Yesterday, the newly appointed Director of the US Consumer Financial Protection Bureau (CFPB), Richard Cordray, testified before the House Committee on Oversight and Government Reform, Subcommittee on TARP, Financial Services and Bailouts of Public and Private Programs. In his first appearance before Congress since his controversial "recess" appointment, Director Cordray addressed the legitimacy of his appointment to the post, outlined his broad vision for the CFPB, and addressed the mechanics and substance of the CFPB's regulatory efforts. Yesterday's hearing represents the beginning of what is likely to be robust congressional oversight of the CFPB's activities. The Senate Committee on Banking, Housing and Urban Affairs has scheduled a January 31 hearing with Director Cordray, and as CFPB gears up its supervisory, examination and enforcement actions, it is likely the Director Cordray and his Deputies will receive frequent invitations to testify.
Brief Summary
This hearing examined how Richard Cordray, recently appointed Director of the Consumer Financial Protection Bureau (CFPB), will exercise his agency's authority moving forward. One main topic of conversation was the legality of Cordray's appointment. Full Committee Chairman Darrell Issa (R-CA) asked Cordray if he had retained counsel or created a contingency plan should his appointment as CFPB Director be deemed invalid. Cordray said his appointment was valid but did not directly answer the question about his counsel, only saying he would give the issue some thought.
Members asked Cordray about potential conflicts when regulating community banks and larger banks. Members were concerned that regulations imposed on large banks would trickle down to smaller banks and create undue burdens. Cordray said he is already committed to this issue and that the CFPB would be willing to conduct impact analysis on how community banks will be affected when rules for banks over $10 billion are made.
Members expressed concern over how private information would be used by the CFPB. Cordray reported that the Bureau is still working on this issue to ensure that customers are protected.
Other issues discussed included: establishing an advisory group for payday lending issues, the CFPB's plans for consumer financial literacy programs, and how many people the CFPB may potentially hire before becoming fully staffed.
Member Statements
Subcommittee Chairman Patrick McHenry (R-NC) said since Dodd-Frank was enacted 18 months ago, the role, agenda and authority of the CFPB have increased uncertainty in U.S. markets, not lessened it and his restricts access to credit. He said that for the last year and a half, interim figureheads for the Bureau have skillfully dodged congressional inquiries about the regulator's operations and powers. McHenry said that now that Mr. Cordray, despite an appointment that is constitutionally questionable, has stated his intention to assume full powers as head of the CFPB, this Subcommittee believes it is time that he deliver definitive responses about how he will implement and enforce the unparalleled powers of his new office. He stated that he is interested in hearing from Mr. Cordray about his thoughts on what he believes to be the CFPB's new regulatory authority, promoting private sector jobs in a robust credit market, and assuring Congress that he—along with the Bureau—will adhere to political independence in the face of an unfortunate politicized appointment.
Subcommittee Ranking Member Michael Quigley (D-IL) said that looks forward to hearing and hopes that his colleagues listen to Cordray today.
Panel I
Richard Cordray - Director, Consumer Financial Protection Bureau
Panel I Testimony
Cordray (CFPB) testified that the Consumer Bureau will benefit consumers by clarifying the prices and risks of consumer financial products and services. He said when consumers know the true costs, benefits, and risks of competing products, they will be better able to make good decisions for themselves and their families. Cordray stated that the Consumer Bureau will benefit honest businesses by leveling the playing field and ensuring that financial institutions play by the same set of rules and with a Director now in place, the Bureau can work to level the playing field on which our nation's financial institutions will innovate and compete. He said that the nonbank supervision program will include conducting individual examinations and may also include requiring reports from businesses to determine what areas need greater focus and that the Bureau will determine what degree of supervision to perform based on an analysis of the risks posed to consumers, including factors such as the nonbank's volume of business, types of products or services, and the extent of state oversight for consumer financial protection. He said that the large bank program, launched last year and meant to ensure that banks with more than $10 billion in assets comply with federal consumer financial laws covers more than one hundred of the largest banks, thrifts, and credit unions in the country, as well as their affiliates. He said that the CFPB launched Know Before You Owe campaigns to help consumers better understand various financial products by simplifying often confusing and duplicative information. He said that on student loans, in collaboration with the Department of Education, the CFPB released a suggested one-page "shopping sheet" to provide students and their families with important. financial aid information such as estimated monthly payment levels after leaving school. He said that under the leadership of Assistant Director Holly Petraeus, the Consumer Bureau has been collecting data and other information from servicemembers, their advocates and counselors, and industry participants. Cordray said that in the area of enforcement, the Bureau is also cooperating closely with other law enforcement agencies to avoid any duplication of work and to coordinate limited resource. He said he will not hesitate to use enforcement actions to right a wrong and that the CFPB will use all tools at its disposal to fulfill the Bureau's mission. He stated that filing lawsuits or administrative actions will be necessary at times to ensure that the law is followed and respected, and that harm to consumers from unlawful conduct is remedied. He said that from the earliest stages of our efforts to stand up the agency, outreach to smaller lenders has been a particular focus of the Consumer Bureau as the organization recognizes that a strong and diversified financial services industry—one that includes small as well as large providers—is the best way to serve American consumer.
Panel I Discussion
McHenry asked about the CFPB's moving forward with the nonbank supervision program. He also asked if the CFPB will submit to similar regulatory disclosure as the SEC. Cordray said the CFPB will be as transparent as possible but is building an agency from the ground up. He said his agenda is set by Congress and much at the beginning would be dictated by that. McHenry asked on what day did the CFPB employ Cordray. Cordray replied roughly January of 2011 and that the CFPB has 750 employees at the end of 2011. McHenry asked if an agenda will be laid out for the public on what the CFPB will be doing for the upcoming year. Cordray said he has been transparent about the regulatory agenda. McHenry said that the SEC outlines the regulatory action for the upcoming year, will the CFPB submit to the idea of laying out an agenda for the next month. Cordray said that the CFPB's agenda is clear and will work with McHenry's staff on this issue. McHenry said that the SEC's best practices on this would be beneficial. McHenry asked what current rulemaking is being worked on now. Cordray responded that the CFPB is consolidating the mortgage disclosure forms around mortgage closings, including TILA and RESPA. He said that the proposed rule on this will be available in the summer. McHenry asked if there would be a small business panel made for large decisions. Cordray said that the CFPB will enact such panels and will be coming soon.
Quigley asked about leveling the playing field for community bankers. Cordray said it is a high priority for the CFPB and that leveling the playing field is very important to making the US banking system work. Quigley asked what the CFPB is attempting to regulate in terms of staff and if there are enough resources. Cordray said it is a concern of his as they are a new agency. Quigley asked about what the CFPB can do to help servicemembers. Cordray said that Holly Petraeus has been extremely helpful in proving a great deal of improvement in this area.
Subcommittee Vice Chairman Frank Guinta (R-NH) asked if the CFPB is one of the most constrained organizations in government as Elizabeth Warren said. Cordray said that there are special oversight provision that apply to the CFPB that do not apply to any other organization, including more audits, among other requirements. Guinta asked if the CFPB is an unbiased agency. Cordray replied that he hopes that would be so but is in the eye of the beholder. He stated that to attain that the CFPB needs to make sure to hear from providers and consumers, those on both sides of transactions, and the CFPB has already been doing that. Guinta asked if it concerns Cordray about the process by which he was appointed and the impact it may have on those being regulated. Cordray replied that he is in an important job and all he can do is carry out the responsibilities that the law has put on his back that is consistent with values that Congress has articulated. Guinta asked if Cordray takes direction from the White House. Cordray said the CFPB does not take direction from the White House and is an independent agency that is kept close to Congress. Guinta asked is there have been any directives from the White House and if in the future there were would they be shared with the committee. Cordray said no such directive has been received and in the future he would evaluate laws before sharing that information.
Full Committee Ranking Member Elijah Cummings (D-MD) asked before the passage of the Dodd-Frank Act, nonbanks operated in the shadows, outside of federal regulatory scrutiny. Cordray said there was little to no regulation of nonbanks at the federal level and less at state and local levels. Cummings asked what does hiring a director of the CFPB mean for the average consumer. Cordray said that it means the CFPB can now begin to have an active supervision program over nonbank areas including mortgage markets, mortgage servicers, payday lenders, and private student lenders. He said this program will allow the CFPB to expand that supervision to a larger field which will happen soon. Cummings asked what Cordray's plans are for meeting with banks and other financial institutions. Cordray said that he reached out to many bankers when he was the State Treasurer of Ohio.
Rep. Pat Meehan (R-PA) asked about conflicting regulation of community banks and larger banks. He also asked how a larger bank regulations will not trickle down to community banks. Cordray replied that the law requires the CFPB to coordinate supervision exam schedules with other regulators and should be coordinating on guidance and regulations as well. Cordray said that the CFPB has just completed an Memorandum of Understanding (MOU) with the Federal Trade Commission (FTC). Meehan asked if the CFPB will make a commitment to make MOUs with other agencies and that the CFPB will also do an impact analysis on how community banks will be affected when rules for banks over $10 billion. Cordray said he has already made that commitment and the Bureau is already working on that issue. Meehan asked about standards being used for requiring confidential information from banks and how it will be protected from third parties. Cordray said that the current law is that when privileged information is provided to a banking agency it does not waive privileges against third parties, and this omission of the CFPB may need to be fixed.
Rep. Peter Welch (D-VT) asked Cordray to address the concern of potential overregulation by the CFPB. Cordray responded that the CFPB has inherited many regulations from other agencies and has determined that a notice in the Federal Register in examining how to streamline these rules. Welch said that small businesses and kids with student loans to have some place they can go to get an answer with financial issues. Cordray stated that there is a growing problem in the student loan servicing realm as well and the CFPB is working to simplify and clarify a student loan shopping worksheet to make things easier for students.
Full Committee Chairman Darrell Issa (R-CA) asked if the CFPB cannot order an entity to take, for example, existing contract law and discount it. Cordray said he has limited authority from Congress and that they will not interfere with other laws. Cordray said that for example the CFPB cannot set interest rates on products. Issa asked if Cordray believes his appointment was valid. Cordray said his appointment is valid. Issa asked if Cordray has begun seeking counsel should the Administration's appointment be considered not valid. Issa also asked if Cordray's appointment ceased to be valid, does Cordray have a contingency plan. Cordray said he has been appointed to be the CFPB's director and will go forward with rulemakings. He said that the CFPB needs to move forward with its mission. Issa asked if Cordray has looked into forms of redundancy should the CFPB's work have to be redone. Issa also asked if Cordray would look into this issue. Cordray said he will give this some thought and that it would be dereliction of duty to act as if he was not appointed. Issa said he does not want the CFPB employees to waste their time if work has to be redone.
Rep. Carolyn Maloney (D-NY) asked why are people trying to stop the CFPB from going forward with protecting consumers. Cordray replied that the concerns may be with potential overregulation and market uncertainty. Maloney asked again why would people try to delay the CFPB's work. Cordray said he will simply work to move the Bureau forward.
Rep. Trey Gowdy (R-SC) said that the CFPB released examination procedures on small term short dollar loans and asked why had some products, such as overdraft protection, been excluded from this guidance. Cordray said that small dollar loans do indeed include payday loans, car title loans, and overdraft protection. He said it is typically the case that when you're talking about overdraft protection, you're talking about a deposit institution, a bank and a bank account and a pay-day loan is a non-bank product typically, not necessarily. He said there are some new products some of the banks are starting to offer that they call some version of deposit advance products but this is a somewhat different product, and it is not itself a deposit type product. Cordray said the guidance released was meant to narrowly focus on nonbank lending. Gowdy asked if Cordray wants to ban payday lending. Cordray said he does not look at these issues in terms of banning products and that the Bureau needs to look at every issue on this practice. He said some debt collection tactics may be illegal and that the CFPB held a hearing in Alabama on payday lending recently. He said to make judgments now is not the right approach and the Bureau needs to collect more information before any decision is made. Gowdy asked if the CFPB has talked with the DOJ about the status of any lawsuits related to the 2008 financial crisis. Cordray said he has talked with DOJ and US attorneys about various issues. Cordray said he is only at the beginning of this process. Gowdy asked if that status of limitations has expired on any cases the US attorney wished they new more about from the 2008 crisis. Cordray said he thinks they have especially related to mortgage fraud.
Rep. Jackie Speier (D-CA) asked what has the CFPB been hearing surrounding credit card complaints. Cordray said those complaints includes changes in interest rates that customers do not understand. Speier asked about privacy of financial information. Cordray said that there is an opt-in/opt-out directive related to that product and some other areas may be appropriate for that approach. Speier asked if private student loans should be extinguished at death. Cordray said he has not had time to think about this yet and student loan debt is growing fast but is not as large as mortgage debt.
Rep. Dennis Ross (R-FL) asked what constitutes an honest business. Cordray said that is a business that abides by the law and competes in the marketplace. Ross said that there are few standards for how CFPB regulatory power can be exercised. Ross asked if in CFPB rulemaking are there standards for what level businesses will be held accountable. He asked if the CFPB will prevent loans from being made or come in after the fact. Cordray said that the CFPB does not have authority to make judgments on a dishonest business, but the term honest business is a term people can understand. Ross asked if private law firms will be used to go after businesses. Cordray said he would not be utilizing private law firms. Ross asked if data will be collected future into mortgage servicing and if it will be shared. Cordray said complaints in the mortgage servicing area are being collected. He stated that he is currently evaluating how to handle that information and CFPB are looking at this issue carefully.
Rep. Gerry Connolly (D-VA) said he shares misgivings about the President's recess appointment. Connolly asked what Cordray thinks created the CFPB. Cordray responded that Congress had a destructive experience in the financial crisis. Connolly asked if the financial crisis of 2008 was the worst since the Great Depression. Cordray agreed and said it made a strong case for the Bureau as many areas were previously not covered. Connolly asked if houses have been foreclosed upon on those who were on active duty. Cordray said that seemingly did happen but was most likely inadvertent.
Rep. Anne Marie Buerkle (R-NY) asked about the CFPB's authority related to interchange. Cordray said that the interchange amendment was specifically not something where any jurisdiction was granted for CFPB to address it. He said the CFPB does not enforce that and cannot adopt or amend rules related to that issue. Buerkle asked how many people will the CFPB will hire. Cordray said it is hard to say but that the long term estimates range from upwards of 1,000 by the end of the year and potentially higher later on. He said between 1,200 and 1,500 employees may ultimately be needed. Buerkle asked if federal guidelines will be followed for CFPB board members. Cordray said he intends to closely follow the law and that Congress said that the CFPB is supposed to be hiring on the federal banking agency pay scale, in particular the Federal Reserve. He said that CFPB is currently 1 percent under the Fed's pay scale as of now.
Rep. Eleanor Holmes Norton (D-DC) asked if banks charging customers to use debit cards would fall under CFPB jurisdiction. Cordray said that the CFPB cannot set the price of any product and that both providers and customers provide each other with ample information. Norton asked if the CFPB plans to correct mortgage servicing abuses. Cordray said that the CFPB now has new tools including: rulemaking authority, the ability to examine these institutions, and the ability to enforce the law. He said this is a difficult but important area.
Guinta asked if a rule come before enforcement. Cordray said it will depend on the certain area and cannot wait on other process to enforce the law in some cases. Guinta asked if the CFPB would commit to expanding transparency tenfold. Cordray said he is posting information up on his website every quarter on financial issues. Guinta asked would the CFPB voluntarily adhere to the hiring freeze from this day forward. Cordray said that that issue would become germane farther down the road.
Gowdy asked if advisory panels would be set up with community bankers and credit unions. Cordray said he did that when he was AG of Ohio. Gowdy asked if he would be willing to do that with payday lenders before rules are promulgated. Cordray said that he intends to have additional advisory panels and that he has a requirement to set up a consumer advisory board. He has no aversion to hearing from nonbank firms that the CFPB will be regulating. Gowdy asked if he will commit to having an advisory panel so that the CFPB can hear from financial institutions fully compliant with state laws. Cordray said he would consider that. Gowdy asked about old regulatory schemes and how they will operate with the new CFPB. Cordray said he will work closely with state regulators to understand their point of view and there is no intention to preempt state law in these areas. Gowdy asked what does Cordray believe the duties of the consumer is to educate themselves. Cordray said that one cannot be a properly functioning citizen if one does not educate themselves. He said financial literacy issues are important to the CFPB now.
McHenry asked about defining unfair and deceptive practices from a CFPB perspective. Cordray said that defining unfair and deceptive in a new way would not be productive. McHenry asked if abusive will be defined on enforcement or definition. Cordray said the mere selling and reselling or mortgages is not illegal but when one is not in control of choosing a provider, if then reasonable advantage was taken in that situation, there might be an issue. McHenry asked if the CFPB will work with other agencies. Cordray replied that he will continue to reach out to other banning and law enforcement agencies in the same way as with the FTC. McHenry asked about defining terms in credit card disclosures. Cordray said that the Know Before You Owe project is progressing and that the TILA/RESPA forms are moving forward. He said that in the credit card area the CFPB has developed a sample agreement that would attempt to pull out and identify specific important terms in a credit card agreement so that a consumer is not given a dense forest of fine print. Cordray said that as the CFPB puts out the proposed sample credit card agreement, it is not mandatory but only meant to drive thinking in a new way.
Rep. Joe Walsh (R-IL) said that small business in America is dying and that everyone feels overregulated. He said that Congress hears from small businesses that they cannot access credit. Walsh asked if the CFPB has determined that a number of rules will not affect small business and thus the small business panel will not be convened. Cordray said that rules were begun by other agencies, such as the Federal Reserve, where the CFPB will finish the rule. He said the panels will be convened before a rule is created and the CFPB has not had occasion to do that. He said that panels may be gathered within a month or two for new rulemaking. He said that he will consider the CFPB's regulatory work with small businesses and community banks in mind.
McHenry asked about a quote Cordray said that some forms of fraud that is not illegal. Cordray replied that he does not mean to say that something can be not against the law but still be acted on by the CFPB, actions would have to violate the law. Cordray said that the CFPB cannot deal with things the Bureau does not like even if they do not violate the law. McHenry said his concern is the CFPB's interpretation of existing law. Cordray said that rules inherited by the CFPB is relevant and the CFPB will not go off in a wild direction. He stated that the CFPB now has authority where there was no application of law before. He stated that it is not the CFPB's point to revolutionize any existing law nor does the CFPB intend to be some sort of mini-Congress. Cordray said the law will be followed carefully.
Outlook
Cordray will testify before the Senate Committee on Banking, Housing, and Urban Affairs on Tuesday, January 31st, 2012 at 10:00 a.m. The title of this hearing is "Holding the CFPB Accountable: Review of First Semi-annual Report."
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