Overview

On April 6, 2017, the House Financial Services Subcommittee on Financial Institutions and Consumer Credit held a hearing titled "Examination of the Federal Financial Regulatory System and Opportunities for Reform." The purpose of the hearing was to examine rules promulgated by the federal financial regulators and the ways that they impact the financial services industry.

The hearing focused a great deal on the Consumer Financial Protection Bureau's indirect auto lending activity and bank capital rules. The hearing was driven largely by the financial regulatory reform proposals championed by each of the witnesses, with the important exception of Mr. Gerety, who has just concluded his government service at the U.S. Treasury Department.

The witnesses were:

  • Mr. Greg Baer, President, The Clearing House Association, Executive Vice President and General Counsel, The Clearing House Payments Company
  • Mr. Norbert Michel, Senior Research Fellow, Financial Regulations and Monetary Policy Institute for Economic Freedom and Opportunity, The Heritage Foundation
  • Mr. Amias Moore Gerety, Former Acting Assistant Secretary for Financial Institutions, U.S. Department of the Treasury

Summary

CFPB Oversight

A significant portion of the hearing was dedicated to analysis of yesterday's House Financial Services hearing on the "The 2016 Semi-Annual Reports of the Bureau of Consumer Financial Protection." The members questioned witnesses on ways that the CFPB could better perform its functions and how Congress could provide better oversight and make changes to the agency. Chairman Luetkemeyer and a number of GOP representatives criticized Director Cordray before the full committee earlier in the week. The Chair stated that the CFPB's opaque rulemaking and enforcement procedures have caused businesses to need a "crystal ball" to operate in compliance. Mr. Himpler noted that CFPB is more interested in "grabbing flashy headlines and punishing companies" than promoting a fair regulatory environment. He called for Congress to write legislation to explicitly bar the CFPB from using disparate impact analysis in its enforcement actions and criticized the CFPB's authority, stating, "Congress should be the one making law."

During his testimony, Subcommittee Ranking Member Rep. Scott (D-GA) highlighted the positive job gains and increases in small business lending that have occurred over the past few years, but expressed concerns that "some regulations might hamstring the unbanked and underbanked families from gaining access to important financial services." He cited the CFPB's regulation of indirect auto lending as an area where regulations limit underbanked citizens.

Rep. Posey (R-FL) asked the witnesses for insight into how Congress could place the CFPB "back on course" to fulfill its statutorily mandated mission. Mr. Himpler noted that he is concerned that the CFPB is regulating by enforcement and argued that the agency needs to provide clearer guidelines in the vehicle lending space. Furthermore, he added that it is very hard to create any sort of objective standard for the definition of "abusive" practices and therefore extremely difficult to understand the boundaries of the CFPB's mission of defending consumers from unfair, deceptive, and abusive practices (UDAP). Mr. Michel noted that Director Cordray has previously said that "they don't want to define [abusive] and should not define it" and argued that such a stance is "absolutely counter to the rule of law." Mr. Himpler also criticized the CFPB's proposed arbitration rulemaking, noting that arbitration is better than litigation for the consumer in terms of "time, convenience, and monetary rewards." Referring to small financial companies, he stated that "if that rule goes into effect, those businesses will go out of business because they can't afford the risk that accompanies a class action lawsuit."

In reference to the CFPB's consumer complaints database, Rep. Loudermilk (R-GA) asked Mr. Himpler to comment on what the agency's low monetary reward return rate indicates about its ability to perform its job. On this topic, Mr. Himpler stated that he would like to "give some credit to CFPB on this." He added that "the lion's share of complaints may not warrant a monetary reward," and the CFPB's low return rate might indicate some restraint on the part of the agency in such cases. That being said, he noted that the database poses substantial regulatory risk because it does not verify the consumers' claims, and "once the damage is done to a company it's hard to get your reputation back."

Merging and Consolidating Regulatory Agencies

In his testimony, Mr. Michel argued that the U.S. has too many banking regulators (banks could fall under the jurisdiction of seven federal financial regulators, in addition to state regulators) and urged Congress to "reorganize so that the U.S. has only one banking regulator and one capital markets regulator." He argued that, as the commodities, swaps, and equity markets have become "increasingly blurred," the U.S. is placed in an unusual position by having multiple regulators in capital markets. Additionally, Mr. Michel called for the elimination of the Federal Reserve's regulatory power, stating that the Fed "should be conducting monetary policy, nothing else."

Rep. Barr (R-KY) expressed interest in Mr. Michel's proposals and asked whether the theory that the presence of multiple regulators leads to greater accountability is true. Mr. Michel responded that the research on the topic is "pretty muddled," and there is "very little support for the race to the bottom hypothesis" and little support that regulatory competition leads to improved regulations. He added that the Fed should not retain its position on the FSOC and that it is "scary" that the Fed insists that its supervisory activities inform its monetary policy, because "the central bank is supposed to provide liquidity to the system" and not make safety and soundness decisions.

Chair Luetkemeyer and Mr. Michel discussed a proposal to provide all Federal Reserve branch presidents a seat on the Federal Reserve Board of Governors on a rotating basis. Mr. Michel commented that the way the Fed is set up is "definitely a relic of the founding" and that "it really does not make sense not to have members rotate on."

Indirect Auto Lending Regulation

Ranking Member Scott offered a mixed review of the CFPB's actions in the indirect auto lending sector. He acknowledged that there were errors in the CFPB's methodologies in the Ally Financial case, but argued that the CFPB did not err in its function of going after suspected wrongdoers.

Rep. Williams (R-TX) argued that the CFPB's bulletin on auto lending regulations used a "now debunked study" citing disparate impact to wrongfully hold indirect auto finance companies responsible. He argued that the CFPB has "extorted hundreds of millions of dollars from these auto companies."

CCAR Testing Reform

Mr. Baer spoke extensively on CCAR reform, noting that there are "clearly ways the process could be streamlined." He stated that the burdens placed on banks would be more sensible if banks' models were not ignored, and the Fed did not simply put banks through the ringer by using its own models during the quantitative portion of CCAR testing. He also called for the Federal Reserve to make public its models for CCAR testing and advocated for a "wholesale review" of the CAMELS ratings system. Furthermore, Mr. Baer argued that the living wills process has been transformed into a "shadow regulatory regime" and that it "ringfenced" some banking institutions' subsidiaries because of the strict capital liquidity regulations placed on banks. Mr. Baer added that the findings of qualitative testing should not be public or "binary" in their outcomes.

Custody Banks

Rep. Rothfus (R-PA) stated that he will introduce legislation that will exempt custody banks' funds held at central banks from supplementary leverage ratio calculations, citing the need for regulators to differentiate between types of banks. He argued that custody banks present far less risk than other banks, and Mr. Baer agreed. He noted that liquidity rules that affect custody banks assume that deposits kept in custody banks are subject to runs, even though the 2008 crisis showed that is not necessarily the case. He added that custody banks are subject to the same capital requirements and leverage ratios as other banks, "even though they're a very low-risk business." Mr. Baer noted that BOE did the same thing in the UK and argued that "it makes a lot of sense."

Orderly Liquidation Authority

Reps. Clay (D-MO) and Maloney (D-NY) testified in favor of retaining the Orderly Liquidation Authority (OLA) granted under Title II of Dodd-Frank. Rep. Maloney argued that the OLA "prevents a government bailout but does not harm the broader markets." Mr. Gerety agreed, stating that "market discipline works when firms have the ability to fail" and noted that the markets have reacted positively to the Dodd-Frank reforms. He also added that bankruptcy for large banks "should be seen as a complement, not a substitute" for large banks. Mr. Gerety argued that the "market is only free when there are clear rules… and markets ensure it is more profitable to play by the rules than game the system." Mr. Baer offered tempered support for retaining the OLA, stating that there "doesn't seem to be much of a cost to retaining Title II," according to studies conducted by rating agencies and the GAO. He stated that it performs its function as a backup plan "for which there aren't a lot of costs to retain."

Anti-Money Laundering Rules

Rep. Royce (R-CA) spoke about the weight of AML compliance burdens and argued that the current regime provides limited use of law enforcement. He argued that "we've missed the mark on creating a framework that emphasizes identifying and catching the bad actors" and instead created one where examiners are more interested in numbers of compliance officers and complaints filed. Mr. Baer agreed, stating that the fundamental problem is a "management and leadership" one. He noted that law enforcement is not engaged in the process, and bank examiners take the reins in enforcing AML rules. He advocated for more guidance from law enforcement and for less responsibility to be delegated to the banking examiners.