WASHINGTON — GOP lawmakers and witnesses at a Senate Banking Committee hearing pointedly criticized the Consumer Financial Protection Bureau on Tuesday, setting the stage for a likely contentious hearing with the agency's director later in the week.
Richard Cordray is slated to appear before the panel on Thursday, when he is expected to face tough questions on the bureau's use of enforcement actions, its complaint database and its proposal to rein in payday lending, judging from questions asked at the earlier hearing.
Following are highlights of the hearing — and items to watch out for when Cordray testifies.
Enforcement vs. Rulewriting
Senate Republicans are increasingly concerned about the CFPB's use of enforcement actions to craft policy over writing proposals or guidelines that would be subject to public comment.
"The consumer agency has habitually used enforcement actions … to set market standards rather than going through the formal rulemaking process to set clear rules of the road where people will have something definite," said Senate Banking Committee Chairman Richard Shelby, R-Ala., near the start of the hearing.
Witnesses agreed that was a strategy of the agency. The most prominent is the agency's actions against indirect auto lenders, in which private documents have shown CFPB officials are seeking a "market-tipping" enforcement action rather than writing a new rule.
Leonard Chanin, a former CFPB official who is now of counsel at Morrison & Foerster, said the enforcement decisions "are quite narrow in scope" and that they lead to inconsistencies in the marketplace because while some institutions might take head from those actions, the principles are not binding to other institutions.
"The enforcement actions are solely between the parties involved … so they do not affect the thousands of other intuitions out there," he said.
David Hirschmann, president and chief executive officer of the U.S. Chamber of Commerce's Center for Capital Markets Competitiveness, said the CFPB's actions against indirect auto lenders have been ineffective.
"Its efforts to regulate the auto dealer market through enforcement actions against nondealers have failed to date, and there is no reason to think that continuing on the same path will bring the bureau a different result in the future," he said.
Consumer Complaint Database
During the hearing, critics hammered the agency for posting narratives in its consumer complaint database, comparing it to a government-sponsored Yelp for financial matters.
"The idea of just dumping unverified consumer narratives out in the public record, I can't see how that furthers any coherent regulatory purpose," said Todd Zywicki, executive director of the Law and Economics Center at George Mason University School of Law.
But others argued it was a way to empower consumers.
"I don't know of any consumer who would take time out of their schedule to just write an arbitrary complaint," said the Rev. Willie Gable Jr., doctor of ministry and chairman of the board at the National Baptist Convention USA.
Sen. Sherrod Brown, the top Democrat on the panel, called criticisms of the database a "personal affront" because it represents one of the few tools that consumers have to pursue recourse in the face of lobbying efforts by the financial industry.
"The one-sided, inaccurate, unverifiable complaints from consumers … this is a town that specializes in one-sided," Brown said.
Payday Lending Proposal
Witnesses at the hearing also narrowed in on the CFPB's pending proposal to restrict payday lending. Some called for the agency to adopt the same annual percentage rate cap that can be charged to members of the military.
"This Congress found that it was necessary and saw fit to pass a 36% cap for the military. I believe if it is good for the military it ought to be good for America," Gable said.
Brown concurred, asking, "Why shouldn't it apply to others?"
But one of the arguments against a rate cap is that many payday lenders would exit the market, limiting the options available to consumers and forcing them to turn to perhaps even more expensive alternatives.
Sen. Jeff Merkley, Democrat of Oregon, a state that implemented a rate cap, acknowledged that the payday market has shrunk since then, but it "didn't disappear," he said, and now consumers who take out the loans "get a far better deal."