On June 10, CFPB Director Richard Cordray testified before the Senate Banking Committee in connection with the CFPB’s recently released Semiannual Report to Congress. The hearing covered a broad range of topics, including, among several others, prepaid cards, student loans, small dollar loans, and arbitration clauses.
Director Cordray advised in response to an inquiry from Senator Menendez (D-NJ) that the CFPB’s prepaid card proposed rule, which the CFPB recently indicated could be released this month, likely will not come until the end of the summer. He reassured the Senator that the delay does not indicate any particular problem about the rulemaking, only that certain of the issues raised have been “hard to work through.”
Senator Menendez raised concerns about “automatic defaults” in the student loan context, an issue raised in the CFPB Student Loan Ombudsman’s mid-year report on student loans. In that report, the CFPB stated, based on an unidentified number of consumer complaints, that “industry participants are automatically placing loans in default – even when a borrower is paying as agreed” – in circumstances such as when a co-signer dies or goes into bankruptcy. The Ombudsman acknowledged that financial institutions may have legitimate business purposes for exercising contractual acceleration options which demand the full balance of a loan when a borrower’s co-signer has died or filed for bankruptcy. Senator Mendendez described legislation to address the issue. Senator Brown (D-OH) also focused on student loan issues, picking up on the CFPB’s common refrain that problems in the student loans servicing market are similar to those seen in mortgage servicing. He called for the CFPB to establish student loan servicing standards. Director Cordray acknowledged that the two markets are different, but pointed to “poor customer service, problems with transfers, lack of information, and harm to consumers” as “eerie” examples of problems seen in both markets.
Small Dollar Loans
On small dollar loans, Senator Brown expressed concern that an eventual CFPB rule on traditional payday loans could lead to arbitrage and leave gaps in consumer protection related to other small dollar loans, including, for example, online loans, auto title loans, and installment loans. Director Corday described this issue as one of “extreme importance” as the CFPB addresses the small dollar loan market. He stated that implementation of the Military Lending Act has given rise to similar problems, which the CFPB is working with the Department of Defense to address. He explained that the CFPB’s process on a payday loan rule is taking longer as the Bureau attempts to deal with these issues, but believes “it’s well worth a little additional time in order to make sure that what we do won’t be made a mockery of by people circumventing it through just transforming their product slightly.”
Senator Warren (D-MA) turned her attention, which recently has focused on student loans, to the issue of arbitration. She stated that “arbitration stacks the deck against customers in favor of large corporations,” and that it is “no surprise that many big banks, and other big corporations, force customers to agree to arbitration clauses to get credit cards, or open checking accounts, knowing that this means that the customer will have no real remedy if things go wrong.” Director Cordray responded that in hearing from corporations and consumers on the issue of arbitration clauses, there is almost no relation between the two, which is contrary to CFPB’s experience on other issues. He explained that while the Dodd-Frank Act barred arbitration in mortgage contracts, he only directed the CFPB to study and consider interventions related to arbitration in other consumer finance contracts. He said the CFPB has pursued a very thorough process to conduct the required study, which the Director believes will be completed this year. Senator Warren pressed him to commit to new rules if the study presents evidence such rules are required. Director Cordray declined to describe any possible policy judgments or actions that could follow the study, but promised the CFPB will fulfill its obligation to engage in policymaking that appropriately reflects the conclusions of the study.