Senate Banking Hearing on the CFPB Semi-Annual Report to Congress

April 7, 2016

Today, the Senate Banking Committee held a hearing on the Consumer Financial Protection Bureau's Semi-Annual Report to Congress featuring testimony from Director Richard Corday.  The hearing followed Cordray's appearance before the House Financial Services Committee three weeks ago.  In contrast to the House hearing, the exchanges between Republican Senators and the Director were considerably more civil despite clear disagreement on the Bureau's actions on indirect auto lenders.

Opening Statements:

In his opening statement, Chairman Richard Shelby (R-AL) referenced the criticism of the CFPB the committee heard from a number of experts on a consumer finance regulation panel earlier in the week.  "There was also concern expressed regarding the Bureau's current structure and the lack of accountability inherent in it.  I have said many times that regulatory independence should never mean independence from accountability or vigorous congressional oversight," Shelby added. 

Ranking Member Sherrod Brown (D-OH) defended the CFPB's accountability to Congress and pointed to requirements that the Director testify before Congress.  In fact, he noted that Director Cordray has testified 61 times before Congress.  Brown also derided Republican efforts to replace the sole director with a 5-member bipartisan commission, citing the committee's track record of not being able to approve nominees.

Question and Answer Session:

During the question and answer session of the hearing, there were a number of CFPB rules and actions discussed – most prominently of which was the Bureau's actions on indirect auto lending.

Indirect Auto Lending:  Shelby highlighted the CFPB's use of disparate impact theory to bring enforcement actions against indirect auto lenders, telling Cordray "you do not have authority to go after your real target."  Shelby continued that indirect auto lending is a "poster child for a rulemaking as opposed to an enforcement action."

Senator Tom Cotton (R-AR) demonstrated the flaws of the Bureau's eligibility criteria for individuals to receive redress for discrimination with his reference to a Wall Street Journal tool that generates estimates of minority status based on the Bureau's disparate impact theory.  According to this tool, several white members of the Banking Committee would receive high probabilities of being African-American.  In addition, Senator Pat Toomey (R-PA) peppered Cordray with questions on the Bureau's methodology.  Senator Donnelly joined the chorus of concern about the Bureau's indirect auto lending actions and asked Cordray to engage with all stakeholders involved, particularly auto dealers.

Regulation through Enforcement:  Senator Toomey and Senator Mike Rounds (R-SD) both pointed to Cordray's comments at CBA Live 2016 on the Bureau's often preferred use of enforcement actions.  Cordray defended his use of enforcement actions, citing that 90% of such actions have been related to deception. Director Cordray responded by saying, "This is good solid law enforcement".  Cordray also reiterated that other companies should take enforcement actions as a signal to improve their practices.

Arbitration:  Cordray defended the CFPB's study on arbitration as the most detailed analysis ever done on the topic.  He continued that the study found that arbitration and individual litigation is "not worth the while of the consumer," thus the need to allow for class action lawsuits.  Cordray confirmed that the proposed rule on arbitration is expected this spring.

Debt Collection:  Senator Jack Reed (D-RI) lauded the Bureau for its work to protect veterans, particularly from illegal debt collection practices.  Specifically, he cited the $5 million in relief the Bureau has provided to service members and their families.

Data Collection:  Senator Mike Crapo (R-ID) brought attention to the Bureau's large scale data collection efforts and expressed concern about the detail of consumer information provided through its data requests.  Cordray responded the Bureau is trying to do more sampling to reduce privacy concerns.

TILA-RESA Integrated Disclosure:  Senator Bob Corker (R-TN) used his question time to discuss the implementation issues that have arisen with the new TRID rules and asked if the CFPB would make a new rule to alleviate such problems.  Cordray responded he had sent a letter to Senantor Corker on the topic just hours before the hearing.  The letter stated mortgage lenders will not be able to tweak contracts in order to shift legal liability on the TRID rules.  "While creditors may enter into indemnification agreements and other risk-sharing arrangements with third parties, creditors cannot unilaterally shift their liability to third parties and under the Truth in Lending Act, alone remain liable for errors on the Know Before You Owe mortgage disclosures," Cordray wrote.

Mortgage Lending:  Senator Tim Scott (R-SC) expressed concern about the low number of first-time homeowners.  Cordray responded there are numerous factors contributing to the housing market including a reluctance from homebuilders and the continued presence of underwater homeowners.  Further, he highlighted mortgage lending from community banks and credit unions has grown since the crisis.

Financial Innovation:  On the topic of regulation of fintech companies, Senator Mark Warner (D-VA) highlighted the importance of balancing innovation with regulatory oversight.  Cordray responded it is not appropriate for fintech companies to take advantage of regulatory system and the Bureau is focused on not falling behind the ball.

Small-Dollar Loans:  Following similar remarks at Tuesday's hearing, Senator Jeff Merkley (D-OR) pointed to the payday loan interest rate cap in Oregon as having served consumers well.  In response, Cordray asked all Senators present at the hearing to talk to the faith communities in their states and listen to their stories about the often devastating impact of payday loans.

Senator Elizabeth Warren (D-MA) utilized her question time to support the CFPB's efforts to reign in payday lending – an industry she notes is generating $7 billion a year.  Cordray called attention to the Bureau's comprehensive research on the topic and its efforts to create a national floor for standards.

Small Business Lending:  Senator Toomey inquired about the scope of the Bureau's authority to monitor small businesses.  Cordray cited the Bureau's Section 1071 authority under Dodd-Frank to collect small business lending data and its jurisdiction over the Equal Credit Opportunity Act.

No Action Letter Policy:  Senator Rounds expressed concern about the Bureau's no action letter policy, which would produce few letters each year in comparison to the hundreds produced by other agencies.  Cordray acknowledged his own concern with the adequacy of their policy, stating "we are leery of how much volume we can handle."