[Senate Hearing 114-520]
[From the U.S. Government Publishing Office]
S. Hrg. 114-520
THE CONSUMER FINANCIAL PROTECTION BUREAU'S SEMIANNUAL REPORT TO
CONGRESS
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED FOURTEENTH CONGRESS
SECOND SESSION
ON
A REVIEW OF THE CONSUMER FINANCIAL PROTECTION BUREAU'S SEMIANNUAL
REPORT TO CONGRESS
__________
APRIL 7, 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
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
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THURSDAY, APRIL 7, 2016
Page
Opening statement of Chairman Shelby............................. 1
Opening statements, comments, or prepared statements of:
Senator Brown................................................ 2
WITNESS
Richard Cordray, Director, Consumer Financial Protection Bureau.. 4
Prepared statement........................................... 45
Responses to written questions of:
Chairman Shelby.......................................... 49
Senator Brown............................................ 56
Senator Toomey........................................... 68
Senator Heller........................................... 73
Senator Sasse............................................ 82
Senator Moran............................................ 95
Senator Reed............................................. 98
Senator Merkley.......................................... 98
Additional Material Supplied for the Record
Semiannual Report of the Consumer Financial Protection Bureau,
October 1, 2015-March 31, 2016................................. 102
Letters and statements submitted for the record.................. 291
(iii)
THE CONSUMER FINANCIAL PROTECTION BUREAU'S SEMIANNUAL REPORT TO
CONGRESS
----------
THURSDAY, APRIL 7, 2016
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:17 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. Mr. Cordray, welcome again to the
Committee. You have seen this before here. We welcome you, and
I will proceed with an opening statement.
On Tuesday, the Committee heard testimony from private
sector experts on consumer finance regulations. We heard a
number of concerns regarding the Bureau's actions in areas such
as indirect auto lending, arbitration, the consumer complaint
database, and small dollar short-term lending. We also heard
broader critiques of the Bureau's approach to regulating,
including its use of enforcement actions to set market
standards rather than the rulemaking process. There was also
concern expressed regarding the Bureau's current structure and
the lack of accountability inherent in it.
I have said many times that regulatory independence should
never mean independence from accountability or vigorous
Congressional oversight. The drafters of Dodd-Frank immunized,
I believe, the Bureau from any meaningful Congressional
influence, leaving it free to engage in questionable practices
and unreasonable expansions of its jurisdiction. The only
effective restraint available now resides in the courts.
Fortunately, this week, a Federal Court of Appeals has
directed the CFPB to defend the constitutionality of its basic
structure. This particular case follows what is now becoming a
string of court decisions criticizing or striking down this
administration's implementation of Dodd-Frank provisions,
including the FSOC's so-called systematically important
designation of MetLife, the SEC's cost-benefit analysis, and
the SEC's conflict of minerals rule.
I believe that future legal challenges will lead to the
invalidation of many parts of Dodd-Frank. That is what happens
when a 2,300-page bill is forced through Congress without
sufficient process and before the lessons of the financial
crisis were fully understood. Congress did not even wait for
the Financial Crisis Inquiry Commission's work to be completed
or its report to be released before it passed Dodd-Frank and
created the CFPB.
And while the Committee held a number of hearings in the
lead-up to the passage of Dodd-Frank, I can assure you that the
thousands of pages of text were being drafted, or were already
drafted well before we ever had a single hearing. We often hear
about the importance of data and data-driven decision making at
our hearings. I would like to highlight once again my concerns
about the striking lack of data and data-driven decision making
that produced the law we now know as Dodd-Frank.
It still strikes me as stunning that this Committee
approved this massive piece of legislation without deposing a
single market participant. The Committee did not subpoena a
single document from a single person or financial institution.
And now, we are starting to see the results of this partisan,
uninformed effort.
There is now growing concern that despite the Bureau's
mission, its rules and regulations actually restrict access to
credit, increase costs, and deny financial products to the
consumers who need them. Last year's survey by the Federal
Reserve found that 47 percent of U.S. households are unable to
come up with $400 in emergency funds without selling something,
going into credit card debt, or using a short-term loan. By
targeting some of these products in its rulemakings, the Bureau
may be blocking access to the very financial services many
Americans may need in a crisis. Consumer protection should not
mean limiting a consumer's options by substituting the Bureau's
judgment for the consumer's.
Today, again, we will hear from CFPB Director Richard
Cordray so that we can have what we hope will be a productive
discussion on these important topics and concerns.
Senator Brown.
STATEMENT OF SENATOR SHERROD BROWN
Senator Brown. Thank you, Chairman Shelby, for holding this
important hearing.
Today's hearing is one example of how the CFPB is
accountable to Congress. You almost cannot turn on C-SPAN and
not see Director Cordray speaking to the House Finances
Services Committee or the Senate Banking Committee, it seems.
So, the issue of accountability bewilders me that anybody would
say you are anything but that.
The law requires the Director to be available twice a year
to testify before this Committee. Director Cordray has been
available every time this Committee has wanted, and I assume, I
am almost certain, for any of you individually that want to
talk to him or try to persuade him of something.
CFPB is subject to three separate annual audits. The
banking agencies have unprecedented authority to veto CFPB
rules that threaten the safety and soundness or financial
stability of our system. Yet, the CFPB's existence continued to
be attacked, now 5, 6 years later, with false arguments that it
lacks accountability.
The industry--and it is the industry--continues to fight
CFPB's existence, and those in Congress who are advocating for
the industry join them to fight their existence, fight their
actions, most recently by trying--unsuccessfully, and I am glad
of that--to attach riders to end-of-year funding legislation.
One of these riders would require a commission of Senate-
confirmed members. Just imagine that. This Committee has gone
now 15 months and we have not seen one person coming out of
this Committee who has been confirmed on the Senate floor, yet
some of my colleagues on the other side of the aisle want a
commission of Senate-confirmed measures.
In a dysfunctional Senate Banking Committee and a
dysfunctional Senate, it is strange credibility to think that
would be good Government. Maybe that is how they want it to be,
the opponents to the Bureau want it to be, that they cannot
simply act because they would not have enough Senate-confirmed
members, since the purpose of the rider is obviously to turn
the CFPB into ideological road kill.
Today's hearing on consumer finance rules, we heard from--
excuse me, at Tuesday's hearing, we heard from three witnesses
representing the financial industry--three--and one witness
representing everyday Americans. The business witnesses claimed
CFPB is hurting people it is supposed to help. But bipartisan
polling shows that three in four voters support this agency.
Just this morning, the Committee received petitions from
literally hundreds of thousands of Americans supporting the
Consumer Bureau. Many of you are in the room today. I thank you
for showing your support for the CFPB.
CFPB has been a strong watchdog for consumers since it
started just 5 years ago. The agency has obtained $11 billion
in relief for 25 million people in our country. Nearly one
million people, including 25,000 in Ohio, submitted complaints
to the agency about their problems with mortgages, student
loans, credit reports, debt collection, or bank accounts. What
amazed me about the Tuesday hearing was that at least one,
maybe two of those three corporate representatives on the panel
complained about these one million people that were sending in
complaints, amazingly enough, because they were not--I guess
because they were not industry lobbyists that sent in their
complaints.
We saw in the crisis that regulators ignored their consumer
protection duties and did not have the authority to act. They
focused on the financial industry's soundness and ignored the
plight of consumers. In my view, these are complementary, not
competing, responsibilities. If people are treated fairly, the
financial system is far less likely to run off the rails.
A former Fed official claimed on Tuesday it did not have
evidence to act against predatory lending. Imagine that. It is
a fact that foreclosures in my home of Cuyahoga County doubled
from 1995 to 2000. They doubled again by 2006. And according to
that former Fed consumer protection official, who was one of
our witnesses Thursday on the corporate side, there was no data
that showed any kinds of problems.
Local officials begged the Fed to act in 2001. The same
story played out across the country. Prior to the CFPB, there
was no centralized place for individuals to file complaints
about consumer financial products. There was no centralized
place for Congress to determine what consumers were
experiencing in the marketplace. There was no centralized place
for regulators to determine when a financial product had become
so abusive that Americans all across the country, a million of
them, as I said, would file complaints about it.
Today, we all have that place. CFPB has exposed bad
behavior by financial companies that had no Federal regulator,
such as credit reporting, student loan servicing, auto finance.
We finally have strong mortgage rules and disclosure designed
for people who have to pay the mortgage.
More is needed. The Bureau is working on rules to regulate
prepaid cards, debt collection, arbitration, and payday loans.
The payday loan market is a prime example. States have fought
predatory lending with mixed results. More than a dozen States
in our country do not allow payday lending. My State did not
until a Republican majority came in the 1994 elections in Ohio
and payday lending, in essence, in my State was created. But
even that legislature, because of abuses, a decade later
enacted a 28 percent rate cap.
The industry attempted to repeal the cap through a ballot
initiative. Ohioans by almost a 2-to-1 vote defeated that
ballot initiative, even though payday lenders were outspending
in that campaign 40-to-one. Since then, unfortunately, the
legislature has caved to those interests, and unfortunately, it
means that payday lending is alive and well in Ohio again.
I hope the CFPB will finish these rules soon on payday
lending. The costs of delay demand it.
I look forward to hearing from Director Cordray about their
priorities. I understand, Director, this is the 61st time that
you have testified before Congress. I hope we can focus on
substantive issues before allowing you to, as we say around
here, do your job.
So, thank you.
Chairman Shelby. Mr. Cordray, your written testimony will
be made part of the hearing record. You proceed as you wish.
STATEMENT OF RICHARD CORDRAY, DIRECTOR, CONSUMER FINANCIAL
PROTECTION BUREAU
Mr. Cordray. Thank you, Mr. Chairman, Ranking Member Brown,
Members of the Committee, for the opportunity to testify today
about the Consumer Financial Protection Bureau's Semiannual
Report to Congress.
I appreciate our continued dialogue as we work together to
strengthen our financial system and ensure that it serves
consumers, responsible businesses, and the long-term
foundations of the American economy.
As we continue to build this new agency, we have made
considerable progress on our core responsibilities to exert
supervisory oversight over the Nation's largest banks and
nonbank financial companies and to enforce the consumer
financial laws enacted by the Congress. Our analytical approach
to risk-based supervision is leading to more systematic
consumer-friendly changes at these financial institutions, and
we are making progress on leveling the playing field for all
market participants.
During this reporting period, our supervisory actions
resulted in financial institutions providing more than $95
million in redress to over 177,000 consumers. Our enforcement
actions are based on careful and thorough investigations and
most have identified deceptive practices by the parties
involved. During this reporting period, the orders entered on
enforcement actions led to approximately $5.8 billion in total
relief for consumers victimized by violations of the law. These
consumers are located in every one of your States across the
country.
We are also working to provide tools and information to
develop practical skills and help people understand the choices
they will be making to manage the ways and means of their
lives. Our ``Ask CFPB'' resource provides guidance and response
to inquiries across the entire spectrum of consumer finance.
Our major moment in time-decisional tools now include paying
for college, owning a home, and planning for retirement. We
have developed a new partnership with the Financial Services
Roundtable to work together on financial education in the
schools, in the workplace, and on behalf of older Americans,
which is proving to be productive.
Listening and responding to consumers is central to our
mission. We continue to refine the capabilities of our Office
of Consumer Response to receive, process, and facilitate
responses to consumer complaints. We also continue to expand
our public Consumer Complaint Database, which updates nightly,
and is now populated by over half-a-million complaints from
consumers about a broad range of consumer financial products
and services.
We marked a milestone for consumer empowerment when we
began to publish Consumer Complaint Narratives, which allows
people to share in their own words their experiences in the
consumer financial marketplace.
Reasonable regulations are essential to protect consumers
from harmful practices and ensure that consumer financial
markets operate in a fair, transparent, and competitive manner.
We focused our efforts on promoting functioning markets, such
as the all-important mortgage market, in particular, where
consumers can shop effectively for financial products and
services and are not subject to unfair, deceptive, or abusive
acts or practices.
During this reporting period, we issued several proposed
rules, final rules, or requests for information. To support
industry compliance with our rules, we publish plain language
compliance guides and other resources to aid in their
implementation. We are also seeking to streamline, modernize,
and harmonize financial regulations that we have inherited from
other agencies.
Over this reporting period, the Bureau has continued to
expand its efforts to support and protect consumers in the
financial marketplace. Recent data indicates that sound
consumer protections in our major markets are strengthening
them for consumers and providers alike.
The mortgage market has been expanding briskly for 2 years
now since our major rules have taken effect. The credit card
market has greatly improved, with strong consumer protections,
better industry performance, and increasing customer
satisfaction. The auto lending market is supporting record
sales of cars and trucks to meet consumer demand.
The growing sense of consumers that these markets can
actually work for them, without fear of tricks and traps and
other predatory conduct, and is stoking their confidence and
restoring their trust. These developments reflect well on the
work being done by the Consumer Bureau, and taken as a whole,
they are making substantial contributions to the continued
recovery of the American economy.
Mr. Chairman, Ranking Member Brown, Members of the
Committee, thank you again for the opportunity to be here today
and to discuss the work we are doing on behalf of consumers. We
will continue to listen closely to our stakeholders and attend
carefully to your oversight in order to ensure that all
Americans can be assured of fair treatment in the consumer
financial marketplace.
I look forward to your questions.
Chairman Shelby. Thank you, Director Cordray.
I would like to summarize my understanding here today of
your enforcement actions regarding the indirect auto lending
and then get some of your impressions, if I could. As I
understand it, Mr. Director, you do not have any statutory
authority to regulate auto dealers. In fact, Dodd-Frank
specifically proscribes that.
Mr. Cordray. That is correct. We have never brought any
action----
Chairman Shelby. I know.
Mr. Cordray. ----against a single auto dealer. Correct.
Chairman Shelby. You do, however, have the authority to
regulate indirect auto lenders.
Mr. Cordray. Not only the authority, but we feel a
responsibility. Congress gave us that task, yes.
Chairman Shelby. The CFPB, in other words, you, recently
approved an enforcement action against certain lenders using
the theory of disparate impact. In these cases, you argued that
the lenders' policies created a significant risk--these are
your words--that they will result in pricing disparities on the
basis of race, national origin, and potentially other
prohibited bases.
I presume that you pursued the disparate impact theory
because the lender actually has no idea whether the borrower
belongs to a protected class. Unlike mortgage lending that is
subject to HMDA data collection, auto lending is not. In other
words, it is my understanding that the lender cannot
intentionally discriminate on the basis of race because the
borrower's race is unknown to them.
Nevertheless, it is my understanding that you did
determine--you, the agency--you did determine that certain
racial groups were being charged the higher rate for their
loans and, hence, the disparate impact. The bad act, for lack
of a better term here, was the lender's policy, not the fact
that they intentionally discriminated against anyone because
they actually could not, even if they wanted to. They did not
know who they were. If anyone was in a position to actually
discriminate, it was the person selling the car. But, the law
does not allow you to regulate the dealer, only the lender, as
you acknowledged. As a result, the indirect lenders were
penalized to the tune of $162 million for what may or may not
have been the action of someone else.
Assuming here that your conclusion of disparate impact was
valid, it would seem to me that this would be a poster child
for a rulemaking as opposed to an enforcement action. There is
a big difference. The lenders did nothing to intentionally
discriminate against anyone, and yet it would appear that you
treated them as such because you do not have the authority to
go after your real target here. Your own press release is
entitled, and I will quote, ``CFPB To Hold Auto Lenders
Accountable for Illegal Discriminatory Markup.'' That is your
press release.
I understand that you make these decisions on a case-by-
case basis, but here today in this Committee, tell us in detail
why you chose to go after these lenders as if they were
knowingly discriminating against certain individuals as opposed
to pursuing a rulemaking that would give the lenders some
clarity and some certainty in the area.
Mr. Cordray. So, I would say a couple of things, and I
would put the matter, I think, somewhat differently than how
you just stated it, but, first of all, auto lenders set up
their lending programs. They can lend directly or they can lend
indirectly. They set up those programs. The results of those
programs are their responsibility. If, in fact, there is a
systematic pattern or practice, in their programs of people
being given higher rates based on race or ethnic origin, that
is against the law.
As to disparate impact, there are two things I would say.
First of all, we enforce the Equal Credit Opportunity Act in
the same way and with overlapping jurisdiction of as the
Justice Department. The Justice Department only has enforcement
authority. All of these matters have been taken jointly with
the Justice Department and they have led to findings of
disparate impact discrimination.
As to whether this is the law, my job is to enforce the
law, whatever it is, whether somebody disagrees with it or not.
Chairman Shelby. Your job is also to follow the law, is it
not?
Mr. Cordray. Yeah. This law----
Chairman Shelby. Is it not----
Mr. Cordray. ----was reaffirmed by the U.S. Supreme Court
last June.
Chairman Shelby. Excuse me.
Mr. Cordray. I am sorry.
Chairman Shelby. Your job is also to follow the law.
Mr. Cordray. Absolutely, and the U.S. Supreme Court----
Chairman Shelby. Respect the law.
Mr. Cordray. ----last June reaffirmed that disparate impact
discrimination is the law of the land.
Chairman Shelby. OK.
Mr. Cordray. That is the law we are required to enforce. We
will enforce it vigorously, and we believe to root out
discrimination, which nobody supports, in any of these markets.
Chairman Shelby. There has been a lot of talk here before
the Committee and in the discussion a couple of days ago about
your agency using enforcement as a tool rather than rulemaking,
that some people believe that what you all are after, money
rather than justice. What do you say to that?
Mr. Cordray. I think if you are enforcing the law, there
are people who are not going to like it because they would
rather get away with violating the law, cutting corners, and
saving money. But, if people are violating the law, they should
be made to pay. They should be made to reimburse consumers who
are harmed. That is a basic premise of any law enforcement
agency. I know you were a prosecutor early in your career. I am
sure you took seriously your obligation to make people follow
the law. That is all we are doing. It is what we should be
doing, and if it has not been done previously and people are
used to it not being done, then that is not correct. That is
not the way things should be.
Chairman Shelby. But everybody should have respect for the
law and the rules, and that includes you and your agency, is
that correct?
Mr. Cordray. Absolutely, yes.
Chairman Shelby. OK. Senator Brown.
Senator Brown. Thank you, Mr. Chairman.
Director Cordray, again, thank you. We heard a lot 2 days
ago about the Bureau's arbitration study. I would like to give
you a chance to talk about the study, specifically, its
methodology and its findings. What did you find? What does the
Bureau plan to do to allow consumers to seek justice in court?
Mr. Cordray. OK. And, it is very important to understand
the authority here. Congress spoke in the Dodd-Frank Act and
they spoke loudly on this issue of arbitration agreements in
consumer finance contracts. And what they said, what Congress
said--this is the law of the land now--is that those
arbitration agreements were harmful in most mortgage contracts
and would be banned flat out in most residential mortgage
contracts.
Congress also said in the statute that as to the rest of
consumer finance, we are going to task this new agency, our
agency, with the job of studying this problem carefully and
reporting to Congress about it, and then based on the results
of that study, to consider whether policy interventions are
warranted, consistent with the study, and--they gave broad
latitude here--consistent with the public interest to protect
consumers.
So, our first job, a mandatory job, was to conduct a study
of arbitration clauses in consumer finance contracts. We took
that very seriously. It took us a couple of years to do that
study. We assembled and brought in data that no one had ever
had a chance to look at before about arbitration matters, about
court cases, about every manner in which different disputes may
be resolved in the consumer finance arena. Those who have
criticized the study acknowledge that it was the single most
comprehensive, really groundbreaking study that had ever been
done and that continues to have ever been done in the history
of arbitration agreements, which go back under Federal law to
the 1920s.
And, the study found that in consumer finance issues in
particular, very often, what you have is a small amount of harm
to individual consumers on a broad basis. Maybe millions of
consumers are harmed to the tune of $50 or $100. That is
enormously profitable for financial institutions, but it is not
worth it to individual consumers, in most cases, to pursue
either an arbitration or a court case. And, in fact, what we
found is arbitration agreements in these contracts tends to
cutoff people's remedies pretty much altogether, in particular
because it bans their ability to group together and bring group
claims so that financial institutions who harm on a broad basis
cannot be held accountable.
That is essentially what our study found. There is a lot of
detail in there, and it is not easily subject to a 30- or 60-
second discussion because it runs to hundreds and hundreds of
pages. But, it continues to be discussed and debated and we
continue to discuss and debate it and consider all of the input
we have gotten.
We offered to speak to the authors of one critical study.
One of them was willing to speak to us about it, the other was
not. And, we will take input from all sides on this.
But, we are moving forward. We have indicated that we are
contemplating a proposed rulemaking to build on the results of
that study and to address this issue and I expect that to be in
a proposal stage at some point this spring.
Senator Brown. Thank you, Director.
Our panel Tuesday claimed that regulations are reducing
access to products like free checking and, therefore, they say,
pushing consumers into payday loans. However, Americans have a
record $3.5 trillion in consumer debt, a full trillion dollars
more than just 6 years ago. Talk, if you would, about the
availability of credit and the research that the Bureau has
done on this topic.
Mr. Cordray. Sure. I had a chance to review the transcript
from Tuesday and there were comments made about free checking
that I think are dubious. I saw some of it was being pinned on
the Durbin Amendment and I thought you were right to be
skeptical of that claim, which has not been established as a
cause or effect.
In fact, access to credit is expanding, by the way, there
was also a lot of looseness around dates in some of that
testimony. Some of the testimony talked about things that have
happened since 2008, like credit being restricted. Credit was
restricted immediately in the wake of the financial crisis
because households lost $12 trillion in household wealth.
Mortgages became tight.
Credit cards became tight. But, what has been happening
since the Dodd-Frank Act was passed in 2010 and the CARD Act in
2009, and also the Consumer Bureau, which did not open its
doors until July of 2011, is that we now see credit begin to
expand again, in the mortgage market and in the credit card
market. The Federal Reserve studies have shown that credit is
expanding. And, I would say, in the credit card market, in
particular, there is broadly increasing consumer satisfaction
with these products.
We think that is a good thing. We are not just pro-consumer
protection at the CFPB, we are pro-consumer, and if consumers
have access to responsible credit, that is a very good thing,
and we do see that expanding across markets.
Senator Brown. Could I do one more question?
Chairman Shelby. Go ahead.
Senator Brown. Thank you, Mr. Chairman.
Last year, the Bureau announced it was considering
proposing rules, and we have talked about this in the past,
that would cover payday lending, vehicle title loans, other
high-cost loans. Our home State of Ohio, as you know, attempted
to block payday lending. Its law has been ineffective. Talk
about how these companies have skirted State laws. Talk about
the importance of the rule. And, you have also commented in the
past that there are a dozen States that do not allow payday
lending, and in those States, how have they done with small
dollar credit in those States without the access to payday
lenders, if you will.
Mr. Cordray. Yeah. There has been no research, and it
ranges, depending on people's definitions here, from 12 to
possibly 18 States that restrict payday lending because they
have usury caps in place to indicate that consumer welfare is
harmed in those States. And, in fact, there are studies
indicating that both credit scores may be higher and
bankruptcies may be lower. So, that is a question.
I think as to circumvention, the best example is one that
this Committee can understand very readily because you have
been involved in the Military Lending Act. The Military Lending
Act was passed in 2006 with the promise Congress made to cut
off some of the predatory credit that was being offered to
servicemembers, active duty servicemembers. The rules that were
then implemented by the Federal agencies at that time were
pathetic. They were narrow. They were easily circumvented. And
you can still see to this day predatory products being offered
outside military bases and online at 500-, 700-, 900-percent
rates of interest.
Congress reopened that a couple years ago. The Consumer
Bureau was part of the discussions about creating new rules,
and we now have strong rules in place--some took effect last
October, and the rest of the rules will take effect this
October--that will bring the meaning of the Military Lending
Act to fruition for servicemembers and their families across
the country.
But, if loopholes are allowed and if rules are flimsy, then
the industry will circumvent those rules, and, in fact, they
have shown their ability to do so.
Senator Brown. Thank you. Thank you, Mr. Chairman.
Chairman Shelby. Senator Crapo.
Senator Crapo. Thank you, Mr. Chairman.
Director Cordray, as you know, I have privacy concerns
about the CFPB's big data collection efforts and the ability to
reverse engineer this information.
Mr. Cordray. Yeah.
Senator Crapo. Last Congress, I requested an official
review of the CFPB's data collection by the Government
Accountability Office. The report acknowledged CFPB's ongoing
collection of up to 600 million credit cards, 11 million credit
reports, 700,000 auto sales, 10.7 million consumers, cosignors,
and borrowers, 29 million active mortgages, and 5.5 million
private student loans.
I do not want to get into it now, but I would like you to
verify that data with me. I want to know if the data that I
just put out is accurate or whether the numbers are higher or
lower.
Mr. Cordray. So, as you know, when we discussed it, we were
glad to have you commission the GAO study. They issued their
report. They made a number of recommendations to us. They have
now indicated to us that we have successfully implemented all
of those recommendations and they will be moving to close those
out, so that is good news, and I think the result has been it
improves our process as an agency.
As we have discussed before, the last thing I want is for
our agency to mishandle data and to be criticized for that. You
have been apprehensive on this issue, I think with legitimate
reason, from the beginning, but we have handled this data
responsibly and carefully and we are looking, in response to
some of the dialogue and oversight we have had from you and
Members of this Committee and House committee, we are looking
to do sampling of data wherever possible. We are now looking at
how we can do that with credit cards.
Senator Crapo. I appreciate your efforts on that. And, what
I was saying, though, is I want to verify with you the data
that I just put out. For example, are you actually only looking
at 600 million credit cards? Are you looking at more or less or
what have you? So, the data I put out, I would like--I do not
want to get it and use my time----
Mr. Cordray. So, I mean, the reality is, that is actually
in a state of flux right now and we are looking to find ways,
and I believe that we will be able to report successfully to
you over time that we will be doing----
Senator Crapo. That you are reducing----
Mr. Cordray. ----a sampling of that data----
Senator Crapo. I appreciate that.
Mr. Cordray. ----rather than comprehensive----
Senator Crapo. As of October 31, 2015, the CFPB has issued
eight mandatory data collection requests under its Section 1022
market monitoring authority, and six of those mandatory data
collection requests were sent to fewer than nine companies, the
significance of which is that that effectively avoids the
review of the request by the Office of Management and Budget
and circumvents the opportunity for public comment on the
information request.
The feedback I received from the CFPB's mandatory data
collection request on deposit advance products was that it was
voluminous and sought a number of data fields, including the
use of deposit advance products, overdraft protection, and
nonsufficient fund fees. While it did include a caveat that the
financial institution should not produce any personally
identifiable information that directly identifies the consumer
or the account, I understand that the data collection request
effectively required these institutions to scan customer
accounts line by line for their financial behavior going back
years. It would seem to me that this is a large-scale data
collection into the individual consumer's use of financial
products on a transaction by transaction basis.
Can you confirm to me how many data fields were collected
through this request and how many customer accounts were
scanned to get this data?
Mr. Cordray. So, there were different requests with
different data fields, but what I want to say is I think the
story you tell, which I agree with, actually vindicates and
shows careful concern by us to comply with the Paperwork
Reduction Act and Congress' purpose in that Act. The fact that
we would limit ourselves to a small number of institutions in
order to get data is sampling of a kind, and we are doing that,
in part, because the Paperwork Reduction Act provides the
incentive to do sampling. Rather than going out to 400
institutions, we may go to nine. If we are going to try to go
to 400 institutions, if that becomes essential, there are
heavier burdens to bear, and we have done that at times and
gone through the OMB process.
Senator Crapo. Well, I understand that, but if you look at
credit cards, for example, my understanding is, and this is
obviously a rough number, that there are somewhere over a
trillion credit cards in the United States--credit card
accounts in the United States. If you are looking at 600
million of them, that is half, at least. And, I understand that
you may be far above the 600 million level, which is why I
asked for that number earlier.
Mr. Cordray. Yeah, sure, but the credit card database is
different from the 1022s. The 1022s----
Senator Crapo. Understood.
Mr. Cordray. ----where you think it is circumventing the
PRA, it is actually compliance with the PRA and it leads to
sampling, which is a good thing.
On the credit card issue, as I said, we are working to go
to a sampling process for that. I believe we will be able to do
that over time and we will continue to report to you on that,
and that is in response to your oversight and your concern,
which I share.
Senator Crapo. Well, thank you. And, again, my question
specifically was how many data fields were collected and how
many customer accounts were scanned to get this data, so I
would like to----
Mr. Cordray. OK. I am happy to follow up with you, again,
depending on which 1022 you are talking about or which database
you are talking about, and we will be glad to brief your staff
and make sure that you are satisfied.
Senator Crapo. All right. Thank you very much.
Chairman Shelby. Senator Reed.
Senator Reed. Well, thank you very much, Mr. Chairman, and
thank you, Mr. Cordray, for your great work.
I worked very hard with my colleagues on the Committee to
ensure that the Office of Servicemember Affairs was included in
the Consumer Financial Protection Bureau, and I must say, under
your leadership and the leadership of Holly Petraeus, it is
doing a remarkable job. Just last year--in 2015, you returned
over $5 million to service men and women and their families.
And, one of the reasons this is so critical to me is that when
I was a younger person, I was an XO of a paratrooper company
and most of my time was consumed fending off creditors coming
after my troops based on very suspicious credit arrangements
that they had worked out.
So, I really appreciate what you are doing, and I do not
think there is anyone in this Congress that would object to
protecting the financial well-being of men and women who are
wearing the uniform of the United States. And, I would go
further, saying that I do not think there should be a
difference for their brothers and sisters who may not be
wearing the uniform of the United States but are being
exploited by other people.
Mr. Cordray. Amen to that.
Senator Reed. Thank you. One of the things, though, that
your inquiries have uncovered is a practice that seems to be,
if not growing, very disturbing, and that is creditors
contacting commanders and threatening the security clearance of
an individual member of the Armed Forces based on a debt, and
this has huge ramifications. It can prevent promotion. In fact,
in some cases, because of their job, they might be separated if
this comes about. Can you comment on that and what you are
doing?
Mr. Cordray. Sure. It is flatly against the law for a debt
collector to threaten anyone, let alone a servicemember, with
consequences that a debt collector has no ability to carry out.
So, for example, it is common for debt collectors, those who
push the envelope, those who do not care about compliance, to
threaten arrest or imprisonment, which they have no ability to
effectuate.
In the servicemember context, the ominous activity that
many debt collectors engage in is to threaten to go to the
commanding officer of the servicemember and threaten their
security clearance, which would threaten their ability to
remain on active duty in the military and perhaps lead to a
dishonorable discharge. That is an execrable practice. It is
against the law. We have taken strong enforcement actions
against it.
And, by the way, when people talk about regulation by
enforcement, when we take an enforcement action against a debt
collector for doing that, threatening the security clearance of
a servicemember, I hope that people do take that as regulation
by enforcement, and every other debt collector out there
understands they are at risk, they are violating the law, and
we will come down hard on them if we become aware of the fact
that they continue to do that. Everybody should be on notice in
this marketplace, no one should be doing that.
Senator Reed. Well, I really appreciate that, because I saw
it from the perspective of an executive officer in an infantry
company where I was getting barraged. The commander would
hand--that was my job. I did that stuff for the commander. And,
letters every day of young men--at that point, all young men--
who had been really goaded into buying vehicles they could
never afford at extraordinary interest rates and then being
hounded and beaten up, finally going to the commander and
threatening that their status in the military would be
impaired. So, what you are doing there is absolutely critical.
As the Ranking Member on the Armed Services Committee, it is
critical to our readiness and the ability of our troops to
concentrate on their jobs, so thank you.
There is one other thing, too, that I must commend you on.
Through your work, we have made improvements in the Military
Lending Act. We had an Act that capped interest rates for
active duty personnel at 36 percent, but people went in--the
Consumer Federation of America, and found that because of the
loopholes in the previous regulation, in fact, some lenders
were charging 400 percent for a title insurance loan, 584
percent for an open end line of credit, 360 percent for an
online installment loan--these are to men and women in the
military.
And, thank you for your efforts, because I think now we
have got a better hold on keeping the level at 36 percent. And,
by the way, 36 percent interest in today's interest economy is
still pretty plush for the lenders, but that is the law. Thank
you.
Mr. Cordray. I think that, actually, the regulations that
were first adopted in the wake of the MLA were disrespectful of
the Congress. Congress clearly indicated its purpose, to
protect servicemembers in this area, and the rules did not get
that job done. And, I am grateful to the Congress for reopening
this issue several years ago so that we could do it right this
time, and I am proud of our team that worked with other
agencies and with the Department of Defense, and I am proud of
the Department of Defense for their determination to make this
work for their servicemembers.
Senator Reed. For the record, it was title installment
loan, not title insurance loan. Thank you.
Chairman Shelby. Senator Corker.
Senator Corker. Well, thank you, Mr. Chairman, and Mr.
Cordray, it is good to see you again.
Mr. Cordray. Thank you.
Senator Corker. I had written you a letter about TILA
RESPA, and I know we--and I appreciate your efforts to try to
make that more simplified for folks. Because of the line of
work I have been involved in in the past, I closed a lot of
loans in the past, and, candidly most of the times, I did not
see the sheet until I was actually at the closing table----
Mr. Cordray. Yeah.
Senator Corker. ----and I was OK with that, because it sped
up the closing process. At the same time, I know that the
attempt here is to make sure that people know what they are
doing in advance and have the opportunity to see it. And, yet
still, things are pretty fluid with most loans, and there are
some calculations that take place at the last minute for lots
of reasons.
And, what we found, and I know that you know this, we found
that what is happening is you have got responsibility or legal
obligations shifting to the settlement agent, which really is
just collecting the information and putting it in a closing
statement. And, I am just wondering, I know that they can
correct this within 60 days or a period of time, but there is
some confusion over what is something that is just a little
clerical error and something that matters. I know that right
now, attorneys are litigating over this and we are finding that
sometimes people are having difficulty selling these loans in
the secondary market.
Mr. Cordray. Mm-hmm.
Senator Corker. I am just wondering if you are considering
making a ruling of some kind to alleviate the problems that I
know you are aware of that are existing out there.
Mr. Cordray. Yeah. So, several things. First of all, it is
a great example of Congressional oversight and how these
hearings matter. We received that letter from you. Because I am
testifying today, we did respond to that letter, it may have
been late last night, it may have been early this morning that
your office received it. You probably have not seen it yet, and
I apologize for that.
Senator Corker. No, I read it. I read it.
Mr. Cordray. OK. And, that is because we knew that you
would want to raise this issue again with me, or likely would.
In terms of the Know Before You Owe rule, the purpose of
that rule, and this is something Congress mandated, it was not
something we just dreamed up on our own--and there was a good
purpose, and everybody acknowledged it was a good purpose--
there used to be two different application forms, one issued by
the Federal Reserve, one issued by HUD, that occurred at the
application stage, and two different closing forms, again, by
each of those agencies under different statutes, and it was
inherently confusing for consumers.
Senator Corker. Right.
Mr. Cordray. Why am I getting two forms? What is the
difference between them?
Senator Corker. No, I got that. I understand that.
Mr. Cordray. You know all that.
Senator Corker. I understand the reasoning and I applaud--
--
Mr. Cordray. And the purpose here was to streamline those
forms. You all had a hand in making sure this happened. But,
our agency was given the job and we have completed that job.
Now, having said that, that is a big transition for
mortgage lenders, who have to work with lots of others in the
industry and all of their IT systems have to work together. We
have recognized that. We have said that we are going to be
understanding and diagnostic about the oversight of this in the
early period. The early period now has stretched past 6 months.
We still feel the same way, and I will reemphasize that today.
There are some concerns that we want to be very mindful of.
We convened recently the leading trade associations, the
Mortgage Bankers, American Bankers Association, others, to hear
from them about specific concerns they have that we can
address. We have held webinars. We have another one coming up
next week on these issues. We have compliance guides out. We do
want to make sure that although this is better for consumers,
and they tell us that it is, that it works for industry, as
well.
Senator Corker. Right.
Mr. Cordray. I was pleased to see mortgage lending was up
12 percent year over year in January from a year before. That
is a good thing. As I say, it is something we like to see,
because this is good, responsible lending. And, the closing
times initially ticked up on this, but they ticked back down,
and in February, the Ellie Mae folks said that this is, you
know, kind of status quo as far as that is concerned. It is not
necessarily for every institution, though. I get that, and we
hear that.
Senator Corker. But, I want to ask you another question, if
I could.
Mr. Cordray. All right.
Senator Corker. I think when you get to a point, and
hopefully very soon, you will be able to issue some clarifying
language----
Mr. Cordray. Yes.
Senator Corker. ----so that people know, you know, whether
something is a minor error or something that, you know, is
something that is major and actually taints the loan, if you
will. I just think that would be helpful to industry and I
appreciate your concern in responding to my----
Mr. Cordray. We have been doing that. We will continue to
do that. And, if you are hearing things that we are not
addressing, we are glad to have you continue to bring them to
our attention. We are probably hearing them directly, but we
are glad to hear them from you----
Senator Corker. I want----
Mr. Cordray. ----because we sit up and take notice of that.
Senator Corker. I am trying to adhere to the time here.
Mr. Cordray. Yeah.
Senator Corker. Payday lending--I know in our State, if you
continued a loan, ad infinitum, for an entire year, the
interest rate would be 459 percent. And, obviously, we want to
make sure that people have access to loans at affordable rates.
We have had our Commissioner of Banking was in yesterday
talking about this. It is just an observation.
Mr. Cordray. Mm-hmm.
Senator Corker. What is it that you see that are potential
outlets down the road for people whose credit has been
tarnished and has issues? Is it through FinTech? I mean, what
are you seeing out there? I would love to hear what your
thoughts are relative to people having access to loans that are
a little different from that if they are in the capacity, if
you will, to be able to execute on them.
Mr. Cordray. Sure. A number of things. And, some of these,
we are trying to sort out and understand.
First, there is the payday lending industry itself, which
could reform in light of potential regulations at the Federal
level, just as they have often changed their practices at the
State level in response to changes. And, frankly, nobody wants
to cut off people's ability to get one or two loans when they
need them. It is the debt trap, when people get stuck in the
loans for 8, 10, 12----
Senator Corker. I understand the problem----
Mr. Cordray. Yes.
Senator Corker. ----and I really do. I am understanding--
what I would like to understand is what the solution is----
Mr. Cordray. Yeah.
Senator Corker. ----so you do not cut people off from----
Mr. Cordray. Let me be real specific. I think there are
possibly three different solutions here. One is reform of the
payday industry itself.
A second is community banks and credit unions. Credit
unions do offer a small dollar product called a PAL product. It
is blessed in law. We think it is a good product and we want to
make sure that there is room for that under any regulations we
would adopt. And community banks could do that. We want to
allow room for that--responsible products, not payday-type
products.
The third piece is FinTech, and there are real
opportunities here, although small dollar lending is tricky. It
is difficulty. And we will see if that develops over time. But,
whatever FinTech innovations occur, we want them to be consumer
friendly and we will be mindful of that and watchful for that,
and I think those in the industry know that. Many of them have
met with us and they are mindful of the CFPB's role here.
Senator Corker. Thank you.
Chairman Shelby. Senator Menendez.
Senator Menendez. Thank you, Mr. Chairman.
Director, let me say, I came today in part, unlike others,
maybe, to praise the Consumer Financial Protection Bureau, not
to bury it, and let me say that I think an example of what you
and your colleagues at the Bureau are doing is embodied in
something I fought very hard as a Member of this Committee,
which is the Credit Card Act. The Bureau noted in its most
recent evaluation that since enactment, consumers have saved
more than $9 billion in over-limit fees, $7 billion in late
fees, and the total cost of credit has dropped almost 2
percentage points, and all the while, the availability of
credit card credit has increased. And that, in my mind, is just
one example of why consumer financial protection laws and
regulations create a fairer marketplace.
In that regard, as I think you know, I have been very
engaged in the question of prepaid cards, which has exploded
over the last few years, especially among households who lack
access to traditional banking services. And, I have introduced
legislation which would require clear disclosure of fees and
prohibit the most abusive kinds of charges. It would also
require prepaid cards to have FDIC insurance, like a
traditional bank account, and comparable protections to a bank
account if a card is lost or stolen.
Many card providers have already voluntarily provided such
measures and standards, which shows it can be done, but it also
highlights the need for strong, consistent protections across
the full market.
So, could you give us an update on the status of the
Bureau's work on prepaid cards, and particularly, since I see
that the rule did not include, or the proposed rule did not
include the issue of FDIC, how will we create the type of
protection necessary in that regard.
Mr. Cordray. Sure, and we have had some discussions around
this previously. We have been very attentive to the legislation
that you introduced and to the thought and care and research
that went into thinking about those issues, which we have
attempted to incorporate into our own approach to these issues.
That rulemaking is pending. It was out for notice and comment.
We have digested those comments and we expect to finalize that,
or we will finalize that rule sometime this spring.
On the issue of FDIC insurance, in particular, that is one
of the issues that is under submission there. I do not want to
overstep proper bounds here, but we have had discussions with
the FDIC about it and we understand the concern there.
Many of these general purpose reloadable prepaid cards now
effectively serve as substitute bank accounts for people who
are unbanked, and they can be pretty effective bank accounts if
they have consumer protections. Right now, as you know, we have
no consumer protections. This rule will provide consumer
protections for the first time, very similar to those for bank
accounts, the Reg E protection.
The other thing I would say on this issue that is new since
we last talked in committee about it is we did have the
RushCard fiasco, and the Consumer Bureau was very engaged in
addressing--these people had prepaid money loaded onto cards
and then thousands of them found that they could not get their
money off the cards because of an operational glitch by the
company, some sort of problem that we continue to sort through
from a standpoint of an investigation and making sure consumers
are made whole.
And, you know, that is outrageous. People prepay money onto
a card in order to be able to use it when they need it, and if
they cannot use it when they need it, then they have been
cheated of their service. So, that, if anything, shows all the
more to me the need for strong protections in this area.
Senator Menendez. Well, I appreciate that. I know that
Senator Brown and I wrote to you about that and I am glad to
see that the Bureau is pursuing it.
Mr. Cordray. Yeah.
Senator Menendez. Two last issues. One is zombie mortgages,
zombie foreclosures, I should say. Unfortunately, my State of
New Jersey has the highest rate of zombie foreclosures, which
is basically a bank begins a foreclosure action, but then,
because of the low value of the house, chooses to abandon the
foreclosure without providing any notice to the homeowner that
they are still on the hook for repaying mortgage debt, taxes,
and other expenses. So, can you talk to me about what steps, if
any, the Bureau has taken or is looking to take to address this
issue? At least can homeowners receive notice when the bank has
decided not to pursue it?
And, last, the National Council La Raza reported that 48
percent of counselors reported that mortgage servicers rarely
or ever provide written communications in the preferred
language of a borrower with limited English proficiency. I know
the Bureau has identified the provision of language services as
an issue in its mortgage servicing examination procedures, but
particularly for homeowners who encounter trouble on their
mortgage, it seems to me that more is needed to ensure they
receive the type of comprehensive loss mitigation assistance
that is necessary.
Can you address those two issues.
Mr. Cordray. Sure. I will take the second one first, in
terms of preferred language. There was a very helpful provision
in the statute that Congress passed on remittances that said
that if you are basically selling a product and marking in a
preferred language, then you ought to follow up in all respects
through the product in that language. That is probably a good
principle across the board, but it was specified there and so
we were able to implement it.
In terms of preferred language, that is something we are
working on with FHFA and others, and we recognize the issues
there and the importance and the vital elements of that for
communities that are affected. And, of course, it is not only
Spanish-speaking, but it is a wide variety of languages in
different parts of the country, we have come to understand.
In terms of zombie foreclosures, it is a difficult issue.
It is often an issue for investor properties, but--sometimes
there are properties taken over by banks. And what you are
talking about is starting a foreclosure, then stopping the
foreclosure at some point. The consumer does not necessarily
have any notice. They do not realize they are still going to be
on the hook legally, since the property was never foreclosed on
and sold, for taxes and insurance and other payments. They may
well have left the home in the meantime, because if you are
being foreclosed--if you think you are being foreclosed on,
often, you start examining your options and you take one when
you can find it.
So, it is a difficult problem. I do think you are right,
that notice is a basic problem there. It often will not be
effective for consumers, entirely effective, because they may
have already left the home. And, it is worse, frankly, in the
States with the longest foreclosure processes because there is
more chance of a bank starting and then stopping maybe 200,
300, 400, 500 days in, at which point the consumer may have
left the home.
So, we understand there is consumer harm here. There are
complexities around it, but it is something that we are looking
to see what we can do and maybe what others can do, as well,
and how we can work together on that, including with State
courts.
Senator Menendez. Thank you. I look forward to working with
you. Thank you.
Chairman Shelby. Senator Scott.
Senator Scott. Thank you, Mr. Chairman.
Thank you, Mr. Cordray, for being here this morning. You
made a speech to the credit unions and talked about how the
mortgage market was good news for all around, that more
opportunity for more consumers and a wider path to the American
dream in a mortgage market made stronger by the changes we have
made. But, the evidence for first-time homeowners over the last
3 years is that the first-time homeowners have been in decline,
and that disproportionately impacts minority would-be
homeowners, since the fact of the matter is that about 74, 75
percent of the majority population owns homes. About 45 percent
of African Americans own homes. About 55 percent of Hispanics
own homes.
So, my question really is, when you look at the rules and
Dodd-Frank being put in place, how do we reconcile the mortgage
market specifically is good news for all around, when, in fact,
for first-time homebuyers, who are disproportionate minority,
the news is not nearly as good? But, what we have seen
throughout the country, and specifically at home in South
Carolina, is that the rental market is far more expensive and
the growth, really, an explosion, in apartments is nearing an
all-time high in the last decade or so.
Mr. Cordray. Yeah. So, this is--and I know you raised that
issue on Tuesday and I had a chance to review the transcript of
the hearing, and it is an important and interesting--it is
actually a very interesting issue, a lot of pieces to it.
So, first of all, I would say, in terms of first-time
homebuyers, I think if you look at the statistics on the
mortgage market, what you will find is that of owner-occupied
real estate, first-time homebuyers are still maintaining about
the same share that they have. The difference that is affecting
the market is that there are many more investor-owned and
investor-purchased properties than there had been before the
crisis. It appears that investors have seen their opportunity
as prices plummeted and they have bought up a lot of
properties, and this is going to be a problem in a number of
communities, because although it helped find a bottom in
certain markets and maybe create equilibrium, it has pulled
inventory off the market and made it unavailable to, say, you
and me, if we were going to go try to buy a house tomorrow.
There are also inventory problems in local markets around
the country. Sometimes, many houses are tied up in the
foreclosure process, depending on the State. Sometimes, many
houses remain underwater, depending on local valuations, so it
is difficult for someone to sell if they are underwater on
their mortgage. And, homebuilders have been kind of reluctant
to come back in with a rush to the market and build new
inventory, although that is starting to happen.
So, by the way, I do not want to be viewed as some sort of
happy talker who sees a glass half full if there are just a few
drops in it. But, what I do see in the mortgage market is that
the share of the mortgage market that is taken right now by
credit unions and community banks together has risen since
Dodd-Frank, has risen since our rules took effect, and is at
levels that are the highest they have been in 20 years. That is
a good thing. Those institutions did do the best lending right
through the crisis. When everybody else was deteriorating, they
stayed firm. They had low default rates. And we have tailored
our rules to give them advantages and recognize their model in
the mortgage market, and I think that is a good thing.
Senator Scott. It certainly appears to me that the
consolidation within the banking space has led to more access
and opportunities for smaller credit unions to continue to
grow----
Mr. Cordray. I think so.
Senator Scott. ----and, frankly, in Section 1022 of Dodd-
Frank, it states plainly that the Bureau, by rule, may
conditionally or unconditionally exempt any class or covered
persons, service providers, or consumer financial products or
services from any provision of this title or from any rule
issued under this title. Do you think if the credit unions or
community banks were being detrimentally impacted--we have
talked about the mortgage market specifically, but generically
speaking--by the rules of your agency, this section would allow
there to be more tailoring of regulations? Do you see that as a
possibility that you are going to take hold of, or do you see
the need of it or not?
Mr. Cordray. We have been doing that since the beginning,
and we tailored our mortgage rules, in particular, which, of
course, is the most significant finance market for all players,
at around $10 trillion, we tailored our rules in notable ways
for smaller providers, and we continue to do that. We have just
implemented Congress', I thought, helpful legislation on
definition of ``rural'' in a way that was very broad for
smaller institutions.
What I will say about the exemption authority is we tend to
be fairly careful about it. We do not regard Congress as having
said to us, you have broad exemption authority. You can do
whatever you want despite what Congress said. That would be too
much. But, where we have evidence that we think we can build
on, in particular, rulemaking, such as the mortgage origination
rules, the mortgage servicing rules, the remittance rules, we
will tailor for smaller institutions because, very often, that
is the right answer. They are responsible. They are close to
their customers. They provide good service.
But, the notion that we would simply countermand--I mean,
Congress set its own limits here in terms of we have authority
over banks over $10 billion but not under, in terms of
supervising them, and the like, and Congress did not just
exempt credit unions from all laws and regulations, and,
therefore, I do not feel that I can just come in as a matter of
opinion or ideology and overrule that.
But, where I can see that, say, in mortgage rules and the
mortgage market, they have done well and we should try to
tailor our rules accordingly, we have done that and we will
continue to do that. And, I would be glad to take your and your
colleagues' input on how you think we should be doing that.
And, we get that input directly from ICBA, from NAFCU, from
CUNA all the time.
Senator Scott. I would be happy to have that conversation
with you offline, if you are open to it.
Mr. Cordray. Sure.
Senator Scott. My main concern, as I wrap up, Mr.
Chairman----
Chairman Shelby. Thank you.
Senator Scott. Yes, sir--is that when you look at the
number of households that are unbanked or underbanked, I know
that we talked on Tuesday, about a million households----
Mr. Cordray. Yes.
Senator Scott. ----the fact of the matter is that with
better information provided by staff, the number is around four
million under- and unbanked households, because the more--the
regulatory burden impacts the institutions. The higher the
cost, the higher the cost, the lower the access. And, for the
unintended consequences--I assume unintended--is the fact of
the matter is that 4.4 million households are now either
unbanked or underbanked than was at the beginning of Dodd-
Frank.
Mr. Cordray. Yeah. Well, actually, I would be interested in
knowing exactly what the numbers and the dates are, because
since the crisis, certainly that number has gone up, because
the crisis blew up the economy for people. Whether it can
actually be pinned on Dodd-Frank when we did not even open our
doors until July of 2011--that is where I get off the train on
some of the commentary I have seen on this.
Senator Scott. Happy----
Mr. Cordray. Yeah.
Senator Scott. One of the things that we did was make sure
that the numbers that we used did not start in 2008 and
immediately after the crisis.
Mr. Cordray. Yeah. That is 3 years before we came along.
Senator Scott. Exactly. That is why we did not use the 2008
numbers.
Mr. Cordray. By the way, I think we certainly----
Senator Scott. I am happy to----
Mr. Cordray. I know we would agree that the fact that
credit unions reached an all-time high in membership nationally
last year is a good thing. I am very supportive of that. I am
sure you are, too. But, again, it is notable that if our rules
are supposedly killing the credit unions, how is their
membership now at an all time high? It does not really make
sense.
Senator Scott. There is no doubt that the number of members
at credit unions are higher. The number of credit unions
themselves are lower, so the fact that----
Mr. Cordray. Yeah, although that has been a decline that
has been steady for 30 years.
Senator Scott. The contraction of credit unions and banks,
obviously, are happening, and there is a consequence that comes
with the regulations that may be contributing to that fact, as
well.
Mr. Cordray. Maybe, although that has been a consistent
trend for 30 years, and the evidence I have seen is that it has
not accelerated since Dodd-Frank, although there was a Lux-
Greene study that I think is, in my view, discredited, that
seems to suggest that. I do not think it bears out when you do
the analysis more carefully.
Senator Scott. Happy to continue to the debate.
Mr. Cordray. All right, sure.
Senator Scott. Thank you.
Mr. Cordray. Thank you.
Chairman Shelby. Senator Warner, thank you for your
patience.
Senator Warner. Appreciate that, Mr. Chairman.
Director Cordray, great to see you again, and I also want
to commend you for your service. I would point out that if you
look behind you, you will see a lot of folks who are supporters
of the Bureau, many of them actually from the Commonwealth of
Virginia brought in by Virginia Organizing who will, I think--
it is a shorter commute for them than some of the people from
around the country.
Mr. Cordray. Amen.
Senator Warner. Although, still, something needs to be done
about that traffic in this region. I wish I knew somebody who
was still Governor.
[Laughter.]
Senator Warner. I want to pick up on where Senator Corker
was. I think there would be actually bipartisan sense that some
of the more egregious actions on payday lenders needs to be
stopped, and people are taken advantage of, and we look forward
to your guidance and rulemaking.
But, an area, as we have discussed before, I have spent
some time looking into is FinTech, and there remains
opportunities in this new area, as we think about more and more
of our banking is going to be put, frankly, with the
supercomputing power you have got on your phone, I have looked
at a number of firms who are looking at tools around income
smoothing, around differential ways of paying folks. Many low-
and moderate-income people, because of managing their finances
on a regular basis, fall off that cliff at the end of a pay
period and end up then having to resort to a payday lender or
others that will put them in that debt spiral.
Mr. Cordray. Yeah.
Senator Warner. The challenge, though, is when you have got
these new technology tools, how do you balance the innovation,
but at the same time, as we have seen entities like Dwolla, who
did not do a very good job of protecting consumer information,
get this right, and what standard are we going to hold them to.
They are not full financial-banking institutions, but I think
there is going to be the same kind of disruption from FinTech
that we have seen perhaps with Uber with taxis, or Airbnb with
hotels. I think it is one of the next areas to be disrupted.
Good, but there are also possibilities for abuse.
Mr. Cordray. True. That is true. The nature of innovation
is that it is neutral, but hopeful and encouraging, and some
innovations have been very bad for consumers. The exotic
mortgages that were developed in the lead-up to the crisis were
innovative, no doubt about that. They were also terrible for
consumers, as it turned out.
As we look at FinTech, and I am very interested in these
issues, as I know you are, and we have a team that we call
Project Catalyst at the Bureau that is very engaged with the
financial innovation community, not just in Silicon Valley, but
across the country, and also innovations that are occurring
within larger institutions that are constantly researching how
to improve their products.
What I would say is we believe it would not be appropriate
for new FinTech startups to be getting an advantage in the
marketplace because they are arbitraging the regulatory system.
They are not complying, they are not taking seriously, or as
seriously what the banks and regulated institutions have to do.
Our enforcement action against Dwolla has been much
remarked upon, but it was actually a rather modest action. It
simply said that if you are telling your prospective customers
and consumers that you are going to handle data security in a
certain way that gives them confidence and then they want to
deal with you, and, in fact, you are not, then you are
deceiving your customers and you are getting an unfair
advantage by doing so and that should stop. And, that should be
a signal to the whole market that, at a minimum, deliver on
your promises to your customers.
But, I do think it is going to be interesting to see how
this develops. There is a lot of promise in FinTech. It could
lower costs in some areas. It could promote convenience, may
well do that, which is great for people. That is a different
kind of cost for them. It may be that the banking system and
the FinTech companies will converge in some ways so that there
is better compliance, but also we get the benefit of the
innovation. We will see. But, we are trying to stay on top of
it, because if we fall behind it, this could dramatically
affect markets over time and we could end up thinking that we
are dealing with a market that is very different from the one
that is actually happening.
Senator Warner. And, I guess I think there will be somewhat
of a distinction. There is a lot of research out now about the
amount of income volatility that is affecting----
Mr. Cordray. Yes.
Senator Warner. ----close to half of Americans, and some of
these tools that could even and level some of that income
volatility--and, I guess, I would simply point out that I hope
Catalyst is also working with the regulators around the rest of
the world. This is a worldwide phenomena.
Let me get one last question and----
Mr. Cordray. I think our team has actually been leading
regulators around the world. Operation--Project Sandbox in
Britain is modeled after our program.
Senator Warner. I actually want to stay close to my
timeline, though, because I want to get in my last question.
Something we raised a year or so ago here, and you had a
response, I would like to reraise it again, the different level
of credit protections between debit cards and credit cards, and
particularly debit cards being with younger persons. I did not
realize until we got into the data breach issues, and we have
got legislation to try to equalize those credit protections.
Would you like to speak to that? I know I had to go back and
try to change out my daughter's cards from debit cards to
credit cards because it is----
Mr. Cordray. These are always the best stories, when we are
talking about some specific issue we dealt with within our own
lives and we find it to be vastly more complicated than we
might have hoped.
But, look, this is exactly what we are doing with prepaid
cards, as well. We are trying to bring them from a standard of
no protection to comparable to debit cards and not exactly
credit cards. There are some specialized provisions for credit
cards. But, there should be--you reach into your wallet, you
pull out a card. You may not distinguish that well between what
kind of card it is. You should be protected in all three areas
And if there are some special protections for credit cards,
those are sometimes--those are applicable. They may be
applicable in some cases to prepaid cards. That is something we
have under consideration, debit cards--again, I am not sure
that all the same provisions should apply to all cards, but
they all should be subject to protection. Certain provisions
should apply to all cards, and that is a subject we can
continue to discuss. And, I appreciate your interest in it,
because it is a hard issue, but it is an important one.
Chairman Shelby. Senator Cotton.
Senator Cotton. Thank you.
Mr. Cordray, I want to discuss the CFPB's actions on
indirect auto lending and specifically the Ally case.
Mr. Cordray. OK.
Senator Cotton. So, in this matter, since auto lenders are
not permitted by law to collect race, you did not have the
actual race of potential claimants available, is that correct?
Mr. Cordray. We did not have it through Ally's own records,
that is correct.
Senator Cotton. OK. So, in administering the settlement
funds from the CFPB's enforcement action, you used a two-tiered
approach to notify potential victims of discrimination based on
a statistical determination of race using the customer's last
name and address, is that correct?
Mr. Cordray. So, and this is consistent with how redress
has been handled in these types of cases in every instance
where you do not have, say, the granular mortgage data, which
is true only for the mortgage market.
Senator Cotton. Yes. So, yes. And, as I understand it, if
someone had a 95 percent chance of being nonwhite by the
Bureau's model, he or she would have received mailing
information informing them of eligibility for and forthcoming
receipt of a remuneration check unless they returned an opt-out
notice?
Mr. Cordray. And discussing what the criteria were for
eligibility and making it plain that they should satisfy those
criteria, yes.
Senator Cotton. And then there was a second tier threshold
of a 50 to 95 percent likelihood of being nonwhite and that
mailing required them to return a form opting into the
settlement, is that----
Mr. Cordray. That is correct. I think you are accurately
stating all pieces of this thus far, yes.
Senator Cotton. In neither group, though, were individuals
required to affirmatively identify the protected minority race
or ethnicity to which they belonged?
Mr. Cordray. So, then, there is always a question, how much
specificity do you want them to actually provide. I mean, there
are various things you could make them do, and you could also
require them to swear under oath and other things. Everything
that makes the whole transaction more complex, you know, there
is a dropoff rate of people who do not bother.
Senator Cotton. Well, since you raised that, were they
required to make any kind of statement or affirmation under
penalty of perjury that they did, in fact, belong to a
protected class under the settlement?
Mr. Cordray. So, they were required to make an opt-in,
which essentially was a statement that they belonged to the
protected class.
Senator Cotton. Did they have to make that statement under
penalty of perjury or----
Mr. Cordray. I do not believe that was the case, but I
could clarify with my staff for you if I have that wrong.
Senator Cotton. I recently discovered a very handy program
on the Wall Street Journal that is similar to the methods that
you use to evaluate the race of buyers of cars in pursuit of
this enforcement action. You just plug in the name and the zip
code and out pops a statistical likelihood of race. Now, the
website on the Journal does caveat that they do not have the
exact method you do, and, of course, the address is more
reliable than the zip code.
But, coincidentally, at a hearing on Tuesday, Senator Brown
revealed his zip code in Ohio to be 44105. Shockingly, the
program says that Senator Brown has an 89 percent likelihood of
being black----
Mr. Cordray. Mm-hmm.
Senator Cotton. ----based on that name and zip code.
Mr. Cordray. Mm-hmm.
Senator Cotton. Senator Shelby turns out to have a 70
percent probability of being black. Tom Cotton, in the zip code
where we sit, has an 88 percent probability of being black.
So, using this example, Senator Brown financed his vehicle
through Ally. He fell within the racially guessed threshold you
just confirmed, and he had no legitimate business reason that
existed to discount the APR he was offered. Would the CFPB have
sent him a remuneration check?
Mr. Cordray. OK. So, let us take those specific examples
and let us also take this back to what we are talking about. In
each of those three examples, they would have to affirmatively
opt in to receive a check.
Senator Cotton. They would have----
Mr. Cordray. They would have to state----
Senator Cotton. They would have been in the second tier.
Mr. Cordray. They would have to respond and state that they
were a minority borrower. I assume that each of you would not
do that, or otherwise, you are committing fraud.
But, let us go back here. What we have is we have a
discrimination matter against Ally Financial. Three-hundred-
and-twenty-five thousand or so consumers were affected. They
were charged higher rates based on a pattern or practice that
systematically showed that minorities in certain categories
paid higher rates. And then the question becomes----
Senator Cotton. No, I am not----
Mr. Cordray. I am just----
Senator Cotton. I am not disputing the underlying facts.
Mr. Cordray. I just want to----
Senator Cotton. No, no. I am not disputing any of the
underlying facts.
Mr. Cordray. But--but the----
Senator Cotton. I am talking about the redress----
Mr. Cordray. Sure----
Senator Cotton. ----the redress that potential claimants
receive.
Mr. Cordray. But, then, what do you do for those 325,000
people?
Senator Cotton. So, Senator----
Mr. Cordray. Do you set up a system that is difficult for
them to comply and get their money, or do you set up a system
that is reasonable for them to comply and get their money? Now,
if there turns out to be some systematic large number of people
who fraudulently got checks under this settlement, that is
something we will take very close account of----
Senator Cotton. But----
Mr. Cordray. ----and consider responding to. But, 325,000
people did qualify for appropriate redress here, and, you know,
I have not seen the large number of fraud cases. It is just all
this hypothetical--people have an apprehension--people think it
could have occurred----
Senator Cotton. Well, it is hypothetical like your model is
hypothetical, that says Senator Brown has an 89 percent chance
of being black----
Mr. Cordray. Yeah, but there is nothing hypothetical about
325,000 consumers who were systematically discriminated
against----
Senator Cotton. But, Senator Brown would have been in the
second tier. He would have had to opt in.
Mr. Cordray. And you would have had to opt in, and Senator
Shelby would have had to opt in. I assume you would not have
done so----
Senator Cotton. But he would not have had to make a
statement----
Mr. Cordray. ----you would have been committing fraud.
Senator Cotton. He would not have had to make any statement
under penalty of perjury or other kind of punishment for making
a false statement.
Mr. Cordray. So, you tell me, would you have committed
fraud simply because it did not say you had to do it under
penalty of perjury?
Senator Cotton. Did the Department of Justice recommend
that you require some kind of oath or affirmation under penalty
of perjury?
Mr. Cordray. We worked with the Justice Department on these
remedies, so----
Senator Cotton. I did not ask if you worked with them. I
asked if they recommended it.
Mr. Cordray. I do not recall----
Senator Cotton. The Department of Justice----
Mr. Cordray. ----and I do not----
Senator Cotton. The Obama Department of Justice suggested
that you require what is--you routinely require it on Federal
forms.
Mr. Cordray. So, I would not speak to any internal
deliberations here. In the end----
Senator Cotton. We do not have to speak to them.
Mr. Cordray. ----we agree.
Senator Cotton. The House Financial Services Committee has
released the documents.
Mr. Cordray. We are not doing something differently than
the Department of Justice in this case. We are acting together.
We are on the same page. But, again, I do not think you would
have committed fraud.
Senator Cotton. Did you personally decline the Department
of Justice recommendation that a penalty of perjury attach to
such----
Mr. Cordray. I do not believe I did. I would be happy to
have my staff follow up with you. But, again, I do not want to
characterize internal discussions with them, but I do not
believe I did. I have no recollection of having done that, and
I do not believe that was the case.
Senator Cotton. I would like to----
Mr. Cordray. And I do think that--let me just say, I stand
by and believe this was a reasonable approach to how to get
relief to hundreds of thousands of consumers who were
discriminated against under the disparate impact theory that I
know some people disagree with, but the Supreme Court has
reaffirmed is the law of the land.
Senator Cotton. Well, 330 members of the House of
Representatives, to include many Members of the Congressional
Black Caucus, disagree. My time has expired.
Chairman Shelby. Thank you, Senator Cotton.
Senator Merkley.
Senator Merkley. Thank you very much, Mr. Chair, and thank
you, Mr. Cordray, for your testimony.
I wanted to make sure I have the numbers right. It seems
like every time you come here, I am underestimating the amount
of money you have returned to consumers, either in the form of
direct restitution after--because of predatory practices or
principal reductions or canceled debts. I believe that number
is now over $11 billion.
Mr. Cordray. I believe it is also true that every time I
come here, my age gets a little older, but now it is--I believe
it is over $11.2 billion in relief made available to consumers.
Senator Merkley. It is a pretty phenomenal thing, that
support for fairness in financial transactions have returned so
much to hard working American families who were victims of
predatory financial practices.
I also was reading recently an estimate of the savings, and
these are the savings that occur because of practices were
discontinued on credit cards, an estimate of about $16 billion
in saved fees, and I believe that is independent from the $11
billion, is that correct?
Mr. Cordray. Yes, and, in fact, that was the CARD Act that
put, or kept $16 billion in consumers' pockets over a period of
time. But, there is another point that I have heard Senator
Warren make many times that is very powerful, which is when we
talk about looking backward, $11 billion was made available to
consumers in relief, or $16 billion was saved to consumers over
a backward-looking period of time.
It is also the case that those changes, as lasting changes,
mean that every month, every year going forward, people are
saving the same amount of money, which over time results in
tens--eventually hundreds of billions of dollars for consumers.
That is really meaningful. It is hard to add that up because it
is prospective----
Senator Merkley. Yes.
Mr. Cordray. ----but it is very meaningful.
Senator Merkley. Which leads right into the question I was
going to ask you, was in terms of the mortgage reforms that
have been undertaken, do we have an estimate of what have been
saved because people got fair, square, fair deal mortgages
rather than predatory mortgages?
Mr. Cordray. I actually do not begin to know how to count
that, but I will ask our Office of Research, who are a lot
smarter than I am about such things, about how they might be
able to go about doing that. Clearly, the mortgage market, when
you compare markets, the mortgage market is about $10 trillion,
the largest single consumer finance market in the world. Credit
cards are under a trillion. Student loans are a little over a
trillion. And auto loans are somewhat around a trillion. So, if
there are savings from our rules, and I am sure there are, but
it may be heard to document them, they are going to be at a
much higher scale for people.
Senator Merkley. Well, it sure is a wonderful thing to have
so much good done for hard working American families by having
fair practices in the financial markets, and sometimes that
just seems to get lost in the conversation in this Committee,
so I wanted to emphasize that point.
I wanted to turn----
Mr. Cordray. Could I say, just briefly, one other thing?
You know, people often talk about, and it's true in this
hearing at times, the Bureau, you, meaning me personally. We
have about 1,500 people who do this work and achieve these
results that people can be very proud of and that benefit every
one of your constituents. They benefit constituents in every
one of your States. And, I am very proud of them, and when you
say nice things about the Bureau, it is them you are talking
about, not so much me.
Senator Merkley. Thank you. Now, I have two more questions
and only a minute and a half, so I will try to be very quick
here.
Mr. Cordray. OK.
Senator Merkley. But, one is you did a study of arbitration
clauses, a very thorough study, the Ross v. Bank of America
settlement that affects Bank of America, Capital One, Chase,
and HSBC. I read through that, and it sounded like the
conclusion was that, contrary to what is often asserted, there
were no particular costs, if you will, raised in terms of the
products when the use of arbitration clauses was discontinued.
Is that a fair summary of--statistically significant, that
could be identified within your study?
Mr. Cordray. It is a fair summary, and it was notable that
there were institutions we could isolate, some of whom had
arbitration clauses all along, some of whom did not have them
at all, some of whom had them for a while and then stopped,
particularly in response to the class action litigation.
Senator Merkley. Let me just make the point here that,
right now, across the country, citizens are so frustrated by
this system that is rigged against them, from Citizens United
on to the actions of the House and the Senate under current
leadership. It is--but this is a real example, an arbitration
clause in a contract where, essentially, the judge of asserting
your rights when there is a predatory action goes before
someone who is hired by the person on the other side of the
issue and only keeps getting hired if they find in favor of the
folks who are hiring them. That is the system that is rigged.
So, I applaud your work on arbitration.
I have a few seconds. Let me turn to payday loans. In State
after State after State, the States have gone to work to say,
these are unfair practices--and, by the way, just yesterday in
our Chairman's State, 28 to one, the State weighed in, the
State legislators weighed in and said, we absolutely want to
curtail the abuses of the payday loan industry. And, often, the
payday loan industry says this reduces access to credit and
they cite a reduced number of loans being made after these
State actions. But, what that does not take into account is a
family that gets a fair loan gets one loan instead of getting
ten in the course of a year, and so on and so forth.
I found in Oregon, after we cracked down on payday lending
and put an interest rate cap on and a rollover cap, that we
still have payday loan companies operating, but citizens do not
have to get continuously rolled over and they get a much fairer
deal, and they still have access to credit, but they have
access to credit at a much lower interest rate. So, it is a
complete win. And the pastor who testified this week noticed
that and certainly many of the pastors in my State, working
directly with poor families, see that.
Is that your impression, as well, that the consumer gets a
much better deal when they get a low interest rate than when
they get a high interest rate that can be 500 percent or more?
Mr. Cordray. I think some of that is probably simple
mathematics. But, what I would say is that I think a point you
made that is quite powerful is there is often this comment
made, well, there are not a lot of complaints about payday
loans, I mean, people going in and being treated well by being
rolled over, rolled over, and rolled over. Ultimately, it can
damage their finances beyond repair.
But, I would say that talk to the faith community. Talk
to--I would like each of you to talk to ministers and leaders
in your States. They can tell you the stories they hear, where
people come to them not because they are financial experts, but
because they know they care about them, and we hear horrendous
stories of the effects of this on people's lives and they are
repeated in massive volume across the country. That is a good
place to start in trying to understand this issue.
Senator Merkley. Amen to that, and thank you, Mr. Chairman.
Chairman Shelby. Senator Toomey.
Senator Toomey. Thank you, Mr. Chairman.
Mr. Cordray, welcome back.
Mr. Cordray. Thank you.
Senator Toomey. Thanks for being here.
As you know, Section 1071 of the Dodd-Frank Act instructs
the Bureau to collect data on small business lending, and I
noticed recently that the CFPB has posted a job listing with
reference to Section 1071. It described the job as, and I
quote, ``once in a career opportunity to make the market for
small business finance fairer and more transparent,'' end
quote. So, is it your intent that the market will become fairer
and more transparent by virtue of the disclosure of data? Is
that----
Mr. Cordray. I think that is clearly what Congress said to
us by mandating this test in the statute----
Senator Toomey. Well, but it is your words in the job
description, so that is why I want to understand your intent.
Mr. Cordray. I think it is a great opportunity----
Senator Toomey. OK.
Mr. Cordray. ----and I hope you will recommend candidates
to us.
Senator Toomey. So, my question is, is it your intention
that the Bureau will limit its work in the small business
lending space to the compilation of data?
Mr. Cordray. So, what I would say is, first of all, we do
not have much authority in the small business lending area, and
so that is what our focus under our statute is, individual
consumers----
Senator Toomey. Right.
Mr. Cordray. ----products for household purposes. But,
there are a couple of places in our statute--you know, again,
Congress said it, not me.
Senator Toomey. Right.
Mr. Cordray. We have jurisdiction over small business
lending under the Equal Credit Opportunity Act and we have this
1071 that you identified here, which is a mandatory job
Congress gave us----
Senator Toomey. Yes.
Mr. Cordray. ----to set up a reporting, data collection,
and data publishing regime for small business lending
comparable to what HMDA has created for the mortgage market,
yes.
Senator Toomey. Yeah. So, my understanding is that what
Dodd-Frank does in Section 1071 is exclusively about data
collection. That is the only authority that I read for the CFPB
with respect to small businesses in Section 1071. Is that
your----
Mr. Cordray. Yeah. Ten-seventy-one speaks for itself. We
are doing our best to implement it faithfully. It is going to
be a big job for us, but it is a task Congress instructed us to
do and so we follow the law.
Senator Toomey. Yeah. Getting back to this issue of your
approach to enforcement, you gave a speech before the Consumer
Bankers Association in which you were essentially defending
your enforcement approach, and one of the things you said in
the speech, and I will quote, it says, ``Any agency is bound to
recognize that they should develop a thoughtful strategy for
how to deploy their limited resources. That means working
toward a pattern of actions,'' by which I think is meant
enforcement actions----
Mr. Cordray. Correct.
Senator Toomey. ----``that conveys an intelligible
direction to the marketplace so as to create deterrence that
can be readily understood and implemented.''
That reads to me--that sounds to me like we are talking
about enforcement as a substitute for rulemaking, at least in
some cases, and one of the things that concerns me about that
is that the rulemaking is an entire process that requires a
level of transparency and gets input and there is a cost-
benefit analysis, and my worry is that if we are using
enforcement instead of rulemaking, that we are going to miss
those pieces. What is your response to that?
Mr. Cordray. So, if I may, I would be glad to speak to
this, and I saw a lot of testimony on Tuesday about this, where
people make sort of perfunctory nods to, of course, we have to
root out fraud, but, you know, should not do much more than
that. Ninety percent of the $11 billion in relief made
available through our enforcement actions has been in cases
where one or more of the claims involved deception, lying to
customers or prospective customers. That is good solid law
enforcement, as far as I am concerned.
Now, as to the pattern of orders, I think everybody would
agree that basic fairness in law enforcement is that if person
A or institution, bank A, say, is doing these things and they
are found to violate the law, an action has to be taken in
consequence, that everybody else in the market that is doing
these things----
Senator Toomey. Yeah.
Mr. Cordray. ----is also violating the law and should stop
doing what they are doing.
Senator Toomey. I get that. Let me----
Mr. Cordray. So, signaling the marketplace very clearly
around each enforcement action is an important thing, but it is
basic.
Senator Toomey. Yeah. I am going to run out of time here,
but in the case in which you guys discovered discrimination on
the basis of protected class being committed by people who were
not aware of the protected class status of the people they were
supposedly discriminating against, you are applying a, what
seems to me, a novel new approach to interpreting the ECOA,
which has been a law since 1974. The Justice Department never
took your approach, that I am aware of----
Mr. Cordray. That is not true----
Senator Toomey. The Justice Department has your model and
it uses your methodology----
Mr. Cordray. In 1994----
Senator Toomey. ----to determine discrimination?
Mr. Cordray. In 1994, joint guidance was put out by the
banking agencies and the Justice Department--we were not around
then--that said, this is the law of the land, that wewould
enforce.
Senator Toomey. That your model would be the law of the
land. So, you are using that model?
Mr. Cordray. Yeah. Disparate impact is the law of the land.
Senator Toomey. And the methodology that you use in
developing that----
Mr. Cordray. The methodology----
Senator Toomey. ----and determining the probability of
people's race, that is all from 1994, is it?
Mr. Cordray. It actually goes back to the 1970s and
employment discrimination law and the like. But, the other
agencies all said that--and the guidance that we issued early
on simply said, we are a new agency, so people might not know
what our position is. We 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 it is the law of the land,
and to me, that is pretty conclusive on the subject.
Senator Toomey. So--OK. So, I am now learning something
new, which is that the methodology that you have learned for
identifying race and identifying people's status in these
protected classes is decades old, and there is nothing new
there. You did not come up with a new approach, no new models,
no new methodology----
Mr. Cordray. No, that is not--that is not what I said.
Senator Toomey. So, it is new, then.
Mr. Cordray. No, no. Let me just--if I may--disparate
impact is the law of the land. It has been recognized since at
least----
Senator Toomey. That is not what I am talking about.
Mr. Cordray. ----since well before 1994, explicitly
recognized by agencies in 1994. It continues to evolve. There
have been cases since then and there have been modifications in
this or that approach, this or that methodology. But, the law
is clear, and people who want us not to enforce that----
Senator Toomey. No, you are changing the subject. The point
is, you developed a new methodology. You have described it as
an evolution. However you choose to describe it is fine. But,
it is a new methodology that was not being used before and it
was not subject to the transparency of a rulemaking process.
Mr. Cordray. I do not think that is true. If you looked at
yourself 10 years ago, you are the same person then as you are
now. But have you changed in certain ways between then and now?
Very likely. I mean, you may look a little different. You may
think a little different. But, you are the same person.
Disparate impact has been the law of the land for decades.
It has been reaffirmed by the Supreme Court. Methodological
approaches have evolved over time. There has been case law on
this. People have adjusted to the case law. There have been--
people have actually taken input from Congressional leaders and
others and thought, maybe that is a better approach, and
thought to refine that. We should certainly continue to do
that, I would think. You are trying to do that with me today.
Senator Toomey. And all I am suggesting is if you are going
to do that and you are going to develop a new methodology for
identifying people's status in a protected class, it ought to
be in a transparent process, and that is part of the way the
rulemaking process is designed and what it is meant to achieve,
and you chose not to use it.
Mr. Cordray. No, it is certainly fair game as to whether
you think, or others think, and whether we agree, that we have
or should be as transparent as we should be. And, that is
always a legitimate grounds for discussion. I would be happy to
have our staff talk with you further about what we have tried
to do around transparency.
But, to say that this is a brand new methodology, that it
is somehow radically different from anything done before, it is
modifications and developments on law that has been around for
decades, law that was resoundingly reaffirmed by the Supreme
Court just last June, and is law that I believe we are required
to enforce. And why are we required to enforce it? Because it
is supposed to root out discrimination against individuals
based on their racial or ethnic origin or gender and that is
very un-American. And, this is the way in which Congress
developed this law and the Supreme Court has interpreted and we
believe that it is our job to enforce it.
Senator Toomey. Thank you, Mr. Chairman.
Chairman Shelby. Senator Warren.
Senator Warren. Thank you, Mr. Chairman.
Thank you for being here today, Director Cordray. Welcome
to your 61st hearing.
As you know, the payday lending industry is now doing $7
billion a year in loans. There are now more payday loan
storefronts in America than there are Starbucks, plus all of
the online payday lenders, often charging 200, 300, even 400
percent interest. Now, when emergencies arise, people need
access to credit, but payday lenders that build business models
around trapping people in the never ending cycle of debt are
throwing bricks to a drowning man.
Director Cordray, I know the CFPB is close to issuing its
payday lending rules, so I want to ask you three questions
about this process.
Mr. Cordray. OK.
Senator Warren. First, can you describe the research and
data gathering that the CFPB has done to try to figure out
where to draw the line between preserving access to credit and
trapping people in never ending cycles of payday loans?
Mr. Cordray. Yes. So, here, as with arbitration, we have
engaged in the most comprehensive research ever done by anyone
on this marketplace. We have done two significant white papers,
analyzed millions--millions--of payday loans across all types
of lenders, and what we found is that the model here is to, in
particular on payday balloon loans, is to get someone into a
payday balloon loan, and if they had to borrow $300 today, the
notion they are going to be able to repay $345 two weeks from
now is not very likely, although some do and great for them,
and maybe it works for them. But, many others end up rolling it
over and rolling it over, because they can pay the $45 at the
end of the 2 weeks, but they cannot pay the $345, and they can
never pay the $345.
And, by the way. you described these products as 200, 300,
400 percent interest rates. In Missouri, we have seen products,
loan products, that go as high as 1,950 percent rate of
interest. You can actually lend where the fees amount to 75
percent of the face value of the loan. That is a $1,000 loan
that becomes $18,000 or $20,000 by the end of the first year
and goes on from there, and this is from a class action
decision by a Missouri appellate court in which they read out
of the record some of the actual instances of people who
borrowed $100 and ended up paying back thousands of dollars and
still owing thousands of dollars. That is not a recipe for
financial success for people.
Senator Warren. Thank you very much.
Let me ask a second question around this. States currently
have different standards for regulating small dollar lending,
but the CFPB would create a single national floor. So, States
could still issue stronger payday lending restrictions if they
wanted to, but they could not drop below the CFPB standard. Can
you explain the benefits of having a single baseline rather
than just a lot of different local rules?
Mr. Cordray. Yeah, sure. In fact, this is the same approach
we took in our mortgage servicing rules, where we established a
baseline of requirements on mortgage servicers--not on States,
by the way, but on mortgage servicers--and said that States
were free to add further requirements on mortgage servicers if
they deemed it appropriate to do so.
And, by the way, this is an approach that has been common
in American law in our system of federalism. It is true of
securities law. It is true of environmental law. It is true of
antitrust law. It is true in many different areas of law, where
the Federal Government may intervene to a certain degree and
set certain requirements on individual citizens and companies.
The States are free to have their own regimes, and they do, and
they set requirements on individuals and companies and the two
systems coexist. There is nothing unusual about this. It has
been described as cooperative federalism and it works
reasonably well. It can be a little complicated at times, I
suppose, but a Federal system is bound to be a little
complicated at times.
Senator Warren. All right. Good. Thank you.
And, let me ask my third question here. The CFPB has been
working in this area now for 3 years. You have been gathering
data as you have described. You have drafted different
approaches, talked about it with industry. Now certain Members
of Congress has proposed imposing an additional 2-year delay on
your efforts. Can you give us some idea about the impact of
that delay and estimate how many more families will get stuck
in a debt trap during that time?
Mr. Cordray. So, I feel keenly already the amount of time
that it takes to embark on a Federal rulemaking in an area that
has a baseline of no research previously. It has taken us
several years to do the kind of detailed research that you
asked me about and I described. It is taking us time to go
through the processes in our statute, including a small
business review panel and report and so forth, and we are now
on the verge of actually proposing the rule. And it will take
time to work through it and finalize it.
I feel keenly that every day that passes--if you think a
rule is going to improve life, and it may or may not, but if
you think it is going to improve life, you would like that to
happen as soon as possible.
Senator Warren. Mm-hmm.
Mr. Cordray. And, delay for delay's sake simply means that
if there are harms here, and our research has identified harms
to consumers, then they will go on, and that anybody should
feel like that is no big deal means that they simply disagree
with the findings around the country of what this does for
people and for families, and----
Senator Warren. So----
Mr. Cordray. ----and I cannot agree with that.
Senator Warren. We are talking about perpetuating a lot of
misery here.
Mr. Cordray. Yes. That is right.
Senator Warren. Well, I want to thank you. I want to thank
all of the people who work at the CFPB for their terrific
efforts in this area.
You know, I know that the payday lending industry hires a
lot of lobbyists and they make a lot of political contributions
to try to protect their multibillion dollar business. I also
know that families that get cheated by payday lenders do not
have lobbyists and they do not have Political Action
Committees, which is why the independence of the CFPB is so
important.
You know, I hope you will move quickly to complete your
rulemaking on payday loans. You are the best hope for millions
of American families to avoid these debt traps in the future.
Thank you for your work.
Chairman Shelby. Senator Rounds.
Senator Rounds. Thank you, Mr. Chairman.
Good morning, Director Cordray.
Mr. Cordray. Good morning.
Senator Rounds. It is not too much longer and it will be
good afternoon.
Mr. Cordray. I was wondering myself. I did not know.
Senator Rounds. Director Cordray, in a recent speech before
the Consumer Bankers Association, one which Senator Toomey
alluded to a little earlier----
Mr. Cordray. Mm-hmm.
Senator Rounds. ----you discussed your philosophy on
consent orders. You had said that, and I will briefly lay this
out, our public enforcement actions have been marked by orders
which specify the facts and the resulting legal conclusions.
These orders provide detailed guidance for compliance officers
across the marketplace about how they should regard similar
practices at their own institutions.
What I want to talk about a little bit, my concern is that
the consent orders without a finding or even an admission of
guilt--the Ally settlement is an example of that--could mean
little more than a company's business decision to settle a
lawsuit with minimal expense.
My question is, do you agree that for compliance officers
to consider following a decree from another company, that
decree should be a part of either a court finding or contain an
admission of guilt, or if not, come from, as Senator Toomey was
alluding to, perhaps a rulemaking process laid out clearly,
definitively, and I am--just your thoughts on it.
Mr. Cordray. Sure. Well, first of all, Ally is a great
example because we worked there in partnership with the Justice
Department and they, as part of their process, were obliged to
file an order in court that the judge had to sign off on. So,
if that is your issue, then Ally is not a good example of it.
But, let me say this. If you are trying to address harm to
consumers out there in society, there are a number of ways you
can go about it. You can do your own research and try to think
about what you think is best and then go through a process to
adopt a rule. But another way, and one tool that Congress gave
us very specifically and emphatically, is to investigate facts
of individual circumstances, and if you find an actual
violation of law, clean it up, and that is what we do all the
time in enforcement.
And, what I say about sort of rulemaking by enforcement,
which is kind of a nice slogan people like and somehow that is
a bad thing, if we find through a thorough investigation, and
the institution typically does not dispute the facts that we
find, that there is a violation of law, then everybody in the
country should be able to see transparently that if they have
similar facts and similar practices and similar situations,
they are violating the law and they ought to stop it right now.
And what I said in that speech, and I stand by it, is it
would be--it is compliance malpractice for other institutions
not to look carefully at our orders in these cases, whether
they are entered in administrative order or court order, and
not to think about, am I doing the same thing, and am I
violating the law, and, therefore, should I clean that up? That
is a basic of consistent uniform law enforcement. And people
can call it regulation by enforcement. I call it good, solid
law enforcement.
Senator Rounds. Even though there was no admission of guilt
in this particular case----
Mr. Cordray. That does not have to be an admission of
guilt. We did a thorough investigation. We found the facts. Our
decree will state the facts as we know them to be. Whether the
institution agrees with that or not does not matter to me. In
the end, the facts are the facts, and if other people find the
same facts in their organization, they are on notice to clean
it up. And when we come to supervise them, we will be looking
to see if they have similar practices and they will be treated
similarly.
The key principle here is a basic principle of justice,
which is similar situations should be treated in the same way,
and it should not just be that one institution gets whacked and
other institutions go blithely on doing the same things that
violate the law. Everybody should be treated the same.
And we try to be very transparent to the marketplace as
quickly as we can through detailed enforcement orders, and when
we act through supervision, which is a confidential process,
without violating the confidentiality for individual
institutions, periodically, we put out our supervisory
highlights that tells you what we found in general at banks and
other institutions, what we thought violated the law, what we
did about it----
Senator Rounds. Well----
Mr. Cordray. ----and people should take account of that, as
well.
Senator Rounds. OK, then let me just slide this in a little
bit----
Mr. Cordray. OK.
Senator Rounds. ----on a little bit different approach, and
that is with regard to the way that you have looked at offering
no action letters.
Mr. Cordray. OK.
Senator Rounds. I know that you finalized your rules on the
no action letters, but it seems like what we are really
challenged with here is do you start out by saying, look, heads
up on your enforcement actions and that is the way that we are
going to be basically laying out the guidance of how we are
going to be interpreting and enforcing the issues, and yet when
you have companies that step back in and ask for guidance--and
by that, I mean in the Bureau's rulemaking it is estimated that
it would issue no action letters only in extraordinary
circumstances and anticipated issuing about one to three
letters per year. By contrast, the SEC is issuing--has issued
104 no action letters in 2015. It looks to me that if companies
are asking for guidance on this, would it not be fair to say,
rather than going through the process of trying to adjudicate
it--I mean, would you consider thinking twice about really not
issuing no action letters as a----
Mr. Cordray. Yeah. I actually think this is a very
legitimate line of questioning and I am not sure that I am
satisfied with where we appear to have landed on this, although
we did issue that to get something going in the area.
There are different agencies--we looked at a lot of
agencies. Some of them do a lot of this, like the IRS does
private letter rulings. They do them by the hundreds. Others do
very, very few. The banking agencies tend to do very, very few.
I do not know what the right answer is for us, but I feel
keenly, and I have had this discussion on the other side with
Representative Heck, who has been very persuasive on the
subject, that a process like this that ends up not really
amounting to anything is not really worth anybody's while. I
tend to agree with that and I want us to think more about that
as we go. We are leery of how much volume we can handle, but we
have begun to get inquiries and we are setting up a process for
how to try to figure out what to do with those inquiries and
see where we----
Senator Rounds. I think if there are questions out there
and they are asking for guidance on it, it seems like it would
be reasonable to find a way to try to work with them rather
than end up in an adjudication process in front of a court.
Mr. Cordray. Yeah. By the way, another thing I would say
is, on the enforcement and regulation differential, regulation
is something more where we feel the law needs to be changed in
certain ways, and we have authority to do that, subject to
Congressional authorization and oversight. Enforcement is more
the law is what it is and it is applying it to specific facts
and finding specific facts. And the facts are powerful. You
know, when the facts show that in the----
Senator Rounds. Mr. Cordray, I hate to cut you off----
Mr. Cordray. I am sorry.
Senator Rounds. ----but I know the Chairman's time is
valuable, as well, and I appreciate your temperance with me,
sir. Thank you.
Chairman Shelby. Thank you.
Senator Rounds. Thank you, Mr. Cordray.
Chairman Shelby. Senator Donnelly.
Senator Donnelly. Thank you, Mr. Chairman, and we can now
officially say good afternoon, Mr. Cordray.
Mr. Cordray. Thank you.
Senator Donnelly. Director, one of your recent undertakings
has been related to auto finance companies. The CFPB finalized
a rule last year to supervise large nonbank auto finance
companies and also reached separate agreements with several
auto finance companies to limit loan pricing and compensation.
I have been hearing from a number of auto dealers in my
State with their concerns on this issue and I just want to ask
to make sure that you work with all the stakeholders involved
in this issue, including auto dealers, to make sure we get this
right, to make sure there is continued access and that
everybody be treated fairly in this process.
Mr. Cordray. OK. And, by the way, I would say that in the
early going, we were kind of leery about talking to auto
dealers because we did not want anybody to think that we were
crossing that line and trying to enforce the law against auto
dealers, which we do not have authority to do. But, we have
always understood ourselves to have authority and, therefore,
responsibility to address auto lenders. I mean, I would not
necessarily have drawn the statute up the way it was drawn up,
where there was a distinction made between the two, because
they tend to work together in the marketplace. But, I do not
see how we can address practices of auto lenders without having
some effect on auto dealers. So, we are quite willing to engage
with taking input from dealers now, as long as they are very
clear that we respect that line.
Senator Donnelly. Understood, but like you said, these are
some of our small businesses that employ the most people in our
towns.
Mr. Cordray. Yeah.
Senator Donnelly. They are our friends and our neighbors.
Mr. Cordray. Yeah.
Senator Donnelly. And they want to get it right for their
customers, as well.
Mr. Cordray. And, by the way, I worked closely with them in
Ohio. I was the Ohio Attorney General. We had a program where
they had the opportunity to correct problems before we took
action that worked fairly well. We had the General Motors and
Chrysler bankruptcies that unfolded while I was Attorney
General. We worked to save dealerships across the State who
were being cutoff by the manufacturers and we created
procedures for them to appeal and many of them were saved.
I understand and very much agree with you on the importance
of auto dealers in our local communities. At the same time, if
we find problems in auto lender lending programs, we have to
deal with them. That is part of our job. We are a law
enforcement agency. But, I am quite willing to have that
discussion and engage in it vigorously and I hope you will find
that nobody says that they are unable to talk to the Consumer
Bureau if they have a concern. That is not what I intend.
Senator Donnelly. Another area I wanted to mention is an
area important to my State, because we have so much
manufacturing in this area, and that would be manufactured
housing. We have previously discussed the impact of CFPB rules
on manufactured housing lending, and I do have concerns that
new rules would negatively impact the ability of consumers to
buy, sell, or refinance these homes, as financing for smaller
balance loans is becoming more difficult. And, there has been a
seeming acknowledgment of some of these challenges by the CFPB.
The 2014 HMDA mortgage data shows high-cost manufactured
housing loans have basically evaporated at this point since the
rules went into effect, and my question is, does that mean that
lenders have reduced rates to get under the threshold, do you
think, or is it that lenders have just stopped taking
applications that they have previously accepted?
Mr. Cordray. I actually do not think there was ever much
high-cost lending in the manufactured housing market, so I do
not think it would be fair to say that there was a lot and then
it evaporated. I think there never was much and people have
shied away from that. I do think there is a lot of pricing that
does, as you said--exactly what you just said--comes in just
under the threshold so that it does not qualify as high-cost
loans, and that is the nature of this market, it seems.
Having said that, you have raised this issue with me and
some House colleagues have raised the issue with me and we went
back and did a white paper to try to understand it better,
because we realized we did not understand it as well as we
would like, and I would acknowledge, in Ohio, my background, I
have seen, and I am sure it is true in Indiana, as well, and in
many States, there are areas of the State where this is going
to be the practical means of finding housing on difficult
properties, rural properties, topography issues and the like.
A white paper showed that there has been a long-term
decline in manufactured housing. I do not know what all the
causes are. I think our folks did not really feel that they
understood that. But, it has been true for about 20 years. It
has not been a new phenomenon.
Senator Donnelly. I would suggest that a good portion of
that, as you look at your white paper, is access to capital,
capital challenges that are out there----
Mr. Cordray. Mm-hmm.
Senator Donnelly. ----because, as you said, it is not fair
to the rest of the country to think the rest of the country is
all Washington, DC, townhouses----
Mr. Cordray. That is right.
Senator Donnelly. ----that sell for a million dollars.
Mr. Cordray. Agreed.
Senator Donnelly. And, that family back in Indiana, that
family in Ohio, they very much, just as much as a family here--
--
Mr. Cordray. Absolutely.
Senator Donnelly. ----wants to have a place to call home--
--
Mr. Cordray. Yes.
Senator Donnelly. ----and to raise their family.
Mr. Cordray. And, by the way, wants to have a place they
can call home and not be gouged on it. That is important, too.
Senator Donnelly. Yeah.
Mr. Cordray. But, how to balance those things is an ongoing
issue.
Senator Donnelly. We agree on that, and in most every case,
I do not assume my local community banker is out to gouge
anybody.
Mr. Cordray. I would agree with that, although there are
some sharp practices in the manufactured housing market we have
seen, yes.
Senator Donnelly. Thank you, Mr. Chairman.
Chairman Shelby. Senator Moran.
Senator Moran. Mr. Chairman, I know we are out of time. I
will be very brief. In fact, I will not ask Director Cordray
any questions.
Director Cordray and I have had a long-time exchange in
these settings about this issue that seems to be getting a lot
of attention, indirect auto financing, today in this hearing,
and I would again indicate to the Director that rulemaking, not
enforcement, would be a better path for the CFPB to pursue.
And then I want to associate my remarks with you, Mr.
Chairman, in what you had to say about indirect auto financing.
None of us agree that discrimination has a place. We just--we
want discrimination out of our economy. This agreement extends
the need for vigorous enforcement of the Equal Credit
Opportunity Act. However, I am concerned that the CFPB auto
financing bulletin has resulted in more adversarial
relationships between the Bureau and the industry.
And, I wanted to highlight, finally, Mr. Chairman, that I
have introduced S. 2663, Reforming the CFPB Indirect Auto
Financing Guidance Act, and this is legislation identical to
what passed the House in a bipartisan way, 332 to 96, and I
would encourage my colleagues to join me in accomplishing that
legislation. It is simply an opportunity not to eliminate
CFPB's indirect auto financing guidance. It is a way to improve
the process and include the industry and consumers, Members of
Congress, in the process.
Thank you, Mr. Chairman.
Chairman Shelby. Thank you.
Senator Vitter.
Senator Vitter. Thank you, Mr. Chairman, and thank you, Mr.
Cordray.
I know our vote has been called on the floor, so I will be
brief----
Mr. Cordray. OK.
Senator Vitter. ----summarizing two real areas of concern,
and if, Mr. Cordray, if you could give a general response, and
if you care to, follow up in more detail perhaps in writing,
that would be great.
Mr. Cordray. OK.
Senator Vitter. The first area of concern is remittance
transfers, international money transfers. I think CFPB has
spent a lot of time and money and man hours on rulemaking for
that, but has been criticized by GAO and others for not setting
to bed abuses yet. And, so, I have a three-part question. What
is the summary of resources that have been spent on that,
number one. Number two, what is your response to criticism like
GAO about not adequately handling problems in that remittance
transfer area. And, number three, has your oversight quantified
and looked at the widespread use of this by folks in the
country and working in the country illegally and sending money
overseas, which by all accounts is a very widespread practice.
The second area of concern is conflicts of interest
involving Corey Stone. As you know, he is Assistant Director,
Office of Deposits, Cash Collections, and Reporting Markets at
CFPB, and he is the lead staffer on the payday rule. Now, I am
concerned about conflicts there because he was a senior
executive before CFPB, was a senior executive for a company he
started which sold out to a rival called MicroBilt, and they
worked with folks within credit files seeking financing, the
type payday lenders would perhaps have as customers.
Corey Stone sold his stock in that company to his brother
to avoid a conflict as he was coming to CFPB, for $18,000. That
stock has been valued recently at between $250,000 and
$500,000. It seems to have been way undervalued in order to
allow him to get rid of it to come to CFPB. That is number one.
Number two, he is in charge of this payday rule, and
depending on how that rule is written, that could increase
significantly the business, the market, the profitability of
his former company, his brother's company. Have you looked at
those serious conflict issues?
Mr. Cordray. So, I will take that one first. I have never
heard any charges against Mr. Stone. I think this is baseless.
I think it is bogus to raise it. If you want our staff to talk
to you about that situation, we will be glad to do so. He is
one of the finest public servants I know. He has been commuting
and gone extra lengths to make his work at the Bureau work. I
do not believe there is anything to anything you have just said
about him. He is a public official with great integrity, and if
there is more that we need to talk about about this, I will be
happy to talk about it with you offline.
Senator Vitter. OK. Can I follow up on that?
Mr. Cordray. Yeah.
Senator Vitter. Are you aware of the stock issue?
Mr. Cordray. Look, people who come to work at the Bureau,
some number of them came from the private sector. Usually, you
all think that that is a good thing. You do not want us to have
everybody not coming from the private sector----
Senator Vitter. But I am saying, are you----
Mr. Cordray. ----and they divest----
Senator Vitter. ----aware of the specific stock valuation--
--
Mr. Cordray. ----they divest assets when they come and they
divest them for fair market value. Now, at the time he came to
the Bureau, it would have been right in the wake of the crisis.
It may be--you know, the entire stock market was down more than
50 percent at that time. So, I do not know what the details
are, but I can assure you, we will be glad to look into it if
you want.
Senator Vitter. OK.
Mr. Cordray. Everything Corey does is with high integrity.
Senator Vitter. What I am asking is, have you looked into
that issue and come to a conclusion or not?
Mr. Cordray. Our Ethics Department vets everybody's
divestiture of assets before they are hired at the Bureau. It
is a painstaking process. I do not believe there is anything to
this, but we will be glad to follow up with you if you want to
pursue it.
Senator Vitter. Well, if you will follow up in writing,
that would be great.
Mr. Cordray. Yeah.
Senator Vitter. And then the second issue, the first one I
mentioned, is this remittance issue.
Mr. Cordray. Yeah. On the remittance issue, this was the
first rulemaking we did. We were required to do it by Congress,
again, not a task that we set for ourselves but a task you all
set for us. The rulemaking is in place. Whether it solved all
the ongoing abuses, it may or may not have. We will take
enforcement actions as needed against the industry if we find
abuses.
If you are aware of abuses or hearing about abuses that are
specific that we should know about, we will follow up with you
and be glad to hear what they are so that we can consider
whether to investigate them. But, I do think it is quite
possible our rulemaking has not solved every problem in the
marketplace, and to the extent it has not, we want to continue
to pursue problems in the marketplace.
And, then I forgot the third part of your question, but----
Senator Vitter. Well, related to that was does your
rulemaking address and does your enforcement and tracking
address what seems to be massive use of this money transfer
opportunity for folks being in and working in the country
illegally and sending money overseas.
Mr. Cordray. Our rulemaking does not address that. Congress
did not direct us to direct that, and those would be issues, I
would assume, for other parts of the Federal Government, not
for us.
Senator Vitter. OK, and so you do not track any of that
activity?
Mr. Cordray. I do not believe we do, no.
Senator Vitter. OK. Would the same apply if we were talking
about organized crime or some illegal sector using the same
remittance opportunity?
Mr. Cordray. I do not think we track undocumenteds in any
of the markets, credit cards, mortgages, et cetera. We are not
trying to dig into Bank of America or Citibank and ask them
what kind of documentation you asked for. If those are issues
for someone in the Federal Government, it would be elsewhere.
They are not issues for us.
Senator Vitter. But, I am saying, for you, would the same
response apply to illegal activity, say, organized crime?
Mr. Cordray. Usually, I come here and people are
criticizing us for trying to expand our jurisdiction. We are
looking at mobile cramming on cell phone companies, et cetera.
You are now telling us you would like us to look into organized
crime and undocumenteds----
Senator Vitter. I am asking if----
Mr. Cordray. We do not. That is not typically----
Senator Vitter. ----organized crime activity would be
something you would care about or look at.
Mr. Cordray. That is not part of our consumer finance--
limited consumer finance jurisdiction.
Senator Vitter. OK. Thank you. We will follow up on this,
as well.
Mr. Cordray. OK.
Senator Vitter. Thank you.
Mr. Cordray. Thank you.
Senator Vitter. Thank you, Mr. Chairman.
Chairman Shelby. Yes, sir. Thank you, Senator Vitter.
I would like to take a moment to respond to comments made
earlier here at the hearing by the Director to the Ranking
Member. He is correct that aggregate credit availability has
been increasing recently, as you said.
Mr. Cordray. Mm-hmm.
Chairman Shelby. But, that is what you would expect in a
near zero interest rate environment. This does not mean that
there are not specific issues, I would hope, in certain credit
markets that may be exaggerated by some of the Bureau's
actions.
For example, more categories of credit may actually be in
decline. Multiple studies have found that small business
lending has declined, while the volume of loans to large
businesses has risen.
In addition, research from Harvard University finds that
credit cards issued to certain lower-income consumers have
fallen by 50 percent. These are economic trends that I hope the
Bureau takes into serious consideration in your day-to-day work
over there.
Another thing I----
Mr. Cordray. That would be----
Chairman Shelby. Do you want to comment?
Mr. Cordray. Could I? Yes, sure.
Chairman Shelby. Go ahead.
Mr. Cordray. So, small business lending, you know, we have
not adopted any regulations that relate to small business
lending. We have very limited capacity there, although we will
be----
Chairman Shelby. But you alluded to small business lending
earlier.
Mr. Cordray. Beg your--yeah, we have a job that Congress
gave us that we have not yet fulfilled to develop the reporting
and data collection for this. But, none of that small business
change could be ascribed to the CFPB.
And as for credit cards for low income, again, I want to
take issue with this. In, I believe it was Mr. Zywicki's
testimony, he said from 2008 to 2012----
Chairman Shelby. Do you take an issue with the Harvard
study that I alluded to?
Mr. Cordray. If that is the Lux-Greene study, it is not a
very credible study and I would be glad to give you a briefing
on that.
Chairman Shelby. Is it not a credible study because you
disagree with it, or you just do not believe it is a credible
study?
Mr. Cordray. Because it is not very well done and it is not
very credible on the supposed evidence. It is just a----
Chairman Shelby. Would you furnish your concerns about the
study to the Committee?
Mr. Cordray. I would be glad to do that. But, I would say
that on the credit cards for low income, which was something
Mr. Zywicki alluded to, he was talking about 2008 through 2012.
Most all of that crash is due to the fact that households lost
$12 trillion in net worth in the wake of the crash, and he says
at one point in a sort of muddled way, it is hard to separate
that out from the effects of new rules. Well, you know, we did
not even come into existence until July of 2011, so trying to
pin all this on us is pretty flim-flam, if you ask me.
Chairman Shelby. Just for the record, now, without
objection, I would like to enter into the record statements
from the following groups that wrote the Committee in
conjunction with Tuesday's hearing on Assessing the Effects of
Consumer Finance Regulations and today's hearing on this
Consumer Financial Protection Bureau's Semiannual Report to
Congress. The statements include statements from the
Independent Community Bankers of America, the Consumer Bankers
Association, the National Association of Federal Credit Unions,
the Credit Union National Association, the American Financial
Services Association, the Electronic Transactions Association,
the Chamber of Commerce of the United States, the National
Automobile Dealers Association, the Mortgage Bankers
Association, an article by Leonard Chanin published in the
American Banker, and, finally, an article from the New York
Post regarding Ally's financial experiences with the Bureau.
Without objection, it is so ordered.
Mr. Cordray.
Mr. Cordray. I would be glad to have access to those so we
can consider them for improving our work.
Chairman Shelby. Well, we have a public record. We will
share with you. We want you to share with us, too.
Mr. Cordray. Yeah. But, again, going back to that credit
card so-called data, at the time a tsunami hit the beach, the
financial crisis, that somebody's garden hose might have been
pouring a little water on the beach at the same time is hardly
very relevant, in my view.
Chairman Shelby. Mr. Cordray, thank you for your appearance
before the Committee.
Mr. Cordray. Thank you.
Chairman Shelby. The Committee is adjourned.
[Whereupon, at 12:20 p.m., the hearing was adjourned.]
[Prepared statements, responses to written questions, and
additional material supplied for the record follow:]
PREPARED STATEMENT OF RICHARD CORDRAY
Director, Consumer Financial Protection Bureau
April 7, 2016
Chairman Shelby, Ranking Member Brown, and Members of the
Committee, thank you for the opportunity to testify today about the
Consumer Financial Protection Bureau's Semiannual Report to Congress. I
appreciate our continued dialogue as we work together to strengthen our
financial system and ensure that it serves consumers, responsible
businesses, and the long-term foundations of the American economy.
The Bureau presents this Semiannual Report to Congress and the
American people in fulfillment of its statutory responsibility and
commitment to accountability and transparency. This report provides an
update on the Bureau's mission, activities, accomplishments, and
publications since the last Semiannual Report, and provides additional
information required by the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank or Dodd-Frank Act). \1\
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\1\ Appendix B provides a guide to the Bureau's response to the
reporting requirements of Section 1016(c) of the Dodd-Frank Act. The
Bureau's most recent Semiannual Report, published in November 2015, and
covered April-September 2015. The report may be viewed at: http://
files.consumerfinance.gov/f/201511_cfpb_semi-annual-report-fall-
2015.pdf.
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The Dodd-Frank Act created the Bureau as the Nation's first Federal
agency with a mission of focusing solely on consumer financial
protection and making consumer financial markets work for American
consumers, responsible businesses, and the economy as a whole. In the
wake of the financial crisis of 2008-2010, the President and Congress
recognized the need to address widespread failures in consumer
financial protection and the rapid growth in irresponsible lending
practices that preceded the crisis. To remedy these failures, the Dodd-
Frank Act consolidated most Federal consumer financial protection
authority in the Bureau. \2\ The Dodd-Frank Act charged the Bureau
with, among other things:
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\2\ Previously, seven different Federal agencies were responsible
for rulemaking, supervision, and enforcement relating to consumer
financial protection. The agencies which previously administered
statutes for which authority transferred to the Bureau are the Federal
Reserve Board (and the Federal Reserve Banks) (Board or FRB),
Department of Housing and Urban Development (HUD), Federal Deposit
Insurance Corporation (FDIC), Federal Trade Commission (FTC), National
Credit Union Administration (NCUA), Office of the Comptroller of the
Currency (OCC), and Office of Thrift Supervision (OTS).
Ensuring that consumers have timely and understandable
information to make responsible decisions about financial
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transactions;
Protecting consumers from unfair, deceptive, or abusive
acts and practices, and from discrimination;
Monitoring compliance with Federal consumer financial law
and taking appropriate enforcement action to address
violations;
Identifying and addressing outdated, unnecessary, or unduly
burdensome regulations;
Enforcing Federal consumer financial law consistently in
order to promote fair competition;
Ensuring that markets for consumer financial products and
services operate transparently and efficiently to facilitate
access and innovation; and
Conducting financial education programs. \3\
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\3\ See Dodd-Frank Act, Pub. L. No. 111-203, Sec. 1021 (b) and
(c).
The Bureau has continued its efforts to listen and respond to
consumers and industry, to be a resource for the American consumer, and
to develop into a great institution worthy of the responsibilities
conferred on it by Congress.
Listening and responding to consumers is central to the Bureau's
mission. The Bureau continues to provide consumers with numerous ways
to make their voices heard. Consumers nationwide have engaged with the
Bureau through public field hearings, listening events, roundtables and
town halls, and through our website, consumerfinance.gov. Consumer
engagement strengthens the Bureau's understanding of current issues in
the ever-changing consumer financial marketplace and informs every
aspect of the Bureau's work, including research, rule writing,
supervision, and enforcement.
The Bureau has continued to improve the capabilities of its Office
of Consumer Response to receive, process, and facilitate responses to
consumer complaints. Consumer Response has also continued to expand a
robust public Consumer Complaint Database. The database updates nightly
and as of September 30, 2015, was populated by over 465,000 complaints
from consumers about financial products and services from all over the
country.
On June 25, 2015, the CFPB marked a milestone for consumer
empowerment when the Bureau began to publish consumer complaint
narratives in the Consumer Complaint Database. \4\ Consumers now have
the choice to share in their own words their experiences with the
consumer financial marketplace. Only those narratives for which opt-in
consumer consent is obtained and to which a robust personal privacy
scrubbing process is applied are eligible for disclosure. The CFPB
gives companies the opportunity to respond publicly to the substance of
the consumer complaints they receive from the CFPB by selecting from a
set list of public-facing response categories. Companies are under no
obligation to avail themselves of the opportunity. The Bureau also
issued a Notice and Request for Information \5\ to seek input from the
public on best practices for ``normalizing'' the complaint data it
makes available via the database to make the complaint data easier for
the public to use and understand.
---------------------------------------------------------------------------
\4\ See ``Final Policy Statement on Consumer Narratives''; 80 FR
15572, March 24, 2015.
\5\ See ``Request for Information Regarding the Consumer Complaint
Database: Data Normalization''; 80 FR 37237, June 30, 2015.
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On July 16, 2015, the Bureau launched the first in a new series of
monthly reports to highlight key trends from consumer complaints
submitted to the Bureau. The monthly report includes data on complaint
volume, most-complained-about companies, State and local information,
and product trends. Each month, the report highlights a particular
product and geographic location and will provide insight for the public
into the hundreds of thousands of consumer complaints on financial
products and services expected to be handled by the CFPB. The report
uses a 3-month rolling average, comparing the current average to the
same period in the prior year where appropriate, to account for monthly
and seasonal fluctuations. In some cases, month-to-month comparisons
are used to highlight more immediate trends.
The Bureau is also working to provide tools and information to
develop practical skills and support sound financial decision making
directly to consumers. These skills include being able to ask questions
and to plan ahead. One way we are doing this is with our online tool,
Ask CFPB. \6\ This tool provides answers to over 1,000 questions about
financial products and services, including on topics such as mortgages,
credit cards, and how to dispute errors in a credit report. We are also
focusing on helping consumers build the skills to plan ahead. For
example, our Paying for College \7\ set of tools helps students and
their families compare what their college costs will be as they decide
where to pursue a college education. Our Owning a Home \8\ set of tools
helps consumers shop for a mortgage loan by helping them understand
what mortgages are available to them, explore interest rates, compare
loan offers, and by providing a closing checklist. The Money Smart for
Older Adults \9\ curriculum, developed with the Federal Deposit
Insurance Corporation (FDIC), includes resources to help people prevent
elder financial exploitation and prepare financially for unexpected
life events.
---------------------------------------------------------------------------
\6\ Available at: http://www.consumerfinance.gov/askcfpb/.
\7\ See http://www.consumerfinance.gov/paying-for-college/.
\8\ See http://www.consumerfinance.gov/owning-a-home/.
\9\ See https://www.fdic.gov/consumers/consumer/moneysmart/
olderadult.html.
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The Bureau is working with other Government agencies, social
service providers, and community service providers to develop channels
to provide decision-making support in moments when consumers are most
receptive to receiving information and developing financial decision-
making skills. This support includes integrating financial capability
into other programs and services where consumers may be seeking
assistance. We are also tailoring our approaches to financial decision-
making circumstances, challenges, and opportunities for specific
populations, including servicemembers and veterans, students and young
adults, older Americans, and lower-income and other economically
vulnerable Americans.
When Federal consumer financial protection law is violated, the
Bureau's Supervision, Enforcement, and Fair Lending Division is
committed to holding the responsible parties accountable. In the 6
months covered by the most recent report, our supervisory actions
resulted in financial institutions providing more than $95 million in
redress to over 177,000 consumers.
During that timeframe, the Bureau also announced orders through
enforcement actions for approximately $5.8 billion in total relief for
consumers who fell victim to various violations of consumer financial
protection laws, along with over $153 million in civil money penalties.
The Bureau brought numerous enforcement actions for various violations
of the Dodd-Frank Act, including an action against a company for
blocking consumers' attempts to save their homes from foreclosure, an
action against a lender for the failure to furnish clear information
regarding the student loan interest consumers paid, and actions against
two companies for mobile cramming. In joint actions, we worked with the
New York Department of Financial Services to take action against two
companies for deceiving consumers about the costs and risks of their
pension advance loans. We also worked with the Office of the
Comptroller of the Currency and the FDIC to take action against a
depository institution for failing to credit consumers for the full
amounts of their deposits, and worked with the Department of Justice to
resolve actions with an auto finance company and a depository
institution that will put in place new measures to address
discretionary auto loan pricing and compensation practices. The Bureau
also took action against a company for engaging in unfair, deceptive,
and abusive acts or practices to collect debt from servicemembers, in
violation of the Consumer Financial Protection Act. In addition, the
Bureau continues to develop and refine its nationwide supervisory
program for depository and nondepository financial institutions,
through which those institutions are examined for compliance with
Federal consumer financial protection law.
The Bureau also released one edition of Supervisory Highlights
during this reporting period. The Supervisory Highlights series is
intended to inform both industry and the public about the development
of the Bureau's supervisory program and to discuss, in a manner
consistent with the confidential nature of the supervisory process,
broad trends in examination findings in key market or product areas.
This edition reported examination findings in the areas of consumer
reporting, debt collection, student loan servicing, mortgage
origination, mortgage servicing, and fair lending. It also included
information about recent public enforcement actions that were a result,
at least in part, of CFPB's supervisory work.
The Bureau has also published new guidance documents, in
partnership with other regulators where appropriate, to help
institutions know what to expect and how to become, or remain,
compliant with the law, including bulletins on private mortgage
insurance cancellation and termination, the Section 8 housing choice
voucher home ownership program, and interstate land sales.
Reasonable regulations are essential for protecting consumers from
harmful practices and ensuring that consumer financial markets function
in a fair, transparent, and competitive manner. The Research, Markets,
and Regulations Division has focused its efforts on promoting markets
in which consumers can shop effectively for financial products and
services and are not subject to unfair, deceptive, or abusive acts or
practices. During this reporting period, the Research and Markets teams
released a data point on ``credit invisibles'' and technical reports
regarding the National Survey of Mortgage Borrowers and the National
Mortgage Database. The Regulations office issued regulations modifying
and clarifying a number of rules implementing changes made by the Dodd-
Frank Act to the laws governing various aspects of the mortgage market,
including amendments relating to small creditors and rural or
underserved areas under Regulation Z, which, among other things,
increased the number of financial institutions able to offer certain
types of mortgages in rural and underserved areas, a rule moving the
effective date of the Know Before You Owe mortgage disclosure rule to
October 3, 2015, and an interpretive rule on home ownership counseling
organizations lists and high-cost mortgage counseling.
During this reporting period, the Bureau issued several other
proposed or final rules or requests for information under the Dodd-
Frank Act, including a final rule defining larger participants of the
automobile financing market and defining certain automobile leasing
activity as a financial product or service, which extends the Bureau's
supervision relating to consumer financial protection laws to any
nonbank auto finance company that makes, acquires, or refinances 10,000
or more loans or leases in a year, and a request for information
regarding student loan servicing.
To support the implementation of and industry compliance with its
rules, the Bureau has published a number of plain-language compliance
guides summarizing certain rules, and it has actively engaged in
discussions with industry about ways to achieve compliance. \10\ The
Bureau also continued its efforts to streamline, modernize, and
harmonize financial regulations that it inherited from other agencies.
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\10\ See http://www.consumerfinance.gov/guidance/#compliance.
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In addition to implementing the Dodd-Frank Act, the Bureau
continues to explore other areas where regulations may be needed to
ensure that markets function properly and possibly harmful or
inefficient practices are addressed. Over the next 6 months, the Bureau
will continue implementing the Dodd-Frank Act and using its regulatory
authority to ensure that consumers have access to consumer financial
markets that are fair, transparent, and competitive.
The Bureau continues to grow and evolve as an institution. As of
September 30, 2015, the CFPB team consisted of 1,486 employees working
to carry out the Bureau's mission. It has worked to build a human and
physical infrastructure that promotes diversity, transparency,
accountability, fairness, and service to the public.
The Bureau recognizes that the best way to serve consumers is to
ensure that its workforce reflects the ideas, backgrounds, and
experiences of the American public. The Bureau's Office of Minority and
Women Inclusion supports the Bureau's mission by working with the
offices of Human Capital and Civil Rights to continue building a
diverse and inclusive workforce that can foster broader and better
thinking about how to approach markets. \11\
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\11\ During the previous reporting period, the Bureau's Office of
Equal Employment and Opportunity transitioned to the Office of Civil
Rights (OCR), and it and the OMWI office moved under the umbrella of
the newly created Office of Equal Opportunity and Fairness (OEOF),
housed in the CFPB Director's Office and reporting directly to the
Director.
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Over the last year, the Bureau has continued to expand its efforts
to support and protect consumers in the financial marketplace. The
Bureau seeks to serve as a resource, by writing clear rules of the
road, enforcing consumer financial protection laws in ways that improve
the consumer financial marketplace and by helping individual consumers
resolve their specific issues with financial products and services.
While the various divisions of the Bureau play different roles in
carrying out the Bureau's mission, they all work together to protect
and educate consumers, help level the playing field for participants,
and fulfill the Bureau's statutory obligations and mission under the
Dodd-Frank Act. In all of its work, the Bureau strives to act in ways
that are fair, reasonable, and transparent.
Chairman Shelby, Ranking Member Brown, and Members of the
Committee, thank you for the opportunity to provide the Bureau's
Semiannual Report. The Bureau will continue working to ensure that the
American people are treated fairly in the consumer financial
marketplace. I look forward to your questions.
RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN SHELBY
FROM RICHARD CORDRAY
Q.1. In a recent speech before the American Constitution
Society, you stated, ``[a]rbitration clauses, as they are used
today both in the field of consumer finance and more generally,
often have been deliberately designed to block Americans from
effective means of vindicating their rights.'' The CFPB's
outline of proposals under consideration favors requiring these
clauses to allow class litigation. In a class action lawsuit,
however, individual class members give up their right to sue, a
large number of cases are settled out of court, the average
reward is very small, and the individual class members
generally play no role in the judicial process.
How did you determine that a class action lawsuit is better
than arbitration for consumers?
A.1. On July 10, 2017, the Consumer Bureau issued a Final Rule
regarding agreements for consumer financial products and
services providing for mandatory pre-dispute arbitration. The
Final Rule was based on and consistent with the Bureau's
Arbitration Study and Report to Congress pursuant to Dodd-Frank
Wall Street Reform and Consumer Protection Act 1028, submitted
in March 2015.
The Final Rule is not based on a determination that a class
action lawsuit is necessarily a better option for a consumer
than arbitration. Rather, the rule reflects the conclusion that
consumers are better off when both individual and class
remedies are available. Indeed, the Final Rule does not
prohibit providers from using pre-dispute arbitration
agreements with respect to claims filed by individual
consumers. Instead, the Final Rule prohibits providers from
using pre-dispute arbitration agreements to block consumer
class actions in court.
The Bureau adopted this provision of the Final Rule in part
because it found that individual dispute resolution alone
(which includes, among other things, individual arbitration and
individual litigation filed in court) is insufficient in
enforcing laws applicable to contracts for consumer financial
products and services. This finding is supported by the
Arbitration Study, which found that a very small number of
consumers seek individual redress either through arbitration or
the courts relative to the size of the market for consumer
financial products and services. According to the Arbitration
Study, the total number of individual consumer financial claims
in the specified markets was approximately 2,400 per year. \1\
Even multiplying those 2,400 claims by 10 or 100 to account for
the markets and jurisdictions the Study did not analyze would
amount to less than 250,000 individual claims. The result would
still be a low number of individual claims in relation to the
hundreds of millions of individual consumer financial products
and services.
---------------------------------------------------------------------------
\1\ The Bureau's arbitration study found in the jurisdictions
studied 1,200 individual cases in Federal court, 800 in small claims
court, and 400 in arbitration.
---------------------------------------------------------------------------
By contrast, as set out in the Final Rule and consistent
with the Arbitration Study, the Bureau found that a much larger
number of consumers derive substantial benefits from class
action settlements. Over a 5-year period, the Arbitration Study
analyzed the results of 419 Federal consumer finance class
actions that reached final class settlements. These settlements
involved, conservatively, about 160 million consumers and about
$2.7 billion in gross relief of which, after subtracting fees
and costs, made $2.2 billion available to be paid to consumers
in cash relief or in-kind relief. Further, as set out in the
Study, nearly 24 million class members in 137 settlements
received automatic distributions, meaning they received
payments without having to file claims. In the five years of
class settlements studied, at least 34 million consumers
received $1.1 billion in cash payments.
In addition to the monetary relief awarded by class action
settlements, consumers also received nonmonetary relief from
those settlements. Specifically, the Study showed that there
were 53 settlements covering 106 million class members that
mandated behavioral relief that required changes in the
settling companies' business practices beyond simply to comply
with the law.
Perhaps most importantly, the threat of class action
proceedings not only facilitates relief to consumers in
specific cases, but also strengthens incentives for consumer
financial service providers to engage in robust compliance on
an ongoing basis. As discussed in the preamble to the Final
Rule, the Bureau found that the rule will incentivize greater
compliance with the law by covered providers. Absent the rule,
providers may be more likely to engage in potentially unlawful
business practices because they know that any potential costs
from exposure to putative class action filings have been
reduced if not effectively eliminated. Due to this reduction in
legal exposure (and thus a reduction in risk), providers have
less of an incentive to invest in compliance management in
general, such as by investing in employee training with respect
to compliance matters or by carefully monitoring changes in the
law. Therefore, the Bureau believes that consumers are better
protected and the market is fairer for those companies that
comply with the law when consumers also are able to obtain
relief by grouping their own disputes against providers of
consumer financial products or services.
Q.2. Why do you believe that arbitration clauses that ban class
action lawsuits deny consumers the ability to vindicate their
legal rights but other arbitration clauses do not?
A.2. In the Final Rule, the Bureau did not find that the terms
of arbitration agreements in today's consumer financial
marketplace generally prevent consumers from seeking and
obtaining individual relief. However, the Bureau found that the
terms of arbitration agreements do prevent groups of consumers
from seeking and obtaining relief on a class basis. As noted
above, the Bureau believes that consumers get substantial
relief and other benefits from having the ability to seek and
obtain relief on class basis.
Q.3. Please explain how class action lawsuits that are settled
out of court and result in tiny rewards for class members give
people a ``day in court.''
A.3. As the Bureau explained in the preamble to the Final Rule,
class actions generally aggregate claims for smaller damage
amounts. As noted above, consumers generally do not pursue
smaller harms that they suffer individually. That means that
where an arbitration agreement is used to stop a class action,
harmed consumers will often be left without remedy. The Bureau
believes that the very substantial relief that consumers get
through class actions (detailed above) is a better result for
harmed consumers than no relief.
Q.4. A year ago, the CFPB issued an outline of proposals to
regulate small dollar loans. The outline contemplates
regulating certain small dollar loans with a duration of more
than 45 days and an annual interest rate above 36 percent.
If the Bureau issues a rule that does not outright ban
these products, but makes it unprofitable to make such loans
above 36 percent, would that violate the Dodd-Frank Act's
prohibition on the CFPB imposing a usury limit?
If not, does the Bureau believe Section 1027(o) of the
Dodd-Frank Act imposes any limits on the Bureau's ability to
set restrictions on the offering of financial products above a
certain interest rate? Why or why not?
A.4. The Consumer Bureau is not prohibiting charging interest
rates or annual percentage rates (APRs) above the demarcation
for coverage of certain longer-term loans. Rather, the Consumer
Bureau is proposing to require that lenders make a reasonable
assessment of consumers' ability to repay certain longer-term
loans above the 36 percent demarcation, in light of evidence of
consumer harms in the market for loans with this
characteristic. It is appropriate to focus regulatory attention
on the segment of longer-term lending that the Consumer Bureau
believes poses the greatest risk to consumers in the form of
potential unfair and abusive practices and to recognize that
price is an element in defining that segment.
The Consumer Bureau believes that the term ``usury limit''
in section 1027(o) of the Dodd-Frank Act is reasonably
interpreted not to prohibit such differential regulation given
that the Consumer Bureau is not proposing to prohibit lenders
from charging interest rates above a specified limit.
The Consumer Bureau's considerations concerning section
1027(o) of the Dodd-Frank Act are described in the notice of
proposed rulemaking in the section-by-section analysis of
proposed 1041.3.
Q.5. You have repeatedly stated that the Bureau would be
sensitive to good faith efforts by companies to comply with the
CFPB's TILA-RESPA mortgage disclosure rule. In December,
however, the American Banker quoted a senior Bureau official
telling mortgage lenders at a conference, ``I want to be
perfectly clear. There is no grace period from the Bureau.''
Why won't the Bureau provide a formal ``hold harmless''
period to clarify mixed messages delivered by the Bureau's
officials and more clearly delineate its expectations?
A.5. The Consumer Bureau has continuously reaffirmed its
commitment to support a smooth transition for the mortgage
market, including its commitment to be sensitive to the efforts
made by institutions to come into compliance. We recognize that
the mortgage industry needed to make significant systems and
operational changes to adjust to the new requirements and that
implementation required extensive coordination with third
parties. We appreciate that the mortgage industry dedicated
substantial resources to understand the rules, adapt systems,
and train personnel in a serious effort to get it right. As
with any change of this scale, despite the best of efforts,
there inevitably will be inadvertent errors in the early days.
While complete and accurate use of the Regulation Z forms is
the ultimate compliance goal, we recognize that a certain level
of minor errors in the early days of implementation is to be
expected.
That is why the Consumer Bureau and the other regulators
have made clear that our initial examinations for compliance
with the rule will be sensitive to the progress industry has
made. In particular, the Consumer Bureau has indicated our
examiners will be squarely focused on whether companies have
made good faith efforts to come into compliance with the rule.
The Consumer Bureau has stated that early examinations will
focus on an entity's implementation plan, including actions
taken to update policies, procedures, and processes; the
training of appropriate staff; and its handling of early
technical problems or their implementation challenges. All of
the regulators have indicated that their examinations for
compliance in the initial period of implementing the new rule
will be corrective and diagnostic, rather than punitive. This
position is consistent with our approach to supervision and
enforcement of the rules implementing title XIV of the Dodd-
Frank Wall Street Reform and Consumer Protection Act, which has
worked out well.
While implementation has posed challenges to industry,
industry reports indicate that implementation is now proceeding
more smoothly. \2\ Data published by one leading provider of
loan origination services as well as a research survey
conducted by a major trade association, confirm these
observations. \3\ Moreover, a recent homebuyer survey by
another trade association suggests that the new disclosures
are, indeed, helping consumers understand their loan terms. \4\
The Consumer Bureau will continue to adjust its approach to the
experience of implementation.
---------------------------------------------------------------------------
\2\ See, e.g., Ben Lane, ``Mortgage Defects Fall for First Time in
a Year as TRID Issues Subside'', Housingwire, Dec. 7, 2016, available
at http://www.housingwire.com/articles/38696-mortgage-defects-fall-for-
first-time-in-a-year-as-trid-issues-subside; Brena Swanson, ``Ellie Mae
CEO: Initial Discomfort of TRID Now Over, Time To Close Finally
Tumbles'', Housingwire, March 21, 2016, available at http://
www.housingwire.com/articles/36563-ellie-mae-ceo-initial-discomfort-of-
trid-now-over; Ken Frears, ``TRID: Back on Track in June'', National
Association of Realtors', July 12, 2016, available at http:/
/economistsoutlook.blogs.realtor.org/2016/07/12/trid-back-on-track-in-
june/.
\3\ See Ellie Mae, ``Origination Insight Report'' (May, 2016),
available at http://www.elliemae.com/origination-insight-reports/
Ellie_Mae_OIR_MA_Y2016.pdf; National Association of
Realtors', Survey of Mortgage Originators, First Quarter
2016: TRID After 6 Months and Changes to FHA's Cancellation Policy,
available at http://www.realtor.org/reports/survey-of-mortgage-
originators-first-quarter-2016.
\4\ Press Release, American Land Title Association, ``American
Land Title Association Survey Shows More Homebuyers Reviewing Mortgage
Disclosures'', May 16, 2016, http://www.alta.org/press/
release.cfm?r=260.
Q.6. During the hearing, I asked you about research from
Harvard University that finds that credit card accounts
originated to certain lower-income consumers have fallen by 50
percent. You replied, ``[i]f that is the Lux-Greene study, it
is not a very credible study . . . [b]ecause it is not very
well done and it is not very credible on the supposed
evidence.''
To the extent you are referring to the study published in
April 2016, please elaborate on your views on the study and the
underlying research, and explain what research and evidence the
Bureau has relied upon to refute the findings of that study.
A.6. According to an April 2016 paper prepared by Marshall Lux
and Robert Greene, the post-2007 fall in credit balances and
accounts held by consumers with lower credit scores should be
attributed to regulatory constraints. \5\ The Lux-Greene list
of such hypothesized supply-side constraints include the Credit
CARD Act of 2009, the Consumer Bureau's credit card enforcement
actions, the lack of a commission structure at the Consumer
Bureau, and an alleged explosion in Bureau credit card
regulation.
---------------------------------------------------------------------------
\5\ The full title of the paper is ``Out of Reach: Regressive
Trends in Credit Card Access''. The authors are Marshall Lux and Robert
Greene.
---------------------------------------------------------------------------
In the Bureau's assessment, the Lux-Greene paper
underweights the impact of the Great Recession on the supply
and demand for credit in the consumer credit card market. To
control the massive credit losses associated with the downturn,
credit card issuers reduced supply, closing or reducing lines
and tightening their underwriting standards. That severely
restricted the availability of credit, especially to consumers
with lower credit scores. On the demand side, consumers reacted
to the Great Recession and its aftermath by becoming more
conservative in their use of credit cards. \6\
---------------------------------------------------------------------------
\6\ The share of borrowers utilizing all available credit across
their cards has actually fallen for credit card borrowers with subprime
scores, from roughly 48 percent of active card users in early 2007 to
roughly 44 percent in 2010 through 2013.
---------------------------------------------------------------------------
As the economy picked up, the picture changed. \7\ The
Consumer Bureau publishes a review of the consumer credit card
market every 2 years. \8\ The Consumer Bureau's 2015 credit
card study showed that account growth from 2012through 2015 was
skewed towards consumers with lower credit scores. \9\ Major
mainstream media have reported the same trends. \10\ Results
recently published by the Consumer Bureau show that, for the
most recent 12 months for which the Bureau has published data,
year-over-year growth in total line originated to borrowers in
both low-income neighborhoods and moderate-income neighborhoods
has outpaced growth in total line originated to borrowers in
high-income neighborhoods. \11\
---------------------------------------------------------------------------
\7\ Figures 2 and 3 in the Appendix to the Bureau's December 2015
Credit Card Market Report (the ``2015 Report'') show the close
relationship through the recession between the unemployment rate and
charged off or delinquent balances.
\8\ The CARD Act formally requires the Bureau to carry out
biennial reviews of the consumer credit card market. These reviews
address a number of issues, including the question of credit
availability to consumers with lower credit scores. We published
associated reports to Congress at the end of 2013 and 2015. The reports
are available on the Bureau's website, available at: (2015 Report)
http://files.consumerfinance.gov/f/201512 cfpb_report-the-consumer-
credit-card-market.pdf; and here (2013 Report): http://
files.consumerfinance.gov/f/201309_cfpb_card-act-report.pdf. We also
published key findings from a 2011 Bureau conference on the CARD Act,
which also addressed this same issue of availability. The findings are
available on the Bureau's website here: https://
www.consumerfinance.gov/data-research/research-reports/card-act-
conference-key-findings/.
\9\ See 2015 Report at pages 90 through 94, especially figures 4
and 8. The Bureau's analysis takes account of private label accounts,
which Lux and Greene ignore despite the significance of such accounts
to consumers with lower credit scores.
\10\ See Wall Street Journal (May 20, 2016), ``Balance Due: Credit
Card Debt Nears $1 Trillion as Banks Push Plastic'', available at
https://www.wsj.com/articles/balance-due-credit-card-debt-nears-1-
trillion-as-banks-push-plastic-1463736600.
\11\ See http://www.consumerfinance.gov/data-research/consumer-
credit-trends/credit-cards/lending-neighborhood-income-level/ (December
2016).
---------------------------------------------------------------------------
The Consumer Bureau recognizes that it is hard to
disaggregate the different effects of the Great Recession on
the supply and demand for consumer credit. However, there is
substantial evidence that shows that the reduction in card
balances held by consumers with lower scores is not
attributable to credit card regulation. For example:
Credit availability and price trends in the small
business credit card market and the consumer credit
card market have been broadly similar through the Great
Recession and its aftermath. \12\ The small business
credit card market, however, has not been subject to
relevant portions of the CARD Act. Indeed, the vast
majority of the Consumer Bureau's regulatory activity
does not apply to business-purpose credit cards at all.
If Lux and Greene were correct about the impact of
consumer protection law on the consumer credit card
market, the small business credit card, which was free
of such ``constraints,'' should have performed
differently. But on core performance metrics for price
and credit availability, it did not.
---------------------------------------------------------------------------
\12\ This point is detailed in the Bureau's 2015 Report at 80-82
and 117-18, and in the 2013 Report at 35-36 and 54-60.
Lux and Greene compare originations in the auto
loan and credit card market. The auto loan market,
however, is the only major consumer credit market that
has recovered faster than the credit card market.
Originations growth since 2009 in general purpose
credit cards outstrips all other major consumer credit
markets, and the recovery in private label credit card
growth has been substantially stronger than for home-
secured loan markets. In fact, when looking only at
consumers with lower credit scores, the recovery in
originations growth for general purpose credit cards
has outstripped even the auto loan market. \13\
---------------------------------------------------------------------------
\13\ See 2015 Report at 95-97.
The share of subprime borrowers holding mortgages
changed by approximately the same amount--20 percent
relative to 2005-07 levels--as did the share of
---------------------------------------------------------------------------
subprime consumers holding credit cards.
In addition, Lux and Greene's characterization of the
Consumer Bureau's actions in the credit card market is often
imprecise or incomplete. In significant cases, the regulatory
constraints that they identify do not, in fact, exist.
Lux and Greene claim an apparent explosion in the
Consumer Bureau's level of credit card regulation from
2011; the red area in the paper's figure 9 purports to
show a significant expansion in the Consumer Bureau's
regulatory activity from that point through 2014. In
fact, from its inception through the end of that
period, the Consumer Bureau issued two new substantive
credit card rules. One made it easier for stay-at-home
spouses and partners to obtain credit cards, thereby
expanding the availability of credit. \14\ The other
substantive change, made in response to a legal
challenge against one of the Board's rules, reduced fee
restrictions on cards marketed to consumers with
subprime credit scores. \15\ It is therefore not
accurate to claim that the Consumer Bureau's regulatory
activity has limited consumers' access to credit. \16\
---------------------------------------------------------------------------
\14\ See http://www.consumerfinance.gov/about-us/newsroom/the-
cfpb-amends-card-act-rule-to-make-it-easier-for-stay-at-home-spouses-
and-partners-to-get-credit-cards/ (April 2013). This new regulation
revised certain credit card ability-to-pay rules issued by the Board of
Governors. Several parties--including credit card issuers--had sought
this change.
\15\ See http://www.consumerfinance.gov/about-us/newsroom/
consumer-financial-protection-bureau-finalizes-credit-card-act-rule/
(March 2013). The Bureau's action was taken in response to a legal
challenge against one of the Board's rules on fee-harvester cards
marketed to consumers with subprime credit scores. That change excluded
certain fees that were charged to consumers before account opening from
the requirements of the Board's rule. To the Bureau's knowledge no
commenter has ever claimed that this change limited access to credit.
\16\ Since its inception the Bureau has issued nonsubstantive
revisions to the credit card rules, but these kinds of technical or
``housekeeping'' adjustments could not possibly create any supply-side
constraint to the issuance of consumer credit card line. For example,
these revisions effectuated the transition of regulatory authority from
the Board of Governors to the Bureau, meaning that the rules were
renumbered and references to the ``Board'' were replaced with
references to the ``Bureau,'' or effectuated adjustments for inflation.
Lux and Greene focus on the supposedly regressive
effect of the Consumer Bureau's reliance on its
``abusiveness'' authority. The Dodd-Frank Wall Street
Reform and Consumer Protection Act's creation of new
authority in this respect, however, has played a
minimal role in the Consumer Bureau's credit card work.
Lux and Greene's main complaint in this area seems to
be with the Bureau's enforcement actions against credit
card add-on products. But those enforcement actions did
not rely on abusiveness authority. They relied instead
on the requirement that issuers not market add-on
products deceptively or unfairly charge consumers for
add-on products that they are not actually receiving.
\17\
---------------------------------------------------------------------------
\17\ Lux and Greene note only one instance in which the Bureau has
in fact cited its abusiveness authority in connection with the credit
card market. The Bureau's September 2014 bulletin on interest rate
promotions points out that when an issuer markets such a promotion on
the basis of the interest rate savings to the consumer from revolving a
promotional balance at lower rates, the issuer risks engaging in a
deceptive or abusive practice if it fails to disclose clearly that
revolving such balances may also increase the consumer's interest rate
charges on new purchases made during the promotion. Lux and Greene do
not explain or offer any evidence for their claim that this commonsense
observation has ``discouraged certain product features.'' Some issuers
have made efforts to improve their disclosures on this point, but that
development should be welcomed.
Q.7. Finally, the Lux-Greene paper sometimes makes factual
assertions contradicted by the available record. For example,
they contend that Consumer Bureau enforcement actions are
``driving'' issuers to ``only offer `plain vanilla' '' credit
cards. But Lux and Greene cite no such cards or any evidence
that such cards are becoming the sole product offering in this
space. In fact, as the Consumer Bureau's 2015 Report documents,
the credit card market shows continued innovation, whether in
rewards, security, or mobile functionality, giving consumers a
wide range of benefits and functionalities to consider when
card shopping.
Does the Bureau have any plans to further clarify what
actions are unfair, abusive, or deceptive to provide clarity to
lenders in order to increase the availability of credit cards
for lower-income consumers? If not, why not?
A.7. The Consumer Bureau does not agree that the credit card
market has been hampered since the Great Recession by a
supposed lack of clarity around regulatory standards. To the
contrary, the Consumer Bureau's rule writing in this market has
been appropriate because the Board of Governors undertook a
clear and comprehensive regulatory effort to implement the
important consumer protections enacted by Congress in the CARD
Act. \18\ As noted above, when necessary, the Consumer Bureau
has acted to revise or build on those rules. In one case, a
legal challenge to a Board rule caused the Consumer Bureau to
issue a revised rule. On another, the Consumer Bureau revised a
Board-issued rule that was having the unintended consequences
of limiting access to credit by spouses and partners who did
not work outside the home but who did have the ability to pay
for a credit card account.
---------------------------------------------------------------------------
\18\ Although Lux and Greene appear to oppose most or potentially
all of that Board effort, many of the Board's CARD Act rules duplicated
earlier rules proposed by the Board in 2008 under its ``UDAP''
authority to regulate unfair and deceptive practices. (See http://
www.federalreserve.gov/newsevents/press/bcreg/20080502a.htm) Their
complaint that the Bureau has not issued rules to implement its own
``UDAAP'' authority, therefore, is hard to reconcile with their
apparent opposition to earlier Board rules that effectively did just
that.
---------------------------------------------------------------------------
When the Consumer Bureau has brought credit card
enforcement actions on the basis of its authority to regulate
Unfair, Deceptive, and Abusive Acts and Practices (UDAAP), it
has focused on well-established legal norms. Thus, as noted
above, the credit card add-on cases attacked deceptive
marketing and the unfair ``sale'' of products that were not in
fact received.
Q.8. Section 1022(b)(2)(A) of the Dodd-Frank Act requires the
Bureau to perform a cost-benefit analysis when prescribing
rules.
Is it important for the CFPB to conduct high quality
economic analysis as part of its rulemaking and cost-benefit
analysis?
A.8. Yes, the Consumer Bureau considers it to be good policy to
conduct economic analysis as part of the rulemaking process.
Section 1022(b)(2)(A) of the Dodd-Frank Wall Street Reform and
Consumer Protection Act calls for the Bureau to consider the
potential benefits, costs, and impacts of its consumer
protection regulations. Specifically, the Consumer Bureau
considers the potential benefits and costs of regulation to
consumers and covered persons, including the potential
reduction of access by consumers to consumer financial products
and services, the impact of proposed rules on insured
depository institutions and insured credit unions with $10
billion or less in total assets as described in section 1026 of
the Dodd-Frank Act, and the impact on consumers in rural areas.
Q.9. Is the CFPB's economic analysis currently sufficiently
robust and thorough? If the answer to (a) and (b) are both
``yes,'' will the Bureau commit to publishing guidance on
economic analysis in CFPB rulemakings, similar to what the SEC
\19\ has already done? If not, why not?
---------------------------------------------------------------------------
\19\ https://www.sec.gov/divisions/riskfin/
rsfi_guidance_econ_analy_secrulemaking.pdf
A.9. Yes, these analyses are an important tool to help evaluate
potential regulatory burdens, and our practice is to seek
public comment on our analyses of potential benefits, costs,
and impacts, and to seek comment on our additional sources of
data. Like other Federal agencies, the Consumer Bureau is
required to conduct a written analysis of the potential impacts
and alternatives at both the proposal and final rule stage.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
FROM RICHARD CORDRAY
Q.1. We heard on Tuesday about regulation leading to bank
consolidation. But the number of financial institutions in this
country has been declining for decades, way before Dodd-Frank.
That being said, it is important that small financial
institutions are not disproportionately impacted by regulation.
Would you describe what the Bureau has done to address the
concerns of small financial institutions and reduce their
regulatory burden?
A.1. Section 1022(b)(1) of the Dodd-Frank Wall Street Reform
and Consumer Protection Act (Dodd-Frank Act) authorizes the
Consumer Bureau to prescribe rules and issue orders and
guidance, as may be necessary or appropriate to administer and
carry out the purposes and objectives of the Federal consumer
financial laws, and to prevent evasions thereof. In doing so,
Section 1022(b)(2) requires that the Consumer Bureau consider
the potential benefits and costs to consumers and covered
persons, including the potential reduction of access to
consumer financial products and services to consumers. Section
1022(b)(2) also requires the Consumer Bureau to consider the
impact of a proposed rule on insured depository institutions
and credit unions with total assets of $10 billion or less as
well as the impact on consumers in rural areas. Moreover,
Section 1022(3)(A) gives the Consumer Bureau the authority to
create exemptions from the Consumer Financial Protection Act of
2010 or rules issued under that Act for any class of covered
persons, service providers, or consumer financial products or
services if the Consumer Bureau determines an exemption is
necessary or appropriate to carry out the purposes and
objectives of the Consumer Financial Protection Act after
taking into consideration a set of factors specified in the
statute.
To date, the Consumer Bureau has sought to carefully
calibrate its efforts to ensure consistency with respect to
consumer financial protections across the financial services
marketplace, while accounting for the different business models
and classes of financial institutions. For example, as part of
the Consumer Bureau's commitment to achieving tailored and
effective regulations, we have taken the following actions for
different models and classes of institutions:
Mortgage Origination Rules (Title XIV)
Expanded safe harbor for small creditors. A small
creditor has a broader safe harbor for its Qualified
Mortgage (QM) loans than non-small creditors. The
Consumer Bureau's rules provide a safe harbor for QMs
with annual percentage rate (APR) spreads over Average
Prime Offer Rate (APOR) up to 350 basis points, whereas
non-small creditors have a safe harbor for spreads up
to 150 basis points. The Consumer Bureau's rules also
allow a small creditor to make QMs with debt-to-income
ratios that exceed the otherwise applicable 43 percent
cap. (Small creditors must hold these loans in
portfolio for 3 years.)
Exempted small creditors in rural and underserved
areas. Small creditors that operate (or operated
``predominantly'' before implementation of the Helping
Expand Lending Practices in Rural Communities Act in
March 2016) in rural or underserved areas are exempt
from requirements to establish escrow accounts for
higher priced mortgage loans and from restrictions on
offering QMs and Home Ownership and Equity Protection
Act (HOEPA) loans (``high cost'' mortgages as defined
in the HOEPA) that have balloon payment features. QMs
and HOEPA loans generally cannot have balloon payments.
Implemented a 2-year pause for small creditors. The
Consumer Bureau established a 2-year transition period
(until January 10, 2016) allowing small creditors to
make balloon-payment QMs and balloon-payment HOEPA
loans regardless of whether they operated predominantly
in rural or underserved areas, while the Consumer
Bureau revisited and reconsidered the definition of
``rural'' for this purpose.
Expanded exemptions for creditors in rural and
underserved areas. In connection with other changes to
amend the definitions of ``small creditor'' and ``rural
area,'' the Consumer Bureau published a final rule in
October 2015 that extended this 2-year transition
period from January 2016 until April 2016. The Bureau's
final rule also provided a significant expansion of
``rural,'' as well as an expansion of which entities
can qualify as ``small creditors.'' The Consumer
Bureau's final rule took effect on January 1, 2016,
before the 2-year transition period expired. In March
2016, the Consumer Bureau issued an interim final rule
that implements the Helping Expand Lending Practices in
Rural Communities Act, and makes these provisions
available to small creditors that extend at least one
covered transaction secured by property located in a
rural or underserved area in the previous calendar
year. The Bureau estimated that about 6,000 additional
small creditors would be eligible as a result of this
change.
Relaxed requirements for appraisals. Small
creditors have relaxed rules regarding conflict of
interest in ordering appraisals and other valuations.
Mortgage Servicing Rules (Title XIV)
Exempted small servicers from providing periodic
statements. Small servicers are exempt from the Truth
in Lending Act requirement to provide periodic
statements.
Exempted small servicers from loss mitigation
requirements. Small servicers are exempt from all of
the Real Estate Settlement Procedures Act provisions on
policies and procedures; early intervention; continuity
of contact; and loss mitigation, except that a small
servicer may not file for foreclosure unless the
borrower is more than 120 days delinquent on the
mortgage. Small servicers may also not file for
foreclosure (or move for a foreclosure judgment or
order of sale, or conduct a foreclosure sale) if a
borrower is performing under the terms of a loss
mitigation agreement.
Excluded certain seller-financed transactions and
mortgage loans voluntarily serviced for a non-afflliate
from being counted toward the small servicer loan
limit. This allows servicers that would otherwise
qualify for small servicer status to retain their
exemption while servicing those transactions.
Home Mortgage Disclosure Act Rule (Reg C)
Exempted lower-volume depository institutions from
Home Mortgage Disclosure Act reporting. In October of
2015, the Consumer Bureau adopted a final rule revising
Regulation C, which implements HMDA. HMDA and
Regulation C, among other things, require covered
mortgage lenders to report data concerning their
mortgage lending activity. Changes to coverage in the
final rule will reduce the number of banks, savings
associations, and credit unions that are required to
report HMDA data. The revisions will relieve about 22
percent of currently reporting depository institutions
from the burden of reporting HMDA data. Also, by final
rule issued in late August of 2017, the Consumer Bureau
expanded the volume-based exemption from reporting of
open-end lines of credit under HMDA for institutions
with fewer than 500, instead of 100, annual
originations in each of the two preceding years of such
lines of credit. This expanded exemption applies for
calendar years 2018 and 2019, during which the Consumer
Bureau will consider whether to reexamine the
appropriate volume level at which to set the exemption
permanently.
Reduced HMDA error submission threshold for certain
small entities. New Federal Financial Examination
Institution Council guidelines, of which the Consumer
Bureau is a member, provide a more lenient 10 percent
HMDA field error resubmission threshold (to determine
whether the lender must resubmit a particular HMDA data
field) for financial institutions with lower lending
volumes, including many small institutions, for data
collected beginning in 2018. Previously, all
institutions were subject to the same error thresholds.
The new guidelines make other burden-reducing changes
that apply to all lenders, which may be particularly
beneficial to small institutions.
Remittances Rule (Regulation E subpart B)
Provided regulatory certainty for small entities
under the Electronic Fund Transfer Act. In the Bureau's
rules implementing the Dodd-Frank Act's amendments to
the Electronic Fund Transfer Act, regarding remittance
transfers, the Bureau recognized that certain entities
do not provide remittances in the normal course of
their business and determined that the remittance
requirements do not apply to transfers sent by entities
that provide 100 or fewer remittances each year.
Small financial institutions play a vital role within many
communities across the Nation, as well as within the economy.
Their traditional model of relationship lending has been
beneficial to many people in rural areas and small towns
throughout the country. For these reasons, the Consumer Bureau
attempts to ensure that rules and regulations are not
burdensome to these smaller financial institutions.
Q.2. A survey from the National Association of Realtors found
that the most frequent errors in mortgage disclosure documents
were missing concessions and incorrect names or addresses. What
outreach did the Bureau done to ensure that industry was ready
for these changes? What will the CFPB do going forward?
A.2. Prior to issuance of the Know Before You Owe mortgage
disclosure rule in November 2013, the Consumer Bureau conducted
extensive outreach and testing of prototype forms with
consumers and industry, provided the public with the
opportunity to comment on the forms through the Consumer
Bureau's website, and convened a panel to consider the impact
of the forms and rules on small financial services providers.
\1\
---------------------------------------------------------------------------
\1\ For more information on the Bureau's Small Business Review
Panel, see http://www.consumerfinance.gov/blog/sbrefa-small-providers-
and-mortgage-disclosure/.
---------------------------------------------------------------------------
Since the Know Before You Owe mortgage disclosure rule was
issued in November 2013, the Consumer Bureau has taken many
steps to support industry implementation and to help creditors,
vendors, and others affected by the Know Before You Owe
mortgage disclosure rule to better understand, operationalize,
and prepare to comply with the Know Before You Owe mortgage
disclosure rule's new streamlined disclosures. We have made it
a point to engage directly and intensively with financial
institutions and vendors through a formal regulatory
implementation project.
The Consumer Bureau's regulatory implementation efforts
include the following:
Interagency coordination. In-depth exam procedures
were approved by the Federal Financial Institutions
Examination Council (FFIEC) in February 2015 and
published by the Bureau on April 1, 2015. The Consumer
Bureau's own examination procedures incorporating the
FFIEC exam procedures were initially published on May
4, 2015.
Publishing a ``readiness guide,'' plain-language
guides, and other resources. The ``readiness guide''
includes a wide-ranging questionnaire to help industry
come into and maintain compliance with the rule. The
Consumer Bureau has also published a compliance guide,
a guide to the new integrated disclosure forms, an
illustrative timeline, and annotated versions of the
new integrated disclosure forms, providing references
to the TILA statutory disclosures implemented on the
Loan Estimate and Closing Disclosure. \2\
---------------------------------------------------------------------------
\2\ These resources are available at http://
www.consumerfinance.gov/policy-compliance/guidance/implementation-
guidance/tila-respa-disclosure-rule/.
Publishing materials targeted to real estate
professionals. The Consumer Bureau published, on its
website, a real estate professional's guide to the Know
Before You Owe mortgage disclosure rule. \3\ These
webpages provide links to materials real estate
professionals and others can download for their own use
or to share with consumers.
---------------------------------------------------------------------------
\3\ http://www.consumerfinance.gov/know-before-you-owe/real-
estate-professionals/
Publishing materials targeted to settlement
professionals. The Consumer Bureau published, on its
website, a settlement professional's guide to the Know
Before You Owe mortgage disclosure rule. \4\ These
webpages provide links to materials settlement
professionals and others can download for their own use
or to share with consumers.
---------------------------------------------------------------------------
\4\ http://www.consumerfinance.gov/policy-compliance/know-you-owe-
mortgages/settlement-professionals-guide/
Maintenance of an implementation website. The
Consumer Bureau's regulatory implementation webpage,
http://www.consumerfinance.gov/policy-compliance/
_guidance/implementation-guidance/tila-respa-
disclosure-rule/, is designed to be responsive to
industry concerns and provides a central location for
---------------------------------------------------------------------------
all the implementation support provided by the Bureau.
Regular internal meetings. An implementation
support team meets weekly to discuss industry feedback
and identify appropriate responses.
Publishing amendments and updates to the rule in
response to industry requests. In January 2015, after
extensive outreach to stakeholders, the Consumer Bureau
adopted two minor modifications and technical
amendments to the rule. \5\ In July 2015, we extended
the rule's effective date by 2 months and made some
minor clarifications to smooth industry implementation.
\6\ In February 2016, we corrected a typographical
error in the Supplementary Information to the Know
Before You Owe mortgage disclosure final rule. \7\ In
April 2016, we announced that we have begun the process
of drafting a Notice of Proposed Rulemaking (NPRM) to
incorporate some of the Bureau's informal guidance into
the regulation text and commentary, as well as provide
greater certainty and clarity in certain areas of the
rule. That NPRM was issued on July 29, 2016. The
comment period ended on October 18, 2016.
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\5\ 80 FR 8767 (Feb. 19, 2015).
\6\ 80 FR 43911 (July 24, 2015).
\7\ 81 FR 7032 (Feb. 10, 2016).
Finalizing final rule to facilitate implementation
of Know Before You Owe. On July 7, 2017, the Consumer
Bureau finalized updates to the Know Before You Owe
rule to provide greater clarity and certainly. The rule
addressed issues including: the tolerances for the
total of payments, housing assistance lending,
cooperatives and privacy and sharing of information.
\8\
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\8\ 82 FR 37656 (Aug. 11, 2017).
Providing unofficial staff guidance. Bureau staff
continues to provide guidance directly to creditors,
vendors, their trade associations and legal
representatives, and other stakeholders. These efforts
---------------------------------------------------------------------------
have been ongoing since the rule was issued.
Engaging with stakeholders. Bureau staff has
provided remarks and addressed questions about the rule
and related implementation matters at over 70 formal
events and over 80 informal stakeholder meetings since
the rule was issued. In addition, as part of its
ongoing engagement with stakeholders, the Consumer
Bureau has supported implementation of the rule in over
300 more general meetings with stakeholders.
Conducting webinars. The Consumer Bureau has
conducted seven free, publicly available webinars,
available for viewing through the Consumer Bureau's
website, \9\ that provide guidance on how to interpret
and apply specific provisions of the rule. All of these
industry-facing webinars are indexed to assist users in
quickly finding the relevant material. The Consumer
Bureau has also conducted a free, publicly available
webinar targeted to housing counselors.
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\9\ These webinars are available at http://
www.consumerfinance.gov/policy-compliance/guidance/implementation-
guidance/tila-respa-disclosure-rule/.
While implementation has posed challenges to industry,
industry reports indicate that implementation is now proceeding
more smoothly. \10\ Data published by one leading provider of
loan origination services as well as a research survey
conducted by a major trade association confirm these
observations. \11\ Moreover, a recent homebuyer survey by
another trade association suggests that the new disclosures
are, indeed, helping consumers understand their loan terms.
\12\ The Loan Estimate and the Closing Disclosure have been
praised by many as improvements to the existing forms. \13\ The
Consumer Bureau will continue to adjust our efforts to the
experience of implementation.
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\10\ See, e.g., Ben Lane, ``Mortgage Defects Fall for First Time
in a Year as TRID Issues Subside'', Housingwire, Dec. 7, 2016,
available at http://www.housingwire.com/articles/38696-mortgage-
defects-fall-for-first-time-in-a-year-as-trid-issues-subside; Brena
Swanson. ``Ellie Mae CEO: Initial Discomfort of TRID Now Over, Time To
Close Finally Tumbles'', Housingwire, March 21, 2016, available at
http://www.housingwire.com/articles/36563-ellie-mae-ceo-initial-
discomfort-of-trid-now-over; Ken Frears, ``TRID: Back on Track in
June'', National Association of Realtors', July 12, 2016,
available at http://economistsoutlook.blogs.realtor.org/2016/07/12/
trid-back-on-track-in-june/.
\11\ See Ellie Mae, ``Origination Insight Report'' (May, 2016),
available at http://www.elliemae.com/origination-insight-reports/
Ellie_Mae_OIR_MAY2016.pdf; National Association of
Realtors', ``Survey of Mortgage Originators, First Quarter
2016: TRID After 6 Months and Changes to FHA's Cancellation Policy'',
available at http://www.real_tor.org/reports/survey-of-mortgage-
originators-first-quarter-2016.
\12\ Press Release, American Land Title Association, ``American
Land Title Association Survey Shows More Homebuyers Reviewing Mortgage
Disclosures'', May 16, 2016, http://www.alta.org/press/
release.cfm?r=260.
\13\ Brian Honea, ``How Satisfied Are Borrowers With the
Origination Process?'' The M Report (July 13, 2016), available at
http://www.themreport.com/news/origination/07-l3-2016/how-satisfied-
are-borrowers-with-the-origination-process; ``STRATMOR: TRID Is
Boosting Customer Satisfaction'', March 29, 2016, available at http://
www.mortgageorb.com/stratmor-trid-is-boosting-customer-satisfaction;
``New ClosingCorp Survey Gauges Early Consumer Reaction to New Real
Estate/Mortgage Rules'', Businesswire (March 15, 2016), available at
http://www.businesswire.com/news/home/20160315005228/en/ClosingCorp-
Survey-Gauges-Early-Consumer-Reaction-Real; Trey Garrison, ``Here's How
TRID Is Changing the Mortgage Industry'', Housingwire (October 12,
2015), available at http://www.housingwire.com/articles/print/35319-
heres-how-trid-is-changing-the-mortgage-industry.
Q.3. Several members criticized your auto lending enforcement
actions, including the use of disparate impact theory. Yet, as
you noted in the hearing, disparate impact has been recognized
for decades as a tool to ensure fair lending. For example, the
Federal financial regulators detailed how financial
institutions should monitor for disparate impact in a 1994
interagency guidance. Can you describe why it is important for
---------------------------------------------------------------------------
financial institutions to monitor for disparate impact?
A.3. Disparate impact is the law and has been used by Federal
agencies for decades and upheld by courts. The applicability of
the disparate impact doctrine, also known as the ``effects
test,'' to credit transactions is reflected in the legislative
history of the ECOA. Regulation B, which the Federal Reserve
Board originally drafted to implement the ECOA, provides that:
The legislative history of the Act indicates that the
Congress intended an ``effects test'' concept, as
outlined in the employment field by the Supreme Court
in the cases of Griggs v. Duke Power Co., 401 U.S. 424
(1971), and Albemarle Paper Co. v. Moody, 422 U.S. 405
(1975), to be applicable to a creditor's determination
of creditworthiness.
The Commentary explicating Regulation B further elaborates:
The act and regulation may prohibit a creditor practice
that is discriminatory in effect because it has a
disproportionately negative impact on a prohibited
basis, even though the creditor has no intent to
discriminate and the practice appears neutral on its
face, unless the creditor practice meets a legitimate
business need that cannot reasonably be achieved as
well by means that are less disparate in their impact.
In accordance with the foregoing authorities, as the
Consumer Bureau exercises our supervisory and enforcement
authority, we consider evidence of disparate impact as one
method of proving lending discrimination under the ECOA and
Regulation B.
In addition, since the Consumer Bureau did not exist when
the Federal law enforcement and prudential regulatory agencies
issued the policy statement in 1994, the Bureau, in 2012,
publicly reaffirmed that the legal doctrine of disparate impact
remains applicable as the Bureau exercises its supervision and
enforcement authority to enforce compliance with the ECOA and
Regulation B. The Consumer Bureau's ECOA Examination
Procedures, Mortgage Origination Examination Procedures, and
Mortgage Servicing Examination Procedures also adopt and
reference the Interagency Fair Lending Examination Procedures,
including those designed to identify evidence of disparate
impact.
Q.4. A series of class actions were filed against auto finance
companies in the 1990s and 2000s, which alleged that dealer
markup resulted in unfair pricing for minority borrowers. The
CFPB has extensively studied arbitration clauses in consumer
financial contracts. What did you learn, if anything, about
arbitration clauses in auto finance contracts? How might this
impact the ability of consumers to file class actions in the
future?
A.4. The Consumer Bureau's Arbitration Study reviewed
arbitration filings in the years 2010, 2011, and 2012 relating
to a number of consumer financial products and services before
the American Arbitration Association. This analysis found 293
individual filings before the American Arbitration Association
regarding what the Arbitration Study describes as ``auto
purchase loans.'' \14\ The Arbitration Study did not study the
prevalence of arbitration provisions in automobile finance
contracts. The Consumer Bureau's review of arbitration filings,
however, found that that in addition to the 293 individual
filings, a class arbitration dispute against an auto dealer and
lender alleging various deceptive practices was one of the two
class arbitration disputes across the six product markets
studied. \15\ The claimants specified that they sought damages
in excess of $1 million. Although the case was filed in 2010,
the AAA case file did not contain any substantive records
beyond the arbitration demand, the arbitration agreement, and
the State court order on the respondent's successful motion to
compel arbitration. \16\
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\14\ The Study's count of auto purchase loans does not include
disputes relating to automobile title loans. It also excluded disputes
against auto dealers unless: (1) it was clear that the auto dealer was
also the issuer of the consumer's auto purchase loan (erring on the
side of overstating the number of disputes that focused on the
automobile loans, as opposed to the automobiles being purchased); or
(2) the consumer brought a claim relating to an auto purchase loan and
only named the auto dealer as a respondent (suggesting that either the
auto dealer was the lender or that the consumer potentially named the
auto dealer in error, believing that the auto dealer was the lender);
or (3) the consumer also named the lender as a defendant. We did not
include in our case count claims against car dealers relating to ``spot
financing'' or similar disputes that do not involve an actual auto
purchase loan, as opposed to a representation that such financing would
be forthcoming. We also did not include disputes about motorcycles or
motorhomes. We use this classification of ``auto purchase loans'' only
for the limited purposes of this report. It is not related to any other
Bureau initiative, current or future, which may address similar loans.
\15\ See Arbitration Study, Section 5, p. 86.
\16\ Arbitration Study, Section 5, p. 20.
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In a separate study of class action settlements in Federal
and selected State courts from the years 2008 through 2012, the
Consumer Bureau found 18 class action settlements relating to
auto purchase loans. \17\ These 18 settlements led to over $202
million of cash relief to class members. \18\ Although the
Consumer Bureau did not explore the number of consumers who
received payments in these 18 settlements, available
information showed that the settlements included more than
560,000 class members. \19\ Ten such settlements reported that
they used automatic methods to distribute funds to consumers,
rather than requiring ``claims made'' processes. Over 17,000
consumers in those ten settlements received automatic
distributions. \20\ Information about attorneys' fees was
available in all 18 settlements, totaling approximately $9.5
million, or 5 percent of the total gross relief. \21\ For the
impact of arbitration provisions on consumers' ability to file
class actions, some commenters have observed that arbitration
clauses may be particularly targeted at class actions. \22\ In
the Consumer Bureau's review of class action litigation filings
in Federal court and selected State courts from 2010, 2011, and
2012 companies moved to compel arbitration in 94 of 562 class
action cases relating to the six consumer financial product
markets reviewed. \23\ 21 of those 94 motions to compel
involved auto purchase loans. \24\
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\17\ Arbitration Study, Section 8, p. 12 table 1.
\18\ Arbitration Study, Section 8, p. 25 table 8.
\19\ Arbitration Study, Section 8, p. 17 table 4
\20\ Arbitration Study, Section 8, p. 22 table 6.
\21\ Arbitration Study, Section 8, p. 33 table 10.
\22\ See, e.g., Thomas B. Hudson, ``Arbitration: Use It or Lose
It, Spot Delivery'' (July 2014); Arbitration Study, Section 6, p. 54
n.91.
\23\ Arbitration Study, Section 6, p. 57.
\24\ See id.
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On July 10, 2017, the Consumer Bureau issued a final rule
on arbitration agreements that will apply to agreements that
are entered into on or after March 19, 2018. Companies subject
to the final rule are prohibited from using a pre-dispute
arbitration agreement to block consumer class actions in court
and requires providers to insert language into their
arbitration agreements reflecting this limitation. This final
rule is based on the Bureau's findings--which are derived from
the Study--that pre-dispute arbitration agreements are being
widely used to prevent consumers from seeking relief from legal
violations on a class basis, and that consumers rarely file
individual lawsuits or arbitration cases to obtain such relief.
In addition, the Bureau's Final Rule includes several
provisions extending coverage to certain automobile finance
companies. The final rule's Comment 2(c)-1.ii clarifies that an
automobile dealer that provides consumer credit is a covered
person under Dodd-Frank section 1002(6)--and such a person's
contracts may contain pre-dispute arbitration agreements as
that term is defined in 1040.2(c). Yet an automobile dealer
that is excluded from the Bureau's rulemaking authority in
circumstances described by Dodd-Frank section 1029 would not be
required to comply with the requirements in 1040.4, because
those requirements apply only to providers, and such automobile
dealers, while they are covered persons, are excluded by
1040.3(b)(6) and therefore are not providers under 1040.2(d).
The requirements in 1040.4 would apply, however, to the use of
the automobile dealer's pre-dispute arbitration agreement by a
different person that meets the definition of provider, such as
a servicer, or purchaser or acquirer of the automobile loan,
where the agreement was entered into after the compliance date.
Section 1040.3(a)(2) extends coverage to brokering or
extending consumer automobile leases as defined in 12 CFR
1090.108, which applies to leases of automobiles with an
initial term of at least 90 days and either of the following
two characteristics: (1) The lease is the ``functional
equivalent'' of an automobile purchase finance arrangement and
is on a ``non-operating basis'' within the meaning of Dodd-
Frank section 1002(15)(A)(ii); or (2) the lease qualifies as a
``full-payout lease and a net lease'' within the meaning of the
Bureau's Larger Participant rulemaking for the automobile
finance market.[868] The Bureau believes that the final rule
should reach brokering or extending consumer automobile leases,
consistent with the definition of that activity in the Bureau's
larger participant rulemaking for the automobile finance
market. The Bureau had explained in that prior rulemaking that,
from the perspective of the consumer, many automobile leases
function similarly to financing for automobile purchase
transactions (which generally would have been covered by
proposed 1040.3(a)(1)) and have a similar impact on the
consumer and his or her well-being.
Q.5. The OCC recently came out with a white paper detailing its
approach to FinTech and financial innovation with regard to the
institutions it regulates. Can you describe the CFPB's approach
to FinTech companies? How will the CFPB work with the other
prudential regulators to coordinate supervision of FinTech
activities?
A.5. The Consumer Bureau recognizes that evolving technologies
are driving constant change in today's financial marketplace.
The developments in consumer financial products and services
can present both significant benefits and potential risks to
consumers. As part of the Consumer Bureau's mission to
facilitate consumer access to innovative products and services,
the Bureau launched its Project Catalyst initiative in 2012.
Through Project Catalyst, the Consumer Bureau engages and
collaborates with companies and other persons pursuing
consumer-friendly financial innovations, including established
financial institutions as well as newer FinTech companies. The
Consumer Bureau was the only Federal agency explicitly
mentioned in the Office of the Comptroller of the Currency's
(OCC) white paper on the subject of regulatory collaboration.
Bureau staff working on Project Catalyst have an open line of
communication with OCC staff working on the OCC's Responsible
Innovation initiative. We expect ongoing collaboration and
coordination between the two teams in the future.
The Consumer Bureau also coordinates closely with Federal
prudential and State bank and nonbank regulators regarding a
broad array of supervisory matters, including FinTech
activities as appropriate. Representatives of the Consumer
Bureau and the Federal prudential regulators meet regularly to
coordinate supervisory and other activities, and supervisory
staff at the Consumer Bureau and the Federal prudential
regulators confer on a routine basis to discuss examinations
and other supervisory matters regarding particular
institutions. The Consumer Bureau also participates in the
Federal Financial Institutions Examination Council (FFIEC) and
coordinates further with the Federal prudential regulators
through the FFIEC.
Q.6. Nearly 1 in 4 Americans either does not have access to a
checking account or has an account but may rely on alternative
financial services. Some of those who cannot get a bank account
cannot do so because they are reported to financial
institutions by specialty consumer reporting agencies. What
work have you done to ensure that these specialty consumer
reporting agencies are reporting accurate information to
financial institutions? More generally, can you detail what
work the CFPB has done to increase individuals' access to the
financial system, particularly checking and savings accounts,
and what plans you have for the upcoming year on this topic?
A.6. The Consumer Bureau is using its supervisory authority to
review the accuracy of information furnished to and reported by
Nationwide Specialty Consumer Reporting Agencies (NSCRAs) to
financial institutions.
As an example, our reviews have found that one or more
NSCRAs had internal inconsistencies in linking certain
identifying information (e.g., Social Security numbers and last
names) to consumer records associated with negative involuntary
account closures, such as checking account closures for fraud
or account abuse. These inconsistencies in some cases resulted
in incorrect information being placed in consumers' files.
Based on the weaknesses identified, Supervision directed one or
more NSCRAs to develop and implement internal processes to
monitor, detect, and prevent the association of account
closures to incorrect consumer profiles, and to notify affected
consumers.
Our reviews have also focused on NSCRAs' oversight of
furnishing practices. Examiners have found that one or more
NSCRAs had weaknesses in their systems and processes for
credentialing of financial institutions before they were
allowed to supply consumer information to the NSCRAs. Based on
these findings, Supervision directed one or more NSCRA to
strengthen its oversight and establish documented policies and
procedures for the timely tracking of credentialing and re-
credentialing of financial institutions.
The Consumer Bureau has also conducted reviews at financial
institutions to assess compliance with furnisher obligations
under the Fair Credit Reporting Act (FCRA) and its implementing
regulation, Regulation V. The reviews focused on entities
furnishing information (furnishers) to NSCRAs that specialize
in reporting in connection with deposit accounts. Based on
supervisory findings, the CFPB issued a bulletin in February
2016 that emphasized the obligation of furnishers under
Regulation V to establish and implement reasonable written
policies and procedures regarding the accuracy and integrity of
information relating to consumers that they furnish to Consumer
Reporting Agencies (CRAs). \25\
---------------------------------------------------------------------------
\25\ See CFPB Compliance Bulletin 2016-01 at: http://
files.consumerfinance.gov/f/201602_cfpb_supervisory-bulletin-fumisher-
accuracy-obligations.pdf.
---------------------------------------------------------------------------
Examinations have also found issues with how certain
furnishers verify data through automated systems and with one
or more institutions updating of deposit account information.
For example, the Consumer Bureau found that one or more
financial institution failed to correct and update the account
information they had furnished to NSCRAs and/or did not
institute reasonable policies and procedures regarding
accuracy, including prompt updating of outdated information.
The Consumer Bureau has also taken enforcement action against a
furnisher for failures related to the lack of proper processes
necessary to report accurate information to the NSCRAs
concerning checking account application details. \26\
---------------------------------------------------------------------------
\26\ See the Bureau's press release on the action against JPMorgan
Chase for failures relating to check account screening information at:
https://www.consumerfinance.gov/about-us/newsroom/cfpb-takes-action-
against-jpmorgan-chase-failures-related-checking-account-screening-
information/.
---------------------------------------------------------------------------
In October of 2014, the Consumer Bureau held a public forum
on Access to Checking Accounts to discuss how financial
institutions screen applicants for consumer checking accounts
and to generate recommendations for improving consumer access
to lower-risk accounts, consumer financial safety, and
institutional risk mitigation.
In February 2016, the Consumer Bureau took a number of
additional steps to improve checking account access.
Specifically, the Bureau sent a letter to the Nation's top 25
retail banking companies urging them to do more to create or
promote deposit accounts designed to meet consumers' financial
needs. \27\ The Consumer Bureau urges banks and credit unions
to offer consumers accounts that help them manage their
spending and maintain their accounts in good standing. In the
letter, the Consumer Bureau encouraged banks and credit unions
to offer products that are designed to prevent overdrafts and
overdraft fees. The Consumer Bureau also urged banks and credit
unions in the letter to feature such products prominently in
their marketing efforts, their online and in-store checking
account menus, and during sales consultations.
---------------------------------------------------------------------------
\27\ Consumer Financial Protection Bureau, ``Consumer Financial
Protection Bureau Takes Steps To Improve Checking Account Access''
(February 3, 2016), available at http://www.consumerfinance.gov/about-
us/newsroom/cfpb-takes-steps-to-improve-checking-account-access/.
---------------------------------------------------------------------------
Supervision examinations also found that furnisher(s) of
deposit account information had enterprise-wide FCRA policies,
but the policies were inadequate to address furnishing activity
for consumer deposit accounts. The furnishers failed to
establish, implement, and maintain reasonable written policies
and procedures consistent with Regulation V regarding the
accuracy and integrity of consumer deposit account information
furnished. Additionally, they had policies for furnishing
consumer deposit account information that were overly broad and
not supplemented with sufficiently-detailed operating
procedures and guidance for consumer deposit-related
furnishing. They had procedures that did not address the
requirement to notify a consumer of the results of a dispute
investigation; and had procedures that failed to address the
requirement to update and correct inaccurate consumer deposit
information. The Consumer Bureau directed the furnisher(s) to
correct these deficiencies. \28\
---------------------------------------------------------------------------
\28\ CFPB Supervisory Highlight: Spring 2017 available at: https:/
/s3.amazonaws.com/files.consumerfinance.gov/f/documents/
201703_cfpb_Supervisory-Highlights-Consumer-Reporting-Special-
Edition.pdf.
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In February 2016, the Consumer Bureau also released
resources to encourage consumers to shop for lower-risk
checking and prepaid accounts that will not authorize them to
exceed their account balances. Additionally, the Consumer
Bureau released a consumer advisory and a series of guides to
help people know what to do if they have been denied a deposit
account or have an involuntary account closure. \29\ The
advisory tells consumers how to obtain a copy of their checking
account history, dispute items with the consumer reporting
company, dispute items with a bank or credit union that
reported inaccurate information, and shop around for lower-risk
products.
---------------------------------------------------------------------------
\29\ Consumer Financial Protection Bureau, ``Guides To Help You
Open and Manage Your Checking Account'' (February 3, 2016), available
at http://www.consumerfinance.gov/about-us/blog/_guides-to-help-you-
open-and-manage-your-checking-account/.
---------------------------------------------------------------------------
In addition, in February 2016, the Consumer Bureau held a
field event in Louisville, KY, that featured remarks from
Director Cordray and panels of industry and consumer interest
organization representatives to discuss the consequences
consumers face without a checking account or upon losing a
checking account and several initiatives that have helped
consumers enter or regain entry into the banking system.
The Consumer Bureau's supervision of financial institutions
and NSCRAs is ongoing. The Bureau will continue to monitor
consumer access of the banking system, including the
availability of lower-risk accounts in the marketplace and the
challenges faced by consumers.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY
FROM RICHARD CORDRAY
Q.1. The CFPB's Fiscal Year 2015 financial report notes that
the Bureau spent $5 million to advertise via digital media.
Was this the total advertising budget for the year? If not,
how much did the CFPB spend on advertising?
A.1. The $5 million reference in the Fiscal Year 2015 (FY15)
financial report refers to funding for a contractor to provide
informational messages via digital media related to the CFPB's
free online financial education tools and resources. The
Consumer Bureau obligated a total of $7 .9 million in FY 2015
for the category of goods/services identified as Support-
Management Advertising contracts.
Q.2. What are the CFPB's strategy and goals for advertising?
A.2. Dodd-Frank Wall Street Reform and Consumer Protection Act
requires the Consumer Bureau to provide timely and
understandable financial information to consumers. \1\ To
fulfill our legislative mandate, the Consumer Bureau has
focused on a strategy to make more consumers aware of the
Bureau as a place to turn to for information and assistance in
living their financial lives. Directing consumers to use our
tools and resources fulfills our statutory educational mandates
and strategic goals and creates real and measurable beneficial
outcomes for American consumers.
---------------------------------------------------------------------------
\1\ Dodd-Frank Act Section 1021(b)(1).
Q.3. Does the CFPB advertise on specific websites, target
specific consumers through tools such as AdWords, or pursue
some other strategy? If advertising is targeted, specifically
---------------------------------------------------------------------------
what consumer groups are being targeted?
A.3. The Consumer Bureau focuses its marketing strategy on
consumers who are currently seeking or are most likely to be
seeking information regarding consumer financial decision
making for which we have tools and resources available. These
tools include: Paying for College, Owning a Home, and more than
1,000 frequently asked financial questions available on the Ask
CFPB site.
Q.4. In 2013 the CFPB issued an Advance Notice of Proposed
Rulemaking for debt collection practices, and the ``Fall 2015
rulemaking agenda'' notes that the CFPB continues to conduct
research on debt collection.
What steps has the CFPB taken to assess how a debt
collection rule could reduce access to credit? Has the CFPB
solicited input from creditor groups, such as manufacturers and
retailers, about their views on how a rule could affect the
continued availability of credit?
Does the CFPB expect to issue a proposed rule soon? When
should we expect a finalized rule?
A.4 The Consumer Bureau generally recognizes that regulations
that impose costs on the credit system can have an adverse
effect on consumer access to credit. Section 1022(b)(2) of the
Dodd-Frank Wall Street Reform and Consumer Protection Act
expressly requires the Bureau, in prescribing a rule under the
Federal consumer financial laws (such as the Fair Debt
Collection Practices Act), to consider, among other things,
``the potential benefits and costs to consumers and covered
persons, including the potential reduction of access by
consumers to consumer financial products or services resulting
from such rule.'' Consistent with the Dodd-Frank Wall Street
Reform and Consumer Protection Act, the Consumer Bureau
routinely considers the effects of its regulations on access to
credit during its rulemaking process.
The Consumer Bureau has issued an Advanced Notice of
Proposed Rulemaking to commence a debt collection rulemaking
proceeding. The Consumer Bureau is developing the factual
information necessary to assess the costs of possible debt
collection regulations and their effect on consumer access to
credit. The Consumer Bureau conducted a qualitative survey of
debt collection firms. The study included a written
questionnaire sent to 60 debt collection firms and then phone
interviews with more than 30 of the original 60 debt collection
firms and vendors to the collections industry. \2\ The
objective of the study is to obtain a baseline understanding of
the operational costs of debt collection firms, and the
Consumer Bureau anticipates using the results of the study to
better understand the likely impact on the debt collection
industry of any potential regulations. This study is in
addition to Consumer Bureau meetings with key industry
stakeholders to discuss their current costs as well as their
concerns about changes in costs that might be associated with
our contemplated debt collection rulemaking, market changes,
and/or changes attributed to other regulations. These meetings
have included creditor groups to better understand how the
regulation of third-party debt collectors could affect their
ability to recover unpaid debts and to extend credit.
---------------------------------------------------------------------------
\2\ From the Bureau's ``Study of Third-Party Debt Collection
Operations'', at: https://s3.amazonaws.com/files.consumerfinance.gov/f/
documents/20160727
cfpb_Third_Party_Debt_Collection_Operations_Study.pdf.
---------------------------------------------------------------------------
The next step in the debt collection rulemaking was the
convening of a Small Business Regulatory Enforcement Fairness
Act (SBREFA) panel in conjunction with the Office of Management
and Budget and the Small Business Administration's Chief
Counsel for Advocacy. The SBREFA process provides a mechanism
for the Bureau to obtain input directly from small business
representatives early in the rulemaking process. At a SBREFA
panel meeting, the Bureau seeks information from small business
representatives about the potential economic impacts of
complying with possible regulatory options, as well as
regulatory alternatives that would achieve the Bureau's
objectives while minimizing the costs imposed on small
entities. The Bureau released an Outline of Proposals under
Consideration and Alternatives Considered in July 2016 in
advance of convening a SBREFA panel. The panel met on August
25, 2016, and focused on companies that are considered ``debt
collectors'' under the Fair Debt Collection Practices Act.
The review panel issues a report on the input received from
small businesses during the panel process. If the Bureau
proposes a rule, the panel's final report will be placed in the
public rulemaking record. The Consumer Bureau discusses and
considers the panel's report and the comments and advice
provided by small businesses when it prepares a proposed rule.
The Consumer Bureau's proposed debt collection rules will
be put out for public comment, which will provide ample
opportunity for stakeholders (including creditors) to provide
the Consumer Bureau with information about their potential cost
and its effect on consumer access to credit. This information
will be very valuable to the Consumer Bureau in developing
final debt collection rules that protect consumers without
imposing unnecessary or undue costs on debt collectors or the
credit system.
Q.5. During the hearing, you stated that the CFPB has
jurisdiction over small business lending under the Equal Credit
Opportunity Act and Section 1071 of Dodd-Frank. In the Policy
Priorities Over the Next Two Years document, the CFPB indicated
that it is exploring the establishment of a complaint intake
system for small business lending. Does the CFPB plan to
publish these complaints as it does with the Consumer Complaint
Database? Will the CFPB only accept small business lending
complaints related to ECOA? If not, what other types of
complaints does the CFPB intend to accept and potentially
publish?
A.5. The Equal Credit Opportunity Act (ECOA) and Regulation B,
which protect applicants from discrimination in credit
transactions, apply to both consumer and business-purpose
credit. Collecting these complaints would assist the Consumer
Bureau's ongoing supervision and enforcement work. Currently,
the Consumer Bureau's Office of Consumer Response is exploring
the feasibility of accepting small-business-lending
discrimination complaints and will need to complete that work
before assessing publication.
Q.6. At the March 16 House hearing, you stated that ``[t]here
are areas where the line between commercial and consumer
lending is blurry,'' and indicated that you would like the CFPB
to protect small businesses. Please provide a comprehensive
list of small business lending issues that you believe fall
within the CFPB's authority.
A.6. While most of the lending laws Consumer Bureau enforces
apply to consumer credit, the Consumer Bureau does have certain
authority related to business-purpose credit transactions. The
Equal Credit Opportunity Act (ECOA) and Regulation B, which
protect applicants from discrimination in credit transactions,
apply to both consumer and business-purpose credit. ECOA also
has requirements related to, among other things, providing
timely notice to applicants of actions taken in connection with
their applications for credit, statements of reasons for
adverse action concerning an application, and copies of
appraisals and other valuations for applications related to
certain dwelling-secured loans.
Section 1071 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act amended ECOA to require financial
institutions to report information concerning credit
applications made by women-owned, minority-owned, and small
businesses. The Bureau is in the early stages with respect to
implementing Section 1071, and is currently focused on outreach
and research to further develop its understanding of the small
business lending market, including the institutions, credit
products, data systems, underwriting approaches, distribution
channels, and types of applicants in that market. The Bureau
intends to work closely with industry leaders, community
advocates, Government agencies, and other stakeholders in the
rulemaking process. We issued a Request for Information (RFI)
on May 10, 2017. We have asked for comments by September 14,
2017. Information submitted as part of this RPI will be
instrumental as we move forward in developing informed policy
decisions.
Our Office of Fair Lending has added small business lending
to its priorities to address fair lending risks in that market.
Small businesses are a backbone of our Nation's economy and
access to credit is critical to their operation and growth.
Unlike large businesses, many small businesses are sole
proprietorships where the owner's personal credit--and
potentially that of family and friends--may be on the line.
With so much at stake, and in light of the heightened fair
lending risk acknowledged by the enactment of Section 1071 of
the Dodd-Frank Act, we will continue to focus on small business
lending in our Fair Lending work going forward.
Some business purpose dwelling-secured loans are also part
of the reporting requirements under the Home Mortgage
Disclosure Act (HMDA) and Regulation C, such as certain loans
related to multifamily lending and investment properties.
Multifamily and rental housing has always been an essential
component of the Nation's housing stock. In the wake of the
housing crisis, multifamily and rental housing has taken on an
increasingly important role in communities, as families have
turned to rental housing for a variety of reasons, and the HMDA
data can provide important information about that market to
Government, industry, and community stakeholders.
In addition, provisions of other statutes that the Consumer
Bureau enforces, such as certain provisions related to credit
cards under the Truth in Lending Act and Regulation Z, are not
limited to consumer lending and may be implicated in small
business-purpose lending transactions. As some of our rules,
including Regulation Z, make clear, there is ordinarily no
precise test for what constitutes credit offered or extended
for personal, family, or household purposes. However, many of
the Consumer Bureau's rules provide illustrative examples and
interpretations for making such determinations across a range
of products, including in some cases noting factors that should
be considered. Moreover, in some instances credit extended
primarily for consumer purposes may occasionally be used for
business purposes. Small business lending transactions may
therefore implicate a range of the Consumer Bureau's
authorities.
Q.7. In a May 2013 memo, Patrice Ficklin acknowledged there was
a ``serious risk'' that releasing the CFPB's proxy methodology
would ``provid[e] fodder to defendants to show how our methods
are inferior to other proprietary proxies'' and ``if we choose
not to publish, we will be more likely to consult an outside
expert for litigation purposes and our internal methodological
deliberations will not be discoverable.'' In the same memo,
Ficklin noted that ``out of 100 applicants that are identified
by the proxy methodology as African Americans, only 54 of them
actually are African Americans according to HMDA data.''
Why did the CFPB pursue enforcement action based on a
methodology that may be flawed? Wouldn't an opportunity for
public notice and comment have improved the CFPB's methodology
and reduced doubts about its potential flaws?
A.7. The statistics you quote in the premise of your question
are not representative of analysis conducted by the Bureau. The
memo you reference is a pre-decisional draft document that did
not represent the Consumer Bureau's final analysis.
The Consumer Bureau has been transparent about the details
of the proxy methodology used in its fair lending analysis,
including the risks and limitations. On September 17, 2014, the
Consumer Bureau published a white paper, Using Publicly
Available Information to Proxy for Unidentified Race and
Ethnicity, that details the Bayesian Improved Surname Geocoding
(BISG) methodology the Bureau uses to calculate the probability
that an individual is of a specific race or ethnicity using
publicly available information regarding surname and geographic
location. \3\
---------------------------------------------------------------------------
\3\ Available at: http://files.consumerfinance.gov/f/
201409_cfpb_report_proxy-methodology.pdf.
---------------------------------------------------------------------------
In choosing its methodology, as part of a robust
deliberative process, the Consumer Bureau did careful analysis
of other available methods based on publicly available data,
and determined that this proxy methodology was the method best
suited to accurately estimate the full scope of consumer harm.
\4\
---------------------------------------------------------------------------
\4\ Available at: http://files.consumerfinance.gov/f/documents/
201604_cfpb_Fair_Lending_
Report_Final.pdf/.
---------------------------------------------------------------------------
As stated in our white paper, the Consumer Bureau is
committed to continuing our dialogue with other Federal
agencies, lenders, advocates, and researchers regarding the
Consumer Bureau's methodology, the importance of fair lending
compliance, and the use of proxies when self-reported race and
ethnicity is unavailable. The Consumer Bureau expects the
methodology will continue to evolve as enhancements are
identified that further increase accuracy and performance.
Q.8. From 2013 to 2014, the Home Mortgage Disclosure Act (HMDA)
data reveal a clear decline in manufactured home loans, raising
concerns that the CFPB's Home Ownership and Equity Protection
Act (HOEPA) rules may be constraining lending in this market.
In comparison, overall mortgage loan data show a year-over-year
increase during the same time period. Is the CFPB concerned
that its rule may be constraining access to credit,
particularly in rural and low-income communities? What actions
will the CFPB take to ensure that access to financing for the
purchase of manufactured housing remains readily available to
consumers?
A.8. The HMDA data show similar trends in originations for
manufactured housing and site-built homes. Total originations
fell between 2013 and 2014 overall as well as for manufactured
homes specifically. The HMDA data show an increase in home
purchase loans for manufactured housing from 2013 to 2014 from
73,820 to 75,826 and a similar trend in home purchase loans for
site-built homes. The decline in total originations reflects
the high level of refinancing in 2013 for both manufactured
homes and site-built homes. \5\ The Consumer Bureau does not
believe the HMDA data on home purchase loans between 2013 and
2014 necessarily indicate that manufactured housing lending is
constrained compared with site-built home lending. As the
Consumer Bureau stated in its 2014 white paper on manufactured
housing, it continues to monitor the effect of its rules on the
manufactured housing industry and on consumers who purchase or
seek to purchase manufactured homes. \6\ As part of this
ongoing monitoring, the Consumer Bureau will continue to engage
with stakeholders and will encourage others to build greater
knowledge of the manufactured housing market, the consumers in
that market, and the differences between the site-built and
manufactured housing markets.
---------------------------------------------------------------------------
\5\ See Neil Bhutta, Jack Popper, and Daniel R. Ringo, Bd. of
Governors of the Fed. Reserve Sys., 101 Fed. Reserve Bulletin 4, The
2014 Home Mortgage Disclosure Data, at 2, 5 (Nov. 2015), available at
http://www.federalreserve.gov/pubs/bulletin/2015/pdf/2014_HMDA.pdf.
\6\ See CFPB, Manufactured-Housing Consumer Finance in the United
States (Sept. 2014), available at http://files.consumerfinance.gov/f/
201409_cfpb_report_manufactured-housing.pdf.
---------------------------------------------------------------------------
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR HELLER
FROM RICHARD CORDRAY
Q.1. In February, during Federal Reserve Chair Yellen's
testimony in the Senate Committee on Banking, Housing, and
Urban Affairs, she told me she believes that there should be
some effort to ensure that regulations meant for big banks are
not burdening community lenders. Do you share that same
viewpoint?
A.1. Section 1022 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (Dodd-Frank Act) authorizes the
Consumer Bureau to engage in rulemaking and issue orders and
guidance to administer and carry out the purposes and
objectives of the Federal consumer financial laws, and to
prevent evasions thereof. In doing so, Section 1022 requires
that the Consumer Bureau consider the potential benefits and
costs to consumers and covered persons, including the potential
reduction of access to consumer financial products and services
to consumers. Section 1022 also requires the Consumer Bureau to
consider the impact of a proposed rule on insured depository
institutions and credit unions with total assets of $10 billion
or less as well as the impact on consumers in rural areas.
Moreover, Section 1022 gives the Consumer Bureau the authority
to create exemptions from the Consumer Financial Protection Act
of 2010 or rules issued under that Act for any class of covered
persons, service providers, or consumer financial products or
services if the Consumer Bureau determines an exemption is
necessary or appropriate to carry out the purposes and
objectives of the Consumer Financial Protection Act after
taking into consideration a set of factors specified in the
statute.
To date, the Consumer Bureau has sought to carefully
calibrate its efforts to ensure consistency with respect to
consumer financial protections across the financial services
marketplace, while accounting for the different business models
and classes of financial institutions. For example, as part of
the Consumer Bureau's commitment to achieving tailored and
effective regulations, the Bureau has taken the following
actions for different models and classes of institutions:
Mortgage Origination Rules (Title XIV)
Expanded safe harbor for small creditors. A small
creditor has a broader safe harbor for its Qualified
Mortgage (QM) loans than non-small creditors. The
Consumer Bureau's rules provide a safe harbor for QMs
with annual percentage rate (APR) spreads over Average
Prime Offer Rate (APOR) up to 350 basis points, whereas
non-small creditors have a safe harbor for spreads up
to 150 basis points. The Consumer Bureau's rules also
allow a small creditor to make QMs with debt-to-income
ratios that exceed the otherwise applicable 43 percent
cap. (Small creditors must hold these loans in
portfolio for three years.)
Exempted small creditors in rural and underserved
areas. Small creditors that operate (or operated
``predominantly'' before implementation of the Helping
Expand Lending Practices in Rural Communities Act in
March 2016) in rural or underserved areas are exempt
from requirements to establish escrow accounts for
higher priced mortgage loans and from restrictions on
offering QMs and Home Ownership and Equity Protection
Act (HOEPA) loans (``high cost'' mortgages as defined
in the HOEPA) that have balloon payment features. QMs
and HOEPA loans generally cannot have balloon payments.
Implemented a 2-year pause for small creditors. The
Consumer Bureau established a 2-year transition period
(until January 10, 2016) allowing small creditors to
make balloon-payment QMs and balloon-payment HOEPA
loans regardless of whether they operated predominantly
in rural or underserved areas, while the Consumer
Bureau revisited and reconsidered the definition of
``rural'' for this purpose.
Expanded exemptions for creditors in rural and
underserved areas. In connection with other changes to
amend the definitions of ``small creditor'' and ``rural
area,'' the Consumer Bureau published a final rule in
October 2015 that extended this 2-year transition
period from January 2016 until April 2016. The Bureau's
final rule also provided a significant expansion of
``rural,'' as well as an expansion of which entities
can qualify as ``small creditors.'' The Consumer
Bureau's final rule took effect on January 1, 2016,
before the 2-year transition period expired. In March
2016, the Consumer Bureau issued an interim final rule
that implements the Helping Expand Lending Practices in
Rural Communities Act, and makes these provisions
available to small creditors that extend at least one
covered transaction secured by property located in a
rural or underserved area in the previous calendar
year. The Bureau estimated that about 6,000 additional
small creditors would be eligible as a result of this
change.
Relaxed requirements for appraisals. Small
creditors have relaxed rules regarding conflict of
interest in ordering appraisals and other valuations.
Mortgage Servicing Rules (Title XIV)
Exempted small servicers from providing periodic
statements. Small servicers are exempt from the Truth
in Lending Act requirement to provide periodic
statements.
Exempted small servicers from loss mitigation
requirements. Small servicers are exempt from all of
the Real Estate Settlement Procedures Act provisions on
policies and procedures; early intervention; continuity
of contact; and loss mitigation, except that a small
servicer may not file for foreclosure unless the
borrower is more than 120 days delinquent on the
mortgage. Small servicers may also not file for
foreclosure (or move for a foreclosure judgment or
order of sale, or conduct a foreclosure sale) if a
borrower is performing under the terms of a loss
mitigation agreement.
Excluded certain seller-financed transactions and
mortgage loans voluntarily serviced for a non-affiliate
from being counted toward the small servicer loan
limit. This allows servicers that would otherwise
qualify for small servicer status to retain their
exemption while servicing those transactions.
Home Mortgage Disclosure Act Rule (Reg C)
Exempted lower-volume depository institutions from
Home Mortgage Disclosure Act reporting. In October of
2015, the Consumer Bureau adopted a final rule revising
Regulation C, which implements HMDA. HMDA and
Regulation C, among other things, require covered
mortgage lenders to report data concerning their
mortgage lending activity. Changes to coverage in the
final rule will reduce the number of banks, savings
associations, and credit unions that are required to
report HMDA data. The revisions will relieve about 22
percent of currently reporting depository institutions
from the burden of reporting HMDA data. Also, by final
rule issued in late August of 2017, the Consumer Bureau
expanded the volume-based exemption from reporting of
open-end lines of credit under HMDA for institutions
with fewer than 500, instead of 100, annual
originations in each of the two preceding years of such
lines of credit. This expanded exemption applies for
calendar years 2018 and 2019, during which the Consumer
Bureau will consider whether to reexamine the
appropriate volume level at which to set the exemption
permanently.
Reduced HMDA error submission threshold for certain
small entities. New Federal Financial Examination
Institution Council guidelines, of which the Consumer
Bureau is a member, provide a more lenient 10 percent
HMDA field error resubmission threshold (to determine
whether the lender must resubmit a particular HMDA data
field) for financial institutions with lower lending
volumes, including many small institutions, for data
collected beginning in 2018. Previously, all
institutions were subject to the same error thresholds.
The new guidelines make other burden-reducing changes
that apply to all lenders, which may be particularly
beneficial to small institutions.
Remittances Rule (Regulation E Subpart B)
Provided regulatory certainty for small entities
under the Electronic Fund Transfer Act. In the Bureau's
rules implementing the Dodd-Frank Act's amendments to
the Electronic Fund Transfer Act, regarding remittance
transfers, the Bureau recognized that certain entities
do not provide remittances in the normal course of
their business and determined that the remittance
requirements do not apply to transfers sent by entities
that provide 100 or fewer remittances each year.
Small financial institutions play a vital role within many
communities across the Nation, as well as within the economy.
Their traditional model of relationship lending has been
beneficial to many people in rural areas and small towns
throughout the country. For these reasons, the Consumer Bureau
attempts to ensure that rules and regulations are not
burdensome to these smaller financial institutions.
Q.2. Please provide a list of all the regulations that the
Consumer Financial Protection Bureau has finalized that
included a full cost-benefit analysis study prior to
implementation.
A.2. Section 1022 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act authorizes the Bureau to engage in
rulemaking and issue orders and guidance to administer and
carry out the purposes and objectives of the Federal consumer
financial laws, and to prevent evasions thereof. In doing so,
Section 1022 requires that, when prescribing a rule under the
Federal consumer financial laws, the Consumer Bureau consider
the potential benefits and costs to consumers and covered
persons, including the potential reduction of access to
consumer financial products and services to consumers. Section
1022 also requires the Consumer Bureau to consider the impact
of a proposed rule on insured depository institutions and
credit unions with total assets of $10 billion or less as well
as the impact on consumers in rural areas. Moreover, Section
1022 gives the Consumer Bureau the authority to create
exemptions from the Consumer Financial Protection Act of 2010
or rules issued under that Act for any class of covered
persons, service providers, or consumer financial products or
services if the Consumer Bureau determines an exemption is
necessary or appropriate to carry out the purposes and
objectives of the Consumer Financial Protection Act after
taking into consideration a set of factors specified in the
statute.
The Consumer Bureau's final rules that considered potential
benefits, costs, and impacts under section 1022, as well as the
dates these were rules published in the Federal Register are
below:
1. Alternative Mortgage Transaction Parity (Regulation D),
July 22, 2011
2. State Official Notification Rules, July 28, 2011
3. Rules of Practice for Adjudication Proceedings, July 28,
2011
4. Rules Relating to Investigations, July 28, 2011
5. Disclosure of Records and Information, July 28, 2011
6. Disclosure Requirements for Depository Institutions
Lacking Federal Deposit Insurance (Regulation I),
December, 16, 2011
7. Fair Debt Collection Practices Act (Regulation F),
December 16, 2011
8. Mortgage Acts and Practices-Advertising (Regulation N);
Mortgage Assistance Relief Services (Regulation O),
December 16, 2011
9. Home Mortgage Disclosure (Regulation C), December 19,
2011
10. Consumer Leasing (Regulation M), December 19, 2011
11. S.A.F.E. Mortgage Licensing Act (Regulations G and H),
December 19, 2011
12. Real Estate Settlement Procedures Act (Regulation X),
December 20, 2011
13. Equal Credit Opportunity (Regulation B), December 21,
2011
14. Fair Credit Reporting (Regulation V), December 21, 2011
15. Privacy of Consumer Financial Information (Regulation
P), December 21, 2011
16. Interstate Land Sales Registration Program (Regulations
J, K, and L), December 21, 2011
17. Truth in Savings (Regulation DD), December 21, 2011
18. Truth in Lending (Regulation Z), December 22, 2011
19. Electronic Fund Transfers (Regulation E), December 27,
2011
20. Electronic Fund Transfers (Regulation E), February 7,
2012
21. State Official Notification Rule, June 29, 2012
22. Rules Relating to Investigations, June 29, 2012
23. Rules of Practice for Adjudication Proceedings, June 29,
2012
24. Confidential Treatment of Privileged Information, July
5, 2012
25. Defining Larger Participants of the Consumer Reporting
Market, July 20, 2012
26. Electronic Fund Transfers (Regulation E), August 20,
2012
27. Defining Larger Participants of the Consumer Debt
Collection Market, October 31, 2012
28. Delayed Implementation of Certain New Mortgage
Disclosures, November 23, 2012
29. Procedure Relating to Rulemaking, December 28, 2012
30. Escrow Requirements Under the Truth in Lending Act
(Regulation Z), January 22, 2013
31. Electronic Fund Transfers (Regulation E) Temporary Delay
of Effective Date, January 29, 2013
32. Ability-to-Repay and Qualified Mortgage Standards Under
the Truth in Lending Act (Regulation Z), January 30,
2013
33. Disclosure and Delivery Requirements for Copies of
Appraisals and Other Written Valuations Under the Equal
Credit Opportunity Act (Regulation B), January 31, 2013
34. High-Cost Mortgage and Homeownership Counseling
Amendments to the Truth in Lending Act (Regulation Z)
and Homeownership Counseling Amendments to the Real
Estate Settlement Procedures Act (Regulation X),
January 31, 2013
35. Appraisals for Higher-Priced Mortgage Loans, February
13, 2013
36. Mortgage Servicing Final Rules Mortgage Servicing Rules
Under the Truth in Lending Act (Regulation Z), February
14, 2013
37. Mortgage Servicing Rules Under the Real Estate
Settlement Procedures Act (Regulation X), February 14,
2013
38. Disclosure of Records and Information, February 15, 2013
39. Loan Originator Compensation Requirements Under the
Truth in Lending Act (Regulation Z), February 15, 2013
40. Disclosures at Automated Teller Machines (Regulation E),
March 26, 2013
41. Truth in Lending (Regulation Z); Amendment relating to
credit limits, March 28, 2013
42. Truth in Lending Act (Regulation Z); Amendment relating
to consumer ability to repay, May 3, 2013
43. Consumer Financial Civil Penalty Fund Rule, May 7, 2013
44. Electronic Fund Transfers (Regulation E), May 22, 2013
45. Amendments to the 2013 Escrows Final Rule Under the
Truth in Lending Act (Regulation Z), May 23, 2013
46. Loan Originator Compensation Requirements Under the
Truth in Lending Act (Regulation Z); Prohibition on
Financing Credit Insurance Premiums; Delay of Effective
Date, May 31, 2013
47. Ability-to-Repay and Qualified Mortgage Standards
Exemptions Under the Truth in Lending Act (Regulation
Z), June 12, 2013
48. Procedural Rule To Establish Supervisory Authority Over
Certain Nonbank Covered Persons Based on Risk
Determination, July 3, 2013
49. Amendments to the 2013 Mortgage Rules Under the Real
Estate Settlement Procedures Act (Regulation X) and the
Truth in Lending Act (Regulation Z), July 24, 2013
50. Rules of Practice for Issuance of Temporary Cease-and-
Desist Orders, September 26, 2013
51. Amendments to the 2013 Mortgage Rules Under the Equal
Credit Opportunity Act (Regulation B), Real Estate
Settlement Procedures Act (Regulation X), and the Truth
in Lending Act (Regulation Z), October 1, 2013
52. Amendments to the 2013 Mortgage Rules Under the Real
Estate Settlement Procedures Act (Regulation X) and the
Truth in Lending Act (Regulation Z), October 23, 2013
53. Defining Larger Participants of the Student Loan
Servicing Market, December 6, 2013
54. Appraisals for Higher-Priced Mortgage Loans, December
26, 2013
55. Rules of Practice for Issuance of Temporary Cease-and-
Desist Orders, June 18, 2014
56. Electronic Fund Transfers (Regulation E); Amendments,
September 18, 2014
57. Defining Larger Participants of the International Money
Transfer Market, September 23, 2014
58. Amendment to the Annual Privacy Notice Requirement Under
the Gramm-Leach-Bliley Act (Regulation P), October 28,
2014
59. Amendments to the 2013 Mortgage Rules Under the Truth in
Lending Act (Regulation Z); November 3, 2014
60. Amendments to the 2013 Integrated Mortgage Disclosures
Rule Under the Real Estate Settlement Procedures Act
(Regulation X) and the Truth In Lending Act (Regulation
Z) and the 2013 Loan Originator Rule Under the Truth in
Lending Act (Regulation Z), February 19, 2015
61. Submission of Credit Card Agreements Under the Truth in
Lending Act (Regulation Z), April 17,2015
62. Defining Larger Participants of the Automobile Financing
Market and Defining Certain Automobile Leasing Activity
as a Financial Product or Service, June 30, 2015
63. 2013 Integrated Mortgage Disclosures Rule Under the Real
Estate Settlement Procedures Act (Regulation X) and the
Truth in Lending Act (Regulation Z) and Amendments;
Delay of Effective Date, July 24, 2015
64. Amendments Relating to Small Creditors and Rural or
Underserved Areas Under the Truth in Lending Act
(Regulation Z), October 2, 2015
65. Home Mortgage Disclosure Act (Regulation C), October 28,
2015
66. 2013 Integrated Mortgage Disclosure Rule Under the Real
Estate Settlement Procedures Act (Regulation X) and the
Truth in Lending Act (Regulation Z), February 10, 2016
67. Operations in Rural Areas Under the Truth in Lending Act
(Regulation Z); Interim Final Rule, March 25, 2016
68. Finalization of Interim Final Rules (Subject to Any
Intervening Amendments) Under Consumer Financial
Protection Laws, April 28, 2016
69. Amendments to Filing Requirements Under the Interstate
Land Sales Full Disclosure Act (Regulations J and L),
May 11, 2016
70. Amendments to the 2013 Mortgage Rules Under the Real
Estate Settlement Procedures Act (Regulation X) and the
Truth in Lending Act (Regulation Z), October 19, 2016
71. Prepaid Accounts Under the Electronic Fund Transfer Act
(Regulation E) and the Truth in Lending Act (Regulation
Z), November 22, 2016
72. Appraisalsfor Higher-Priced Mortgage Loans Exemption
Threshold, November 30, 2016
73. Truth in Lending (Regulation Z), November 30, 2016
74. Consumer Leasing (Regulation M), November 30, 2016
75. Prepaid Accounts Under the Electronic Fund Transfer Act
(Regulation E) and the Truth in Lending Act (Regulation
Z); Delay of Effective Date, April 25, 2017
76. Arbitration Agreements, July 19, 2017
77. Amendments to Federal Mortgage Disclosure Requirements
Under the Truth in Lending Act (Regulation Z), August
11, 2017
Q.3. Director Cordray, do you believe Americans are better
served by having fewer banking and financial options to choose
from?
A.3. No. Small financial institutions play a vital role within
many communities across the Nation, as well as within the
economy. Their traditional model of relationship lending has
been beneficial to many people in rural areas and small towns
throughout the country. For these reasons, the Consumer Bureau
attempts to ensure that rules and regulations are not unduly
burdensome to these smaller financial institutions.
Since the passage of the Dodd-Frank Act the share of the
mortgage market serviced by credit unions and community banks
has risen. That increase in participation, represented by these
two groups since the Consumer Bureau's rules took effect,
represents levels that are the highest they have been in 20
years. These institutions had low default rates during this
time period and the Consumer Bureau tailored our rules to
recognize the need to ensure balance and competition in the
mortgage market.
Further, to support the implementation of and industry
compliance with its rules, the Consumer Bureau has published a
number of plain-language compliance guides summarizing certain
rules, and it has actively engaged in discussions with industry
about ways to achieve compliance. \1\ The Consumer Bureau also
continues its efforts to streamline, modernize, and harmonize
financial regulations that it inherited from other agencies.
---------------------------------------------------------------------------
\1\ See http://www.consumerfinance.gov/guidance/#compliance.
Q.4. Director Cordray, do you believe that the Consumer
Financial Protection Bureau's collection of Americans'
personally identifiable information is necessary for the
---------------------------------------------------------------------------
Bureau's statutory mission?
A.4. The Consumer Bureau collects personally identifiable
information when such information is necessary for the
statutory mission. In general the information the Consumer
Bureau collects for research purposes does not contain data
that directly identifies individuals. We are interested in
monitoring the behavior of the markets, not of particular
individual consumers. The Consumer Bureau needs individual-
level data to understand how consumer markets perform and
proactively monitor consumer financial markets to make sure
they are working for consumers. However, this data is generally
de-identified so that any particular individual is not
identified. A lesson from the 2008 financial crisis was that
trends and problems can often be spotted in analyzing microdata
(individual or institution level data) long before it can be
seen in industry aggregates.
In addition, there are other purposes where identifying
information is necessary to carry out our statutory mission
such as enforcement actions and consumer complaints.
Individual-level data enable the Consumer Bureau to
successfully bring enforcement actions and provide relief to
consumers. These actions have resulted in approximately $11.6
billion in redress to victims of illegal practices like
mortgage servicing errors, discriminatory home and auto
lending, and deceptive credit card practices. The handling of
consumer complaints by the Consumer Bureau has helped
individual consumers get responses and resolutions to their
issues.
Q.5. Director Cordray, do you believe that the data the Bureau
has collected on U.S. consumers is 100 percent secure from
being breached by hackers and cybercriminals?
A.5. The Consumer Bureau works to ensure the best possible
protection for the information in an environment where threats
will continue to evolve. The Federal Information Security
Modernization Act of 2014 states that agency heads are
responsible for ``providing information security protections
commensurate with the risk and magnitude of the harm resulting
from unauthorized access, use, disclosure, disruption,
modification, or destruction'' of information assets. Further,
agency officials are charged with providing ``information
security for the information and information systems that
support the operations and assets under their control,
including through . . . implementing policies and procedures to
cost-effectively reduce risks to an acceptable level.''
While no organization can ensure that the data they have is
100 percent secure from being breached by hackers and
cybercriminals, the Bureau continues to appropriately manage
risk to consumer data and has performed its duties responsibly
over its relatively brief history. The guidance provided under
FISMA requires that Federal agencies manage their cybersecurity
risks proactively, take appropriate action when a risk is
unacceptable, and constantly exercise due diligence to increase
their situational awareness of new cyber threats and
vulnerabilities. The CFPB is executing on all of these
activities on a continual basis to demonstrate due protection
of consumer data.
The Consumer Bureau's commitment to data protection is
demonstrated through a risk-based approach to implementing
security controls and countermeasures, through our active and
voluntary participation in Federal cybersecurity initiatives
such as the Department of Homeland Security (DHS) Cyber Hygiene
and Continuous Diagnostics and Mitigation programs, and in the
focus and dedication we place on addressing recommendations
from the Office of the Inspector General and other auditors.
Between August 2016 and August 2017, DHS reported zero critical
or high vulnerabilities for the CFPB under the Cyber Hygiene
program. The Consumer Bureau also successfully closed 27
recommendations in FY 2016 and 25 in FY 2017 from independent
audits of our technology management and information security
programs. Our progress in establishing and executing on a risk-
based information security program has been acknowledged by our
Office of the Inspector General in the FY16 Annual FISMA Report
to Congress, where the CFPB's maturity in each of the
Cybersecurity Framework areas was rated as equal or higher than
the Federal Government-wide median.
Like other Federal information security programs, the
policies, principles and security controls that form the
Consumer Bureau information security program are based on
guidance and standards provided by the National Institute of
Standards and Technology (NIST). We are continuously improving
the processes and capabilities to safeguard all Consumer Bureau
data, adapting to the rapidly changing risk landscape, and
working to ensure that we are protecting consumer information.
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RESPONSES TO WRITTEN QUESTIONS OF SENATOR SASSE
FROM RICHARD CORDRAY
Q.1. I'd like to discuss the CFPB's upcoming proposed
arbitration rule.
(a.) My understanding is the CFPB is expected to issue a
proposed rule that would ban pre-dispute arbitration clauses
that waive a consumer's right to a class action lawsuit and to
further regulate individual arbitration. Is that correct?
(b.) At your April 7, 2016, Senate Banking Committee
appearance, you said that the arbitration rule is expected to
come out in the spring. Can you provide a more specific
timeline?
(c.) Why does it insufficiently protect consumers to allow
them to ``opt-out'' of an arbitration agreement with a class
action waiver? Are consumers incapable of making the right
decision for themselves regarding whether they would prefer
vindicating their rights through arbitration or a class action
waiver?
(d.) What percentage of companies do you expect will stop
offering arbitration altogether under this new proposed regime?
How does this conclusion impact the pending proposed rule?
(e.) Has the CFPB conducted a cost-benefit analysis of the
pending proposed regime? If so, can you share the results of
this study?
(f.) At your April 7, 2016, appearance before the Senate
Banking Committee, you explain that the pending arbitration
rule is important because arbitration agreements ``tend[] to
cut off people's remedies pretty much all together . . .
because it bans their ability to . . . bring group claims so
that financial institutions who harm on a broad basis cannot be
held accountable.'' In other contexts, you have spoken of the
efficacy of the CFPB's enforcement actions to hold financial
institutions accountable for their actions. Are the CFPB's
enforcement actions insufficient in this context? If so, why?
(g.) Has the CFPB studied the extent to which the threat of
class action lawsuits changes firm behavior to better comply
with consumer laws? If so, please share the results of that
study.
(h.) Does the CFPB believe there is a risk that encouraging
class action lawsuits actually encourages ``frivolous''
lawsuits that companies settle instead of challenge, given the
costs associated with going to court in a class action lawsuit?
How does this possibility impact the degree to which the CFPB
believes that class action lawsuits encourage firms to comply
with the rule of law, instead of merely imposing unnecessary
costs on companies whose actions should not have been punished?
(i.) If the CFPB found that the class action lawsuits do
not change firm behavior in a meaningful way, how would that
change the CFPB's pending arbitration rule?
(j.) Please describe the extent to which the CFPB consulted
with any advocacy groups describing themselves as representing
plaintiff attorneys during the development of the pending
proposed rule.
A.1. (a.) On May 5, 2016, the Consumer Bureau released a Notice
of Proposed Rulemaking regarding agreements for consumer
financial products and services providing for mandatory pre-
dispute arbitration.
After a 90-day comment period that ended on August 22,
2016, the Consumer Bureau reviewed and considered the 110,000
comments it received in response to the Notice of Proposed
Rulemaking in accordance with its obligations for notice-and-
comment rulemaking.
On July 19, 2017, the Consumer Bureau published in the
Federal Register the Final Rule regarding agreements for
consumer financial products and services providing for
mandatory pre-dispute arbitration. In the Final Rule, the
Consumer Bureau finalized the proposed rules in the Notice of
Proposed Rulemaking, with adjustments made to respond to the
concerns of stakeholders expressed in the comments they made
during the notice-and-comment process.
The Final Rule imposes two sets of restrictions on the use
of pre-dispute arbitration agreements by providers offering or
providing consumer financial products and services that are
covered by the Final Rule (referred to herein as providers).
First, it prohibits providers from using a pre-dispute
arbitration agreement to block consumer class actions in court
and it requires providers to insert language into their
arbitration agreements reflecting this limitation. The Consumer
Bureau bases its findings on the Arbitration Study as well as
the Consumer Bureau's further analysis. These include findings
in support of the final rule that pre-dispute arbitration
agreements are being widely used to prevent consumers from
seeking relief from legal violations on a class basis, and that
consumers rarely file individual lawsuits or arbitration cases
to obtain such relief.
Second, the Final Rule does not prohibit providers from
maintaining arbitration agreements with their customers, but it
does require covered financial services providers that continue
to use them to submit certain records with appropriate
redactions, relating to arbitral proceedings to the Consumer
Bureau. The Consumer Bureau's Final Rule also provides for the
publication of this redacted information on its website, to
provide greater transparency into the arbitration of consumer
disputes. The Consumer Bureau also will use this information to
continue monitoring arbitral proceedings to determine whether
there are developments that raise consumer protection concerns
that may warrant further Consumer Bureau action. The Final Rule
applies to agreements entered into by providers after March 19,
2018, the compliance date of the rule. \1\
---------------------------------------------------------------------------
\1\ The Final Rule explains how the rule applies to various types
of contractual relationships. See 80 FR 33325-58 (section by section
analysis of 12 CFR 1040.3), 33428-29 (text of 12 CFR 1040.3), 33431-32
(official commentary for 12 CFR 1040.3), The Bureau also adopted a
temporary exception for pre-packaged general-purpose reloadable prepaid
card agreements under 12 CFR 1040.5(b). 80 FR 33388-90 (section by
section analysis of 12 CFR 1040.S(b)), 33430 (text of 12 CFR
1040.S(b)), 33434 (official commentary to 12 CFR 1040.S(b)).
---------------------------------------------------------------------------
(b.) On May 5, 2016, the Consumer Bureau released a Notice
of Proposed Rulemaking regarding agreements for consumer
financial products and services providing for mandatory pre-
dispute arbitration. July 19, 2017, the Consumer Bureau
published in the Federal Register a Final Rule regarding
agreements for consumer financial products and services
providing for mandatory pre-dispute arbitration.
(c.) In the Arbitration Study, the Consumer Bureau learned
that most consumers were unaware of whether their contracts
contained arbitration agreements. The Arbitration Study found
that more than 75 percent of credit card consumers surveyed did
not know whether they were subject to an arbitration clause,
and fewer than 7 percent of those covered by arbitration
clauses realize that those clauses restrict their ability to
sue in court. Even fewer were aware of whether the contracts
permitted them to opt out of their arbitration agreements.
While the Arbitration Study found provisions permitting
consumers to opt out of arbitration were not uncommon, very few
consumers in the telephonic survey conducted were aware of the
opt-out provisions, far fewer than 1 percent of respondents
believed that they had been given an opportunity to opt-out of
the arbitration agreements.
(d.) The Consumer Bureau received feedback from industry
groups, before the issuance of the Notice of Proposed
Rulemaking (for instance, during the SBREFA panel), that a rule
that prohibited the use of class action waivers in arbitration
agreements would likely cause some or many providers of
consumer financial products and services to eliminate their
arbitration agreements completely. The Consumer Bureau also
received comments in response to its Notice of Proposed
Rulemaking from some industry groups and providers indicating
they intend to drop arbitration clauses altogether if the
proposed rule is adopted. The Consumer Bureau took such
feedback into account in promulgating its Final Rule. In its
Final Rule, the Bureau acknowledged that providers may choose
to drop arbitration agreements altogether.
As set out in final rule, the Bureau believes that, even if
providers do remove their arbitration agreements, harm to
consumers would be negligible because so few consumers pursue
arbitration today. The Study showed that very few individual
consumers filed claims in arbitration about consumer financial
products; as noted, there were just over 600 arbitration
filings per year in the six product markets studied and just
over 400 of those were filed by consumers. By contrast, more
than 60 million consumers per year were eligible for either
cash or in-kind relief from class actions in the 5-year period
covered by the Study. Indeed, more than 34 million of these
consumers obtained cash relief over 5 years studied, or more
than six million per year. Thus, the number of consumers who
sought relief in arbitration pales in comparison to the number
who actually obtained relief through class actions. The number
of consumers who sought relief in arbitration also pales in
comparison to the benefits to consumers from the deterrent
effect of class actions, discussed in Part VI.C.1 of the Final
Rule.
In any event, even if consumers do not have access to
arbitration for individual claims those claims still can be
filed in court, including small claims court. Consumers would
not be left without a forum to prosecute their individual
claims. Given the extremely low number of consumer-filed AAA
and JAMS arbitrations, the Bureau believes that the magnitude
of consumer benefit, if any, of individual arbitration over
individual litigation would need to be implausibly large for
the elimination of some, or even all, arbitration agreements to
make a noticeable difference to consumers in the aggregate.
Therefore, the Bureau believes that preserving consumers'
right to participate in a class action is for the protection of
consumers even if providers will no longer include arbitration
agreements in their consumer contracts.
(e.) The Bureau conducted a cost-benefit analysis, as set
out in the Notice of Proposed Rulemaking and the Final Rule.
Under this analysis, the Consumer Bureau's class action rule
would benefit consumers in two main ways. First, consumers will
benefit from increased legal compliance by providers. The
Consumer Bureau believes that, because more providers will face
class action liability for violations of law they commit, they
will increase their compliance with the law to reduce the risk
of facing a class action--resulting in less consumer harm. The
Consumer Bureau is not aware of, and commenters did not
provide, reliable methods to quantify these benefits. Second,
consumers will benefit from the relief provided in the class
action settlements that will now occur because providers will
no longer be able to use an arbitration agreement to block
class actions. This relief will include both monetary relief
and changes in business practices. The Consumer Bureau
estimates monetary relief to be $342 million per year for
additional Federal class settlements; the Consumer Bureau lacks
the information needed to quantify the relief in State court
settlements and is not aware of reliable methods to quantify
the benefits to consumers from changes in business practices.
The cost to consumers will mostly result from financial
institutions ``passing through'' at least some portion of the
increased costs they may face to consumers. In the Consumer
Bureau's view, the extent to which this will occur cannot be
reliably predicted, especially because research is mostly
unavailable for the markets covered.
The Consumer Bureau believes that providers that will be
exposed to class action liability as a result of the final rule
will have an increased incentive to take steps to reduce their
risk of facing a class action. The Consumer Bureau believes
providers will generally respond to this incentive by
increasing their attention to activities designed to reduce
their class litigation exposure, such as reviewing policies and
procedures, discontinuing risky products, and obtaining more
comprehensive insurance coverage. The Consumer Bureau is
unaware of, and commenters did not provide, reliable methods
for quantifying these costs.
Providers will incur costs related to additional class
litigation that will occur because they can no longer use
arbitration agreements to block class actions (and because the
compliance investments described above will not eliminate
additional class litigation completely). The Consumer Bureau
estimates that the Final Rule will result in about 103
additional class settlements per year in Federal court (no
estimate is made for State court because of the above-mentioned
lack of information). In those class settlements, the Consumer
Bureau estimates that providers will pay an additional $342
million to consumers; an additional $66 million to plaintiffs'
attorneys; and an additional $39 million for their own
attorneys' fees and internal staff and management time for only
these Federal court cases. The Consumer Bureau believes
providers will enter a similar number of settlements in State
court, with lower amounts at stake, although there is
insufficient data to quantify these costs. Providers may also
incur costs due to changes in business practices resulting from
class settlements, but the Consumer Bureau is unaware of
reliable methods for quantifying these costs. Further, the
Bureau also estimates that providers will spend an additional
$76 million per year in defense costs related to Federal class
cases that do not settle.
Providers will incur costs related to changing their
contracts to comply with the proposed rule. The Consumer Bureau
believes that the average provider's expense to be about $400
per provider. Given the Consumer Bureau's estimate of about
48,000 providers that use arbitration agreements, the Final
Rule's required contractual change will result in a one-time
cost of $19 million. (The Consumer Bureau's estimate for the
number of providers is different here than above because debt
collectors would not incur costs related to changing
agreements.)
Providers will incur costs related to submitting
arbitration records to the Consumer Bureau. However, because
arbitrations are so infrequent, the total cost to all providers
is unlikely to reach $1 million per year.
(f.) The Consumer Bureau's enforcement actions are a
powerful tool to address violations of the law and to make
consumers whole. Since opening in July 2011, the Consumer
Bureau has ordered that almost $12 billion be returned to 29
million consumers and imposed about $600 million in civil
penalties. The Consumer Bureau has also shut down illegal
practices, protecting other consumers from suffering similar
financial harm in future years.
While the Consumer Bureau and other public enforcement
agencies can act to remedy some consumer harms, public
resources are limited. The various consumer finance markets
consist of tens of thousands of companies interacting with
hundreds of millions of consumers. The Consumer Bureau has
limited resources and authority and cannot obtain relief for
all violations of law that may occur. As the Arbitration Study
has noted, there appears to be little overlap between
enforcement actions by the Consumer Bureau, or other Federal or
State regulators, and private class actions brought against
companies. The Consumer Bureau therefore believes that
consumers are better protected and markets are fairer when
consumers can group their disputes together in private
proceedings, typically through class proceedings in court.
(g.) The cost-benefit analysis in the Consumer Bureau's
Final Rule, mentioned above in response to Question 1(f), sets
out some of the Bureau's analysis of the impact of the proposed
rule on provider compliance with consumer financial laws.
Further, in the Consumer Bureau's 2012 Request for Information
regarding the appropriate scope of the Arbitration Study, the
Bureau sought ``specific suggestions from the public to help
identify the appropriate scope of the Study, as well as
appropriate methods and sources of data for conducting the
Study.'' \2\ Despite raising concerns about the costs to
defendants of class action litigation, no commentators writing
in response to the Consumer Bureau's query identified a data
set that would facilitate such an analysis. Nor did the Bureau
receive such data in comments received after the Notice of
Proposed Rulemaking.
---------------------------------------------------------------------------
\2\ RFI, supra note 4.
---------------------------------------------------------------------------
In conducting the Arbitration Study, the Consumer Bureau
decided not to compel the production of data reflecting firms'
internal response to the risk of class actions because, among
other concerns, the data may be considered privileged or
sensitive information. A joint comment letter by several major
trade associations stated that assessing the economic impacts
of class actions on businesses might be difficult or impossible
and suggested that the Consumer Bureau instead look at fees
paid by firms to plaintiffs' lawyers as part of a class action
settlement. In response, the Consumer Bureau obtained data from
the public records on fee awards in all of the class action
settlements that the Study analyzed and reported on these fees
in the Arbitration Study.
The Arbitration Study also sheds considerable light on the
benefits of a class action system as compared to the benefits
most consumers derive from individual resolution of their
disputes. The Arbitration Study found, for example, that few
consumers of financial products and services seek relief
individually, either through the arbitration process or in
court. In its review of all American Arbitration Association
consumer disputes from 2010 to 2012 relating to credit card,
checking/debit account, payday loan, prepaid card, auto
purchase loan, and student loan products, the Consumer Bureau
found an average of over 600 arbitration proceedings a year
were filed for all six product markets combined, of which only
over 400 were recorded as filed by consumers acting alone. Only
25 disputes a year involved consumers bringing affirmative
claims for $1,000 or less than that amount.
In contrast, the Arbitration Study found that consumers
derive substantial benefits from class action settlements. As
noted, the Consumer Bureau identified a significant volume of
consumer financial class settlements that were approved between
2008 and 2012. \3\ In the more than 400 settlements that the
Consumer Bureau analyzed, there were about 160 million total
class members (excluding the TransUnion settlement noted
above). \4\ These settlements included cash relief, in-kind
relief, and relief relating to fees and other expenses that
companies paid. The total amount of gross relief in these
settlements that is, aggregate amounts promised to be made
available to or for the benefit of damages classes as a whole,
calculated before any fees or other costs were deducted--was
about $2.7 billion. \5\ This estimate included cash relief of
over $2 billion and in-kind relief of nearly $650 million. \6\
About two-thirds of the settlements reporting some cash relief
contained enough data for the Consumer Bureau to calculate the
value of cash relief that, as of the last document in the case
files, either had been or was scheduled to be paid to class
members. Based on this subset of cases alone, the value of
calculable cash payments to class members to that point was
about $1.1 billion. \7\ This excludes payment of in-kind relief
and any valuation of injunctive relief.
---------------------------------------------------------------------------
\3\ Arbitration Study, supra note 7, section 8 at 3.
\4\ Arbitration Study, supra note 7, section 1 at 16. This figure
excludes one large settlement (In re: TransUnion Privacy Litigation)
with 190 million class members.
\5\ Arbitration Study, supra note 7, section 8 at 24. The
Arbitration Study defined gross relief as the total amount the
defendants offered to provide in cash relief (including debt
forbearance) or in-kind relief and offered to pay in fees and other
expenses.
\6\ These figures represent a floor, as the Bureau did not include
the value to consumers of making agreed changes to business practices.
\7\ Arbitration Study, supra note 7, section 8 at 28.
---------------------------------------------------------------------------
The Consumer Bureau explained in the Final Rule its belief
that based on the data from the Arbitration Study set out
above, the class rule, by reversing the status quo, creating
incentives for greater compliance, and restoring a means of
broad relief and accountability, will be for the protection of
consumers for several reasons.
The Consumer Bureau explained in the Final Rule its belief
that the class rule is likely to induce greater compliance with
the law by covered providers. When laws cannot be effectively
enforced (in this instance because of the use of arbitration
agreements), providers may be more likely to engage in
potentially unlawful business practices, because they know that
any potential costs from exposure to putative class action
filings have been reduced if not effectively eliminated. Due to
this reduction in legal exposure (and thus a reduction in
risk), providers have less of an incentive to invest in
compliance management in general, such as by investing in
employee training with respect to compliance matters or by
carefully monitoring changes in the law.
Thus, the class rule is based on the Consumer Bureau's
belief that the availability of class actions affects firms'
compliance incentives. The standard economic model of
deterrence holds that individuals who benefit from engaging in
particular actions that violate the law will instead comply
with the law when the expected cost from violation, i.e., the
expected amount of the cost discounted by the probability of
being subject to that cost, exceeds the expected benefit.
Consistent with that model, Congress and the courts have long
recognized that deterrence is one of the primary objectives of
class actions.
The Consumer Bureau believes that consumers are better
protected from harm by consumer financial service and product
providers when they are able to aggregate claims. Accordingly,
the class rule is based on the Consumer Bureau's belief that
ensuring that consumers can pursue class litigation related to
covered consumer financial products or services without being
curtailed by arbitration agreements protects consumers,
furthers the public interest, and is consistent with the
Arbitration Study.
(h.) The judicial process--especially as expressed by the
Federal Rules of Civil Procedure--has mechanisms to prevent or
mitigate any harm businesses may face from baseless class
actions. As the Bureau noted in its final rule, courts dismiss
claims that fail to state a plausible claim for relief and can
sanction attorneys that file frivolous claims without
evidentiary support for the allegations. In addition, Congress,
through amendments to the Federal Rules of Civil Procedure and
enactment of CAFA, has and continues to consider further
adjustments to class action procedures. The Supreme Court has
also rendered a series of decisions making clear that Federal
Rule 23 ``does not set forth a mere pleading standard'' and
establishing a number of requirements to subject putative class
claims to close scrutiny. Thus the law expects courts to act to
limit frivolous litigation. Further, the Bureau understands
that class action attorneys will typically earn nothing for the
time invested in developing, filing, and litigating a class
case that is dismissed on a dispositive motion. The Bureau
believes this may serve as an incentive not to bring cases that
would be dismissed for lacking merit.
While trial verdicts in consumer financial class action
cases are rare, they do occur. A bench trial in Gutierrez v.
Wells Fargo Bank, N.A., led to a judgment on the merits in
favor of the plaintiff class. 730 F. Supp. 2d 1080, 1082 (N.D.
Cal. 2010). This case was not included in the Study's analysis
of consumer financial litigation in court because it was filed
in 2007 and the Study analyzed cases filed from 2010 through
2012. Although that judgment was limited to a California class
of the bank's consumers, the bank thereafter appears to have
also changed its overdraft practices in other jurisdictions in
the United States, presumably out of concern regarding other
State's laws. \8\
---------------------------------------------------------------------------
\8\ See Danielle Douglas-Gabriel, ``Big Banks Have Been Gaming
Your Overdraft Fees To Charge You More Money'', Wash. Post Wonkblog
(July 17, 2014), https://www.washingtonpost.com/news/wonk/wp/2014/07/
17/_wells-fargo-to-make-changes-to-protect-customers-from-overdraft-
fees/ (``Half of the country's big banks play this game, but one has
decided to stop: Wells Fargo. Starting in August, the bank will process
customers' checks in the order in which they are received, as it
already does with debit card purchases and ATM withdrawals.'').
---------------------------------------------------------------------------
(i.) As set out in the Consumer Bureau's responses to 1(d)
and 1(g), the Bureau believes the data it has gathered shows
that it is likely class action lawsuits change firm behavior in
meaningful ways. The Consumer Bureau considered relevant
evidence and data it received during the comment period.
(j.) The Consumer Bureau has been open to feedback from all
stakeholders in the course of working on the Arbitration Study
and since the study was made available. In this process, the
Consumer Bureau has received written and spoken comments from
some stakeholders representing class action lawyers on the same
terms as other stakeholders, including trade and industry
representatives, public interest and consumer groups,
academics, and State governments. Further, the Consumer Bureau
specifically sought out feedback, in writing and in-person,
from small businesses in the SBREFA Panel process. Finally, the
Consumer Bureau met with stakeholders, including tribal
governments, after the release of the Notice of Proposed
Rulemaking and before the publication of the Final Rule.
Summaries of these ex parte consultations with stakeholders
will be published on the Consumer Bureau's website.
Q.2. At your April 7, 2016, appearance before the Senate
Banking Committee, you testified--regarding a letter that
Senator Corker sent to you on TILA-RESPA--that ``[b]ecause I'm
testifying today, we did respond to that letter . . . ''
(emphasis added). Please review the Congressional letters sent
to you during your tenure at the CFPB and the timing of your
responses, along with the same for questions for the record, as
of the date of this hearing.
(a.) Does the CFPB have a practice of responding only to
letters before it is scheduled to appear before a Congressional
committee, of which the writer was a member?
(b.) To how many letters have you not yet responded?
(c.) Of these letters, how many of them are from members
who do not sit on a Congressional committee with jurisdiction
over the CFPB?
(d.) Of these letters, what was your average response time?
(e.) What was your average response time for Republican
caucus members?
(f.) What was your average response time for Democrat
caucus members?
(g.) What percentage of your responses were sent less than
a week before a Congressional hearing, when the writer was a
member of the Committee where the CFPB was appearing?
(h.) What percentage of your responses were sent less than
a week before a Congressional hearing, of which the recipient
was a member, for Republican caucus members?
(i.) What percentage of your responses were sent less than
a week before a Congressional hearing, of which the recipient
was a member, for Democrat caucus members?
(j.) Please provide the average response time to questions
for the record, for Republican caucus members.
(k.) Please provide the average response time to questions
for the record, for Democrat caucus members?
A.2. The Consumer Bureau is an independent Federal agency
created by Congress responsible for implementing, and where
necessary, enforcing, Federal consumer financial law
consistently and for the purpose of ensuring that consumer
financial markets are fair, transparent, and competitive. As an
independent Federal agency, the Consumer Bureau routinely
handles correspondence, requests for information, and other
inquiries from Members of Congress and Congressional Committees
on a variety of topics that are related to the Consumer Bureau
and the Bureau's work. The Consumer Bureau's Office of
Legislative Affairs (OLA) is responsible for managing the
responses to both Members of Congress and Committees, as well
as collaborating with other divisions within the Bureau to
answer questions that have been posed.
The Consumer Bureau attempts to send a response to each
request within a 30-day period following receipt of the
incoming letter. This drafting period allows OLA to collaborate
amongst different internal divisions prior to finalizing a
response to ensure that the information provided is thorough
and accurate. The actual time required for each response
depends on the unique characteristics of the incoming letter,
including the complexity of the subject matters and the depth
and number of questions posed. Often, the process will require
additional follow up with the Member's office to clarify any
outstanding questions OLA may have prior to drafting a
response. Additional questions or issues posed may create a
delay in answering the question. The Consumer Bureau does not
track average response times, response times by political party
affiliation, percentage of responses in fewer than one week, or
percentage of responses sent during time periods surrounding
hearings by Congress.
Q.3. I'd like to discuss the CFPB's pending rule regarding
``payday, auto title, and similar lending products'' (payday
lending). \9\
---------------------------------------------------------------------------
\9\ http://www.consumerfinance.gov/blog/fall-2015-rulemaking-
agenda/.
---------------------------------------------------------------------------
(a.) In March of 2015, the CFPB announced that it was
considering ways to regulate payday loans. That notice said
that the CFPB was considering prohibiting longer-term products
with a monthly payment that exceeded 5 percent of a consumer's
gross monthly income. Please provide the economic research that
the CFPB produced and consulted to reach the conclusion that a
monthly payment in excess of this amount is unaffordable.
(b.) Many have argued that the alternative to payday
lending is not accessing credit at a lower interest rate, but
either using higher interest rate forms of ``credit'' (such as
overdrawing from a checking account) or losing access to credit
altogether. Please provide the economic research that the CFPB
produced and consulted regarding alternative forms of credit
beyond current payday lending practices.
(c.) Please provide the economic research that the CFPB
produced and consulted regarding the possibility that further
regulating the payday lending industry will force some payday
lenders to stop offering products altogether.
(d.) Are consumers better off not having the option of
accessing payday lending, even if it means they will lose
access to credit overall?
(e.) Does the CFPB trust consumers to evaluate the risks
associated with payday lending?
(f.) What research has the CFPB conducted or identified
that indicates consumers are unable to evaluate the risks
associated with payday lending?
A.3. In its Outline of Proposals under Consideration and
Alternatives Considered, which was released in March 2015 as
part of the Small Business Review Process, the Consumer Bureau
noted that it was considering whether to propose exempting from
the ability-to-repay requirements under consideration longer-
term loans with payments equal to or less than 5 percent of a
consumer's gross monthly income. The proposed rule released in
June 2016 did not propose to include this exemption. The March
2015 Outline did not indicate that the Consumer Bureau was
considering whether to prohibit longer-term loans with monthly
payments that exceeded 5 percent of a consumer's gross monthly
income. The proposed rule similarly would not prohibit longer-
term loans with a monthly payment that exceeds 5 percent of a
consumer's gross monthly income.
In the lead up to the proposed rule on payday, vehicle
title, and certain high-cost installment loans, the Consumer
Bureau released several research publications. These reports
looked at use patterns of payday loans and vehicle title loans,
online lending, high-cost installment lending, and the impact
of various State approaches to regulating payday lending. The
Consumer Bureau's research and analysis is included in the
notice of proposed rulemaking and supplemental report released
alongside the proposed rule in June 2016. In considering the
scope and content of the proposed rule, the Consumer Bureau
studied the forms of liquidity loan products on the market
today, including forms of credit beyond typical payday lending.
The Consumer Bureau's findings in this regard are included in
part II of the Notice of Proposed Rulemaking (81 FR 866 et
seq.). The Consumer Bureau discusses research and analysis on
the harms associated with payday loans in Market Concerns--
Short-Term Loans (81 FR 47919 et seq.).
Consistent with section 1022(b)(2) of the Dodd-Frank Wall
Street Reform and Consumer Protection Act, the Consumer Bureau
considered the potential benefit, costs, and impacts of the
proposals. Additionally, consistent with section 603(a) of the
Regulatory Flexibility Act, the Bureau prepared an initial
regulatory flexibility analysis that describes the impact of
the proposed rule on small entities. These estimates of the
impact of the proposed rule on payday lenders and on access to
credit are presented in parts VI (81 FR 48115 et seq.) and VII
(81 FR 48150 et seq.) of the notice of proposed rulemaking.
Q.4. I'd like to discuss the CFPB's efforts to tailor
regulations for community banks and credit unions.
Please describe the criteria and processes by which you
decide when and how to exempt small financial institutions from
certain regulatory requirements.
At your April 7, 2016, appearance in front of the Senate
Banking Committee, you testified, regarding tailoring
regulations for small financial institutions, that ``we tend to
be fairly careful about it. We don't regard Congress as having
said to us you have broad exemption authority.'' However,
Section 1022(b)(3) of Dodd-Frank authorized the CFPB to
``conditionally or unconditionally exempt any class of covered
persons, service providers, or consumer financial products or
services'' from the CFPB's rules and regulations, taking into
account the entity's ``total assets,'' ``volume of
transactions,'' and the extent to which existing laws already
protect consumers. Please explain why the CFPB does not believe
the statute confers at least a significant authority to tailor
regulations.
How much does the CFPB value ``relationship banking,''
where a financial institution makes a lending decision based
upon their personal knowledge of a customer, instead of mere
statistical analysis?
A.4. Section 1022 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (Dodd-Frank Act) authorizes the
Consumer Bureau to engage in rulemaking and issue orders and
guidance to administer and carry out the purposes and
objectives of the Federal consumer financial laws, and to
prevent evasions thereof. In doing so, Section 1022 requires
that the Consumer Bureau consider the potential benefits and
costs to consumers and covered persons, including the potential
reduction of access to consumer financial products and services
to consumers. Section 1022 also requires the Consumer Bureau to
consider the impact of a proposed rule on insured depository
institutions and credit unions with total assets of $10 billion
or less as well as the impact on consumers in rural areas.
Moreover, Section 1022 gives the Consumer Bureau the authority
to create exemptions from the Consumer Financial Protection Act
of 2010 or rules issued under that Act for any class of covered
persons, service providers, or consumer financial products or
services if the Consumer Bureau determines an exemption is
necessary or appropriate to carry out the purposes and
objectives of the Consumer Financial Protection Act after
taking into consideration a set of factors specified in the
statute.
To date, the Consumer Bureau has sought to carefully
calibrate its efforts to ensure consistency with respect to
consumer financial protections across the financial services
marketplace, while accounting for the different business models
and classes of financial institutions. For example, as part of
the Consumer Bureau's commitment to achieving tailored and
effective regulations, the Bureau has taken the following
actions for different models and classes of institutions:
Mortgage Origination Rules (Title XIV)
Expanded safe harbor for small creditors. A small
creditor has a broader safe harbor for its Qualified
Mortgage (QM) loans than non-small creditors. The
Consumer Bureau's rules provide a safe harbor for QMs
with annual percentage rate (APR) spreads over Average
Prime Offer Rate (APOR) up to 350 basis points, whereas
non-small creditors have a safe harbor for spreads up
to 150 basis points. The Consumer Bureau's rules also
allow a small creditor to make QMs with debt-to-income
ratios that exceed the otherwise applicable 43 percent
cap. (Small creditors must hold these loans in
portfolio for 3 years.)
Exempted small creditors in rural and underserved
areas. Small creditors that operate (or operated
``predominantly'' before implementation of the Helping
Expand Lending Practices in Rural Communities Act in
March 2016) in rural or underserved areas are exempt
from requirements to establish escrow accounts for
higher priced mortgage loans and from restrictions on
offering QMs and Home Ownership and Equity Protection
Act (HOEPA) loans (``high cost'' mortgages as defined
in the HOEPA) that have balloon payment features. QMs
and HOEPA loans generally cannot have balloon payments.
Implemented a 2-year pause for small creditors. The
Consumer Bureau established a 2-year transition period
(until January 10, 2016) allowing small creditors to
make balloon-payment QMs and balloon-payment HOEPA
loans regardless of whether they operated predominantly
in rural or underserved areas, while the Consumer
Bureau revisited and reconsidered the definition of
``rural'' for this purpose.
Expanded exemptions for creditors in rural and
underserved areas. In connection with other changes to
amend the definitions of ``small creditor'' and ``rural
area,'' the Consumer Bureau published a final rule in
October 2015 that extended this 2-year transition
period from January 2016 until April 2016. The Bureau's
final rule also provided a significant expansion of
``rural,'' as well as an expansion of which entities
can qualify as ``small creditors.'' The Consumer
Bureau's final rule took effect on January 1, 2016,
before the 2-year transition period expired. In March
2016, the Consumer Bureau issued an interim final rule
that implements the Helping Expand Lending Practices in
Rural Communities Act, and makes these provisions
available to small creditors that extend at least one
covered transaction secured by property located in a
rural or underserved area in the previous calendar
year. The Bureau estimated that about 6,000 additional
small creditors would be eligible as a result of this
change.
Relaxed requirements for appraisals. Small
creditors have relaxed rules regarding conflict of
interest in ordering appraisals and other valuations.
Mortgage Servicing Rules (Title XIV)
Exempted small servicers from providing periodic
statements. Small servicers are exempt from the Truth
in Lending Act requirement to provide periodic
statements.
Exempted small servicers from loss mitigation
requirements. Small servicers are exempt from all of
the Real Estate Settlement Procedures Act provisions on
policies and procedures; early intervention; continuity
of contact; and loss mitigation, except that a small
servicer may not file for foreclosure unless the
borrower is more than 120 days delinquent on the
mortgage. Small servicers may also not file for
foreclosure (or move for a foreclosure judgment or
order of sale, or conduct a foreclosure sale) if a
borrower is performing under the terms of a loss
mitigation agreement.
Excluded certain seller-financed transactions and
mortgage loans voluntarily serviced for a non-affiliate
from being counted toward the small servicer loan
limit. This allows servicers that would otherwise
qualify for small servicer status to retain their
exemption while servicing those transactions.
Home Mortgage Disclosure Act Rule (Reg C)
Exempted lower-volume depository institutions from
Home Mortgage Disclosure Act reporting. In October of
2015, the Consumer Bureau adopted a final rule revising
Regulation C, which implements HMDA. HMDA and
Regulation C, among other things, require covered
mortgage lenders to report data concerning their
mortgage lending activity. Changes to coverage in the
final rule will reduce the number of banks, savings
associations, and credit unions that are required to
report HMDA data. The revisions will relieve about 22
percent of currently reporting depository institutions
from the burden of reporting HMDA data. Also, by final
rule issued in late August of 2017, the Consumer Bureau
expanded the volume-based exemption from reporting of
open-end lines of credit under HMDA for institutions
with fewer than 500, instead of 100, annual
originations in each of the two preceding years of such
lines of credit. This expanded exemption applies for
calendar years 2018 and 2019, during which the Consumer
Bureau will consider whether to reexamine the
appropriate volume level at which to set the exemption
permanently.
Reduced HMDA error submission threshold for certain
small entities. New Federal Financial Examination
Institution Council guidelines, of which the Consumer
Bureau is a member, provide a more lenient 10 percent
HMDA field error resubmission threshold (to determine
whether the lender must resubmit a particular HMDA data
field) for financial institutions with lower lending
volumes, including many small institutions, for data
collected beginning in 2018. Previously, all
institutions were subject to the same error thresholds.
The new guidelines make other burden-reducing changes
that apply to all lenders, which may be particularly
beneficial to small institutions.
Remittances Rule (Regulation E Subpart B)
Provided regulatory certainty for small entities
under the Electronic Fund Transfer Act. In the Bureau's
rules implementing the Dodd-Frank Act's amendments to
the Electronic Fund Transfer Act, regarding remittance
transfers, the Bureau recognized that certain entities
do not provide remittances in the normal course of
their business and determined that the remittance
requirements do not apply to transfers sent by entities
that provide 100 or fewer remittances each year.
Small financial institutions play a vital role within many
communities across the Nation, as well as within the economy.
Their traditional model of relationship lending has been
beneficial to many people in rural areas and small towns
throughout the country. For these reasons, the Consumer Bureau
attempts to ensure that rules and regulations are not
burdensome to these smaller financial institutions.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR MORAN
FROM RICHARD CORDRAY
Q.1. I know that everyone agrees that discrimination has no
place in our economy. That agreement extends to the need for
vigorous enforcement of the Equal Credit Opportunity Act.
However, I'm concerned that the CFPB's 2013 auto finance
bulletin has resulted in a more adversarial relationship
between the bureau and the auto industry rather than a
relationship based on cooperation toward a shared goal of
rooting out discrimination.
That is part of my reasoning in introducing S.2663, the
Reforming CFPB Indirect Auto Financing Guidance Act, the Senate
companion legislation to H.R.1737 which passed the House by a
vote of 332-96. The name of the legislation is not the
ELIMINATION of the CFPB Indirect Auto Financing Guidance Act,
thereby disqualifying the CFPB from further exploring the
issue. Rather, the process can be improved by creating greater
collaboration on the CFPB's pursuit of discrimination by adding
Congress, industry stakeholders, and consumers to the fold as
we all work together to achieve a fair marketplace.
You and I have had exchanges on this topic since the spring
of 2013. During that time, additional information has been
brought forth.
Auto loan volume numbers aside, has the Bureau studied the
price effects that will impact all consumers due to the 2013
guidance?
A.1. The Consumer Bureau is working hard to ensure that lending
practices are fair and equitable for all consumers and honest
businesses. Our March 2013 Indirect Auto Lending and Compliance
with the Equal Credit Opportunity Act Bulletin \1\ reminded
indirect auto lenders of their existing responsibilities under
the Equal Credit Opportunity Act, but did not mandate any
particular method for mitigating fair lending risk.
---------------------------------------------------------------------------
\1\ http://files.consumerfinance.gov/f/201303_cfpb_march_-Auto-
Finance-Bulletin.pdf
---------------------------------------------------------------------------
We have examined over a dozen of the Nation's largest auto
lenders and achieved important market awareness and movement,
and we believe that a wide range of supervisory compliance
solutions tailored to each lender will work to secure and
advance our progress in protecting consumers. The Consumer
Bureau takes a data-driven approach to our work and we are
always interested in reviewing analyses of the impact of this
work.
Q.2. Is it fair to say that the CFPB's view on this indirect
auto finance leaves open the possibility that all consumers may
find themselves paying higher costs for auto loans due to the
lenders' management of fair credit risk?
A.2. No. The Consumer Bureau is working to ensure that lending
practices are fair and equitable and that credit markets
function competitively and efficiently for all consumers and
businesses. We take a data-driven approach to our work and
would be interested in any analyses of the impact of greater
lender adoption of nondiscretionary compensation programs,
lower caps, or more stringent compliance management systems.
The Consumer Bureau has seen no indication that our work in
indirect auto lending has resulted in credit being restricted
or made more costly for consumers. To the contrary, the number
of new auto loans originated in the first half of 2015 was up 8
percent over the prior year; for auto loans, this marks a 45
percent increase since 2011 and a 9-year high. \2\
---------------------------------------------------------------------------
\2\ See Financial Report of the Consumer Financial Protection
Bureau for Fiscal year 2015, available at http://
files.consumerfinance.gov/f/201511_cfpb_report_fiscal-year-2015.pdf.
---------------------------------------------------------------------------
Further, a November 2015 press release from the National
Automobile Dealers Association (NADA) predicts that sales of
new cars and light trucks will continue their post-recession
climb, reaching an all-time high of 17.71 million vehicles in
2016. \3\ A July 2017 press release from NADA predict new
vehicle sales will remain unchanged in 2017. \4\
---------------------------------------------------------------------------
\3\ National Automobile Dealers Association. (2015). NADA
forecasts 17.71 million new vehicle sales in 2016, citing, in part,
because of low interest rates on auto loans [Press release]. Retrieved
from: https://www.nada.org/Custom_Templates/DetailPressRelease.aspx?
id=21474842879; see also National Automobile Dealers Association.
(2016). NADA declares new vehicle sales for cars and light trucks are
on pace to reach forecast of 17.7 million vehicles in 2016. [Press
release]. Retrieved from: https://www.nada.org/2016Convention/
EconomicForecast/;
\4\ See also National Automobile Dealers Association. (2017). NADA
declares new vehicle sales forecast remains unchanged at 17.1 million
for 2017. [Press release]. Retrieved from: https://blog.nada.org/2017/
07/06/nadas-new-vehicle-sales-forecast-remains-unchanged-at-17-1-
million-for-2017/.
Q.3. Does the CFPB's approach, at the very least, prevent
reimbursements or restitution to borrowers who were not
---------------------------------------------------------------------------
actually discriminated against in the financing of a vehicle?
A.3. With regard to the distribution of settlement funds, the
Consumer Bureau works hard to ensure that as many eligible
consumers as possible receive appropriate remuneration, while
at the same time putting in place important safeguards to
ensure that eligible consumers are the recipients of relief.
Q.4. Would you please list the considerations that go into the
calculation the CFPB uses to determine whether an enforcement
action or a rulemaking process is the right course of action?
Please be specific.
A.4. The Consumer Bureau's approach to regulation and
enforcement is consistent with the Administrative Procedures
Act and the practices of other Federal agencies. The Dodd-Frank
Wall Street Reform and Consumer Protection Act gave the
Consumer Bureau a number of tools--including rulemaking and
enforcement--to address and prevent consumer harm. In each
action the Consumer Bureau takes, we endeavor to choose the
appropriate tool to protect consumers and honest businesses in
the marketplace. The Consumer Bureau has taken enforcement
actions where we believe violations of existing laws warranted
that response.
When it comes to specific enforcement actions, the Consumer
Bureau considers a number of factors in each filed action and
negotiated resolution. These include, but are not limited to:
(a) the number of victims affected; (b) the amount of
individual consumer harm; (c) the type of harm, including
whether such harm is temporary, likely to or likely to affect
the broader economy; (d) whether consumers have the ability to
avoid the conduct or ``shop'' for the product or service; (e)
whether the harmful conduct creates market distortion; and (f)
whether the conduct targets or significantly affects a
vulnerable population.
On the other hand, where our research and analysis suggests
the need for regulatory intervention, the Consumer Bureau seeks
to develop regulations that will protect consumers without
unintended consequences or unnecessary costs. As part of the
rulemaking process, the Consumer Bureau carefully assesses the
benefits and costs that the regulations we consider may have on
consumers and financial institutions. Balanced regulations are
essential for protecting consumers from harmful practices and
ensuring that consumer financial markets function in a fair,
transparent, and competitive manner.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED
FROM RICHARD CORDRAY
Q.1. There is a need for student loan refinancing opportunities
for both Federal student loans and private student loans.
Is the private market providing sufficient access to high
quality, safe student loan refinancing products for a broad
range of borrowers who could benefit? What are the gaps in
consumer protections for student loan refinancing?
A.1. We have observed considerable growth in new student loan
refinancing activity--both refinancing of private student loans
and Federal student loans. This growth has been driven by the
expansion of refinance programs at large financial
institutions, specialty refinancing providers and State lending
authorities.
Although refinancing has expanded, the market is oriented
to serve consumers with prime and super-prime credit profiles.
In contrast, these products may be effectively unavailable for
consumers with limited or negative credit histories. As a
result, the interest rate savings offered to certain consumers
through private refinancing may be unavailable to broad
segments of the student loan market.
An additional key concern is whether those borrowers who
have access to private refinancing are aware of and understand
the inherent trade-off when converting one or more Federal
loans into a private student loan. These may include risks when
converting a fixed-rate loan to a variable-rate loan and the
loss of access to a wide array of Federal consumer protections,
including: Income-driven repayment plans, death and disability
discharge, loan forgiveness, deferment and forbearance, loss of
benefits on pre-service obligations for active-duty
servicemembers.
The Consumer Bureau has advised borrowers with Federal
student loans considering refinancing to be sure to understand
what they are giving up before making this choice. In general,
lenders may warn borrowers about the benefits they are giving
up when refinancing out of a Federal student loan. For
consumers who have a secure job, emergency savings, strong
credit, and are unlikely to benefit from forgiveness options,
refinancing may be a choice worth considering.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR MERKLEY
FROM RICHARD CORDRAY
Q.1. Over the past several years, financial technology firms
(or FinTech firms) have expanded their online lending presence
to consumers and small businesses. FinTech has the potential to
offer a new source of credit for borrowers and a potential
investment opportunity for those with capital to lend.
According to Morgan Stanley, FinTech firms funded an
estimated $5 billion in small-business loans in 2014 and will
grow 50 percent annually through 2020. \1\ And according to the
Wall Street Journal, in recent years alternative lenders
increased their market share to 26 percent from 10 percent. \2\
---------------------------------------------------------------------------
\1\ ``Global Marketplace Lending: Disruptive Innovation in
Finance'', Morgan Stanley Blue Paper, Morgan Stanley Research, May 19,
2015, Accessed April 7, 2016. Available at: http://www.synthesis-
sif.lu/wp-content/uploads/2015/07/GlobalMarketplaceLending.pdf.
\2\ Ruth Simon, ``Big Banks Cut Back on Loans to Small Business'',
The Wall Street Journal, November 26, 2015. Accessed April 7, 2016.
Available at: http://www.wsj.com/articles/big-banks-cut-back-on-small-
business-1448586637.
---------------------------------------------------------------------------
The industry's growth did not go unnoticed by the Treasury
Department which put out Request for Information (RFI) on
FinTech companies last summer. Senators Brown and Shaheen
joined me in writing to Treasury asking for more specifics of
their findings. \3\ San Francisco Federal Reserve President
Williams has also taken notice of the growing FinTech industry.
In an interview with the American Banker, Fed President
Williams noted that while there is promise in alternative
lending products, there does exist the potential to leave low-
and middle-income borrowers behind or make it easier to engage
in predatory lending. \4\ And the OCC recently released a white
paper on ``responsible innovation,'' taking a look into
FinTech. \5\
---------------------------------------------------------------------------
\3\ ``Merkley, Brown, Shaheen Press for Information on Financial
Technology Market's Impact on Small Businesses and Consumers'', Press
Release, The Office of Senator Jeff Merkley. Accessed April 7, 2016.
Available at: https://www.merkley.senate.gov/news/press-releases/
merkley-brown-shaheen-press-for-information-on-financial-technology-
markets-impact-on-small-businesses-and-consumers.
\4\ John Heitman, ``Ten Questions for San Francisco Fed President
John Williams'', American Banker, March 28, 2016. Accessed April 7,
2016. Available at: http://www.americanbanker.com/news/law-regulation/
ten-guestions-for-san-francisco-fed-president-john-williams-1080114-
1.html.
\5\ United States, Department of Treasury, Office of the
Comptroller of the Currency, ``Supporting Responsible Innovation in the
Federal Reserve Banking System: An OCC Perspective'', March 2016,
Accessed April 7, 2016. Available at: http://www.occ.treas.gov/news-
issuances/news-releases/20l6/nr-occ-2016-39.html.
---------------------------------------------------------------------------
What we do know is that FinTech firms operate in a largely
undefined regulatory space. Given this industry's sudden
emergence and exponential growth, there is concern that they
are operating outside the boundaries of regulation and there is
a potential for individuals and small businesses to become
targets of predatory practices.
In February, the CFPB finalized a new policy to issue no-
action letters to FinTech firms. Companies must apply for a no-
action letter and if they are granted, these letters offer
assurances from the CFPB that it has no intention of taking
enforcement action against the company for introducing a new
financial service. However, no-action letters can be revoked at
any time should the CFPB changes its mind.
It is my understanding that the CFPB's policy is aimed at
reducing regulatory uncertainty hanging over companies that
develop untested financial products and services with the
potential for ``significant consumer benefit.'' However, the
CFPB estimated that it would receive an average of only two or
three ``actionable'' applications per year and that approvals
would be given only ``rarely.''
Director Cordray, the CFPB recently finalized a new policy
to issue no-action letters to firms with ``innovative financial
products or services.'' Why did the CFPB decide to take this
step?
A.1. The Consumer Bureau decided to use No-Action letters as
one possible means of reducing regulatory uncertainty,
specifically in cases where doing so would facilitate consumer
access to innovative financial products or services. The
Consumer Bureau finalized the policy to establish a process for
companies to apply for a No-Action letter in February 2016. The
policy lays out the information a company should provide in an
application, as well as the criteria the Consumer Bureau would
use to assess applicants. \6\
---------------------------------------------------------------------------
\6\ Consumer Financial Protection Bureau Policy on No-Action
Letters; information collection, 81 FR 8686 (Feb. 22, 2016), also
available at http://files.consumerfinance.gov/f/201602_cfpb_no-action-
letter-policy.pdf.
---------------------------------------------------------------------------
The Consumer Bureau views the No-Action Letter policy as a
means of fulfilling its objectives under the Dodd-Frank Act,
which include ``facilitating [consumer] access'' to and
``innovation'' in markets for consumer financial products. The
No-Action Letter program is not designed solely for FinTech
startups, but for any firm, including Consumer Bureau
supervised entities the Consumer Bureau supervised entities,
looking to offer an innovative financial product or service
that holds the promise of consumer benefit, but facing
regulatory uncertainties. We have estimated that only a limited
number of no-action letters would be released, given the
limited scope of the No-Action Letter policy and the limited
resources available to devote to the consideration and issuance
of No-Action Letters at this time. However, the Consumer Bureau
is committed to devoting substantial resources to improve
regulatory clarity more broadly through other means, such as
extensive interpretive guidance, official interpretation,
plain-language guides and other similar resources for industry.
Q.2. Why did you decide to open up the CFPB's complaint
database to FinTech?
A.2. Millions of consumers take out personal loans online.
Marketplace lending--often referred to as ``peer-to-peer'' or
``platform'' lending--is a relatively new kind of online
lending. A marketplace lender uses an online interface to
connect consumers or businesses seeking to borrow money with
investors willing to buy or invest in the loan. Generally, the
marketplace lending platform handles all underwriting and
customer service interactions with the borrower. Once a loan is
originated, the company generally makes arrangements to
transfer ownership or the right to receive payments to the
investors while it continues to service the loan. Some
marketplace lenders enter into arrangements with depository
institutions whereby the bank sets underwriting standards and
originates the loans and the marketplace lending platform
handles marketing, underwriting, and customer service. All
lenders, from online startups to large banks, must follow
consumer financial protection laws. By accepting these consumer
complaints, the Consumer Bureau is giving consumers a greater
voice in these markets and a place to turn to when they
encounter problems.
Q.3. The CFPB has created an office to examine FinTech called
Project Catalyst. What are they specifically looking for?
A.3. We believe that good, consumer-friendly innovation holds
great potential for achieving our mission of making the
consumer finance market work for consumers. Project Catalyst
closely monitors the developments in the FinTech space and
educates the Consumer Bureau at large so that the Consumer
Bureau is always up to date with the latest innovations.
Project Catalyst also looks for opportunities for the Consumer
Bureau to engage and collaborate with innovators of consumer-
friendly products. In particular, Project Catalyst searches for
opportunities to collaborate with innovators by either engaging
in research collaborations partnerships, considering trial
disclosure waivers under the Bureau's authority under section
1032(e) of the Dodd-Frank Act, or considering No-Action
Letters.
Q.4. Mr. Cordray, I want to thank you for continuing the effort
to protect consumers from the many different predatory mortgage
products which caused millions of Americans to lose their homes
during the recent housing crisis. But I'm troubled by recent
press reports in The Wall Street Journal \7\ and Washington
Post \8\ that ``alt-doc'' or ``low-doc'' loans are making a
minor resurgence thanks to a renewed appetite from industry
looking for riskier assets with higher returns.
---------------------------------------------------------------------------
\7\ Kirsten Grind, ``Remember `Liar Loans'? Wall Street Pushes a
Twist on the Crisis-Era Mortgage'', The Wall Street Journal
(subscription), February 1, 2016. Accessed April 7, 2016. Available at:
http://www.wsj.com/articles/crisis-era-mortgage-attempts-a-comeback-
1454372551.
\8\ Editorial Board, ``Talk About Breaking Up Big Banks Ignores
Reforms Made Since the Recession'', Op-Ed, Washington Post, February 3,
2016, Accessed April 7, 2016. Available at: https://
www.washingtonpost.com/opinions/talk-about-breaking-up-big-banks-
ignores-reforms-made-since-the-recession/2016/02/03/e0043618-c9e9-11e5-
a7b2-5a2f824b02c9_story.html.
---------------------------------------------------------------------------
While this market's resurgence is still small, at an
estimated $18 to $20 billion in 2015, compared to $767 billion
for conventional mortgages, the one thing we learned from the
mortgage crisis is that these tidal waves must be stopped while
they're small or they can threaten the entire economy.
Director Cordray, are these types of loans on the CFPB's
radar?
A.4. We routinely monitor consumer financial services markets,
and the types of mortgage product being offered are one part of
that monitoring. We conduct this monitoring through various
means, including analysis of published and unpublished data
that we have available as well as regular outreach and other
informational meetings with industry participants, consumer
advocates, and other stakeholders. In addition, we review our
consumer complaints and information submitted to our
whistleblower hotline for relevant information.
As you know, the Truth in Lending Act, as amended by the
Dodd-Frank Wall Street Reform and Consumer Protection Act,
generally prohibits a creditor from making a residential
mortgage loan unless the creditor makes a reasonable and good
faith determination, based on verified and documented
information, that the consumer has a reasonable ability to
repay the loan according to its terms. These documentation and
verification requirements effectively prohibit no documentation
and limited documentation loans that were common in the later
years of the housing bubble. For example, the Consumer Bureau's
rules require a creditor to verify the information relied on in
considering a consumer's debts relative to income or residual
income after paying debts, using reasonably reliable third-
party records, with special rules for verifying a consumer's
income or assets. To the extent creditors evade or ignore these
verification and documentation requirements, we are prepared to
bring supervisory and enforcement attention to them.
Additional Material Supplied for the Record
SEMIANNUAL REPORT OF THE CONSUMER FINANCIAL PROTECTION BUREAU, OCTOBER
1, 2015-MARCH 31, 2016
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
STATEMENTS AND LETTERS SUBMITTED FOR THE RECORD
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]