Banking and Finance Law Daily CFPB, consumer finance regulations put under Senate banking committee spotlight
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Wednesday, April 6, 2016

CFPB, consumer finance regulations put under Senate banking committee spotlight

By Colleen M. Svelnis, J.D.

The Senate Committee on Banking, Housing, and Urban Affairs has held a hearing on the effects of consumer finance regulation, inviting private-sector experts on consumer finance regulation to discuss. The hearing, entitled “Assessing the Effects of Consumer Finance Regulations,” focused on the regulatory actions of the Consumer Financial Protection Bureau in the aftermath of the financial crisis.

Committee Chair Sen. Richard Shelby (R-Ala) gave an opening statement calling the CFPB “one of the least accountable agencies in the federal government.” Shelby said he has advocated for sensible consumer protections but does not believe “they should be used as a substitute for an individual consumer’s independent judgment.” Shelby asserted that the bureau has enormous power over consumer financial matters and no meaningful statutory check by Congress.

Ranking member Sherrod Brown (D-Ohio) also delivered remarks at the hearing about the origin of the Dodd-Frank Act and the creation of the CFPB as a result of the financial crisis. Brown described how companies put millions of people into predatory mortgage products they couldn’t afford “while regulators looked the other way.” According to Brown, the bureau “has taken strong actions in a number of consumer finance markets that previously had no federal oversight, including credit reporting, debt collection, payday loans, student loan servicing, and auto finance.” Additionally, he stated, it has “exposed unfair and abusive behavior by financial companies” over and over and “has made consumer financial products safer and better for consumers.” According to Brown, the CFPB should be allowed to finalize and implement rules it is working on to limit forced arbitration clauses in consumer financial products and to rein in payday loans, prepaid cards, and debt collection.

Former Fed regulator. Leonard Chanin, currently a financial services lawyer at a Morrison & Foerster, a Washington D.C. law firm, spoke about the effects of consumer finance regulations. Chanin spent 20 years at the Federal Reserve Board and served as the Deputy Director of the Division of Consumer and Community Affairs. He later was the Assistant Director of Regulations at the CFPB for 18 months. According to Chanin, regulations have had a “significant adverse impact” on the ability and willingness of institutions to offer financial products and services. However, Chanin also asserted that, despite the “dangers” and problems associated with regulations, they are “vastly preferable to “regulating” by the issuance of guidance or using enforcement orders to establish policy.

Warren attacks. Senator Elizabeth Warren (D-Mass), who had a major role in the creation of the CFPB, questioned Chanin about what she termed his failures while working at the Fed, where he had the responsibility and authority to regulate deceptive mortgages. Warren pointed out the consequences of the Fed’s failure to regulate, citing estimates by the Federal Reserve Bank of Dallas that the financial crisis cost the American economy an estimated $14 trillion. Additionally, she noted, “It cost millions of families their homes, their jobs, their savings—devastating communities across America.” She asked Chanin why anyone should take his concerns seriously given his “abysmal” track record.

In response, Chanin claimed that there were no data provided to the Fed that suggested that it should further regulate the mortgage market before the crisis hit. But Warren asserted “of all the people who might be called on to advise Congress about how to weigh the costs and benefits of consumer regulations, I am surprised that my Republican colleagues would choose a witness who might have one of the worst track records in history on this issue.”

Support for post-crisis rules. In a Statement for the Record for the hearing, Mike Calhoun, President of the Center for Responsible Lending expressed support for post-crisis lending rules “that have made the financial system safer by eliminating abusive financial products, reining in reckless behavior, and encouraging more effective oversight.” Calhoun stated that, by addressing the frontline abuses that caused the housing crisis, CFPB's Ability-to-Repay threshold and the Qualified Mortgage rule “provide both stability and bright line standards to the financial market. The two initiatives are working to move the marketplace away from the high-risk, and unsustainable loans that caused the housing crisis.”

Calhoun claimed that these mortgage reforms are helping to support sustainable homeownership and wealth-building opportunities for lower-wealth households. He stated that the latest Home Mortgage Disclosure Act data show that the now two-year-old Ability-to-Repay standard and QM rule have not curbed the availability of mortgage credit.

Steps to fulfill mandate. David Hirschmann, President and CEO of the Center for Capital Markets Competitiveness for the U.S. Chamber of Congress, also gave a statement, citing CFPB’s mixed record on achieving its goal in five years. According to Hirschmann, the Chamber “strongly supports sound consumer protection regulation that deters and punishes financial fraud and predation and ensures that consumers receive clear, concise, and accurate disclosures about financial products.” He also stated that “Choice empowers consumers,” and that they benefit from access to a broad range of competitive financial products and services.

Hirschmann said that a regulator’s responsibility is to ensure that competitive and transparent markets flourish within the bounds of clear and consistently enforced rules of the road. He listed several steps the bureau could take to fulfill its statutory mandates to implement and enforce federal consumer financial laws, ensure that consumers have access to a range of financial services, and ensure that the markets for financial products and services remain “fair, transparent, and competitive”:

  1. Provide clear rules of the road for financial services companies so they can compete on a level playing field.
  2. Use enforcement actions to deter fraud and predation, not to announce new, broadly applicable regulatory policies.
  3. Strengthen the bureau’s own accountability by enhancing transparency and committing itself to fair administrative processes.
  4. Limit regulatory duplication and conflict by coordinating with other agencies.
  5. Preserve companies’ use of diverse tools, like arbitration agreements, to manage their relationships with the customers they serve.

Squandered opportunity. Todd Zywicki, Professor of Law at George Mason University School of Law and Executive Director of the Law and Economics Center, also testified at the hearing. Zywicki supported the creation of the CFPB because, he stated, the regulatory framework that existed prior to Dodd-Frank was “too fragmented and too cumbersome to effectively regulate the full range of consumer financial protection products at the federal level.” However, he believes that the CFPB “squandered” the opportunity to modernize the consumer credit system to promote competition, consumer choice, and innovation. Instead, the post-crisis regulatory framework resulted in “higher prices and reduced choice for consumers and little improvement in consumer financial protection.” Zywicki also asserted that low-income and younger consumers, those who already had the fewest choices, have suffered the most from Dodd-Frank’s “regulatory onslaught.”

Safer today. Reverend Willie Gable Jr., Chairman of the Board for the National Baptist Convention USA’s Housing and Economic Development Commission,implored Congress to let the CFPB be the consumer watchdog it was intended to be. Gable said it is “impossible to overstate the damage” and devastation for low and moderate-income persons caused by the unrestrained predatory mortgage lending practices and existing regulators’ failure to stop those practices. He lauded the CFPB’s part in today’s “safer” mortgage market with “reasonable rules” in place to prevent predatory practices. He also noted that the CFPB has returned more than $10 billion to consumers through enforcement actions against illegal practices.

Gable stated that “The notion that struggling Americans need access to products like those the Bureau has been working so hard to address is, at best, an insult to the basic dignity of every vulnerable person. At worst, it is a thin veil for the influence corporate money and power hold in our nation’s politics at every level.”

The Consumer Federation of America also submitted a statement for the record about the work the CFPB is doing to address payday auto title lenders and urging the committee to support the CFPB proposal under consideration.

Companies: Center for Responsible Lending; Consumer Federation of America

MainStory: TopStory CFPB CommunityDevelopment DoddFrankAct FinancialStability Mortgages

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