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AFSA to Congress: The CFPB ‘Needs to Be Reined In’

April 7, 2017

By Gregory Arroyo

WASHINGTON, D.C. — A day after House Republicans called for the dismissal of Consumer Financial Protection Bureau and its leader, the American Financial Services Association (AFSA) called on Congress to prohibit the CFPB’s use of the disparate impact theory, limit its enforcement authority, remove its supervision authority, prevent the finalization of its small-dollar and arbitration rules, and halt the bureau’s use of its complaint database.

Director Richard Cordray and his bureau weren’t without their supporters during the back-to-back hearings, which began on Wednesday, April 5, with Cordray delivering the bureau’s semiannual report to the House Financial Service Committee and ended on Thursday, April 6, with a hearing on financial regulatory reform. Leading the calls to dismiss Cordray was Rep. Jeb Hensarling (R-Texas), who called Cordray’s leadership and the bureau’s successes into question.

“... I believe the president is clearly justified in dismissing you and I call upon the president, yet again, to do just that, and to do it immediately,” Hensarling said to open the April 5 hearing.

“Today, Mr. Cordray and his CFPB don’t just act as a cop on the beat, they act as legislator, prosecutor, judge, and jury all rolled into one,” Hensarling added. “The tyranny must end and the people’s constitutional rights returned to them.”

Rep. Maxine Waters (D-Calif.) told Cordray to ignore Henslaring’s comments before listing off the bureau’s successes under his leadership, including the recovery of nearly $12 billion for 29 million victims of predatory financial practices, the handling of more than a million consumer complaints, and the collection of approximately $600 million in civil fines.

“The Consumer Financial Protection Bureau and Director Cordray are doing exactly the job they’re supposed to do and they’re doing it well,” Waters said.

“Republicans have been clamoring to weaken, impede and ultimately destroy the CFPB since its creation. First, they did everything they could to block a director from being appointed in the first place,” she added. “And since then, they pushed measures to defund and dismantle the Consumer Financial Protection Bureau.”

Cordray then delivered his report, highlighting the consumer safeguards the bureau implemented in the mortgage industry and the growth in mortgages, credit cards and auto loans despite the regulator’s activities in those markets. He then listed off areas where more work is needed, including credit reporting, debt collection, and financial performance incentives like those employed by Wells Fargo before the bureau, working with other enforcement authorities, imposed $185 million in fines over unauthorized customer accounts.

“Issues like this demonstrate why the consumer bureau is so important to protect consumers,” Cordray said. “Those who talk about weakening the consumer bureau are missing the importance of the work we are doing to stand up for individuals and families all over this country.

“Nobody should want to return to a system that failed us and produced a financial crisis that damaged so many lives.”

Republicans, however, hammered Cordray and the bureau for failing to respond to congressional inquiries and engaging in discretionary rulemaking. They also charged the agency and its director with abuse of power and denying market participants due process.

Hensarling criticized the bureau for finalizing a rule that would reduce access to prepaid card products, saying it harms nearly 70 million consumers with no access to traditional banking services. He also blamed the bureau’s oversight for rising credit card rates, and said borrowers are paying almost $600 more for their auto loans due to the bureau’s March 2013 guidance on dealer participation.

The committee chairman also quoted research from the University of Maryland showing that middle income borrowers not only “didn’t obtain cheaper mortgages,” but were cut out of the market altogether as a result of the Dodd-Frank and the CFPB. 

“For conducting unlawful activities, abusing his authority and denying market participants due process, Richard Cordray should be dismissed by our president,” Hensarling said. “Not only must Mr. Cordray go, but this current CFPB must go as well.”

The hearing set the stage for the Financial Institutions and Consumer Credit Subcommittee’s “Examination of the Federal Financial Regulatory System and Opportunities for Reform” hearing the next day. While the CFPB wasn’t the only regulator discussed, U.S. Rep. Blaine Luetkemeyer (R-Mo.) repeatedly used the bureau as an example of the “regulatory quicksand” financial companies must constantly shift through “to stay afloat.”

“They’re unending attempts to decipher a regulator’s wants and needs lie on little to no foundation on which to run a business,” the subcommittee’s chairman said. “Ultimately, this world of ambiguous guidance, contradictory rules, and aggressive enforcement has led to confusion for financial companies seeking to comply with Dodd-Frank and other Obama-era rules.”

The hearing featured representatives from the Clearing House Association, The Heritage Foundation, and the former acting assistant secretary at the U.S. Department of the Treasury. Also on the panel was Bill Himpler, executive vice president of the American Financial Services Association.

The AFSA executive first clarified that banks and finance companies operate under different business models, noting that the latter “are creatures of state law and have been supervised and examined at the state level for close to 100 years.” Himpler’s point was that while many are focused on financial institutions being too big to fail, the association is concerned about those that are “too small to succeed” under the weight of the CFPB’s overregulation.

“Credit should not be limited to the wealthy or those with perfect credit scores,” Himpler said. “It is not apparent that the Consumer Financial Protection Bureau shares this philosophy. The CFPB seems to believe that credit should only be extended to those borrowers who do not present any risk — those black AmEx cardholders who make more than enough money to pay back the loan.”

Himpler also charged that the bureau exceeds its authority, offering the bureau’s use of the disparate impact theory — which says a finance source can be held liable for discriminatory practices, even if the discrimination was unintentional — as an example. The bureau based its guidance on dealer participation on that theory without going through any notice or comment period, Himpler said.

The guidance warned finance sources operating in the indirect auto finance channel they’d be held liable for discrimination resulting from their dealer compensation policies. “Not only is that contrary to the Dodd-Frank Act, which prohibits the CFPB from regulating dealers, but it demonstrates the CFPB’s fundamental misunderstanding of the vehicle finance market — a retail interest rate offered by a dealer and voluntarily accepted by a car buyer is different from a wholesale rate offered by a finance company or bank to a dealer,” Himpler said.

The trade group’s executive also charged that the CFPB pursued enforcement actions against banks despite knowing its methodology for uncovering discrimination was flawed. He used the CFPB’s $98 million settlement with Ally Financial and Ally Bank as an example, saying the bureau did not know the race of any of the 235,000 consumers it said were harmed by the bank’s dealer compensation practices.

“In fact, the CFPB knew that factors other than discrimination were causing the disparities they observed, but refused to control for such factors in their statistical analysis,” he said.

“In short, the CFPB pursued a disparate impact case without a valid legal basis, issued guidance designed to function as rulemaking without due process of law, employed a statistical proxy methodology it knew was flawed, refused to consider nondiscriminatory factors that could explain alleged pricing disparities, tried to force finance companies to regulate dealers because the CFPB is prevented by Dodd-Frank from doing so, and employed a remuneration process that was designed to achieve political ends,” he added.

Himpler also questioned the bureau’s regulation by enforcement, telling subcommittee members that it’s difficult for financial services companies to comply with orders that lack consistency. He used the CFPB’s July 2015 enforcement order against American Honda Finance Corp. In it, the captive agreed to reduce dealer discretion to mark up a car buyer’s interest rate to only 1.25% above the buy rate for auto loans with terms of five years or less, and 1% on loans with longer terms. Facing similar charges, Ally was only asked to implement a compliance monitoring program as part of its settlement with the bureau.

The executive also offered examples of the bureau’s misunderstanding of “unfair” in the Dodd-Frank Act’s prohibition on unfair, deceptive, or abusive acts or practices, calling on Congress to limit the CFPB to enforcing only federal consumer financial laws and regulations, and to remove its UDAAP authority.

“While UDAAP commonly refers to types of laws that are intended to prevent businesses from engaging in deceptive practices, the CFPB emphasizes the first prong of UDAAP, i.e., the unfair prong, which is not commonly used,” Himpler said in written testimony. “The CFPB examiners use the ‘unfair’ prong of UDAAP to claim that companies that, while in full compliance with all applicable laws in an examined area, are still in violation of the CFPB requirements because the practice or conduct is subjectively deemed by the examiners to be ‘unfair’ to consumers.

“The examined company’s compliance is thus subject to being judged by the particular whim of the examiner, rather than based upon express, objective statutory law.”

Himpler also charged that examiners don’t understand the businesses of the companies they are examining, noting that they continue to describe retail installment sales contracts finance sources purchased from dealers as loans. He pointed to the CFPB’s examination manual as an example. Not only does it never mention indirect auto finance, it uses the word “loan” 57 times and the phrase “retail installment sales contract” only twice.

The trade group’s executive also said the bureau should not be allowed to finalize its proposed small-dollar rule, which would impose underwriting requirements on loans with a total cost of credit that exceeds 36%. He also said the bureau should not be allowed to finalize its proposed ban on pre-dispute arbitration agreements. In both cases, the executive said it would be consumers, not financial services providers, who would be hurt by these rules.

Himpler also charged that the bureau overreached in its definition of “larger participants” in the auto finance market, which went into effect in August 2015. “By any common sense description, ‘larger participants’ would mean those participants in a market who are at least large in size. But that’s not the case,” he said. “There are auto finance companies that meet the Small Business Administration’s definition of a small business, but yet qualify as ‘larger participants’ according to the CFPB.”

The executive also requested that the bureau halt its consumer complaint database, saying it does not provide any meaningful information to the public and that the bureau does not verify or validate the complaints posted.

“The CFPB is tasked with helping consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives,” Himpler said. “Unfortunately, that’s not what the CFPB does. The CFPB has greatly expanded its mission, and needs to be reined in.”

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