CFPB's Cordray: Fintech Firms Should Play by Same Rules as Banks

The Consumer Financial Protection Bureau and bankers found rare common ground Thursday as the agency's director agreed with a long-running industry demand that fintech firms be subject to the same rules as traditional financial institutions.

Speaking before the Senate Banking Committee, Richard Cordray responded to a question about what standards fintech companies will be held to since they are not depository institutions.

"We believe it would not be appropriate for new fintech startups to be getting an advantage in the marketplace because they are arbitraging the regulatory system, they are not complying, they're not taking seriously what the banks and regulated institutions have to do," Cordray said.

Cordray said fintech companies hold "a lot of promise" by potentially lowering costs and providing convenience to consumers. But he noted that subprime mortgages were also considered innovative before the housing meltdown.

He said regulators are focused on keeping up with changes to the market.

"It may be that the banking system and fintech companies may converge in some ways," Cordray said. "We're trying to stay on top of this because if we fall behind it, this could dramatically affect markets over time."

At the hearing, Cordray also fielded questions on payday loans, arbitration agreements, prepaid cards and small-business lending. The most contentious exchanges involved indirect auto lending and regulation by enforcement.

The CFPB has been heavily criticized by the industry for creating uncertainty by using consent orders as a means of crafting policy rather than promulgating rules that firms can comment on.

But Cordray reiterated his view that financial industry executives would be engaging in "compliance malpractice" if they did not glean information from consent orders and respond by cleaning up their own practices.

"People can call it regulation by enforcement, but I call it good law enforcement," Cordray said. "The key principle here is a key principle of justice, [that] similar institutions should be treated the same way. It isn't just that one institution gets whacked. Other institutions that have violated the law should be treated the same way."

Lawmakers were also focused on the agency's pending proposal to rein in payday loans. Sen. Bob Corker, R-Tenn., asked what solutions and alternatives consumers have other than payday lending, worrying that the plan could cut off access to credit.

"Frankly, nobody wants to cut off people's ability to get one or two loans when they need them," Cordray replied. "The payday lending industry itself could reform."

Cordray said the CFPB is "on the verge" of issuing its proposal, which many expect will be released by the end of June. He suggested that delaying the plan would further harm consumers. He also praised credit unions for offering small-dollar loan programs and denied that regulations on payday lenders would leave many low-income consumers without access to credit.

Several senators also homed in on the CFPB's use of the controversial legal theory of "disparate impact," which faults firms for unintentional discrimination. The issue is particularly contentious in auto lending because, unlike in the mortgage industry, borrowers do not have to state their race. That leaves regulators to infer through surnames and ZIP codes whether a borrower is a minority.

Sen. Tom Cotton, R-Ark., questioned why the CFPB did not require potential claimants in its auto loan discrimination settlement with Ally Financial to verify their race "under penalty of perjury."

Cotton said he had found a computer program that could determine a person's race by plugging in a name and a ZIP code, which he likened to the CFPB's own methodology in auto loan discrimination. Cotton said he used the ZIP code of Sen. Sherrod Brown, the ranking Democrat on the committee, and found that Brown "had an 85% likelihood of being black."

"If Sen. Brown financed his vehicle through Ally, would the CFPB have sent him a remuneration check?" Cotton asked. He then added that he not dispute the underlying facts in the Ally case of discrimination against some 325,000 consumers, but rather the CFPB's "method of redress."

Cordray responded by describing how claimants would have to affirmatively respond to receive a check as part of the settlement. By opting in, the consumer was effectively stating that they were a minority borrower, he said.

"Do you set up a system that is difficult to comply with for [consumers] to get their money?" Cordray asked. "I haven't seen a high number of fraud cases here. I believe this was a reasonable approach to get relief to hundreds of thousands of people who were discriminated against."

Separately, Sen. David Vitter, R-La., questioned whether the CFPB had addressed abuses in remittance money transfers, an area the bureau made revisions to in 2014.

"Has your oversight quantified and looked at the widespread use of this by folks working in this country illegally and sending money overseas?" Vitter asked. "Does your rulemaking address massive use of this for folks being in and working in the country illegally? Would the same apply for organized crime?"

Cordray appeared surprised by the question.

"Those would be issues for other parts of the federal government, not us," he said. "I don't think we track undocumented [workers] in any part of the market. Usually I come here and people are criticizing us for expanding our jurisdiction. You're now telling us to look at organized crime and undocumenteds? That is not part of our limited consumer finance jurisdiction."