[Senate Hearing 114-318]
[From the U.S. Government Publishing Office]
S. Hrg. 114-318
ASSESSING THE EFFECTS OF CONSUMER FINANCE REGULATIONS
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED FOURTEENTH CONGRESS
ASSESSING THE EFFECTS OF CONSUMER FINANCE REGULATIONS ON CONSUMERS AND
EXPLORING WAYS TO IMPROVE REGULATION TO ENSURE THE CONSUMER FINANCE
PROTECTION BUREAU ISSUES RULES THAT PROVIDE STAUNCH CONSUMER PROTECTION
APRIL 5, 2016
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
RICHARD C. SHELBY, Alabama, Chairman
MIKE CRAPO, Idaho SHERROD BROWN, Ohio
BOB CORKER, Tennessee JACK REED, Rhode Island
DAVID VITTER, Louisiana CHARLES E. SCHUMER, New York
PATRICK J. TOOMEY, Pennsylvania ROBERT MENENDEZ, New Jersey
MARK KIRK, Illinois JON TESTER, Montana
DEAN HELLER, Nevada MARK R. WARNER, Virginia
TIM SCOTT, South Carolina JEFF MERKLEY, Oregon
BEN SASSE, Nebraska ELIZABETH WARREN, Massachusetts
TOM COTTON, Arkansas HEIDI HEITKAMP, North Dakota
MIKE ROUNDS, South Dakota JOE DONNELLY, Indiana
JERRY MORAN, Kansas
William D. Duhnke III, Staff Director and Counsel
Mark Powden, Democratic Staff Director
Dana Wade, Deputy Staff Director
Jelena McWilliams, Chief Counsel
Shelby Begany, Professional Staff Member
Laura Swanson, Democratic Deputy Staff Director
Graham Steele, Democratic Chief Counsel
Jeanette Quick, Democratic Senior Counsel
Phil Rudd, Democratic Legislative Assistant
Dawn Ratliff, Chief Clerk
Troy Cornell, Hearing Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
C O N T E N T S
TUESDAY, APRIL 5, 2016
Opening statement of Chairman Shelby............................. 1
Opening statements, comments, or prepared statements of:
Senator Brown................................................ 2
Leonard Chanin, Of Counsel, Morrison & Foerster LLP.............. 4
Prepared statement........................................... 34
Responses to written questions of:
Chairman Shelby.......................................... 93
David Hirschmann, President and CEO, Center for Capital Markets
Competitiveness, U.S. Chamber of Commerce...................... 6
Prepared statement........................................... 38
Responses to written questions of:
Chairman Shelby.......................................... 95
Senator Warren........................................... 103
Senator Cotton........................................... 105
Reverend Dr. Willie Gable, Jr., D. Min., Pastor, Progressive
Baptist Church, New Orleans, Louisiana, and Chair, Housing and
Economic Development Commission, National Baptist Convention
USA, Inc....................................................... 8
Prepared statement........................................... 65
Responses to written questions of:
Chairman Shelby.......................................... 107
Todd Zywicki, George Mason University Foundation Professor of
Law, Antonin Scalia School of Law at George Mason University,
Executive Director, Law and Economics Center, and Mercatus
Center Senior Scholar.......................................... 9
Prepared statement........................................... 70
Additional Material Supplied for the Record
Prepared statement of the Consumer Federation of America......... 110
Joint cover letter from the Americans for Financial Reform, Color
Of Change, CREDO Action, National Council of LaRaza, National
People's Action, Other 98, and Public Citizen.................. 116
Prepared statement of Americans for Financial Reform (AFR)....... 118
Prepared statement, fact sheet, and report from Alliance for a
Just Society................................................... 129
Prepared statement of the Consumer Finance Center for American
Prepared statement of the Center for Responsible Lending (CRL)... 179
Article by Kimberly D. Krawiec, Kathrine Robinson Everett
Professor of Law, Duke University.............................. 182
Prepared statement of the Food Marketing Institute............... 233
Prepared statement of the National Association of Convenience
Stores and the Society of Independent Gasoline Marketers of
Letter from the Main Street Alliance............................. 242
Prepared statement and attachments of the National Association of
Consumer Advocates (NACA)...................................... 245
Prepared statement of the National Consumer Law Center (NCLC).... 256
Prepared statement of the National Community Reinvestment
Coalition (NCRC)............................................... 262
Prepared statement of the National Fair Housing Alliance (NFHA).. 264
Prepared statement of the National Retail Federation (NRF)....... 268
Prepared statement of the U.S. PIRG.............................. 274
Prepared statement of Public Citizen............................. 280
Article, ``He Who Makes the Rules,'' in Washington Monthly, by
Haley Sweetland Edwards........................................ 281
ASSESSING THE EFFECTS OF CONSUMER FINANCE REGULATIONS
TUESDAY, APRIL 5, 2016
Committee on Banking, Housing, and Urban Affairs,
The Committee met at 10:03 a.m., in room SD-538, Dirksen
Senate Office Building, Hon. Richard Shelby, Chairman of the
OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY
Chairman Shelby. The Committee will come to order.
Today the Committee will hear from private sector experts
on consumer finance regulation. This Thursday, we will hear
from Director Richard Cordray.
Nearly 5 years ago, the Bureau of Consumer Financial
Protection opened its doors. Because of the Bureau's structure
and the means by which it is financed, it remains one of least
accountable agencies in the Federal Government.
As a result, the very consumers that the CFPB was designed
to help have been harmed by the Bureau because some of its
rules make it more difficult for companies to lend and offer
products in the marketplace.
For example, certain rules will make it more difficult for
a consumer to get a prepaid card or take out a short-term,
small-dollar loan. Such regulations may restrict access to
credit entirely for individuals, households, and businesses.
I have long advocated for sensible consumer protections,
but I do not believe they should be used as a substitute for an
individual consumer's independent--yes, independent--judgment.
Also, so-called protections should not be implemented without
regard to their costs or their effects on economic growth or
the safety and soundness of any particular financial
The Bureau has enormous power over consumer financial
matters. It has, however, no statutory mandate to write
balanced regulations that protect the economy or promote
institutional safety and soundness. As it continues to exercise
its considerable regulatory powers, it does so without any
meaningful statutory check by Congress.
For example, its actions in the indirect auto lending space
have pushed the envelope on its jurisdiction under Dodd-Frank.
In order to circumvent Dodd-Frank's explicit exemption for auto
dealers, the Bureau has targeted auto lenders.
To do so, it has also circumvented the regular rulemaking
process that has been in place for 70 years. This process
ensures transparency and accountability in Federal regulations.
Instead of setting clear rules, the Bureau is using
enforcement actions to reshape the auto finance industry. As
demonstrated by settlements with the Bureau, its goal has been
to limit the interest rate that dealerships charge based on
factors other than financial risk.
What is more, these limits often differ leading to an
uneven playing field not only among companies that have
settled, but also between them and the rest of the market. I
fear that this sets a dangerous precedent for the role of a
regulator in our financial markets.
In addition, the Bureau continues to base its fair lending
enforcement on the controversial legal theory of disparate
impact, under which a company can be held liable for policies
that lead to different results, without any intent to
Further, as part of this process, the Bureau uses a
methodology to identify ``victims'' that is known to produce
inaccurate results. As a consequence, settlement funds may
regularly go to individuals who have not been harmed in any
Outcomes like this should cause the Bureau to seriously
reevaluate its approach in this area. Instead, we have seen the
Bureau and its Director double-down on the same faulty
Equally troubling is the Bureau's look at the use of
arbitration clauses for financial products. Its 2015 study on
this matter relies on a series of questionable assumptions and
I think it should surprise no one that the final study
makes sweeping conclusions that arbitration agreements harm
consumers and downplays or altogether ignores its potential
benefits to individuals. One can only assume that any final
rule on arbitration will incorporate many of these dubious
As the Bureau continues to reshape the consumer finance
landscape, it is important that these and other issues be fully
vetted before Congress and the American public. Today we will
hear from our witnesses on how we can improve the regulation of
consumer finance and ways to prevent the Bureau from
overstepping its boundaries at the consumer's expense.
STATEMENT OF SENATOR SHERROD BROWN
Senator Brown. Thank you, Chairman Shelby, for holding this
important hearing on consumer finance regulation.
Nine years ago this week, New Century Financial, once the
second largest subprime mortgage originator in the country,
filed for bankruptcy. This marked the beginning of the worst
financial crisis this country has seen since the Great
Depression, something many on this Committee seem to have
Over the next 3 years, the crisis ravaged the country. Nine
million homes went into foreclosure between 2007 and 2010.
Think of the family with young teenagers that paid their
mortgage every month, lost their jobs, or were victimized by
speculation and all the things that played into that crisis.
Billions of dollars of household wealth disappeared overnight.
Think of the senior citizen in a 401(k) or savings they had,
much of which they lost.
Estimates on the costs of this crisis in the American
economy are at least $10 trillion--that is $10,000 billion. It
could be as high as $25 trillion.
We learned that large companies gambled with retirement
savings and homes of everyday Americans, that millions of
Americans were put into predatory mortgage products they could
As that happened, regulators all too often were looking the
other way. In response, Congress passed the Dodd-Frank Wall
Street Reform and Consumer Protection Act, which created the
Consumer Financial Protection Bureau.
The crisis revealed that Americans needed a Federal
watchdog that would put their interests first. The CFPB has
been absolutely a success. The agency has taken strong actions
in a number of consumer finance markets that previously had no
Federal oversight: credit reporting, debt collection, payday
loans, student loan servicing, and auto finance.
The benefits of CFPB are clear. Its actions have resulted
in more than $11 billion being returned to 25 million
consumers. Over and over, CFPB has exposed unfair and abusive
behavior by financial companies, companies adding on hidden
fees to credit cards, companies attempting to collect on debt
that has already been paid off, companies discriminating
against minorities, companies deceptively marketing financial
products. CFPB has made consumer financial products safer and
better for consumers.
Its work is not done. The Bureau is working on rules to
rein in payday loans, prepaid cards, and debt collection. It is
working to limit forced arbitration clauses in consumer finance
products--forced arbitration clauses, I would emphasize--
clauses which deny consumers the right to litigate when they
It is critical that CFPB be allowed to finalize and
implement these rules. It is also critical for the agency to be
vigilant against new threats to consumers. Americans have a
record $3.5 trillion in consumer debt, not even including
mortgage debt. This number, including $1 trillion in student
loan debt, $1 trillion in auto loan debt, is a full $1 trillion
more than it was in 2010.
Those who say that credit is not available to consumers
today are not paying attention. Credit is available and it is
growing month after month. We are seeing increasing levels of
lending to subprime borrowers in mortgages and credit cards and
auto loans. We are seeing nonbank lenders expanding their role
in consumer lending from FinTech companies to nonbank mortgage
It is vital that CFPB exist. It is vital that they exist to
watch these developments and take action when needed. It is our
duty on the Banking Committee in both parties, it is our duty
in Congress to resist the collective amnesia that is all too
present in this hearing room and in this Congress, and to
ensure that the same bad practices that led to the crisis that
hurt so many Americans, that those practices are not repeated
by a new set of players. It is why I continue to be troubled by
Republican efforts to undermine and in some cases eliminate the
Three years ago, Director Cordray said he wants the Bureau
to ``make sure we stay in touch with the people who need us
most to do our work.'' That is why I am pleased that Reverend
Willie Gable could be with us here today from New Orleans. I
understand you are a graduate of Union Theological Seminary in
Dayton, Ohio. Good move--for us and for you. Dr. Gable has seen
firsthand the effects of too little financial regulation in
I know, Mr. Chairman, that Dr. Gable is the only witness on
this panel representing consumers, representing everyday
Americans. The other three witnesses, by and large, represent
the views of the financial industry. I regret--as much as Dr.
Gable, I know, can hold his own--I regret that this Committee's
panel today is not more balanced. Dr. Gable is by no means
alone. I ask consent to enter 11 statements I have received
from consumer advocacy organizations in the record.
Chairman Shelby. Without objection.
Senator Brown. Thank you, Mr. Chairman. I look forward to
the testimony of all four of you. Thank you.
Chairman Shelby. I think as we start this hearing, we need
to recognize that we are all consumers, every single one of us,
you know, with some degree.
First, we will today receive testimony from Mr. Leonard
Chanin, Of Counsel at Morrison & Foerster.
Next we will hear from Mr. David Hirschmann, President and
CEO of the U.S. Chamber of Commerce Center for Capital Markets
Then we will hear from Reverend Willie Gable, Jr., Doctor
of Ministry, Chairman of the Board, National Baptist Convention
USA, Housing and Economic Development Commission, and Pastor,
Progressive Baptist Church.
Finally, we will receive testimony from Mr. Todd Zywicki,
Foundation Professor of Law and Executive Director of the Law
and Economics Center at the George Mason University School of
We welcome all of you. Your written testimony will be made
part of the hearing record. We will start with you, Mr. Chanin.
STATEMENT OF LEONARD CHANIN, OF COUNSEL,
MORRISON & FOERSTER LLP
Mr. Chanin. Good morning. Chairman Shelby, Ranking Member
Brown, and Members of the Committee, my name is Leonard Chanin.
I am Of Counsel in the financial services practice group of the
law firm Morrison & Foerster here in Washington, DC, and have
more than 30 years' experience working as an attorney on
consumer financial services issues. I spent 20 years at the
Federal Reserve Board, including 6 years as Assistant Director
and Deputy Director of the Division of Consumer Affairs, and 18
months as Assistant Director of Regulations at the Consumer
Financial Protection Bureau. I have spent nearly 10 years in
private practice advising financial institutions on Federal
consumer financial services laws. I am pleased to be here today
to discuss the effects of consumer finance regulations.
The primary Federal agency entrusted with regulating
consumer financial products is the CFPB. I would like to
address two issues: the impact of regulations on the consumer
financial services market; and, second, the use of enforcement
orders to create policy.
If properly designed, regulations can better ensure a
standardized approach is used to provide disclosures to
consumers to allow them to compare products and choose the ones
they prefer. However, there are many risks to regulating too
much. Regulations need to be clear, but also provide
flexibility to accommodate new products, new delivery channels,
and new ways of doing business. Clear rules ensure that
institutions know what is required to comply and manage risks,
but detailed, proscriptive rules inhibit the availability of
products and development of new products.
While it is difficult to quantify the precise impact that
CFPB rules have had on consumers and the market for financial
products and services, it seems clear that such rules have had
a significant adverse impact on the ability and willingness of
institutions to offer those products and services. Anecdotal
evidence clearly indicates because of the rules' complexity,
some institutions that previously offered mortgages have simply
stopped doing so. Other institutions have reduced the mortgage
products and services offered to consumers, and some
institutions have been reluctant to offer new products and
Despite the problems associated with regulations, they are
vastly preferable to regulating by the use of enforcement
orders to establish policy. It is quite clear that the CFPB
uses enforcement orders to create new policies and rules. When
enforcement orders are used to establish policies, there can be
First, most enforcement orders lack specificity about the
practices involved, so it is difficult to discern how to apply
any guidance in the orders to a variety of products
availability. This creates inconsistencies in the marketplace.
Second, unlike rules, enforcement orders are not published
for public comment. This deprives the public of the opportunity
to comment and deprives the agency of the ability to consider
operational and other issues as well as potential negative or
Finally, enforcement orders that contain broad statements
and allege unfair or deceptive acts and practices may result in
financial institutions simply choosing not to offer products or
develop new products due to lack of certainty about what is
required and how to manage potential risks.
The use of fair lending enforcement orders dealing with the
pricing of indirect auto loans illustrates this problem, as it
has created an unlevel playing field in the automobile loan
market. There are hundreds of banks, credit unions, and finance
companies that purchase auto loans. Institutions take a variety
of approaches in how they deal with pricing and the purchase of
loans made by auto dealers due to competition in the local
markets and other factors. By using enforcement orders to
create a policy that provides only three options for ways
lenders can compensate dealers for their work in originating
auto loans, the CFPB has failed to recognize that there are
many other legitimate means institutions can use to compensate
dealers and still comply with fair lending laws. By using
enforcement orders to create new legal requirements, the CFPB
has failed to provide critical guidance to lenders on what laws
require or permit.
In conclusion, the CFPB is less than 5 years old, and the
question remains as to how the agency will balance its mandated
purpose of ensuring consumer access to financial products while
ensuring fairness in these markets.
Thank you for the opportunity to be here today. I would be
happy to respond to any questions.
Chairman Shelby. Thank you.
STATEMENT OF DAVID HIRSCHMANN, PRESIDENT AND CEO, CENTER FOR
CAPITAL MARKETS COMPETITIVENESS, U.S. CHAMBER OF COMMERCE
Mr. Hirschmann. Senator Shelby, Ranking Member Brown,
Members of the Committee, thank you for the opportunity to
testify today on behalf of the Chamber's Center for Capital
The Chamber shares the Committee's goal of ensuring that
consumers are both treated fairly and that they retain access
to the financial products they need. After all, in today's
economy consumer products are critical sources of financing,
not just for consumers but for small businesses as well. Fully
4 in 10 small businesses rely on personal credit cards and
other forms of consumer credit to finance their business. So
whether you are managing the finances of a small business or
those of a family of four, everyone benefits from a system that
deters fraud, creates clear rules of the road within an
evenhanded enforcement across the board, ensures consumer
products are clearly explained and disclosed, and creates a
level playing field to spur competition and encourage
innovation to serve diverse consumer needs.
We have engaged with the CFPB from the day it first opened
its doors nearly 5 years ago now to promote those basic
principles. While we certainly do not expect to agree with the
CFPB on every decision it makes, we have urged them to clarify
the rules of the road by doing two things: creating a system to
provide guidance and no-action relief to companies seeking to
do the right thing, and avoiding regulating through one-off
enforcement or supervision. Unfortunately, progress has been
slow, and over time that means fewer choices, higher prices,
and less credit available for consumers and small businesses.
Today I would like to address two specific Bureau
initiatives: the first is the CFPB's forthcoming rule on
arbitration, and the second is the CFPB's continued efforts to
regulate auto dealers through consent orders with loan
First, on arbitration. One way in which businesses compete
in the consumer financial marketplace is by subsidizing dispute
resolution programs like arbitration that provide a better
customer experience than any court litigation. The Bureau's
2015 study reaches four conclusions on arbitration.
First, it points out that arbitration is faster and more
convenient than litigation. Consumers can initiate arbitrations
by filing claims online. They can submit documents by email and
participate in hearings by telephone.
Second, arbitration is cheaper for the consumer. Many
companies actually pay for a consumer to file a complaint in
arbitration. Some even pay double legal fees and a bonus award
to consumers who prevail.
Third, consumers generally receive bigger awards in
arbitration than they would in litigation.
And, finally, arbitration is often presided over by a
neutral arbitrator who has expertise in the specific area of
the law, unlike a judge who is usually a generalist.
Despite these benefits, the Bureau has indicated it is
planning to propose a rule this spring that will have the
practical effect of eliminating consumer arbitration. If that
happens, consumers with small, individualized disputes will
have a much harder time getting quick and effective resolutions
to their claims. But the Bureau appears not to have considered
the likelihood of that outcome.
The Chamber's CCMC, our Institute for Legal Reform, and, in
fact, many Members of this Committee and throughout the Senate
have expressed serious concerns about the arbitration study,
including its omission of certain data and critical analysis
that led to flawed conclusions. We hope, for example, that the
Bureau has considered the impact of the loss of arbitration in
drafting its rule.
Turning to auto loan underwriting, in my remaining time I
would like to briefly add a few thoughts on that topic.
For over 2 years, the Chamber has urged the Bureau to
abandon its effort to regulate auto dealers through regulation
by enforcement campaign against auto loan underwriters.
Intentional discrimination is both morally repugnant and has no
place in the 21st century society or economy, period. But the
Chamber rejects the argument that the Equal Credit Opportunity
Act permits claims to be brought under the disparate impact
theory of discrimination. The Bureau has, nonetheless, used
this approach in enforcement actions against a handful of
If the Bureau believes that the auto loan market needs
regulating, we would welcome an open public debate about how
best to do it. The Bureau should pursue a transparent
rulemaking, complete with notice and comment. In fact, if they
had taken us up on our suggestion, it is highly possible they
could have concluded a rulemaking by now. The Bureau has
instead preferred to push for one-off settlements. I strongly
believe the CFPB could have found a swifter, more effective
path for both consumers and credit providers if they engaged
with lenders, auto dealers, and the American public on a more
sensible approach to regulatory policy.
The Chamber will continue to encourage the Bureau to
consider the significant negative impact of its indirect auto
campaign on consumers and small businesses and urge it to
develop a transparent and effective resolution on this issue.
We encourage the Committee, Mr. Chairman, to continue its
oversight over this program as well.
Mr. Chairman, I am happy to answer any questions you or
Members of the Committee may have.
Chairman Shelby. Reverend Gable.
STATEMENT OF REVEREND DR. WILLIE GABLE, JR., D. MIN., PASTOR,
PROGRESSIVE BAPTIST CHURCH, NEW ORLEANS, LOUISIANA, AND CHAIR,
HOUSING AND ECONOMIC DEVELOPMENT COMMISSION, NATIONAL BAPTIST
CONVENTION USA, INC.
Mr. Gable. Chairman Shelby, Ranking Member Brown, and
Members of the Committee, thank you for inviting me to testify
today. I am Reverend Willie Gable, Pastor of the Progressive
Baptist Church in New Orleans, Louisiana. Our congregation is a
member of the National Baptist Convention USA, the Nation's
largest predominantly African American religious denomination.
I am also Chair of the National Baptist Convention Housing
and Economic Development Board, and over the past 20 years, the
commission has developed over 1,000 affordable homes for
seniors in 14 different States.
Home--I would ask you to think about that word for a
minute, Senators, to think about that place. Perhaps you live
with family there, with a spouse or a family or a child. Now
imagine being kicked out of your home, your possessions
scattered on the curb. Twelve million families lost their homes
as a result of the financial crisis. Twelve million lives
turned upside down. Life savings washed away, $2.2 million lost
property value, trillions lost in property value. Over half of
the communities that lost this were people of color.
Predatory lending practices caused that financial crisis,
and the lax oversight enabled predatory lending. The whole
Nation suffered, many worse than others. Some will continue to
suffer for the rest of their lives.
The Consumer Financial Protection Bureau was formed in the
wake of that crisis by this body, Congress. It was vested with
the authority by this body to prevent financial practices. That
is mandated, and it was handed down by this body.
CFPB implemented mortgage rules that have made the mortgage
market far safer, have required lenders to determine borrowers'
ability to repay, have offered some assurances that mortgage
credit will grow the community rather than implode it. But
other abuses continue to run rampant. Some may be more obscure
than mortgage lending, but they are ever powerful and ever
destructive. And if not controlled, they will relegate some
communities to a state of perpetual poverty.
Payday lending is an abomination in plain sight, a debt
trap--legalized loan sharking, I think. The CFPB is studying
and proposing a rule in this area, and rightly so. Bank
overdraft fees are the banks' version of exploiting the most
vulnerable among us, billions of dollars annually in fees
derived mainly from a select few unlucky people. The CFPB is
studying and considering rules in this area, and rightly so.
In the auto lending industry, predatory discrimination
practices have been evidenced for years. The CFPB is studying
and proposing guidance and taking enforcement actions in this
area, and, again, rightly so.
Debt collectors routinely break the law. The CFPB has
appropriately taken action against some, and again I say
rightly so. Mandatory arbitration clauses stuck in fine print
of so many
predatory loan contracts is an affront, I think, to our
constitutional rights. Congress mandated that the CFPB study
this. It has, and it is considering rules to limit it to permit
individuals to join together and pursue justice, and rightly
And the list goes on: student loans, credit cards,
protection against elder abuse. It is clear that a strong,
well-funded, independent agency whose job is to wake up in the
morning thinking about protecting the most vulnerable among us
is necessary to ensure the financial service practices do not
drain the hard-earned income and savings for many of my
constituents and many Americans across this country.
Please allow me to be clear. The notion that the struggling
Americans need access to products like these the Bureau has
been working on so hard to address is an insult to the basic
dignity of every vulnerable person. The predatory practices the
CFPB is addressing siphons off what little resources targeted
persons have and leave them in worse-off situations.
I thank you for the opportunity to share my experiences,
and I look forward to your questions.
Chairman Shelby. Thank you.
STATEMENT OF TODD ZYWICKI, GEORGE MASON UNIVERSITY FOUNDATION
PROFESSOR OF LAW, ANTONIN SCALIA SCHOOL OF LAW, GEORGE MASON
UNIVERSITY, EXECUTIVE DIRECTOR, LAW AND ECONOMICS CENTER, AND
MERCATUS CENTER SENIOR SCHOLAR
Mr. Zywicki. Thank you, Senator Shelby, Ranking Member
Brown, and Members of the Committee. It is my pleasure to
testify at this hearing this morning on this crucially
important issue of access to consumer credit and consumer
Let me make clear at the outset that as a scholar of
consumer credit and the former Director of the Office of Policy
Planning at the Federal Trade Commission, I was a strong
supporter at the time of Dodd-Frank of creating a new,
modernized, scientifically based consumer financial protection
system. I think the old system did not work very well, and I
agreed with the idea of centralizing this in one regulatory
Unfortunately, by creating a super regulator that lacks the
democratic accountability and checks and balances of a
traditional Government regulatory agency, we have created a
monster that is passing regulations that are harming American
consumers and American families.
During the time since the financial crisis, Dodd-Frank, and
the creation of the CFPB, we have seen Washington impose a
series of laws and regulations that have reduced access to
credit for consumers, stifled innovation, substituted the will
of Washington's bureaucrats for the good, sound judgment of
American families of how to manage their finances, and driven
millions of consumers out of the mainstream financial system,
forcing increased reliance on
alternative products such as payday loans, auto title loans,
and the like.
Most tragic, the cost of this regulatory onslaught has
fallen most heavily on lower-income, younger, and the most
vulnerable consumers in the American economy.
I will start with the Durbin amendment, which was attached
as a midnight amendment to Dodd-Frank. It imposed price
controls on debit card interchange enrollees, not credit card
but debit card interchange fees, which one thing we could say
did not contribute to the financial crisis by consumers
overusing their debit cards. Nevertheless, it was attached to
Dodd-Frank and passed through.
The results of these price controls have been disastrous
for American consumers as the loss in revenues has been passed
on to consumers in the form of higher bank accounts. We have
Chairman Shelby. Can you take a second to digress and
explain its effects?
Mr. Zywicki. Certainly, Senator, yes. Under the Durbin
amendment, it reduced the interchange fees on debit cards,
which are the fees that are paid when you swipe your debit card
at, say, Target or the grocery store. Under the Durbin
amendment, they basically cut in half what could be compensated
for with respect to the recovery. That loss of several billion
dollars of revenues by banks that are most affected by that has
been passed on to consumers. It has been passed on in two ways,
which is the loss of free checking. Before the Durbin amendment
went into effect, 76 percent of bank accounts in America were
eligible for free checking. Today that number has been reduced
to 38 percent.
It has been passed on a second way, which is that the bank
fees that people pay on a monthly basis have doubled during
that period. So we have seen a reduction of free checking and a
doubling of bank fees.
Chairman Shelby. [off microphone] I don't get to
[inaudible] but can you explain what consumers lost on this
from the--what they gained, if anything--in other words, the
Mr. Zywicki. Certainly, yes. What consumers lost was that--
access to debit cards had been a huge driver, the introduction
of debit cards into the market at the beginning of 2000, had
raised free checking from under 10 percent to 76 percent. Why?
Because the 44 cents or whatever that was generated on average
from those payments were enough to cover the bank accounts for
most consumers and especially low-income consumers who lack the
ability to have the high minimum balances and that sort of
thing that otherwise make them eligible----
Senator Brown. Mr. Chairman, if we are going to begin the
questioning, which apparently we are already, I would have to--
Chairman Shelby. Observations.
Senator Brown. Well, and I will make observations, also,
in--just for fair play, the Durbin rule, maybe it was added in
the middle of the night, as you claim, but it was a Senate
vote, and it was a heavily lobbied Senate vote on both sides.
Second, the millions of dollars that the Durbin amendment
may have cost banks----
Mr. Zywicki. Billions.
Senator Brown. I am sorry, excuse me. I stand corrected.
The billions of dollars it may have cost banks, to imply that
that was not passed on in large numbers to consumers is also a
Mr. Zywicki. Actually----
Senator Brown. I would add that you really--you make the
statement that all of a sudden because of the Durbin rule,
these banks cut down on the number of free checking accounts,
the amount of free checking they were doing, that is a pretty
tentative cause and effect that you really cannot prove. And
you can prove in a timeline, but considering what banks have
done in fees over the years, they are always looking for
opportunities, and that is how they nicked Dr. Gable's
congregation and so many others. But that was just an
observation also since we have begun the questioning, Mr.
Mr. Zywicki. Well, thanks for that. I will just elaborate
and then move on.
First, you mentioned in theory these costs could be passed
on to consumers. According to a study by the Richmond Federal
Reserve that was conducted this fall, there is zero evidence
that anything has yet been passed on to consumers by retailers.
And, in fact, because of the way the market has adjusted, small
businesses look like, many of them, have actually paid higher
interchange fees. Big-box retailers certainly have generated a
huge multi-billion-dollar windfall to big-box retailers. Yet
according to the study by the Richmond Federal Reserve this
fall, there is no evidence that any of that has been passed on
With respect to whether it was the Durbin amendment, what
we can say is that free checking has disappeared only at the
banks that were affected by the Durbin amendment. Small banks
have not so far scaled back--and community banks and credit
unions have not scaled back on access to free checking. And so
I think the evidence overwhelmingly supports that.
The second thing I want to point to that has driven
consumers--and the impact of that for consumers has been
tragic, maybe a million consumers, especially lower-income
consumers, have lost access to bank accounts as a result of the
higher fees and less access to free checking relative to the
The Credit CARD Act, which was passed in the wake of the
financial crisis, has had a similar effect. By interfering with
the ability to price risk accurately, certainly it has helped
some consumers, especially middle-class consumers who may be
paying less fees than they did otherwise. Yet according to
research by CFPB and other researchers, the impact of the
Credit CARD Act--and it is hard to disentangle from the
recession--275 million credit card accounts were closed, $1.7
billion of credit card lines disappeared, and, unfortunately
and most tragically, many of those who lost their credit cards
have had to turn to things like payday loans, auto title loans,
and overdraft protection to make ends meet.
With respect to mortgages, the qualified mortgages rule and
other regulations have driven up the cost, the regulatory cost,
and the risk of making loans substantially and imposed a one-
size-fits-all system of mortgage underwriting that has stifled
innovation and consumer choice in the consumer financial
system. Since the qualified mortgages rule has gone into
effect, mortgage originations have fallen and have not
A report this fall finds most strikingly by the National
Association of Realtors that the share of mortgages going to
first-time borrowers has fallen for the third straight year
last year and now stands at the lowest rate since 1987, largely
because of the inability of first-time home buyers to be able
to get access to mortgages as a result of the regulations such
as the qualified mortgages rule.
At the same time, it has driven community banks out of the
mortgage market. According to a study done by the Mercatus
Center at George Mason University, 64 percent of community
banks reported they changed their mortgage offerings, and 15
percent have left the market completely as a result of the
regulatory cost and risk associated with the qualified
mortgages rule and other regulations.
Finally, the imposition of one-size-fits-all underwriting
has deprived community banks of their competitive advantage in
the market, which is the relationship lending that they have
with their consumers. Now, basically because of the one-size-
fits-all blanket of uniformity that has been thrown over the
mortgage market, it has eliminated the ability of community
banks to compete with the mega banks. And, unfortunately, as
banks have exited this market because of the regulatory costs,
as Senator Brown mentioned so well at the outset, nonbank
lenders have stepped in to fill this voice; nonbank lenders
have dramatically increased their market share as traditional
banks and lenders have been driven out of the market by
regulatory and liability risks.
Unfortunately, as consumers have been driven out of the
mainstream financial system, they have lost access to bank
accounts, credit cards, mortgages, and the like, and they have
turned increasingly to products like payday loans, overdraft
protection, and auto title loans to try to make ends meet.
Unfortunately, as we stand here today, the CFPB stands
poised to shoot holes in the life rafts to which consumers are
increasingly clinging to as they try to make ends meet to these
alternative financial products.
Now, these products serve an important function in the
American system of providing a buffer between mainstream
lenders and the black market. They serve an important role, but
I think we--and we want to be careful about driving them out of
the market and making vulnerable consumers even more desperate.
In closing, let me reiterate I support, supported then and
support now a modern consumer financial protection system in
one centralized agency that has the ability to basically bring
coherence and innovation and promote competition in our
consumer credit market. Unfortunately, in the period since the
financial crisis and the imposition of Dodd-Frank, we have seen
exactly the opposite. We have seen a stifling of competition.
We have seen consumers being driven out of mainstream financial
products. We have seen small banks disappearing at twice the
rate they were before Dodd-Frank was enacted. And we are seeing
increase misery for American consumers in this market.
I think it is important to reform the CFPB, to bring
democratic checks and balances and democratic accountability to
this process in order to help American consumers.
Thank you for your time.
Chairman Shelby. Thank you, Professor.
I will start with you, Mr. Chanin. Your background, having
been at the Fed how many years? A number of years?
Mr. Chanin. Twenty years, sir.
Chairman Shelby. And also you worked at the consumer agency
for, what, a year and a half?
Mr. Chanin. Correct, a year and a half.
Chairman Shelby. You have a unique background here. And I
will also direct this question to Mr. Hirschmann. As you both
mentioned in your testimony, the CFPB, the consumer agency, has
habitually used enforcement actions against companies to try
to--companies and individuals, small companies--to set market
standards rather than going through the formal rulemaking
process to set clear rules of the road where people will have
something definite, yes or no? Could you provide a little more
detail--I will start with you, Mr. Chanin--to the Committee and
the record here regarding the downsides of using such
enforcement actions in lieu of a more formal rulemaking
Mr. Chanin. Sure, I would be happy to. So there are a
number of drawbacks to using enforcement actions to create a
policy or really create rules.
First, the enforcement actions are solely between the
parties involved, so usually a bank or other financial
institution, and the CFPB. So they do not affect the thousands
of other institutions out there. So other institutions can
choose to abide by those, the principles in them, or not. And
institutions differ. Some do choose to abide by them, and
others take different approaches there. What that does is to
lead to inconsistencies in the marketplace in terms of how
lenders deal with fair lending issues.
The other problem is they are not published for public
comment, so no one has an opportunity to point to problems,
unforeseen consequences, and those sort of things in terms of
the orders. So you are dealing with a marketplace that has
thousands of lenders. The CFPB in the case of fair lending and
the enforcement orders has not obtained or provided the public
with the opportunity to comment on those and point out some of
Chairman Shelby. Basically, it is narrow in scope. Is that
Mr. Chanin. The enforcement orders are quite narrow in
scope. They also do not provide very many details about what
the issues are. It is very narrowly drawn in terms of the facts
and what the remedies are.
Chairman Shelby. Mr. Hirschmann, do you have any comments?
Mr. Hirschmann. First, I think we would agree with every
Member of this Committee that strong, effective enforcement is
important. The real issue is: Do you use enforcement to change
the rules of the road, or do you write a new rule? Let me give
you a couple specific examples.
Recently, the Bureau did an enforcement action against a
company that it felt exaggerated its cybersecurity claims. Now,
it did not just tell the company adjust your--your claims are
invalid, but it said here is a best practice of what we think
cybersecurity should be.
Now, nobody knows if the Bureau is now getting into
regulating cybersecurity and joining all the other players in
this space, if that is the standard the CFPB wants, or if it is
going to do a separate rulemaking. So it is very hard for those
trying to comply to
understand how to read the tea leaves from one enforcement
action and understand what the rules of the road are going to
Now, in the case of indirect auto, it is particularly
troublesome because that is such a diffuse market that even
doing enforcement against one, two, three, five, or ten players
only gets you a small fraction of the marketplace, and,
therefore, it does not solve the problem more broadly. So in
that case in particular, we thought that writing a rule would
make much more sense than one-off enforcement.
Chairman Shelby. I will start with you, Professor. Last
year, the consumer agency began publishing consumer narratives
in its consumer complaint database. The Bureau admits that it
does not verify the accuracy of complaints. Meanwhile, it uses
this unverified data to inform its supervisory activities and
for other purposes.
Should a Government agency be publishing narratives about
companies that are known to be inaccurate? And, second, is it
appropriate for the consumer agency to use this unverified
information as part of its supervision and regulation? Is this
anecdotal versus real hard statistics? What is it?
Mr. Zywicki. Thank you, Senator Shelby, for calling
attention to that issue, and I know some of the other witnesses
have spoken to this.
Chairman Shelby. I think Mr. Hirschmann has a view on this.
Mr. Zywicki. Yes, and I am very concerned by that, really
based--drawing on my experience at the Federal Trade
Commission. The idea of just dumping unverified consumer
narratives out on the public record, I cannot see how that
furthers any coherent regulatory purpose. Certainly, it has
always been the case, it has been an important part of consumer
protection to collect complaint data and use complaint data in
the aggregate as a way of marshalling resources for enforcement
regulatory purposes and the like. But the idea of basically
creating a Government-sponsored Yelp where people can just
simply, you know, put their own unverified views out on the
market and basically have the Government endorse it I think
serves no coherent regulatory purpose that I can see, just
these isolated, unverified, often inaccurate, one-sided
Chairman Shelby. Mr. Hirschmann, do you have any comments?
This area you have worked in.
Mr. Hirschmann. Yes. Senator, nobody argues that gathering
complaints is a good idea. We just take particular issue with
the way the Bureau has done it. By gathering the unfiltered
data, it is not providing consumers with----
Chairman Shelby. Is it the methodology?
Mr. Hirschmann. It is the way they are doing it. So it is
hard, particularly when you look at these monthly press
releases they do, kind of the naming and shaming approach, it
is hard for a consumer to know if a particular company is a bad
actor they should avoid or is simply larger than the other
players. So the unfiltered data, the raw data, without
providing any way of verifying, creates--might actually make it
harder for consumers to really understand what is going on.
So what we have said is let us work together to find ways
to improve and make the consumer data that is available
verified and more useful for consumers rather than potentially
Chairman Shelby. The consumer agency has also brought
enforcement cases against indirect auto lenders for violating
fair lending laws using the theory of disparate impact. In
these instances the companies being accused of discrimination
are by law not even allowed to know the race of the purported
victims. In your opinion, is this an appropriate way to enforce
fair lending laws? Because I think all of us believe that you
should not discriminate against anybody, period; we should be
fair in lending; we should do everything with it. But is this
Mr. Hirschmann. Well, it has created a particular problem
for companies who want to be compliant and want to avoid even
an allegation that they might be dealing with consumers
unfairly. Nobody wants to do that. So, you know, the approach
of doing it through enforcement and using a proxy methodology
that has been questioned by a number of places is not working
toward solving the ultimate problem the Consumer Bureau sought
to solve. It had a view, initially perhaps, that flat pricing
was better. Now in some enforcement cases, it has put a cap.
Why not have an open debate where everybody can participate?
Let us agree on clear rules of the road, and then we can all
Chairman Shelby. Where you have some certainty?
Mr. Hirschmann. Exactly.
Chairman Shelby. Mr. Hirschmann, the consumer agency's
March 2015 study on arbitration has been criticized for its
lack of transparency and for incorporating limited input from
interested parties. Director Cordray has repeatedly defended
the study and has said that it is, and I will quote, ``the most
comprehensive study ever done.'' Nobody disputes that.
Do you agree with this? And if not, why not?
Mr. Hirschmann. Well, we urged them, for example, to look
at how consumers fare in arbitration and what would happen if
you limit arbitration and whether consumers are better off in a
world where arbitration goes away and class actions come in.
The Bureau did look at a number of class actions before it
existed, and even its own data found that 87 percent of
consumers get absolutely nothing, nada, zilch out of those
So you cannot just look at class actions and say should we
add this to the system. You have to look at what system will
provide the best, cheapest way for consumers to get redress.
Today they get redress by calling their credit providers, and
in most cases companies want to do right. They also do complain
to the CFPB. The CFPB is a new actor in this space and has
brought enforcement actions in a number of areas. It would be
smart to look at how all those things work together and then
determine: Is arbitration a valuable tool, or should we replace
it with something else? That is not what the Bureau did.
Chairman Shelby. That is what real analysis is about, is it
not? Thank you.
Senator Brown. Thank you, Mr. Chairman.
I do not even know where to start. I want to--I just am
incredulous today at this testimony. I have been on this
Committee for close to 10 years. I have never quite heard the
unsubstantiated claims, and let me start with, first, the
Richmond Fed study was not really a study. It was a survey. It
did not find savings were passed through--it did not find
savings were not passed through. It just found that merchants
actually did not get savings. So, again, it was not an economic
study. It was a survey.
Number two, the Durbin amendment was not part of Dodd-
Frank. It is not part of CFPB. It was debated with heavy,
heavy, heavy lobbying and still was affirmed on the Senate
But the most troubling was when I hear three of you--or
maybe not all three talked on this--talk about the one-sided,
inaccurate--you used another--unverifiable complaints from
consumers--I mean, this is a town that specializes in one-
sided, inaccurate, un--I cannot even read my writing, I was so
agitated--unverifiable complaints, I mean, this town--look
after Dodd-Frank. Do you remember when Dodd-Frank passed? The
day the President signed it, the chief financial service
lobbyists in this town said, ``Now it is half-time.'' Well,
what that meant is it was time for a cascading of one-sided,
inaccurate, unverifiable complaints from industry that did not
want these rules and regulations.
Look at the ratio. We are trying to find specifics on this,
but 2:1, 3:1 ratio from industry--one being the consumer side--
2:1, 3:1, 4:1 ratio from industry on all of these--on so many
of these issues. So to just say, well, these consumers, they
have got one-sided, inaccurate, unverifiable complaints, but to
never say that about industry--because you know the agencies,
whether it is the Consumer Bureau, whether it is the Fed,
whether it is any other agency, they do not have time to track
the thousands of complaints, whether they are one-sided,
whether they are inaccurate, whether they are unverifiable. So
to put it on the CFPB is collecting and then releasing all
these unverifiable complaints is disingenuous, and that is a
rather kind description of that.
Let me move on. I have a question for Dr. Gable. You have
done significant work on payday lending. I love how you started
your testimony when you have seen--as an observer of this
Committee, you have seen the amnesia, the collective amnesia,
like there was not that big a problem 10 years ago, and
certainly nobody in industry caused it, it was all those
consumers and all those GSEs and all. But you have done
significant work on payday lending and what it meant. I love
how you started your testimony by talking about what
foreclosure means to families. I know my colleagues on this
Committee are tired of me saying this, but I live in Zip code
44105, my wife and I, in Cleveland. My Zip code in the first
half of 2007 had more foreclosures than any Zip code in
America. I know some of those people. I know what happens to a
teenaged kid who is told by his mom and dad you are losing your
house. They have to sell their pets first, and then they give
away their pets. They have to move their kids to another school
district--all the things that happened to far to many of your
parishioners in New Orleans and happened to my constituents on
Cleveland because of this.
So talk narrowly, if you would, about your experience with
payday lending, why it is important for CFPB to write a strong
rule in the next few weeks .
Mr. Gable. It is very important that the rules be--that we
have a strong rule. First of all, let me explain that I have
had firsthand experience where we have had individuals,
Senators, that have ended up in these debt traps. One of the
most heart-wrenching ones was a young member of the
congregation who came in and found out that her mother had nine
payday loans. But to make it even more exasperating and
incredulous is the fact that her mother was in pre-dementia,
and there was no ability to pay that was investigated by these
Over and over, what has happened in our churches is this:
Through our benevolent funds--and it is almost a shameful
thing, but our benevolent funds, we have individuals come to
the churches, and they ask for support for their utility bills.
But we found out, once we started presenting and asking the
questions about, you know, how did you get into this situation,
because of shame they did not tell us that they had payday
So some of the things that we are hoping the rule will do
is, in fact, have a strong rule that will allow for the ability
to pay. And, second, not only a strong rule that will allow for
the ability to pay before making the loan, we are asking that
the rule also has some cap in terms of the number of loans, so
that individuals cannot go from ``Get Your Money Here'' or ``I
Have Got Money for You Over There'' and you have got 10. The
industry establishes the fact that it takes--they make money
off of those folks who have at least 10 loans, continued loans,
and that is just unnecessary.
And I might just add this here, and let me add this: This
Congress found that it was necessary and saw fit to pass a 36-
percent cap for the military. I believe if it is good for the
military, it ought to be good for America. And I know that you
asked me about payday lending, and I know we have had some
discussion, and my colleague here, Mr. Zywicki, talked about,
you know, what was happening in arbitration on both sides and
about the consumers putting in unverifiable claims because of
the CFPB. I do not know of any consumer who would take time out
of their schedule and just write an arbitrary complaint just to
fill out a piece of paper.
Senator Brown. Well said.
Mr. Gable. It just does not happen. And when we come to the
arbitration in terms of finding it, what the study did show
after two decades, before it was looked into by auto dealers
and the lending, is that those who were targeted were women;
and to my dismay, preachers, pastors were the ones who were
most vulnerable to these high increases.
Senator Brown. Thank you. And I think you--and a couple
comments and one last question, Mr. Chairman. I think your
comments about the 36-percent cap in the statute for military
families is exactly right. I am very happy we did that. I am
very happy that is the law. But why should it not apply to
And you also made a couple other comments along those
lines, that, you know, there are 12 or 13 States that do not
allow payday lending, and access to credit does not seem to be
a particularly huge problem in States like--I know Senator
Warren's State is one of those.
Mr. Gable. New York.
Senator Brown. I wish my State--my State used to be one of
those until 1994. But a couple of comments first.
You know, if arbitration is better for consumers, one would
expect groups representing consumers would oppose CFPB's
efforts, but they are not. And I think that is pretty
Also, some comments about the CARD Act that were made, the
CFPB published a report that the CARD Act reduced credit card
fees by more than $16 billion. In 2014 alone, consumers opened
more than 100 million credit card accounts, so it is not like
credit card access has been particularly restricted.
And I wanted to apologize. I did say that the Durbin
amendment was not part of Dodd-Frank. I should have said it is
not a CFPB rule. It was voted on the Senate floor. I apologize
to Professor Zywicki that I did not say that quite precisely.
My last question, Mr. Chanin, for you, if I could. You
were--the Financial Crisis Inquiry Commission found that the
Fed would not exert its authority over nonbank lenders nor
others that came under its purview in 1994 with any real force
until after the housing bubble burst; in other words, there was
no CFPB, and the Fed, it appears, did not do what it should
have. And that is really my two questions to you. Sitting in
that position, which you were as the Deputy Director of the
Division of Consumer and Community Affairs, do you think that
what the Fed did to enforce consumer protection laws was
sufficient? And, second, should the Fed have acted sooner to
protect consumers from products that could have been updated by
the HOPE Act if we had done that? So if you would answer those
two questions for the remainder of my time. Thank you.
Mr. Chanin. Senator, the Fed has fundamentally two
authorities. One is a rulemaking authority. Those rules in the
consumer space apply to all financial institutions, banks and
nonbanks, and the Fed exercised that authority particularly in
the late 1990s as well as later 2006 and 2007, I believe it
was, dealing with high-cost mortgages and the like.
The Fed also has supervisory authority. That authority is
limited; that is, it only applies to banks and certain other
institutions. For example, it does not apply to national banks,
credit unions, nondepository institutions. So the Fed has no
authority to deal with those institutions in terms of
supervisory or enforcement actions.
In hindsight, it is easy to say that the Fed could have
acted sooner in terms of high-cost mortgages, in terms of
predatory lending practices. My experience at the time was the
data was not there that showed the problem. It was only later--
2008, 2009--that the data emerged that said there is a
significant problem in terms of lender activities in this
space. And the Fed took action at that point, not prior to that
because it simply did not have any data that suggested there
was systemic of fundamental issues in terms of those types of
Senator Brown. So were they not getting complaints as the
only consumer--as kind of the consumer bureau, were they not
getting complaints that--that is why you need an agency to
anticipate those problems when consumers--or to respond to the
number of them?
Mr. Chanin. The Fed, like all of the banking agencies, as
well as the Federal Trade Commission, gets complaints on lots
of things. The way the agencies operate those, if the complaint
deals with an institution not under the jurisdiction of the
Fed, such as a national bank, those complaints would go to the
Comptroller of the Currency. If it dealt with a nonbank, they
would go to the Federal Trade Commission or another entity. So
the Fed did get complaints, but it had supervisory authority
over a fairly small number of institutions. There was no
dramatic increase, as I recall, in terms of the complaints over
those entities that the Fed had jurisdiction over.
Senator Brown. Well, Mr. Chairman, I will close. Whether
wittingly or unwittingly, I think Mr. Chanin just made a pretty
good case for the Consumer Bureau, so thank you for that.
Chairman Shelby. Senator Heller.
Senator Heller. Mr. Chairman, thank you, and to the Ranking
Member, for this discussion. There are very few topics that
have both sides so far apart on a particular issue, and I want
to thank our witnesses also for being here and for what you are
bringing to this hearing.
We can go on and on about who is right and who is wrong,
but let us talk about the practical effect of what we are
talking about today.
During our last recess, I had an opportunity to talk to our
lenders in the State of Nevada. I am going to guess that the
comments that I got from these lenders in the State of Nevada
are very similar to probably what the lenders would be saying
in Ohio and probably what they would be saying in Alabama
today, and let me give you some examples.
One particular lender said that 75 percent of all their new
employees were compliance officers because of the new
regulations. Community lenders in Nevada have stopped
originating mortgages--you brought that up, Professor--stopped
originating mortgages because they are now too overregulated. I
have them telling me that it takes just as much time and effort
to service a deposit customer as a person with a loan, again,
because of all the new regulations. And I will tell you in
Nevada we have half as many credit unions and community banks
in Nevada than we did 5 years ago.
I think these are pretty stark messages, and like I said, I
have no doubt that the same comments would be made in Ohio and
the same comments would be made in Alabama.
And thanks for your comments because they played very much
into what is going on in my State. But to Mr. Chanin and also
to Mr. Hirschmann, does the CFPB have the authority to exempt
small community lenders from these regulations that were meant
for big banks?
Mr. Chanin. Yes, the CFPB has a great many authorities in
the Dodd-Frank Act, and those authorities are under the statute
itself, but also for each individual law that it implements,
like the Truth in Lending Act, the Equal Credit Opportunity
Act, et cetera. It has separate authorities to make exemptions.
So it has a great deal of authority, if it wants to, to either
exempt small institutions from some of the requirements or all
of the requirements, assuming there is evidence that shows that
institutions by complying would not make credit available to
consumers or other things. So there is a test they have to use
before they create an exemption, but I do think they have
sufficient authority to make exemptions if the evidence
Senator Heller. Are you aware of them ever exempting a
small community lender from these regulations?
Mr. Chanin. They have created some exceptions in some of
their regulations from some of the requirements. For example,
in the mortgage rules dealing with balloon payment provisions
and those sort of things, they have created exemptions in some
of their rules in Truth in Lending, for example, from some
requirements, but not a blanket exemption that I am aware of.
Senator Heller. Mr. Hirschmann, do you support tailoring
regulations based on the size of institutions?
Mr. Hirschmann. Absolutely. I think it is also important
that the lenders in your State and other States, even if the
rules do not directly apply to them, find that rules meant for
larger institutions kind of roll downstream, and when it comes
to their safety and soundness regulators, that they are asked
to comply with some of the things that maybe were never
intended for them. You know, certainly even smaller
institutions want to be compliant. But our Nation benefits from
having every size of financial institution, and we should
continue to ensure that we do not force smaller institutions to
merge just to have the scale to meet the compliance
Senator Heller. Mr. Zywicki, do you believe that America is
better served having fewer banks and fewer credit unions?
Mr. Zywicki. No, most certainly not. America's consumers
are better served when there is robust competition and an equal
playing field where you do not have banks getting bigger and
succeeding simply because they can more readily bear the
regulatory costs than smaller banks. We have known this for
decades: proportionally small businesses bear higher regulatory
costs per unit, and not just consumers but also community banks
make most of the small business loans in this country. And so
what we have seen in several studies is, as small banks have
been hammered by Dodd-Frank and driven out of business, access
to credit for small businesses has disappeared as well. So it
is not just consumers who lose, it is not just communities that
lose when credit unions and community banks go under. It is
also small business and the entrepreneurs and the dynamism that
we see in the economy. And it is probably not just a
coincidence that 2 years ago it was documented for the first
time in measured memory more small businesses disappeared than
were created. And part of that is because of the costs that
Dodd-Frank is imposing on small banks and thereby reducing
access for small businesses to credit.
Senator Heller. Professor, thank you.
Mr. Chairman, I am a big believer that big banks serve big
businesses, small banks serve small businesses.
Chairman Shelby. Right.
Senator Heller. And that is why we are seeing the problems
that the professor just expressed. So, anyway, thank you for
Chairman Shelby. Thank you.
Senator Merkley. Thank you very much, Mr. Chair.
Mr. Chanin, did mortgage lending increase or decrease over
the last 3 years?
Mr. Chanin. So I do not know the answer to that, quite
honestly. I do not have data in front of me.
Senator Merkley. OK. Thank you. You do not know the answer.
But it is relevant because all of this testimony about all this
imposition on mortgage lending, in fact, it has increased
between 2012 and 2015 by $500 billion. You divide that by
$250,000 for a family home, you are talking about 2 million
more mortgages, or the equivalent of that, then than now. It
just does not fit the argument you are making that mortgage
lending is under oppression.
And let me just add that a lot of those loans previously,
before Dodd-Frank, that were predatory loans where after 2
years you had a prepayment penalty, you could not get out of
the loan and the interest rate doubled after 2 years, they did
not help families. They destroyed families. So not only do we
have mortgages, but mortgages that are helping families build
wealth, which is what we had before those predatory practices
that helped tear down, losing trillions of dollars for working
families in America.
Mr. Hirschmann, has car lending gone up or down over the
last 3 years?
Mr. Hirschmann. Car lending has gone up.
Senator Merkley. Thank you. You are right. It has gone up.
It has gone up from $60 billion to $84 billion, and 2015 was a
record number of sales. I mean, people are buying cars at
unprecedented numbers. So, again, that is really a great
contrast to the argument that something is seriously wrong in
the car lending business or the car sale business. The system
is working very well, and people are getting fair loans.
Mr. Zywicki, consumers of payday loans in States that have
put an interest rate cap can now borrow at 25 to 36 percent
rather than at 500 percent. Do you think from a consumer's
point is it better to get a 25- or 36-percent loan or better to
get a 500-percent loan?
Mr. Zywicki. Well, actually, they do not borrow at 25 or 36
percent because the product--payday loans disappear from the
market in places that have----
Senator Merkley. OK. Well, thank you, because--thank you
for that answer. They disappear, because that was exactly the
argument in State after State. In Oregon, we wrestled with this
argument because the payday loan industry said: You know what?
If you lower the interest rate to 36 percent, we are just going
to disappear. So we looked at every State that had such a cap,
and you know what? You are wrong. They did not disappear, and
we went ahead and put a cap in Oregon, and you know what? They
did not disappear. You can still find payday loan storefronts
throughout our metropolitan area, title loan fronts. But the
consumer is getting a far better deal.
So let me just point out that if you are going to make the
argument, at least know the facts, that they do not disappear
when you put a cap on the interest rate.
Mr. Zywicki. The research I have seen on that by Jon
Zinman, which is the study of the Oregon payday loan, indicates
that there was a substantial drop in payday loans and an
increase in use of overdraft protection and a slight increase
in auto title loans.
Senator Merkley. Well, you can come out to the State, and
we can--I will take you--we can visit some payday loan places
Mr. Zywicki. You are saying the volume of payday loan was
completely unaffected by the law?
Senator Merkley. No, I am not saying that, but that was not
the question. The question was: Can the consumer get a payday
loan at a much lower interest rate now than before? And the
answer is yes. And I can tell you, for example, I went to a
food bank, and the head of the food bank said, ``Senator, the
biggest change is that we no longer have people bankrupted by
this vortex of debt from payday loans. They are not coming to
our food bank because of the 500-percent interest rates. Thank
you so much for putting a cap on the interest rate.''
And then she proceeded to say, ``Now, the economy as a
result of the crash''--of course, that goes back to the
predatory mortgage loans. ``Unfortunately, a lot of people have
lost work, and they are coming to our food bank.'' But the
victims of payday loans disappeared.
Now, let us just look at the model. This is the model that
we are putting up the chart of. This is the model payday loan
interest--payday loan companies use. Their model is to trap
people in debt. This happens to come from a training manual for
a payday loan company. It is called ``ACE,'' and they say
consumer applies, consumer exhausts--they get the loan, they
exhaust the cash, and they do not have the ability to pay,
because those are the folks they make money off of. And then
the consumer cannot make the payment, the account enters
collections, so we come along and we give them a new loan. And
that is the cycle of debt, the vortex of debt. If you take
$1,000 at 500 percent, you can do the math, I am sure, in your
head. That is $25,000. Do you think any low-income family can
pay off $25,000 debt when they started out with $1,000 2 years
earlier? Of course the answer is no. They end up in bankruptcy.
Their finances are destroyed. Their marriages are stressed.
Their children are shortchanged.
So my time is up, but I have never heard a hearing where
the testimony from industry is so apart from the reality on the
ground across America. Getting rid of predatory practices in
the credit card industry, in the mortgage industry, in the
lending industry in general allows middle-class families and
families of modest means to be successful rather than to be
victims of tricks and traps. And that is a plus for America.
Chairman Shelby. Senator Scott.
Senator Scott. Thank you, Mr. Chairman. Thank you to the
witnesses for investing your time in trying to help us to
understand and appreciate the actual impact of Dodd-Frank on
our country and specifically on the most vulnerable.
To me, as I listen to both sides have this conversation, I
am disappointed in the tone. I am concerned that as viewers
watch this at home, the reality of it is that they are missing
the point. We are missing the point for the average person in
the average place in this country who suffers on a daily basis
because of financial stress. The facts are very simple.
Mr. Zywicki, I would love to chat with you about the facts.
As a kid growing up, just by circumstance I went to four
different elementary schools because poverty has a transient
nature. You move a lot. And so when I think about the impact of
Dodd-Frank, I think about the impact on Dodd-Frank on the poor
very specifically. And to me it is pretty clear, the facts are
very clear, that Dodd-Frank makes it worse for people living in
poverty and people living on the threshold of poverty.
Question: If, in fact, Dodd-Frank stays as it is, there
will be, in my opinion, more payday lending and not fewer
loans. Is that accurate from your perspective?
Mr. Zywicki. Yes, Senator. First, let me say I went to high
school in Greenville, South Carolina, so I feel like you are my
honorary Senator in some sense.
Senator Scott. Thank you. Move back and vote, please.
Senator Scott. If you agree with me. If no, just stay where
Mr. Zywicki. Well, I agree with you, yes, that that is who
has borne the biggest impact of this, and basically what
happens if we have known this for decades, which is, if you
take mainstream products away from people, you drive people
down the credit ladder from credit cards to payday loans and
overdraft protection to pawnshops and so forth. And so that is
what we are seeing, unfortunately.
Senator Scott. I only have 5 minutes. I want to try to use
my 5 minutes as quickly as possible. But, in other words, there
is a correlation. The higher the fee, the lower the access.
Mr. Zywicki. Correct.
Senator Scott. It is kind of a simple concept.
Mr. Zywicki. Yes.
Senator Scott. So in the end, then, if we have, according
to some studies, 2009 through 2011, a million more unbanked
consumers, that translates to more people finding access to
credit outside of the banking system----
Mr. Zywicki. That is right.
Senator Scott.----which means higher interest rates.
Mr. Zywicki. Check casher, payday loans, pawnshops, and the
like. Exactly right. They are forced to rely on those products
Senator Scott. This should be a simple concept for us to
understand and digest here.
Mr. Zywicki. It seems like it to me.
Senator Scott. I must be missing something.
Third point: First-time home buyers fell for the third
straight year. Now, according to the statistics, 74.1 percent,
I think it is, of white folks own their homes. Around 45
percent of African
Americans own their homes. If first-time home buyers have
fallen for the third consecutive year, logically the
disproportionate impact is on people of color and folks living
toward that threshold of poverty. Is that a fair conclusion
based on deductive reasoning?
Mr. Zywicki. Yes, that would follow.
Senator Scott. And the data, frankly?
Mr. Zywicki. Yes, as a percentage of home buyers, yes.
Senator Scott. Another outstanding and stunning fact that
is hard to argue with is that the African American unemployment
rate is about 70 or 80 percent higher consistently than the
white unemployment rate. The Dodd-Frank legislation makes it
far more difficult for first-time business owners to find
access to credit.
In South Carolina, small business is the heartbeat of our
economy. From my perspective, having been a small business
owner for about 15 years, the reality of it is that you hire
folks from your neighborhood, from the place where you do
business, which means that if you have fewer businesses in
minority areas, you are going to have a higher unemployment
rate in those areas.
Dodd-Frank has had--have we seen more small businesses or
fewer small businesses?
Mr. Zywicki. We have seen fewer small businesses. We have
seen a loss of small banks. And, of course, as you know, women
in particular disproportionately start small businesses as well
as minorities, so that is particularly important to those
communities and those folks.
Senator Scott. And the final thought before I wrap this up
on the Durbin amendment, which we have heard so much about, if
billions of dollars were transferred from banks to big-box
retailers, one of the ways that you can figure out whether or
not there has been a passing on to the consumers, look at the
prices. This is not a hard thing to discuss. Here is what you
will hear as I depart and go to my next meeting. You will hear
from both sides a conversation about how we need to do better
for the consumer and how we need to protect the consumer, when
the reality of it is that the goal of protecting the consumer
has been lost in Dodd-Frank, and the CFPB is not making it
easier for consumers to have access to credit, not making it
easier for people to experience the American dream. They are
not making it easier for any of us to see the goal of the most
vulnerable in our society being protected.
It may be well intended, maybe the intentions of the
legislation, but the facts are inconsistent with the reality,
no matter how we spin it up here. Thank you.
Mr. Gable. Mr. Chairman, may I just respond to that?
Senator Scott, one of the statements you made was that the
payday lenders, when they come in and they are driving
individuals out of the banking business----
Senator Scott. Actually, I did not make that statement. My
statement was simply this: that as a result of higher fees, you
will have more people unbanked. And if you have a million
people unbanked, the question then is: Where do they go to get
their access to credit?
Mr. Gable. Absolutely.
Senator Scott. And they get their access to credit from, as
you call it, predatory lenders or payday loans or some other
access, whether it is pawnshops or something else that is close
in proximity to where they live. And then so the question
becomes: What is the interest rate because of the result of
Dodd-Frank increasing the cost of doing business and running
some folks out of banks, what is the cost to society and what
is the cost to the poorest communities? The actual cost is a
higher interest rate because of the result of Dodd-Frank.
Mr. Gable. What I wanted to point out, first of all, payday
lenders were around--started out in 1985 before Dodd-Frank.
Second, payday lenders require individuals to have bank
accounts, so they have bank accounts. And they have first
access to those bank accounts. And that is how they keep them
in the cycle, and it has been consistent in poor communities in
our country that poor individuals, the weakest and the most
vulnerable individuals, have to pay more for everything. When
they are purchase in their community, their prices are high.
When they go to get credit, their prices are high. We use the
statement, ``They are at risk.'' In fact, what we do is we
develop a consistent area where people are in perpetual
So my position on this, my view on this is that when we
have these predatory lending practices, when we have--everybody
in here has arbitration clauses that are bad in their
contracts. Unless we have somebody, some watchdog group like
the CFPB looking out for the most vulnerable, we are going to
always have that small cadre of community in America who will
have to pay the most and get the least out of what this country
Senator Scott. Well, let me just say this, Reverend. Thank
you for your service to the country. Without any question, the
National Baptist Association is a fantastic organization. I
think your passion for people is right on spot. I would just
disagree with our conclusions.
My conclusion is a simple conclusion, that the way that we
increase the costs to the most vulnerable in our society is to
increase the costs in an area where the fees are lower, that
the interest rates are lower. So if you increase the fees and
you shrink that market, the unintended consequence is going to
be higher unemployment in those very areas that we both want to
help, higher costs at the grocery stores or whatever the food
mart is in those areas, and a very difficult time to increase
the employment opportunities and entrepreneurs in those
communities because those communities are the communities where
I have lived the vast majority of my life.
So the goal of having a watchdog agency that provides the
type of protection that we both hope for is not happening as we
are watching it unfold today around this country.
So I do not disagree with the fact that the goal of having
an agency that provides greater protection is a wonderful goal.
I am simply saying that the CFPB is not that agency, and the
results of Dodd-Frank have not been--that goal has not been
achieved. It is not getting closer to being achieved. It is
getting further away. The fact of the matter is that as we
eliminate small banks in small communities, the reality of it
is they do not go to bigger banks; they go to a different
market for their access to credit. That is just the unfortunate
reality of the facts, no matter our goals. I do not disagree
with the goal. I would love to work with you on seeing that
goal become a reality. If we study the CFPB, we will conclude
that, unfortunately, with all the good intentions, the reality
is the poor are still getting poorer and that is why the
poverty rate in America is 15 percent and in the African
American community it is 28 percent.
So when we look at the facts, we find ourselves with a big
question mark on why are these not changing. And I will submit
this to you, I will suggest this to you: that as we watch this
unfold for the next couple of years, let us just see what
happens. And if we are both around in 24 months, I would love
to have the conversation about what has happened because of our
conversation and Dodd-Frank.
Mr. Gable. I certainly appreciate that. I just want to make
Senator Scott. Yes, sir.
Mr. Gable. Maybe it is just in New Orleans, Chairman
Chairman Shelby. Go ahead.
Mr. Gable. Or in Louisiana, and I have heard my colleague
here, Mr. Zywicki, talk about the disappearance of small banks.
We have to understand there are some variables in terms of
their disappearance. Some disappeared because they were just
bad banks. But many community banks purchased those small
banks. So I deal with small banks. Most of our churches in the
National Baptist Convention deal with community banks. But many
of those communities banks are the ones that are providing
access for us.
Senator Scott. Yes, sir.
Mr. Gable. But they bought up other small banks. We have a
plethora of small banks. They are not mega banks. But they are
still community banks. What I am simply saying is that when it
comes to payday loans, when we have some banks in some
communities move out, then we have payday loan individuals move
in. Individuals who are purchasing--who are going in for payday
loans, it is not a matter of the fact that they do not have
banking or they do not have a job. They have a crisis in their
lives, and small-dollar loans are not available from some of
our banks the way they should be.
Our National Baptist Convention is in the process of
establishing a structure with our 31,000 churches, and we hope
to be able to provide small-dollar loans. But if we do not have
some enforcement on the process, there is just no reason why
someone has to pay who is at the bottom already, has to pay 400
or 500 percent when the interest rate that the Feds have been
giving over the last 8 years has been 0.25 percent.
Senator Scott. Yes, sir.
Mr. Gable. It is immoral, it is unbiblical, and it is a
Senator Scott. I do not disagree with you at all, sir, and
I will say thank you to the Committee for your indulgence here.
I am a fan of the Bible and a fan of the Proverbs about usury,
usury fees. So there is no doubt that I do not disagree with
you at all. The only question I have is: Can we achieve the
goal that you want us to achieve through the CFPB? And my
answer is: I do not think we are getting closer. And we can
measure this progress or the lack thereof over the next couple
of years. We will hear a lot of
conversation, and some will--Senator Warren will tear up what I
have said to pieces. I would love to have a chance to come back
and respond to her as well. But the fact of the matter is that
let us just watch and see what happens to the most vulnerable
in our society as the good wishes and the good intentions of
this Congress does not produce the results that we want.
Mr. Gable. Since you mandated the CFPB to do these things,
let us work together with them so that we both reach that
Senator Scott. I would love to replace them and work with
Mr. Gable. Well, that is the difference. Thank you, sir.
Chairman Shelby. Senator Warren, thank you for your
Senator Warren. That is fine. Thank you, Mr. Chairman.
Senate Republicans called this hearing today to talk about
the costs of regulating consumer financial products like
mortgages and payday loans and credit cards. I want to focus on
the other side of the equation, and that is, the cost to
American families of failing to regulate consumer financial
Mr. Chanin, as Senator Brown mentioned, from 2005 to 2011,
you held top positions in the Federal Reserve's Division of
Consumer and Community Affairs, and in those positions you had
both the legal authority and the legal responsibility to
regulate deceptive mortgages, including dangerous subprime
lending that sparked the 2008 financial crisis. But you did not
do it despite years of calls and even begging from consumer
advocates and others asking you to act. Instead, you did
Now, your failure had devastating consequences. The
bipartisan Financial Crisis Inquiry Commission identified, and
I am quoting here, ``the Federal Reserve's pivotal failure to
stem the flow of toxic mortgages'' as the ``prime example'' of
the kind of hands-off regulatory approach that allowed the 2008
crisis to happen.
Now, according to the Dallas Fed, that crisis cost the
American economy an estimated $14 trillion. It cost millions of
families their homes, their jobs, their savings, devastated
communities across America.
So when you talk now about how certain regulations are too
costly or too difficult to comply with, you sound a lot like
you did before the 2008 crisis when you failed to act. So my
question is: Given your track record at the Fed, why should
anyone take you seriously now?
Mr. Chanin. So since you were responsible for creating the
CFPB, you know and set forth the notion that they should be a
data-driven organization. And we can debate whether they are or
not, but I can assure you the Fed was and is a data-driven
organization. There was simply no data provided to the Fed on
Senator Warren. I----
Mr. Chanin. Let me finish, please, Senator.----on a
statistical basis that suggested that there was a meltdown in
the mortgage market in 2005 and 2006----
Senator Warren. I am sorry. Are you saying there were no
data in the lead-up to the financial crash that showed the
default rates on subprime mortgages and what they were doing to
communities across America? Did you have your eyes----
Mr. Chanin. There was----
Senator Warren.----stitched closed?
Mr. Chanin. There was anecdotal evidence to be sure----
Senator Warren. I am not talking----
Mr. Chanin.----but there was no hard data----
Senator Warren.----anecdotal--are you telling me you never
saw any data about the increases in mortgage foreclosure rates
before the crash in 2008? Is that what you are saying here?
Mr. Chanin. No hard data was----
Senator Warren. Oh, my----
Mr. Chanin.----presented to the Fed until the crisis
Senator Warren. Mr. Chanin, let us just be----
Mr. Chanin.----in 2008.
Senator Warren. Let us just be clear. You want to defend
your tenure. It is not just me or consumer advocates who are
calling your Fed tenure a disaster. The bipartisan Financial
Crisis Inquiry Commission spent years looking into the causes
of the crisis and identifying the Fed's failure to regulate
subprime mortgages as one of the key drivers of the collapse of
2008. That was you. Even former Chair Greenspan admitted that
the Fed made a mistake by failing to regulate subprime
mortgages. That was you.
If you are still defending your time at the Fed and saying
you had no information about a problem that was emerging, then,
frankly, that raises even more questions about your judgment.
Mr. Chanin. Senator, do you have a question?
Senator Warren. I do.
Mr. Chanin. OK. Thank you.
Senator Warren. And I will get there, but thank you for
indulging me on this, Mr. Chanin.
After the crisis, you joined the CFPB to oversee the
agency's rulemaking. Within a couple of years, though, you
sailed through the revolving door to a big law firm where,
according to the Web site for this law firm, your job is ``to
counsel financial institutions on consumer finance issues.''
Now, after taking that job, working for banks you were
quoted as saying that you ``lost faith that the agency would
become a truly independent entity and carefully balance
consumer costs and access to credit with consumer protection.''
So the question I have is: Does that mean that you want the
CFPB to operate more like your Division of Consumer and
Community Affairs at the Fed did before the 2008 crash?
Mr. Chanin. No. In my view, the CFPB does not appropriately
balance consumers' need for access to products and the fact
that if costs are excessive, the institutions simply will not
offer those products.
Senator Warren. I am sorry, Mr. Chanin. If you would answer
the question that I asked. The question is: Do you want it to
operate more like your Division of Consumer and Community
Affairs did at the Fed before the 2008 crash?
Mr. Chanin. The CFPB was created as an independent agency.
I do not think it fulfills that role if it does not serve the
two mandates set forth in the Dodd-Frank Act of access----
Senator Warren. I am sorry, Mr. Chanin. I asked you a
question. You wanted to hear a question. Could I have an answer
to the question? Are you asking for the CFPB to operate more
like the agency that you directed that the Financial Crisis
Inquiry Commission said played the pivotal role in the crash of
Mr. Chanin. I do not think that is the goal of the CFPB.
The goal is twin: access and fairness. And it has not satisfied
that need for access, in my----
Senator Warren. I will take it, then, that you do not want
to answer this question.
You know, Mr. Chanin, when I was setting up the CFPB, I was
told that even though you played a key role in blowing up the
economy, that I needed to hire you because you were one of the
few people within the technical expertise needed to write the
Dodd-Frank rules. Now, people said that you and your team made
a terrible decision that helped crash the economy, but we
needed to keep you all around because you were the only ones
who really understood the mistakes that had been made. And when
you wanted the job at the CFPB, you claimed that you had
learned from your failure. But I see today that is obviously
not the case.
Of all the people who might be called on to advise Congress
about how to weigh the costs and benefits of consumer
regulations, I am surprised that my Republican colleagues would
choose a witness who might have one of the worst track records
in history on this issue.
Thank you, Mr. Chairman.
Chairman Shelby. Thank you, Senator Warren.
Senator Cotton. Goodness. Mr. Chanin, if you think it is
tough being questioned by Senator Warren, try to be on her
first-year contract class panel one day. That is even tougher.
I would like to turn my attention to the Credit Repair
Organizations Act of 1996, also known as CROA. This is a law
that was designed to root out the fraudulent practice of credit
repair clinics promising consumers that they can remove
negative but accurate information from consumers' credit
histories. The law's strict obligations and penalties enforced
through public and private cause of actions have been useful in
preventing some forms of fraud peddled by credit clinics. But
at the same time, over the past several years, the plaintiffs'
bar has pushed courts to expand CROA's reach to cover important
services never intended by lawmakers to be subject to CROA's
requirements and penalties, including credit monitoring and
credit education services.
One way that companies providing these services have been
able to limit their exposure to CROA has been through
arbitration clauses. Mr. Hirschmann, I would like to ask you:
Does the CFPB's forthcoming arbitration rule expected next year
make the need for CROA reform more urgent or less urgent?
Mr. Hirschmann. Senator, I honestly do not know the answer
to your question, but I am happy to get back to you on that. We
are expecting the CFPB to issue an arbitration rule literally
within months, and I am happy to get back to you on that.
Senator Cotton. OK. The FTC, which is charged with
enforcing CROA, has been on the record in Senate testimony
stating that it is very sympathetic about the need for reform
to protect credit monitoring and similar services. Do you see
any risks with the intersection of the CFPB's potential
arbitration rule and the FTC's position?
Mr. Hirschmann. I am happy to get back to you on the
Senator Cotton. OK.
Senator Cotton. Are there any other unique issues with
respect to the application of this potential arbitration rule
as it applies to credit bureaus that the CFPB should have in
mind as it goes forward with its arbitration rule?
Mr. Hirschmann. Well, arbitration is certainly a much more
cost-effective and timely way for consumers to get redress,
and, particularly when it is very expensive for individual
claims that are not classable to get into the courts, it is
unlikely that consumers will want to go to the expense to take
those claims into the court if they are not classable. Even the
class action--you know, even with the low percentage of
consumer benefits that come from class action, they are
unlikely to take those as well. So we have to look carefully to
make sure that--and it is one of the things we have urged the
CFPB to do, is to look carefully at what consumers would lose
if they take away arbitration.
Senator Cotton. Thank you. And if you can take those
earlier questions for the record and respond, I appreciate very
much the analysis that you have submitted to this Committee,
and CROA reform is something on which I will continue to be
engaged, particularly as we look forward to the new arbitration
rulemaking, impacting not just Arkansas consumers but also many
Arkansas jobs as well. So I would like to receive your insights
in the future on the record, if you could get back to us.
Chairman Shelby. Mr. Chanin, is it not true that the Fed
actually did several rulemakings in 2007 and 2008 while you
were there on mortgages under its UDAP and other authorities?
Mr. Chanin. That is correct, Mr. Chairman. The Federal
Reserve Board both proposed and adopted a final rule that set
forth an ability-to-repay requirement for basically high-cost
mortgages that became part of Truth in Lending Regulation Z,
and applied to all lenders who offered those mortgages.
Chairman Shelby. Let me direct this at you, Professor
Zywicki. How important is it that the regulators do cost-
benefit analysis on any regulations that they propose?
Mr. Zywicki. It is really the single most important thing
that a regulator can do. The regulation of consumer credit is a
very complicated, challenging issue because of the tradeoffs
involved, which is we know that, as I described earlier, as you
choke off access to certain products, it drives consumers to
other products, and eventually may drive them out of all
So, for example, in 1968, for example, there was a U.S.
Senate report that found that the second largest revenue source
of the Mafia was loan sharking. When ``Fat Tony'' Salerno was
indicted, the head of the Genovese crime family was indicted in
1974 on 14 counts of loan sharking, and, in fact, one count of
having a victim's legs broken for not paying their debts, he
was running $80 million a day, which is $463 million a day in
today's dollars, in his territory in New York City. And what we
saw was the regulatory structure at that period in the 1960s
and 1970s led to everybody coming together and basically
saying, look, we need to make sure that consumers have access
to credit products in a competitive market, even if they are
expensive. And that is what we have always wrestled with.
And so cost-benefit analysis is the key issue to try to get
at these questions of access, competition, price, and doing so
in a way that promotes transparency, competition, and consumer
choice, because if we do not do that, if the costs do exceed
the benefits, it can be really tragic for consumers, I am
Chairman Shelby. But it is not just cost to the lender. It
is the loss or cost to the consumer that is part of this study.
Is that not right?
Mr. Zywicki. Yeah, let me make clear, I do not care
personally. I do not work for the banking industry, and I
personally do not care about the cost to the lender, except to
the extent that it affects the cost to the consumer.
Chairman Shelby. But we do care about the cost of
Mr. Zywicki. Absolutely. We care about the cost----
Chairman Shelby. Considering all of it together.
Mr. Zywicki. Absolutely. I care about the cost to the
lender to the extent that it impacts the consumer. And what we
are seeing now is we are imposing costs that do not have
offsetting benefits, I think, to the consumer, imposing costs,
imposing especially high costs on small banks that are hurting
consumers, and that is why I think it is so important. Yes, a
good, robust, modernized, educated consumer protection policy
can help consumers, can help the economy, can help competition,
innovation, consumer choice. Innovation is so important. The
biggest issue, I think, in this sector we have today is
financial inclusion, and I think innovation is the goal to
that. And to the extent we pass policies where the costs exceed
the benefits, that stifle competition, innovation, and consumer
choice, we are moving in the opposite direction.
Chairman Shelby. Senator Brown.
Senator Brown. Just a couple of comments, and I want to ask
UC to insert a couple of things in the record, Mr. Chairman,
but first a few comments.
I am going back to the statement that hundreds of thousands
of one-sided, inaccurate, unverifiable complaints have been
filed with the Consumer Bureau. I want to put that in
perspective, and I will quote from a law review article in the
Arizona Law Review from Kimberly Krawiec and then quote from an
article in the Washington Monthly by Haley Sweetland Edwards
called ``He Who Makes the Rules.'' Again, I want to put in
perspective the claims that these hundreds of thousands of
complaints filed by individual Americans--I cannot think that
is not who they were--put that into perspective about what
happened to them.
First, financial institutions, financial industry trade
groups, law firms representing such institutions, and trade
groups collectively accounted for 93 percent of all Federal
agency contacts on the Volcker rule during the time period
studied. In contrast, public interest, labor advocacy research
groups, and other persons and organizations accounted for only
7 percent. Again, think of that perspective. You claim hundreds
of thousands of unverifiable, one-sided, inaccurate complaints
were filed by real live consumer people--individual consumers.
A second point to make: According to public records,
representatives from the financial industry have met with a
dozen or so agencies that regulate them thousands of times in
the past 2 \1/2\ years. According to the Sunlight Foundation,
the top 20 banks and banking associates met with just three
agencies--the Treasury, the Federal Reserve, and the CFTC--an
average of 12.5 times per week for a total of 1,298 meetings
over the 2-year period from July 2010 to July 2012. JPMorgan
Chase and Goldman Sachs alone met with those agencies 356
times. That is 114 more times--a ratio of 114:1--than the
financial reform groups combined.
Third point. Since the passage of Dodd-Frank, the industry
has estimated--it has been estimated $1.5 billion in registered
lobbyists alone, a number that most dismiss as comically low as
it does not take into account the industry's much more
influential allies and proxies, including a battalion of groups
like the U.S. Chamber of Commerce, the Business Roundtable, the
American Bankers Association, also does not take into account
the public relations firms and think tanks or the silos of
campaign cash the industry has dumped into lawmakers'
Now, the reason for the agitation of many of us on this
side, I am--it is a personal affront in many ways to talk about
the hundreds of thousands of one-sided, inaccurate,
unverifiable complaints. It is insulting to those consumers all
over the country that have been wronged time and time again. It
is another example of how this town sings with an upper-class
accent on issue after issue after issue.
I will close with this. In the last quarter of 2010, just a
few months after Dodd-Frank passed, the financial industry
raked in $58 billion in profits--$58 billion in profits. That
was 30 percent of all U.S. corporate profits that year, $58
billion in profits. That was close to a third of all profits
that corporations raked in that year. So there's something
amiss, and to lay it all on these ill-informed consumers that
file these complaints that were not vetted when by a factor of
whatever it is, the number of lobbying hits and discussions
coming from a very well-organized, well-capitalized, well-
funded group of interest groups is, frankly, insulting.
Thank you, Mr. Chairman.
Chairman Shelby. Mr. Chanin, I would just like to take a
moment to thank you for your dedication to consumer protection
over the years and your decades of work in the Federal
Government at the Federal Reserve and at the CFPB. I only
regret that you are no longer at the consumer agency because I
think your guidance and your experience and wisdom would help
guide its efforts toward sensible regulation that is open,
transparent, accountable, and in the consumers' and all of our
best interests. You know, we all go to the basic premise that I
said earlier. We are consumers. We want the market to work.
Mr. Chanin. Thank you, Mr. Chairman.
Chairman Shelby. Overregulation does not work. Cost-benefit
analysis, I pushed it for years, and I am going to continue to
push it. We will get there someday, because that would protect
and weigh the benefits and the costs to the consumer, for the
consumer, and the people who loan money both. I think we need
Thank you very much, all of you. The hearing is adjourned.
[Whereupon, at 11:47 a.m., the hearing was adjourned.]
[Prepared statements, responses to written questions, and
additional material supplied for the record follow:]
PREPARED STATEMENT OF LEONARD CHANIN
Of Counsel, Morrison & Foerster LLP
April 5, 2016
Chairman Shelby, Ranking Member Brown, and Members of the
Committee, my name is Leonard Chanin. I am Of Counsel in the financial
services practice group of the firm here in Washington, DC, and have
more than 30 years' experience working as an attorney on consumer
financial services issues. I spent 20 years with the Federal Reserve
Board, including 6 years as Assistant Director and Deputy Director of
the Division of Consumer and Community Affairs. In addition, for 18
months I was Assistant Director of Regulations at the Consumer
Financial Protection Bureau (``CFPB''). I have spent nearly 10 years in
private practice advising banks and other financial institutions on a
number of Federal consumer financial services laws. I am pleased to be
here today to address the effects of consumer finance regulations.
The primary Federal agency entrusted with regulating consumer
financial products and services is the CFPB, a creation of the Dodd-
Frank Wall Street Reform and Consumer Protection Act (``Dodd-Frank
Act''). The Dodd-Frank Act sets out in broad terms the purpose of the
CFPB. The Act states that the CFPB shall:
seek to implement and, where applicable, enforce Federal
consumer financial law consistently for the purpose of ensuring
that all consumers have access to markets for consumer
financial products and services and that markets for consumer
financial products and services are fair, transparent, and
This goal is challenging to achieve. ``Fairness'' to consumers
depends on what one views as being ``fair,'' and it is open to a wide
variety of perspectives. The overzealous pursuit of ``fairness''
adversely affects the ability and willingness of financial institutions
to offer products to consumers and, thus, negatively affects the
ability of consumers to obtain such products. In addition, access to
financial products is affected--both directly and indirectly and both
positively and negatively--by rules and other actions taken by Federal
agencies that regulate consumer financial services products and
While it is difficult to quantify the precise impact that CFPB
rules, guidance, enforcement orders and other actions, as well as
activities by other Federal banking agencies, have had on consumers and
the broader market for financial products and services, it seems clear
that such rules and other actions have had a significant adverse impact
on the ability and willingness of institutions to offer those products
and services. Anecdotal and other evidence clearly indicates that
institutions have reduced the products and services offered to
consumers and some institutions have been reluctant to offer new
products and services. Recent CFPB rules on mortgages illustrate this
result. In addition, the use of enforcement orders by the CFPB to
establish policy has had adverse results; for example, enforcement
orders dealing with the pricing of indirect auto loans and alleged
discriminatory practices have created an unlevel playing field in the
automobile loan market.
THE IMPACT OF REGULATIONS
Federal consumer financial regulations unquestionably have a
significant impact on consumers, financial institutions and the broader
economy. The effect rules have and whether they actually harm
consumers, hinder competition, or reduce the products available to
consumers, likely depends on the specific rule and which consumers are
There can be benefits to regulation. If properly designed,
regulations can better ensure that standardized approaches are used to
provide disclosures to consumers to enable them to compare products and
choose the ones that best suit their needs. Regulations are most
effective when they require all institutions that offer consumer
financial products to ``play by the same rules.'' This better ensures a
competitive marketplace, where all participants are subject to the same
But, there are many risks and dangers to regulating ``too much.''
Regulations need to be clear, but at the same time provide flexibility
to accommodate new products, new delivery channels and new ways of
doing business. Clear rules are needed to ensure that institutions know
what is required to comply and manage risks. However, detailed,
proscriptive rules can inhibit the development of new products and new
ways of doing business. In addition, rules that lack flexibility can
discourage, and, in some cases, stifle the development of new products
or services or new features of financial products or services.
Furthermore, new rules can be very costly, particularly, for example,
for smaller institutions that may make few loans. For those
institutions, the overall costs to support a small loan program may be
so great that they may simply exit the business.
So, what impact have the CFPB mortgage rules had on the market?
Some institutions that previously offered mortgages have stopped doing
so because the costs of complying with the new rules cannot be spread
over a sufficient number of loans to enable them to effectively compete
in the marketplace. In addition, a number of institutions have reduced
the products offered to consumers. In fact, a recent American Bankers
Association survey revealed that, due to the CFPB mortgage rules, 75
percent of banks surveyed eliminated one or more mortgage product
offerings, such as construction loans and loans with payout options.
An examination of the CFPB rules that integrate mortgage
disclosures under the Truth in Lending Act (Regulation Z) and the Real
Estate Settlement Procedures Act (Regulation X) illustrates the adverse
impact that regulations can have on consumers and the broader market.
The CFPB's integrated mortgage disclosure rules and explanatory
information are hundreds of pages long. They contain dozens upon dozens
of sub-rules and prohibitions dealing with how creditors must disclose
information about mortgages to consumers. A small bank or credit union
cannot hope to comply with the extraordinary level of detail required.
And even the largest institutions face great difficulties in ensuring
compliance and likely face litigation risks if they make a mistake.
One example illustrates the extraordinary level of detail required
under the integrated mortgage disclosure rules. There are several
different rounding rules for the disclosure of dollar amounts and
percentages (rates). One sub-rule states that the principal and
interest payments must be disclosed using decimal places, even if the
amount of cents is zero. (Thus, a disclosure of a payment of ``$800''
violates the rule, whereas a disclosure of ``$800.00'' complies.) This
sub-rule is in contrast to the sub-rule for disclosing the loan amount,
which actually prohibits the use of decimal places in disclosures.
(Thus, a disclosure of a loan amount of ``$240,000.00'' violates the
rule, whereas a disclosure of ``$240,000'' complies.)
The adoption of such a proscriptive rule can only lead to errors
and ultimately can result in litigation, even if a consumer did not
rely on the information and was not harmed by the error. In addition to
litigation risks, failure to comply with the integrated mortgage
disclosure rules could lead investors who purchase loans to require
lenders to buy back any loans where lenders make errors in providing
USE OF GUIDANCE AND ENFORCEMENT ORDERS TO ESTABLISH
In spite of the ``dangers'' and problems associated with
regulations, they are vastly preferable to ``regulating'' by the
issuance of guidance, or, even worse, use of enforcement orders to
Guidance can be helpful to institutions in understanding laws that
apply to specific transactions or products. But any such guidance
should be published for public comment. Failure to do so can lead to
confusion as to the scope and meaning of the guidance and create
operational and other compliance problems. In addition, agencies
benefit by allowing the public to comment, as it results in clearer and
better guidance. The CFPB has issued dozens of guidance documents, in
the form of official CFPB bulletins, as well as by using blog posts and
other ways of communicating its views on issues. These documents are
not published for public comment. Failure to get public input creates
By way of an example, one of the most problematic documents deals
with indirect auto lending and the application of the Equal Credit
Opportunity Act (``ECOA'') and implementing Regulation B to
institutions that purchase loans made by automobile dealers. The CFPB
issued a bulletin interpreting Regulation B on this issue, rather than
publishing a proposed revision to the Regulation for public comment.
The bulletin addresses the obligation of indirect auto lenders (those
who purchase loans made by auto dealers) to address potential
discrimination in the pricing of loans by auto dealers.
The failure of the CFPB to issue guidance for comment on issues
such as this creates significant problems. Because the public was not
afforded the opportunity to comment on the indirect auto lending
bulletin, the guidance fails to address important issues. The bulletin
does not state that use of discretionary pricing to compensate auto
dealers is illegal, but states that lenders should monitor and address
the effects of such policies to ensure that discrimination does not
occur. However, aside from ``conducting regular analyses'' of dealer-
specific and portfolio-wide loan pricing data, the guidance fails to
inform lenders about what analysis would be satisfactory to avoid fair
lending violations. For example, should analysis be done on a monthly,
quarterly, or annual basis? What if a quarterly analysis shows
potential issues, but a semi-annual analysis shows no statistically
significant disparities? What action should a lender take to address
any risks in these circumstances?
Neither lenders nor consumers are helped when guidance issued is not
clear. Such guidance frequently leads to inconsistencies in the
marketplace, due to differing interpretations of such guidance.
``Regulating'' institutions that offer consumer financial products
and services by use of enforcement orders is a new trend. Although the
prudential banking agencies and other agencies have long entered into
public enforcement orders with institutions, this practice has
increased exponentially by the CFPB. Moreover, it seems quite clear
that the CFPB uses enforcement orders to establish policy.
Public enforcement orders are not inherently inappropriate or a
``bad'' tool for agencies to use. But, when enforcement orders are used
to establish policy, there can be many problems and drawbacks. First,
enforcement orders do not apply to any company or person that is not a
party to the order; thus, other companies can take a variety of
approaches regarding their views of such orders. Oftentimes, some
companies may ``comply'' in a certain way and others may take a
different approach. This results in inconsistency--inconsistency for
consumers and for institutions' practices--which results in a
marketplace that offers products and services not governed by the same
standards. Second, most CFPB enforcement orders lack specificity about
the practices involved and only give a brief statement of facts and
issues. It is often difficult to discern how to ``apply'' any guidance
in orders to the variety of products or practices that exist in the
marketplace. This also creates inconsistency. Third, the failure to
create rules that apply to all players in the marketplace can have the
unintended effect of driving some parties to entities that ``don't
comply.'' Anecdotal information suggests that this is precisely what is
so-called discretionary dealer pricing and auto loans, where the
marketplace is highly diffuse and where some auto dealers may do
business with those lenders who offer dealers greater compensation for
loans the dealers originate. Fourth, unlike rules, enforcement orders
are not published for comment. This deprives the public of the
opportunity to comment on significant issues and also deprives an
agency of the ability to consider operational and other issues as well
as potential negative or unforeseen consequences. Fifth, enforcement
orders that contain broad statements and allege unfair, deceptive or
abusive acts or practices may result in financial institutions simply
choosing not to offer new products, certain product options or new ways
of delivering products due to lack of certainty about what is
``required,'' as well as uncertainty about how to effectively manage
For these reasons, use of enforcement orders to establish policy is
both inappropriate and unsuccessful. The pricing of auto loans and use
of fair lending enforcement orders illustrates this problem. The CFPB
has entered into several enforcement orders with financial institutions
asserting that institutions that purchased consumer car loans made by
multiple auto dealers have violated the ECOA. While recognizing that it
is appropriate for dealers to be compensated for work done on
transactions, the CFPB orders conclude that financial institutions that
purchase auto loans violate the ECOA because the CFPB determined that
approach used had a discriminatory impact on consumers on the basis of
race or ethnicity.
Leaving aside the significant issue of the validity of the CFPB's
methodology and analysis in the orders, the use of enforcement orders
in this circumstance has resulted in an unlevel playing field and has
raised numerous questions for which the orders provide no answers. For
example, the most recent orders state that an institution must select
one of three options. One option is for the institution to limit dealer
discretion to no more than 1.25 percentage points above the buy rate
for loans with a term of 60 months or less, and 1 percentage point for
loans with a term longer than 60 months. For this option, the
institution must ``monitor for compliance'' with the limits.
But, what if institutions not subject to the orders want to retain
a dealer discretion model of compensation to effectively compete in the
marketplace? The orders only recognize two options. There are hundreds
and perhaps thousands of banks, credit unions and finance companies
that purchase auto loans. Anecdotal evidence indicates that
institutions have taken a variety of approaches in how they deal with
pricing and the purchase of loans made by auto dealers, due to
competition in local markets and a variety of other factors. By using
enforcement orders to create a policy addressing how lenders can
compensate dealers for dealers' work in originating auto loans, the
CFPB has failed to recognize that there may be many other legitimate
methods institutions can use to compensate dealers and still comply
with the ECOA. By using enforcement orders to create new legal
requirements, and doing so without publishing proposed changes to
Regulation B to address these issues, the CFPB has failed to provide
critical guidance to lenders on what the law requires or permits.
In this case, if the CFPB believes the way in which institutions
interact with auto dealers regarding the pricing of car loans is
contrary to the ECOA, the far better approach for consumers and
financial institutions would be for the CFPB to formally propose
changes to Regulation B. This would ensure that any policy applies
consistently to all financial institutions. In addition, engaging in a
rulemaking proceeding would allow the public to comment on the
approach, ensuring that the CFPB has an opportunity to address any
concerns or issues raised. Rulemaking, of course, takes more time than
issuing ``guidance'' or entering into enforcement orders. But such an
approach better ensures the creation of sound policy. Establishing a
policy by regulation also enables a company or person who disagrees
with a rule to challenge that policy and have a court independently
review the agency action.
The CFPB is a new agency--less than 5 years old. It continues to
develop expertise and a broader understanding of consumer financial
services markets. The question remains as to how the CFPB will balance
its mandated purposes of ensuring consumer access to financial products
and services while ensuring fairness in these markets.
Thank you for the opportunity to be here today. I would be happy to
respond to any questions.
PREPARED STATEMENT OF REVEREND DR. WILLIE GABLE, JR.,
Pastor, Progressive Baptist Church, New Orleans, Louisiana, and Chair,
Housing and Economic Development Commission, National Baptist
Convention USA, Inc.
April 5, 2016
Chairman Shelby, Ranking Member Brown, and Members of the
Committee, thank you for inviting me to testify today.
I am the Reverend Willie Gable, Jr. I serve as Pastor of
Progressive Baptist Church in New Orleans. My congregation is a member
of the National Baptist Convention USA, Inc. the Nation's largest
predominantly African American religious denomination.
I also serve as Chair of the Housing and Economic Development
Commission of the National Baptist Convention USA, Inc. This
Commission's mission is to develop affordable housing for low- and
moderate-income persons, particularly for senior citizens and the
disabled, allowing them to live with pride in a place they can proudly
call home. Over 20 years, the Commission has developed over a thousand
homes at 30 housing sites across 14 State.
I appear before you today to bear witness to the utter devastation
that predatory financial practices have wrought on my community and on
communities across this Nation; to the safer mortgage market we have
now thanks to newly implemented reasonable rules; and to a desperate
need for further regulatory action to weed out the abhorrent financial
abuses in other product areas that continue today.
The financial crisis
It is impossible to overstate the damage done to the families and
communities most impacted by the worst financial crisis since the Great
Depression. Over 12 million homes lost, representing families
displaced, lives turned upside down, life savings washed away. Over
$2.2 trillion in lost property value for communities surrounding
foreclosed properties, with over half of that lost value sapped from
communities of color. The wealth gap, already a chasm, made wider
This crisis was caused by unrestrained predatory mortgage lending
practices and a failure to stop them. These practices included steering
borrowers with 30-year fixed-rate mortgages, and with significant
equity in their homes, into toxic refinance products that would
inevitably become unaffordable--exploding adjustable rate mortgages,
balloon loans, loans that negatively amortized. There were no
requirements to determine whether the borrower had the ability to repay
the loan. Often, lenders paid brokers perverse kickbacks, or yield-
spread premiums, to steer borrowers into riskier, more expensive loans
when they could have qualified for a safer, more affordable one--a
practice that disproportionately impacted borrowers of color.
These predatory lending practices were permitted because the
existing regulators, with whom consumer protection authority had been
vested, failed to prohibit them. Congress gave the Federal Reserve
Board rulemaking authority in 1994 to prohibit unfair and deceptive
practices in the high-cost mortgage market. The Board failed to use
this authority until 2008; by then, the damage had been done. The
national bank and thrift regulators, the OCC and the OTS, had
enforcement authority against unfair practices. But they treated their
supervisee banks like clients, competing for their charters by being
most willing to ignore the abusive practices that the agencies' own
supervisory guidance advised against. The existing Federal regulators
failed, and the whole Nation suffered. Some suffered far more
profoundly than others. Many continue to suffer. Full recovery will
Today, we can be thankful for a safer mortgage market, one with
reasonable rules in place to prevent predatory practices. Lenders must
determine a borrower's ability to repay a loan. Kickbacks for steering
borrowers into more expensive or riskier loans are prohibited.
Contrary to lender predictions, the implementation of ability-to-
pay rules in 2014 did not result in a constriction of the credit
market, according to Home Mortgage Disclosure Act data \1\ Recovery, to
be sure, is slow. And there is much work to be done to increase the
availability of home loans to people of color and low- and moderate-
income families. But we can rest easier knowing that when a borrower
receives a loan, it is a reasonably designed, affordable loan where
underwriting has been conducted, instead of a toxic one designed to
mortgage credit will again serve to help stabilize, rather than
shatter, our neighborhoods.
The Consumer Financial Protection Bureau (CFPB or Bureau) has
played a critical role in the implementation of these mortgage rules.
The mortgage market is, of course, an absolutely vital one.
Homeownership is the primary vehicle through which families build
wealth and pass it on to future generations. Homeownership brings
tangible benefits to neighborhoods, schools, and cities, and carries
immense intangible value as well. This is particularly important for
families of color, who still lag so far behind economically. The
predatory practices in the market had catastrophic consequences, and
ones that became evident to all.
But other, often less conspicuous, predatory practices also wreak
destruction. And in my experience working with people in need, families
do not tend to experience a predatory practice in isolation. These
predatory practices tend to be interconnected, raiding families'
resources and assaulting their dignity from every direction.
Congress created the CFPB in the wake of the financial crisis
precisely to protect consumers from abusive financial practices, be
they mortgages or any other kind. The Bureau has begun good work in
many areas, and there remains much more to be done.
Payday and car title loans
Payday loans and their close cousins, car title loans, are an
abomination in plain sight. Consider the plight of one Louisiana mother
who lost one of her two jobs when a rehabilitation center where she
worked closed. Down one income stream and struggling to pay her bills,
she took out a $300 payday loan. As lenders hope, she could not afford
the repayment 2 weeks later, so a lender gave her another loan to repay
the first, charging her new interest and fees. This happened five
times, ultimately costing her $2,500 and, as payday loans often do, her
bank account. She also lost her car and mementos from her children she
pawned, all in an effort to escape the debt trap.\2\
\2\ Addo Koran, Lawmakers eyeing limits on payday loan industry,
The Advocate, March 24, 2014.
She is not alone. Payday lenders make loans to 57,000 Louisianans
each year. In my community, we often encounter elderly individuals who
have taken out payday loans. Their younger family members often don't
learn of it until they are caught deep in the trap. It is not
surprising these loans are kept secret. For many, payday loans carry a
deep sense of shame.
These lenders weave themselves into the fabric of our neighborhood
and purport to lend a helping hand. But they are wolves in sheep's
clothing. They claim to be for a once-in-a-blue moon emergency, but
three-fourths of their loan volume comes from borrowers with more than
10 loans a year. And they use this blood money to pad the pockets of
legislators to prevent enactment of any reasonable restrictions. In
Louisiana, this strategy has been sadly successful, despite widespread
opposition from churches and other organizations who work directly with
families these loans hurt.
In Louisiana, there are more than four times as many payday loan
storefronts as McDonald's. They are concentrated in African American
communities. I do not believe this is an indication that people
``need'' or ``desire'' payday loans. The most common reason people
``need'' a payday loan is because a previous payday loan was designed
to be unaffordable. It's a cycle, by design--so-called ``demand'' that
generates and feeds itself. It is intentional exploitation of the
My comments here have focused on short-term balloon-payment payday
loans. But as we speak, many payday lenders are restructuring their
payday loans to be high-cost, longer-term installment loans, designed
to work essentially the same way--by trapping the borrower in a cycle
of high-cost debt. In Louisiana, payday lenders are currently pushing a
bill that would authorize loans of up to $1,500 at 240 percent APR.
This is immoral.
In total, payday loans in Louisiana strip $146 million in fees and
interest from working families, costing residents an average of over
$800 for every $300 borrowed.\3\ The destructive business model caused
a net loss of $42 million to the State's economy in 2013, costing the
State a net 614 jobs.\4\
\3\ Together Louisiana. (April 2014). The economic impact of payday
lending in Louisiana, An analysis of the Office of Financial
Institutions report ``Deferred Presentment and Small Loans 2013 Data''
issued on April 1, 2013. Available at http://www.togetherbr.org/wp-
\4\ Id, applying methodology from Lohrentz, T. (March 2013). The
New Economic Impact of Payday Lending in the U.S. Insight Center for
Community Economic Development.
My community has helped to pay the payday loan debts of many
individuals. Like so many churches across the country, we wish that
they would have come to us sooner, before the first payday loan, so
that more of our congregation's funds could benefit people in need
instead of paying off economic predators. Last year, a diverse group of
faith organizations formally came together to establish Faith for Just
Lending, a national coalition that shares the belief that Scripture
speaks to the problem of predatory lending. Our coalition condemns
usury and the exploitation of financial vulnerability.
We will continue to fight in Louisiana, and in States across this
Nation, for State legislators to limit the cost of credit to 36 percent
annual interest or less. Absent Congressional action to do the same at
the Federal level--which, to be clear, is warranted and overdue--the
CFPB is exactly who must, by the Congressional mandate it was given,
address abusive payday and car title loan practices. The Bureau lacks
authority to limit interest rates, but it can and should require
lenders to determine whether a borrower has the ability to repay a
loan, without reborrowing or refinancing. This is a reasonable
requirement--far from extreme--that should serve as a Federal floor for
State and national regulation. Many States already go much further than
this, prohibiting the loans altogether. Other States don't, but they
always can, and we will continue to press for just laws at the State
Bank overdraft practices
Overdraft fees are the banks' version of preying on those with the
least, of taking advantage of those in need and leaving them only worse
off. Already, too many low-income people are unbanked or underbanked,
and this is particularly so for people of color. We should be seeking
to bring these individuals into the banking mainstream, which can
facilitate low-cost financial transactions and saving for economic
emergencies. But overdraft fees, common on bank accounts, undermine
Banks spin their overdraft programs as a courtesy, but they collect
the large majority of overdraft fees from a select few who get
hammered, some paying thousands of dollars annually. Overdraft fees
fund the checking account business model, and they drive those
struggling to make ends meet out of the banking system altogether. When
accounts go too far negative, banks close them and report the account
holder to a black list like Chexsystems, which prevents the individual
from opening another checking account for years. In an environment
where distrust of banks is very strong, overdraft practices only
exacerbate economic disenfranchisement.
The disturbing reality is that banks design their practices to
maximize overdraft incidents. They charge $35 overdraft fees on small
debit card transactions they could easily decline when the account
lacks funds. Why are credit practices that would no longer be permitted
on credit cards permitted on debit cards? This is the sort of
inconsistency the CFPB can and should address.
Overdraft is credit and should be extended only when, again, the
individual can afford to repay it. With this overdraft fee cash cow, it
is not surprising that banks do not more often offer reasonably priced
credit to those living on the margins, or more safe bank accounts that
do not carry these fees. The Bureau is rightly studying overdraft
practices extensively and plans to issue rules. Curbing high cost
overdraft fees would help move banks toward offering affordable
products, without hidden penalty fees or gotcha fees, for people living
paycheck to paycheck.
Driven out of the banking system by overdraft fees, or wary of the
banking system generally, many low- and moderate-income families turn
to prepaid cards. Well-designed prepaid cards can be a useful tool for
many families. But they have lacked basic protections for far too long.
High-cost credit on prepaid cards is especially concerning given that
many families turn to prepaid cards precisely to avoid taking out
credit, and given that prepaid cards are often sold by payday lenders.
Overdraft fees on prepaid cards are a dangerous and deceptive notion,
and they should be prohibited. The Bureau has taken a close look at
prepaid cards and issued a proposal that would provide important
protections in this area, including critical protections around credit
on prepaid cards.
After one's home, the largest purchase many will make is their car.
Here, too, predatory practices abound. Car dealer interest rate mark-
ups, much like yield-spread premiums in the mortgage market, make car
loans more expensive for many consumers. This is also a practice with a
long history of discriminatory impact on borrowers of color. However,
this is not the only abusive practice in auto lending, and the Federal
Trade Commission's car lending roundtables 5 years ago brought many to
the surface. Yo-yo scams force consumers into higher priced financing
than they agreed to--the dealer claims the original financing deal fell
through after the borrower has left the lot with the new car. Consumers
are faced with the loss of a down payment or trade-in if they don't
agree to more expensive financing. Expensive and sometimes worthless
add-on products are financed into the loan. Evidence suggests these
products are sold disproportionately to borrowers of color, who are
more frequently told their loans require these products when they do
not. And buy-here, pay-here operators churn high-cost used car loans
through our communities, using, as the CFPB has found, high-pressure
and sometimes illegal collections tactics to extract payments.
Abuses that are in this industry have escaped attention until
recently. But CFPB has taken important action in this area, including
providing guidelines aimed at preventing discriminatory practices and
taking much-needed enforcement actions. As a result, the Bureau has
come under fire from Members of Congress. This fire is misplaced.
Instead, the focus should be directed at why, for more than two
decades, auto lenders' and dealers' practices have operated under a
cloud of discrimination and abuse of low-income borrowers. Rather than
defending a system that continues to fail many of our communities,
Congress should push for a more transparent, fair system of auto
Debt collectors commonly engage in harassment and threats; they
commonly attempt to collect debts consumers never owed, or no longer
owe. They induce dread, fear, embarrassment, panic in good, honest,
hard-working individuals and in their family members, their children.
Though existing laws are not as strong as they must be, debt collectors
routinely break them.
The CFPB has taken strong enforcement actions to address illegal
debt collection practices. And it has indicated it will propose rules
in this area in the coming months. These new rules will permit
collection of debts while, we hope, requiring that this collection be
done without employing abusive tactics. This is reasonable and
necessary. This is not extreme.
There is no question that predatory practices are a violation of
both biblical and social moral norms. Often, they also violate the law.
But remedies are seldom available, as the financial industry has
cloaked itself in a shield of impunity in the form of pre-dispute
mandatory arbitration clauses.
These clauses, often in the fine print of take-it-or-leave-it
contracts for payday loans, bank accounts, auto financing, student
loans, and other products, deprive ordinary Americans of their liberty
and constitutional rights. They require that complaints be brought on
an individual basis to a private arbitration system where the arbiter
has every incentive to rule in favor of the private company that brings
them repeat business. The fine print also often prohibits individuals--
with little power standing alone--from joining together with others in
class actions. The effect is to strip individuals of their ability to
secure redress when they have been wronged by a clearly illegal
This is wrong. And we need the Bureau to exercise its authority to
limit pre-dispute mandatory arbitration clauses and restore the right
of individuals to join together to seek justice when they are cheated.
The Bureau has taken important action in other areas as well, like
credit cards, student loans, and, an often-overlooked rampant problem,
prevention of elder abuse. To date, CFPB has returned over $10 billion
to consumers through enforcement actions against illegal practices. To
be sure, this is to be commended. But relative to the funds predatory
practices strip, this amount is quite modest; some individual predatory
practices cost consumers more over the course of only a single year.
This means that the Bureau has far more work to do.
Other Federal regulators have an important role to play as well--
the Department of Education with student lending; the Department of
Defense with important new rules limiting costs on consumer loans made
to our military service members; the prudential banking regulators, who
have worked to prevent the payments system from being used to violate
the law and reined in abusive payday lending directly by banks.
But it is clear that a strong, well-funded, independent agency
whose job it is to wake up in the morning thinking about protecting the
most vulnerable among us is necessary--to ensure that financial
services practices do not drain hard-earned income and savings from my
constituents, and from the millions of other Americans who are affected
by predatory lending every day.
Please let me be clear: the notion that struggling Americans need
access to products like those the Bureau has been working so hard to
address is, at best, an insult to the basic dignity of every vulnerable
person. At worst, it is a thin veil for the influence corporate money
and power hold in our Nation's politics at every level. The predatory
practices CFPB is addressing drain what little resources targeted
persons have and leave them worse off. Not controlled, they will
relegate some communities to a state of perpetual poverty.
I implore you to let the CFPB be the consumer watchdog this body
mandated that it be in the wake of the financial crisis. We have seen
what happened when there was none. And we all deserve far better.
Thank you for the opportunity to share my experiences with you. I
look forward to your questions.
RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN SHELBY FROM LEONARD
Q.1. On April 7th, CFPB Director Richard Cordray testified
before the Committee and was questioned by numerous Members on
the Bureau's approach to indirect auto lending. Director
[w]e join our fellow agencies and the Justice Department in
believing disparate impact is the law of the land. That was
then challenged up to the Supreme Court, and the Supreme Court
reaffirmed that that's the law of the land. And to me that's
pretty conclusive on this subject.
However, the Supreme Court decision in Texas Department of
Housing and Community Affairs v. Inclusive Communities applied
specifically to the use of disparate impact under the Fair
Housing Act, and referenced features unique to that statute,
while the CFPB has invoked disparate impact under the Equal
Credit Opportunity Act as authority for its approach to
indirect auto lending. Has the Supreme Court ruled on the
application of disparate impact theory to the Equal Credit
A.1. The ``Official Interpretations'' of the CFPB's Regulation
B (which implements the Equal Credit Opportunity Act (ECOA))
state that the disparate impact doctrine applies under the ECOA
and Regulation B. However, the U.S. Supreme Court has not
issued a decision evaluating whether disparate impact is a
valid basis for asserting discrimination under the ECOA and
implementing Regulation B. The Supreme Court's recent decision
evaluating disparate impact under the Fair Housing Act and the
Department of Housing and Urban Development's implementing
regulation does not deal with the question of whether disparate
impact is ``valid'' under the ECOA and implementing Regulation
Q.2. During the hearing, you were questioned about the actions
the Federal Reserve took to evaluate and address subprime
mortgages before the crisis. Please explain what specific
rulemakings and other actions regarding subprime mortgages you
were involved in before the crisis while you served at the
Division of Consumer and Community Affairs at the Federal
A.2. I served in the Division of Consumer and Community Affairs
at the Federal Reserve from 2005 to 2011. The Federal Reserve
took several actions, including adopting rules, to address
subprime mortgage issues prior to the financial crisis.
In 2005, the Federal Reserve, along with the other Federal
banking agencies, proposed guidance to address nontraditional
mortgage loans and to address ``risk layering'' issues. Final
guidance was issued in 2006, and addressed layering risks of
nontraditional mortgages to subprime borrowers. In 2006, the
Federal Reserve held four hearings in four cities to obtain
information from consumer advocates, community development
groups, researchers, mortgage lenders, and others about
nontraditional mortgage products and the effects on consumers
of State predatory lending laws.
In addition, in the fall of 2005, as well as on three
occasions in 2006, the Federal Reserve gathered information
from its Consumer Advisory Council meetings dealing with
subprime mortgages and nontraditional mortgage products.
In March 2007, the Federal Reserve, along with the other
Federal banking agencies, proposed guidance addressing
heightened risks to consumers for certain adjustable rate
mortgage loans. Final guidance issued in 2007 set out standards
institutions should follow to ensure borrowers in the subprime
market obtain loans they can afford to repay.
In June 2007, the Federal Reserve held an additional
hearing to explore how the Federal Reserve could use its
authority to prevent abusive practices in the subprime market
while at the same time preserving responsible subprime lending.
In January 2008, the Federal Reserve proposed a rule that would
protect consumers against unfairness and deception, while
preserving responsible and sustainable home ownership. In July
2008, the Federal Reserve approved a final rule addressing
Q.3. Before the creation of the CFPB, the prudential banking
regulators collected consumer complaints on a regular basis.
How did that process differ from the CFPB's current process for
collecting and publishing consumer complaints?
A.3. Historically and currently, consumers can submit
complaints to the Federal Reserve about various practices. The
Federal Reserve investigates complaints against State member
banks (and certain other entities) and forwards complaints
against other banks and businesses to the appropriate
enforcement agency. In its annual report, the Federal Reserve
provides detailed statistical information about the complaints
it receives. For example, the report lists the number of
complaints received, including the number referred to other
Federal/State agencies. However, the report and other
information made available by the Federal Reserve do not
provide information about specific banks or specific consumer
The annual report also lists the number of complaints
received against State member banks (and certain other
entities) based on the specific law/rule the consumer alleged
the bank violated. For example, in 2014, 25 complaints alleged
that State member banks violated Regulation B, which implements
the Equal Credit Opportunity Act.
Importantly, the Federal Reserve investigates complaints it
receives against State member banks (and certain other
entities). The vast majority of investigated complaints reveal
that institutions ``correctly handled'' the matter. For
example, of complaints
received in 2014 against State member banks (and certain other
entities), the Federal Reserve found that 86 percent were
``correctly handled'' by institutions. Of the remaining 14
percent, 4 percent were deemed violations of law, 4 percent
were errors (corrected by the bank), and the remaining 6
percent were withdrawn, or involved litigation or other
matters. The Federal Reserve does not publish information on
individual complaints or information about specific State
member banks. While it is unclear why such individualized data
is not published, it may be that because the overwhelming
majority of complaints were deemed ``correctly handled'' by the
Federal Reserve, it could be viewed as misleading to publish
data about complaints and the names of specific institutions
suggesting either violations of laws or other problems.
In the CFPB's Consumer Response Report published in 2015
(for 2014 complaints), the CFPB provides results of consumer
complaints. Of the complaints addressed to companies within the
CFPB's authority, 70 percent of the companies closed the
complaint with an ``explanation'' (without providing monetary
or nonmonetary relief to the consumer). For 84 percent of those
complaints, consumers were given the option to provide feedback
to the company's response. For those complaints, 66 percent of
consumers did not dispute the response by the company, while 19
percent did dispute the company's response (with 15 percent
pending). Thus, the overwhelming majority of consumers did not
dispute the company's findings for complaints, which were
closed without providing any monetary or nonmonetary relief to
RESPONSE TO WRITTEN QUESTION OF CHAIRMAN SHELBY FROM DAVID
Q.1. Several commenters have expressed concerns that upcoming
CFPB rules on pre-dispute arbitration clauses may prohibit such
clauses or make it impractical to include such clauses in
consumer contracts. In your opinion, what would be the cost to
consumers if such clauses were prohibited or made impractical?
A.1. The bottom line is that consumers will be harmed if
arbitration ceases to be an available dispute resolution forum
for them. Let me explain in more detail. Arbitration is a
dispute resolution process that is faster, less expensive, more
user-friendly, and altogether more efficient than in-court
litigation. Consumers are more easily made whole in
arbitration-certainly much more so than they are in class
actions. Particularly in the consumer context, consumers can
seek and obtain redress for the many claims for which a lawyer
is too expensive or that lawyers are unwilling or unable to
take on. Indeed, one study reported that a claim must be worth
at least $60,000; in some markets, this threshold may be as
high as $200,000.\1\ Plaintiffs who brave the court system find
that a hearing on their claims is long delayed by overcrowded
dockets in our underfunded courts.\2\
\1\ Elizabeth Hill, Due Process at Low Cost: An Empirical Study of
Employment Arbitration Under the Auspices of the American Arbitration
Association, 18 Ohio St. J. on Disp. Resol. 777, 783 (2003);
Recommendations of the Minnesota Supreme Court Civil Justice Reform
Task Force 10 (Nov. 23, 2011), http://www.mnbar.org/sections/outstate-
\2\ In California, for example, repeated budget cuts have forced 52
courthouses and 202 courtrooms to close, prompting the State judiciary
to warn that funding for the State's courts is no longer ``enough to
sustain a healthy [judicial system].'' Judicial Council of Cal.,
InFocus: Judicial Branch Budget Crisis, available at http://
www.courts.ca.gov/partners/courtsbudget.htm. Los Angeles County, the
State's largest, reported this year that its remaining courts are
facing ``unmanageably high'' workloads, which is producing
``intolerable delay'' in civil cases. Judicial Council of Cal., 2015
Budget Snapshot: County of Los Angeles (Feb. 2015), available at
Most injuries that consumers suffer are small and
individualized-excess charges on a bill, a defective piece of
merchandise, and the like. These claims are too small to
justify paying a lawyer to handle the matter; in any event,
most consumers do not have the resources to do so. And because
they are individualized, they cannot be asserted in class
actions. As Justice Breyer has recognized--in a decision joined
by Justices Stevens, Souter, and Ginsburg--``the typical
consumer who has only a small damages claim (who seeks, say,
the value of only a defective refrigerator or television set)''
would be left ``without any remedy but a court remedy, the
costs and delays of which could eat up the value of an eventual
\3\ Allied-Bruce Terminix Cos., Inc. v. Dobson, 513 U.S. 265, 281
(1995). Professor Peter Rutledge has observed that, without access to
arbitration, consumers would be ``far worse off, for they would find it
far harder to obtain a lawyer, find the cost of dispute resolution far
more expensive, wait far longer to obtain relief and may well never see
a day in court.'' Peter B. Rutledge, Who Can Be Against Fairness? The
Case Against the Arbitration Fairness Act, 9 Cardozo J. Conflict
Resolution 267, 267 (2008).
Arbitration is inexpensive and easy for consumers to use.
The American Arbitration Association (``AAA''), for example,
requires the business to bear most arbitration costs; many
companies pay even the consumer's share, which the AAA caps at
$200.\4\ The AAA offers hearings by telephone, and participants
can file documents and otherwise communicate with the AAA and
arbitrator through email. Consumers forced to go to court have
to sit through lengthy proceedings and postponements--losing
pay while seeking justice. That does not happen in arbitration.
\4\ AAA, Costs of Arbitration, https://www.adr.org/aaa/
And arbitration works. Studies show that consumers and
employees who use this efficient dispute-resolution system
prevail in arbitration at least as frequently as_and often more
frequently than_they do in court:
LA recent study by scholars Christopher Drahozal and
Samantha Zyontz of claims filed with the AAA found that
consumers win relief 53.3 percent of the time.\5\ By
contrast, empirical studies that have sampled wide
ranges of claims have similarly reported that
plaintiffs win in State and Federal court approximately
50 percent of the time.\6\
\5\ Christopher R. Drahozal & Samantha Zyontz, An Empirical Study
of AAA Consumer Arbitrations, 25 Ohio St. J. on Disp. Resol. 843, 896-
\6\ See, e.g., Theodore Eisenberg et al., Litigation Outcomes in
State and Federal Courts: A Statistical Portrait, 19 Seattle U. L. Rev.
433, 437 (1996) (observing that in 1991-92, plaintiffs won 51 percent
of jury trials in State court and 56 percent of jury trials in Federal
court, while in 1979-1993 plaintiffs won 50 percent of jury trials).
LDrahozal and Zyontz found that ``the consumer
claimant[s] won some relief against the business more
than half of the time,'' and were generally awarded
between 42 percent and 73 percent of the amount they
claimed, depending on the size of the claim and how
average recoveries were calculated (mean or median).
The authors found little evidence for a purported
``repeat player'' effect. Consumers prevailed more than
half the time against repeat and nonrepeat businesses
alike; prevailing claimants were ``awarded on average
an almost identical percent of the amount claimed''
(approximately 52 percent). The authors concluded that
any discrepancy could be explained by businesses
becoming better at screening cases ahead of time to
``settle meritorious claims and arbitrate only weaker
\7\ Drahozal & Zyontz, 25 Ohio St. J. on Disp. Resol. at 898, 912-
LA study of 186 claimants who pursued employment
arbitration in the securities industry concluded that
employees who arbitrate were more likely to win their
disputes than employees who litigate in Federal court.
The study found that 46 percent of those who arbitrated
won, as compared to only 34 percent in litigation; the
median monetary award in arbitration was higher; only
3.8 percent of the litigated cases studied ever reached
a jury trial; and the arbitrations were resolved 33
percent faster than in court.\8\
\8\ Michael Delikat & Morris M. Kleiner, An Empirical Study of
Dispute Resolution Mechanisms: Where do Plaintiffs Better Vindicate
Their Rights?, 58 Disp. Resol. J. 56, 58 (Nov. 2003--Jan. 2004).
LOne study of 200 AAA employment awards concluded
that low-income employees brought 43.5 percent of
arbitration claims, most of which were low-value enough
that the employees would not have been able to find an
attorney willing to bring litigation on their behalf.
These employees were often able to pursue their
arbitrations without an attorney, and won at the same
rate as individuals with representation.\9\
\9\ Elizabeth Hill, Due Process at Low Cost: An Empirical Study of
Employment Arbitration Under the Auspices of the American Arbitration
Association, 18 Ohio St. J. on Disp. Resol. 777, 785-88 (2003)
(summarizing results of past studies by Lisa Bingham that lacked
empirical evidence proving the existence of an alleged ``repeat
player'' and ``repeat arbitrator'' effect).
LA later study of 261 AAA employment awards from the
same period found that for higher-income employees, win
rates in like cases in arbitration and litigation were
essentially equal, as were median damages. The study
attempted to compare ``apples'' to ``apples'' by
considering separately cases that involved and those
that did not involve discrimination claims. With
respect to discrimination and nondiscrimination claims
alike, the study found no statistically significant
difference in the success rates of higher-income
employees in arbitration and in litigation. For lower-
income employees, the study did not attempt to draw
comparisons between results in arbitration and in
litigation, because lower-income employees appeared to
lack meaningful access to the courts--and therefore
could not bring a sufficient volume of court cases to
provide a baseline for comparison.\10\
\10\ See Theodore Eisenberg & Elizabeth Hill, Arbitration and
Litigation of Employment Claims: An Empirical Comparison, 58 Disp.
Resol. J. 44, 45, 47-50 (Nov. 2003-Jan. 2004).
LAnother study of arbitration of employment-
discrimination claims concluded that arbitration is
``substantially fair to employees, including those
employees at the lower end of the income scale,'' with
employees enjoying a win rate comparable to the win
rate for employees proceeding in Federal court.\11\
\11\ See Elizabeth Hill, AAA Employment Arbitration: A Fair Forum
at Low Cost, 58 Disp. Resol. J. 9, 13 (May/July 2003) (reporting
employee win rate in arbitration of 43 percent); see also Eisenberg &
Hill, 58 Disp. Resol. J. at 48 tbl. 1 (reporting employee win rate in
Federal district court during the same time period was 36.4 percent).
LIn 2004, the National Workrights Institute compiled
all available employment arbitration studies, and
concluded that employees were almost 20 percent more
likely to win in arbitration than in litigated
employment cases. It also concluded that in almost half
of employment arbitrations, employees were seeking
redress for claims too small to support cost-effective
litigation. Median awards received by plaintiffs were
the same as in court, although the distorting effect of
occasional large jury awards resulted in higher average
recoveries in litigation.\12\
\12\ National Workrights Institute, Employment Arbitration: What
Does the Data Show? (2004), http://workrights.us.
LCritics of arbitration sometimes point to a now-
discredited report from the advocacy group Public
Citizen,\13\ as purported support for the assertion
that arbitration is unfair. That report shows the folly
of examining outcomes in arbitration without comparing
them to analogous outcomes in court.
\13\ Public Citizen, The Arbitration Trap, Sept. 2007, http://
LPublic Citizen examined data about claims brought
by creditors against consumer debtors, and concluded
from a high win rate for creditors that arbitration is
biased. In those cases, however, the consumer often
does not appear and does not contest the claim, and is
therefore liable either because he has defaulted or
``because he owes the debt.''\14\
\14\ Sarah Rudolph Cole & Theodore H. Frank, The Current State of
Consumer Arbitration, 15 Disp. Resol. Mag. 30, 31 (Fall 2008).
LA more rigorous empirical study showed that
``consumers fare better'' in debt-collection
arbitrations than in court: ``creditors won some relief
before the AAA in 77.8 percent of individual AAA debt
collection arbitrations and either 64.1 percent or 85.2
percent of the AAA debt collection program
arbitrations,'' depending on how the research
parameters were defined. By contrast, in contested
court cases creditors won relief against consumers
between 80 percent and 100 percent of the time,
depending on the court.\15\
\15\ Christopher R. Drahozal & Samantha Zyontz, Creditor Claims in
Arbitration and in Court, 7 Hastings Bus. L.J. 77, 91, 97, 111-16
As one study published in the Stanford Law Review explained in
surveying the empirical research, ``[w]hat seems clear from the
results of these studies is that the assertions of many
arbitration critics were either overstated or simply
wrong.''\16\ There simply is no empirical support for the
contention that arbitration leads to unfair or subpar outcomes
when compared with litigation in our overcrowded court system.
Rather, the overwhelming weight of the available evidence
establishes reflects that arbitration allows consumers and
employees to obtain redress faster, cheaper, and more
effectively than they could in court.
\16\ Sherwyn et al., 57 Stan. L. Rev. at 1567 (emphasis added).
Arbitration also has built-in fairness guarantees. The
rules of arbitration organizations along with existing law
protect consumers and employees against unfair procedures and
Thus, when courts find arbitration provisions unfair to
consumers or employees under generally applicable principles,
they do not hesitate to invalidate the agreements. Thus, courts
have repeatedly invalidated provisions of arbitration
agreements that purported to impose:
Lexcessive costs and fees to the consumer or
employee for accessing the arbitral forum;\17\
\17\ The Supreme Court has held that a party to an arbitration
agreement may challenge enforcement of the agreement if the claimant
would be required to pay excessive filing fees or arbitrator fees in
order to arbitrate a claim. See Green Tree Fin. Corp.--Ala. v.
Randolph, 531 U.S. 79, 90-92 (2000). Since Randolph, courts have
aggressively protected consumers and employees who show that they would
be forced to bear excessive costs to access the arbitral forum. See,
e.g., Chavarria v. Ralphs Grocery Co., 733 F.3d 916, 923-25 (9th Cir.
2013) (refusing to enforce an arbitration agreement that required the
employee to pay an unrecoverable portion of the arbitrator's fees
``regardless of the merits of the claim''); Am. Express Co. v. Italian
Colors Rest., 133 S. Ct. 2304, 2310-11 (2013) (reaffirming that a
challenge to an arbitration agreement might be successful if ``filing
and administrative fees attached to arbitration . . . are so high as to
make access to the forum impracticable'' for a plaintiff). Courts also
have reached the same conclusion under State unconscionability law.
See, e.g., Brunke v. Ohio State Home Servs., Inc., 2008 WL 4615578
(Ohio Ct. App. Oct. 20, 2008); Liebrand v. Brinker Rest. Corp., 2008 WL
2445544 (Cal. Ct. App. June 18, 2008); Murphy v. Mid-West Nat'l Life
Ins. Co. of Tenn., 78 P.3d 766 (Idaho 2003).
Llimits on damages that can be awarded by an
arbitrator when such damages would be available to an
individual consumer or employee in court;\18\
\18\ See, e.g., Venture Cotton Coop. v. Freeman, 395 S.W.3d 272
(Tex. Ct. App. 2013) (limit on damages and attorney's fees under State
consumer protection law); Mortg. Elec. Registration Sys., Inc. v.
Abner, 260 S.W.3d 351, 352, 355 (Ky. Ct. App. 2008) (limited to
``actual and direct'' damages); see also Carll v. Terminix Int'l Co.,
793 A.2d 921 (Pa. Super. Ct. 2002) (limit on damages for personal
injury); Alexander v. Anthony Int'l, L.P., 341 F.3d 256 (3d Cir. 2003)
(limit on punitive damages); Woebse v. Health Care & Retirement Corp.
of Am., 977 So. 2d 630 (Fla. Dist. Ct. App. 2008) (limit on punitive
damages); cf. Am. Express Co., 133 S. Ct. at 2310 (explaining that
Federal law would require invalidating ``a provision in an arbitration
agreement forbidding the assertion of certain [Federal] statutory
Lrequirements that arbitration take place in
\19\ See, e.g., Willis v. Nationwide Debt Settlement Grp., 878 F.
Supp. 2d 1208 (D. Or. 2012) (travel from Oregon to California); College
Park Pentecostal Holiness Church v. Gen. Steel Corp., 847 F. Supp. 2d
807 (D. Md. 2012) (travel from Maryland to Colorado); Hollins v. Debt
Relief of Am., 479 F. Supp. 2d 1099 (D. Neb. 2007) (travel from
Nebraska to Texas); Philyaw v. Platinum Enters., Inc., 54 Va. Cir. 364
(Va. Cir. Ct. Spotsylvania Cnty. 2001) (travel from Virginia to Los
Angeles); see also, e.g., Dominguez v. Finish Line, Inc., 439 F. Supp.
2d 688 (W.D. Tex. 2006) (travel from Texas to Indiana); Swain v. Auto
Servs., Inc., 128 S.W.3d 103, 108 (Mo. Ct. App. 2003) (travel from
Missouri to Arkansas); Pinedo v. Premium Tobacco Stores, Inc., 102 Cal.
Rptr. 2d 435 (Ct. App. 2000) (travel from Los Angeles to Oakland).
Lbiased procedures for selecting the arbitrator;\20\
\20\ See, e.g., Chavarria, 733 F.3d at 923-25 (holding that an
arbitration agreement was unconscionable and unenforceable when it
``would always produce an arbitrator proposed by [the company] in
employee-initiated arbitration[s],'' and barred selection of
``institutional arbitration administrators''); see also, e.g., Murray
v. United Food & Commercial Workers Int'l Union, 289 F.3d 297 (4th Cir.
2002) (striking down an arbitration agreement that gave the employer
the sole right to create a list of arbitrators from whom the employee
could then pick); Hooters of Am., Inc. v. Phillips, 173 F.3d 933 (4th
Cir. 1999); Newton v. American Debt Services, Inc., 854 F. Supp. 2d
712, 726 (N.D. Cal. 2012) (refusing to enforce a provision that would
have granted a company sole discretion to choose an ``independent and
qualified'' arbitrator for its consumer disputes because, under the
circumstances, there was no guarantee that the arbitrator would be
neutral); Roberts v. Time Plus Payroll Servs., Inc., 2008 WL 376288
(E.D. Pa. Feb. 7, 2008) (refusing to enforce provision that would have
given employer sole discretion to select arbitrator, and instead
requiring parties to select arbitrator jointly); Missouri ex rel.
Vincent v. Schneider, 194 S.W.3d 853 (Mo. 2006) (invalidating provision
giving president of a local home-builder association sole discretion to
pick arbitrator for disputes between local home builders and home
Lunreasonably shortened statutes of limitations;\21\
\21\ See, e.g., Zaborowski v. MHN Gov't Servs., Inc., 2013 WL
1363568 (N.D. Cal. Apr. 3, 2013); Adler v. Fred Lind Manor, 103 P.3d
773 (Wash. 2004) (180 days); see also Gandee v. LDL Freedom Enters.,
Inc., 293 P.3d 1197 (Wash. 2013) (refusing to enforce arbitration
agreement in debt-collection contract that required debtor to present
claim within 30 days after dispute arose); Alexander, 341 F.3d at 256
(same, for an employee); Stirlen, 60 Cal. Rptr. 2d at 138 (rejecting
provision that imposed shortened 1-year statute of limitations).
L``loser pays'' provisions under which a consumer or
employee might have to pay the full costs of the
arbitration,\22\ or must pay the drafting party's costs
regardless of who wins.\23\
\22\ See Gandee, 293 P.3d at 1197; Alexander, 341 F.3d at 256; Sosa
v. Paulos, 924 P.2d 357 (Utah 1996).
\23\ See, e.g., In re Checking Account Overdraft Litig., MDL No.
2036, 485 F. App'x 403 (11th Cir. 2012); see also Samaniego v. Empire
Today LLC, 140 Cal. Rptr. 3d 492 (Cal. Ct. App. 2012) (attorneys'
Of course, the vast majority of arbitration agreements do
not exhibit these sorts of defects; and the clear trend has
been for companies to make arbitration provisions ever more
favorable to their customers and employees. But when courts
find that overreaching occurs, they have not hesitated to
strike down the offending provision.
In addition to the courts' oversight of arbitration
provisions, the leading arbitration forums provide additional
fairness protections. The AAA and JAMS--the Nation's leading
arbitration service providers--recognize that independence, due
process, and reasonable costs to consumers are vital elements
of a fair and accessible arbitration system. They therefore
adhere to standards that establish basic requirements of
fairness that provide strong protections for consumers and
employees--and refuse to administer arbitrations unless the
operative clause is consistent with those standards.
Furthermore, companies increasingly are adopting consumer-
friendly arbitration agreements. In the wake of the Supreme
Court's decision in Concepcion, an increasing number of
arbitration agreements include consumer- and employee-friendly
provisions modeled on the elements of the arbitration agreement
upheld in that case. That should not be surprising. As the
Solicitor General of the United States explained in its
briefing before the Supreme Court in American Express v.
Italian Colors Restaurant, ``many companies have modified their
agreements to include streamlined procedures and premiums
designed to encourage customers to bring claims.''\24\ The
Government recognized that consumer-friendly clauses ensure
that instances where individuals cannot bring their claims
``remain rare.'' As the brief explained:
\24\ Brief for the United States as Amicus Curiae Supporting
Respondents at 28-29, American Express Co. v. Italian Colors
Restaurant, 133 S. Ct. 2304 (2013) (No. 12-133), 2013 WL 367051
AT&T Mobility modified its arbitration agreement during the
course of the litigation to include cost- and fee-shifting
provisions and premiums designed to ensure that customers could
bring low-value claims on an individual basis. These
modifications left consumers `better off under their
arbitration agreement' than they would have been in class
litigation. And by obviating a potential objection to
enforcement of the arbitration agreement, those modifications
simultaneously served the company's interest in avoiding
Consistent with these observations, arbitration agreements
include a variety of consumer-friendly provisions:
LMany require businesses to shoulder all of the
costs of arbitration, including filing fees and the
LSome agreements, such as the one the Supreme Court
considered in Concepcion, provide for ``bounty
payments'' as an incentive for an individual to bring a
claim in arbitration, and agree not only to pay any
attorney's fees that would be authorized by the
underlying law, but double the attorney's fees if the
arbitrator awards more than the company's last pre-
hearing settlement offer.
LIn some very complex cases, it is possible that a
consumer or employee might require an expert witness or
even complex discovery in order to pursue a claim
against a company. Many agreements contain provisions
that allow for such costs to be shifted to the company
if the claimant prevails--even when the underlying law
does not provide for such cost-shifting, which thus
would not be available in a lawsuit in court.
LAgreements often adopt informal procedures that
make it easy for claimants to pursue their disputes.
For example, these agreements enable consumers and
employees to choose whether the dispute should be
resolved on the basis of a written submission, a
telephonic hearing, or in-person proceedings.
In addition to all these direct benefits, consumers and
employees also benefit through the systematic reduction of
related transaction costs, which leads to lower prices for
products and services and higher wages.
How does this work? Businesses face many costs in bringing
products and services to market. On top of the ordinary costs
of running a business, they must absorb costs of litigating
business-related claims. The transaction costs of litigation
are high; they include settlements, judgments resolving
meritorious claims, and the costs of defending against all
lawsuits. Because those transaction costs are lower in
arbitration, businesses can reduce costs that otherwise inflate
product and service prices and reduce the availability of
margins that could pay for wage increases.
The CFPB's Effort To Ban Arbitration
Given the clear benefits of arbitration, it is
disappointing that the CFPB has now proposed a rule that will
eliminate arbitration. Of course, the Bureau's proposal does
not say that; it is framed as a requirement that class
procedures be permitted either in arbitration or in court. But
the practical effect of that will be a ban on arbitration, and
the Bureau knows it.\25\
\25\ Arbitration imposes significant additional transaction costs
on companies--paying consumers' filing fees and other costs of
arbitration, for example. Thus, as one group of businesses has
explained, ``when there is no assurance that all claims will be
arbitrated in lieu of litigation, and a [company] must shoulder the
additional costs of class action litigation, subsidizing the costs of
individual arbitration is no longer a rational business option''; the
only logical decision is to ``disengage from arbitration altogether.''
Brief for CTIA--the Wireless Association as Amicus Curiae at 21, AT&T
Mobility LLC v. Concepcion.
The bottom line: consumers will lose the ability to
vindicate most of the injuries they suffer--which cannot be
addressed in class action because they are individualized--so
that lawyers can continue to reap the benefits of class
The Bureau is basing its proposal on its ``study'' of
arbitration. But that study is the result of a closed process
that solicited public comment once at the outset and never
again for the 3 years that the study was underway. The Bureau
never informed the public of the topics it had decided to study
and never sought public comment on them--even though a number
of commenters suggested that the Bureau utilize that procedure.
The Bureau never convened public roundtable discussions on key
issues, as many other agencies routinely do. And the Bureau
never sought public input on its
\26\ The Bureau staff would meet with interested parties and accept
written submissions. But the staff refused to provide any information
regarding the topics that the Bureau was studying or the timeline for
its study process, and those oneway conversations therefore did not
permit anything resembling meaningful input.
The product of this closed process is flawed in numerous
respects. The Bureau's study:
Lignores the practical benefits of arbitration as
compared to the court system for vindicating the types
of disputes that consumers most often have;
Lfails to consider the benefits that arbitration
provides to injured parties in a variety of contexts--
benefits that plainly would accrue to consumers as well
if they were not discouraged by plaintiffs' lawyers and
others from invoking arbitration;
Lfails to consider the reduced transaction costs
resulting from arbitration, which under basic economic
theory produce lower prices to consumers;
Lexaggerates the supposed benefits of class actions
to consumers and ignores the grossly disproportionate
gains reaped by self-interested plaintiffs' lawyers;
Lignores the significant role of Government
enforcement--particularly the CFPB's own enforcement
and supervision processes--in protecting consumers.
More than 80 Members of the House and Senate sent a letter
to the Bureau stating that:
the process that led to the Bureau's Arbitration Study has not
been fair, transparent, or comprehensive. The Bureau ignored
requests from senior Members of Congress for basic information
about the study preparation process.
The Bureau also ignored requests to disclose the topics that
would be covered by the study, and failed to provide the
general public with any meaningful opportunities to provide
input on the topics. Because the materials were kept behind
closed doors, the final Arbitration Study included entire
sections that were not included in the preliminary report that
was provided to the public.
As a result, the flawed process produced a fatally flawed
study. Rather than focusing on the critical question--whether
regulating or prohibiting arbitration will benefit consumers--
and devising a plan to address the issues relevant to resolving
that question, the Bureau failed to provide even the most basic
of comparisons needed to evaluate the use of arbitration
Two prominent academics conducted an independent analysis
of the CFPB's study, concluding that it ``provides no
foundation for imposing new restrictions or prohibitions on
mandatory arbitration clauses in consumer contracts.''\28\ In
particular, the study ``fail[s] to support any conclusion that
arbitration clauses in consumer credit contracts reduce
consumer welfare or that encouraging more class action
litigation would be beneficial to consumers and the
\28\ Jason Scott Johnston & Todd Zywicki, The Consumer Financial
Protection Bureau's Arbitration Study: A Summary and Critique 5
(Mercatus Ctr., George Mason Univ., Working Paper, Aug. 2015),
available at http://www.law.gmu.edu/assets/files/publications/
\29\ Id. at 6.
It is particularly remarkable that the Bureau's proposal
apparently will be justified by the asserted benefits of class
actions when the plain reality is that consumer class actions
deliver little to anyone other than lawyers. Thus, eliminating
arbitration in order to preserve class actions sells out the
interests of consumers in order to benefit plaintiffs' lawyers.
A recent empirical study found that the overwhelming
majority of putative class actions studied resulted in no
recovery at all for members of the putative class. The idea
that class actions consistently provide benefits to consumers
is just plain wrong.
The chief proponents_and the principal beneficiaries_of
restrictions on arbitration are the plaintiffs' lawyers.
Because arbitration is quicker and more efficient than
litigation, it is less expensive, which means that they cannot
extract large settlements and attorneys' fees for meritless
claims in arbitration as easily as they could in class actions
in court. As Professor Martin Redish has noted, this confirms
that ``[t]he real parties in interest in . . . [many] class
actions are . . . the plaintiffs' lawyers.''\30\ Indeed, the
CFPB's own study found that plaintiffs' lawyers average class
action fee is $1 million per case; the average recovery by
\30\ Testimony of Martin H. Redish at 7, Class Actions Seven Years
After the Class Action Fairness Act (June 1, 2012), available at http:/
Also, as Justice Kagan has recognized, ``nonclass options
abound'' for effectively pursuing claims on an individual
basis.\31\ Many arbitration agreements require businesses to
pay all or most filing fees, authorize recovery of attorney's
fees and other costs, and provide other incentives for
plaintiffs, making it easier for consumers to bring claims
individually. Class actions are not needed to enable consumers
to vindicate their rights--particularly when the cost of
providing class actions will be the elimination of arbitration,
which enables consumers to vindicate claims that as a practical
matter cannot and are not asserted in court.
\31\ Am. Express Co. v. Italian Colors Rest., 133 S. Ct. 2304, 2319
(2013) (Kagan, J., dissenting).
Finally, to the extent there are practices that inflict
harm on broad classes of consumers that might go unremedied,
the Bureau's enforcement and supervision authority provides
strong protection that did not previously exist. There is no
need to rely on self-interested class action lawyers given the
obvious flaws of the class action system and the benefits to
consumers from arbitration.
RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN FROM DAVID
Q.1. Since the 2008 financial crisis, the U.S. Chamber of
Commerce has devoted enormous resources to lobbying against
rules that would protect consumers, strengthen the financial
markets, and hold the financial industry accountable when it
breaks the law. You testified before the Banking Committee as a
representative of the U.S. Chamber of Commerce. For members of
interpret the information and advice you are providing, it is
critically important for us to have a better sense of who is
behind that work.
LPlease explain to the Committee how much funding
the Chamber of Commerce has received from the six
largest banks in the country--JPMorgan Chase, Bank of
America, Citigroup, Wells Fargo, Goldman Sachs, and
Morgan Stanley--in each of the following years.
LPlease explain to the Committee how much funding
the Chamber of Commerce received from all other
depository institutions in:
LPlease explain to the Committee how much funding
the Chamber of Commerce received from nondepository
financial institutions in:
LIs there any reason that you would be unwilling to
inform Congress which financial institutions are
funding your work, including your testimony before the
Senate Banking Committee? If so, please explain.
LIf you will not disclose your funding, why should
Congress give your testimony the same weight as the
testimony of those who appear before this Committee and
are willing to make clear who funded their work?
A.1. The Chamber supports strong, clear, and predictable
consumer financial protection policies that deter fraud and
predation and contribute to well-functioning capital markets.
As you know, the Chamber is under no obligation to disclose
its membership or the manner in which it prepares testimony. It
does, however, represent the interests of over 3 million
businesses of every size, sector, and region of this country;
over 95 percent of the Chamber's members are small businesses.
Q.2. Did you share drafts of your testimony with any
representatives of any financial institutions or employees of
organizations representing financial institutions prior to this
hearing? If so, who, and what kind of access did you provide
Is there any reason that you would be unwilling to inform
Congress which representatives of financial institutions
participated in the drafting of your testimony or reviewed your
testimony before it was submitted? If so, please explain.
A.2. The Chamber supports strong, clear, and predictable
consumer financial protection policies that deter fraud and
predation and contribute to well-functioning capital markets.
As you know, the Chamber is under no obligation to disclose
its membership or the manner in which it prepares testimony. It
does, however, represent the interests of over 3 million
businesses of every size, sector, and region of this country;
over 95 percent of the Chamber's members are small businesses.
FOLLOW-UP RESPONSE TO HEARING QUESTION OF SENATOR COTTON FROM
Q.1. Does the CFPB's forthcoming arbitration rule expected next
year make the need for CROA reform more urgent or less urgent?
A.1. The U.S. Chamber of Commerce is the world's largest
business federation, representing the interests of more than 3
million businesses of all sizes, sectors, and regions. The
Chamber created the Center for Capital Markets Competitiveness
to promote a modern and effective regulatory structure for
capital markets to function well in a 21st century economy.
I write to follow up with you and your colleagues on the
Committee on Banking, Housing, and Urban Affairs regarding your
questions from yesterday's hearing concerning the impact of the
forthcoming Consumer Financial Protection Bureau (CFPB) rule
that, as a practical matter, will eliminate arbitration from
the consumer financial services industry. In particular, you
asked about its likely impact on the ability of credit bureaus
to provide helpful credit monitoring and credit education
services to consumers. Thank you for your question; my thoughts
on this subject are set forth below.
As you mentioned in your question to me, the Credit Repair
Organizations Act of 1996 (CROA) was enacted to prohibit
fraudulent representations by companies offering credit repair
services about their ability to remove true but negative
information from an
individual's credit history.\1\ In addition to Government
enforcement, CROA is enforced through a strict liability
private right of action, including a statutorily authorized
class action.\2\ This means that even the most insignificant,
immaterial error by a credit repair organization is actionable.
Needless to say, under this particular strict liability
statute, the potential liability of any ``credit repair
organization'' is immense.\3\
\1\ See generally Credit Repair Organizations Act of 1996, Pub. L.
No. 104-208 2451 (Sept. 30, 1996) (codified at 15 U.S.C. 1679-
\2\ Id. 1679g, 1679h.
\3\ Under CROA, the defined term ``credit repair organization'' (A)
means any person who uses any instrumentality of interstate commerce or
the mails to sell, provide, or perform (or represent that such person
can or will sell, provide, or perform) any service, in return for the
payment of money or other valuable consideration, for the express or
implied purpose of (i) improving any consumer's credit record, credit
history, or credit rating; or (ii) providing advice or assistance to
any consumer with regard to any activity or service described in clause
(i)[.] It does not include a 501(c)(3) nonprofit organization, a
creditor that is helping a person restructure debt, or a depository
institution or credit union. 15 U.S.C. 1679a(3).
The question of who is a ``credit repair organization'' is
more than a proverbial ``million dollar question''--the class
action plaintiffs' bar has recently turned it into a literal
one. In February 2014, the Ninth Circuit Court of Appeals
issued its opinion in Stout v. FreeScore, LLC, concerning
whether the district court properly dismissed a putative class
action case alleging that FreeScore, a company that provided
consumers with credit scores, credit reports, and credit
monitoring services, was strictly liable under CROA for various
violations of the statute. To be sure, FreeScore did not at any
time actually perform credit repair services--a point the Court
did not dispute.\4\ Instead, the Court's opinion focused on
FreeScore's advertising, which state that having access to
credit reports and scores and using credit monitoring services
could help consumers improve their overall credit. Incredibly,
the Court took the view that stating the most basic principle
of financial literacy--that knowing more about your credit can
help you improve your credit--was exactly the type of nefarious
``representation'' that CROA was enacted to root out.\5\ That
holding is at odds with congressional testimony by the Federal
Trade Commission, the agency tasked with enforcing CROA, in
which the Commission said it ``sees little basis on which to
subject the sale of legitimate credit monitoring and similar
educational products and services to CROA's specific
prohibitions and requirements, which were intended to address
deceptive and abusive credit repair business practices.''\6\
\4\ See generally Stout v. Freescore, LLC, 743 F.3d 680 (9th Cir.
\6\ Oversight of Telemarketing Practices and the Credit Repair
Organizations Act (CROA): Hearing Before the Senate Committee on
Commerce, Science, and Transportation, 110th Cong. 8 (2007) (written
statement of Lydia B. Parnes, Dir., Bureau of Consumer Prot., Fed.
Class action lawsuits under CROA are existential threats to
companies actually subject to its jurisdiction; more
perniciously, in light of cases like Stout, they threaten the
existence of companies not intended to be subject to CROA that
provide credit monitoring and education services to millions of
Americans worried about identity theft, hacking, and other
cybersecurity threats. The Chamber is very concerned that Stout
and cases like it, which we believe seriously misread CROA's
statutory text, defy congressional intent, and subject more
companies to class action litigation, will harm consumers by
reducing or eliminating their access to helpful
products that help them take more control over their financial
well-being. We therefore take this opportunity to encourage
Congress to clarify that the provision of credit monitoring and
credit education services is not covered by CROA.
Moreover, as you foreshadowed in your question to me at
yesterday's hearing, the CFPB's forthcoming arbitration rule
will further jeopardize the availability of consumer credit
monitoring and education services--a strange result for a
Government agency charged with improving financial literacy.\7\
Like many financial services providers, many credit monitoring
service providers use pre-dispute arbitration agreements to
provide their customers a faster, cheaper, more efficient way
of recovering a greater amount of money for claims they have
against the company. That shouldn't be surprising--after all,
the CFPB's own 2015 Arbitration Study and Report to Congress
confirms these benefits of consumer arbitration; it also
concludes that 87 percent of class action lawsuits result in
absolutely no recovery for consumers. Despite this data, the
CFPB's arbitration rule is likely to prohibit consumer
financial contracts from requiring that claims be filed in
arbitration rather than class action litigation, which will
likely have the practical effect of eliminating arbitration
altogether. The impact of CFPB's rule on the continued
availability of consumer arbitration is a critically important
question that should be answered before any such rule is
proposed; regrettably, the CFPB did not even bother to study
it. The Chamber has and will continue to encourage the CFPB to
preserve consumer arbitration in financial services contracts.
I hope that I have answered your questions. If not, please do
not hesitate to
\7\ See Dodd-Frank Wall Street Reform and Consumer Protection Act,
Pub. L. No. 111-203 1013(d) (July 21, 2010) (creating the CFPB's
Office of Financial Education to ``educate and empower consumers to
make better informed financial decisions'').
RESPONSE TO WRITTEN QUESTION OF CHAIRMAN SHELBY FROM REVEREND
DR. WILLIE GABLE, JR., D. MIN
Q.1. Dr. Gable, in addition to your many other roles, you are
also the founder and Executive Director of a nonprofit that
offers housing and rental assistance to low-income individuals.
Can you talk about what you saw during and after the crisis
in the housing market?
A.1. Foreclosure Impact in Louisiana
LLouisiana continued to suffer financial devastation
due to Hurricane Katrina when the foreclosure crisis
LThe Center for Responsible Lending projected that
26,306 homes in the State would be lost to foreclosure
from 2008 through 2009. As a result, it was estimated
that an additional 400,306 homes in close proximity to
those foreclosed properties would see a decrease in
home values and tax bases of $1 billion dollars. The
average decrease in home value affected per unit
totaled $2,578. (See http://www.responsiblelending.org/
info-with-fc-starts.pdf). A later 2012 report by CRL
showed that Louisiana had 88,898 foreclosure starts
affecting 1,042,210 households with each household
facing a home equity loss of 2.7 percent and $4,587.
Families living in minority census tracts in the State
loss 36.2 percent of their wealth to foreclosure. (See
LIn 2012, the Brookings Institute conducted a study
titled, ``The Ongoing Impact of Foreclosures on
Children,'' and found that 2.3 million children who
lived in single family homes during the crisis lost
their homes. In Louisiana, 45,000 children were
displaced due to completed foreclosures on home loans
that were originated between 2004-2008. (See http://
LAccording to RealtyTrac, as of April 2016 1 in
every 1593 homes in the State of Louisiana is facing a
foreclosure action despite being 7 years post ``Great
Recession''. (See ``America's foreclosure crisis isn't
LCredit accessibility has become overly constrained
as a result of the market over correction in response
to the foreclosure crisis. Lower wealth families and
people of color with a history of success with
mortgages are now basically locked out of the housing
finance system except for the Government-insured
mortgages they received. In Louisiana, African
Americans received only 10,655 mortgages and Latinos
only 1,618 in 2014 according to Home Mortgage
Disclosure Act data. These low numbers are in
comparison to the 60,177 whites in the State received.
Home ownership is the primary way that most families
build wealth and move into the middle class. Lower-
wealth families have been sidelined by conventional
mortgage lenders when interest rates are at historical
lows and home prices are relatively affordable. (See
Q.2. Dr. Gable, in your testimony, you stated ``in the auto
lending industry, predatory discrimination practices have been
evidenced for years''? Can you describe those practices,
including what you have observed in your community?
A.2. Auto Lending
LThe issue of discrimination in auto lending has
persisted for the past few decades.
LThe first evidence of discrimination came as a
result of a series of lawsuits filed in the mid-1990s
against the largest finance companies in the country
alleging discriminatory impact from the practice of
dealer interest rate markups. Data from those lawsuits
showed that borrowers of color were more likely to have
their interest rates marked up by the dealer, and paid
substantially more than white borrowers.
LTo settle these cases, the lenders agreed to cap
the amount dealers could add to the interest rate at 2-
2.5 percent. These caps have all expired, and while
most lenders have maintained those caps, they are
voluntary and lenders could increase them at any time.
LIn 2007, the Department of Justice settled cases
with Pacifico Ford and Springfield Ford in Pennsylvania
in which the DOJ found that African American borrowers
were charged higher markups than white borrowers. Those
dealers agreed to take steps to reduce or eliminate
racial disparities, although there is no data available
to show whether those steps actually
did reduce or eliminate that discrimination.
LMore recently, the CFPB and DOJ have entered into a
series of settlements with lenders in which the CFPB
said that data indicated continued discrimination.
While the levels of discrimination were not the eye-
popping levels found in the cases from the mid-1990s,
CFPB's data still shows unacceptable levels of
LThe Federal Trade Commission's (FTC) 2011
Roundtables on auto lending also shone light on
practices that those presenting said have been
problematic for quite some time. Those include yo-yo
scams, issues with add-on products, and other sales and
financing abuses. The FTC has taken strong action on
car dealer advertising issues, but we still await
action on many of the other abuses identified.
LSpecifically in Louisiana auto dealers seek to
target minorities who are unaware the higher financing
charges added to the vehicle they chose to purchase. I
personally have been seduced into deals like these.
However, I persist in showing my FICO score and then
informed the dealer I have a rate from my bank which
they can match if they desire my business. Many bi-
vocational pastor/clergy in my community fall prey to
this predatory practice.
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