The House Financial Services Committee will hold a hearing tomorrow, March 3, entitled “The Semi-Annual Report of the Bureau of Consumer Financial Protection” at which Director Cordray is expected to testify. The most recent report was issued in December 2014 and covered the period from April 1 through September 30, 2014. The report itself typically serves only as a backdrop, with Committee members using the hearing as an opportunity to question Director Cordray about items of interest to their constituents.
We recently wrote about two studies, one by Professor Ronald Mann and the other by Professor Jennifer Lewis Priestley, that cast serious doubt on the benefit to payday loan borrowers of an ability-to-repay requirement and limits on rollovers for payday loans, two elements that the CFPB is expected to include in its payday loan proposal.
Another recent study casts doubt on the value of a payment-to-paycheck (PTI) ratio ceiling, another payday loan limit thought to be under consideration by the CFPB and advocated by certain consumer groups. The PTI ratio ceiling would be used either as a maximum payment amount or a safe harbor above which other limits would apply. For example, in a 2013 report, The Pew Charitable Trusts recommended that a payday loan should be presumed unaffordable, and prohibited as a result, if it required payments of more than 5 percent of a borrower’s pretax income. A lender could overcome this presumption only by showing that a borrower had sufficient income to make required payments while meeting all other financial obligations without additional borrowing or using savings.
The study by Peter Toth, a PhD candidate in the Economics Department at the University of Texas at Austin, is titled “Measures of Reduced Form Relationship Between the Payment-Income Ratio and the Default Probability.” The data set to which Mr. Toth had access consisted of over 100 million payday loan records spanning five years that were contributed by five large companies that operate retail outlets. After excluding certain data, Mr. Toth analyzed approximately 87 million loans.
Mr. Toth’s research showed no correlation between individual consumer defaults and a particular PTI ratio. His results therefore suggest that a PTI rule may not be useful in limiting default. In addition, as indicated by the studies of Professors Mann and Priestley, because it would restrict borrower access to credit, a PTI rule could in fact be detrimental to consumer welfare.
As a data-driven agency, we hope that the CFPB will pay attention to the Mann, Priestley and Toth studies since they appear to be much more meaningful in terms of assessing benefits or detriments to payday loan borrowers than the one study done by the CFPB.
As he has done in prior years, Director Cordray spoke earlier this week to the National Association of Attorneys General. His prepared remarks focused on the familiar theme of “the four Ds” that create obstacles for consumers in the financial services marketplace–deceptive marketing, debt traps, dead ends, and discrimination.
Director Cordray’s remarks included the following noteworthy comments on the “Four Ds”:
- Deceptive marketing: Director Cordray stated that “one of the most objectionable experiences we have had to date has been with law firms that purport to be helping people resolve their debts, but really are misusing their law license to defraud consumers.” He indicated that these cases “have provided some of our most protracted litigation…including sanctions motions we had to file in some instances and criminal referrals we had to make in others.”
- Debt traps: With regard to payday and other “short-term, high-cost” loans, Director Cordray stated that the CFPB is “in the latter stages of considering how we can best formulate new rules to reform the market.” His comments indicate that the CFPB’s proposal is likely to reflect state approaches to regulating payday loans. He stated that the CFPB is “going about this rulemaking with the clear knowledge that states were regulating payday lending before the Bureau even existed. That extensive and varied experience has shed light on the problems in this market and opportunities to craft measures that will benefit consumers.”
- Dead ends: Labeling debt collection a “key market where we find many dead ends,” Director Cordray stated that the CFPB is “hard at work analyzing and preparing the details of proposed policy measures, which could lead to the most significant changes in federal law in this area in almost forty years.” He also indicated that the CFPB has been seeking input from state AGS and the FTC.
- Discrimination: Director Cordray indicated that the CFPB “has focused significant resources on rooting out discrimination in indirect auto lending” and that settlements have resulted in supervised entities “collectively paying out approximately $136 million to provide redress for up to 425,000 consumers who were discriminated against on the basis of race.” (We note that based on supervisory information previously provided by the CFPB, approximately $56 million of the $136 million in redress resulted from non-public supervisory resolutions.)
Also noteworthy were Director Cordray’s statements that (1) the CFPB’s publicly announced enforcement actions “so far have resulted in $5.3 billion in relief to 15 million consumers and more than $200 million in civil money penalties,” and (2) 22 state AGS and 28 state banking regulators have signed up to access the CFPB portal that provides “real time access” to complaints filed with the CFPB.
The CFPB has issued a proposal to suspend for one year the Truth in Lending Act/
Regulation Z requirement for issuers of open-end credit cards to send their credit card agreements to the CFPB quarterly for posting in a public database on the CFPB’s website. The suspension would not affect the TILA/Reg Z requirement for such issuers to post their credit card agreements on their own publicly available websites. The proposal is scheduled to be published in tomorrow’s Federal Register and comments will be due on or before
March 13, 2015. The CFPB is proposing that the suspension take effect immediately upon publication of a final rule in the Federal Register.
Pursuant to Reg Z, the quarterly submissions must be sent to the CFPB no later than the first business day on or after January 31, April 30, July 31 and October 31 of each year. In the supplementary information accompanying the proposal, the CFPB states that it believes the current process, under which issuers submit agreements to the CFPB manually via e-mail, “may be unnecessarily cumbersome for issuers and may make issuers’ own internal tracking of previously submitted agreements difficult.” The CFPB also observes that the current process for its staff to manually review, catalog, and upload new or revised agreements to the CFPB’s website and remove outdated agreements can extend for several months after the quarterly submission deadlines.
Accordingly, the CFPB indicates that it is working on developing “a more streamlined and automated electronic submission system which would allow issuers to upload agreements directly to the Bureau’s database.” The CFPB wants the new system to be less burdensome and easier for issuers to use and enable faster posting of new or revised agreements on the CFPB’s website.
To reduce the burden on issuers while it works on the new system, the CFPB is proposing to suspend the submission requirement for the submissions that would otherwise be due to the CFPB by the first business day on or after April 30, 2015; July 31, 2015; October 31, 2015; and January 31, 2016. Issuers would resume submitting credit card agreements beginning with the submission due on the first business day on or after April 30, 2016. In lieu of providing new and amended agreements and notice of withdrawn agreements for the April 30, 2016 submission, issuers would be permitted to submit to the CFPB a complete, updated set of agreements offered to the public as of the calendar quarter ending March 31, 2016.
The CFPB also notes that in addition to not affecting the requirement for issuers to post their credit card agreements on their own publicly available websites, the proposal would not affect the annual submission of college credit agreements and related data required by Reg Z or the biannual submission of credit card pricing and availability information required by TILA.
In addition, during the temporary suspension period, the CFPB plans to collect credit card agreements from the largest card issuers’ public websites as of approximately September 2015 and post them to the CFPB’s online consumer credit card agreements database. According to the CFPB, “[g]iven the longstanding concentration in the credit card market, the Bureau believes that uploading agreements obtained from a relatively small number of issuers’ websites to the Bureau’s own website is sufficient to provide the agreement terms available to the overwhelming majority of credit card consumers in the U.S. as of the mid-point of the proposed suspension period.”
On February 19, 2015, the CFPB released its credit report study, entitled “Consumer voices on credit reports and scores.” After conducting focus groups with 308 consumers in four major metropolitan areas, the study concludes that while many consumers do access their credit scores and credit reports in various ways, confusion about both still persists.
In determining that credit confusion exists, the CFPB classified the consumers involved in the focus groups into three categories, based upon their familiarity with their own credit reports and scores: active checkers, former checkers, and noncheckers. The CFPB also remarked on perceived common characteristics and motivations influencing consumer behavior in each category. The CFPB did note that the focus groups did not represent a statistically valid sample of American consumers. Thereafter, the CFPB relied upon the observations of the focus groups to conclude that additional consumer outreach and education relating to credit is necessary.
But what is not clear is how the CFPB intends to do accomplish this objective, or how this objective may differ in its implementation across the various consumer groups identified in the study. Will education and outreach be achieved through initiatives put forth by the CFPB, the financial services industry, or both? Or will it be accomplished through enforcement? The CFPB is giving conflicting messages about how it would like to proceed down this path.
For one, in his prepared remarks relating to the study’s release, Director Cordray suggested that the CFPB intends to leverage its enforcement authority to more closely regulate the credit reporting industry: “Using our supervision and enforcement authorities,” “we are already bringing significant new improvements to the credit reporting system − and we are only getting started.” But this may not be the approach the CFPB actually intends to take, nor, in our opinion, is it the correct one.
Case in point: notwithstanding Cordray’s enforcement-related comments, in releasing the study, the CFPB also touted the fact that by working with financial services companies, over 50 million consumers now have free and regular access to their credit scores through monthly credit card statements or online. Indeed, the CFPB said that it believes the growing number of companies providing this information to consumers provides an opportunity to engage consumers and educate them about their credit.
But nothing from the CFPB yet suggests practical ways by which the CFPB would like the industry to achieve this desired “consumer engagement and education.” Instead, the study offers only a series of vague suggestions about potential messages to consumers about their credit. But when coupled with Cordray’s comments about expanding enforcement in the credit reporting arena, some companies may be hesitant to roll out new outreach initiatives without any idea how those initiatives will be received by the CFPB.
Our impression is that many in the consumer financial services industry would welcome an opportunity to engage with the CFPB on this issue. As one of the CFPB’s mandates under Dodd-Frank is to educate consumers about financial products, it makes sense for the CFPB to attempt to do this in conjunction with the industry, rather than through adversarial action. This is a perfect opportunity for productive dialogue between the CFPB and the industry – let’s hope the CFPB takes advantage of it.
The CFPB has announced that on Tuesday, March 10, 2015, it will hold a field hearing in Newark, N.J. on arbitration. The hearing will feature remarks from Director Cordray, as well as testimony from consumer groups, industry representatives, and members of the public.
Our expectation that the CFPB would issue its arbitration study in early 2015 coupled with the agency’s history of using field hearings as the venue for announcing new developments makes it seem highly likely that the field hearing will coincide with the CFPB’s release of the arbitration study. The CFPB is conducting the study under Section 1028 of Dodd-Frank. In April 2012, it published a request for information about the scope, methodology and data sources for the study. In December 2013, it published preliminary study results.
In his prepared remarks for an appearance last week at the Exchequer Club, CFPB Deputy Director Steven Antonakes discussed the CFPB’s risk-based approach to supervision. (The Exchequer Club’s members include senior professionals from trade associations, federal regulatory agencies, law firms, congressional committees and national press.)
Mr. Antonakes commented on why “the traditional approach to supervision wouldn’t work at the Bureau.” He explained that “visiting all of the banks and nonbanks under our jurisdiction on a set, regular schedule, as other federal agencies have in the past, would be impractical given their number, size, and complexity as well as the relatively small size of our examination force.” He also stated that a “fixed-schedule approach would fail consumers by focusing precious resources on potentially less severe problems, when larger, more pressing consumer protection issues awaited their turn.”
He then explained the two key distinctions between the CFPB’s supervisory approach and that of the federal banking agencies. First, the CFPB focuses on risks to consumers rather than risks to institutions. Second, the CFPB conducts its examinations by product line rather than by using an institution-centric approach. Mr. Antonakes indicated that the CFPB’s product line approach allows it to compare product lines across institutions, charters or licenses.
He then stated that the CFPB evaluates each product line “based on potential for consumer harm related to a particular market; the size of the product market; the supervised entity’s market share; and risks inherent to the supervised entity’s operations and offering of financial consumer products within that market.” He also observed that the CFPB views certain markets, such as debt collection and mortgage servicing, as presenting higher risk.
The most interesting comments made by Mr. Antonakes concerned how the CFPB approaches the decision to take corrective action based on an examination. He indicated that in certain instances, where there are “more significant violations,” the CFPB refers matters to its action review committee. That committee determines whether a matter will be resolved through confidential supervisory action, such as a board resolution or memorandum of understanding, or through a public enforcement action. He also indicated that the CFPB’s examination team will make a recommendation to senior leadership in the Division of Supervision, Enforcement, and Fair Lending whether supervisory or enforcement action is appropriate.
He explained that the CFPB uses a common set of factors to ensure determinations are made in a consistent fashion. He described these factors as generally falling into “one of three buckets: violation-focused factors; institution-focused factors; and policy-focused factors.” Violation-focused factors include the severity of the violation “in terms of the number of consumers affected, the magnitude of the harm, and the nature of the violation,” whether the violation has ceased or is ongoing, and the importance of deterrence. He observed that if “we suspect a troubling practice is widespread, we may want to put the entire industry on notice through public enforcement actions.”
The CFPB’s institution-focused factors look at the regulated entity’s behavior after the violation occurred, particularly whether the entity has cooperated with the CFPB and its willingness and ability to comply on a going forward basis. Mr. Antonakes indicated that the balance may tilt in favor of supervisory action if an entity self-identified or self-corrected the violation, with a public enforcement action viewed as more appropriate when an entity has been unwilling to take corrective action or has repeatedly been cited by the CFPB or another regulator for similar conduct.
The CFPB’s policy-focused factors include how the CFPB has treated similar violations in the past, other CFPB activity related to the problematic conduct, and how the CFPB’s action fits into the agency’s broader priorities and goals.
Five prominent industry trade groups sent a letter to the CFPB yesterday seeking “to engage the CFPB in a constructive dialogue” on the study of indirect auto financing commissioned by the American Financial Services Association. The study, which was conducted by Charles River Associates, found that the CFPB’s proxy methodology for measuring disparities in auto dealer reserve was “conceptually flawed in its application and subject to significant bias and estimation error.” Among the study’s other key findings was that the CFPB’s preferred alternative dealer compensation methods, namely the use of a fixed fee, fixed percentage of the amount financed, or hybrid of the two, may increase the cost of credit for consumers.
The letter was sent by the American Bankers Association, American Financial Services Association, Consumer Bankers Association, Financial Services Roundtable, and U.S. Chamber of Commerce. The letter urges the CFPB to “conduct a thorough review of the CRA study, provide a public response to its findings and recommendations, and correct any bias in its testing methodology, before pursuing further dealer mark-up discrimination through supervisory or enforcement action.” The letter also lists specific issues the CFPB should address in its public response, including the bias in the CFPB’s Bayesian Improved Surname Geocoding (BISG) proxy methodology and its overestimation of individuals within protected classes.
The National Automobile Dealers Association, American International Automobile Dealers Association, and National Association of Minority Automobile Dealers issued a press release stating that they “applauded the efforts of five financial services organizations to fix the serious flaws in the Consumer Financial Protection Bureau’s approach to regulating auto financing.”
The FTC recently sent a letter to the CFPB reporting on the FTC’s 2014 activities related to compliance with the Equal Credit Opportunity Act and Regulation B.
Although the FTC has authority to enforce the ECOA and Reg B as to nonbank providers within its jurisdiction, the letter does not include any specific 2014 FTC enforcement activity. The letter only includes information about some of the FTC’s research and policy development efforts and educational initiatives.
With respect to fair lending research and policy development, the FTC’s efforts included hosting a public workshop on the use of “big data,” including how such data impacts the extension of credit to consumers, and a seminar on alternative scoring products. The FTC’s educational initiatives included providing information to consumers through blog posts dealing with ECOA issues related to advertising and other issues related to auto financing.
Isaac Boltansky of Compass Point has issued an estimated timeline for the CFPB’s payday loan rulemaking that includes a July 2015 expected date for the CFPB’s release of a proposed rule.
Mr. Boltansky estimates that the CFPB will initiate a small business panel pursuant to the Small Business Regulatory Enforcement Fairness Act (SBREFA) this month, conclude the SBREFA process in April 2015, and issue its proposal in July 2015. He then expects the comment period on the proposal to end in October 2015, with a final rule to be released in January 2016 that becomes effective in January 2017.