There was no shortage of emotionally charged rhetoric and pointed accusations during yesterday's testimony of the Consumer Financial Protection Bureau's (CFPB or "Bureau") Director, Richard Cordray, before the House Financial Services Committee (the "Committee"). The hearing made clear that several industries have done their homework and have utilized their representatives to outline their pointed opposition to impending CFPB rules and their work to date.
The Director's appearance before the Committee was in conjunction with the CFPB's release of its Semi-Annual Report to Congress, covering the Bureau's work from April 1, 2015 thru September 30, 2015. In his opening remarks, Director Cordray reminded the Committee of the Bureau's charge which, among other things, is to ensure that consumers have correct and proper information to make informed financial decisions, to protect consumers from unfair, deceptive or abusive acts or practices (UDAAP) as well as discrimination, and to take appropriate enforcement actions to address violations of Federal consumer financial laws. Director Cordray pointed to the many programs the Bureau has undertaken to achieve that mission including the publishing of complaint narratives, monthly reports to highlight key trends in consumer complaints received by the Bureau, as well as practical tools to help consumers in their financial decision making. Finally, the Director highlighted that supervisory action within the subject time period resulted in an estimated return of $95 million dollars to over 177,000 consumers, which amounts to a little over $500 per consumer.
Setting the tone and the outline for the Republicans, Chairman Jeb Hensarling (R. TX) started the meeting and minced no words for his displeasure of the Bureau. In noting the tremendous power of the CFPB, Hensarling lamented that shortly only the Director, not Congress, will decide whether consumers can take out a small dollar loan or whether contracts can have an arbitration provision. The Director, Hensarling noted, has already decided who can qualify for a mortgage or who can't. He called the CFPB's use of disparate impact as junk science which found only hypothetical discrimination at best, all the while his agency has engaged in actual discrimination against its own employees. He noted that the Bureau operates as legislature when it engages in its enforcement actions and that in effect Congress, in its enactment of Dodd-Frank, empowered the Director as a dictator. Finally, as it relates to the Ally Financial consent order, Hensarling insinuated that the CFPB knew that Ally had a pending application to become a bank holding company with the FDIC and Federal Reserve and used that information as leverage to force a settlement.
The common themes and questions posed by the majority members of the Committee were as follows:
PayDay/Small Dollar Loans
Many expressed their concerns regarding the failure of the CFPB to recognize state authority to regulate these loans and the pre-emptive effect once the CFPB's rules are promulgated. Rep. Neugebauer (R. TX) asked the Director which states have failed to protect their citizens from these loans. The Director could only answer that no one state was failing but all in fact were. Rep. Ross (R. FL) noted that his state has enacted the best standards for payday lenders with the lowest complaints in the nation. The Congressman questioned why the CFPB did not look at his state's standards. Finally, many members of the Committee questioned why the CFPB would create a conflict between state and federal regulations when it came to payday lending.
Many Committee members questioned the CFPB's Arbitration Study calling it flawed and the data deficient. It also came to light that a subpoena was issued to the CFPB regarding the data used for the study which many members contend was not responded to appropriately, a claim the CFPB denies. It was also learned during the hearing that 92 Representatives from both sides of the aisle sent a letter to the Bureau to re-open the Arbitration Study but, to date the Bureau has not responded to the letter.
An interesting exchange occurred between Rep. Scott (D. GA) and the Director when he questioned the methodology used by the Bureau in paying out the settlement for the Ally matter. The Congressman wanted to know why non-minority consumers were getting settlement checks when they were not being discriminated against. The Congressman also had serious concerns about the unintended consequences of the Bureau's recent consent orders against auto lenders which was having a significant impacting upon auto dealerships' ability to meet the financial needs of minority consumers.
Regulation by Enforcement
Rep. Luetkemeyer (R. MO) focused his questioning on the issue of "regulation by enforcement" citing to the recent consent orders against Encore (See CFSRC update September 11, 2015). Although the Congressman did not seem well versed on the specifics of the Encore matter, he queried the Director as to why enforcement actions were being filed on violations of proposed rules rather than violations of a rule itself. Cordray responded that the Bureau's UDAAP authority allowed it to take necessary actions well before rules are written.
Both Rep. Royce (R. CA) and Rep. Stivers (R. OH) urged the Director to use his authority to exempt community banks and credit unions from the CFPB's regulations. The Director did not express support for that proposal stating that the percentage of credit unions in the financial services market is at an all-time high.
Most of the Democrats on the Committee, with the exception of Rep. Scott, expressed their unwavering support for the Bureau and its mission. An interesting exchange occurred between ranking member Walters (R. CA) and those members who questioned the Bureau's enforcement actions, with Walters suggesting that if these businesses did not agree with the action being brought against them, there was nothing preventing them from going forward and litigating the case, instead they all chose to settle.
Noticeably absent were any questions posed to the Director about the pending debt collection rules, an outline of the proposed rules; is expected in 2016, or the Bureau's efforts to regulate the practice of law, despite the exceptions found in the Dodd-Frank Act itself.
The CPFB's unique structure provides it with a tremendous amount of unchecked authority. The Director, however, has never shied away from the Committee's request to appear and testify. As the body of the CFPB's work becomes more solidified, opportunities to seek appropriate explanation of the CFPB's practices and methodology are becoming more relevant and in a few instances have resulted in necessary change where the CFPB has been able to comprehend the full spectrum of a particular industry. Those subject to the CFPB's supervision must continue to be strategic and well documented in their efforts to forge the appropriate balance of regulation.