While Director Cordray’s appearance at the House Financial Services Committee’s hearing on the CFPB’s fifth Semi-Annual Report yesterday was accompanied by the usual dose of political theater, his testimony did yield the following items of noteworthy information: 

  • The CFPB will be issuing a white paper later this summer regarding use of the proxy methodology for identifying discrimination in indirect auto financing.  In March 2013, the CFPB issued its bulletin warning banks and finance companies that purchase motor vehicle installment sales contracts that, under existing law, any dealer finance charge participation may violate the Equal Credit Opportunity Act and Regulation B.  Since that time, industry and numerous members of Congress have been pressing the CFPB for information as to how it determines that practices that are neutral on their face are nonetheless discriminatory.
  • The CFPB is considering the issuance of advisory opinions “in appropriate cases,” with Director Cordray acknowledging that the CFPB “can probably do more in this area” and stating that “you will see more from us in this area.”  During the hearing, both Democratic and Republican committee members voiced support for the CFPB’s use of advisory opinions to provide guidance to industry.  (Among the CFPB-related bills passed last week by the House Financial Services Committee was H.R. 4662, titled the “Bureau Advisory Opinion Act,” which would require the CFPB to establish a process for issuing advisory opinions.)
  • In the fall, the CFPB will begin the process of convening panels under the Small Business Regulatory Enforcement Act in connection with a proposed small dollar loan rule.
  • By the end of this summer, the CFPB plans to also issue a white paper on issues related to manufactured housing loans.  Both Republican and Democratic committee members, as well as the manufactured housing industry, have charged that the CFPB’s new mortgage rules have severely restricted the ability of moderate and low income consumers to obtain financing to purchase manufactured homes.  Director Cordray acknowledged at the hearing that the CFPB had received data from leading manufactured housing lenders.
  • The Department of Defense (DOD) will soon be sending a proposed rule to the Office of Management and Budget to implement amendments to the Military Loan Act (MLA) enacted in January 2013.  The amendments directed the DOD to consult with the CFPB, FTC and federal banking regulators, in developing the proposal.  The proposal is expected to include an expansion of MLA coverage.  Current MLA regulations impose a 36% rate cap on, and prohibit the use of certain terms in connection with, extensions of “consumer credit,” which as currently defined, only includes tax refund loans and certain closed-end payday and auto title loans made to active duty armed forces members and their dependents. 

During the hearing, Director Cordray defended the CFPB’s ability-to-repay/qualified mortgage rule against claims that it has reduced the availability of mortgage credit.  He attributed the rule’s “success” in part to the CFPB’s creation of a temporary QM category for mortgage loans that are backed by the GSEs.  (The temporary category covers mortgages that satisfy certain QM criteria and are eligible for purchase, insurance, or guarantee by, Fannie Mae or Freddie Mac while they operate under federal conservatorship or receivership (or a limited-life regulatory entity that is a successor to Fannie Mae or Freddie Mac), the Federal Housing Agency (FHA), the Department of Veterans Affairs, or the Rural Housing Service.)

Several Republican committee members focused their questions on the National Mortgage Database which the CFPB is developing jointly with the FHA.  The database is being built using a nationwide sampling of credit bureau files on mortgage loans.  As did members of the Senate Committee on Banking, Housing and Urban Affairs when Director Cordray appeared before that committee at its hearing last week on the CFPB’s fifth semi-annual report, several House Republicans expressed their concern to Director Cordray regarding the breadth of the information to be collected.  They also expressed concern over the security of the data, a concern that was shared by a Democratic committee member. 

When asked whether the CFPB is working with the FDIC and Department of Justice in connection with Operation Choke Point, Director Cordray responded by saying that the CFPB works regularly with the other agencies on issues involving “know your customer.”  

Not surprisingly, Director Cordray was taken to task by Republican committee members, and defended by Democratic members, as to the amounts the CFPB is spending on its Washington, D.C. office renovations.




Last month, the CFPB filed its first lawsuit against companies involved in online payday lending.  The lawsuit against CashCall and several related companies that funded, purchased, serviced and collected online payday loans broke new ground by asserting UDAAP violations based on the defendants’ efforts to collect loans that were purportedly void in whole or in part under state law.  

Now, in what we think is an earth-shattering development, the U.S. Department of Justice has filed a lengthy complaint and consent order in a lawsuit against a small North Carolina bank that processed ACH transactions for payday lenders through an arrangement with an unidentified third-party payment processor.  The DOJ action against Four Oaks Bank & Trust Company is the first lawsuit (and settlement) under “Operation Choke Point,” a coordinated multiagency enforcement initiative targeting banks serving online payday lenders and other companies that have raised regulatory concerns. 

Based on allegations of inadequate diligence and control over the payment processor and its customers, the DOJ obtained $1.2 million in monetary relief and elaborate injunctive relief addressing the bank’s dealings with third-party payment processors and with Internet short-term (payday) lenders, credit repair organizations, mortgage assistance relief companies, telemarketers and Internet-based businesses (collectively, Target Companies). 

Under Operation Choke Point, in addition to or in lieu of bringing actions against Target Companies believed to be in violation of the law, the DOJ and its fellow agencies are pursuing relief against banks that provide services to such companies.  The Four Oaks lawsuit will certainly make it more difficult for unlawful Target Companies to prey on consumers.  It will also have a substantial impact on lawful Target Companies and their bank partners. 

Banks can be expected to increase their charges for ACH services to Target Companies and to engage in extensive due diligence over such companies as a result of the DOJ lawsuit and other actions against them by enforcement agencies and private litigants.  Target Companies should act now to prepare for the pricing changes and diligence requests they will inevitably receive. 

Target Companies with high ACH return rates could also find themselves the subjects of increased CFPB scrutiny.  In remarks to The Clearing House in November 2013, Director Cordray indicated that the CFPB believes it will “be better able to identify and enforce the law against illegitimate firms” if it can identify companies with high ACH return rates. 

For a detailed discussion of the Four Oaks lawsuit, see our legal alert.  On Tuesday, February 18, at 12:00 p.m. ET, Ballard Spahr will conduct a webinar on the lawsuit.  The registration form is available here.