Cordray Defends Rulemaking Delays to Senate Panel

WASHINGTON — The Consumer Financial Protection Bureau is taking longer than expected to issue rules on financial products like prepaid cards, payday loans, student loans as well as releasing a final report on arbitration clauses.

But CFPB Director Richard Cordray sought to reassure lawmakers on Tuesday that the agency would soon address many of those areas within the year. Speaking at a Senate Banking Committee hearing on the CFPB's budget, he also confronted fears about the agency's "big data collection," saying it could not be reverse engineered to identify personal information.

Below are key takeaways from the hearing:

Prepaid Card Regs Delayed Until End of Summer
Cordray acknowledged that the CFPB will miss its own tentative schedule to have a rulemaking out on prepaid cards this month, something that sparked worries from some lawmakers.

"The last time you were here in November we discussed your upcoming rulemaking on prepaid cards," Sen. Robert Menendez, a Democrate from New Jersey, told Cordray. "You can have products that largely remain unregulated. Consumers can fall victim to all types of hidden or abusive fees being charged for customer service or just to check your balance."

Cordray said it was taking the agency "a bit longer" to release new regulations but that was not because of the rulemaking process.

"It will be end of the summer before that can happen. But it's a very high priority for us right now," he said. "It doesn't indicate any particular problems about the rulemaking, just that it's hard to work through some of these issues. We're getting there, and we'll have something fairly soon."

Payday Lending Regs Also Pushed Back
Some senators also raised concerns about where and when the CFPB will move on regulation for short-term, small-dollar advances such as payday lending. The CFPB is the only bank regulator that has not issued some form of guidance on this product, although it is also the only agency with authority to regulate non-bank payday lenders.

Some senators urged Cordray to ensure the final regulation would not be too narrow, focusing solely on traditional payday lending, but also encompass auto title loans and online lending.

"Targeting only traditional payday loans allows lenders to move into other products that trap consumers in a cycle of debt," said Sen. Sherrod Brown, D-Ohio. "As the bureau considers new oversight for the high-cost loan market, how do you ensure that new rules will protect consumers through the whole range of products, including obviously traditional payday loans, but online payday loans, auto title loans, installment loans?"

Cordray said the agency was working with the Department of Defense, which was the first agency ordered by Congress to place a cap on the interest rate that payday lenders could charge military personnel and their families. Cordray said the Defense rule was ultimately too narrow and that high-cost lenders found a way to garner the same business from military families off of bases.

That is "exactly the same type of problem we're going to be dealing with in small-dollar lending markets," Cordray said. "It is taking us somewhat longer as a result to address this, but I think it's well worth a little additional time in order to make sure that what we do won't be made a mockery of by people circumventing it through just transforming their product slightly."

Sen. Mike Crapo, the Banking Committee's lead Republican, advised Cordray to do a more "thorough" cost-benefit analysis on each of its pending rules so as not to accidently push consumers into unregulated financial companies.

"As the CFPB proceeds with rules targeting short-term and small-dollar credit, overdraft protection, auto financing, mortgage servicing and settlement, and arbitration, it must fully understand how these rules will affect the cost and availability of credit for consumers," Crapo said. "I'm concerned that many of the CFPB's recent proposals and actions will continue to push mainstream financial products into unregulated areas, diminish consumer choice, and make certain products unaffordable. Those outcomes could come at a great cost to the consumer and should be prevented."

Student Loan Regulation Is a Cliffhanger
The swelling student loan debt also came to the fore at the hearing, even though the CFPB only recently began supervising large student loan servicers. The agency has, however, repeatedly raised problems with the servicing of student loans in reports spanning the past year.

"Whether that will lead to specific standards — and we do a lot of work with the Department of Education on these issues — I don't know yet," Cordray said. "But we now have the ability to go in and actually correct problems on the spot, which we did not have before. And it's going to make a significant difference in this market."

During the hearing, Menendez introduced bill sponsored by Democratic senators Brown and Cory Booker of New Jersey that would require student lenders to clearly define the obligations of borrowers and a cosigner in the event of death or disability. Menendez said he also plans to introduce another bill "in the coming weeks" that addresses a tax issue when a debt is forgiven and when a current borrower is automatically placed into default after the cosigner dies, is disabled or files for bankruptcy. The CFPB already released a report identifying the latter issue to Congress in April.

But it was unclear whether the CFPB needed legislation to go after student lenders who were not allowing borrowers to release co-signers in circumstances such as death.

"I'm not clear in my mind, as I sit here now, whether we need legislation on that or not," Cordray said when Menendez asked for some form of guarantee. "Obviously, when things are written in legislation they're more lasting and more secure."

Final Arbitration Report Expected by Yearend
The CFPB's founder, Massachusetts Sen. Elizabeth Warren, also prodded Cordray on when the agency would issue a final report on arbitration clauses, which are typically imbedded in account and credit agreements that require a customer to go through an arbitrator rather than dispute a claim in court.

"The bureau released the preliminary reports last December and they were damning. Force arbitration clauses are everywhere, particularly in contracts with the largest banks. And these clauses dramatically restrict the legal options available to consumers," Warren said. "I know there are additional issues that the bureau wants to examine in its final study. When do you think the bureau will have that study?"

Cordray said he expects the final report to come out this year and then they would make decisions on potential rulemaking.

"I understand that some people think we should take forever on this. And other people think we should have finished it yesterday," Cordray said. "I have my own views. But we're pushing along, and we're trying to do the work as Congress set it out in that framework, the two-step, just as they said."

Data Collection Continues to Spur Worries
Senators on both sides of the aisle also continued to raise concerns about the so-called "big data collection" that the CFPB is performing. The agency is primarily collecting data on credit cards and mortgages in an effort to better understand what is happening in the market and inform its rulewriting process.

"I understand the need to have enough to do the analysis. But we need to be very, very mindful of the sensitivities of consumers today about their information," said Democratic Sen. Heidi Heitkamp of North Dakota. "And if they look at the federal government, we haven't exactly given them reason to believe that we're going to be confidential with it, or that we're going to be straightforward."

Crapo said he was also concerned to hear in April that the Federal Housing Finance Agency and CFPB will expand the national mortgage database to include a person's religion, Social Security number and other links to various forms of credit. Several senators have long raised concerns that this data collection could be reverse engineered to identify a person.

"This information is undoubtedly intrusive, unnecessary and contrary to the CFPB's public statements of not collecting and using personally identifiable information," Crapo said.

Cordray disagreed, saying none of the data would enable a person to be individually identified. He said the agency has not changed its collection strategy and that while the data source it pulls information from could include items like religion, the agency itself will not store that in its own database.

"The national mortgage database, as it's conceived, will not include personally identifiable information, such as name, address, Social Security number," he said. "I also want to make a point to assure you and your colleagues, because the question was raised, there are no plans and we will not be including religion in the national mortgage database. … We have to know more about the mortgage market to prevent this economy from cratering again on the same grounds it did before."