CBA LETTER FOR THE RECORD - HFSC HEARING RE SMALL DOLLAR THE CFPB'S SEMI-ANNUAL REPORT

 

Dear Chairman Hensarling and Ranking Member Waters:

The Consumer Bankers Association (CBA) appreciates the Financial Services Committee’s continued oversight of the Consumer Financial Protection Bureau and its activities.  We would like to take this opportunity to submit the following comments on the hearing entitled, “The Semi-Annual Report of the Bureau of Consumer Financial Protection.”  CBA is the voice of the retail banking industry whose products and services provide access to credit for consumers and small businesses.  Our members operate in all 50 states, serve more than 150 million Americans and collectively hold two-thirds of the country’s total depository assets.

Over the next year, the CFPB is expected to finalize a set of regulations and propose others that will have the potential to severely restrict the American consumer’s ability to exercise free will over the financial products they use.  The actions by the CFPB could place additional regulatory constraints on an already heavily regulated industry, ultimately limiting consumer choice and access to credit. 

Small-Dollar Lending

In the coming months, the Bureau is expected to issue a proposed rule that would cover payday loans, certain loans secured with a vehicle title, “high-cost” installment loans, and lines of credit.  CBA understands consumers should be protected from harmful predatory lending that can lead to a seemingly never-ending cycle of debt.

It is our hope that the Bureau is actively exploring products that are viable for banks to offer our customers who need access to safe and available forms of small-dollar credit.  Unfortunately, this does not seem to be their approach.  The Bureau’s current outline, published last year in advance of their small business review panel process, would make it difficult for any lender to offer affordable, easy-to-use products.  Specifically, the Bureau would require overly restrictive underwriting and unrealistic terms of use, including limits on frequency of use and limited loan-to-income ratios.  For example, short-term loans (45 days or less) would require lenders to verify the consumer’s income, “major financial obligations,” and borrowing history using third-party records.  “Major financial obligations” would include such obligations as housing payments, car payments, and child support payments.  Using this information, the lender would then have to make a determination whether the consumer has the ability to repay the loan after covering other major financial obligations and basic living expenses.  This level of underwriting complexity ignores the cost of providing this type of loan.  These are small-dollar loans, not mortgages.  Requiring a high-touch level of underwriting will only result in pricing out would-be providers.  Additionally, consumers cannot afford to wait long periods of time for an underwriting decision when they have emergency expenses that need to be paid. 

The Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) issued overly restrictive guidelines on bank-offered small-dollar loan alternatives, sometimes known as a deposit advance products, that were effectively serving bank customers. Without the existence of safe and affordable bank small-dollar products, consumers will have fewer credit options in their time of need, leaving them vulnerable to those who would take advantage of their economic situation.  

Marketplace competition benefits consumers by keeping prices affordable and product options numerous. We encourage the CFPB and other prudential regulators to work with banks and others in the financial services industry to ensure the availability of properly regulated small-dollar loan products that will continue to meet the credit needs of consumers. 

Arbitration

Many believe arbitration is often the best way for consumers and banks to resolve disputes. It is often cheaper, faster and easier for the consumer than going to court. The CFPB is charged by the Dodd-Frank Act with undertaking a study of mandatory pre-dispute arbitration, and then deciding, based on the outcome of the study, if it is necessary to regulate or restrict the use of arbitration in consumer financial contracts. The CFPB has concluded a study, and now it is signaling an intention to effectively prohibit the availability of these terms in consumer financial agreements.

We believe the study, which was not peer-reviewed, lacked some critical elements necessary for a thorough analysis.  In a letter to Director Cordray (see attached letter in Appendix A), CBA and other trade associations asked the Bureau to conduct additional research to complete its study before making any final policy decisions on arbitration, and we do so again here.  Due to the inconsistency and concerns that have emerged from the CFPB’s study, we provide several suggestions on how to clarify the data, such as: The CFPB should perform a comparison between litigation and arbitration on the basis of accessibility, cost, fairness, and efficiency; the CFPB should determine if consumers would benefit from becoming more informed about arbitration; the Bureau should examine the net benefit of class actions to consumers in light of the supervisory or enforcement authorities of the regulatory and enforcement agencies; and finally, the Bureau should determine if prohibiting or restricting the availability of mandatory pre-dispute arbitration provisions would effectively eliminate arbitration as an alternative dispute resolution process for the majority of consumers.

Even with its limitations, however, a strong argument could be made that the study shows consumers are better off taking their disputes through arbitration than participating in a class action to resolve a dispute.  The study shows that very few class actions are tried on the merits and 60 percent of class actions produce zero benefit to putative class members.  Moreover, while the CFPB highlighted the fact that consumers obtained $2.7 billion through class action settlements between 2008 and 2012, this only works out to  $79.41 per consumer on average (and $32.35 if we focus only on cash recoveries), compared with the $5,389 on  average consumers recover in a favorable arbitration decision. In summary, we believe the arbitration study provides an insufficient basis for prohibiting the use of arbitration.

Home Mortgage Disclosure Act Privacy

Since 1975 when HMDA was enacted, our members have strived to responsibly and fairly serve the housing needs of their communities and are committed to the purposes of HMDA, which are to: “1. help determine whether financial institutions are serving the housing needs of their communities; 2. assist public officials in distributing public-sector investment so as to attract private investment to areas where it is needed; and 3. assist in identifying possible discriminatory lending patterns and enforcing antidiscrimination statutes.”[3] 

The Dodd-Frank Act mandated the expansion of information collected under Regulation C, HMDA’s governing regulation. However, the final HMDA rule, written by the CFPB, almost tripled the number of data fields and greatly increased the complexity of reporting.  This is in addition to increased compliance pressures stemming from the Dodd-Frank Act’s strengthened enforcement monitoring due to the uncertainty of what is an Unfair, Deceptive, and Abusive Acts and Practice (“UDAAP”), and additional rules and requirements that have inundated the banking industry, including the implementation of the Qualified Mortgage rules and TILA-RESPA Integrated Disclosure. The compliance burden placed on banks requires expenditures of resources that inevitably are reflected in the cost and availability of credit for consumers.

As institutions begin implementing the sweeping changes, we would like to raise our concerns about the sensitive data that CFPB intends to collect, store, and publish. We ask that the Bureau keep all the new HMDA data confidential and refrain from publishing it on the Federal Financial Institutions Examination Council (FFIEC) website.  Consumers buying a home are forced to relinquish their most sensitive information often without understanding this information is being handed over to a governmental agency.  The new data fields are even more sensitive than many of those currently collected, with the addition of credit score, debt to income ratio, and property address, among other new fields.  It is the CFPB’s duty to protect consumers from risks associated with data breaches and re-identification.  In a 2005 speech, former Federal Reserve Board Senior Advisor Glenn Canner raised concerns about HMDA’s privacy risks, noting “approximately 95 percent of loan records are “unique,” meaning loan amount and census tract can be attributed to a single person. With a cross match to private lien transfer records, one can identify these individuals in 95 percent of the cases. Simply put, “privacy in HMDA data: there is none.” With the inclusion of even more sensitive information under the new rule, it’s critical that the CFPB protect consumers’ information by establishing robust data security protections and decrease re-identification risks by not publishing the new information--even anonymized—to the FFIEC website.

Indirect Auto Lending Settlements

Our members are unequivocally committed to providing access to credit fairly and equally to all qualified borrowers.  To this end, our members maintain robust compliance departments and stringent internal procedures to ensure they are meeting this imperative goal.  This is particularly the case in the auto market.  By nature, an indirect auto lender does not come into contact with a borrower until the borrower finalizes his purchase with the dealer.  After the transaction is complete, the indirect lender reaches an agreement with the dealer to finance the loan. Yet, the CFPB, based on statistical disparities, alleges the indirect auto lenders discriminated against borrowers they have never met.

Since 2013, the CFPB has recovered more than $140 million from indirect auto lenders in settlements over disparate impact claims.  From Ally to Toyota Financial, the CFPB engaged in policymaking by enforcement actions that completely neglected the Administrative Procedures Act (APA) and created pervasive uncertainty in the marketplace.  Moreover, the Bureau is extracting these settlements based on a proxy methodology the Bureau acknowledged is flawed.  We ask Congress to work with the Bureau to create a policy in accordance with APA in place of rulemaking by enforcement.

Complaint Portal

CBA appreciates the Bureau heeding feedback from CBA member banks and releasing a revised Company Portal Manual earlier this month to clarify and update several items pertaining to its complaint portal.  Specifically, CBA was pleased to see the more accurate definition of what constitutes a “duplicate” complaint, additional categories and “Administrative Response” options, and improved disclosure for companies that do not publically respond to complaint narratives, which better captures banks’ commitment to customer relationships and maintenance of customer privacy.  Though we applaud these improvements, we continue to ask the Bureau to follow the Consumer Product Safety Commission model and institute an appeals process where companies have the ability to flag and potentially eliminate materially inaccurate complaints.

Overdraft Services

Later this year, the Bureau has indicated it will begin its long-awaited rulemaking process on overdraft services, one of the last viable sources of short-term liquidity for many U.S. consumers.  In recent years, various groups have examined how consumers use overdraft services.  Some have concluded that overdraft services are inherently bad for consumers.  These studies have largely been based on the assumption that a reasonable consumer would avoid overdraft and that institutions providing overdraft services must therefore be “tricking” consumers.  These assumptions are fundamentally flawed.  Recent research by Novantas has found that consumers in fact make highly-informed choices about when to use overdraft services.  The decisions to use these services are based on clear disclosures and personal experience. 

The Bureau should also keep in mind that the existing regulatory framework for overdraft services clearly acknowledges the role of informed individual choice and responsibility.  Just five years ago, significant changes were made to the law on overdraft services to increase transparency and improved disclosures.  Since the implementation of these reforms, consumers must affirmatively opt-in to overdraft services for ATM withdrawals and debit purchases, and they receive numerous written disclosures concerning their right to revoke the decision to opt-in at any time.  Again, this process supports consumer choice. 

We urge the Bureau to take into consideration that without viable short-term liquidity access, consumers will be left with little recourse but to use ill-supervised, less-regulated, non-depository institutions to meet their needs—an undesirable position in which to place consumers. The Bureau and other regulators should be working closely with banks to design real options for consumers, not idealistic products and services unattached to business and economic principles. 

Conclusion

The Bureau’s purpose is to promote fairness and transparency for mortgages, credit cards, and other consumer financial products and services.  We understand that protecting the consumer is of the upmost importance, however, we have concerns that many of the actions taken by the Bureau to overregulate the financial service marketplace will have adverse effects on the availability and affordability of financial products that our customers use to help meet their credit needs. 

Improving the financial lives of our customers is a goal we share with the CFPB.  The best way to ensure that shared outcome for consumers is to establish a governance structure at the CFPB that promotes debate and deliberation among leaders with diverse experiences and expertise so rules and regulations are written for the financial betterment of consumers.  As proposed in the Financial Product Safety Commission (H.R. 1266), a bipartisan commission of five, Senate-confirmed commissioners would provide a balanced and deliberative approach to supervision, regulation, and enforcement of rules and regulations that oversee the financial services sector. Transitioning the CFPB’s governance structure to a bipartisan commission would ensure greater regulatory collaboration from all stakeholders culminating in the development of financial products that are safe, affordable and meet consumer demand.

CBA stands ready to work with Congress and the CFPB to craft a regulatory framework that safeguards the American consumer, ensures access to credit and promotes competition in the financial marketplace.  On behalf of the members of CBA, we appreciate the opportunity to submit this statement for the record. 

Sincerely,

Richard Hunt

President and CEO

Consumer Bankers Association