House Panel Should Reject Bills that would Neuter Consumer Bureau and Benefit Predatory Lenders

Dear Chairman Barr and Ranking Member Foster,

On behalf of the Center for Responsible Lending, we thank you for the opportunity to submit this letter for the record on the House Committee on Financial Services’ Subcommittee on Financial Institutions and Monetary Policy hearing entitled, “Consumer Financial Protection Bureau: Ripe for Reform.”

The Center for Responsible Lending (CRL) is a non-partisan, nonprofit research and policy advocacy organization working to promote financial fairness and economic opportunity for all, end predatory lending, and close the racial wealth gaps. We strongly believe many of the reforms being considered today will harm consumers and the financial markets. These misguided approaches will place every American taxpayer at risk by increasing the likelihood that our nation’s economy may suffer yet another financial crisis.

It is imperative that we remember why the Consumer Financial Protection Bureau (CFPB) was created. Congress created the Bureau in the wake of a national outcry over the many failures in supervision, regulatory compliance, and enforcement exposed by the 2008-2010 financial crisis and the ensuing Great Recession.

We cannot forget the lessons memorialized by the bipartisan and Congressionally mandated Financial Crisis Inquiry Commission, whose final report stated that the primary cause of the crisis was a failure on the part of the government to regulate the financial industry.

A handful of federal regulators had unclear and confused jurisdictions, while their consumer protection divisions were shrunk in size and moved to the proverbial basement offices of those agencies. Simply put, it was clear that the financial market and its federal supervision were ripe for reform, and consumers had no advocate.

In all its wisdom, Congress responded by consolidating the consumer protection functions of those agencies into a single entity and giving the newly created Bureau the same independent funding mechanism as other prudential financial regulators. The Office of the Comptroller of the Currency has been operating this same way for 160 years.

Mr. Chairman, we should not bring back the same policies that led to the Great Recession.  Did we not learn our lesson when homeowners saw their properties plummet 30 percent, on average, from their mid-2006 peak to mid-2009, or when the S&P 500 index fell 57 percent from its October 2007 peak to its trough in March 2009?

In just two years, the Great Recession wiped away $15 trillion in net worth for U.S. households and non-profit organizations. In a four-year span, the Federal Deposit Insurance Corporation (FDIC) was forced to close 465 failed banks. Nearly four million families saw their homes foreclosed and, as millions more felt the economic effects of the ensuing recession, many asked themselves –who is looking out for the average, American consumer?

The bipartisan Financial Crisis Inquiry Commission highlighted its concern with how “Changes in the regulatory system occurred in many instances as financial markets evolved. But as the report will show, the financial industry itself played a key role in weakening regulatory constraints on institutions, markets, and products.” And, the Commission members were troubled by “… the extent to which the nation was deprived of the necessary strength and independence of the oversight necessary to safeguard financial stability.”

The Commission described how three decades of deregulatory policies had “opened up gaps in oversight of critical areas with trillions of dollars at risk, such as the shadow banking system and over-the-counter derivatives markets. In addition, the government permitted financial firms to pick their preferred regulators in what became a race to the weakest supervisor.”

The second most important contributing factor was the rapid rise in shadow banking, which had grown to rival the depository banking system but was not under the same scrutiny or regulation. When the shadow banking system failed, the collapse impacted the flow of credit to consumers and businesses. Much of the pushback we’re seeing today against the CFPB is due to its efforts to regulate these dark corners of the marketplace and the rapid rise of financial services provided by non-bank entities.

Even the International Monetary Fund and World Bank learned from the Great Recession and warned other nations how “political interference in financial sector regulation and supervision contributed to the depth and magnitude of nearly all of the financial crises of the past decade.” These entities urged world governments to find ways to insulate regulators and supervisors from political influence.

As we all know, the Supreme Court has agreed to hear CFPB v CFSA, which will determine the constitutionality of the Bureau’s funding structure. Until then, the Bureau’s funding should remain exactly as it has been since its inception, with no modifications. Doing otherwise would be harmful to consumers and the industry.

Some financial institutions and their advocates may feel tempted to pick and choose which laws they would like to keep on the books should the Supreme Court issue a misguided verdict. Congress must not support changes to the CFPB’s funding or structure before the Court rules. Further, most of the proposals listed for discussion at this hearing – to varying degrees – would weaken or eliminate important safeguards for both consumers and the market as a whole. We unequivocally request that you reconsider these proposals.

There is simply no need for legislation that converts CFPB to a yearly appropriations cycle, as proposed in the TABS Act. CFPB funding is legally defensible, constitutional, and firmly grounded in a rationale of economic stability.

Weakening the CFPB is bad for lenders. The Bureau has created concrete standards like the qualified mortgage safe harbor to the ability-to-repay rule, and establishing small creditor exemptions to reporting and disclosure requirements when necessary. The Bureau has evened the playing field between the big banks, community institutions, CDFIs, and non-depository actors by establishing clear rules of the road.

Undoubtedly, the CFPB has created certainty in the marketplace, and without that certainty, lenders would be left exposed to unacceptable risk and hamstrung in their ability to provide capital.

Simply said, the CFPB is badly needed. The proof is in the results. Since it was created, the CFPB has helped nearly 200 million consumers receive over $16 billion in relief and issued $3.7 billion in civil penalties. Those penalties also go to consumers – even if the company that defrauded them has vanished.

One example of the extent CFPB's efforts support American families is enforcement of the Military Lending Act (MLA). Initially, the MLA covered three types of credit for active-duty service members and their dependents: payday loans, vehicle title loans, and tax refund anticipation loans. In 2015, the Department of Defense expanded the MLA to include additional credit products, adding overdraft lines of credit, installment loans (non-vehicle), certain student loans, and credit cards; limiting rates to 36% for these additional products.

Prior to the MLA and its expansion, servicemembers and their families were victims of egregious triple-digit rates while using open-end lines of credit, personal and installment loans, and car title loans. It is because of the CFPB’s enforcement of the MLA that servicemembers and their families are protected from the known harms of predatory high-interest-rate loans.

New data from Republican polling firm Chesapeake Beach Consulting and Democratic firm Lake Research Partners shows that 79 percent of voters across the political spectrum – including 64 percent of independents and 75 percent of Republicans – overwhelmingly support the mission of the CFPB to regulate the financial industry and protect consumers. These new findings are consistent with over a decade of opinion research showing that voters believe financial companies, while serving an important role, need more regulation.

Americans strongly support the agency’s role in providing protections aimed at new types of financial products. They want the CFPB to protect consumers from excessive fees, abusive high-cost lenders, and discrimination in all areas of banking, not just lending. There is wide agreement that the CFPB is essential to the proper function of our economy.  The Bureau curbs worst practices, punishes repeat offenders, and creates a stable regulatory environment for consumer finance. Inversely, those who stand to benefit from neutering the CFPB peddle in worst practices, break the law repeatedly, and seek to exploit an inconsistent regulatory environment with unsafe products and services.

Mr. Chairman, we urge you to consider the consequences of many of these proposals and put aside any further discussion on changes to the governance and funding structure of the CFPB and other financial regulators until after the Supreme Court can render its judgment.

Thank you again for the opportunity to present these thoughts for the hearing record.

Sincerely,

The Center for Responsible Lending

Contacts: Nadine Chabrier, Senior Litigation and Policy Counsel
David Ferreira, Senior Manager for Government Relations