On Wednesday, September 29, CFPB Director Richard Cordray appeared before the House Committee on Financial Services to answer questions regarding the Bureau’s activities since March.
Director Cordray used his introductory remarks to highlight the expansion of the marketplace for consumer credit over the last year. He specifically noted increases in home mortgage lending, auto loan origination and new consumer credit card accounts, with consumer loan delinquencies falling to an eight-year low. He also outlined recent Bureau enforcement actions, rulemakings and educational tools.
Members of Congress questioned Dir. Cordray on a range of issues reflecting recent Bureau actions. There were several noteworthy topics addressed which I have discussed below.
- The extent of Bureau regulation of auto finance and its impact on dealerships: Several members of Congress expressed concern at the CFPB’s fair lending initiatives in the auto finance market. Members, such as Republican Congressman Williams of Texas, inquired as to whether the Bureau would be attempting to limit or eliminate the “dealer reserve,” or dealer markups on interest rates offered by auto finance companies that purchase motor vehicle installment sale contracts. Director Cordray expressed skepticism at this arrangement and acknowledged the possibility of curtailing the reserve or limiting it to a flat fee. Director Cordray noted that “if you set up a lending program where you’re going to allow people to mark up rates and be financially incentivized to do so and the consumer is none-the-wiser, we believe it creates great risk of discrimination.” When asked if the CFPB had asked dealerships how best to mitigate these risks, he noted that the Bureau has not communicated with auto dealers since they are not subject to Bureau jurisdiction under Dodd-Frank.
- Referencing a recent article in the American Banker, a number of Congressmen questioned Director Cordray on the methodology for assessing racial discrimination in the auto finance market. Notably, Democratic Congressman Scott of Georgia challenged the Director on the use of last names as a proxy for race and expressed concern that this would result in large overestimates of the size of the affected population. Director Cordray defended the Bureau’s methodology in making these calculations as being based on the best efforts of Bureau officials to determine the most accurate means of assessing disparate impact discrimination.
- Delayed enforcement for TILA-RESPA Integrated Disclosure (“TRID”) rule: Director Cordray fielded several questions about the possibility of delaying enforcement of the new TRID rules. Republican Congressman Hurt of Virginia asked the Director if “the CFPB has rejected the request by industry to grant a grace period of the implementation of [the rule] for the next six months . . .” He went on to ask if the CFPB would pledge not to take enforcement action against those institutions attempting, in good faith, to comply with the new rules. Director Cordray described the Bureau’s approach for the immediate future as “diagnostic-corrective,” emphasizing that the Bureau would avoid direct enforcement action and attempt to assist industry to comply with the new rules, although he was vague as to how this would look in practice.
- Rulemaking regarding payday loans and small dollar, short term lending: Members of Congress on both sides of the aisle emphasized the need for a rule that allows for small dollar lending to continue in some form. The Florida Congressional delegation, in particular, expressed concern that the Bureau’s payday lending rule would preempt recent state action to create a functioning market for small dollar lenders. Director Cordray acknowledged the need to balance consumer protection concerns against the need for access to small dollar credit, but appeared to remain committed towards taking a hard stance against the industry.
- Forthcoming rulemaking based on the Bureau’s arbitration study: Republican Congressman Neugebauer of Missouri questioned Director Cordray as to the desirability of prohibiting arbitration clauses based on some of the findings of the Bureau’s arbitration study. Referring to the report, the Congressman noted that “customers who prevailed in arbitration recovered on average more than $5,300 compared to $32.35 obtained by the average class action member in class action settlements.” The Director noted that the Military Lending Act and Dodd-Frank had previously prohibited arbitration in certain contexts and that the study found that arbitration was often not pursued by individual consumers because of the small amount of money at stake, relative to the aggregate costs of certain industry practices. As we recently noted in another blog, a field hearing will be held on October 7 in Denver to consider the imminent rule making that the Bureau is considering in the aftermath of the release of its arbitration study.
The hearing did not provide other significant newsworthy discussion, despite covering a broad range of topics, including student loans, consumer complaints, CFPB enforcement settlements, and several other issues.