Editor's Note: This story has been revised from the original. Background paragraphs were added to describe the CFPB's mortage plan and a separate one by banking regulators. Paragraph two was updated to clarify that Cordray was not opposing the banking regulators' plan.
The Consumer Financial Protection Bureau opposes a 20% down payment on low-risk mortgages and will not use its special rulewriting powers to undermine the Dodd-Frank Act, Director Richard Cordray told lawmakers Thursday.
Testifying before the Senate Banking Committee, Cordray made clear that a 20% down payment requirement will not be part of a regulation the CFPB is crafting dictating underwriting standards for loans classified as low risk.
"The 20% down payment is not part of our proposal," Cordray said, in response to a question from Sen. Mike Crapo, R-Idaho, about whether lenders should get relief from the CFPB's pending mortgage requirements if they provide proof of a borrower's ability to repay.
A 20% down payment "would not make sense as some sort of rule that would be imposed on the mortgage market," Cordray said.
The CFPB is currently drafting a plan that would require mortgage lenders to verify a borrower's ability to repay a loan, including creating a set of "qualified mortgages" that would automatically comply with the rule.
While Cordray clearly indicated the CFPB did not intend to make a down-payment requirement as part of the QM proposal, it was unclear if he would also oppose a 20% down payment as part of a separate, but related, plan to designate certain loans as "qualified residential mortgages."
The CFPB is crafting the QM plan, but the federal banking regulators have proposed such a down-payment requirement for QRM loans — which would be exempt from a regulation that requires lenders to retain at least 5% of the risk of a loan they sell into the secondary market.
Crapo urged Cordray to convene a small business advocacy review panel to discuss the impact of the proposal, due in January. There is not enough time to hold one, Cordray said.
Meanwhile, Richard Shelby of Alabama, the panel's ranking Republican, grilled Cordray about the extent of the CFPB's powers.
The bureau is "completely immune from congressional oversight," said Shelby, who asked several questions about whether it has the authority to modify, or grant exemptions from, certain statutory requirements of Dodd-Frank and bypass congressional will.
Shelby singled out a mortgage disclosure requirement in Dodd-Frank that the CFPB recently said would be difficult to explain to consumers and that it was considering exempting some companies from the requirement.
"In this case, the bureau could ask Congress to amend the statute," Shelby said. "Instead, the bureau has interpreted its exemptive authority so broadly that it believes it can just ignore the statute. After all, if the bureau can easily ignore a statute, it raises the more serious question of whether Congress or the bureau has the final say over what the law is."
Cordray sought to defuse the matter with a polite — yet firm — reply.
"I absolutely do not think we can rewrite statutes," Cordray said. "I will say, interestingly enough, there are many requests for us to consider our exemption or modification authority ... [but] we do not believe we have the authority to ignore or rewrite the law."
Senate Democrats generally praised Cordray, giving him an opportunity to describe how the bureau has responded to the 72,297 complaints it had received from consumers as of Sept. 3. At that rate, the CFPB is expected to field 120,000 consumer complaints a year, the majority of them on mortgage lending and servicing.
"The volume of complaints we're receiving is heavy, and it's hard work to keep up with it," Cordray said.
Sen. Bob Corker, R-Tenn., questioned why the CFPB puts complaints against banks and other financial institutions on its website.
"What is the purpose in putting those [complaints] up publicly, and do you all verify that they are real?" Corker asked. "Are you first checking out the complaint to make sure it's real or is it a gossip board?"
After explaining how the CFPB weeds out some consumer complaints and verifies the relationship between a consumer and a company, Cordray said the process puts pressure on financial institutions. Two other federal agencies, the Consumer Product Safety Commission and the National Highway Traffic Safety Administration, have a similar process of publicizing complaints, he said.
"We do find it somewhat incentivizes companies on how they can serve their customers better," Cordray said.
While Cordray clearly has plenty of detractors, Senate Democrats spent a good portion of the hearing congratulating the CFPB director.
Sen. Robert Menendez, D-N.J., singled out the CFPB's first enforcement action in July against Capital One, which agreed to refund $140 million to consumers for misleading marketing of its products.
"But for the agency, I personally doubt whether consumers would have been protected," said Menendez, who told Cordray that his "modesty is a challenge."
Capital One "responded extremely responsibly," to the enforcement actions, "and was as distressed about the problem as we were," Cordray said.
"They addressed it, they resolved it, and I thought it was quite commendable and some of that got lost in the shuffle and I wanted to say that publicly," he said.