed a single dollar of those settlements
to any alleged victim of indirect auto lending discrimination?
Mr. Friedman. My understanding is that the Bureau collected
$80 million in restitution from Ally in December 2013 and zero
dollars of that have been distributed.
Mr. Barr. And that is because their methodology can't
identify any victims, is that right?
Mr. Friedman. That is my understanding, yes, sir.
Mr. Barr. Thank you.
I yield back.
Chairman Neugebauer. I thank the gentleman.
The gentleman from New Hampshire, Mr. Guinta, is recognized
for 5 minutes.
Mr. Guinta. Thank you, Mr. Chairman. I want to follow up or
continue this line of discussion.
Back in March of 2013 the CFPB issued guidance that
threatens to eliminate auto dealers' flexibility to discount
the interest rate that is offered to consumers to finance
vehicle purchases. And the guidance offered attempts, I think,
to alter the $905 billion loan market, and I think it restricts
market competition. I would add the term ``credit rationing''
that you utilized.
This guidance, in my view, attempts to pressure indirect
auto lenders into changing the way that they compensate the
dealers to a flat fee system where dealers would no longer be
able to discount for their consumers. I see this as a
significant problem. I think that this would directly affect
the dealer's ability to negotiate with the consumers to help
beat a competitor's financing rates, and I think it would also
negatively impact the consumer's ability to negotiate a
reasonable and what they deem to be an appropriate deal.
Last year the CFPB admitted that they did not study the
impact of their guidance and what it had on consumers, so my
question is along the same lines to Mr. Friedman.
First--and I think it has been said before but I want to
clarify it again for the record--has the CFPB offered a public
comment period in regards to this guidance, to your knowledge?
Mr. Friedman. No, they have not.
Mr. Guinta. So they have said that auto lending policies
may be discriminatory, yet there have been 12 letters from
Congress requesting information on this, the CFPB has refused
to release any information that would, in my view, help them
avoid potential liability by altering their lending--yes?
Mr. Friedman. Sir, in response to some of those letters,
the CFPB did actually issue a White Paper in September 2014
detailing their methodology for proxying for race, and what
that paper revealed is that the CFPB, by their own admission,
gets it wrong 21 percent of the time. The analysis that we have
talked about earlier from Charles River Associates actually
pegs that at a 41 percent error rate.
Mr. Guinta. Why is there a disparity between Charles River
and what CFPB says in terms of the percentage?
Mr. Friedman. In the Charles River analysis of all aspects
of this issue, I think that they have taken a more robust
statistical approach than the CFPB does and included other
factors at play. The Charles River analysis measures the proxy
method against HMDA data, so this is mortgage data where we
actually do know the actual race of the borrower. And so what
they have found is that the CFPB's method guesses the
borrower's race wrong two out of five times.
Mr. Guinta. Okay. What do you think about the flat fee
compensation arrangement preferred by the Bureau? Do you think
it would lower interest rates? Do you think it would increase
them? And what do you think the impact would be to the
consumer?
Mr. Friedman. Alternative compensation structures such as
flats for nondiscretionary dealer compensation may lead to
increased borrowing costs for many minority and non-minority
customers, and in turn, may limit access to credit for some or
all consumers, which is, I think, not a desirable outcome.
Mr. Guinta. So it is rationing.
Mr. Friedman. I would say that it is unintentional
rationing, but it--that is what we believe would be the result.
Mr. Guinta. I believe Senator Warren, either last night or
this morning, came out with comments already opposing what we
are trying to do here, which is again, in my view, to provide
flexibility to the consumer and give the auto dealer the
opportunity to be competitive, which, quite honestly, last I
checked that is what our economic system is built upon is the
competitiveness.
Ms. Wilson, I was interested if you had any comments or
thoughts about that access to credit, because I know you have
talked a little bit about this over the course of the hearing.
Ms. Wilson. Briefly, what I would say is that I understand
that people have talked about this question of indirect auto
lending as a question of providing discounts. What I would
remind you is that discounts that are based on race, religion,
or nationality are not discounts; they are discrimination, and
it is illegal.
And so the issue that we want to make sure we are talking
about in this conversation is whether or not we are engaging in
practices that have that correlation to those prohibited
categories. And you don't just need the CFPB's analysis to
justify that concern in this industry. There are a litany of
cases that have been settled--not just Ally Bank, but Namco,
Union Bank--
Mr. Guinta. So would a veteran applying--getting a $500
discount, would that be discriminatory?
Ms. Wilson. What I am suggesting is that if I gave you a
$500 discount because you happen to be African-American, that
is discriminatory under our law. If I gave it to you because
you are White, that is discriminatory. The question is whether
or not these practices actually lend themselves to that, and
the evidence suggests that they have.
Chairman Neugebauer. The time of the gentleman has expired.
I now recognize the gentleman from--
Mr. Sherman. Mr. Chairman?
Chairman Neugebauer. --California for a unanimous consent
request.
Mr. Sherman. Thank you. I ask unanimous consent to add to
the record the statement of the African American Credit Union
Coalition, the statement of the National Council of La Raza,
and the statement of the Consumer Federation of America.
Chairman Neugebauer. Without objection, it is so ordered.
I also, without objection, would like to submit the
statement of the Community Home Lenders Association for the
record.
Without objection, it is so ordered.
The Chair now recognizes the gentlewoman from Utah, Mrs.
Love, for 5 minutes.
Mrs. Love. Thank you.
Thank you, all of you, for being here today.
I just wanted to try and ask these as quickly as I possibly
can.
Mr. Shaul, in your testimony about the CFPB replacing State
law with their upcoming payday regulation, I just want you to
know that concerns me quite a bit because in the State of Utah
we have passed a law that actually regulates the payday
industry in a responsible manner. As a mayor, I have realized
that the most efficient way of dealing with things, the best
solutions are found at the most local level.
There are some things that we need to handle on a Federal
level, but our legislature crafted legislation that protects
consumers but keeps alive this source of credit.
Now, as I understand it, if the CFPB pushes ahead with the
rulemaking it will wipe the common-sense law of Utah--it would
wipe it out pretty much and replace it with Federal law. Is
that correct?
Mr. Shaul. Yes, Congresswoman, it is correct. And I take
particular pride in the fact that I was out there last year
when the State legislature in Utah considered this, and I
considered the law to be an example of the failure of the
Bureau to critically examine what is already happening at the
State level. Under the Utah law, which went into effect in
January, if a person after three rollovers is--three times
asking to continue the loan--does that very act, then at the
fourth instance he or she must either pay the loan off in total
or go into an extended pay plan, which ends his interest
payment and allows him to pay the principal off on time.
This structure we recommended to the Bureau as one they
ought to look at if they were genuinely concerned about the
issue of how long people were in loans. And so far as I know,
it has not been looked at by--
Mrs. Love. It is really interesting because as a mayor a
lot of times we took a lot of the rules and learned from a lot
of the mistakes of other cities and figured out what works. And
what I like about that is other States can do certain things
and we as a State can look at it and say, ``Actually that
works,'' or, ``That doesn't work,'' instead of taking one
entity and suffering the consequences of some of those things.
Short-term small-dollar lending has historically been a
State-regulated industry, and my understanding is that, in
fact, some States have actually banned the practice.
Mr. Shaul. Correct.
Mrs. Love. So do you--do we have any States that do not
have the same authority to regulate the payday loan industry?
Are there any States that do not have the authority to regulate
the payday--
Mr. Shaul. No. No. Any State can do that. And I must remind
you of a statement that was made in an academic forum a year
ago in Philadelphia--about 18 months ago, actually, in
Philadelphia, in which a panelist who had done research on
payday lending said, ``Every State has payday lending, but some
States fail to recognize that it is going on despite the fact
that it is not authorized or registered in their district.''
In other words, if you go on in New York State, which bans
payday lending, and you look under the payday loans, you will
find several ways to get a payday loan. The fact is that
people--there is a demand for this product.
Now, if it is brought in every State into daylight and
competition ensures, the rates will fall.
Mrs. Love. Okay.
I have just a little bit of time and I want to--I really
want to get a point across. This, frankly, is not about you or
your business. It is not about the banking industry. It is
about creating as many products out there.
I remember--I am going to keep the last name out of it
because I am trying to protect this person's identity--a good
friend of mine coming to me and talking to me about a story
where she came home, Maria, I am going to leave her last name
out of it, a single mother with three children, came home in
the evening and realized that her babysitter said, ``You know,
I don't have enough milk for the baby.'' And she didn't have
any cash, didn't have any way of getting cash at that time, so
she went to her local place and hurried up and that is what she
thought about, grabbed milk for her baby and went out and was
able to do that.
Had she planned ahead of time would she have done something
differently? Maybe, if she had had that time to plan. But it
was just another option for her.
Now, this is not--again, it is not about you; it is about
people.
I want to say, Ms. Wilson, I appreciate your testimony here
today. I want to congratulate you on your award, being named
the Woman of Influence by HousingWire Magazine. I think it is
absolutely commendable.
But I just want to say, as you go on and you think about
some of these things, we really want to get to the same place,
which is giving as many people as many options as possible. And
we can't forget about the Marias, that if this option didn't
exist she wouldn't have that option out there. We cannot pick
winners and losers.
And so I want to commend you for what you are trying to do,
and I want you to keep that in mind, that we want to give as
many options to people as possible.
Thank you.
Chairman Neugebauer. The time of the gentlewoman has
expired.
The gentleman from Oklahoma, Mr. Lucas, the vice chairman
of the Science Committee, is recognized.
Mr. Lucas. Absolutely, Mr. Chairman. Thank you very much,
sir.
I sense that at least on this end of the aisle and maybe
the whole process, I am sort of batting cleanup here.
I would like to go back to the core issues, I think, here
and address this to Ms. McGrath and Ms. Evans, because
everything has a cost, and for all the discussions we can have
about social policy or goals or intentions or a lack of
intentions, nonetheless, it is what the real effect is. How
many hours would you estimate that your institution has spent
trying to comply with the new most recently issued regulations?
Ms. McGrath. Oh, goodness. I don't know that we have
calculated the manhours, but I can tell you that our
association has calculated the cost to its members, and we have
seen a 200 percent increase in the cost of compliance from 2010
to 2014 in trying to deal with the regulatory burden.
I can tell you that just in looking at the number of
employees, the average company has gone from having two
compliance personnel to having seven compliance personnel, so
if you look at it in terms of personhours, in that regard, it
is astronomical.
Mr. Lucas. Ms. Evans?
Ms. Evans. Thank you, Congressman Lucas. Actually, the
exact same thing.
I can't tell you the dollar amount, but I can tell you that
our organization has had to create an additional compliance
division or group of individuals who are focusing totally on
how does our IT system work? What new softwares do we need to
put in place? What additional training do we need to put in
place for our individual employees? And most importantly, how
are we getting out there and educating our customers, making
sure consumers understand the consequence of this rule, making
sure that REALTORS and lenders understand the consequence of
the rule?
It is an astronomical number, and I don't know how to
quantify it at this time.
Mr. Lucas. And I would assume in addition to the permanent
personnel brought onboard, probably you have spent a little
money on outside consultants trying to work through these
issues. Is that a fair assessment, in your home offices and in
your parts of the industry?
Ms. McGrath. Yes, absolutely. We now hire at least two or
three different firms to help us with compliance matters.
And part of that has to do with not being able to get a
straight answer out of the CFPB on some of the regulations that
they have--that they are trying to regulate. I can't get a
straight answer.
Ms. Evans. And when I look at the consequences to many of
our small title providers across the Nation, even in your home
State of Oklahoma, and the cost to bring in an outside
provider, even the ability to find one in their local market so
that the cost is more appropriate and reasonable, it actually
could cause significant harm and the inability for that
provider to continue to offer services in their market.
Mr. Lucas. Absolutely. So clearly there is a quantifiable
amount there. Clearly, ultimately the consumer is the
recipient, because that has to be passed down. That is just the
nature of everything.
Like so many things Congress does, whatever the good intent
may have been, there is the absolute impact and effect, and
ultimately the person we are trying to help pays the price,
which is reminiscent many times of the comments in my town hall
meetings: ``Please stop helping us, Congressman.''
With that, Mr. Chairman, I think we have observed how hard
this process has helped the American consumer. Let's try to
stop helping them while they are still able to survive.
Chairman Neugebauer. I thank the gentleman.
I am going to recognize the gentleman from Georgia, Mr.
Scott, for a brief question.
Mr. Scott. Very brief question to you, Mr. Friedman. I am a
strong supporter of the CFPB, but we have been getting a few
concerns. One concern is whether or not we believe that the
CFPB understands the differences between banks and the consumer
finance companies and the need for the typically unbanked
consumer who is served by finance companies.
How do you feel about that, very quickly?
Mr. Friedman. I would observe that the CFPB's personnel are
drawn largely from the ranks of the Federal banking agencies.
Generally, historically speaking, States licensed and regulated
consumer finance companies, non-depository institutions, and
the Federal Government, in conjunction with States, was
responsible for depository institutions.
So it just stands to reason that folks who have been
dealing with banks and regulating banks for their careers and
suddenly have jurisdiction over non-banks will find that it is
new ground, and we believe the CFPB would benefit from drawing
some expertise from State agencies that have had jurisdiction
over non-bank consumer financial institutions for decades.
Mr. Scott. So you believe there is some difficulty in the
CFPB understanding that, is that correct?
Mr. Friedman. I do, and I would add that non-banks are more
likely to serve unbanked consumers by nature, and these
consumers tend to have different needs than banked consumers,
and they tend to be more inclined to go to storefront lenders
like traditional installment lenders to take out $500, $1,000,
or $5,000 and repay it in installments.
Mr. Scott. Thank you very much.
Chairman Neugebauer. I thank the gentleman.
Mr. Scott. Thank you, Mr. Chairman. I appreciate it.
Chairman Neugebauer. I want to thank the witnesses.
Your testimony has been very informative, it has been
articulate, and I think we have all benefited from the comments
that have been made today.
I want to thank the folks on my side of the aisle. I think
we had all of our Republican Members except for one participate
today.
And I appreciate the participation from the Minority, as
well.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
And with that, this hearing is adjourned.
[Whereupon, at 3:29 p.m., the hearing was adjourned.]
A P P E N D I X
April 15, 2015
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