CFPB Report April 26, 2013

CFPB Director Cordray Testifies Before Senate Banking Committee

On Tuesday, April 23, 2013, CFPB Director Richard Cordray testified before the Senate Banking Committee on the CFPB’s Semi-Annual Report to Congress. The Committee discussed a number of pressing issues with Director Cordray, most notably, CFPB collection of “big data,” the consumer complaint database, indirect auto lending, student loans, systemic risk, cost-benefit analysis, exams, financial literacy, and the upcoming CFPB arbitration study. 

In his opening statement, Chairman Johnson (D-SD), complimented the CFPB for its work on the mortgage rules, and hoped the Bureau would help provide regulatory relief to community banks and credit unions, especially those in rural areas. Senator Crapo (R-ID), the Committee’s Ranking Member, raised a recently published Bloomberg story stating the CFPB has spent $20 million for data collection on over 10 million consumers – Senator Crapo asked about this throughout the hearing. CBA’s full summary of Tuesday’s hearing is available here. 

Meanwhile, the House Financial Services Committee Chairman, Jen Hensarling (R-TX), refuses to invite Director Cordray to deliver counterpart testimony before his Committee. “The House Financial Services Committee cannot legally accept testimony from Richard Cordray on the Consumer Financial Protection Bureau’s (CFPB) semi-annual report until he is validly appointed as the bureau’s director,” Chairman Hensarling said.

CFPB Releases White Paper on Payday Lending and Deposit Advance Products

On Wednesday, April 24, 2013, the CFPB issued a white paper based on its research at banks and storefront payday lenders on short-term dollar loans. According to the CFPB, the white paper is a result of the agency’s in-depth review of payday loans extended by non-depository institutions and deposit advance products offered by a small number of depository institutions. This review began with a field hearing held in Birmingham, AL in January 2012. 

Director Cordray said, “This comprehensive study shows that payday and deposit advance loans put many consumers at risk of turning what is supposed to be a short-term, emergency loan into a long-term, expensive debt burden. For too many consumers, payday and deposit advance loans are debt traps that cause them to be living their lives off money borrowed at huge interest rates.” 

The CFPB reports many consumers repeatedly roll over their payday and deposit advance loans or take out additional loans; often a short time after the previous one was repaid. The CFPB also reports these loans are expensive and not suitable for sustained use. Specifically, the study found limited underwriting, and the single payment structure of the loans may contribute to keeping consumers in debt. 

Key findings from the white paper include:

  • Loose Lending: Lenders often do not take a borrower’s ability to repay into consideration when making a loan.
  • Risky Loan Structures: The risk posed by loose underwriting is compounded by features of payday and deposit advance loans, particularly the rapid repayment structure.
  • High Costs: Both payday loans and deposit advances are designed for short-term use and have very high associated costs.
  • Sustained Use: Loose underwriting, rapid repayment requirement, and high costs contribute to turning a short-term loan into a very expensive, long-term loan.

The CFPB has not indicated what regulatory action it likely will take. CBA’s Deposits and Payments Committee established a Deposits Advance Products Subgroup, which will engage the CFPB and other federal regulators as this issue moves forward. We will continue to update you on further developments.

Administration Files Supreme Court Petition Regarding Recess Appointments

On Thursday, April 25, 2013, the Administration filed a petition for writ of certiorari with the U.S. Supreme Court, seeking to overturn the Noel Canning decision issued by the U.S. Court of Appeals for the District of Columbia. In this decision, the Court of Appeals ruled the President’s January 4, 2012 recess appointments to the National Labor Relations Board (NLRB) were unconstitutional as the Senate was not in “recess” and, even if it had been in recess, the NLRB vacancies did not arise during the relevant recess period. 

Although the CFPB was not a party to the Noel Canning case, Director Cordray's legitimacy as head of the Bureau is called into question by the appellate court’s decision, as he was recess appointed on the same day as the President’s NLRB appointments.

CFPB Issues Second Round of Clarifications to Mortgage Rules

On Friday, April 19, 2013, the CFPB issued the second in a series of proposed clarifications to the mortgage rules recently issued. Previously, the CFPB issued proposed clarifications of the Escrow Rule. This new proposal addresses issues arising under the Ability to Repay (ATR) Rule and the Servicing Rule. A detailed summary of the proposed clarifications can be found here. 

On April 10, 2013, CBA and other industry groups urged the CFPB to provide these clarifications as soon as possible to give the industry the guidance necessary to implement the new rules in the time allotted; and further requested additional time to begin compliance. These proposed clarifications of the ATR Rule, in particular, will provide some of the answers needed to implement the rules. Since they are being issued as amendments to the Commentary in proposed form, with 30 days to comment, the CFPB expects to issue final clarifications in June 2013. At that time, the CFPB will issue additional proposed clarifications of portions of the Servicing Rule and the Loan Originator Rule. 

CBA will submit a comment letter in response to the proposal. The comment period will be open for 30 days following publication in the Federal Register.

CFPB Issues Preemption Determination

On Monday, April 22, 2013, the CFPB issued a decision in which it determined Maine’s unclaimed property law as to gift cards is not preempted by EFTA and Regulation E, even though it requires the unclaimed property to transfer to the state in two years. The CFPB determined under the Maine Act, an issuer that has transferred the unused value on an abandoned gift card to the state must continue to honor the gift card on presentation, and may then request reimbursement from the state. Hence, the CFPB has determined there is no inconsistency in Maine. 

The Tennessee law, on the other hand, does not require the issuer to honor the card, and according to the CFPB it is inconsistent, does not provide greater consumer benefit that federal law, and is therefore preempted. CBA commented on the notice and argued both laws should be preempted.