Senate hearing considers impacts of CFPB presence
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In advance of Richard Cordray’s semiannual appearance before the U.S. Senate Banking Committee, lawmakers from Congress’ upper chamber conducted a hearing on Tuesday dubbed “Assessing the Effects of Consumer Finance Regulations,” where the primary topic was Consumer Financial Protection Bureau impact.
While the CFPB’s director returns to Capitol Hill on Thursday, the Senate committee spent more than two hours hearing from a trio of witnesses who all questioned the negative consequences the bureau is leaving, including on auto financing. After Sen. Richard Shelby — an Alabama Republican and committee chairman — and Sen. Sherrod Brown — an Ohio Democrat and ranking member — gave their opening remarks, the session moved on to the experts brought to share their perspectives, which included Leonard Chanin. After spending 20 years at the Federal Reserve, Chanin now is of counsel in the financial services practice group at Morrison & Foerster in Washington, D.C.
In Chanin’s opening remarks, he discussed how financial institutions are behaving differently now that the CFPB is wielding its regulatory powers.
“While it is difficult to quantify the precise impact that CFPB rules, guidance, enforcement orders and other actions, as well as activities by other federal banking agencies, have had on consumers and the broader market for financial products and services, it seems clear that such rules and other actions have had a significant adverse impact on the ability and willingness of institutions to offer those products and services,” Chanin said
“Anecdotal and other evidence clearly indicates that institutions have reduced the products and services offered to consumers and some institutions have been reluctant to offer new products and services,” he continued in his early testimony.
Another witness who questioned the positives the CFPB brings to the financing environment was Todd Zywicki, who is professor of law at the Antonin Scalia School of Law at George Mason University and executive director for law and economics at the university’s Mercatus Center. Initially, Zywicki defended the CFPB’s origins having spent part of his professional career as the director of the Federal Trade Commission’s Office of Policy Planning.
“Let me stress at the outset that at the time of Dodd-Frank, I supported the need to unify consumer financial protection policy under a single agency,” Zywicki said. “Based on my long study of consumer finance and its regulation as well as my hands-on experience … I believe that 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.”
But how the CFPB has gone about its business left Zywicki with a different assessment.
“The tragedy of Dodd-Frank and the CFPB is that it squandered this unprecedented opportunity to modernize the consumer credit system to promote competition, consumer choice, and innovation. Instead, the post-crisis regulatory framework has resulted in higher prices and reduced choice for consumers and little improvement in consumer financial protection,” he said during his opening testimony.
“Indeed, by stifling competition and driving millions of Americans out of the mainstream financial system, it may actually result in more consumer protection problems,” Zywicki went on to say.
Also sharing more than 20 pages of opening testimony in an attempt to poke holes in the CFPB’s effectiveness was David Hirschmann, who is president and chief executive officer of the Center for Capital Markets Competitiveness at the U.S. Chamber of Commerce.
Like Zywicki, Hirschmann also praised some of the objectives the CFPB outlines as priorities.
“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,” Hirschmann said. “Everyone — businesses as well as consumers — benefits from a marketplace free of fraud and other deceptive and exploitative practices.
“We have welcomed efforts by the bureau that advance this important goal,” he continued.
Then Hirschmann went into scores of details about how the CFPB is negatively impacting financial flow and opportunity in the market. In order for the CFPB to carry out its goal of making products and services ““fair, transparent, and competitive, Hirschmann offered five recommendations to the bureau, including:
—Provide clear rules of the road for financial services companies so they can compete on a level playing field
—Use enforcement actions to deter fraud and predation, not to announce new, broadly applicable regulatory policies
—Strengthen the bureau’s own accountability by enhancing transparency and committing itself to fair administrative processes
—Limit regulatory duplication and conflict by coordinating with other agencies
—Preserve companies’ use of diverse tools, like arbitration agreements, to manage their relationships with the customers they serve
Of the four witnesses gathered for the hearing, the individual who defended the CFPB’s action most fervently was Rev. Willie Gable Jr., who is pastor of Progressive Baptist Church in New Orleans and chair of the Housing and Economic Development Commission of the National Baptist Convention USA. The commission’s mission is to develop affordable housing for low and moderate-income persons, particularly for senior citizens and the disabled.
While Gable discussed housing, he also made special mention of the auto finance space while articulating what he sees as problems in acquiring a vehicle by individuals with soft credit histories or lower income levels.
“After one’s home, the largest purchase many will make is their car. Here, too, predatory practices abound. Car dealer interest rate mark-ups, much like yield-spread premiums in the mortgage market, make car loans more expensive for many consumers. This is also a practice with a long history of discriminatory impact on borrowers of color,” Gable said.
“Abuses are in this industry have escaped attention until recently. But CFPB has taken important action in this area, including providing guidelines aimed at preventing discriminatory practices and taking much-needed enforcement actions. As a result, the Bureau has come under fire from members of Congress. This fire is misplaced,” he continued.
“Instead, the focus should be directed at why, for more than two decades, auto lenders’ and dealers’ practices have operated under a cloud of discrimination and abuse of low-income borrowers. Rather than defending a system that continues to fail many of our communities, Congress should push for a more transparent, fair system of auto finance,” Gable went on to say.
Perhaps an example of what Gable referenced came at the start of this hearing when Shelby criticized the CFPB’s handling of auto finance, making the connection of how the bureau might be indirectly regulating dealerships not under its jurisdiction by bringing actions against indirect finance companies.
“Instead of setting clear rules, the bureau is using enforcement actions to reshape the auto finance industry,” Shelby said. “As demonstrated by settlements with the bureau, its goal has been to limit the interest rate that dealerships charge based on factors other than financial risk.
“What’s more, these limits often differ leading to an uneven playing field not only among companies that have settled, but also between them and the rest of the market,” he continued. “I fear that this has set a dangerous precedent for the role of a regulator in our financial markets.”
Brown mentioned what he is fearing too, referencing consumer debt not including mortgages has topped $3.5 trillion with about a third of that amount being in auto finance.
“It is our duty in Congress to resist collective amnesia and ensure that the same bad practices that led to the crisis are not repeated by a new set of players,” Brown said. “This is why I continue to be troubled by Republican efforts to undermine, and even eliminate, the CFPB.”