[Senate Hearing 114-318]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 114-318


         ASSESSING THE EFFECTS OF CONSUMER FINANCE REGULATIONS

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

                                 HEARING

                               BEFORE THE

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                    ONE HUNDRED FOURTEENTH CONGRESS

                             SECOND SESSION

                                   ON

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

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs
                                
                                
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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

                                  (ii)
                            
                            
                            C O N T E N T S

                              ----------                              

                         TUESDAY, APRIL 5, 2016

                                                                   Page

Opening statement of Chairman Shelby.............................     1

Opening statements, comments, or prepared statements of:
    Senator Brown................................................     2

                               WITNESSES

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 
  Progress.......................................................   177
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 
  America........................................................   236
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

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:03 a.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Richard Shelby, Chairman of the 
Committee, presiding.

        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 
institution.
    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 
discriminate.
    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 
way.
    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 
methodology.
    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 
conclusions.
    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 
findings.
    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.
    Senator Brown.

               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 
forgotten.
    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 
not afford.
    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 
are harmed.
    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 
originators.
    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 
CFPB.
    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 
communities.
    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 
Competitiveness.
    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 
Law.
    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 
services.
    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 
many drawbacks.
    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 
unforeseen consequences.
    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.
    Mr. Hirschmann.

 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 
Markets Competitiveness.
    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 
underwriters.
    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 
underwriters.
    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 
so.
    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.
    Professor.

 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 
credit regulation.
    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 
agency.
    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 
seen----
    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 
cost-benefit there?
    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 
bit misleading.
    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. 
Chairman.
    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 
to consumers.
    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 
Durbin amendment.
    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 
recovered.
    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 
process?
    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 
the problems.
    Chairman Shelby. Basically, it is narrow in scope. Is that 
right?
    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 
be.
    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 
complaints.
    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 
misleading consumers.
    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 
fair itself?
    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 
follow them.
    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 
cases.
    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.
    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 
floor.
    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 
payday loans.
    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 
loans.
    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 
others?
    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 
interesting.
    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 
loans.
    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 
supports that.
    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 
requirements.
    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 
the time.
    Chairman Shelby. Thank you.
    Senator Merkley.
    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 
and----
    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.
    [Laughter.]
    Senator Scott. If you agree with me. If no, just stay where 
you are.
    [Laughter.]
    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 
instead.
    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 
poverty.
    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 
offers.
    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 
one comment.
    Senator Scott. Yes, sir.
    Mr. Gable. Maybe it is just in New Orleans, Chairman 
Shelby.
    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 
shame.
    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 
outcome.
    Senator Scott. I would love to replace them and work with 
you anyway.
    [Laughter.]
    Mr. Gable. Well, that is the difference. Thank you, sir.
    Chairman Shelby. Senator Warren, thank you for your 
indulgence.
    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 
products.
    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 
essentially nothing.
    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 
a----
    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 
increasing
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 
erupted----
    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. 
You know----
    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 
2008?
    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.
    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 
question.
    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.
    Thank you.
    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 
products.
    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 
afraid.
    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 
regulation.
    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' 
reelection campaigns.
    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 
both.
    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 
        competitive.

    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 
services.
    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 
considered.
    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 
legal requirements.
    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 
disclosures.
USE OF GUIDANCE AND ENFORCEMENT ORDERS TO ESTABLISH
        POLICY
    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 
establish policy.
Guidance
    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 
significant problems.
    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.
Enforcement Orders
    ``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 
happening with
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 
potential risks.
    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 
the pricing
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.
CONCLUSION
    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.,
                                D. MIN.
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 
still.
    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 
take decades.
Mortgage market
    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 
responsible
underwriting has been conducted, instead of a toxic one designed to 
fail; that
mortgage credit will again serve to help stabilize, rather than 
shatter, our neighborhoods.
---------------------------------------------------------------------------
    \1\ http://www.federalreserve.gov/pubs/bulletin/2015/pdf/
2014_HMDA.pdf.
---------------------------------------------------------------------------
    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 
desperate.
    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-
content/uploads/2010/09/Economic-impact-of-payday-lending-in-
Louisiana_4-5-14.pdf.
    \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 
level.
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 
this aspiration.
    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.
Prepaid cards
    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.
Auto lending
    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 
finance.
Debt collection
    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.
Forced arbitration
    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 
practice.
    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.
Conclusion
    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 
                             CHANIN

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 
Cordray stated:

        [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 
Opportunity Act?

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 
B.

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 
Reserve.

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 
these matters.

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 
complaints.
    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 
the consumer.
                                ------                                


  RESPONSE TO WRITTEN QUESTION OF CHAIRMAN SHELBY FROM DAVID 
                           HIRSCHMANN

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-
practice/11-23-11%20Civil%20
Justice%-20Reform.pdf.
    \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
http://www.courts.ca.gov/partners/-documents/
County_Budget_Snapshot_Combined
_2015.pdf.
---------------------------------------------------------------------------
    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 
small recovery.''\3\
---------------------------------------------------------------------------
    \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/
ShowPDF?doc=ADRSTAGE2026862.
---------------------------------------------------------------------------
    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-
904 (2010).
    \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 
        claims.''\7\
---------------------------------------------------------------------------
    \7\ Drahozal & Zyontz, 25 Ohio St. J. on Disp. Resol. at 898, 912-
13.

   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://
www.citizen.org/documents/ArbitrationTrap.pdf.

   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 
(Winter 2011).

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
biased arbitrators.
    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 
rights'').

   Lrequirements that arbitration take place in 
        inconvenient locations;\19\
---------------------------------------------------------------------------
    \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 
buyers).

   Lunreasonably shortened statutes of limitations;\21\ 
        and
---------------------------------------------------------------------------
    \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' 
fees).

    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 
(emphasis added).

        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 
---------------------------------------------------------------------------
        litigation.

    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 
        arbitrator's compensation.

   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 
litigation-
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 
actions.
    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
tentative findings.\26\
---------------------------------------------------------------------------
    \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; 
        and

   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 
        agreements.''\27\
---------------------------------------------------------------------------
    \27\ http://www.cfpbmonitor.com/files/2015/06/McHenry-Scott-to-
Cordray-Letter-re-Arbitration.pdf.

    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 
economy.''\29\
---------------------------------------------------------------------------
    \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/
working_papers/LS1507.pdf.
    \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 
consumers: $32.35.
---------------------------------------------------------------------------
    \30\ Testimony of Martin H. Redish at 7, Class Actions Seven Years 
After the Class Action Fairness Act (June 1, 2012), available at http:/
/judiciary.house.gov/hearings/Hearings%202012/-Redish%2006012012.pdf.
---------------------------------------------------------------------------
    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 
                           HIRSCHMANN

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 
Congress to
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.

      i. 2016

      ii. 2015

      iii. 2014

      iv. 2013

      v. 2012

      vi. 2011

      vii. 2010

      viii. 2009

      ix. 2008

   LPlease explain to the Committee how much funding 
        the Chamber of Commerce received from all other 
        depository institutions in:

      i. 2016

      ii. 2015

      iii. 2014

      iv. 2013

      v. 2012

      vi. 2011

      vii. 2010

      viii. 2009

      ix. 2008

   LPlease explain to the Committee how much funding 
        the Chamber of Commerce received from nondepository 
        financial institutions in:

      i. 2016

      ii. 2015

      iii. 2014

      iv. 2013

      v. 2012

      vi. 2011

      vii. 2010

      viii. 2009

      ix. 2008

   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 
them?
    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 
                        DAVID HIRSCHMANN

Q.1. Does the CFPB's forthcoming arbitration rule expected next 
year make the need for CROA reform more urgent or less urgent? 
(Page 29)

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-
1679j).
    \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. 
2014).
    \5\ Id.
    \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. 
Trade Comm'n).
---------------------------------------------------------------------------
    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
contact me.
---------------------------------------------------------------------------
    \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 
        hit.

   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/
        mortgage-lending/research-analysis/louisiana-state-
        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 
        http://www.responsiblelending.org/sites/default/files/
        uploads
        /3-mortgages.pdf.)

   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://
        www.brookings.edu//media/research/files/papers/2012/4/
        18-foreclosures-children-isaacs/
        0418_foreclosures_children
        _isaacs.pdf.)

   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 
        over''--http://www.cbsnews.com/news/americas-
        foreclosure-crisis-isnt-over/.)

   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 
        http://www.consumerfinance.gov/data-research/hmda/
        explore#filters.)

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. 
        http://www.nclc.org/images/pdf/car_sales/ib-auto-
        dealers-racial_disparites.pdf.

   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.
        https://www.justice.gov/archive/opa/pr/2007/August/07_
        crt_639.html.

   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 
        discrimination.

   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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