Yesterday, the U.S. House Financial Services Committee held a hearing to discuss the Consumer Financial Protection Bureau (CFPB or Bureau) and the newly-introduced Consumers First Act. The hearing opened with a sometimes contentious four hours of testimony from the Bureau’s new Director, Kathy Kraninger. This was followed by testimony from a panel of consumer advocates and one industry representative.
The industry representative was Scott Weltman, of Weltman, Weinberg & Reis Co., LTD, a collection firm which recently prevailed in a lawsuit filed against it by the CFPB. Scott Frotman, the Bureau’s former student loan ombudsman who resigned and launched a student loan borrower protection center, also testified. Other panelists included Hilary Shelton from the NAACP, Linda Jun from Americans for Financial Reform, and Jennifer Davis from National Military Family Association.
Kathy Kraninger's full prepared statement can be downloaded here.
Both parts of the hearing covered seven main topics extensively. Each is discussed in detail below.
1. The Bureau’s Purpose and Mission
One thing Director Kraninger, the panelists, and the committee members all agreed on is that the main purpose of the Bureau is to protect consumers, but opinions differed about how to accomplish this. Democratic committee members and the consumer advocate panelists insisted the fact that the Bureau (under former Acting Director Mick Mulvaney) disbanded the Consumer Advisory Board and eliminated the student loan and fair lending offices is evidence it has abandoned its mission of protecting consumers. Kraninger indicated that protections for these groups are still a priority and a reorganization of the Bureau, which is within the Director’s discretion as granted by Congress, is helping to protect consumers. For example, the fair lending section is now within the Director's office which, Kraninger states, gives the issue a higher profile.
Several committee members brought up the reduction of enforcement actions and restitution to consumers under Kraninger and Mulvaney. When asked to define success for the Bureau, Kraninger suggested it should be measured by the prevention of harm, not the number of complaints filed or the dollar amount of penalties. Each enforcement action, according to Kraninger, has its own set of circumstances and any settlements and consent orders are reviewed on a case-by-case basis.
2. Regulation by Enforcement
While listening to some of the questioning and testimony, it appears there is not a common understanding of what “regulation by enforcement” means. The consumer advocates and several on the committee seem to think the phrase “ending regulation by enforcement” means ending enforcement actions altogether. On the other hand, Kraninger, Weltman, and other committee members used the phrase to specifically describe enforcement actions where there is no clear guidance on how to perform a certain activity, and the regulator targets the lawful practices of a single company to establish retroactive rules through consent orders.
An example of the latter is Weltman’s recollection of what happened to his firm. After the Bureau issued its CID to the firm, a two years-long investigation ensued. The Bureau ultimately presented Weltman with a proposed consent order stating that if the firm doesn’t agree to it, the Bureau will file suit. The consent order, according to Weltman, contained provisions that far exceeded what the Bureau accused the firm of doing. It was as if the CFPB was using the investigation as the means to an unrelated end. The firm refused to sign the consent order and fought the matter. Despite forcing the firm to provide over one million recordings of conversations with consumers, the CFPB dropped most of the charges related to these recordings on the eve of trial. After spending over $2 million in attorney fees to fight the case, the firm succeeded at trial.
Weltman’s testimony was accentuated by the fact that the CFPB’s action against his firm was taken under the leadership of Former Director Richard Cordray. The very collection letter the Bureau took issue with was the same letter that Cordray, as the then-Attorney General of Ohio, approved for Weltman to use for collecting on the state’s debts. In fact, it was Cordray who approved the hiring of Weltman's firm after thorough due diligence, and indeed re-hired them a second time as well. It was mentioned that when Cordray was deposed in the Bureau's case, he stated “I don’t know what the state of the law was then, I’m not sure what the state of the law is now.”
Kraninger indicated that enforcement actions should be used on the bad actors who have no intention of complying with laws and regulations, not on the companies that are putting forward a good faith effort to comply. She stated that the Bureau is reviewing how to make the enforcement process more efficient.
3. The Complaints Database
Many of the consumer advocates took issue with the complaints database becoming non-public. According to Jun, the public nature of conumer complaints under Cordray's leadership caused financial services companies to be more eager to respond. She described an instance where one of her clients was unable to get any movement by contacting the institution directly, but once a CFPB complaint was filed, the request moved along.
In response to this, Kraninger indicated that the Bureau has a responsibility to collect consumer complaints without stating that the complaint database needs to be made public. She mentioned that she is listening to consumer groups and industry on the issue and reviewing the comments provided to the Bureau’s prior RFI on the issue.
4. Accountability and Power of the Bureau and its Director
The Bureau’s structure and accountability has been a hot button issue ever since CFPB v. PHH; it was front and center at the hearing as well. Kraninger consistently stated that it is her duty to carry out the responsibilities laid out by Congress, and that it is for Congress to decide what those duties look like and to whom the Bureau and its Director should be accountable. As it stands, Congress gave the Director "tremendous authority" through its legislation and only Congress can change this.
5. The Student Loan Crisis
Everyone across the board agreed that student loans need to be a top-priority. Frotman spoke at length about the $1.5 trillion in outstanding student debt and what the Cordray-era CFPB did to combat the issue. He and several committee members noted that his former position – the student loan ombudsman – has yet to be filled six months after his resignation and that the Bureau’s 2018 report on student debt is yet to be released.
Kraninger agreed that student debt is a big issue. She stated that there is currently a job posting out for the student loan ombudsman position. According to Kraninger, Mulvaney did not fill the role because he wanted his successor to be able to make the choice. One committee member raised twice – once during Kraninger’s testimony, once during Frotman’s testimony – that the job posting only went up the day prior to the hearing. Kraninger mentioned that the 2018 report will be issued once the position is filled.
6. Controversy Over Bureau’s Payday Lending Rule
The Bureau’s decision to pull back the payday lending rule was also of controversy at the hearing. Kraninger stated that reconsideration of the rule is driven by concerns for "legal and factual sufficiency issues." The primary section causing the rollback is the requirement for covered lenders to assess a borrower's ability to pay. The Bureau is also reviewing the concept of allowing three pings for automatic payments. The CFPB is currently seeking comments on the payday lending rule and Kraninger mentioned she welcomes any and all comments submitted on the issue.
This caused a lot of concern among the consumer advocates. It was mentioned that delaying the payday lending rule puts the most at-risk consumers in danger. Jun said the payday lending rule was a culmination of 5.5 years of research and that nothing in the past 18 months warranted a rollback.
7. Whether the Bureau Has Supervisory Power for Military Lending Act (MLA)
The Bureau’s decision to stop supervision of MLA compliance was a common concern by many left-leaning committee members and consumer advocates. Kraninger stated that according to her reading of the law, the Bureau currently does not have authority to conduct such supervision. However, Kraninger also mentioned that she welcomes Congress providing that authority to the Bureau and that she has provided Congress with proposed legislation that would allow this. Discussions on this issue seemed like a tennis match, with both sides believing the ball was in the other side’s court.
Overall, while multiple important issues were discussed and fair points were made on both sides, the majority of the session provided an opportunity for grandstanding. The structure of these hearings, which allows only five minutes of questioning per member, often favors rhetorical questions, or cutting off witnesses attempting to respond. The goal simply seems to be to get a point and/or a non-answer on the record.
Finally, as Rep. Anthony Gonzalez (R-OH) put it, neither side is happy with the way things are at the CFPB; Democrats are unhappy with the current direction of the Bureau and Republicans were unhappy with the direction of the Bureau under Cordray. It’s up to Congress to figure this out, since it was Congress that gave this kind of flexibility and authority to the Bureau and its Director.