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Letter to Senate in Advance of CFPB Semi-Annual Report to Congress
Dear Chairman Brown and Ranking Member Toomey:
The Consumer Bankers Association (CBA) submits the following comments for the hearing entitled “The Consumer Financial Protection Bureau’s Semi-Annual Report to Congress.” We appreciate the Committee’s continued oversight of the Consumer Financial Protection Bureau (CFPB or Bureau) and its activities. CBA is the voice of the retail banking industry whose products and services provide access to credit to millions of consumers and small businesses. Our members operate in all 50 states, serve more than 150 million Americans and collectively hold two-thirds of the country’s total depository assets
Increasing transparency and fairness should be a top priority for the Bureau. Clearly defining the rules of the road is profoundly important and a mission CBA has long championed. Director Chopra even discussed the need for clarity in the rulemaking process during his confirmation hearing in March 2021 by stating, “I have said repeatedly that I want to make sure we move toward a system where the law and the rules are easy to understand, easy to follow, easy to enforce.” CBA has appreciated, for more than a decade, a professional working relationship with the CFPB – one that has allowed those on the frontlines of banking to provide data-driven analyses and market insights, and explain the direct and indirect impact policymaking the nation’s capital can have on the very people we are all working to serve: America’s families and small businesses. We believe this open and honest dialogue is critical to thoughtful, consistent rulemaking in the best interest of consumers, and it is our hope this historically constructive communication with the Bureau will resume under the new leadership of CFPB Direct Rohit Chopra.
We believe it is important for the Bureau to carefully consider input from a wide range of stakeholders – even those with whom it may disagree – and propose policy changes based on a comprehensive review of the facts. Policy proclamations based on ideological preferences rather than on data and stakeholder input only create confusion for all stakeholders, eroding confidence in our highly-competitive and well-regulated financial system.
CBA looks forward to working with Congress to instill fairness and transparency at the CFPB, which is charged with the duty of protecting consumers’ financial wellbeing. In this letter, we offer legislative and regulatory suggestions to lawmakers and the Bureau for the purpose of ensuring consumers continue to have access to highly regulated financial products that enable them to achieve their financial goals.
Bipartisan CFPB Commission
Consistent consumer protection laws are necessary to ensure American consumers are best safeguarded. Stability between administrations and a need for transparency within regulatory agencies is vital to a fair and competitive financial services marketplace. CBA renews our long-standing call to Congress: Immediately pass legislation to put in place a bipartisan commission to bring stability and insulate the Bureau from political shifts.
In June 2020, the Supreme Court ruled in the Seila Law v. Consumer Financial Protection Bureau case that the Director of the CFPB was removeable at will by the President of the United States, subjecting the Bureau to greater shifts based on political ideology. Replacing the sole director model with a bipartisan, Senate confirmed, five-person commission will depoliticize the CFPB and increase stability, accountability and transparency. The lack of certainty and long-term consistency in leadership at the Bureau adversely affects consumers and the financial services industry. For instance, after the departure of both Directors from the two previous Administrations, the CFPB’s endured drastic political changes. These political shifts make it difficult for the financial services industry to plan long term, which ultimately stifles innovation, limits access to credit, and hurts consumers. As demonstrated by other government regulators, a bipartisan commission would create more certainty and stability so banks can plan and better serve consumers. Passing legislation to create a 5-person, bipartisan commission at the Bureau will bring needed long-term stability to the Bureau.
Changes to UDAAP
On March 16, 2022 the CFPB amended its exam manual by broadening and redefining what an “unfair” practice is and requiring financial institutions to “implement” procedures to mitigate discrimination across all consumer financial product and services. These changes to the exam manual provide little to no clarity or context into what is meant by the change or how to implement these new procedures. This lack of clarity and transparency leaves the entire market guessing on how to comply because no guidance was supplied by the Bureau, leading to the potential standardization of products and services which could negatively impact innovation.
The changes to the exam manual did not go through any public notice or comment period, and it’s not clear what statutory authority the Bureau is relying upon for this interpretation. The Dodd-Frank Act clearly authorizes the Bureau to enforce fair lending laws, and Congress is the only body to determine this broad reaching interpretation. The Bureau chose to amend the exam manual to avoid their legal responsibility of following the Administrative Procedures Act by not allowing all stakeholders an opportunity to voice support or raise concerns with a significant change.
CBA believes the CFPB should immediately rescind the changes to the exam manual and follow the APA process and solicit public input into the proposed changes.
As policymakers review the overdraft market, it is essential that a better understanding of consumer demand for the product, its use as a form of emergency liquidity or a financial safety net and the evolution of the overdraft product by financial institutions is warranted before making any changes that could have unintended consequences on low to moderate-income Americans.
In December 2021, Acting Comptroller of the Currency Michael Hsu recognized overdraft services as one of the last viable sources of short-term liquidity for many U.S. consumers. In his remarks, Acting Comptroller Hsu commented on the state of the overdraft market in the United States, highlighting the important need to provide safe and affordable short-term liquidity options for consumers within the well-regulated, well-supervised banking system. Amidst a renewed focus from policymakers on examining overdraft practices, Hsu’s observed that while some banks have eliminated overdraft from their financial suite, widespread adoption of this practice may yield unintended consequences.
Recent research by Curinos, titled ‘Competition Drives Overdraft Disruption’ (Appendix A), has found consumers make highly informed choices about when to use overdraft services. These decisions are based on real-time access to account information, clear disclosures and personal experience. Policymakers should keep in mind the existing regulatory framework for overdraft services acknowledges the role of informed individual choice and responsibility and is a voluntary action that is “opt-in.” Specifically, the study found:
- Consumers understand overdraft: Consumers, especially overdraft users, continue to demonstrate a deep understanding of overdraft and available alternatives. More than 60% of overdrafts come from consumers who intend to use the service. More than 80% of overdraft transactions come from consumers who opted into debit card overdraft programs with the clear intention of using it to cover their payments. And two-thirds of consumers indicate that they will incur the cost to ensure no reduction in their access to service.
- Fewer consumers use overdraft, in part as a result of bank-led innovations: The percentage of regular overdraft users (those with 10 or more transactions annually) fell by 40% to 4.9% of the population between 2010 and 2020.
- Consumers use overdraft for purchases of increased size: Bank-led initiatives aimed to help consumers avoid an unintended fee have dramatically reduced the number of small purchases tied to overdraft. Since 2008, as a result of banks’ innovations, overdraft fees, per U.S. adult, have declined by 77%, with, the average size of purchases triggering overdraft fees quadrupling from $50 to almost $200.
- Consumers want more short-term liquidity choices: Consumers seek convenient and relevant alternatives to overdraft. The emergence of alternatives in the market is driving consideration of new checking purchases.
- Overdraft fee revenue is down significantly: U.S. overdraft revenue fell approximately 57% from $40 billion in 2008 to $17 billion in 2019.
- Challengers that adopt consumer-friendly policies win market share: New entrants, including fintechs and challenger banks, have created solutions to better manage or reduce the cost of overdraft. These entities have experienced a 40% increase in account acquisition since 2017. Financial institutions that haven’t adopted overdraft innovation have experienced a nearly 30% reduction in consumer acquisition.
The popularity of overdraft products is clear. In response to consumer demand and heightened competition, banks proactively updated their polices to increase affordability and expand access to those who use overdraft to help meet their short-term liquidity needs.
Over the past decade, a growing number of Americans leading banks have unveiled new innovations designed to avoid overdraft fees or have an overdraft product with features selected by the consumer (Appendix B). Banks have proactively implemented new overdraft polices such as the elimination of overdraft fees, the elimination of account transfer fees to coverage overages, de minimums exceptions to cover small overages (avoiding an overpriced cup of coffee), grace periods for customers to make accounts whole before overdraft fees are ever assessed, access to small dollar loans (discussed more fully below), the elimination of extended overdraft fees, the elimination of returned items fees and more. These changes, in conjunction with clear disclosures, add continued benefit to consumers that rely on overdraft services to cover short-term gaps in finances and provide a viable service that will come at minimal or no cost.
Small-Dollar – An Essential Solution to Emergency Liquidity Deficits
Our recovering economy has left many consumers with less cushion for emergencies and reduced credit options, making access to reasonably priced small-dollar liquidity products even more important. While various entry-level credit products exist to meet a wide range of these needs, including traditional credit cards, personal loans and other forms of credit, some consumers unfortunately cannot qualify. When debating policy affecting overdraft service, we urge policymakers to also consider a viable solution to help consumers who need short-term loan options: small-dollar lending.
Today, the need for accessible small-dollar, emergency credit for consumers has never been greater. According to the Federal Reserve, nearly half of all American adults say they cannot cover an unexpected expense of $400. Similarly, Bankrate states “63% of American adults say they are unable to pay an unexpected expense with their savings…" The Financial Health Network (formerly the Center for Financial Services Innovation) study found that more than a third of all households say they frequently or occasionally run out of money before the end of the month. 
Banks have been encouraged by policymakers to enter or remain in the small-dollar lending market. Banks worked with regulators to develop products carefully designed to ensure strong safeguards at reasonable prices. Unfortunately, in 2017, the CFPB finalized a strict and prescriptive rule that restrained lenders’ ability to enter into the small-dollar market. The rule’s conditions created unreasonable hurdles for loans exceeding 36% requiring compliance costs so great that they negate a bank’s ability to make small-dollar loans at reasonable cost to consumers.
Due to regulatory uncertainty, banks find themselves with little assurances from regulators that a product they innovate and offer today, would be deemed acceptable tomorrow, by a change in leadership at the Bureau and future regulatory action. As stated in a recent GAO report from February 2022, “Banks are hesitant to offer such loans in part because of changes to related rules or guidance in recent years. In particular, some market participants and observers noted that banks do not want to offer small-dollar products because they are expensive to develop, and the regulations or supervisory expectations may change.” Consumer demand still exists for a short-term loan product. If allowed, highly regulated banks can make safe, affordable and easy to access small-dollar loans to consumer in need. In the absence of dependable and consistent regulatory guidelines, many banks will remain unable to offer a small dollar loan product that could help consumers that face a short-term financial need.
The CFPB Fee Inquiry
Heavily shaping the current fee debate, on January 26, 2022, the CFPB issued a Request for Information Regarding Fees Imposed by Providers of Consumer Financial Products or Services (RFI). In the RFI, the CFPB sought public feedback regarding fees, with a focus on the overdraft product. CBA has several concerns we would like to bring to the attention of Congress regarding this recent RFI. First, fee amounts and fee disclosures are subject to numerous federal and state laws. Second, fees are a necessity that allows lenders to recoup operational costs, mitigate risk and can even act as a deterrence that may avoid repeated use by a customer. Finally, by characterizing various, disconnected charges as “junk fees,” the RFI serves to confuse consumers and undercut the purpose and utility of disclosures that regulators have worked so hard to police and implement.
The disclosure of fees is a highly prescriptive area of banking regulation. A myriad of federal and state laws govern fee disclosures and these statutes have been in place, in some instances, for over half a century. For example: the Truth in Lending Act (TILA), Regulation Z’s disclosures, the Electronic Funds Transfer Act, and Regulation DD, 12 C.F.R. Part 1030 which governs fee disclosures in deposit accounts.
Congress charged the Bureau with enforcing federal consumer law consistently, “in order to promote fair competition.” With individual financial institutions disclosing, fully and completely, what their fee practices entail, consumers can make informed choices. The Bureau itself provides information designed to help consumers understand overdraft fees and comparison shop between different financial institutions.
As noted above, according to the Curinos study, consumers are more likely to open new accounts or increase checking account activity with banks that offer overdraft innovations, with traditional banks and fintechs who offer consumer-friendly overdraft and overdraft alternatives experiencing a 40% improvement in account acquisition since 2017, compared to a decline of almost 30% for non-innovators. Market competition – a force the Bureau has consistently referred to for its critical importance – has driven financial institutions to address gaps in their product suites and will continue to require banks to provide consumer-friendly overdraft products.
We urge policymakers to focus on the consumer need, a complete market analysis, including the many changes already in place, and take into consideration all the facts as they consider future action.
Provide Sufficient Implementation Time and a Reasonable “Small Business” Threshold
The CFPB should provide a sufficient implementation timeline for the Section 1071 rule and lower the threshold for “small business.” On September 1, 2021, the CFPB issued a notice of proposed rulemaking (NPRM) requesting public comment on its proposed rule to implement Section 1071 of the Dodd-Frank Act. As we have maintained since the promulgation of Dodd-Frank, CBA and its member institutions strongly believe that the CFPB should keep top of mind that although Section 1071 mandates this rule, its implementation will not be simple process and compliance will have to streamlined to ensure reliable data. While we continue to identify concerns with the NPRM, below are CBA’s top issues to note:
- The proposed 18-month timeline is too restrictive. Lenders need at least three years to implement Section 1071 data collection requirements.
- A $5 million dollar annual gross revenue threshold is too high. We urge the CFPB to lower the threshold to $1 million dollars for covered small businesses.
The following section provides additional analysis of CBA’s observations concerning the proposed Section 1071 rule.
- First, the CFPB has proposed an extremely constrictive implementation period of just eighteen months. This approach rejects the two-year deadline endorsed in the Bureau’s Small Business Regulatory Enforcement Fairness Act (SBREFA) outline and asserts an implementation period of less than two years is preferable given the length of time since the passage of Dodd-Frank. In doing so, the CFPB inappropriately shifts the time burdens of the delayed rulemaking from itself to covered lenders. To implement an effective 1071 data collection process, lenders will need to build completely new reporting systems, requiring great time and expense. By way of comparison, the recent changes to the HMDA reporting system, which already had a strong foundation, took the CFPB over two years to implement. FinCEN’s recently promulgated Beneficial Ownership Rule (or Customer Due Diligence), which is a far less complicated data collection compared to 1071, had a three-year implementation timeframe (2015-2018). Simply put, lenders will need considerably more time than proposed to get this complicated rule right and to successfully deliver on our shared goals of financing the American Dream for minority- and woman-owned businesses and expanding access to credit in underserved communities
- Secondly, we agree a standardized revenue-based approach, however, a $5 million gross annual revenue threshold is simply too high. Under the proposed rule, a business is a “covered entity” if its gross annual revenue for its preceding fiscal year is $5 million or less. As acknowledged in the NPRM, most SBREFA small entity representatives commented most of their small business customers were under $1 million in annual revenue. Companies that fall above the $1 million threshold often offer different structures and are more sophisticated. Further, data collection would bleed into separate commercial banking operations with different systems, processes, and platforms, increasing the cost of collection but offering little insight into actual small business lending. That’s why we strongly recommend lowering the threshold to focus on entities that are truly small businesses.
- Thirdly, in the case of race and ethnicity (but not gender) of an applicants’ principal owners, the Bureau has proposed for the information to be collected on the basis of observation. More specifically, if an applicant does not provide at least one principal owner’s ethnicity, race, or sex information and the financial institution meets with any principal owners in person or by video, the financial institution would be required to collect such information via visual observation or surname. Although visual observation and surname are used by lenders to collect and report HMDA data, Section 1071 should be viewed very differently from the HMDA process, which involves circumstances in which bankers are more likely to be able to make certain observations concerning the applicant, because the business banker may not have the opportunity to make a visual observation of the owner of the business. In many cases, the person making the inquiry may not be the owner, but instead an employee of the company. Additionally, the majority of small business lending will be composed of credit card and other digital products with digital application processing providing no opportunity for visual observation, making such observations skewed toward certain loan types, which may be received by applicants with higher revenues on average. Given most small business credit applications are digital, including a visual observation requirement will not significantly increase the demographic data collected and may in fact diminish the quality and accuracy of the results, potentially negatively impacting small businesses and stifling small business lending
Ensuring a Level Playing Field between Banks and Nonbanks
The growth of nonbank lenders in the marketplace and the consumers who use their products and services have increased substantially since the passage of the “Dodd-Frank Wall Street and Consumer Protection Act of 2010”, but our nation’s regulatory framework has not. We are pleased to see the Bureau’s recent attention to nonbank lenders, and we encourage the Bureau to ensure nonbanks adhere to the same level of consumer protections required of highly regulated depository institutions. Financial technology companies (fintechs) increasingly provide financial products and services, but their activities are largely unsupervised by the Bureau. Products offered by these fintechs lack the high level of protections and federal regulatory scrutiny consumers have come to expect from banks.
A failure to supervise and examine fintechs does not just contribute to an uneven playing field between fintechs and supervised entities, more importantly, it results in a continuous and growing threat of consumer harm. The Bureau itself has pursued actions against bad fintech actors in numerous markets, including the unsecured consumer lending market. When a consumer obtains a financial product or service, they should know the same standards and protections apply, regardless from whom the consumer obtains such products or services.
All consumers deserve consistent and equal protections regardless of financial institution or market participant. With new players entering the space every day, the world of financial services is constantly evolving. Nonbank lenders who offer consumer products are not currently required to abide by the same rules as well-regulated banks. To ensure the most thorough consumer protection initiatives are upheld, the Bureau should strive to create a level playing field for all financial institutions. The CFPB has an obligation to apply consumer regulations across the board so Americans using a fintech or non-bank lender are assured the same protections as those using a well-regulated bank.
Protect Consumers Throughout the Entire Data Access Ecosystem
In order to ensure consumers’ sensitive financial data is used appropriately, it is imperative a Section 1033 rule: (i) regulate all participants in the data access ecosystem, (ii) prioritize consumer control of their data security and privacy, and (iii) provide consistent and standard data security and data minimization throughout the entire ecosystem. The current regulatory framework lacks adequate safeguards to ensure consumers’ personal financial information is protected when leaving a regulated and supervised financial institution.
Data holders and fintechs are not subject to the same data security and privacy standards as banks, which leaves consumer data exposed to potential bad actors. In addition, some data holders use screen scraping techniques to access consumer permissioned data. Screen scraping does not allow banks to know which data fields are being accessed or to control the flow of access to guard against potential misuse. All participants in the data access ecosystem should be held to the same or a materially comparable standard contained in the Gramm-Leach-Bliley Act (“GLBA”) to hold or process consumer financial data. Moreover, the financial services industry, through industry standard-setting bodies, should continue to take the lead in developing the standards for consumer-authorized data access. Such an approach is the most efficient way to facilitate both innovation and interoperability.
Consumers should have full awareness and control over how their data is shared and used. Currently, when consumer data is shared with a fintech the consumer has no knowledge if and how their data is used beyond the intended purpose. Consumers also commonly mistake deleting a fintech app with revoking consent. As a result, fintechs have continued, unfettered access to consumer information even after the relationship has been severed. To promote consumer control of their data security and privacy, consumer disclosures used by data aggregators and other data users must be clear, understandable, and explicitly communicate to consumers about any secondary or downstream use of their data, as well as how to delete their information. In addition, a potential reauthorization requirement would prevent data aggregators from having infinite, unfettered access to consumer data.
A highly functioning financial services marketplace thrives when the regulatory agencies that oversee stakeholders who provide products and services to consumers and small businesses issue rules and guidance that are developed through a transparent and consistent regulatory process. We look forward to meeting with the leadership at the Bureau to ensure the opinions of all participants are considered before any change or new regulatory action is considered.
CBA stands ready to work with Congress and the CFPB to implement suggested legislative and regulatory improvements to the Bureau, and we appreciate the opportunity to implement the suggested legislative and regulatory improvement to the Bureau, and we appreciate the opportunity to submit this statement for the record.
President and CEO
 Acting Comptroller Michael J. Hsu Remarks before the Consumer Federation of America’s 34th Annual Financial Services Conference (December 8, 2021) - “Reforming Overdraft Programs to Empower and Promote Financial Health”- https://occ.treas.gov/news-issuances/speeches/2021/pub-speech-2021-129.pdf.
 12 U.S.C. § 5511(b)(4).
 See “Comparing overdraft fees and policies across banks,” by Rebecca Borné and Amy Zirkle (Feb. 10, 2022); https://www.consumerfinance.gov/about-us/blog/comparing-overdraft-fees-and-policies-across-banks/.