On April 7, 2016, the Senate Banking Committee held a hearing on the Consumer Financial Protection Bureau’s Semi-Annual Report to Congress and featured testimony from CFPB Director, Richard Cordray. This hearing followed Director Cordray’s appearance before the House Financial Services Committee in March, but unlike the House hearing, exchanges between Republican Senators and Director Cordray remained civil despite vehement disagreement on a number of issues.
During his opening remarks, Republican Committee Chairman Richard Shelby highlighted concerns regarding the “CFPB’s current structure and lack of accountability.” Ranking Member Sherrod Brown (D-OH) defended the Bureau and pointed to the fact that Director Cordray has testified before Congress on 61 occasions as evidence of vigorous congressional oversight.
Not surprisingly, much of Director Cordray’s testimony focused on defending CFPB enforcement actions and responding to other criticisms of Bureau activity. There were a number of Bureau rules and activities discussed:
Shelby criticized the CFPB’s reliance on disparate impact theory to bring enforcement actions against indirect auto lenders. Director Cordray pointed to the U.S. Supreme Court’s decision in Inclusive Communities to vindicate the CFPB’s position, but neglected to address whether disparate impact claims are cognizable under the Equal Credit Opportunity Act (ECOA).
In June 2015, the U.S. Supreme Court held that disparate impact claims are cognizable under the Fair Housing Act (FHA). This means that the FHA permits a plaintiff to establish liability without proof of discriminatory intent by challenging business practices that have a disproportionate effect on minorities and are otherwise unjustified by legitimate rationale. The Supreme Court’s Inclusive Communities decision, however, does not resolve whether disparate impact claims are cognizable under the ECOA.
Senator Cotton discussed the flaws in the Bureau’s eligibility criteria for individuals entitled to relief for discrimination and referenced a Wall Street Journal tool that generates estimates of minority status based on the CFPB’s disparate impact theory. Director Cordray defended the Bureau’s methodology for establishing disparate impact and identifying consumers entitled to redress for discrimination.
Regulation by Enforcement
Shelby added that CFPB enforcement actions against auto finance companies have become the “poster child” for regulation by enforcement and questioned remarks Director Cordray recently made at the Consumer Bankers Association where he described the CFPB’s approach as “a thoughtful strategy for how to deploy [the CFPB’s] limited resources most efficiently to protect the public.” Cordray had also stated that consent orders are “intended as guides to all participants in the marketplace to avoid similar violations and make an immediate effort to correct any such improper practices.” Director Cordray did not back down from those statements. He repeated, “This is good solid law enforcement” and that consent orders function as a signal to companies to improve their practices.
Senators questioned whether consumers will be able to access small–dollar loans after the CFPB’s proposed restrictions on payday lending take effect. Director Cordray explained that consumers will be able to rely on a “reformed” payday loan industry, Fintech companies, as well as community banks and credit unions for their small-dollar credit needs. With regard to Fintech, Senator Warner (D-VA) cautioned that the CFPB must be careful not to stifle innovation while performing its regulatory oversight duties. Director Cordray explained that the CFPB will be “mindful” of that balance but also mentioned that Fintech companies should not be able gain advantages over banks by exploiting the regulatory system.
Senator Rounds (R-SD) expressed concern regarding the CFPB’s policy on no-action letters and questioned why the Bureau would produce so few letters each year in comparison to other agencies that produce hundreds. Director Cordray acknowledged concerns and said that he was “not satisfied” with the Bureau’s policy. He indicated that the Bureau would reconsider the policy but also mentioned that he is “leery of how much volume” the Bureau can handle.
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