On April 5, 2017, the Financial Services Committee held a regularly scheduled hearing, which was statutorily mandated to present the Consumer Financial Protection Bureau's (CFPB) two most recent editions of its semiannual reports (fall and spring 2016). The sole witness was CFPB Director Richard Cordray.
During the contentious hearing, Republican members attacked the CFPB's constitutionality, leadership structure, transparency, and enforcement procedures, while the Democrat members of the committee defended CFPB Director Cordray. The hearing lasted nearly 6 hours, and each member of the committee had an opportunity to speak.
The hearing did not offer substantive insight into any future rulemaking efforts, enforcement activity, or predictions about the future of the current organizational structure of the CFPB. It was largely political theater, whereby many Republican members laid out the case for Cordray's removal and revived well-established complaints against the CFPB regarding the CID authority, consent order language, and their accompanying press releases.
During the hearing, many Republican members laid out the case for Cordray's removal and revived well-established complaints against the CFPB regarding the CID authority, consent order language, and their accompanying press releases.
Timing of the Release of CFPB Rules
Multiple committee members asked Director Cordray to comment on timelines for certain rules. He declined to comment on specific timelines on rulemakings for overdraft fees, TRID disclosures, and HMDA data collections. He did note that the CFPB will be issuing guidance on the privacy aspects of HMDA data collections as they pertain to the handling of highly sensitive consumer data.
Republican members of the committee took particular exception to what they perceived to be the CFPB's unfair treatment of companies that enter into consent orders with the agency. Chairman Hensarling and Reps. Huizenga (R-MI), Trott (R-MI), and MacArthur (R-NJ) criticized the CFPB's practice of entering into consent orders with companies that admit no wrongdoing while simultaneously posting press releases with language negatively characterizing the companies' activity.
Rep. Huizenga criticized the CFPB for using absolute and accusatory language in the press releases that accompany the agency's announcements of penalties and consent orders. He pointed out that more than 90% of companies enter into consent decrees with the CFPB without admitting guilt.
Chairman Hensarling noted that only four out of nearly 200 companies targeted by the CFPB have adjudicated the matter and that not a single one has admitted guilt even if they did not adjudicate. Rep. Trott argued that the CFPB's treatment of companies in its press releases would be analogous to the Financial Services Committee issuing a press release painting the CFPB as absolutely guilty of sexual and racial discrimination based upon the fact that the agency had settled cases with employees on those issues in the past. Rep. MacArthur echoed sentiments commonly espoused by SEC Commissioner Michael Piwowar and argued that the CFPB's use of punitive financial fines negatively effects shareholders and therefore innocent bystanders who are just trying to develop a 401(k). He urged the CFPB to be cautious and highly aware of the adverse impacts that the CFPB's public statements and actions could have on shareholders.
Director Cordray defended the CFPB's practices, arguing that the CFPB enters into consent orders with companies because the agency performs a "thorough investigation of facts" concerning alleged wrongdoings and that companies realize "they don't have a leg to stand on." He stated that the CFPB does "not just dream it up" when it initiates enforcement actions against companies and that companies enter into orders because they do not dispute the facts at hand.
Prepaid Card Rules
The CFPB issued rules pertaining to prepaid cards that were originally intended to take effect in October of 2017. The effective dates of those rules were recently delayed six months to April of 2018. The rules would require prepaid card issuers to provide certain disclosures to consumers, limit the amount of overdrafts that consumers could take on, and establish a dispute resolution process for consumers. Democrats on the committee questioned why the CFPB decided to delay the effective date of the rules, while Republicans argued that the rules should be delayed even longer or be fully withdrawn. Rep. Williams urged the CFPB to drop the prepaid rules altogether, citing the fact that the percentage of individuals filing complaints pertaining to prepaid card issues on the CFPB's database made up only 0.6% of all complaints filed.
Director Cordray noted that the purpose of the prepaid card rules was to provide protections to prepaid card holders similar to those given to individuals with bank accounts. He argued that implementing such projections amounts to "equal justice" in his evaluation. Director Cordray noted that the reason for the delay of the rules' effective date is that the industry brought to light two issues that would affect their ability to comply. The delay, he stated, stemmed from issues relating to the linking of prepaid cards to "digital wallets" and the error resolution of prepaid cards that had not yet been registered. The CFPB is seeking comment on both issues as part of the delayed effective date.
No Action Letters
Rep. Posey (R-FL) asked Director Cordray to comment on the "Project Catalyst" program element that issues opinions on regulations and provides no action letters and advisory opinions. Director Cordray noted that the agency has established an outlet for the issuance of such letters and opinions, but that either there is not enough demand for its use or there is something wrong with the process. He stated that the CFPB gets calls requesting guidance "all the time" and that the agency puts forth its best effort to answer those questions, but argued that it would be overkill to issue advisory opinions for all requests when they could easily be handled in informal conversations. When asked whether the CFPB has ever denied a request for an advisory opinion, Director Cordray stated that he does not believe it has ever done so.
The committee traded commentary across the aisle on the question of whether the CFPB had a substantive role in the uncovering of the Wells Fargo scandal, in which the bank's employees opened millions of unauthorized accounts as a result of its "high-pressure cross-selling culture."
Rep. Wagner (R-MO) and Director Cordray engaged in a lengthy and tense discussion of the CFPB's role in outing the bank's wrongdoings. Rep. Wagner cited a number of documents and emails obtained from CFPB employees that appear to show the CFPB engaged in the investigation of Wells Fargo much later than the agency claims. She added that those emails indicated the CFPB may have followed the lead of the OCC and the Los Angeles City Attorney's office, and the agency may not have worked with the two other groups to investigate Wells Fargo's practices. Director Cordray took exception to those allegations, arguing that the CFPB and OCC worked in coordination with the L.A. Attorney's office from the outset of the investigation and had been supervising Wells Fargo's sales practices since 2013.
During the highly contentious exchange, Director Cordray refused to look at a binder provided to him by Rep. Wagner that held the documents she claimed proved the CFPB's "peripheral" involvement in the Wells Fargo case. Rep. Wagner claimed that the CFPB was "asleep at the wheel" and that the CFPB failed to provide evidence that it was involved with the case until two days after the L.A. Times published a story about it. Director Cordray argued that the congresswoman was conflating initiation of an enforcement action with supervisory actions or investigatory actions, which, he argued, the CFPB had been conducting for years before the L.A. Times story broke. "There are some that don't like to see any positive work from the Consumer Bureau," stated Director Cordray.
Leadership Structure and Removal Power of the President
Chairman Hensarling started the hearing by stating he believes the President would be "justified" in removing Director Cordray from his position at the CFPB and called on the President to do so. He implied that Director Cordray has other political aspirations, such as the governorship of Ohio, and argued that the CFPB "has made credit more expensive and less available in many instances" and has acted "unlawfully" by "denying market participants due process." The chairman noted that the CFPB has taken on a number of discretionary rulemaking initiatives since its inception, while ignoring the statutorily mandated rulemakings on data collections on lending to women and minority-owned businesses under Section 1071 of Dodd-Frank. Chairman Hensarling argued that the Director's failure to promulgate a statutorily mandated rule within five years warrants grounds for removal for cause.
Referring to the CFPB as a "rotting agency," Rep. Duffy (R-WI) argued that Director Cordray should step down to preserve his alleged "political aspirations" before the committee has the opportunity to publicly air the reasons why the Director should be removed for cause. Notably, Director Cordray stated that he has "no insights to provide" when asked by Rep. Zeldin (R-NY) whether he would finish his current term as the Director of the CFPB absent any action by the President. He also denied that he would step down if President Trump asked for his resignation, stating that his removal from office would have to "follow the law of the land." This statement may imply that Congress would have to change the statute governing his term in office if it wants him to leave.
Ranking Member Waters argued otherwise, praising the CFPB for its work and Director Cordray. Ranking Member Waters cited the fact that the CFPB has recovered $12 billion for consumers and rebuffed arguments that the CFPB's structure is unconstitutional, claiming that other agencies have structures similar to that of the CFPB.
Use of CIDs
The CFPB's use of CIDs in its investigatory process was a highly contentious topic throughout the hearing. Rep. Royce (R-CA) argued that the CFPB has "largely unchecked power" to issue CIDs and voiced concerns that the CFPB does not even need to have evidence of wrongdoing before initiating a CID. He argued that companies deserve the right to appeal to a body other than the CFPB itself once an investigation has been initiated by the agency, and that companies deserve greater due process throughout CFPB investigations. Rep. Luetkemeyer (R-MO) argued that the CFPB's actions have been unconstitutional, and Rep. Davidson (R-OH) posited that the CFPB has "unlimited power of discovery" while subjecting companies to a highly adversarial process. Chairman Hensarling stated that the CFPB acts as "legislature, prosecutor, judge, and jury all rolled into one."
Director Cordray noted that the CFPB has the authority to conduct investigations into companies with or without court orders, but that once an investigation is opened, the subjects in question are issued a CID and notified of the investigation. He also rejected the premise that subjects of CFPB investigations do not have the right to appeal to other bodies besides the CFPB. Director Cordray noted that subjects of CFPB investigations have the ability to refuse settlements and take the agency to court over a CID at any point.
Auto Lending Enforcement
A number of committee members leveled attacks against the CFPB, charging that the agency had stepped outside of its jurisdiction by engaging in enforcement initiatives against auto lenders. (Recall that auto dealers are not within the CFPB's jurisdiction.) Rep. Hultgren (R-IL) argued that the "operating theory behind the CFPB's indirect auto efforts has been to 'eliminate dealer markup' and thereby regulate dealer compensation." Rep. Tenney (R-NY) agreed and argued that the CFPB intended to circumvent the laws and regulate auto dealers despite the fact that the CFPB has no jurisdiction in such matters. Director Cordray noted that it is very difficult to separate auto lenders from auto dealers when enforcing rules, because they operate so closely together. Nonetheless, Cordray emphasized that the CFPB has never taken any enforcement or supervisory activity against any auto dealership.
Rep. Cleaver urged Director Cordray to make sure that the algorithms used by online lenders "are not used to the detriment of minority borrowers." He stated that he is not against progress, but that the "problem, of course, is that with each new technology we have new challenges – studies have shown that algorithms are not necessarily unbiased." Director Cordray agreed with Rep. Cleaver and noted that the CFPB has issued a request for information on how fintech companies use data to underwrite loans and has put out an additional request for comment on the risks algorithms can present in terms of biased lending practices.