[Senate Hearing 114-104]
[From the U.S. Government Publishing Office]
S. Hrg. 114-104
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
FIRST SESSION
ON
EXAMINING THE CONSUMER FINANCIAL PROTECTION BUREAU'S SEMIANNUAL REPORT
TO CONGRESS, REVIEWING THE BUREAU'S OPERATIONS AND ACTIONS SINCE THE
LAST SEMIANNUAL REPORT WAS PUBLISHED
__________
JULY 15, 2015
__________
Printed for the use of the Committee on Banking, Housing, and Urban Affairs
Available at: http: //www.fdsys.gov /
_________
U.S. GOVERNMENT PUBLISHING OFFICE
97-399 PDF WASHINGTON : 2016
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
RICHARD C. SHELBY, Alabama, Chairman
MIKE CRAPO, Idaho SHERROD BROWN, Ohio
BOB CORKER, Tennessee JACK REED, Rhode Island
DAVID VITTER, Louisiana CHARLES E. SCHUMER, New York
PATRICK J. TOOMEY, Pennsylvania ROBERT MENENDEZ, New Jersey
MARK KIRK, Illinois JON TESTER, Montana
DEAN HELLER, Nevada MARK R. WARNER, Virginia
TIM SCOTT, South Carolina JEFF MERKLEY, Oregon
BEN SASSE, Nebraska ELIZABETH WARREN, Massachusetts
TOM COTTON, Arkansas HEIDI HEITKAMP, North Dakota
MIKE ROUNDS, South Dakota JOE DONNELLY, Indiana
JERRY MORAN, Kansas
William D. Duhnke III, Staff Director and Counsel
Mark Powden, Democratic Staff Director
Dana Wade, Deputy Staff Director
Jelena McWilliams, Chief Counsel
Beth Zorc, Senior Counsel
John V. O'Hara, Senior Counsel for Illicit Finance and National
Security Policy
Christopher Ford, Senior Counsel, National Security Policy
Laura Swanson, Democratic Deputy Staff Director
Graham Steele, Democratic Chief Counsel
Colin McGinnis, Democratic Policy Director
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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WEDNESDAY, JULY 15, 2015
Page
Opening statement of Chairman Shelby............................. 1
Opening statements, comments, or prepared statements of:
Senator Brown................................................ 3
WITNESS
Richard Cordray, Director, Consumer Financial Protection Bureau.. 4
Prepared statement........................................... 45
Responses to written questions of:
Chairman Shelby.......................................... 47
Senator Brown............................................ 52
Senator Crapo............................................ 58
Senator Vitter........................................... 60
Senator Sasse............................................ 62
Senator Rounds........................................... 64
Senator Moran............................................ 66
Senator Menendez......................................... 67
Additional Material Supplied for the Record
Semi-Annual Report of the Consumer Financial Protection Bureau,
October 1, 2014-March 31, 2015................................. 75
(iii)
THE CONSUMER FINANCIAL PROTECTION BUREAU'S SEMIANNUAL REPORT TO
CONGRESS
----------
WEDNESDAY, JULY 15, 2015
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:02 a.m., in room SD-538, Dirksen
Senate Office Building, Hon. Richard Shelby, Chairman of the
Committee, presiding.
OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY
Chairman Shelby. The Committee will come to order.
Today the Committee will hear from Richard Cordray, the
Director of the Bureau of Consumer Financial Protection. The
Bureau has grown to over 1,450 employees and has been very
active since Director Cordray's last testimony before this
Committee.
Among other things, it has recently expanded enforcement
actions to cover telecom companies and broadened its authority
over the auto finance industry. These actions, like others
undertaken by the Bureau since its formation, have not been
without controversy. Many would say that some of them go beyond
what Congress envisioned in Dodd-Frank.
For instance, the Bureau's regulation of auto lending now
involves over 30 nonbank lenders not previously subject to its
supervision. This move has been called into question given the
specific exemption for auto dealers in Dodd-Frank.
In addition to concerns with recent regulatory actions,
issues remain with the Bureau's lack of accountability. This
has been demonstrated by concerns with the Bureau's budgeting
process, including the rising costs of renovation for the
CFPB's new headquarters.
According to the Federal Reserve Inspector General, the
estimated cost of actual renovation increased from $40 million
in February of 2012 to $145 million in December of 2013. This
is over 3 \1/2\ times the initial estimate. The Inspector
General also estimated that the total cost is now closer to
$216 million. The Administration has yet to explain who
approved the renovation and what happened to the documentation
involved.
Unfortunately, Congress does not have control over how the
Bureau spends its funds because the CFPB operates outside of
the appropriations process. Even the Federal Reserve, which
funds the CFPB from its earnings, does not control the Bureau's
budget.
Because Congress cannot tighten the financial reins when
budgeting issues arise, the Bureau's current structure makes
meaningful congressional oversight very difficult.
So-called independence is one reason cited by the authors
of Dodd-Frank for the Bureau's structure. But other independent
agencies, such as the Securities and Exchange Commission, the
CFTC, the FTC, and the CPSC, are all subject to the
appropriations process. Additionally, the Bureau does not even
have its own Office of Inspector General, relying instead on
the Inspector General of the Federal Reserve.
Some of us have urged the adoption of specific reforms to
make the Bureau more accountable and more transparent. By
putting the Bureau through the appropriations process and
establishing a board of directors, I believe it would resemble
other independent agencies and provide Congress with the
ability to conduct meaningful oversight.
Unfortunately, calls for reform have been rejected in past
Congresses. Therefore, the only remaining oversight tool
available to Congress is to hold hearings and hope that any
concerns expressed perhaps would be addressed.
Director Cordray, it would be like giving you the authority
to implement Federal consumer financial laws but withholding
the authority to enforce them. I think you would agree that
would make you highly ineffective as an agency charged with
implementing our consumer financial laws.
Congressional oversight of the Bureau is critical now more
than ever because of the CFPB's growing reach over the
practices of individuals and companies in the financial sector.
For the time being here, we will conduct hearings and
submit respectful requests that may or may not be addressed. I
am confident that the time will come when we will reassert our
constitutional prerogative that the supporters of Dodd-Frank
sacrificed 5 years ago in the name of bureaucratic
independence. Only then, I believe, will the Bureau be truly
accountable to the people's representatives.
Senator Brown.
STATEMENT OF SENATOR SHERROD BROWN
Senator Brown. Thank you, Mr. Chairman.
Director Cordray, welcome back to the Senate Banking
Committee. Next week marks, as we know, the 5-year anniversary
of the Wall Street Reform Act which created the Consumer
Financial Protection Bureau. The financial crisis, we should
never forget--the worst this country has seen since the Great
Depression--exposed many weaknesses in our financial regulatory
system.
One of the most troubling before the crisis was that no one
was looking out for consumers. Consumers were steered into
mortgages they could not afford, often with terms that were not
disclosed: high fees, abusive payment structures, and sudden
interest rates increases. Five million Americans lost their
homes in foreclosure. In the home State of the Director and my
State alone, half a million homes were foreclosed upon between
2006 and 2011--one-half a million homes.
At the height of the crisis in 2009, one in three Ohioans
with mortgages were underwater; one in every six mortgage
holders was at least 30 days delinquent or in foreclosure.
Though the banking regulators were supposed to be enforcing
consumer financial laws, too often they looked elsewhere. A
number of industries developed in the shadows with no clear
Federal oversight. More importantly, no Federal regulator was
expressly tasked with ensuring that consumers were treated
fairly in their financial transactions.
We created the CFPB to fill this void to make sure that
never again would consumers be an afterthought in our Nation's
financial system. The CFPB opened its doors just shy of 4 years
ago. In these 4 years, the CFPB has proved over and over that
its creation was one of the big success stories of Wall Street
reform.
As the Chairman speaks of the CFPB's budget, I think it is
important to note that the CFPB has returned $10 billion to the
pockets of 17 million consumers. It has fined countless
companies for egregious consumer abuses, including credit card
companies secretly adding on unwanted products, phone companies
cramming fees onto consumers' bills, or mortgage servicers and
lenders illegally foreclosing on homeowners and servicemembers.
The agency has served as an important place where consumers
can turn. Over 650,000 complaints have been filed with the
Bureau. The CFPB is to be commended for these successes. The
ongoing enforcement actions, though, show us that work is not
done. Just last week, the CFPB, 47 States, and the District of
Columbia took action against a bank for illegally robo-signing
court documents in selling zombie credit card debt, or debt
that had already been cleared. Today I will introduce a bill
that will address zombie debt, along with several of my
colleagues in the introduction, and I hope that CFPB will
continue to address this issue.
Last week, the Fed published numbers showing that consumer
borrowing is at a record high, $3.4 trillion dollars, led by
steady increases in student loans, auto loans, and credit card
loans. As consumers take on more debt, the opportunity for
risky behavior increases.
I look forward to hearing from Director Cordray on what the
CFPB views as areas to watch in the consumer market and what
this agency will do moving forward. I look forward to hearing
when Director Cordray expects to finalize rules on payday and
installment loans, on auto title loans, and prepaid cards, on
overdraft and debt collection. We have seen in State after
State that predatory lenders are nimble. As soon as a State
passes legislation to rein them in, the lenders morph into
something else. We saw that in Ohio after a ballot issue
passed. Six years ago, Ohio enacted a short-term lender law
with strong bipartisan support. It was short-lived as payday
lenders evaded this law by registering as mortgage lenders or
by adding fees. This creativity at the State level necessitates
continued vigilance by the Consumer Bureau, and I hope that the
CFPB's rules governing short-term loans close these loopholes.
Much of the CFPB's most important work is centered on
mortgage regulation. The agency's ability to repay rules ensure
that consumers are not trapped in mortgages they cannot afford.
The CFPB's rule to streamline forms will help consumers
understand what is happening at the table during closing.
All these actions speak for themselves as to why this
agency is so, so important to millions of Americans. Yet
opponents continue to work to undermine the agency by weakening
its independence, by changing its structure. Lately, there have
been attempts to chip away at actions the agency has taken on
arbitration and small-dollar loans. They have argued the agency
should not be able to collect data about markets that were
formally nontransparent and unregulated.
I will continue to fight, as so many Members of this
Committee will, all these attempts to destabilize the CFPB. Our
consumers deserve a strong watchdog that can do its job
independently, and it is our job to make sure that happens.
Thank you, Mr. Chairman.
Chairman Shelby. Thank you, Senator Brown.
Without objection, at this time I would like to enter into
the record statements from the Credit Union National
Association and the National Association of Federal Credit
Unions.
Chairman Shelby. Director Cordray, welcome to the Committee
again. Your written testimony will be made part of the 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. Thank you all for the opportunity to
testify today about our latest semiannual report to Congress.
We appreciate your continued oversight and leadership 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. And I would
reiterate, Mr. Chairman, that we take very seriously the
oversight that we get from Congress. These hearings in front of
the Senate Banking Committee, which are required by law, are
important oversight for us. We listen carefully to what is
said, and we take it to heart as we go about our work.
Next week marks 5 years since the passage of the Dodd-Frank
Wall Street Reform and Consumer Protection Act, as has been
noted, and it is 4 years since the Consumer Bureau actually
opened its doors. As you know, Congress created this agency in
response to the financial crisis with the purpose and sole
focus of protecting consumers in the financial marketplace. We
understand our responsibility to stand on the side of consumers
and ensure that they are treated fairly. Through fair rules,
consistent oversight, appropriate enforcement of the law, and
broad-based consumer engagement, the Consumer Bureau is working
to restore people's trust and confidence in the markets they
use for everyday financial products and services.
To date, the Bureau's enforcement activity has resulted in
more than $10.1 billion in relief for over 17 million
consumers. Our supervisory actions have resulted in financial
institutions, correcting many sub-par and illegal practices,
and providing almost $200 million in redress to over 1.6
million consumers. And we have now handled, as was mentioned,
more than 650,000 complaints--a matter that is particularly
important to us--from consumers that address all manner of
financial products and services. These consumers are your
constituents in each of your States. For example, one excerpt
of a complaint narrative from a servicemember in Alabama reads:
We opened an account . . . We paid as agreed until we became
unable to pay the full amount . . . We made an agreement to pay
a lesser amount per month and kept paying via allotment. [The
company] got a judgment against us while I was training. I was
not served with a judgment prior to court or after . . . I was
informed of it when my wages began to be garnished . . . We
have asked repeatedly to have this issue fixed . . . We have in
total paid this company nearly $25,000 over the past 11 years
for a couch and loveseat, computer hutch, table and chairs. The
furniture has not lasted, however the payments and ruin
continue . . . We need assistance as we have tried every other
step possible to fix this without aid.
Another excerpt, from a consumer in my home State of Ohio,
and the Ranking Member's home State, reads:
[I] elected and agreed to a Reduced Rate Payment Plan with [a
student loan servicer]. In addition to being charged incorrect
interest rates, my monthly payment was incorrectly allocated
which is resulting in late fees and a delinquency notice. After
speaking with . . . customer service representatives and a call
time of . . . hours, no resolution had been reached.
These are the stories that motivate us in our work.
In this, our most recent semiannual report to Congress and
the President, we describe the Bureau's efforts to achieve our
vital mission on behalf of consumers, including those in your
home States and mine. During the timeframe covered by the
report, we have helped secure orders through enforcement
actions for millions of dollars in relief to consumers who fell
victim to various violations of consumer financial protection
laws, along with over $32 million in civil money penalties. For
example, we took action against a company for illegal debt
collections practices that resulted in $2.5 million in relief
for servicemembers. We also stopped an illegal kickback scheme
for marketing services, which resulted in $11.1 million in
redress for wronged consumers. We worked with the Department of
Education to obtain $480 million in debt relief to student loan
borrowers who were wronged by Corinthian Colleges, a for-profit
chain of colleges that violated the law and has since declared
bankruptcy.
During the reporting period, the Bureau also issued a
number of proposed and final rules. In October 2014, we issued
a final rule to reduce burdens on industry by promoting more
effective privacy disclosures from financial institutions to
their customers. In November 2014, the Bureau issued a Notice
of Proposed Rulemaking to provide strong new Federal consumer
protections for the first time for prepaid cards and accounts
that had no such protections. In December 2014, the Bureau
issued a proposal to clarify various provisions of its mortgage
servicing rules. In January 2015, the Bureau proposed further
changes to some of our mortgage rules to facilitate mortgage
lending by small creditors, particularly those in rural or
underserved areas, community banks, and credit unions. This
would increase the number of financial institutions able to
offer certain types of mortgages in rural or underserved areas
and help small creditors adjust their business practices to
comply with the new rules.
As a data-driven institution, the Consumer Bureau published
several reports during this reporting period that highlight
important topics in consumer finance such as medical debt,
arbitration agreements, reverse mortgages, and consumer
perspectives on credit scores and credit reports. We also
released a new ``Know Before You Owe'' mortgage toolkit that
will help encourage consumers to shop for mortgages and better
understand how to go about the important task of buying a home.
In the years to come, we look forward to continuing to
fulfill Congress' vision of an agency that is dedicated to
cultivating a consumer financial marketplace based on
transparency, responsible practices, sound innovation, and
excellent customer service.
Thank you for the opportunity to testify today, Mr.
Chairman. I look forward to your questions.
Chairman Shelby. Thank you.
Director Cordray, you have said many times that you are
accountable to Congress. However, you get to determine your
budget and how to spend it. Neither Congress nor the Fed can
tell you how to allocate taxpayers' money. Many Members of
Congress have expressed strong disapproval of the Bureau's
costly building renovations, which include a waterfall and a
four-story glass staircase, and now stands at more than 3 1/2
times, it is my understanding, the original estimate.
Has this disapproval by people caused you to change your
renovation plans in any way? And if so, tell us what changes
you have made, if any?
Mr. Cordray. So two answers to that question.
First, on the overall issue of accountability and
oversight, we are accountable to this Congress in numerous ways
that are in our statute. The GAO does a regular audit of our
financial statements and internal controls each year, which is
not common to Federal agencies. We are subject to an
independent audit also by our statute. We are subject to
reviews by our Inspector General, which have been vigorous. I
am required by law to testify in front of this Committee--that
is where the Congress put the jurisdiction, which is
appropriate, and you are vigorous in your oversight--twice a
year and the House Financial Services Committee twice a year.
We have numerous other accountability mechanisms as well,
and like the other banking agencies, we are not subject to the
appropriation process. But that is not unique. It would be odd
if we as a banking regulatory agency were different from the
others in that respect.
As to the building project, that has been overhyped and
misrepresented. The construction costs have remained
essentially static from before we took on this building and the
Office of Thrift Supervision had performed an audit that found
that the building was in disrepair and needed an overhaul if it
was going to remain a productive Government asset. The
construction costs have been pretty steady at between $95 and
$120 million, approximately. We recently awarded the contracts
through competitive bidding, and they came in thus far under
budget. And the GSA is managing the program, which feels
appropriate to me. They know more about it than I do. And they
have felt and have stated that this is an appropriate
Government renovation project well within the cost estimates
for similar projects. That is my understanding of that issue.
Chairman Shelby. Thank you.
Yesterday, the Bureau announced the settlement of an
enforcement action against American Honda Finance Corporation,
one of the Nation's largest auto lenders. As part of this
settlement, Honda, it is my understanding, must substantially
reduce or eliminate entirely the ability of auto dealers to
raise or lower the finance rate offered to consumers. A recent
American Banker article quoted from a leaked CFPB memo, stating
that the Bureau is seeking to accomplish ``the significant
limitation of dealer discretion.''
Considering that auto dealers were explicitly exempted from
the CFPB's jurisdiction in Dodd-Frank, can this be seen as
anything other than a back-door effort to regulate the auto
dealers, which were basically exempt from Dodd-Frank?
Mr. Cordray. So three things on that.
The first is we and the Justice Department--we are not
alone in enforcing the Equal Credit Opportunity Act. We work
together on that. We did resolve a matter with Honda yesterday,
and it is to Honda's credit--I would commend them. They have
taken far-reaching steps to constrain the discretionary markup
which we think has led to discrimination for consumers and the
Justice Department thinks has led to discrimination for
consumers. But it was industry leadership that Honda
demonstrated yesterday, and I commend them for that.
Second, in terms of our responsibility here, we have been
very careful to observe a line that was not necessarily an
obvious or logical line that Congress drew, which was to say
that the Consumer Bureau has jurisdiction over auto lenders,
but does not have jurisdiction over auto dealers. That
jurisdiction, as I understand, is given to the Federal Trade
Commission. We feel that means that the law has spoken clearly,
that we have a responsibility to address any sort of issues of
discrimination or other violations of the law by lenders, but
not by dealers. You know, that may be illogical, but that is
the line we have, and we have taken our responsibility
seriously there. And as I say, we have a partner in this work,
which is the Department of Justice, and we work together to
address these issues.
I think that has been appropriate, but I am always willing
to hear more from Members of this Committee and Members of
Congress. We are simply looking to enforce the law and do it
accurately and appropriately.
Chairman Shelby. On March 26th, the Bureau released an
outline of its proposed plans to end payday debt traps. Every
State, it is my understanding, either regulates or outright
prohibits payday lending. What analysis did the Bureau conduct
of State laws and regulations prior to deciding it should
preempt their regulations? And if you have it, could you
provide that analysis to the company? Do you want to comment on
it first?
Mr. Cordray. Sure. In our statute, there were four issues
that were very explicitly given full jurisdiction to the
Consumer Bureau: mortgage origination, mortgage servicing,
payday lending, and
private student lending. Those were specifically and explicitly
called out in our statute.
We have been working on the issue of small-dollar lending
for several years since we became an agency. We have published
two extensive white papers that really detail our analysis of
this market. They involved scrutiny of upwards of 15 million
loans. It was the most comprehensive work that has ever been
done on this industry. And what we concluded from that was that
the problem of debt traps, rollovers of loans, was a very
significant problem for consumers who are in the small-dollar
loan market.
There is a representation that this is a product that
people get a loan and repay it and they get in and get out and
do not end up in a trap. And what we found was that well over
half the loans are repeat loans in sequences of 6, 8, 10, 12
loans where people are living their lives off of 400 or 500
percent interest. That is the issue that we are looking at and
working to address. It is a very complex issue, I will say. We
want to preserve access to credit for people who need that
credit, and we recognize there is a demand for that credit. At
the same time, we do not want consumers to end up harmed by
being stuck in a debt trap they cannot get out of and harming
their finances further. That is the dilemma that we are trying
to confront there.
Chairman Shelby. Thank you.
Senator Brown.
Senator Brown. Thank you, Mr. Chairman. Before I begin
questions, I would like to comment on recent attempts to
undermine the Consumer Bureau.
Last month, the House Appropriations Committee passed a
bill that kills the CFPB's independence. Similar attempts have
been made in the Senate, including the idea that CFPB's
governance should be changed to a commission. The argument that
CFPB would be better led by a commission is clearly designed to
cripple the Bureau and set up one nomination fight after
another.
We are, I believe, the only Committee in the Senate that
has yet to hold a hearing on any of our nominees, most of whom
were sent to the Committee in January. By contrast, in 2007,
when Senator Tester and I joined this Committee, when we were
in the seventh year of the Bush administration and the
Democrats were in the majority in the Senate, this Committee
had three nomination hearings and reported out a dozen or so
nominees before the August recess.
We have important jobs open waiting for us to act from a
Fed nominee to the Treasury Under Secretary for Terrorism and
Financial Crimes. Changing the CFPB's governance would stop the
agency in its tracks and again leave consumers without a
Federal watchdog. And I would again point out with the
criticism that we hear so frequently of the CFPB on budgets, on
buildings, all that, that the CFPB has returned over $10
billion to 17 million Americans.
Now, my questions. I was encouraged, Director, to see the
CFPB's release of its study on forced arbitration as we
required in Wall Street reform. I am concerned, but not
surprised, that the Bureau found no evidence that forced
arbitration leads to lower prices for consumers and that three
out of four consumers did not even know they were subject to an
arbitration clause. A couple of months ago, a number of Members
of this Committee sent a letter to the Bureau urging swift
rulemaking to ban forced arbitration in consumer contracts.
What is the Bureau's thinking on this issue? When can we
expect to see action?
Mr. Cordray. Thank you, Ranking Member Brown.
First of all, as to nominees, all I can say is I was very
pleased to have the opportunity to be confirmed by the Senate
in July 2013. It took awhile but ultimately was a strong vote,
and I really appreciated the care with which the Senate
considered that nomination. I cannot speak to the others you
are talking about.
On the arbitration report, we did issue an arbitration
report. The Congress required us to do that as part of the
Dodd-Frank Act. What they said was--actually, Congress did a
couple things that were interesting on arbitration in that law.
They first said that they were going to ban outright any sort
of arbitration clauses, pre-dispute arbitration clauses, in any
mortgage contracts. This was a significant shift away from the
permissive attitude to the Federal Arbitration Act that had
developed over decades.
They also said--and this is what we are getting to here--
that as to the rest of consumer financial products and
services, they required the Bureau, mandated that the Bureau
perform a study and a report to Congress on the potential
effects of arbitration agreements of that kind. We did that
very carefully and deliberately. It took us a couple years of
work, lots of research, and ultimately a significant report
that looked into areas that had not been looked into before,
comparing arbitration in the consumer context with judicial
resolutions.
We did issue that report to Congress earlier this year.
What the statute then says is, having done that, having
performed that task, it was then for the Bureau to consider
what might be done, consistent with the public interest and
consistent with the results of that study, to either modify or
address pre-dispute arbitration agreements for other consumer
financial products and services.
We have determined at this point, having digested our own
study and gotten a great deal of feedback from industry and
others on it, that we will be moving ahead with rulemaking in
this area, and we will be in due course here convening a small
business review panel as the first step in considering what
actions to take. So that is where it stands as of this morning.
Senator Brown. Thank you. We hear from banks about issues
related to coordination of exams with prudential regulators. I
know the Inspector General recently reported that it has not
found duplication of regulators' oversight responsibilities. I
would like you to talk for a moment about your examinations.
What is the value of your examination and supervision
authority? What are you doing to improve coordination with
other agencies of your exams, particularly of smaller
institutions, so that--because obviously the exams can be
costly to them, and we want to make sure there is not
duplication.
Mr. Cordray. This is an area of real focus for us and one
where we have made a tremendous amount of progress over the
last several years. If you had asked me that question back in
2012, when we were just undertaking our examination program, we
were only minimally staffed up. We were probably at about a
third of what we needed in terms of manpower. The coordination
was not as good as we would have liked it to be.
At this point I think the coordination has become quite
good--not perfect but quite good. I would say in particular, on
the nonbank side, we coordinate with the Conference of State
Bank Supervisors who had primary responsibility in that area
prior to the Consumer Bureau entering the scene, and we have
done numerous coordinated exams with them, and we share
information with them back and forth consistently.
With the other Federal banking agencies, which is also
quite important because they have prudential safety and
soundness authority, which is very significant, over these
institutions and somewhat distinct from our consumer protection
authority, the law mandates that we collaborate. The law
mandates that we share drafts of examination reports, which we
do back and forth. The law mandates that as we go about
proposing rules that they have a lot of insight and input into
those rules, which they have had. And I think that has improved
enormously. Not to say that I do not still hear isolated
instances now and then where it feels to me the coordination
could be somewhat better, but I think certainly the leadership
at those agencies--at the Federal Reserve, at the FDIC and the
OCC--have been very committed to collaborating with the CFPB in
understanding that we have distinct but related roles that need
to be integrated so that institutions do not have to face what
I would regard as a very unfair situation where they are
hearing different things from different regulators; then they
would not know how to proceed. I do not think we are hearing
that. I tell institutions all the time, let us know about your
complaints in this regard so we can fix them. And, again, I
think there has been tremendous progress over the last 3 years.
Senator Brown. Thank you.
Thank you, Mr. Chairman.
Chairman Shelby. Senator Crapo.
Senator Crapo. Thank you, Mr. Chairman.
Director Cordray, as you know, recently in Congress we have
been debating the question of whether the NSA should be allowed
to access telephone records of Americans, and I have been very
concerned about the massive data collection that the CFPB has
been engaged in.
Last Congress, again, as you know, I asked that the CFPB's
data collection program be reviewed by the Government
Accountability Office, and that GAO report established--and I
would just like to confirm the facts with you, but that GAO
report established, as I understand it, that the CFPB has an
ongoing collection of up to 600 million credit cards that are
being evaluated, the data is being collected on 11 million
credit reports, 700,000 auto sales, 29 million mortgages, and 5
\1/2\ million private student loans. I actually think the
numbers are higher than that. But is that in the ballpark of
the amount of data collection that the agency is engaging in?
Mr. Cordray. I certainly would agree with the figures that
are set forth in the GAO report. They did a very careful
evaluation of us over the better part of a year. We worked
closely with them, and I have nothing to dispute in that
report.
Senator Crapo. And as you know, in several places the Dodd-
Frank legislation prohibits the CFPB from collecting personally
identifiable information. The CFPB claims it is not doing so
because it is not collecting certain things, like the name,
Social Security number, and address of the person whose credit
card data, for example, they are collecting.
Could you tell me what data points the CFPB is not
collecting on those credit card transactions?
Mr. Cordray. So you mentioned the fact that we have
developed a credit card database. We are working on a national
mortgage database, consumer credit panel. In all of those
areas, this information, it is really significant to get this
because it is often misunderstood. This is de-identified,
anonymized information. As you noted, the personally
identifiable information--name, address, Social Security
number, account number--is not typically included in any of
that material.
So it is actually pretty uninteresting data from the
standpoint of, say, you or I being concerned about our privacy.
Instead, what it does is it gives us a sense of patterns of
consumer protection, consumer abuse, consumer service in the
industry. That is what we are looking for. It is like a GDP or
an unemployment rate analysis. It is not about what you or I do
in our daily lives. I am not interested in that. I do not have
any interest in that.
Senator Crapo. And you and I have had this conversation
before.
Mr. Cordray. Yes.
Senator Crapo. One of the concerns that I have is that it
is easy to say that data has been anonymized.
Mr. Cordray. Yes.
Senator Crapo. It is also relatively easy to de-anonymize
it. A recent study by the Massachusetts Institute of Technology
found that just the dates and locations of four purchases are
enough to identify about 90 percent of the people in a credit
card data set.
So are you telling me that the information the CFPB
collects cannot be de-anonymized?
Mr. Cordray. So it is not easy to do that. It would take a
lot of time and effort to do that. I do not see that it would
be worth anybody's while to try to do that. Certainly I have no
interest in that. I do not think anybody at the Bureau does.
Personally identifiable information within the Federal
Government agency is only a problem to us doing our work. It
creates all kinds of issues, and we try to avoid it as much as
possible so to avoid making extra work for ourselves on those
issues.
Senator Crapo. With regard to scope, just to get clear on
the scope, my understanding is that you are collecting data on
somewhere above 80, maybe even up to 90 percent of all credit
cards. Is that correct?
Mr. Cordray. In that one--all the other areas, we do
sampling. In that one we do not simply because industry has
told us it is more efficient and less costly for them to simply
do a data dump than to have to organize a representative
sample. And this is consistent with other agencies' treatment
of the same issues.
Senator Crapo. Well, because of time, I am going to move
on. I want to continue this conversation with you----
Mr. Cordray. That is fine, yes.
Senator Crapo.----because I do believe that the protection
for Americans is not adequate.
Mr. Cordray. I am happy to speak to you personally further,
and your staff, in your office, wherever you would like, about
this.
Senator Crapo. The last question I want to get into with
you is the Paperwork Reduction Act was designed, among other
things, to ensure the greatest possible public benefit from and
maximize the utility of information created, collected,
maintained, used, shared, and disseminated by the Federal
Government, and to improve the quality and use of Federal
information, decisionmaking, and so forth.
It is my understanding that each of the 1022 orders issued
to date by the CFPB, which is its orders to collect this data,
has been sent to fewer than nine companies to avoid the review
of the request by the Office of Management and Budget. Could
you tell me, how many times has the CFPB utilized the exception
for reviewing data requests by sending 1022 requests to fewer
than ten companies?
Mr. Cordray. We have utilized it several times, and we have
also gone through the full process several times. That is one
way of characterizing what we have done. Another way of
characterizing it is, as we are seeking data, if we can limit
the number of institutions so that we do not have to burden
other institutions, I assume that is what you would like us to
do. It is another version of sampling, right? So rather than
seeking the data from hundreds of institutions, if we can get a
representative sample and it is fewer than nine, that is easier
for us. But, also, it is easier for institutions, and----
Senator Crapo. Well, could you clarify for me--and since my
time is up, maybe you could do it in a written response. I
would like to know the exact data rather than several times
this way and several times that way.
Mr. Cordray. Sure.
Senator Crapo. I would like to know, out of all of the data
requests you have made, how many have avoided the OMB review?
Mr. Cordray. Fair enough. We will get you that, yes.
Senator Crapo. All right. Thank you.
Chairman Shelby. Senator Reed.
Senator Reed. Well, thank you very much, Mr. Chairman, and
thank you, Director Cordray. I am told today is Military
Consumer Protection Day, so it is fitting that you should be
here. And I think one of the--I will speak personally. One of
the prouder achievements in the Dodd-Frank Act was the Office
of Servicemember Affairs, which is in your organization, led by
Holly Petraeus. So thank you for all you are doing to help
protect our servicemen and -women.
The basic legal protection for these young Americans is the
Servicemembers Civil Relief Act that goes back to the Civil
War. Enforcement is scattered about. The Department of Justice
has civil authority, civil actions. Banking regulators can go
in and correct, but the enforcement is really lax. And I think
you pointed out last week, when you did a report which
indicated that servicemembers continue to report difficulty
obtaining their Servicemembers Civil Relief Act protection of 6
percent on loans, the law going back a long time ago is that if
you have prior existing debt and you entered the Armed
Services, it is capped at 6 percent, and they are not getting
that, particularly student loans. That was the focus of your
report.
Mr. Cordray. Yes.
Senator Reed. And I have put legislation in to give
authority for enforcement to the CFPB, just as background.
Now, if Congress were to enact this legislation, how would
the CFPB be equipped to better protect servicemembers from
financial harm?
Mr. Cordray. I just think it stands to reason, Senator, if
there are more cops on the beat to protect our troops in terms
of potential abuses or problems in financial products and
services, which for them are just a distraction from their
ability to focus on their job, which is defending and
protecting all of us, that would be a helpful thing.
I note that the Congress a couple years ago--and I think it
was under your urging--did provide enforcement authority to the
Consumer Bureau under the Military Lending Act. I thought that
was a positive step forward.
What we do is we work with partners, particularly the
Department of Justice, who has been active in this area. But,
again, they only have so many resources. We only have so many
resources. If there is ever an area where we should be training
and focusing our resources on the problem, it is making sure
that our servicemembers are treated appropriately and fairly in
the financial marketplace so they do not have to worry about
those problems.
Senator Reed. Thank you very much. And you made reference
to the Military Lending Act. That was passed in the fiscal year
2007 National Defense Act, and it gives you authority, but it
puts the burden on the Department of Defense to create the
framework, the rules and regulations. And they are trying to do
that again. They had a series of regulations that were well
intentioned but did not really fully address some of the
problems that face servicemen and -women.
Can you briefly explain how these members remain vulnerable
today in anticipation, we hope, of rules that will be
forthcoming?
Mr. Cordray. Yes, and I particularly appreciate that you
have had a very constant and sharp focus on these issues and
have seen to it that progress moves along in this area. And I
think we are very close to having a new set of Military Lending
Act rules, and I commend the Department of Defense for the
speed with which they have recognized the importance of working
on this problem.
The difficulty is that the Military Lending Act, as you
say, passed in 2007, there was originally a set of rules meant
to implement it, but they were too narrow, and they were too
easily circumvented. It is very much the problem that Senator
Brown pointed out earlier of people being able to swim around
some of the otherwise well-intentioned rules, and you still can
see Web site after Web site of online lenders offering loans to
servicemembers at
triple-digit percentages and some of them 400, 500, 600
percent. And they are, gallingly, perfectly legal under the
current set of rules, which is why Congress, as I understand
it, has directed that this be redone.
The Department of Defense has taken that very seriously
and, again, acted with great speed in addressing it, and I
believe that very shortly we are going to have a new set of
rules, and servicemembers will have new, important protections
that they probably should have had several years ago.
Senator Reed. Well, thank you very much. Again, you know,
we are all, rightfully, appreciative of the service that these
men and women render to the country, and we say that
repeatedly. But if their rights cannot be adequately protected,
then the rhetoric is nice, but it is better to have the access
to the rules and protections. So I thank you for that.
Mr. Cordray. And I saw in preparing for the testimony today
that a number of Members of this Committee can speak to this
personally from their own experience of service. So I think it
is quite important.
Senator Reed. Thank you very much.
Chairman Shelby. Senator Vitter.
Senator Vitter. Thank you, Mr. Chairman, and thank you, Mr.
Cordray.
Like a lot of Members and a lot of citizens, I am really
concerned about the vast amounts of data that CFPB collects on
all citizens related to financial transactions. I have a
proposal to allow any citizen to see what personally
identifiable data the CFPB has collected on them at least once
a year. Would you support that concept?
Mr. Cordray. So, in general, our approach to this issue is
we are not interested in personally identifiable data where we
can at all avoid it because it only causes problems for us as
an agency in our work. The data that we are collecting to be
able to monitor the credit card market, the mortgage market,
issues where you all will ask us from time to time whether laws
have gone too far, whether they have gone far enough, how can
we possibly answer those questions if we do not have data on
the marketplace?
Now, that is very different from me wanting data on what
Senator Vitter does in individual transactions or what Richard
Cordray----
Senator Vitter. You do collect personally identifiable
data, do you not?
Mr. Cordray. We have some personally identifiable data in
two respects in particular: consumer response where consumers
actually give us their data so that we can work on their
complaint, the same way constituents go to your office and give
you personal data----
Senator Vitter. Apart from complaints where you collect
significant personally identifiable data?
Mr. Cordray. And then the second----
Senator Vitter. You do not?
Mr. Cordray. Except in a limited number of cases, we do
not.
Senator Vitter. You do not collect any of that?
Mr. Cordray. We have no reason to do that, and the credit--
--
Senator Vitter. So you do not collect any of that?
Mr. Cordray. For example, our credit card data, we take--we
do not have name, we do not have address, we do not have Social
Security number, we do not have account number. We are not
interested in that. We are interested in the pattern of what
goes on in the market.
Senator Vitter. Do you collect it before you scrub it?
Mr. Cordray. We ask for the data to be scrubbed before it
comes to us wherever possible.
Senator Vitter. Who gets it and who scrubs it?
Mr. Cordray. It depends on which database we are talking
about. I would be happy to have a full briefing for you on
this.
Senator Vitter. So somebody involved in the process has
that.
Mr. Cordray. Well, typically it is scrubbed before it comes
to the agency. So private companies have all this data. They
care very much what you and I do in our personal transactions,
and they are always marketing to us on that. I mean, that is
where the focus should be. We typically do not have that data.
We are trying to monitor markets as a whole. It is a big
difference and a big distinction, and it is often misunderstood
and misstated by people. So that is what I would say to that.
Senator Vitter. So what about these databases, the one-time
collection of 100,000 to 500,000 deposit advance accounts that
contain deposit account and transaction-level data? Did you all
never collect that?
Mr. Cordray. So we have had particular collections from
industry in order to work on particular reports. Again, we are
typically not interested in transaction-level data or
individual transactions.
Senator Vitter. So what I just referenced did include
transaction-level data?
Mr. Cordray. Again, a number of different collections over
different times. If you would like us to have people come to
your office and speak very specifically about anything in
particular you want to know more about, happy to do it.
Senator Vitter. OK.
Mr. Cordray. I do not think you will find it problematic,
but I want you to be able to work it through. If you do see
something problematic, I want to know about it because if it is
a problem in your mind, it is a problem in my mind.
Senator Vitter. Well, there are big problems in my mind,
and I have seen personally identifiable, transaction-related
data that have been collected. However----
Mr. Cordray. You say you have seen that? How have you seen
that?
Senator Vitter. I have read about at least three specific
databases that you all have collected that contain that, number
one. Number two----
Mr. Cordray. Give us a chance to come and brief you, and we
can speak to the----
Senator Vitter. OK. Number two, there is all sorts of data
you collect that involve that information at least before it
gets to you. So, in any case, however large or small, in your
opinion, this universe is, would you support citizens being
able to see what data is being collected by or because of
regulations of CFPB?
Mr. Cordray. So that sounds good in the abstract, but
typically the data that we are collecting, we would not even be
able to identify individuals, because you and I do not want us
to know that, and we do not know it. And, therefore, in most
instances we could not even answer that question.
Senator Vitter. Well, then what I am describing would not
apply. It would only apply to what I am describing. Would you
support citizens having access to that to understand what is
being collected?
Mr. Cordray. Again, I would be glad to talk to you further
about that. If it is consumer response information, they gave
us the data so we could work their problem, the same way they
do to your constituent services arms of your offices. If it is
an enforcement or a supervisory action to get relief to people,
we need to know who should get the relief and work with the
institutions to accomplish that.
In terms of our general data gathering, we typically do not
know it, and, therefore, we could not tell an individual
anything about their data because we do not even know whose
data it is. And that is the way you should want it, and that is
the way I want it.
Senator Vitter. Thank you, Mr. Chairman.
Chairman Shelby. Senator Menendez.
Senator Menendez. Well, thank you, Mr. Chairman.
With the fifth anniversary of the Wall Street Reform Act
this month, there has been a lot of discussion about what the
law did well, where there might be room for improvement, and
what challenges still remain on the financial landscape. And as
we look back, I think without question that establishing the
Consumer Financial Protection Bureau has been one of the
cornerstone achievements of the law. Families now have an
independent cop on the beat on their side to identify and stop
predatory and deceptive practices. And the CFPB provides both
consumers and policymakers with better information and research
about financial products, risks, and trends of the market.
Now, I fought hard for the CFPB's creation as a Member of
the Committee, as well as many of the protections it is charged
with enforcing, such as strong mortgage servicing rules to stop
foreclosure abuses and protections to end abusive and deceptive
credit card practices. And I also fought hard for many of the
Wall Street Reform Act's financial stability and corporate
governance improvements. And while the law is not perfect and
some important challenges remain, the last 5 years have shown
that, overall, there is a lot it got right.
Director Cordray, the CFPB has been at the forefront of
many of these gains, which is a testament to the work that you,
Senator Warren, and the CFPB staff have put in to stand up the
agency from scratch and continue its positive development. So I
want to commend you for being a force for good.
There are two areas that I would like to get into in my
questions. One is about mortgage servicers' evasion of the
dual-tracking protections and some of the credit card reforms
that I fought for in the 2009 Credit CARD Act, and I want to
talk to you about those.
I am pleased that the Bureau has made these a priority.
While our economy and housing market continue to recover from
the
crisis, there are still many parts of the country struggling
with mortgage debt and foreclosure, including my home State of
New Jersey, which has the highest rate in the country of homes
currently in foreclosure.
Now, despite the CFPB's new rules, many homeowners behind
on their mortgages continue to face obstacles to obtain
modifications that can help. For example, until mortgage
servicers mark applications as ``Complete,'' homeowners are not
eligible for dual-tracking protections, which prohibit a
servicer from moving forward with a foreclosure while the
homeowner is pursuing loss mitigation. While homeowners
scramble to pull together document after document, they
accumulate additional fees and burdens that make them even more
likely to default. Some servicers request documents on a
piecemeal basis and repeatedly request the same documents,
making prompt and effective loss mitigation a pipe dream for
distressed homeowners.
Do you have concerns that servicers are intentionally
obstructing the loss mitigation process to favor foreclosure?
And if so, what more can be done to correct misaligned
incentives and protect consumers?
Mr. Cordray. We do and I do have concerns about that, and
for me they go back to when I was a State treasurer and county
treasurer at the local level in Ohio and saw the difficulties
that mortgage servicing problems were creating for individual
homeowners who really did not deserve to have that heaped on
top of financial distress.
When we created our new mortgage servicing rules, which
went into effect in January of 2014, we looked closely at those
issues which we knew were pain points for consumers--we hear
about it on our consumer complaint line frequently--and worked
to address them. We have had further work that we are doing
both in enforcement actions--we have had several enforcement
actions against mortgage servicers where this has been part of
the problem and part of the answers in orders that we had to
impose, and also in supervisory work that we are doing with
institutions that we highlighted in our supervisory highlights
last edition so that all of industry could know again that this
is a focus for us. It is a problem that has been persisting for
years, and it is one that they need to clean up.
It is a complex problem, and as you noted, different States
have different situations that they are in with underwater
homeowners or with foreclosure processes that differ
dramatically from judicial to nonjudicial foreclosure States.
But this has been pretty much a constant across the country.
Senator Menendez. Well, I would like to follow up with
you----
Mr. Cordray. That is fine.
Senator Menendez.----because there are many cases of this.
Mr. Cordray. That is fine.
Senator Menendez. Finally, with the 2009 Credit CARD Act,
we are pleased to see that an independent evaluation 4 years
later shows that the Act's reforms are saving American
consumers almost $21 billion per year. In 2013, the Bureau
released its own report on the CARD Act that found similar
successes, but also
identified market practices that are a concern for consumers.
Can you give us an update in that regard?
Mr. Cordray. I can. I will tell you that--and I go back to
the State level where we saw the kinds of complaints people
were making about credit cards. This is 2005-06, before the
CARD Act, before the financial crisis. That market is
considerably better today than it was 10 years ago, and I would
say there are three reasons for that, and I want to give credit
where it is due. I think the CARD Act and the Federal Reserve
rules have made an enormous difference in correcting problems
in late fees, universal default, other issues. Some of the real
problems have been cleaned up.
Second, credit card companies themselves have done a better
job on customer service. You can see it in the J.D. Power
surveys. The net promotion score index, which they have used in
handling credit card calls from customers, has been an enormous
shift, putting financial incentives behind the way people
handle those calls so that they are more consistent with what
the customer is looking for rather than just trying to get them
off the phone. I want to give the companies credit for that. I
would ask them to think about using net promotion score index
principles across their customer service in all of their
financial products. That would be a good thing. They know how
to do it. They should do it.
The third thing is consumers themselves. Coming out of the
financial crisis, consumers have been more responsible about
thinking about how to approach their credit card debt, whether
to maintain long-term revolving credit card debt, what the
interest rates are on that. People have been paying down debt.
And I think when you are a consumer who is having a better
experience in managing your own debt, you are going to have a
better experience with your company, and you are going to have
a better experience with the marketplace. That to me has been
one of the success stories.
There are still issues that we are concerned about and we
are looking at. Deferred interest is an issue of some concern
for us. How the rewards programs are advertised, we just want
to be careful about that. And the credit card add-ons obviously
have been a point of particular focus for us through
enforcement actions, and I think much of that has been cleaned
up. But I would say the credit card industry is a hopeful sign
for me that the financial institutions, when they come under
pressure from Congress and others, and also when they
understand the importance of doing it themselves, have the
ability to clean up their act. And I would urge them to
consider what they have done there and how they could do it
elsewhere.
Senator Menendez. Thank you, Mr. Chairman.
Chairman Shelby. Senator Scott.
Senator Scott. Thank you, Mr. Chairman. Good morning.
Mr. Cordray. Good morning.
Senator Scott. As I am sure you are probably aware, South
Carolina has become an automotive giant in the sector of
transportation. I am very proud of my State's progress. Whether
it is BMW, Volvo, Mercedes, Continental Tires, Bridgestone,
Michelin, Sage Automotive, we certainly have seen a lot of jobs
created by these manufacturers that depend on dealers in South
Carolina and around the country being able to sell cars.
That is why I am particularly concerned by the CFPB's 2013
bulletin on indirect auto lending, which imposes one-size-fits-
all, cookie-cutter regulations on lenders and dealers. As
Chairman Shelby has already stated, CFPB has no jurisdiction
over auto dealers, but it seems that your Bureau is regulating
heavily the relationship between lenders and dealers.
My concern, however, I am not as concerned about the
dealers or the lenders. I am really concerned about the
consumers in South Carolina, and whether it is Greenville or
Charleston, who will now perhaps pay a higher price for their
vehicles because of the Government's involvement in trying to
make things better.
Director Cordray, eliminating the ability for lenders and
dealers to compete for a customer's business will mean that the
customer, simply the customer, ultimately pays a higher
interest rate. How do we explain back at home that CFPB's
involvement effectively forces some South Carolinians shopping
for vehicles to pay a higher interest rate on a car note? And
how does that provide greater consumer protection?
Mr. Cordray. So a couple things, Senator, and thank you for
that question.
First of all, just understand my background, too, is I come
from a strong automotive State. Talk to Senator Portman, talk
to Senator Brown. You know, GM, Ford, Chrysler, Honda have been
very significant presences in that State. When I was the Ohio
Attorney General, we had to deal with significant challenges in
the automotive industry resulting from the financial crisis,
first with Chrysler and then the General Motors bankruptcies,
which were tremendously burdensome for everybody involved, but
ultimately came to a good result--the result being that we
understand the importance of employment in that industry,
pensions and health care for people who work in that field, and
its importance to our economy.
I am the Director of the Consumer Financial Protection
Bureau. The last thing I want is to do things that hamstring
important markets like auto lending, mortgage lending, and the
like. And if I do that, it will be to the detriment of my
agency and to the American public. And so I am very concerned
about this.
In the last several years, we have had the hottest auto
market. I believe in the history of this country. And that is
at the same time that the Consumer Bureau was gathering its
wings and coming into existence. I am pleased about that
because I think consumers benefit when they have access to
automotive transportation. Probably in your area as in mine, if
you do not have the ability to get around through a car or
truck, you are really in a lot of trouble in your life. So that
is important.
Having said that, we also believe strongly that people
should not be subject to higher prices or onerous terms based
on their ethnic, racial, or gender background. And the Justice
Department feels strongly about that as well, and they are our
partner in this work.
The bulletin that you described was actually a bulletin
that was a pretty straightforward restatement of the law--it
was not a change in the law--several years ago which simply
stated that if you are a lender and you have an automotive
lending program, you are subject to the Equal Credit
Opportunity Act--that is a
undeniable proposition--and you need to think carefully about
what your program is.
Senator Scott. Director Cordray, thank you. I hate to
interrupt you.
Mr. Cordray. That is fine.
Senator Scott. However, I need to go to another question.
But I will say that there is legislation being promulgated or
working its way through the House with a large number of the
CPC members on this specific topic. So I would suggest that
perhaps the members of the CPC and myself and others as well
are very concerned about discrimination, and perhaps your
approach to the indirect lending market is inconsistent with
the outcome that I think you sincerely desire to achieve.
My other question in some of the time that I have remaining
is on our conversation before we started the panel as it
relates to the TILA and the RESPA and heading toward TREA. I
think Senator Donnelly and myself both submitted a letter back
in May asking for a grace period or some time so that those
good actors in the mortgage business who are trying to
transition to the new forms would have more time than October
to have less liability exposure as they move to the new forms.
I would love to hear your response as we talked about earlier.
Mr. Cordray. Thank you for that. We have heard a tremendous
amount from Members of Congress on both sides of Capitol Hill
about TILA-RESPA, what we call our ``Know Before You Owe''
mortgage rule, which is something Congress required us to do.
Just as a reminder, it is in the law. I am required to do this.
And it is a good thing. It takes a regime that has grown up
historically that did not make a lot of sense where the
consumer had to get two different forms at the application
stage from two different Government agencies--HUD and the
Federal Reserve--and then two different forms at the closing
stage. Very confusing to consumers: ``Why am I getting two
forms? How do they differ? What am I supposed to take from
that?'' It was impenetrable.
We were supposed to reduce that to one form at each stage,
which we have done in this rule, and that is a good thing. And
everybody recognizes that is a good thing. There is still pain
always in any kind of transition.
So that requirement was in the law 5 years ago when it was
passed. We worked on this very carefully over time, did a lot
of consumer testing, very transparent about it. We finalized
the rule in November of 2013. We gave a 21-month implementation
date, a long implementation date, in response to what we heard
from industry.
Nonetheless, as we get toward the end of it, some people
are not ready. We heard from you and others back in the spring,
and it is an example of the oversight, Mr. Chairman, you talked
about. When we get congressional oversight, I take it
seriously. I do not regard myself as able to blow off concerns
that people raise to me. If you are raising a concern on behalf
of your constituents, they are the people I am trying to serve
as well.
So we did in the end--and it was due to an error on our
part, in part, but we did back up the implementation date
further out of the summer sales season, which was important to
a number of people. It is now under consideration to put that
in October. A lot of people do not like a date of something
like January because when we did our first round of mortgage
rules and we were under a requirement of timeframes from
Congress, it was January, and there are so many systems changes
that they do or systems freezes that they do at the end of the
year that that is actually inconvenient for people.
The other thing we said, in specific response to your
question, was that we went out and worked with the other
agencies to get an agreement, which we have, that the early
examination of this will be diagnostic and corrective. We do
not think people are out there trying to exploit consumers on
something like this. They are just going to be trying to get it
right. And so for the first period, which may last many months,
as we and other agencies look at this, if we see errors, we
will point out what they are and how they should be corrected.
We will not be looking to be punitive toward people. We have
said that explicitly. I will say it again on the record here
today to you. That is how it will be.
I can tell you that is what we said about the mortgage
rules 2 years ago, and that is how it has been, and nobody has
said otherwise or complained. And we have taken that to heart
here as well.
So happy to talk further about it, but I think we have been
trying to give a fair amount of leeway here while at the same
time moving forward with an important change that is good for
consumers and will help them be able to understand this
transaction better.
Senator Scott. Thank you.
Chairman Shelby. Senator Tester.
Senator Tester. Thank you, Mr. Chairman. Thank you and
Ranking Member Brown for having this hearing, and thank you for
being here today, Richard. I appreciate what you are doing. And
I also want to say, as Senator Scott did, we appreciate the
extension you gave the TILA-RESPA. You did respond to a letter
that I and many on this Committee have signed, with Senator
Donnelly.
I want to talk a little bit about Native Americans. It is a
little different ball game there than in other parts of the
country because of the issues of sovereignty and the issues of
consultation. You know well, because we have talked about it
before, I have had some Montana tribes that have been very
unhappy with the consultation process.
To be fair, I have also heard from an Oklahoma bank that
thought that you are doing good things.
So the question comes up: Is the consultation process--is
there a policy on what you do and how you do it that applies to
every tribe across the country? And if that is true, can you
give me an idea what it is?
Mr. Cordray. Yes. We--in fact, in response to the back-and-
forth that you and I had had on this subject, and others from
that area of the country in particular--but other parts of the
country may have a tribe or two as well--we did put together a
policy on consultation, and we formalized that and shared it
and got input on it from the leading tribal organization. We
have since then been asked to put together an MOU that would be
more specific about some of the aspects of how this works, so
we are working with the tribes on developing an MOU.
I do not want to have to get into having individual
consultations to individual tribes because my understanding is
there are more than 500 of them across the country.
Senator Tester. There are.
Mr. Cordray. But we are trying to deal with them as a
group.
They are very concerned about the small-dollar lending,
potential regulations there. We have had two distinct
consultations with them on that subject at their request at
this point and had a considerable amount of input from them.
And, of course, we are open--I want to emphasize this. We try
to be as an agency very accessible to people at all times to be
able to come and see us and tell us what they are concerned
about and what they think. I always feel like that improves our
work if we know it, and it does not help me not to know it.
Senator Tester. I agree.
Mr. Cordray. So I would say that, too.
But I think we have been trying to be very fulsome in our
approach to this, and I know you have emphasized that to me
again and again. Happy to hear further from you as we go.
Senator Tester. Yeah, and we will try to help where we can
help. I appreciate that.
Earlier this year, the Bureau proposed several changes to
facilitate mortgage lending in rural America. And while I still
think there are a few things that we can keep working on, I am
certainly appreciative of what the Bureau did and made some
positive changes, one of which was expanding the definition of
rural States; and now under those proposed changes, almost the
entire State of Montana is considered rural--which is correct,
by the way.
So my question is: Outside of Montana, are you still
hearing from folks who think they are in rural areas that the
CFPB has not defined very well?
Mr. Cordray. By the way, I still recall meeting in your
office in which you impressed upon me that I thought--I said
that I understand something about rural from parts of Ohio
which are quite rural. And you said, ``I do not think you
really know what rural means in Montana.'' And you gave me a
little schooling on that, and that led in part to our thinking
about how to expand this definition.
To go back, the Federal Reserve first proposed a definition
of rural under this rule before we came into being as an
agency, and their definition would have covered about 2.2
percent of the American population, which was plausible but
somewhat narrow. We looked at it, and we decided that it was
too narrow. I looked at some maps of Ohio at the time. We came
out with a different definition that was more like 9.9 percent
of the population, so about quintupled it. And even after that,
then people showed me maps of Ohio county by county, and
Senator Brown and I could do this in our sleep. There were a
whole bunch of counties that were clearly rural in my mind from
what I know about them but were not covered under our
definition. So we felt the need to go back in and do it again.
One of the things about the Bureau that I appreciate among
the strong team there is we want to get it right, and if we did
not get it right, we are typically not going to pretend like we
did and just say we cannot change it. We are going to try to
fix it. So we now have a definition of rural that is much
broader, as you say, includes almost your entire State, covers
about 22 percent of the American population. Whether it is too
broad or not, I do not know, but it feels appropriate to me. We
have had disagreements within the agency over it, but we are
working to finalize rules on that, which we should do by the
end of summer. And I think that for the most part they have
been fairly well received, although once we hear from people,
as they see how they work, we will think some more about it.
Senator Tester. OK. One last point, and you do not have to
answer this. I just want to make the point. I was very
concerned before this hearing about the information you are
collecting. And because of the data breach at OPM, the concern
with it, maybe this database will be breachable, too. I would
say I was very encouraged by the fact you are not collecting
Social Security numbers, names, addresses, account numbers.
Mr. Cordray. Right.
Senator Tester. I think we have to be careful as
policymakers, if we were to pass a bill that tells you to
release any personally identifiable data, that you would have
to go back and put names and addresses and Social Security
numbers to that data, which would take a ton of time and would
make me very concerned about what is going on here.
Mr. Cordray. I really would not like to have to do that.
Senator Tester. Yes. Thank you very much. Thank you,
Richard, and thank you, Mr. Chairman.
Chairman Shelby. Senator Kirk.
Senator Kirk. Director, I want to raise the issue, which
several people have raised on a bipartisan level, of the cost
of your building. From what I understand from your Inspector
General, the total cost of this building, which used to be used
by the Office of Thrift Supervision, is $216 million all in.
This is a leased facility which you have gutted, and you are
putting in a two-story waterfall and a glass staircase.
If you look at the number of employees in your Bureau, it
is 1,459. That would lead to a per employee cost of
headquartering them in Washington, DC, of $148,046 per
employee. I would say that is a little--since this building was
way OK with the Office of Thrift Supervision, how come you need
$216 million in upgrades of what they already had?
Mr. Cordray. So several things. Number one----
Senator Kirk. Let me just follow up. How does a two-story
waterfall help you do your job?
Mr. Cordray. Well, on that one in particular, I would say I
do not begin to see how it helps us do our job, and probably we
will not end up with a waterfall in this building, although any
two-bit shopping mall in America you can probably find a
waterfall in it somewhere, and I think that has been very
overstated by people.
But, in any event, the Office of Thrift Supervision, which
had this building before it went defunct in the Dodd-Frank Act,
had
already recognized and--had done an audit and recognized that
the building was in deep need of fundamental repairs. We are
talking about useful----
Senator Kirk. Let me just interrupt a little bit and follow
on the line of Senator Tester by saying, as Ohio Attorney
General, you certainly would be able to pick up the issue of
the bulk collection that you are doing against the American
people. As someone who was a reservist in the intelligence
community for over 20 years, have you taken the specific
action--I would ask you again: Have you taken the specific
action to take members of Congress out of your data collection
and members of the Supreme Court out of your data collection?
Do you see the issue on separation of powers?
Mr. Cordray. So you have now kind of piled up two questions
on me that I have not yet had a chance to answer. I would like
to go back to the building first, if I may.
The Office of Thrift Supervision recognized that systems
were reaching the end of their useful life----
Senator Kirk. If you would get back to my secondary
question, have you made sure that you have not collected the
credit card data of Supreme Court Justices? I will take----
Mr. Cordray. We have not collected credit card data on any
Member of Congress or any Supreme Court Justice. I would note
there would be no purpose for me to do so. But I do not
consider that issue as more important than the privacy of
individual consumers across the country where we are typically
not collecting their data either.
Senator Kirk. Have you made sure that you have not
collected Supreme Court Justice information?
Mr. Cordray. Why on Earth would I do that?
Senator Kirk. Because of the separation of powers.
Mr. Cordray. But why would I be collecting Supreme Court
Justice data? Why would I----
Senator Kirk. I would assume that this scandal is a bit
like the NSA scandal, that you have vacuumed up too much, that
it gives you too much power.
Mr. Cordray. I cannot really even follow the question here.
Senator Kirk. I think any first-year law student would pick
this up, a separation-of-powers argument. It gives you the
ability to abuse this power and intimidate the Court.
Mr. Cordray. So--intimidate the Court. I do not really
follow that at all. We are not doing anything--you are
hypothesizing--nor would I want to do that, nor would it make
any sense for me to do that. All it would do is discredit my
agency.
Senator Kirk. I think Senator Tester also picked up on the
issue. If you are collecting all this data, the only purpose of
collecting data is to be able to access it. And the problem is,
as you collect this----
Mr. Cordray. Not so. For private sector, the purpose of
collecting this information----
Senator Kirk. My question----
Mr. Cordray.----is to access it. For us it is to monitor
markets.
Senator Kirk. Does the Chinese intelligence service have it
before you do, now that we have seen on the order of 10 or 200
million people compromised by OPM? The problem is we do not
even trust you to keep this secure.
Mr. Cordray. I can see that you do not trust me. I think
you are setting out a set of hypotheticals that have nothing to
do with anything we are doing. I would be happy to have our
staff brief you more to give you comfort on that score.
Do you want me to go back to the building, or are we just
never going to answer that question?
Senator Kirk. Well, I would ask, why is $148,000 per
employee absolutely necessary to your mission?
Mr. Cordray. OK. Those numbers are off.
Senator Kirk. They are actually the numbers of your
Inspector General.
Mr. Cordray. Look, they are talking about things like other
rents; they are talking about other services. The construction
costs have remained actually fairly consistently constant. We
have now let those contracts, and they are coming in under
budget. And they are fairly consistent with what the OTS first
opined was necessary 6 or 7 years ago before the CFPB even
existed. So I think this is, again, vastly overdone. That is my
view. But I am happy to talk further with you about it.
Senator Kirk. I would gently suggest that you probably
ought to scrub the picture you are not collecting intel on
members of the Supreme Court or the Congress.
Mr. Cordray. I will tell you what. I will be glad to take a
look at that. I cannot imagine we are doing that. And if we
were doing that----
Senator Kirk. I think that would reassure us all----
Mr. Cordray. OK.
Senator Kirk.----make sure that the Chinese do not have it
before you do.
Mr. Cordray. OK. We will look to give you reassurance on
that point.
Senator Kirk. Thank you.
Chairman Shelby. Senator Warren.
Senator Warren. Thank you, Mr. Chairman.
So since it has opened its doors 4 years ago, the CFPB has
had a consumer complaint hotline where consumers can call in,
they can go online, they can lodge a complaint about a
financial product or service. And that is what consumers have
been doing. They come in and they complain about sketchy fees
on a checking account, errors on a credit report, harassment by
a debt collector.
The agency then sends those complaints on to the company,
who then has some time to respond to both the consumer and the
CFPB, and to try to resolve the issue.
Now, the agency has received more than 650,000 complaints
through the hotline. Could you give us a sense, Director
Cordray--just a ballpark figure is fine--about how many of
those complaints were resolved to the consumer's satisfaction
and how much consumers have recovered financially through this
process?
Mr. Cordray. Yeah, and I will say the arc of consumer
complaints continues to increase in terms of volume, and I
believe that is simply a function of there is still a lot of
lack of visibility. People do not necessarily know what the
CFPB is, and they will know more over time, I hope. And I hope
they will see that we are providing value to them. That is what
we aim to do.
I think we had something like 700-some credit card
complaints in our first month, and we are now up to about
25,000 complaints per month across the entire range of
financial services.
What happens then is we give the consumer a chance to tell
us whether they were satisfied with the resolution of their
complaint or, if not, what they continue to be concerned about,
and we then prioritize issues for further investigation or
perhaps enforcement action or supervisory activity. And the
institutions know that, and I think that pushes them to be more
thoughtful about how they try to resolve those complaints in
the first instance. And I do not know the exact numbers on
this, but it may be 20 percent of consumers continue to feel
they have a dispute once we have worked through our process,
and then we have, as I say, further steps that we can take.
In terms of how much resolution there has been for
consumers, it has been many millions of dollars. It is hard to
know exactly for sure. They do not always tell us how the
matter was resolved, although many of them come back to our
``Tell Your Story'' line and tell us, you know, often with real
gratitude, that they did get a resolution, and they could not
get a resolution for months and months and months, but after
speaking to us and us working it, they got one promptly. And
that really thrills us when we hear that.
But the other thing is there is a lot of nonmonetary relief
people get from those complaints. Getting something fixed on
their credit report can loom very large for them and is hard to
quantify.
Senator Warren. Yes, although I take it it certainly does
have financial ramifications to get your credit report fixed.
Mr. Cordray. Absolutely. And maybe they can get a mortgage
then that they could not always get.
Senator Warren. Yes.
Mr. Cordray. That may be worth thousands of dollars to
them. It is hard to quantify. Debt collection issues are a
constant source of irritation for consumers--the wrong debt or
they are not the right person or whatever, and they cannot get
people to stop calling their home. I do not know how to put a
price on that, but getting 12 calls a day or calls in the
workplace and it is not the right person or whatever it is, us
being able to stop that looms large for people.
And another point you have made to me is it is sometimes
easier to quantify--it is always easier to quantify the amount
of relief we give back to people for things that happened to
them before today, and we cannot easily quantify the benefit to
them of things that will not happen to them tomorrow because of
changes made today. You know, those go on into the future and
accumulate extensively over time. We do not have any way of
putting a price tag on that, but I have got to think it is very
significant.
Senator Warren. Great. So you have created this Web site.
We are getting roughly about 25,000 people a month who come on
the Web site----
Mr. Cordray. And rising.
Senator Warren. And rising.
Mr. Cordray. Web site or phone.
Senator Warren. Or phone, and gets some resolution. We say
it looks like roughly about 80 percent get some kind of
resolution here. So the agency also just recently went live
with this consumer complaint database, and here you have a
collection of thousands of narratives from real consumers about
problems they are having with financial products or with
companies, and it is all sortable now online. So it is possible
to go online and see it by product, by date, by where the
consumer lives. For example, just this morning I went to the
database and looked for all the complaints from Massachusetts
about mortgages. So it is a powerful way to see what kinds of
issues are cropping up in the communities that all of us
represent.
Now, I know it has only been online for just a few weeks,
but I wondered if you could describe how you think this will
help improve the market for financial products.
Mr. Cordray. So the database has actually been online
longer, although it was really broken into very generic
categories which I think were less insightful for people than
hearing in the consumer's own words what the problem was as
they saw it. I think that is incredibly important. We have
described the narrative as really the heart and soul of the
complaint.
I mean, for me to make a complaint and then have it be
categorized as somehow ``debt collection,'' ``wrong amount,''
one of a number of complaints, and that is all you know about
it, it is just not nearly as insightful as to be able to hear
exactly ``what happened to me,'' ``the calls I got at home,''
``the effect on my life.'' It is just tangible. It is real. It
is the difference between statistics and actual stories, and to
me that is very significant.
The database, I think, is really causing institutions to
have to compete on customer service, which is a good thing. And
the good ones are competing very well on customer service, and
others are having to improve, and that is a kind of pressure
that I think is a positive pressure.
I will also mention that there are many Members of
Congress, many Members of this Committee, who are now referring
complaints over to us when they come to their office, and we
encourage you to do that. We are supposedly the experts, and we
are happy to work those complaints, and then you can see and
keep track of how they go. We want every American who has a
problem to potentially know to come to us and see if we can get
it resolved for them. We cannot always, but we are always going
to try.
Senator Warren. Well, I really appreciate that, and I see
this as a prime example of how Government can take small steps
that will have a very positive impact on the market. There is
now a bit more accountability for companies that mistreat or
just plain cheat their customers. On the other hand, there is
some public acknowledgment for the companies who treat their
customers well and resolve their complaints quickly.
Mr. Chairman, if I can, I just want to slip in one little
follow-up to the point that Senator Brown made earlier.
Chairman Shelby. Go ahead.
Senator Warren. And that is about forced
arbitration clauses. As Senator Brown highlighted, the report
that the CFPB recently released contains some damning findings
about how forced arbitration clauses fundamentally tilt the
process against consumers and keep them from effectively
fighting back even when they have been cheated.
Now, it is clear that the biggest banks and some of their
Republican friends in the House of Representatives see the
writing on the wall here, and that is that a rule is coming. So
they are pushing legislation that would force the CFPB to redo
the report before you issue any new rules. I think this is a
stall tactic, plain and simple. The report took 3 years and 728
pages to complete. It carefully documents a wide range of
problems. It is thorough and extensive.
I just want to ask you very briefly, because the Chairman
is indulging and I am over time here, but can we get on the
record the steps the agency took to ensure that this study was
complete and accurate, including soliciting and considering
comments from the financial services industry?
Mr. Cordray. Sure. First of all, we did a request for
information at the very outset to ask people how we should go
about doing the study, so we really broadly solicited people's
thoughts and heard a lot from both industry and different kinds
of markets, and also from consumer groups and others, and we
erred toward the side of being very comprehensive about what
they told us we should do in the study and trying to do as much
of it as we possibly could.
We found that in many areas this was breaking brand-new
ground. There was not necessarily data easily accumulated on
that. We did go to the American Arbitration Association and
were able to get significant data about the arbitration
process, which really shed light on that and people had not had
that before.
We looked at a number of different ways of trying to get
judicial resolutions of similar matters. We were helped in part
because there was some class actions involving certain
institutions who at one point had stopped doing their
arbitration agreements, so you could actually see what the
before and after was. Did it actually save consumers money for
them to have this forced arbitration process? And we were able
to map that and discern that. We looked at enforcement actions
as another means of affecting the marketplace, and people
talked more about our consumer complaint process as a new
element here.
It was a very comprehensive report. I honestly do not think
we could think of a single thing we could have done that we did
not do. We are always happy to hear more. And we have had
tremendous input all along, and now since we have given
roundtables and other opportunities to digest the report, talk
to us about it, and that is an ongoing process. And as we now
embark on a rulemaking process, there will be small business
review panels. We have found that useful. And there will be
notice-and-comment process on that. Everybody will have their
say. We will listen to it all, digest it as best we can, and do
what we are supposed to do as Congress told us to do: act in
the public interest consistent with the results of that report
to determine what to do about this.
Senator Warren. Thank you, and thank you, Mr. Chairman, for
your indulgence on this. I really appreciate it. It is an
important issue.
Chairman Shelby. Thank you, Senator.
Senator Rounds.
Senator Rounds. Thank you, Mr. Chairman.
Director Cordray, earlier several of the other Members of
the panel requested information concerning the collection of
data. Probably the reason why it is really an item of real
interest is because of OPM and the loss of the data there. A
lot of our employees have come in, and they have been very
concerned about the loss of their personal data. So I think
when we talk about the collection process that you use and that
you utilized to collect the data that you want to do the market
analysis with, I think the question comes to really are the
organizations that are required to submit data to you, are they
submitting from them through perhaps a third party that scrubs
it? Or are they providing data to you that has been scrubbed by
the organization itself? Are you aware of how that works in
terms of how you actually scrub the data or how it gets
scrubbed to begin with?
Mr. Cordray. I am generally aware of it, and we have people
who are very carefully focused on that, and it depends on the
data collection. Some of it is negotiating with industry
because that is who we are getting the data from--they have all
this data, by the way. They know everything you are doing. They
know everything I am doing. They use it to market to us. I do
not myself object to that. Some privacy folks do. It can be
positive, it can be negative. But, you know, there are
repositories of data that are much more troublesome than
anything we have.
Where we can get the data on a sampling basis and ask
specifically for certain fields and not for other fields, then
it comes to us in that form. The credit card database I believe
is vetted through Experian, which is a credit reporting--one of
the leading credit reporting companies that scrubs the data
before it comes to us and removes certain fields.
We are trying very hard to make sure our employees do not
have access to personally identifiable information. That only
causes me trouble in our work. And let me just say the OPM
breaches, they affect my employees as well as your employees,
and we are very sensitive to that. And it is something that we
are now dealing with to make sure employees know what their
rights are, what is available to them, and I am sure you are,
too. The notion we would contribute to that ourselves is not
something we ever want to happen.
Senator Rounds. What it did, though, was it brought to
light the fact that when we collect data, we have an additional
obligation to protect that data.
Mr. Cordray. I think that is right.
Senator Rounds. What I was curious about is whether you
actually received the data and then scrubbed it or if it was
delivered to you by a third party who would then have that
responsibility. It sounds like what you have indicated is that
in the case of some of the larger bulk data amounts, it is
being scrubbed by a third party before it gets to you.
Mr. Cordray. A credit reporting agency that has access to
all this kind of data, anyway, typically. But I would be happy
to have our folks come and present to you on each individual
thing just to--I want you to have comfort on this. I think we
are trying to be very careful about it. I want you to know that
we are trying to be very careful about it. I read and see the
stories about the NSA. I am an American citizen. I have the
same concerns that I think you do about that. I think that is
very distinct from what we are talking about here. But I am
happy to have our folks come and spend some time giving----
Senator Rounds. Thank you.
Mr. Cordray.----And if you remain concerned, to know your
concerns.
Senator Rounds. I think that is a good way to leave it, and
we will request that.
Mr. Cordray. All right.
Senator Rounds. Let me just move on to rural appraisals. I
am from South Dakota. We have had challenges. I am not sure how
deep into this you have gotten personally, but rural appraisals
have been really tough to get. I am not sure how they are in a
lot of the more urban areas, but in rural South Dakota, trying
to get an appraisal has been very difficult. Two things.
Number one, I know that you tried to set it up so that we
could identify rural locations, and I am asking, is there
another way in which we can get a third or a fourth look at it?
Because we have got some communities in western South Dakota
that are clearly rural in nature, but they are not identified
that way. Is there a process in place today where we can get
the challenge set up to get them placed in the appropriate
category?
Mr. Cordray. When we first opened our doors, we had a
number of mortgage rules we were required to do by law, and one
of them had to do with appraisals, and another one was an
interagency rule with the Federal Reserve on appraisals. And I
have always been somewhat concerned as to whether we got that
right. One of the big issues, as you are describing--and I am
familiar with it--is in rural areas there are just fewer
comparables.
Senator Rounds. Correct.
Mr. Cordray. It is more difficult. Appraisers might have to
come from a greater distance, so they are not as accessible. So
just barriers to being able to make rural transactions.
I think we have been working at trying to alleviate that,
but I would encourage you to continue to press on that. You are
pressing on it with me here, so I will be taking it back. We
will talk to the Federal Reserve about it, if there is more
relief we can give on that, because it is a peculiar
circumstance of the few and far between areas, and we want
people to be able to get mortgages there just as they can in
the dense areas of the country.
Senator Rounds. I think it is two different things. Number
one, it is the appraisals themselves and what is expected of
them, and comps with regard to rural areas, which in many cases
do not exist. And along with that, I think you are seeing
legislation proposed right now that would actually create the
ability for some of the banks who are literally holding those
mortgages because they cannot qualify on the secondary market.
They are holding them inside. And yet we want to make sure that
those are still considered an appropriate asset for those banks
that end up doing that.
If I could, Mr. Chairman, I have just got one more
question. I know when you work through the qualified--or the
consolidated statements, and the goal was to perhaps simplify
some of it. Last year, as I was moving around South Dakota, one
of my community bankers said, look, I just got a copy of the
most recent release or the qualification statement. And he said
the new disclosure statement as proposed is 164 pages. That was
the PDF.
Now, the only reason why I bring this up is if that is
actually the case and if he is accurate in his definition and
his explanation----
Mr. Cordray. He is not, but----
Senator Rounds. OK.
Mr. Cordray. Yeah.
Senator Rounds. Look, we have got to have disclosures that
people will actually read.
Mr. Cordray. So, look, that is not correct. What he was
talking about is the regulation, the rule that actually
implemented these forms is lengthy. I wish it were not, but it
is lengthy. But the actual forms themselves, they are not 164
pages. I mean, that would be ridiculous. They are shorter than
they were before when you had the two forms. They are not as
short as my friend over here, Senator Warren, really wanted it
to be--one page at the application stage, one page at the
closing stage. We were not able to achieve that. But I think it
is five pages and three pages.
Senator Rounds. We might find something that we agree on.
Mr. Cordray. Yeah, well, so, look, if Congress legislates,
Congress legislates. But we are at five and three pages. It is
the key information. To me it is the executive summary of the
whole transaction, and we are looking to try to do electronic
closings and push the industry in that direction, which is
where they want to go anyway, so that a lot of the paper gets
taken off and you can really focus on the key form here.
We have tested those forms with consumers, and they have
found them to be much easier and more accessible and more
understandable. That is the key thing for us. Whether it is two
pages or three pages, you know, might matter in some sense in
the abstract, but these are not lengthy forms. They are meant
to be key summarized forms, and that is what we are doing.
Again, on the rural and underserved, I would be glad to
hear more from you. I heard a lot from Senator Johnson when he
was Chair of this Committee about South Dakota, and I hear from
Senator Tester and others about Western States that are--the
population is more spread out. We have been working to give
more latitude toward community banks and credit unions to
portfolio mortgages in their own portfolio and have them be
given all the protections of the rule. I think we are getting
to a good place on that, but we will hear more from them as we
go. And what I would say there is----
Senator Rounds. My time is up, and the Chairman has been
very kind----
Mr. Cordray. Community banks are increasing their market
share in the mortgage market, which I am glad of, and it is a
good thing.
Senator Rounds. Thank you, sir.
Thank you, Mr. Chairman.
Chairman Shelby. Senator Warner.
Senator Warner. Thank you, Mr. Chairman. Director Cordray,
great to see you again. I have got two or three areas I want to
touch on. I will try to be brief.
One, when we started to see all the hacking, obviously I
have huge concerns about OPM as well, and I am hopeful that
Acting Director Cobert, who I have had a couple conversations,
is going to move aggressively. But one of the areas that when
we started seeing this on the private sector side early on in
terms of credit card and debit card hacking was generally an
area that I was not even that familiar with of the differential
consumer protections between credit cards and debit cards.
Mr. Cordray. Yes.
Senator Warner. And, you know, I know as--and I think
particularly about so many young people using debit cards
rather than credit cards. I know they have different business
models, but how do we kind of lean in this a little bit to make
sure at least consumers--one, Senator Kirk and I have got some
legislation that would try to harmonize the protections for
consumers. But would you speak to that for a moment, how we
kind of better inform particularly our--as a parent of
daughters that use debit cards rather than credit cards all the
time, how we equalize these protections?
Mr. Cordray. I will, and actually this is interesting
because some of the regulation grows up through sort of
historical circumstances that do not necessarily make logical
sense. So credit card protections were developed at a different
time and for different purposes than debit card protections.
And, by the way, another example of this is prepaid cards,
which is yet another card people have in their wallet, that
currently have no consumer protections. Most people are unaware
of that, and that is why we have been working to get that rule
finalized so that we cover that gap.
But what you are saying is credit cards and debit cards, I
think they started out as being seen as very distinct. You
know, credit cards were about credit and a way to get away from
just store cards and give you credit generally. But debit cards
were seen as having to do with ATMs and other things. They have
kind of merged more together as just payment mechanisms, and I
think people often now may pull out one card or the other and
not think that carefully about them, although some people are
quite careful. But there are differential protections. I
believe that the fraud protection on a credit card is $50 limit
of exposure, and on debit cards I believe it is $500.
Senator Warner. Right, it is much----
Mr. Cordray. That may have made more sense when debit cards
were really only about the ATM and you might be taking out a
fair amount of cash. I do not know if it makes sense today. It
is something that I would invite Congress to think about, and
you may have guidance for us on that. Whether we could fix it
ourselves or we would have to have a statutory fix, I am not
clear on that.
Senator Warner. And, Mr. Chairman, I would just say that
this is an area where I have found even within the industry I
think there is some interest in harmonization, and at least
folks ought to know that there are very different protections.
Let me move to another subject. One of the areas that I
have spent some time on in the last 8 or 9 months is looking at
this
dramatic growth in the gig economy or the sharing economy or
the on-demand economy, particularly amongst Millennials. There
are good sides and bad sides to that. Obviously, there is a lot
of freedom that comes with these kind of new work environments.
For some folks it is quite lucrative to cobble together these
different revenue sources. There are a whole host of questions
around the fact that there is a lack of a social safety net in
terms of unemployment, workmen's comp, and disability, areas
not necessarily from your purview but something I think we will
have to work through, maybe not with a top-down solution but
with public, private, opt-in, and opt-out models. But one area
that, Richard, would really fall in your area is we have been
starting to hear, as more and more--there are some estimates
that as much as a third of the workforce falls at least
somewhere along this continuum of contingent workers. But as we
think about qualifying for mortgages within QM, we have got
some concerns--or we have heard some concerns that this
emerging new kind of 1099 or contingent workforce, you know,
the traditional banking system does not record their income in
an appropriate way so their ability to qualify for QMs are
somewhat undermined. My understanding is that Appendix Q is the
section within QM that includes guidance for verifying and
documenting borrower income.
Is this an area that you have taken a look at? If not, I
understand because there is not a lot of policymakers taking a
look at it. But it far and away is the fastest growing sector
of our economy, and we ought to get ahead of it a little bit.
Mr. Cordray. Anytime anybody asks a question that includes
the phrase ``Appendix Q,'' I know they are commendably in the
weeds.
Senator Warner. Well, let me acknowledge on the front end
that I did not know about Appendix Q until my staff----
Mr. Cordray. All right. But, in any event, the point you
raise is a very interesting one and a good one, and it is
something that I have become increasingly aware of and
concerned about. So there are different aspects of this--I
would say several aspects.
We are moving to an economy in which we have fewer full-
time, full-salary employees in the old model, just as we have
moved over time away from defined benefit pension systems to
defined contribution pension systems. This is happening.
Interestingly, I read that the health care law is actually pro-
liberty as a piece of legislation in the sense that it does not
cause people to have to be stuck in a job to get their health
care. They can actually consider being an independent
contractor or other things and still now get health care.
But I would say several things. It does create more
complications for people qualifying for a mortgage because it
is harder to document their income. Their income may be more
fluctuating. But, I mean, you start adding up who are
intermittent employees, who are contract employees, who are
temporary employees, who are seasonal employees, you know, it
is a huge portion of the American population. So I think we
need to look again at our mortgage rules in light of that. It
is not an easy thing to figure out how to handle, but it is
something we need to go back and think more about.
I would also say that from a standpoint of wealth and
retirement accumulation for Americans, this is going to be
increasingly a big problem because pension plans and even
401(k) contributions tend to be limited, even in companies that
have multiple types of workforces, to the full-time, full-
salary people. And everybody else does not have access to the
ability to put away savings for retirement or get a match by an
employer, and we are going to have to think hard about what we
do about that. Treasury is developing a myRA account that may
be an example in this area. I think Illinois just did something
legislatively. It is something we need to think about because,
otherwise, people are going to be possibly falling behind in
income disparity, but also very much falling behind in wealth
and retirement disparity.
Senator Warner. Thank you, Mr. Chairman. I would love to
work with you on that.
Mr. Cordray. Yes.
Chairman Shelby. Thank you.
Senator Corker.
Senator Corker. Thank you, Mr. Chairman. Mr. Cordray,
thanks for being here.
In our office, we talked a little bit about QM, and I know
we were all working on this issue way back when in the bad old
days when so much was happening. We were all concerned about a
5-percent risk sharing, if you remember. That was where
everybody's focus was and trying to figure out a way to get
that right.
One of the things that we have looked at in legislation is
dealing with qualified mortgages, and there seems to be this
focus to only deal with it at community banks, only smaller
institutions. And I guess if you look at a qualified mortgage
that is held on portfolio, that means the institution is
keeping 100 percent of the risk. And I guess I have wondered
why we have tried to differentiate, if you will, between
smaller institutions holding qualified mortgages but larger
institutions being unable to do so. And I know we have talked a
little bit about it, but I just wondered if you might address
that. And I have one other question.
Mr. Cordray. That is fine, and, obviously, we do not have
as much time to talk about it today as we did, and I am happy
to talk about it more with you.
We generally are trying to find ways to continue to
encourage community banks and credit unions to do mortgage
lending because if you look at the data going through the
crisis, they had lower defaults than anyone else. They are the
most responsible lenders we have, and the more lending they do
in accordance with their traditional underwriting models, the
better it is for consumers, the better it is for our economy.
So that is why we have focused portfolio provisions to benefit
them.
I am concerned about it at upper levels because I do not--
the logic of it, you know, may or may not attain at larger
levels. But we had--just experientially I am aware we had a
number of institutions that did a lot of portfolio lending and
that blew up, did not get it right: Washington Mutual,
Countrywide, AmeriQuest, some of these companies that really
threatened the economy because they made such a mess of things,
and they were doing portfolio lending. So portfolio lending is
not always a cure-all in terms of I am bearing the risk so I am
responsible about it, although it feels to me that community
banks and credit unions who have borne the risk have been
highly responsible about it, and we are looking to encourage
them. And as I say, I am pleased to see that the community
banks' share of mortgage lending seems to be on the increase.
That is good for America, I think.
Senator Corker. So it just seems to me that--and I agree
with much of what you just said. But it seems to me, on the
portfolio lending component, there is something different than
just stopping it at $2 billion or whatever, and then people
just going whole slog into it at certain levels. There ought to
be some----
Mr. Cordray. Maybe.
Senator Corker. There ought to be something that is
different than just that stark line, and I think we ought to
try to explore that together.
On manufactured housing, look, I live in a State here we
have a lot of people that have difficulty affording housing.
Senator Brown lives in a State where there are a lot of people
that have difficulty affording housing. Many of us are in the
same--I know Senator Cotton does. No offense. But the fact is
that, you know, for some of the lower-income citizens that we
represent, manufactured housing is an outlet. I know Senator
Brown and I sponsored legislation back in 2012 that actually
was more expansive than what was in the Shelby bill this time.
And yet we have these rules that are in place that really make
it difficult. I mean, you and I talked about the fact that on a
smaller loan, a $20,000 loan or a $30,000 or $40,000 loan, the
costs that are associated with doing that up front end up
bumping up against some of the regulations we have. And I just
wondered if you might address that, and at least address the
fact that you understand that is a problem, and I am wondering
if we might collectively generate a solution for that.
Mr. Cordray. So, to me, the problem I am concerned about--
and it is a very real problem, and it is not limited to
manufactured housing. It is that as you go to the lower end of
the spectrum in terms of the size of loans, the smaller the
loan, there is still a certain amount of costs that have to be
incurred in order to make that loan. And so, you know, at a
loan that is $200,000, $300,000, $400,000, I guess in
California maybe $800,000, the costs are spread over a big
base. At $25,000 or $50,000--a lot of houses in my States are
of that kind, and manufactured homes, very much of that kind--
the costs start to get larger.
The law as it now currently exists and that we implemented
does provide for that, and it says under $100,000, the 3-
percent points and fees cap can rise to 4 and then to 5, and at
lower levels to be a hard dollar amount. Whether those numbers
are set exactly at the right spot is a point worthy of
attention. Again, that is not specific to manufactured housing,
but manufactured housing falls very much at that end of the
spectrum. And I want to know that people at the lower end of
the cost spectrum can get access to mortgages and are not
blocked from that by something in the Administration or just
costs of this. Just as automobile lending actually is going
farther down the spectrum, people need their cars, and to me
that is a good thing.
So I am happy to talk further about it. We have been trying
to look at the data on manufactured housing to understand.
People have been raising this problem. Is it really a problem
or is not really a problem? What we do see is that every month
of last year from the Census Bureau survey data, manufactured
housing lending was up from the month the year before. And some
of the leading manufactured housing manufacturers are quite
profitable. So I do not know what to make of some of the
concerns people are raising to me, but I will say that this
issue of costs on a smaller loan I think is a universal issue
and problem and one that maybe we should be thinking further
about whether the thresholds are exactly right.
Senator Corker. Mr. Chairman, thank you for the time, and I
would just close by saying I appreciate you looking at that
data. And I understand that in a growing economy you are likely
to see more people doing these types of things. We have seen
some data that shows that numbers of these people are unable to
be served, and they are ending up paying more for rental
housing than they could be paying for actually purchasing,
again, a lower-cost home of either type, whether it is
conventional or manufactured. So I hope we will continue----
Mr. Cordray. That does not sound optimal from anybody's
standpoint.
Senator Corker. I agree. Thank you.
Thank you, Mr. Chairman.
Chairman Shelby. Senator Heitkamp.
Senator Heitkamp. Thank you, Mr. Chairman.
At the risk of going down this rabbit hole one more time, I
just want to kind of begin with where we are with data
collection, because I have listened and I think in some ways I
feel like we are ships passing through the night here and not
really hearing.
You do not require the transfer of personally identified
information other than to do consumer services based on a
complaint. Is that what I am hearing?
Mr. Cordray. That is generally correct, although in
enforcement and supervision matters where we are going to be
getting money back to consumers, we ultimately will need to
have information to get the money back to consumers.
Senator Heitkamp. These would not be individual complaints.
This would be kind of a broad, sweeping kind of investigation
where you then would require individual information?
Mr. Cordray. So, for example--and I could name names of
institutions, but they are public, where we had credit card
add-on matters, ultimately we have to get money back to
consumers.
Senator Heitkamp. Right.
Mr. Cordray. Now, either we can work with the institution
to do that, or we may have to pull the data ourselves.
Senator Heitkamp. I think my point is, in terms of your
data collection, the only way you would have personally
identified data would be if it were necessary to serve the
consumer either in a broad complaint or an individual
complaint.
Mr. Cordray. I believe that is generally correct. And there
is typically no purpose for me having it otherwise. It just
gets in my way and my team's way in terms of doing our work.
Senator Heitkamp. OK. And do institutions send you a bulk
amount of data that actually has that information with it
requiring you to scrub it, or do you always get information
that has been scrubbed and where Social Security numbers and
personally identified information has been removed?
Mr. Cordray. So on that, what I would like to do is have
our staff come and brief your staff on all of our data
collections----
Senator Heitkamp. I think there is enough interest here
that maybe just a report back to the Committee would be very
helpful.
Mr. Cordray. That is fine. OK. We can do that. That is
typically our aim, and I believe it is true in all
circumstances. But I am always hesitant to say ``all'' without
making sure my staff tells me that that is correct.
Senator Heitkamp. And I want to make one final point on
this, which is interesting to me, and that is, where we are
deeply concerned about what you have, we should be equally
deeply concerned about the cybersecurity of the information
where it resides, which is with the companies that you access
every day. And so they are going to have--any breach of their
data is much more damaging than access to your data that is
being used for market analysis.
Mr. Cordray. Sure. Target, Home Depot, I mean, that is
account information, Social Security numbers, those kinds of
things, very problematic.
Senator Heitkamp. I think another thing that would be
helpful--and, obviously, we have found great response from your
agency on what is rural and what is not. We think that you
probably have made the right decisions in North Dakota. But I
am curious as to the percentage of land mass in this country
that you have determined is, in fact, rural. So if you could
get that to me, that would be great.
Also, I would reiterate Senator Tester's concern about
consultation and would be interested in follow-up on
consultation with tribes as well.
Mr. Cordray. OK.
Senator Heitkamp. That is part of the overall scheme in a
government-to-government relationship. We need all agencies to
appreciate what that means.
Mr. Cordray. And I know you have got me promising to come
visit you, so we will make sure that we do that.
Senator Heitkamp. I know. I was going to mention that.
Mr. Cordray. OK.
Senator Heitkamp. And I do have to say that where we can
disagree, I think your personal integrity is unimpeachable.
Mr. Cordray. Thank you.
Senator Heitkamp. And I think you are doing a very
difficult job, Director.
Mr. Cordray. I hope that is the case.
Senator Heitkamp. And I want to thank you for your service.
Someone with your credentials having, I believe, clerked for
the Supreme Court at one point, with your great academic
background, is someone who is extraordinarily valuable, and I,
of course, am partial to past AGs, so we are all good.
Mr. Cordray. That is very kind of you. Thank you.
Senator Heitkamp. I want to reiterate some of the points
that you have been hearing about where we are at with the
people we are trying to protect. And I think what we are all
trying to get at is how do you balance protecting the consumer
against access to necessary credit, whether it is small-dollar
lending, whether it is in manufactured housing, whether it is
just access to rural communities or Native American communities
to the market. I think there is a balance there, and I know I
have told you frequently my story. I was probably one of the
first people who got beat up by trying to shut down payday
lending and predatory lending, and I learned something in that
process, which is, you know, sometimes people need diapers and
sometimes they need gas and they have a flat tire and they
cannot fix it. And these are folks that are living on the
margin. So I understand the need to protect people, but I also
understand the need to have some form of small-dollar, short-
term lending.
What do you think those products--and this will be my last
question. What do you think those products should look like?
And how do we achieve that balance? And how do you as the
Director, you know, address the concerns that we have--which is
let us give people access to credit, it helps build their
credit, it helps build America, but let us also protect them.
And that is a tough balance with this population.
Mr. Cordray. It really is. And, by the way, we first saw
this issue with our mortgage rules where we--in the Dodd-Frank
Act they passed certain things that we were required to do on
mortgages at a time when the mortgage market was all overheated
and quite irresponsible and the underwriting had deteriorated.
And by the time we came to actually write the rules, things had
crashed, the mortgage market was now frigid, credit was very
tight. It was a hugely different situation.
And so as we wrote those rules, we really became very
keenly aware, face to face with this problem of how do you
balance protections, which we want, with access to credit,
which we do not want to choke off. And that is something we
tried to balance in the mortgage rules, and I think we did
pretty well with it, but it is something we are constantly
monitoring and trying to think about.
The same thing now in these small-dollar rules. We know
people have a demand for small-dollar credit. They have had it
for over 100 years, and they get that demand served in various
ways, and some products are more responsible and some are less
responsible, but people have a demand. And we cannot choke off
a supply to them, but at the same time, we are concerned about
this issue of the debt trap, people ending up thinking they are
getting in and getting out, but many of them end up rolling
over and getting stuck at a very high cost over a long period
of time. And that is the issue we are trying to address.
Now, whether the industry business model relies on that to
subsidize the single-demand loans, I am not entirely clear on
that. They say they do not, but maybe they do. It is something
we are trying to figure out as we are working on these rules.
But I have the same objective in mind that you describe.
People need to have access to money, and not everybody has an
uncle or a sister or mother-in-law that they can go to for $300
or $500, and if they have done it once or twice, they may not
be able to go to it a third time. And so we get that. At the
same time, we do not want people to end up in products that
harm them further.
I do not know that I am the right person to say what all
the right products are. What we are trying to identify is that
there are certain wrong products that we want to try to rein in
a bit while still leaving access to credit. That is the right
answer in that marketplace. How to get there, though, is a
complex, as you say, difficult issue, and I am hopeful, and we
are working hard to try to understand enough to get it right.
Senator Heitkamp. Thank you, Mr. Chairman.
Chairman Shelby. I think Senator Heitkamp raised a real
important issue, and we have talked about this before, Mr.
Cordray. We do not want to drive the small, marginal consumer
underground where there is no regulation, because that is what
we have had before. And I believe that goes right to the thrust
of her question. You know, how do we do this without
overregulating this? And how do we have access to some type of
credit for--because there will be credit. It is a question of
is it going to be legal or illegal.
Now we have Senator Cotton coming up. We can have that Ivy
League debate with Mr. Cordray that you referred to. Senator
Cotton?
Senator Cotton. Thank you, Mr. Chairman. Thank you,
Director, for appearing before us.
I want to return to a topic that Senator Corker touched
upon: affordable housing. Census and HUD indicates that there
may not be a single county in this country that currently has
enough affordable housing. This is particularly acute in the
kind of rural State that I represent or rural county where I
live. There are not a lot of new single-family homes being
built. There is not a large stock of multi-family rental units,
which is why many families find manufactured housing to be the
most affordable option they have, as Senator Corker described.
They end up paying less on a mortgage for a manufactured home
than they would pay for a very limited supply of rental stock.
As you describe, there is a basic math problem. It takes a
certain amount of time and resources to process any loan,
whether the loan is $40,000 or $400,000 or $4 million. And over
a bigger loan, that cost is spread out across a bigger base
and, therefore, the percentage costs do not appear to be as
high. Over a smaller loan, like you have for manufactured
housing, it is a much smaller base to spread out, so it appears
to be much higher, even though that is the preference of the
consumer, and you have many financial institutions who are
willing to make those loans.
You have regulatory flexibility under the Dodd-Frank Act,
under Section 1431, to address this, to raise those percentage
rates, yet you have not used that yet. Could you explain why
you have not used that and maybe if you are looking ahead to
using it to grant some relief for these families and lenders?
Mr. Cordray. Yes, we did consider this, and pretty
carefully, with a lot of input at the time we adopted our
mortgage rules, our big set of mortgage rules, in 2013. And
this issue was raised, and the 3 percent was not seen as
appropriate for loans under $100,000. And it went to 4 at
certain levels; it went to 5 at lower levels; and it went to a
dollar figure at the lowest levels.
Now, that was an effort to try to address the issue that
you are raising that I see as a very legitimate issue. Whether
we have got those numbers right, whether we should reconsider
them and think further about them, just as we have reconsidered
and thought further about the rural and underserved issue, is a
fair point, and it is one that I will take back from this
hearing.
I do remain concerned that credit at the lower dollar end
of the spectrum is tight. It is tight. It is tight for people
who also often have lower credit scores and more difficult to
access the credit. I do not want to try to pretend to redo
underwriting that is being done by these institutions on that.
But whether those numbers are set at the right level, whether
$100,000 is the right level are things that I am not entirely
clear on. I think we should be looking at it some more. You
should be looking at it some more. We should have a fruitful
discourse on whether there maybe should be changes there.
Senator Cotton. Well, thank you for that, and you
referenced in your answers to Senator Corker that you have seen
some encouraging data, which I have seen as well. I do think
that is, though, limited to the sale of new manufactured
housing. I believe that----
Mr. Cordray. I see, as opposed to used----
Senator Cotton. So, yes, there is still a robust market
also for refinancing and for secondary sales. Manufactured
housing obviously does not have the same lifetime that single-
family housing does, but oftentimes families need manufactured
housing at a time in their life when they are going through a
lot of change, when they are newly married, when they have new
children. They are also going through economic change,
hopefully getting higher wages, moving up the economic ladder,
and ready to move into a different kind of home when there is
another family who would be willing to buy their manufactured
home.
Director, I would like to turn to another question now.
Last year, you brought an enforcement action against a mortgage
lender, PHH. You did not file a lawsuit. You went in front of
an administrative law judge, and that judge ruled for the CFPB
and issued a judgment of $6.4 million. You overturned that
judgment and imposed a fine of $109 million. Could you explain
your thinking, both why you pursued an administrative law judge
as opposed to an Article III court? And then what evidence and
thinking went into your decision to overturn your own ALJ and
impose a fine 17 times his initial judgment?
Mr. Cordray. Yes. So the use of an administrative law judge
as opposed to a court under the statute is a discretionary
decision. We have used administrative law judges fairly
sparingly, except for consent orders. We have been in court,
and we are in court in many, many matters. One difference is
that the ALJ route can be faster and can be more streamlined.
You know, whether that is a good or bad thing is often in the
eye of the beholder. That happened to be the approach that was
used in this particular matter.
As for the decision, that decision is published, and the
reasons for it are set out on their face. I think it was like
maybe a 36-page decision, so it is lengthy. The particular
point that you are getting at had to do with whether under the
law--and this is not an obvious point, and the administrative
law judge saw it one way; I saw it another way. Maybe a court
will see it a different way. We will see. Under the law,
whether if you violate the RESPA statute, is the right relief
only contracts that violated the RESPA statute after a certain
date? Or is it payments made after a certain date on contracts
that violated the RESPA statute before that date? It has to do
with the limitations period here.
Not an obvious point, but it is a point that, once you
decide it one way or the other, makes this huge difference in
this matter in terms of the amount of relief. That is the sole
reason for it. I thought the law pretty clearly was one way.
Others may see it differently. But we tried to come to the
right result as we understood the law.
Senator Cotton. Thank you for that explanation, Director.
You are right that the implication of my question and the
concern I am driving at is not necessarily even about that
specific decision, but just about the structure of
decisionmaking, not only within your own Bureau but within
independent agencies as a whole. Your own Bureau has certain
features that exacerbate the problem, the fact that your budget
is not subject to annual appropriations and that you are single
Director as opposed to a five-member commission. This is not a
reflection on you or any future Director. These are concerns I
have about the nature of this Bureau. Madison said in
Federalist No. 47 that, ``The accumulation of all powers,
legislative, executive, and judiciary, in the same hands . . .
may justly be pronounced the definition of tyranny.''
So independent of your judgment in this single case or in
any other cases, or future Directors' judgments, I am going to
continue to have these concerns about----
Mr. Cordray. That is fine, and having said that, I am here
in front of you consistently and happy to be speaking to you
anytime. I regard that legislative oversight as very meaningful
and very vigorous. That decision is subject to appeal. It is
being appealed to a court. I hope that they will see the case
the same way I did and think that I did things right. If they
disagree, they will tell us so, and we will comply and abide by
that ruling. So we are subject to judicial review in that
respect as well.
Senator Cotton. And we are glad to have you here, and we
are glad to have judicial review, but original fact finders
without life tenure and salary protections are different from
fact finders at agencies and bureaus, not just yours.
Mr. Cordray. True, although State court judges are not
subject to life tenure as well.
Senator Cotton. Or regulators issuing rules that provide
standards of conduct under which the force of law can impose
penalties who are not elected are different from people up here
making those, and we have to answer to people that we serve
back home for the wisdom of those rules.
Mr. Cordray. Fair enough.
Senator Cotton. Not a specific commentary on a particular
case or any particular thing you have done, but I have real
reservations about the structure of this Bureau.
Chairman Shelby. Senator Merkley.
Senator Merkley. Thank you very much, Mr. Chairman, and
thank you, Director Cordray, for your testimony. But I want to
thank you in particular for your leadership of finally having a
watchdog fighting for consumers and fairness in financial
transactions.
In your testimony, you note that the Bureau enforcement
activities resulted in more than $10.1 billion in relief for 17
million consumers. Is it my understanding this is specific
funds that come from addressing predatory practices that has
been returned to 17 million families across America?
Mr. Cordray. Yeah, and it takes different forms. Some of it
is direct restitution. Some of it is uncompensated victims that
get compensated out of a civil penalty fund. Some of it is,
say, mortgage relief. Some of it is debt that they otherwise
would be required to pay and might be subject to further costs
and court proceedings that is forgiven and wiped from the
books. But, yes, it is meaningful relief for American
consumers.
And the other point that Senator Warren has made to me that
is worth making, which is every time we then correct practices,
the same things do not happen going forward, and you can expect
that the same money is being saved each year in the future, but
it is very hard to quantify that.
Senator Merkley. It is hard to quantify, but every time a
consumer gets a fair mortgage loan rather than a predatory one,
a great deal of help has been created in terms of a wealth-
building enterprise versus a wealth-stripping one, and your
agency is critical to that.
I wanted to turn to the subject of payday loans. You are
now engaged specifically in laying out a policy framework, not
yet a draft regulation, and taking feedback on it. In Oregon,
we proceeded to establish a pretty rigorous framework,
reestablishing a usury cap on the full range of loans--consumer
loans, title loans, payday loans--because we had seen the
migration from one area to another where States had tried to
tackle the 500 percent interest rate in payday loans.
But we see aggressive outreach by payday loan companies to
solicit people online and to do so outside the framework of
State law. And in that regard, about once a week I get a text
message like this one that came the other day: ``Dylan''--I do
not know who Dylan is, but whoever Dylan is, he is one click
away from a predatory payday loan. ``Dylan, do you need some
extra dollars? Bad credit is OK. Approved in 4 minutes. Click
here.''
Now, I am absolutely convinced this is not a payday lender
operating under State law. It is probably offshore, as most
online payday lenders are. And the challenge is that with the
ability to reach out to folks through text messages in this
case--I also receive phone calls for Dylan. If Dylan is out
there anywhere and wants his phone messages, well, please
contact me. So folks then respond to this and say, ``OK, great.
This is convenient. I do not have to go down to the brick and
mortar payday loan store.'' And, by the way, we still have
those stores in Oregon, even though they now operate at 36
percent interest rate. They are still providing credit as they
have in every State that has cracked down on the 500 percent
interest rate. So citizens still have access to credit when
they need it at a fair rate, but they are getting ensnared by
these online solicitations.
The reason this works is because these companies are able
to use electronic fund transfers or remotely generated checks
to essentially access accounts, and once they have the number
of the account of the individual, they simply reach in and grab
the money, even though their loan is in violation of the law.
How are we going to stop this?
Mr. Cordray. First of all, you may need a better spam
filter on your phone, although maybe you are picking up some
good intel this way.
Second, the online lending is a particularly acute problem
for any enforcement regime. I saw it as Attorney General in
Ohio. I hear about it from our colleagues at the Justice
Department who battle with it and help us especially when we
are trying to deal with something that is international in
scope. Like a scam we dealt with earlier this year, some of the
folks were based in Kansas City, but they were incorporated in
Turks and Caicos. I do not even know where that is, someplace
in the Pacific maybe. Maybe it is in the Caribbean. I do not
know.
Chairman Shelby. The Caribbean.
Mr. Cordray. The Caribbean? All right. In any event, the
enforcement of that is quite difficult but important.
Also, one might have thought that online lending would end
up being more efficient because you would not have to have the
brick and mortar. But the default rates are so high, they are
paying lead generators $300 to $400 to acquire customers. What
does that tell you about a customer they are acquiring if they
think it is worth paying $300 to $400 to get that fish on the
line for then the lending they are going to do to them,
particularly in small-dollar loans? It is going to be
astronomic interest rates, and they are--540 percent, 720
percent, even more. And that is a major concern.
In terms of the small-dollar lending rules that we are
working on now, that is a big piece of it. The account access
where they can just take the money directly from your account
creates all kinds of risks. That was the case with that Kansas
City outfit. They were called the Hydra Group that we shut down
earlier last year. These are things we are wrestling with
because the account access particularly creates vulnerability
for consumers and can cause them to be trapped in these loans,
and they may or may not appreciate what is happening when it is
in the fine print.
So it is something we are trying to think very carefully
about, but we are aware of and very sensitive and concerned
about the same problem that I think you just described as we
are trying to work through these issues.
Senator Merkley. Well, thank you for your efforts to
wrestle with this issue. It matters a lot to a family whether
or not they acquire a payday loan in Oregon under a 36 percent
interest rate cap or whether they respond to the text message
or the phone call and end up with a 500 percent interest loan
from a group that is operating with no accountability and
reaches in and takes money without authorization. There has to
be a solution to this. I have suggested several in my Stopping
Abuse and Fraud Electronic Lending Act, the SAFE Act, in 2013.
I continue to look for a way for fair lending to happen to help
families succeed and to stop these predatory practices. And I
know that is the business you are in, and you are doing an
excellent job of it, and thank you for the work you do.
Mr. Cordray. Thank you.
Chairman Shelby. Thank you, Senator Merkley.
Director Cordray, thank you for appearing again before the
Banking Committee, and we appreciate your testimony and your
frankness.
Mr. Cordray. Thank you, Mr. Chairman.
Chairman Shelby. The Committee is adjourned.
[Whereupon, at 12:10 p.m., the hearing was adjourned.]
[Prepared statement, responses to written questions, and
additional material supplied for the record follow:]
PREPARED STATEMENT OF RICHARD CORDRAY
Director, Consumer Financial Protection Bureau
July 15, 2015
Chairman Shelby, Ranking Member Brown, and Members of the
Committee--thank you for the opportunity to testify today about our
latest Semi-Annual Report to Congress. We appreciate your continued
oversight and leadership 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.
Next week marks 5 years since the passage of the Dodd-Frank Wall
Street Reform and Consumer Protection Act and 4 years since the
Consumer Bureau opened its doors. As you know, Congress created this
agency in response to the financial crisis with the purpose and sole
focus of protecting consumers in the financial marketplace. We
understand our responsibility to stand on the side of consumers and
ensure they are treated fairly. Through fair rules, consistent
oversight, appropriate enforcement of the law, and broad-based consumer
engagement, the Consumer Bureau is working to restore people's trust
and confidence in the markets they use for everyday financial products
and services.
To date, the Bureau's enforcement activity has resulted in more
than $10.1 billion in relief for over 17 million consumers. Our
supervisory actions have resulted in financial institutions providing
more than $178 million in redress to over 1.6 million consumers. And we
have now handled more than 650,000 complaints from consumers addressing
all manner of financial products and services. These consumers are your
constituents in each of your States. For example, one excerpt of a
complaint narrative from a servicemember in Alabama reads:
We opened an account . . . We paid as agreed until we became
unable to pay the full amount . . . We made an agreement to pay
a lesser amount per month and kept paying via allotment. [The
company] got a judgment against us while I was training. I was
not served with a judgment prior to court or after . . . I was
informed of it when my wages began to be garnished . . . We
have asked repeatedly to have this issue fixed . . . We have in
total paid this company nearly $25,000 over the past 11 years
for a couch and loveseat, computer hutch, table and chairs. The
furniture has not lasted, however the payments and ruin
continue . . . We need assistance as we have tried every other
step possible to fix this without aid.
Another excerpt, from a consumer in my home State of Ohio, reads:
[I] elected and agreed to a Reduced Rate Payment Plan with [a
student loan servicer]. In addition to being charged incorrect
interest rates, my monthly payment was incorrectly allocated
which is resulting in late fees and a delinquency notice. After
speaking with . . . customer service representatives and a call
time of . . . hours, no resolution had been reached.
In this, our most recent Semi-Annual Report to Congress and the
President, we describe the Bureau's efforts to achieve our vital
mission on behalf of consumers, including those in your home States and
mine. During the timeframe covered by the report, we have helped secure
orders through enforcement actions for more than $19 million in relief
to consumers who fell victim to various violations of consumer
financial protection laws, along with over $32 million in civil money
penalties. For example, we took action against a company for illegal
debt collections practices resulting in $2.5 million in relief for
servicemembers. We also stopped an illegal kickback scheme for
marketing services, which resulted in $11.1 million in redress for
wronged consumers. We also worked with the Department of Education to
obtain $480 million in debt relief to student loan borrowers who were
wronged by Corinthian Colleges, a for-profit chain of colleges that
violated the law and has since declared bankruptcy.
During the reporting period, the Bureau also issued a number of
proposed and final rules. In October 2014, we issued a final rule to
reduce burdens on industry by promoting more effective privacy
disclosures from financial institutions to their customers. In November
2014, the Bureau issued a Notice of Proposed Rulemaking to provide
strong new Federal consumer protections for prepaid cards and accounts.
In December 2014, the Bureau issued a proposal to clarify various
provisions of its mortgage servicing rules. In January 2015, the Bureau
proposed further changes to some of our mortgage rules to facilitate
mortgage lending by small creditors, particularly in rural or
underserved areas. This would increase the number of financial
institutions able to offer certain types of mortgages in rural or
underserved areas, and help small creditors adjust their business
practices to comply with the new rules.
As a data-driven institution, the Consumer Bureau published several
reports during this reporting period that highlight important topics in
consumer finance such as medical debt, arbitration agreements, reverse
mortgages, and consumer perspectives on credit scores and credit
reports. We also released a new ``Know Before You Owe'' mortgage
toolkit that will help encourage consumers to shop for mortgages and
better understand how to go about buying a home.
In the years to come, we look forward to continuing to fulfill
Congress's vision of an agency that is dedicated to cultivating a
consumer financial marketplace based on transparency, responsible
practices, sound innovation, and excellent customer service.
Thank you for the opportunity to testify today. I look forward to
your questions.
RESPONSE TO WRITTEN QUESTIONS OF CHAIRMAN SHELBY FROM RICHARD
CORDRAY
Q.1. During the hearing, I expressed concerns with the Bureau's
costly headquarters renovations. These concerns are not new.
For example, during the June 2014 semiannual hearing, Senator
Coburn asked you whether the renovations could ``be done for
less,'' and you replied ``that is fair, and I am responsible to
you for that, and this is meaningful oversight.'' However, when
I asked whether congressional disapproval led you to change
your renovations plans in any way, you defended the project but
did not answer the question.
a. LHas congressional disapproval led you to change your
renovation plans in any way since your last semiannual
testimony before this Committee?
b. LIf so, please provide a detailed explanation on each
change, including estimated cost savings resulting from
such changes.
c. LIf no changes have been made, please explain why.
A.1. As a result of congressional oversight, the Office of the
Inspector General of the Consumer Financial Protection Bureau
reviewed and evaluated the Bureau's headquarters renovation
project, including an audit of renovation expenses. The
Inspector General released the audit report in August 2015
stating, ``We determined that construction costs appear
reasonable based on comparisons to an independent cost estimate
and the costs of two comparable building renovations identified
by the U.S. General Services Administration (GSA). We also
determined that potential renovation costs are below the amount
previously budgeted and obligated for the renovation.''\1\
---------------------------------------------------------------------------
\1\ Office of Inspector General, Board of Governors of the Federal
Reserve System, Consumer Financial Protection Bureau, CFPB Report:
2015-FMIC-C-012, ``CFPB Headquarters Construction Costs Appear
Reasonable and Controls Are Designed Appropriately,' July 21, 2015
available at: http://oig.federalreserve.gov/reports/cfpb-headquarters-
construction-costs-jul2015.htm.
---------------------------------------------------------------------------
As with all expenditures and major investments, the Bureau
is committed to cost-effective management of our resources. The
Bureau is working with the GSA to ensure the headquarters
renovation is completed in a manner that minimizes cost while
maximizing the value of the investment. For example, the
Bureau's renovation process will include a value engineering
process.
Value engineering is an approach used to analyze the
functions of building systems, equipment, facilities, and
services for the purpose of designing and building systems that
functionally perform as needed--meeting all reliability,
quality, and safety requirements--while minimizing the life
cycle costs (i.e., costs incurred over the next 10-50 years for
installation, maintenance and replacement) imposed on the
building's owner and operator. The approach takes into account
short-term and long-term expenses and performance to ensure the
building will last, while identifying opportunities to do so as
cost effectively as possible.
For this project, the GSA brought in a third-party value
engineering consultant who will hire experts from various
trades (mechanical, electrical, etc.,) to analyze the current
design and provide recommendations to the team for system,
equipment, and other material substitutions that are
representative of the above criteria to maximize value while
minimizing lifecycle costs. We held a workshop in September,
and the Bureau hopes to have value engineering changes and the
associated cost savings estimates completed this spring.
Q.2. During the hearing, I asked what analysis the Bureau has
conducted of State laws and regulations prior to publishing its
proposal to regulate payday lending. While you provided a broad
overview of the Bureau's work on payday lending, you did not
answer this question.
LWhat analysis has the Bureau conducted of State
laws and regulations prior to publishing the proposal?
LPlease provide a copy of the analysis conducted of
State laws and regulations that relate to payday
lending, including explanations and any related
assessments as to why such State laws and regulations
are insufficient.
A.2. The Bureau continues to carefully consider existing State
laws and regulations, as we have throughout our research and
development of options to address potential consumer harm. In
April 2013 the Bureau released a report entitled, Payday Loans
and Deposit Advance Products: A White Paper of Initial Data
Findings,\2\ which references how variations in State laws may
impact how products are structured. In March 2014 the Bureau
released, Data Point: Payday Lending,\3\ which presents
findings on the impact of State laws and regulations on loan
rollover rates. In addition, in March 2015, the Bureau
published the Outline of Proposals Under Consideration and
Alternatives Considered.\4\ as part of the Small Business
Review Panel process, which also includes analysis relative to
State laws and regulations. Moreover, the Bureau has met with
representatives of State and local governments from around the
country to hear directly about their experiences related to
payday lending regulations and impact.
---------------------------------------------------------------------------
\2\ Available at http://files.consumerfinance.gov/f/
201304_cfpb_payday-dap-whitepaper.pdf.
\3\ Available at http://files.consumerfinance.gov/f/
201403_cfpb_report_payday-lending.pdf.
\4\ Available at http://files.consumerfinance.gov/f/
201503_cfpb_outline-of-the-proposals-from-small-business-review-
panel.pdf.
Q.3.a. In a 2013 bulletin posted on its Web site, the Bureau
stated that the compensation policies of some auto lenders lead
to the ``significant risk'' of illegal pricing disparities on
the basis of race. In September of 2014, the CFPB published a
report explaining its methodology for measuring racial
disparities in the auto lending market. The Bureau uses a proxy
method called Bayesian Improved Surname Geocoding to estimate
the race of different borrowers based on last names and zip
codes. In November 2014, Charles Rivers Associates published a
study demonstrating that the CFPB's methodology was
substantially flawed. For example, the study found that only 24
percent of African Americans were correctly identified by the
methodology employed by the CFPB.
Is the Bureau still using this methodology?
A.3.a. Yes. On September 17, 2014, the Bureau published a white
paper, entitled Using Publicly Available Information to Proxy
for Unidentified Race and Ethnicity,\5\ that details the
methodology the Bureau uses to calculate the probability that
an individual is of a specific race and ethnicity based on his
or her last name and place of residence. The Bureau's analysis
demonstrates that its proxy is more accurate at approximating
the overall reported distribution of race and ethnicity than
other available methods using publicly available data. The
Bureau's proxy assigns an individual probability of inclusion
in a prohibited basis group based on both geography and
surname, whereas other proxies use geography or surname alone
in predicting individual applicants' reported race and
ethnicity.
---------------------------------------------------------------------------
\5\ Available at http://files.consumerfinance.gov/f/
201409_cfpb_report_proxy-methodology.pdf.
---------------------------------------------------------------------------
The Bureau and the paper you cite both agree that there are
racial and ethnic disparities in pricing resulting from
discretionary dealer markup and compensation policies, and that
a proxy can be used to estimate both pricing disparities and
the number of consumers potentially harmed. The disagreement is
regarding how many borrowers were harmed and by how much.
The Bureau's approach is designed to arrive at the best
estimate of the total number of harmed borrowers and to
accurately identify the full scope of harm. The Bureau makes
final determinations regarding discriminatory outcomes and
their scope in consultation with individual lenders, and
carefully considers every argument lenders make about
alternative ways to identify the number of banned borrowers and
the amount of harm. In some instances, the Bureau has adopted
changes and reduced our estimates in response to specific
alternatives offered by individual lenders with regard to their
specific loan portfolios.
As we stated in our white paper, the Bureau is committed to
continuing our dialogue with other Federal agencies, lenders,
advocates, and researchers regarding the Bureau's methodology,
the importance of fair lending compliance, and the use of
proxies when self-reported race and ethnicity is unavailable.
We expect the methodology will continue to evolve as
enhancements are identified that further increase accuracy and
performance.
Q.3.b. What, if anything, has the Bureau done to address the
issues raised by the Charles Rivers Associates study?
A.3.b. The paper you reference does not undermine either the
importance of the Bureau's anti-discrimination work in indirect
auto lending or the Bureau's confidence in its use of the
Bayesian Improved Surname Geocoding (BISG) methodology. That
paper does not provide reassurance that the fair lending risk
presented by discretionary dealer markup is less significant
than the Bureau--and other regulators and consumer advocates--
believe. Rather, the paper takes issue with the manner in which
its authors think the Bureau is assessing that risk, using the
BISG methodology, in order to determine whether violations have
occurred. The authors do not reject the use of a BISG
methodology itself, they simply offer a variety of
recommendations based on their beliefs regarding the Bureau's
use of the BISG proxy. These beliefs reflect a potential
misunderstanding of how the Bureau conducts its analysis, which
is based on the specific business practices of individual
lenders.
The paper you cite presumes the Bureau applies the same
analysis to all lenders, in all contexts, including
recommending statistical controls the Bureau should use in
every case, regardless of whether those controls apply to an
individual lender's business model. At the Bureau, each
supervisory examination or enforcement investigation is based
on the particular facts presented. In analyzing lending data
for statistical disparities on a prohibited basis, examination
teams typically construct regression models based on the
particular institution's specific policies and practices, which
vary from institution to institution and may also vary by
product and channel. For this reason, for each institution
subject to review, examination teams may construct multiple
regression models by including controls that reflect the
institution's various policies, practices, products, and
channels, as well as any additional factors identified by the
examination team or the institution.
The Bureau engages with individual lenders to better
understand their policies and products. As such, the Bureau has
considered, on a case-by-case basis, many of the controls and
recommendations listed in the paper you cite. Many of the
controls and recommendations are already incorporated into our
analysis, both to test the robustness of the results and to
anticipate (and respond to) lender concerns. This process is an
ongoing dialogue between specific institutions and the Bureau.
Once the Bureau has found disparities in outcomes by race,
ethnicity, or another prohibited basis under the Equal Credit
Opportunity Act for a particular lender, the Bureau will
consider whether these disparities result from legitimate
business needs that are actually incorporated in the lender's
pricing policies and practices. Where lenders have demonstrated
this, the Bureau has incorporated controls into our analysis,
and as a result the disparities may be reduced or eliminated
altogether. However, where lenders simply offer up controls
without justification or proof that these factors in fact
reflect legitimate business needs and are actually incorporated
into decisions about discretionary markup, it is not
appropriate for the Bureau to include these factors in our
analysis. That determination is one that the Bureau will make
on a case-by-case basis and based on actual evidence.
Q.4. At the hearing, when asked about the Bureau's March 2015
report on arbitration, you stated, ``It was a very
comprehensive report. I honestly do not think we could think of
a single thing we could have done that we did not do.'' The
arbitration report submitted to Congress by the Bureau states,
``Although a relatively large number of empirical studies have
examined employment and securities arbitration, relatively few
such studies have examined consumer arbitration in detail.''
a. LDid the Bureau study arbitration in areas outside of
consumer products in which the use of arbitration is
more developed, such as the FINRA arbitration system?
b. LIf not, please explain why not and provide a list of
other arbitration systems that the Bureau believes
would be useful in understanding the costs and benefits
of arbitration relative to other forms of dispute
resolution.
c. LIf so, what conclusions were drawn, and how did such
analysis inform the Bureau's study of arbitration in
consumer financial disputes? Also, please provide a
list of other arbitration systems that the Bureau
evaluated during the course of its study.
A.4. In conducting the study, the Bureau reviewed scholarship
and associated data relating to arbitration in areas outside of
consumer products, such as the arbitration of employment claims
and the Financial Industry Regulatory Authority (FINRA)
arbitration system. (See for example 3.2, 4.9, 5.3, 5.6.12,
and 10 of the Arbitration Study,\6\ as well as 4.7 of the
preliminary results released in December 2013).\7\
---------------------------------------------------------------------------
\6\ Available at http://files.consumerfinance.gov/f/
201503_cfpb_arbitration-study-report-to-congress-2015.pdf.
\7\ Available at http://files.consumerfinance.gov/f/
201312_cfpb_arbitration-study-preliminary-results.pdf.
---------------------------------------------------------------------------
The Bureau ultimately did not include an empirical
comparison of these systems in the Bureau's March 2015 report
on arbitration for several reasons. Congress's direction to the
Bureau, set forth in Section 1028(a) of the Dodd-Frank Wall
Street Reform and Consumer Protection Act, was that the study
address pre-dispute arbitration, ``in connection with the
offering or providing of consumer financial products or
services.'' In addition to the statutory instruction, the
Bureau determined that employment and FINRA arbitration
disputes are qualitatively different than arbitration disputes
concerning consumer financial products and services. As the
Bureau found in the March report, most pre-dispute arbitration
agreements relating to consumer financial products and services
prohibit consumers from seeking relief in class action
litigation. This is not the case with FINRA disputes, where
FINRA rules prohibit the arbitration of class action claims.\8\
Similarly, claims in employment and FINRA arbitration disputes
can involve claims worth tens or even hundreds of thousands of
dollars. Consumer financial claims, by contrast, are typically
significantly smaller. However, the Bureau did include several
empirical analyses regarding other forms of dispute resolution
involving claims relating to consumer financial products and
services, such as class action litigation in Federal and State
court, as well as small claims courts.
---------------------------------------------------------------------------
\8\ See, e.g., Financial Industry Regulatory Authority Press
Release, Board Decision Finds Charles Schwab & Co. Violated FINRA Rules
by Adding Waiver Provisions in Customer Agreements Prohibiting
Customers From Participating in Class Actions; Reverses FINRA Hearing
Panel Decision (April 24, 2014), https://www.finra.org/newsroom/2014/
board-decision-finds-charles-schwab-co-violated-finra-rules-adding-
waiver-provisions.
---------------------------------------------------------------------------
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR BROWN FROM RICHARD
CORDRAY
Housing/OM
Q.1. Director Cordray, the Semiannual Report showed that 20
percent of consumer complaints received by the Bureau were
about mortgages. With the largest percentage of first-time home
buyers since 2009 entering the market this year, how do the
Bureau's ``know before you owe'' initiatives and ability-to-
repay rule inform and protect those borrowers?
A.1. Home buyers now benefit from important protections that
did not exist in Federal law before the Dodd-Frank Wall Street
Reform and Consumer Protection Act (Dodd-Frank Act). Two
essential new protections, mandated by the Dodd-Frank Act and
implemented by the Consumer Financial Protection Bureau,
include the Ability-to-Repay rule and the ``Know Before You
Owe'' mortgage disclosures.
Ability-to-Repay
The Ability-to-Repay rule informs and protects consumers by
requiring that creditors make reasonable and good faith
determinations that borrowers have the financial ability to
repay the loan. Prior to the rule, consumers throughout the
United States experienced unprecedented foreclosure rates. At
least some of those foreclosures likely were the result of
inadequate underwriting of loan applicants. The ability-to-
repay requirement is an important bulwark to prevent a
recurrence of problematic lending practices that gave rise to
the crisis.
The Ability-to-Repay rule also helps maintain borrowers'
access to responsible, affordable mortgages by creating a
presumption of compliance with the rule when creditors make
``qualified mortgages'' that meet certain reasonable,
prescribed underwriting standards and do not contain certain
risky features. Despite arguments that these straightforward
and commonsense requirements would have deleterious effects on
the mortgage market, we have seen no evidence that the
availability of responsible, affordable mortgage credit has
been reduced as a result of these requirements.
Know-Before-You-Owe Mortgage Disclosures
The new mortgage disclosures provide information that the
consumer needs to understand the costs and terms of the
mortgage, and these disclosures do so in a simpler and more
easily understood manner than the previous disclosures. In
developing the new mortgage disclosures, the Bureau conducted
extensive qualitative and quantitative testing, including over
10 rounds of qualitative testing to test prototypes and a large
scale quantitative study to validate the effectiveness of the
Bureau's new disclosures and evaluating their performance
compared to the previous disclosures. The study showed that the
``Know Before You Owe'' disclosures had on average
statistically significant better performance than the previous
disclosures. This advantage was consistent, regardless of the
level of consumer sophistication, the complexity of the loan
product, or whether the loan had a fixed rate or an adjustable
rate.
The validation study also showed that new mortgage
disclosures also outperformed the previous disclosures in ways
that are essential to a consumer's ability to shop for and
understand a mortgage loan. For example, when consumers used
the disclosures to compare two competing loan offers, the new
mortgage disclosures outperformed the previous disclosures by
about 24 percentage points. For understanding a single loan's
projected costs and terms, the difference was about 10
percentage points for the initial disclosures received upon an
application; about 17 percentage points when consumers compared
those early disclosures to the later disclosures they receive
before closing; and about 29 percentage-points in understanding
the final loan terms and costs using only the closing
disclosures.
Participants in the study were also asked to select between
two loans using the application disclosures, and then asked in
an open-ended question to provide reasons for their selection.
In response to the open-ended question, participants using the
``Know Before You Owe'' integrated disclosures on average
provided a greater total number of reasons for their selection
of a particular loan, and this difference was statistically
significant and consistent across the variables of the study.
This result suggests that participants using the new
disclosures could better articulate and explain the reasoning
behind their choice.
In addition to the ability-to-repay and ``Know Before You
Owe'' mortgage disclosure rules, the Bureau has accomplished
other important work to inform and protect consumers looking to
buy a home or refinance their mortgage. For example, after
conducting a study, the Bureau recently completed a pilot
program concerning eClosings, which the Bureau believes may
help consumers understand their mortgages even better in the
future. The Bureau also has developed a suite of materials to
help educate consumers about mortgages and the process of
obtaining one. The materials, called ``Owning a Home,'' are
publicly available on the Bureau's Web site.\1\ The Bureau also
has posted a series of questions on its ``AskCFPB'' Web site,
where home buyers can get answers to common questions about
buying a home and getting a mortgage. The Bureau has issued a
revised settlement cost or special information booklet, ``Your
Home Loan Toolkit,''\2\ to be used in conjunction with the new
mortgage disclosures. The Toolkit is available in both English
and Spanish. The Toolkit was developed through several rounds
of consumer feedback. The Bureau believes it will provide
significant benefits to first-time home buyers and other
consumers purchasing a home.
---------------------------------------------------------------------------
\1\ Available at http:/lwww.consumerfinance.gov/owning-a-home/.
\2\ Available at http://files.consumerfinance.gov/f/
201503_cfpb_your-home-loan-toolkit-web.pdf.
---------------------------------------------------------------------------
The Bureau understands that, for many consumers, purchasing
a home represents the largest financial transaction of their
lives. The Bureau will continue to actively seek out ways to
help consumers obtain the information they need to shop for and
succeed at obtaining the best mortgage that fits their needs.
Notably, home purchase mortgage applications were up 22 percent
year-over-year in October after our rule had taken effect.
Small Lender
Q.2. Director Cordray, in January the Bureau proposed several
changes to the Qualified Mortgage rule's ``small lender''
definition. We've heard a lot about the need for relief for
small lenders.
Can you discuss how these changes will benefit small
lenders? More generally, what has the Bureau done to streamline
regulations, particularly as they relate to small lenders?
A.2. The proposal finalized in September would expand the
definitions of ``small creditor'' and ``rural area'' and
thereby increase the number of small creditors that are
eligible for regulatory exemptions and that are able to offer
certain types of mortgages. These changes will also help
creditors adjust their business practices in the event they
grow to exceed the small creditor thresholds. Instead of having
an abrupt end to small creditor status on January 1 of the year
after first exceeding the small creditor criteria, creditors
could continue to operate as small creditors for mortgage
applications they receive through the first quarter of that
year, providing additional time to adjust systems and train
staff.
There are a variety of special provisions and exemptions in
the Bureau's rules that affect small creditors, including small
creditors that operate predominantly in rural or underserved
areas (notwithstanding changes made by the Fixing America's
Surface Transportation Act (P.L. 114-94)).
LA provision in the Ability-to-Repay rule extends
Qualified Mortgage status to loans that small creditors
hold in their own portfolios, even if a consumer's
debt-to-income ratio exceeds 43 percent and without
requiring the use of Appendix Q.
LA Qualified Mortgage made by a small creditor also
provides a higher annual percentage rate (APR)
threshold for a safe harbor from ability-to-repay
claims. A small creditor has a safe harbor if the
mortgage's APR does not exceed the applicable Average
Prime Offer Rate (APOR) by 3.5 or more percentage
points. In contrast, general Qualified Mortgage loans
provide safe harbors if their APRs do not exceed the
applicable APOR by 1.5 or more percentage points.
LSmall creditors operating predominantly in rural or
underserved areas can originate Qualified Mortgages and
high-cost mortgages with balloon payments even though
balloon payments are otherwise not allowed on such
mortgages.
LSmall creditors operating predominantly in rural or
underserved areas are not required to establish escrow
accounts for higher-priced mortgage loans.
The Bureau continues to believe that responsible lending by
community banks and credit unions did not cause the financial
crisis, and our mortgage rules reflect the fact that small
institutions play a vital role in many communities and
anecdotal evidence suggests that smaller lenders' loans
performed better than larger lenders loans through the crisis.
Credit Reporting/Zombie Debt
Q.3. Earlier I mentioned the CFPB's action last week on debt
collection. I have heard that millions of Americans are faced
with ``zombie debt,'' or debt that continues to negatively
impact their credit reports after it has been paid off or
discharged in bankruptcy.
Can you discuss how this happens? Aren't financial
institutions required under the Fair Credit Reporting Act to
ensure that debt is reported to CRAs accurately?
A.3. ``Zombie debt'' occurs when credit reports are not
properly updated to reflect that a debt has been paid off or
discharged in bankruptcy. Negative information remains on a
consumer report for a period of time because creditors consider
a consumer's past payment behavior to be predictive of a
consumer's future payment behavior. While debts that have been
paid off or discharged in bankruptcy can continue to appear on
credit reports, the reports should also indicate that they have
been discharged in bankruptcy or paid off.
The Bureau is aware of allegations that some financial
institutions have failed to report accurately the status of
certain accounts that have been discharged in bankruptcy, in
violation of Federal bankruptcy law. For example, several large
banks currently face lawsuits accusing them of deliberately
failing to update accounts to reflect that they have been
discharged.
Under the Fair Credit Reporting Act (FCRA), consumer
reporting agencies are required to follow reasonable procedures
to assure maximum possible accuracy of the information they
report. A financial institution that regularly furnishes
information to a consumer reporting agency has a variety of
obligations under the FCRA and Regulation V, including the
obligation to correct and update information that it has
determined is incomplete or inaccurate. As part of its
supervision program, the Bureau conducts examinations of the
furnishing practices of many of the largest creditor and debt
collector furnishers. Although the Bureau cannot comment on
whether specific practices violate the law, the Bureau will
take appropriate action, including enforcement action, in cases
where it concludes that there is a statutory or regulatory
violation.
Credit Reporting/Specialty CRAs
Q.4. We have heard repeatedly that credit reporting is a major
issue for many consumers, with 1 in 5 Americans facing an error
on his or her credit reports. This is particularly concerning
due to the importance of credit scores on consumers' ability to
access credit and, increasingly, employment or housing. Nearly
50 million people saw their scores fall by more than 20 points
during the crisis.
Many of us are aware of the big 3 credit reporting bureaus,
and I understand the Bureau has begun examining those 3 and 27
other companies in this market. However, the Bureau has also
noted that there are approximately 400 consumer reporting
agencies in the country, some of which are known as ``specialty
consumer reporting agencies.''
What do these specialty CRAs do? Does the CFPB have
authority to supervise these companies?
A.4. There are numerous specialty consumer reporting agencies,
some of which may also qualify as a ``nationwide specialty
consumer reporting agency,'' as defined in Section 1681a(x) of
the FCRA. In general, specialty consumer reporting agencies
collect and share information about a consumer's history using
a specific product or service and other transactions with
certain types of businesses. The information specialty consumer
reporting agencies collect, which may also include public
records on bankruptcies, liens, arrests and convictions,
depends on the agency and its specialty industry. Specialty
consumer reporting agencies may collect information and produce
reports on your history of:
LOpening or using bank accounts (including account
abuse or fraud);\3\
---------------------------------------------------------------------------
\3\ For more information, see http://www.consumerfinance.gov/
askcfpb/1819/do-bounced-checks-and-overdrafts-go-my-credit-report.html.
LApartment rental payments;\4\
---------------------------------------------------------------------------
\4\ For more information, see http://www.consumerfinance.gov/
askcfpb/1815/could-late-rent-payments-or-problems-landlord-be-my-
credit-report.html.
LCar insurance claims;\5\
---------------------------------------------------------------------------
\5\ For more information, see http://www.consumerfinance.gov/
askcfpb/1821/do-auto-and-homeowners-insurance-companies-share-my-
information-about-claims-and-policies.html.
---------------------------------------------------------------------------
LHomeowners and renters insurance claims;
LPayday lending;
LUtility payments;\6\
---------------------------------------------------------------------------
\6\ For more information, see http://www.consumerfinance.gov/
askcfpb/1817/does-my-history-paying-utility-bills-telephone-cable-
electricity-or-water-go-my-credit-report.html.
---------------------------------------------------------------------------
LPhone bill payments;
LEmployment;\7\ and
---------------------------------------------------------------------------
\7\ For more information, see http://www.consumerfinance.gov/
askcfpb/1823/ive-been-looking-iob-what-do-employers-see-when-they-do-
credit-checks-and-background-checks.html.
LMedical records or payments.\8\
---------------------------------------------------------------------------
\8\ For more information, see http://www.consumerfinance.gov/
askcfpb/1837/how-can-i-find-out-whats-my-medical-payment-history.html.
Under the Bureau's larger participant rule for consumer
reporting agencies, the Bureau has supervision authority over
entities engaging in or offering consumer financial products or
services only if they (or their parent company) have more than
$7 million in annual receipts from consumer reporting
activities. The Bureau also has other tools it can use to help
consumers with specialty consumer reporting agencies that don't
fall within the Bureau's supervision authority. If appropriate,
the Bureau can take enforcement actions. The Bureau can also
engage in consumer education about specialty consumer reporting
agencies, which it has done numerous times.
Credit Reporting/Credit Invisibility
Q.5. In May, the consumer agency published a report that 26
million Americans are ``credit invisible,'' and that 1 in 10
adults do not have any credit history with a nationwide
consumer reporting agency.
Can you discuss the impact of not having a credit score on
access to credit?
A.5. As reported in the Bureau's recent release Data Point:
Credit Invisibles,\9\ 26 million adults in the United States do
not have a credit record maintained by one of the Nationwide
Credit Reporting Agencies (NCRAs) and an additional 19 million
adults have NCRA credit records that could not be scored by a
widely used commercially available credit scoring model.
Because credit scores are widely used in underwriting and
pricing credit to assess the creditworthiness of applicants,
these consumers may face substantially reduced access to
credit. Without the information about creditworthiness that
credit scores provide, lenders may deny loan applicants
outright, require more collateral or co-signers, or charge
higher interest rates. As a result, many of these consumers may
have to rely more heavily on ``nontraditional'' sources of
credit, such as payday lenders or pawnshops, which either do
not require credit checks or use credit history information
from non-NCRA sources to assess creditworthiness. Since these
nontraditional sources of credit generally do not report
information to the NCRAs, borrowing from these sources does not
help establish a credit history at the NCRAs and thus may
prolong the problems associated with having an unscored credit
record.
---------------------------------------------------------------------------
\9\ Available at http://files.consumerfinance.gov/f/
201505_cfpb_data-point-credit-invisi
bles.pdf.
---------------------------------------------------------------------------
Student Loans
Q.6. The student loan market stands at $1.3 trillion, with many
predicting a long drag on our economy due to this debt.
What are the top complaints that you hear from consumers
about student loans?
A.6. As noted in the 2014 Annual Report of the CFPB Student
Loan Ombudsman,\10\ the single most common issue reported by
private student loan borrowers is the inability to negotiate
alternative repayment options with lenders and servicers when
facing distress. A substantial share of private student loan
borrowers graduated in a time of extremely challenging labor
market conditions and found the economic landscape meaningfully
different than when they first made the decision to borrow.
Although the labor market has recovered since the recession,
job prospects for many young graduates remain limited. One
recent analysis estimated that more than one in four recent
college graduates was either unemployed or underemployed. While
market participants have addressed some of the root causes of
consumer complaints, the lack of availability of transparent
loan modification options and complicated enrollment procedures
persist as pain points in the market.
---------------------------------------------------------------------------
\10\ Available at http://files.consumerfinance.gov/f/
201410_cfpb_report_annual-report-of-the-student-loan-ombudsman.pdf.
---------------------------------------------------------------------------
As noted in the 2014 Report, the most common broad category
of complaints the Bureau receives from borrowers with private
student loans generally relates to the student loan repayment
process, identified in our intake form as ``dealing with [a]
lender or servicer,'' and broadly defined by consumers as
problems related to ``making payments, getting information
about [a] loan, managing [an] account.'' Consumers submitting
complaints about these issues comprised 57 percent of all
private student loan complaints received by the Bureau between
October 1, 2013 and September 30, 2014.
In May 2015, the Bureau, in coordination with leaders from
the Department of the Treasury, launched a public inquiry into
student loan servicing practices. In support of this
initiative, the Bureau published a notice in the Federal
Register soliciting input on potential solutions to improve the
delivery of service to student loan borrowers in repayment.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO FROM RICHARD
CORDRAY
Q.1. Last month, the CFPB sent a data collection request under
its section 1022 market monitoring authority to a number of
financial institutions seeking input on consumer use of deposit
advance products. I have been told that the request sought
information about specific transfers from consumer accounts and
requires these institutions to scan customer accounts line by
line for their financial behavior dating back years. According
to market participants, this could involve hundreds of
thousands, if not millions, of customer's transaction level
data to the CFPB.
How many 1022(c)(4) orders under the CFPB's market
monitoring authority have been issued to date and what is the
process for a recipient of an order to challenge or limit the
breadth of the order?
A.1. As of October 31, 2015, the Consumer Financial Protection
Bureau has issued eight mandatory orders under the Bureau's
1022(c)(4) market monitoring authority. The Bureau's practice
is to consult with financial institutions in advance of issuing
1022(c)(4) orders to minimize compliance burden. Although there
is no formal process to challenge an order, the Bureau welcomes
input from recipients, even after they receive the orders. When
appropriate, the Bureau also sends voluntary requests for
information to financial institutions.
Q.2.a. The Paperwork Reduction Act was designed, among other
things, to ``ensure the greatest possible public benefit from
and maximize the utility of information created, collected,
maintained, used, shared and disseminated by or for the Federal
Government'' and to ``improve the quality and use of Federal
information to strengthen decisionmaking, accountability, and
openness in Government and society.'' It is my understanding
that each of the 1022 orders issued to date was sent to fewer
than 9 companies, which 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.
How many times has CFPB utilized the exception for
reviewing data requests by sending 1022 request to fewer than
10 companies?
A.2.a. To date, all of our mandatory 1022 orders have been for
one-time collections to help understand a particular financial
product, market, or business practice. When researching
financial markets to protect consumers, the Bureau consistently
works to reduce burden on industry by working with existing
available data where possible. Bureau staff supplements
existing data by requesting new data when necessary, and then
works in those cases to minimize how many firms we request data
from. As of October 31, 2015, the Bureau has issued six
mandatory 1022 orders to fewer than 10 companies. Most of these
orders involved 3 to 5 companies.
Q.2.b. Given the CFPB's use of the exemption by only sending
the request to fewer than 10 companies, how is the public
informed about their transaction level data being sent to the
CFPB and what privacy protections do they have?
A.2.b. The Bureau is interested in how consumer financial
markets behave rather than individual consumers' transactions.
In general, the Bureau studies market behavior by observing
aggregated information or anonymized account level statistics.
In compliance with section 1022(c)(4)(C) of the Dodd-Frank Wall
Street Reform and Consumer Protection Act, the Bureau does not
use its market monitoring authority to obtain data from covered
persons or service providers for purposes of gathering or
analyzing consumers' personally identifiable financial
information.
In April 2013, the Bureau released a study, Payday Loans
and Deposit Advance Products: A White Paper of Initial Data
Findings.\1\ The Bureau believes deposit advance products as
currently structured raise serious consumer protection concerns
related to the sustained use of a high-cost product. This
concern has been echoed by the other banking regulators. To
further study this market, the Bureau recently issued a one-
time 1022(c)(4) order for additional aggregate data from five
financial institutions.
---------------------------------------------------------------------------
\1\ Available at http://files.consumerfinance.gov/f/
201_304_cfpb_payday-dap-white
paper.pdf.
---------------------------------------------------------------------------
Your first question refers to this recent 1022 order for
aggregate data. The Bureau will receive no individual account
or transaction history as a result of this request. For this
request, the Bureau will only receive aggregate statistics
about groups of accounts.
In the limited cases where the Bureau does receive
personally identifiable information, the Bureau reduces the
privacy risk of information it maintains by redacting and
restricting access to personally identifiable information,
providing training to personnel on the appropriate use and
disclosure of that information, and maintaining the information
in secure environments in accordance with applicable law. To
inform the public about situations in which the Bureau does
collect individual-level data, the Bureau complies with the
Privacy Act requirements and publishes System of Record Notices
(SORNs) in the Federal Register and on our public Web site. The
Bureau publishes privacy impact assessments on our public Web
site as well.
Q.3. Data security is a growing concern and the breaches at the
Office of Personal Management highlights the importance of
privacy concerns and the sensitive data that is collected. In
the case of OPM we are now being told that more than 21 million
Social Security numbers, 1.1 million fingerprint records, and
19.7 million forms with data like someone's mental-health
history were stolen as part of the breach.
Has CFPB detected any attempts to breach its systems and,
if so, what is the frequency/number of attempts to gain
unauthorized access to CFPB systems?
A.3. The Bureau has designed and implemented layers of proven
defense mechanisms and safeguards for its systems and data.
This work is continuously refined to keep pace with emerging
threats, tactics, and techniques. The Bureau coordinates with
other agencies and cross-sector groups to maintain awareness of
and improve defenses against individuals and organizations that
might attempt an attack. The Bureau's adherence to security
practices such as monitoring, patching, building security into
new services, and requiring end-user training reduces the
likelihood that any attempt to gain unauthorized access would
succeed.
As of December 11, 2015, the Bureau has confirmed 34
attempts to gain unauthorized access. Incident analysis of
these attempts did not identify any leakage or breach of
sensitive data. The Bureau continuously monitors its network
and investigates any anomalies or issues.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR VITTER FROM RICHARD
CORDRAY
Q.1. Mr. Cordray, as you know, the Dodd-Frank law requires your
Bureau to reach out to small businesses and solicit their input
prior to drafting regulations. The purpose of that requirement
is for the Bureau to benefit from the experience of small
business owners prior to writing a Federal regulation. This
exercise is designed to prevent unintended negative
consequences on the small business community. As you know your
agency recently conducted a Small Business Advocacy Review for
an upcoming rule on the small dollar lending industry. The
panel offered an essential opportunity for small businesses
impacted by a proposed rule to voice their concerns about it,
which your agency must fully consider and incorporate into the
final rule.
Can you explain what changes you made to this rule based on
the feedback from small businesses? How do you expect these
changes to benefit the numerous small businesses that might be
affected by your upcoming rule? Why are you keeping that report
secret and not making it public? Isn't this another example of
how the CFPB does not operate in an open and transparent
fashion, unlike the standard you impose on regulated entities?
A.1. Under the Regulatory Flexibility Act (RFA), the Consumer
Financial Protection Bureau (Bureau) is required to convene a
Small Business Review Panel when it is considering a proposed
rule that could have a significant economic impact on a
substantial number of small entities. In April, the Bureau
convened such a panel with the Small Business Administration
Office of Advocacy and Office of Information and Regulatory
Affairs in the Office of Management and Budget to obtain
feedback from small businesses about the proposals under
consideration for payday, vehicle title, and similar loans.
Through the Small Business Review Panel process, the Bureau
received important feedback from small businesses about the
potential economic impact of the proposals. The Bureau is
carefully considering this feedback as we refine the proposals
to develop a proposed rule. The Bureau will make public the
Panel's report in its entirety when we publish a Notice of
Proposed Rulemaking.
Q.2. It is my understanding that those small business owners
who volunteered their time to help the CFPB come up with
workable consumer protections were frustrated that the CFPB
could not answer how the Bureau's approach would work with
State consumer protection laws.
Will you re-start the required Dodd-Frank small business
process once you are able to tell the small business owners how
your regulatory approach will work with State laws?
A.2. The Bureau's proposals under consideration for payday,
vehicle title, and similar loans, if implemented, would
establish a Federal baseline for regulation of these markets.
The Federal rules would coexist with stricter consumer
protection laws and regulations at the State and local level
and States would continue to regulate aspects of the market
that are not impacted by the Bureau's rule. The Bureau
continues to carefully analyze the ways in which State
regulation of this market would be affected by the Bureau's
proposals. We continue to receive and consider feedback from
small businesses, other industry participants, consumers, State
government officials, and other interested parties on this and
all parts of the proposals under consideration and will do so
throughout the rulemaking process.
Q.3. It has been estimated that the proposed rules to the
payday lending industry will result in 70 percent of small
dollar lending operators out of business. I do not see how any
small business can survive the overwhelming loss of revenue
that even you predict. I am sure you recognize that hard
working Americans have their life savings invested in these
business, which are completely lawful in the States in which
they exist.
LDo you believe the regulations you have proposed
will have a disproportionate impact on small
businesses?
LWill you take into account the cost of compliance
when creating your rule?
LWhat alternatives have you considered to these Rule
Proposals that might avoid this destruction of small
businesses and loss of millions of dollars of capital
investment and hundreds of thousands of jobs?
LWill you be comfortable with only large payday
lenders dominating the market?
A.3. The Bureau expects that the proposals under consideration
for payday, vehicle title, and certain other similar loans
would have a significant economic impact on a substantial
number of small entities. Therefore, in accordance with the
RFA, the Bureau convened a Small Business Review Panel to
obtain feedback from small entities and consider these impacts.
Under the Dodd-Frank Wall Street Reform and Consumer Protection
Act, the Bureau is also required to consider the potential
benefits and costs of a potential rule to consumers and covered
persons of a potential rule. As part of this assessment, we
consider the cost of compliance with the potential regulation.
As not in the Outline of Proposals Under Consideration and
Alternatives Considered released in March 2015, the Bureau is
considering numerous alternatives to components of the
regulatory framework. Some of these alternatives may have a
greater or lesser impact on small businesses.
Throughout the rulemaking process, the Bureau seeks
feedback from small businesses and other industry participants.
In developing the proposed rule on payday, vehicle title, and
certain other similar loans, the Bureau is carefully
considering the feedback provided by small businesses and the
findings of the Small Business Review Panel. Following
publication of a Notice of Proposed Rulemaking, we hope to
receive robust public comment, including from small businesses,
about the potential impacts and costs associated with the
proposal and any alternatives. The Bureau will then carefully
consider such comments and consider ways to reduce the burden
associated with compliance, while still fulfilling the purpose
of the rulemaking.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR SASSE FROM RICHARD
CORDRAY
Q.1. The CFPB has proposed a rule on prepaid debit cards that
also applies to digital wallets, despite the fact that these
products have a different function and a different structure.
For prepaid debit cards, a customer loads money onto a prepaid
card and is charged a fee if they exceed the balance. A digital
wallet helps consumers make purchases online, by helping them
access other payment options. Fees are generally not charged on
digital wallets. Why is the CFPB treating these dissimilar
products the same way?
A.1. The Consumer Financial Protection Bureau (Bureau) believes
it is appropriate to cast a wide net in including products
within the proposed definition of prepaid account in its
prepaid rulemaking. The Bureau crafted the definition of
prepaid account after reviewing the comments received on its
May 2012 Advance Notice of Proposed Rulemaking \1\ (ANPR) on
general purpose reloadable cards and conducting significant
outreach to aid its understanding of the scope and diversity of
the prepaid product marketplace, including digital wallets. The
Bureau received a wide range of comments on the ANPR as to what
types of products its proposed rule should cover. Industry
commenters disagreed, for example, over whether the Bureau
should limit its proposed rule to products represented by
physical cards or whether it should also include other types of
prepaid products such as those that are entirely online (and
might use a barcode or QR code displayed on a mobile device
such as a smart phone or other online means to interact with a
payment network).
---------------------------------------------------------------------------
\1\ Among other things, the Bureau asked: ``How should the CFPB
define GPR cards in the context of Regulation E? Should certain prepaid
products not be included in this definition, such as cards that may
serve a limited purpose (e.g., university cards or health spending
cards)? Why or why not?'' 77 FR 30923 (May 24, 2012).
---------------------------------------------------------------------------
Some commenters specifically urged the Bureau to
distinguish between digital wallets that simply store payment
credentials for other accounts and both cards and noncard
products that store funds themselves.
The Bureau's proposed definition of ``prepaid accounts''
would encompass only those digital wallets that are capable of
storing funds. With such digital wallets, a consumer can
maintain a balance in the wallet account through transfers from
sources such as the consumer's own bank account or a transfer
received from another user of the digital wallet system--in
other words, the consumer loads money into the digital wallet
account in the same way that a consumer might load funds onto a
prepaid card. To the extent that a digital wallet merely stores
payment credentials (e.g., a consumer's bank account or payment
card information), rather than storing the funds themselves,
the digital wallet would not be considered a prepaid account
under the proposed rule.
The Bureau received extensive feedback from commenters on
the scope of the proposed definition of prepaid accounts and is
continuing to evaluate the appropriate scope for a final rule.
Q.2. Customers must link their bank account or a credit card to
use their digital wallet, because the wallet is merely an
``agent'' to facilitate a payment. But, the CFPB's Prepaid Rule
prohibits linking credit products to prepaid accounts. Given
that the digital wallet's purpose is to merely facilitate
payments, should the prohibition of ``linking'' apply to
digital wallets? If so, how does the CFPB expect that digital
wallets will work under the rule?
A.2. The Bureau's prepaid accounts proposal covers virtual
wallet products that, among other things, are capable of
storing funds. The Bureau understands that consumers can fund
digital wallets in a variety of ways, including, in some cases,
by linking the wallet to a consumer's existing credit card. The
Bureau is also aware that digital wallet issuers may provide
consumers with the option to link their digital wallet to a
line of credit provided by the issuer or its financial
institution partner. The credit portions of the Bureau's
proposal do not prohibit these methods of linking credit
products to digital wallets. Under the proposal, overdraft
services and credit features offered on prepaid accounts would
be subject to provisions within the Truth in Lending Act and
Regulation Z that govern open-end credit and credit cards, as
well as provisions in Regulation E. This proposal would ensure
greater consistency of treatment even where the linked type of
credit would otherwise be subject to different regulations.
As the Bureau reviews the many comments received on the
prepaid proposal, the Bureau is continuing to examine whether
revisions to its proposed approach to overdraft and credit
features on prepaid accounts would be appropriate.
Q.3. Last week, the CFPB released its ``Guiding Principles for
Faster Payment Networks.'' At the same time, the Federal
Reserve has established a ``Faster Payments Task Force'' and a
``Safer Payments Task Force.'' These task forces are working on
issues that affect the broader payments industry. How does the
CFPB plan on working with the Federal Reserve to ensure that
efforts to protect consumers do not harm innovation?
A.3. The Bureau published Consumer Protection Principles:
CFPB's Vision of Consumer Protection in New Faster Payment
Systems \2\ to inform and spur, rather than harm, innovation.
The Bureau recognizes, based in part on discussions with
industry stakeholders, that system developers can best and most
efficiently ensure consumer protection in new payment systems
during system conceptualization and design. Thus, the
principles are intended to ensure consumer interests remain top
of mind throughout system development and to facilitate the
integration of consumer interests into these developing
systems.
---------------------------------------------------------------------------
\2\ http://files.consumerfinance.gov/f/201507_cfpb_consumer-
protection-principles.pdf.
---------------------------------------------------------------------------
Bureau staff works closely with Federal Reserve
counterparts in this vein. Bureau staff participates in the
Federal Reserve's Secure Payments Task Force and on the
Steering Committee of the Federal Reserve's Faster Payments
Task Force. In this capacity, the Bureau has assisted the
Federal Reserve and its task forces in the ongoing development
of a broader set of new payment system objectives that will
further inform and hopefully accelerate industry innovation.
More generally, as a member of the Steering Committee for the
Faster Payments Task Force, Bureau staff helps to cultivate
input from a broad set of industry stakeholders and develop a
shared understanding of consumer needs and vulnerabilities,
technological and other concerns, and market opportunities.
Bureau staff also meets frequently outside of the task force
with Federal Reserve staff and representatives of various
industry stakeholders.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR ROUNDS FROM RICHARD
CORDRAY
Q.1. According to the U.S. Treasury, it costs $1.03 to issue a
paper check and only 10.5 cents to issue an electronic payment.
Currently, however the CFPB is proposing that agencies that
provide government benefit cards include a statement at the top
of a required disclosure that reads ``You do not have to get
your payments on this prepaid card. Ask about other ways to get
your payments.''
This statement appears designed to drive people away from
government benefit cards and a payment system that will cost
taxpayers 10 times as much as a prepaid card.
LBefore the CFPB proposed this language, did the
Bureau calculate how much these proposed disclosures
would cost taxpayers?
LIf so, how much? If not, why not?
A.1. The proposed disclosure statement and underlying
regulatory provisions in the Consumer Financial Protection
Bureau's rulemaking on prepaid accounts \1\ were not intended
to discourage use of government benefit cards or to mandate
disbursement of government benefits via paper check.
Accordingly, the Bureau did not conduct the type of analysis
you describe. Rather, as explained in the proposal, the
statement was designed to inform consumers of their rights
under the Electronic Fund Transfer Act, given that Congress
expressly prohibited any person from requiring a consumer to
establish an account for receipt of electronic fund transfers
with a particular financial institution as a condition of
employment or receipt of a government benefit.\2\ For instance,
where a government institution chooses to deliver benefits by
direct deposit, recipient have a right to decide which
financial institution will receive the direct deposits on their
behalf.
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\1\ 79 FR 77102 (Dec. 23, 2013).
\2\ EFTA section 913, 15 U.S.C. 1693k(2); see also 12 CFR
1005.10(e)(2) (implementing this provision in Regulation E).
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The Bureau believes that informing consumers that they have
a statutory right to choose something other than a government-
selected payment product will ensure that consumers can benefit
from market competition for their business, including
potentially a prepaid card from another financial provider. The
Bureau is considering all feedback on the proposed language and
conducting additional consumer testing on the best way to
convey this information.
Q.2. The CFPB has been collecting detailed information on over
millions of credit card accounts including the credit card
users balances, the account holder's other relationships with
the issuing bank, and the account holder's income, FICO score,
and payment history.
The CFPB has claimed that this data is anonymous, but when
asked if it could be reverse-engineered to reveal individual
identities, you said the answer was ``complicated.''
LShould the CFPB's credit card database be hacked,
will the Bureau notify any individual consumers or
Congress of that breach?
A.2. The Bureau is conscious of the many, and variety of,
threats to information security and the associated privacy
risks. As threats become more sophisticated, it is not possible
to suggest that any system or particular dataset is unhackable
or could never be reverse-engineered, though we take all
precautions to prevent the type of hack you reference. Due to
the Bureau's awareness of the complicated nature of security
threats and privacy concerns, the credit card information you
reference consists solely of de-identified records and does not
include information that directly identifies individuals, such
as name, address, or account number. The information also does
not contain purchase level information. The Bureau cannot
identify and thus cannot contact individuals associated with
the data. Therefore, unauthorized access of the information you
reference would grant visibility only to de-identified
information.
The Bureau's information security and privacy programs
continue to evolve to keep pace with emerging threats. The
Bureau strives to refine and automate risk management,
continuous monitoring, analysis, and response capabilities. Our
efforts include ongoing refinements to the Bureau's internal
processes and risk assessment methodology, performing proactive
or `red-team' assessments of systems, and implementing dynamic
technologies and services to better detect vulnerabilities and
respond to threats. The Bureau is committed to reducing the
information security and privacy risks of any information it
maintains by restricting access as necessary, providing
training to personnel on the appropriate use and disclosure of
information, and maintaining information in secure environments
in accordance with applicable law.
Q.3. I have heard repeatedly from small community bankers in
South Dakota that the CFPB's new rules and red tape are making
it harder and harder for them to make loans to their customers.
These banks aren't predatory lenders and they certainly
didn't cause the financial crisis.
LTo give these small banks some relief, can you list
three regulations small banks have to comply with that
you think are duplicative and that the CFPB can cut to
reduce their compliance burden?
A.3. Congress, in mandating rules to address the abuses that
lead up to the financial crisis, recognized the important role
that small banks play in providing access to credit in their
communities. The Bureau has adjusted its rules in several
places to reduce burden on small banks. For example, the
Bureau's 2013 mortgage rules provide small creditors with a
broader safe harbor from ability-to-repay liability. The 2013
rules also provide a safe harbor for small lenders operating in
predominantly rural or underserved areas, which allow these
lenders to continue to offer balloon loans to
consumers. \3\ In response to feedback about the 2013 rules
from small lenders, the Bureau finalized a change to the
criteria for what constitutes a small creditor, so that more
small lenders can get the broader safe harbor from ability-to-
repay liability. The Bureau will also allow more lenders to
qualify as serving rural or underserved areas, which would
allow more small lenders to continue offering balloon loans
that they have traditionally offered without adversely
impacting consumers. Similarly, the Bureau has exempted small
mortgage servicers from several provisions of the Bureau's 2013
mortgage servicing rules. We also modified the provisions on
annual privacy notices to reduce the burdens on smaller
institutions.\4\
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\3\ These actions were taken prior to the enactment of the Fixing
America's Surface Transportation Act (P.L. 114-94).
\4\ These actions were taken prior to the enactment of the Fixing
America's Surface Transportation Act (P.L. 114-94).
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RESPONSE TO WRITTEN QUESTIONS OF SENATOR MORAN FROM RICHARD
CORDRAY
Q.1. Director Cordray, the first goal identified in the CFPB's
strategic plan is to prevent financial harm to consumers while
promoting good practices that benefit them. I have heard
anecdotes from financial market participants and industry
groups that CFPB's enforcement actions often attempt to remedy
so-called consumer harm that is only theoretical, when no
actual financial harm to consumers took place. Should not the
CFPB's enforcement actions be focused on cases where real
financial harm occurred rather than merely supposed harm?
A.1. The Consumer Financial Protection Bureau's enforcement
work is indeed focused on remedying real consumer harm. We also
seek to level the playing field and ensure that those
institutions operating legally are able to enjoy a market that
is fair. The Bureau's Office of Enforcement has obtained $11
billion in relief for over 25 million consumers.\1\
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\1\ http://team.cfpb.local/wiki/images/f/f3/2015-07-
21_CFPB_Supervision_and_Enforce-
ment_Factsheet.pdf, October 2015.
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For example, we have taken action against a company for
illegal debt collection practices resulting in $2.5 million in
relief for servicemembers. We have stopped an illegal kickback
scheme for marketing services, which resulted in $11.1 million
in redress for wronged consumers. The Bureau worked with the
Department of Education to obtain $480 million in debt relief
to student loan borrowers who were wronged by a for-profit
chain of colleges that violated the law and has since declared
bankruptcy. The Bureau has also worked with the Department of
Justice to settle a historic redlining case against a company
engaging in discriminatory practices. Remedying real consumer
harm to servicemembers, students, older Americans, targeted and
vulnerable populations, and any consumers throughout the
country is central to our mission.
Q.2. The CFPB's enforcement actions seem focused on the largest
participants in financial markets, even though those are the
companies likely to devote the most resources to training,
quality control and compliance. In fact, the Bureau's press
releases often boast of having taken action against ``one of
the largest'' in a particular market. Doesn't the Bureau's
focus on a company's market share risk that those who actually
engage in the most egregious practices go overlooked if they
are not large enough to generate a headline?
A.2. As noted above, the Bureau takes a number of factors into
consideration in our enforcement work. Since its creation, the
Bureau has taken numerous actions against entities and
individuals within its jurisdiction that have harmed consumers
through illegal actions in the financial marketplace. Our
actions have addressed the conduct of some of the largest
players in given markets, as well as smaller companies and
individuals engaged in violations of the law. Through our
enforcement work, we seek to level the playing field and ensure
that those institutions operating legally are able to enjoy a
market that is fair.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR MENENDEZ FROM RICHARD
CORDRAY
Q.1. As we discussed, I'm concerned with reports that mortgage
servicers may be taking steps to evade the CFPB's protections
against ``dual tracking'' by unfairly subjecting distressed
homeowners to prolonged documentation collection processes. By
keeping a homeowner's application from being marked
``complete,'' a servicer may prevent the homeowner from
becoming eligible for the protections, which prohibit the
servicer from moving forward with a foreclosure while the
homeowner is pursuing loss mitigation.
LDo you have concerns that servicers are
intentionally obstructing the loss mitigation process
to favor foreclosure? And if so, what must be done to
correct misaligned incentives and protect consumers?
LWhy aren't servicers able to identify, shortly
after receiving an application for loss mitigation, any
additional required documents and provide a clear list
to borrowers? It seems like it should be fairly
straightforward. Either the homeowners have provided
the necessary paperwork or they haven't. And if not,
the servicer should be able to provide a final and
comprehensive list of what's missing in a timely
fashion.
LWhat else can be done to streamline the process for
loss mitigation?
A.1. The Consumer Financial Protection Bureau (Bureau) shares
your concerns about the difficulties that consumers face when
submitting an application for loss mitigation assistance. The
Bureau continues to receive a high volume of complaints about
problems with loss mitigation and dual tracking through
consumer complaints and from our engagement with external
stakeholders. These complaints help inform our risk-based
identification of mortgage servicers for supervisory exams and,
in some cases, enforcement investigations.
The Bureau is actively engaged with this issue, and several
offices across the agency are involved. Ensuring servicer
compliance with the loss mitigation rules that became effective
in January of 2014 remains a high priority for the Bureau's
Offices of Supervision and Enforcement, while monitoring the
effectiveness of those rules and considering clarifications and
corrections to improve the consumer experience is a high
priority for the Offices of Research, Markets, and Regulations.
During supervisory examinations of mortgage servicers, the
Bureau has prioritized the evaluation of servicer loss
mitigation operations. When the Bureau identifies violations,
we require corrective actions and, in some cases, consumer
redress. While the results of individual exams are
confidential, the Bureau routinely publishes highlights of exam
findings that describe findings and outcomes in our Supervisory
Highlights reports.
In the Summer 2015 edition of Supervisory Highlights,\1\
the Office of Supervision described instances where at least
one servicer sent borrowers loss mitigation acknowledgment
notices requesting documents, sometimes dozens in number, that
were inapplicable to the borrowers' circumstances and which the
servicer did not actually need to evaluate the borrower for
loss mitigation. Additionally, examiners found that at least
one servicer requested documents already submitted by the
borrower. Those servicers were cited for violating Regulation X
and ordered to revise their acknowledgment notices to State the
specific additional documents actually required to complete a
loss mitigation application. The Bureau examiners also found
that one or more servicers failed to send any loss mitigation
acknowledgment notices because of a sustained processing
platform failure. This finding was cited both as a violation of
Regulation X and also as an unfair practice. The Bureau
directed one or more servicers to fix the servicing platform
problems and to compensate consumers for interest and fees
incurred and for any additional harm.
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\1\ Available at http://files.consumerfinance.gov/f/
201506_cfpb_supervisory-highlights.pdf.
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Other editions of Supervisory Highlights, available on the
Bureau's Web site,\2\ detail additional supervisory findings
and actions related to mortgage servicing examinations,
including compliance with mortgage loss mitigation rules.
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\2\ Available at http://www.consumerfinance.gov/guidance/
supervision/manual/#suphigh
lights.
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In addition to our supervisory activity, in some cases, the
Bureau's Office of Enforcement may bring a public enforcement
action depending on several factors. In one recent case, a
financial institution was ordered to pay $1.5 million in
restitution to consumers for, among other violations, failing
to honor trial modifications on loans transferred from other
servicers and requiring those customers to essentially reapply.
The financial institution was also ordered to pay a $100,000
civil money penalty and to implement corrective actions to
prevent future violations.
The Bureau's Office of Regulations works closely with the
Offices of Supervision and Enforcement as well as external
stakeholders to monitor the effectiveness of existing mortgage
servicing rules and as necessary, propose changes or
clarifications. In November 2014, the Bureau issued a proposed
mortgage servicing rule \3\ that includes key changes to the
loss mitigation application process. Among other things, the
proposed changes would:
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\3\ Available at https://www.federalregister.gov/articles/2014/12/
15/2014-28167/amendments-to-the-2013-mortgage-rules-under-the-real-
estate-settlement-procedures-act-regulation-x.
LRequire servicers to comply with the loss
mitigation requirements more than once in the life of a
loan for borrowers who brought their loans current
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since the last application;
LRequire servicers to promptly provide a written
notice once a complete loss mitigation application is
received;
LProhibit servicers from denying loss mitigation
assistance solely because they are waiting to receive
information that is not within the borrower's control,
such as an appraisal or investor approval; and
LAllow servicers to offer a short-term repayment
plan without requiring borrowers to submit a11 of the
information required for a complete application.
The Bureau is currently reviewing the comments that it
received in response to the proposed rule and plans to issue a
final rule in 2016. The Bureau will continue to pursue this
work with the goal of further minimizing consumer harm and, as
you suggest, better aligning servicer incentives.
Q.2. The last time you were before this Committee, you and I
discussed several issues regarding student loan co-signers. As
the CFPB has reported, more than 90 percent of private student
loans today have a co-signer, often a parent or grandparent,
who can help the student qualify for the loan or obtain better
terms.
The CFPB has described a whole host of problems facing
consumers in this area--including a lack of clear information
about co-signer obligations; unfair obstacles to obtaining co-
signer releases from lenders who offer them; and automatic
defaults if a co-signers dies or becomes disabled, even if the
student continues to make all payments on the loan.
These practices are inexcusable, and can take advantage of
families during times of tragedy and hardship. Students and
their families deserve clear rules of the road and lenders who
hold up their side of the bargain.
LI believe legislative action is needed--and I thank
your staff for the technical assistance they have
provided on a bill that I intend to introduce in the
near future. In the meantime, what steps can the CFPB
take using its existing authorities?
LAnd are we seeing any voluntary responses from
lenders to improve their practices?
A.2. As you note, in June 2015, the Bureau Student Loan
Ombudsman published a report identifying a range of problems
specific to co-signed private student loans, including
potential barriers to obtaining the ``co-signer release''
benefit advertised by many private student lenders.\4\ These
issues continue to be of significant concern to the Bureau.
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\4\ Available at http://files.consumerfinance.gov/f/
201506_cfpb_mid-year-update-on-student-loan-complaints.pdf.
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In addition to accepting complaints from individual
borrowers with student loans, the Bureau maintains a student
loan servicing supervision program, publishes consumer
education materials for student loan borrowers, including
offerings specific to borrowers with co-signed loans, and
monitors the market for new and emerging risks.
The Bureau Student Loan Ombudsman's report raised concerns
that student lenders and servicers may not be making even the
most modest investments to improve their processes to ensure
appropriate levels of customer service. The Bureau intends to
continue to monitor this marketplace closely using all
appropriate tools to ensure that borrowers are treated fairly.
Q.3.a. As the CFPB has reported, we're seeing a growing number
of colleges and universities in our country partnering with
financial companies to market and provide school-sponsored
debit and prepaid accounts to students. These cards are often
co-branded with the school's logo, tied to a student's
identification card, and used to deliver financial aid
balances, all of which have a strong effects of steering a
student toward the product.
Students and their parents place their trust in a school to
choose cost-effective options. But in reality, many of these
agreements are negotiated not with students' best interests in
mind, but with the goal of increasing the bank's bottom line
and providing kickbacks and deal-sweeteners to revenue-strapped
schools.
The Department of Education recently proposed rules to
address some of these issues, which I was pleased to see--
particularly with respect to predatory and abusive fees and
stronger disclosures to students and their families.
LI know the CFPB has also been focused on this area.
To what extent is the CFPB coordinating with the
Department of Education on the rule proposal and other
actions in this area?
A.3.a. The Bureau helps to make consumer finance markets work
by making rules more effective, by consistently and fairly
enforcing those rules, and by empowering consumers to take more
control over their economic lives. The Department of Education
is empowered by Congress through the Higher Education Act to
protect the integrity of the Federal student aid programs. This
authority includes, but is not limited to, ensuring aid dollars
are delivered to students to pay for educational expenses with
minimal fees.
The Bureau presented to the Department of Education's
negotiated rulemaking panel, which was established to create
new rules on cash management. The Bureau's presentation
addressed initial findings of the Bureau's inquiry into student
banking, including potential conflicts of interest that exist
when financial institutions partner with schools to market
financial products.\5\
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\5\ Available at http://www2.ed.gov/policy/highered/reg/
hearulemaking/2014/pii2-cfpb-presentation.pdf.
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Additionally, the Bureau has provided feedback to the
extent the Department of Education has sought technical
assistance.
Q.3.b. Beyond the Department of Education's proposal, is the
CFPB planning any further actions of its own to improve
consumer protections for campus financial products?
A.3.b. As part of the Bureau's ongoing inquiry into student
banking on campus, in early 2015, the Bureau launched an
initiative on Safe Student Banking, requesting feedback from
the public on a Safe Student Account Scorecard designed to help
colleges better avoid promoting campus financial products with
tricks and traps. Due to the influence schools may have on the
financial products students choose, the Bureau is working to
empower students with the information they need to negotiate
safe and affordable products that are in students' best
interests.
Q.4. My State of New Jersey holds the unfortunate title of
having the highest rate in the Nation of so-called ``zombie''
foreclosures. As you know, zombie foreclosures occur when banks
start a foreclosure action--typically sending the homeowners
multiple foreclosure notices--but then, because of the low
value of the home, choose to abandon the foreclosure without
providing any notice to the homeowner that they are still on
the hook for repaying the mortgage debt, taxes, and other
expenses.
By this point, the homeowner has usually left the house,
hoping to cut their losses. But the property exists in limbo
because neither the borrower nor the servicer has clear
control. And more importantly, neither has a strong incentive
to keep the property in good shape, which hurts both the
homeowner and the surrounding community.
LLast year, CFPB officials announced they were
looking into this issue of ``zombie'' foreclosures.
What updates can you provide at this time?
LAre there changes that can be made to disclosure or
other requirements to give homeowners better awareness
of when mortgage servicers abandon a property?
A.4. The Bureau recognizes that concentrations of abandoned
properties have a negative impact on communities and consumers,
who may be left in legal limbo. ``Zombie'' foreclosures which
occur when a servicer abandons an already initiated
foreclosure, can contribute to those concentrations of
abandoned properties. Uncertainty about legal title may
complicate efforts to enforce compliance with local ordinances
that require basic maintenance of the property and may cloud
responsibility for payment of sewer, water, and other local
taxes and assessments. Consumers, believing a foreclosure
inevitable and imminent, may move out of the property, leaving
behind an empty house. The resulting concentration of empty
homes in economically distressed communities can further tax
local government resources and strain neighborhood stability.
As you know, ascertaining the cause of vacancy or
abandonment is not simple nor is the solution. According to a
2010 Government Accountability Office (GAO) report, ``zombie''
foreclosures represent approximately 1 percent of vacant homes.
In many cases, vacant or abandoned houses may be owned by local
taxing entities or third parties who acquired title as a result
of a tax sale or foreclosure of a tax lien. In many cases,
these owners may lack sufficient resources to rehabilitate or
demolish the structures so that they can be conveyed to
occupants or converted to other uses.
State law generally governs the foreclosure process in
concert with the rights and remedies specified in the mortgage
contract. Neither State nor Federal law generally requires
servicers or investors to exercise their right to foreclose and
take possession of the property securing a note upon default.
In extreme cases, servicers may abandon foreclosures in the
belief that doing so minimizes losses to their investors, whose
financial interests they have a fiduciary duty to protect.
However, the discretion afforded by the mortgage contract,
State and Federal law, together with the exercise of the
servicer's fiduciary duty to investors, has led to significant
loss mitigation work by servicers. This has helped stabilize
communities and preserve home ownership, while reducing
investor losses.
The Bureau's servicing rules do require mortgage servicers
to have policies and procedures in place reasonably designed to
provide consumers accurate and timely information about their
accounts, including the availability of loss mitigation. In
addition, the Bureau has proposed that some further information
be provided to consumers when a decision is made to charge off
their loan. These basic informational requirements may be
helpful to consumers facing foreclosure and could help
consumers make informed decisions about whether they should
remain in the property or not.
Although the foreclosure process is addressed differently
in each State, some States and local governments have created
foreclosure laws and court rules, which include: expedited
foreclosure procedures for abandoned properties; enhanced
property condition code enforcement; or mandatory property
registration or preservation requirements. For example,
following passage of the Vacant Property Registration Act by
the New Jersey legislature in 2011, many municipalities across
the State enacted ordinances requiring creditors to register
and maintain abandoned properties as a condition of conducting
a foreclosure. Dealing with the issue of abandoned properties
at a local level in the communities most affected by the
problem may allow communities to tailor their response to local
conditions.
The Bureau continues to monitor this important issue and to
meet with other government agencies, consumer advocates, and
industry stakeholders to identify solutions to reduce the
number of uncompleted or ``zombie'' foreclosures.
Q.5. The financial services sector, like much of our economy,
continues to experience changes driven by the rise of mobile
devices and related technology. This is especially true in the
consumer financial services space, including with respect to
nontraditional loans. And some in the industry believe that
mobile devices may offer a promising opportunity to improve
access among underbanked consumers--according to the Federal
Reserve, among underbanked consumers, more than a third use
mobile banking.
LHow does the CFPB's proposed rule on small-dollar
lending take into account the technology and systems
used by financial service providers who focus on mobile
device access?
LSome market participants who focus on mobile access
have expressed concerns that requirements under the
rule for consumers to provide paper documentation in
some circumstances could reduce access or create data
security concerns. Does the CFPB agree with these
views? What steps is the CFPB taking to account for
these considerations in the rule?
A.5. The proposals under consideration for payday, vehicle
title, and certain other similar loans would apply to all
covered loans, regardless of the channel--including mobile
device--through which a consumer obtains the loan. The Bureau's
goal is to ensure that consumers are offered the benefits and
protections of Federal law regardless of how the consumer
applies for, receives, and makes payments on a loan. The Bureau
recognizes that evolving technology can provide important gains
in efficiency and convenience and will seek to provide
appropriate flexibility in our rulemaking to allow lenders and
consumers both to take advantage of such developments.
Q.6. As you know, the CFPB recently began the process of
proposing new rules for small-dollar consumer credit, such as
payday and auto title loans. I support the CFPB's efforts to
address abuses in these markets. I appreciate the general
principles outlined in the proposal and am hopeful that the
final rule will leave consumers better protected.
As you and I have discussed in the past, I believe it is
important for the final rule to strike the right balance
between strong protections and continued access to credit for
underserved consumers. According to the FDIC, nearly 68 million
adults are unbanked or underbanked, and 63 percent of these
consumers use alternative financial services outside the
traditional banking system--including payday and title loans
that would be regulated under the new proposal.
Many of these consumers likely also fall in the category of
what the CFPB has termed ``credit invisibles''--individuals who
have no credit record, no credit score, and as a consequence,
very restricted access to credit.
With almost half of American households reporting in a
recent Federal Reserve survey that they would not have access
to as little as $400 to cover emergency expenses, the
combination of all three can be devastating: lacking access to
the banking system, unable to obtain credit through traditional
providers, and lacking the resources to cover emergency
expenses.
While the CFPB has identified abuses in the small-dollar
consumer lending market, its 2014 report on payday lending also
found that at least some share of borrowers have two or fewer
loans, pay on time, and then borrow no more.
LWhat steps is the CFPB taking to ensure that its
small-dollar lending rule maintains access to credit
for one-time borrowers who truly face no other option
for emergency financial needs?
LHas the CFPB received feedback as to whether its
proposed framework for determining a borrower's ability
to repay allows sufficient flexibility for borrowers
whose credit is more difficult to evaluate through
traditional means? If so, how is the CFPB taking this
feedback into account?
A.6. Under the Dodd-Frank Wall Street Reform and Consumer
Protection Act, the Bureau is required to consider as part of
the rulemaking process the potential reduction in access to
consumer financial products or services for consumers. For
payday, vehicle title, and certain other similar loans, the
Bureau is considering several alternative requirements that
would permit lenders to extend certain covered loans without
determining whether a consumer has the ability to repay the
loan. These proposals are crafted to facilitate ongoing access
to such forms of credit while retaining some
important protections that prevent consumers from harm
associated with a debt trap. The Bureau sought feedback on
these proposals under consideration as part of the Small
Business Regulatory Enforcement Fairness Act (SBREFA) process
and continues to obtain feedback from lenders, consumers, other
governments, and other interested parties as we develop a
proposed rule.
The Bureau also sought feedback on the ability-to-repay
requirements under consideration. During the SBREFA process,
the Bureau received robust response from small business. The
Bureau is carefully considering comments from the small
entities and the findings of the Small Business Review Panel as
we develop a proposed rule. Following public release of the
proposals under consideration for payday, vehicle title, and
certain other similar loans, the Bureau has also sought and
received considerable feedback from other industry
participants, consumer advocates, other governments, and
consumers about the potential ability to repay framework. The
Bureau continues to use all of this information to develop a
proposed rule that permits lenders flexibility in
conducting the ability to repay determination while achieving
the stated consumer protection purposes of the rulemaking.
Additional Material Supplied for the Record
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]