CFPB Under Congressional Pressure And Increased Scrutiny

The last 24 hours have likely been less than thrilling for the CFPB.

The House of Representatives has passed a bill that would limit the U.S. Consumer Financial Protection Bureau’s 2013 auto lending guidance. That guidance notes that lenders either need to impose limits on or eliminate dealerships’ abilities to adjust, on a case-by-case basis, the amount of compensation they keep for arranging a consumer auto loan (known as a dealer reserve).

Dealer reserves are legal, but the CFPB says they can lead to discriminatory loan pricing. The CFPB can only regulate the lenders, as dealers are explicitly outside its purview.

H.R. 1737 — the Reforming CFPB Indirect Auto Financing Guidance Act — would basically revoke the guidance. Congress argues that the rule is a backdoor attempt for the CFPB to grab power over auto lending that it was statutorily denied, as dealer reserves are put onto loans by auto dealers, not auto lenders.

The CFPB has no power over auto dealers — such power is explicitly denied to it — and so the rules essentially use the CFPB's ability to fine a lender to leverage the lender into pressuring the dealers to drop the reserves.

The bill, however, has a long road to becoming law. It is unclear if the Senate will upvote the bill, and even if it does, President Obama will more likely than not veto it, since his opposition to it is well-known.

In fact, the Obama administration directly noted on Monday (Nov. 16) that it opposes the bill because the CFPB guidance “helps ensure customers are not charged disproportionately higher prices for auto loans because of their race, color, religion or other characteristics that should have no bearing on loan decisions.”

So yeah, he won't sign it, and Congress certainly doesn't have the votes to override a veto. It is possible that the votes don't exist to get the bill through the Senate despite being Republican-controlled.

Still, the bill's successful exit from the House floor to the terms of the Senate chamber is itself an achievement, as most legislative efforts originated in the House to dial back CFPB power have died a quiet death from suffocation in committee. And it wasn't just a Republican effort to strike down the organizational brainchild of Sen. Elizabeth Warren; the bill passed the House 332-96 — with 84 Democrats voting with the Republican majority.

The CFPB still has many congressional supporters, but it is also gaining an increasingly loud group of detractors.

Detractors who, it appears, just got a lot more fodder to throw at it.

The CFPB also likely looks forward to an immediate future defending the fact that it let a consumer nonprofit group have pretty significant input into drafting payday lending regulations. According to reports by Politico, this access was granted despite the fact that the nonprofit it worked with sells a product that directly competes with the financial product offered by payday lenders.

The nonprofit in question — the Center for Responsible Lending (CRL) — worked closely with senior CFPB and Obama administration officials with specific a focus on how to pass rules that would limit the vast majority of both short-term loans and lenders. The nonprofit also provided a pile of collateral to support the effort.

The collaboration surfaced when a review of emails exchanged between the CFPB and various nonprofit groups was handed over as part of a Freedom of Information Act request filed by the payday lending industry trade group Community Financial Services Association. And the emails further buttress claims of a very, very close association.

In Nov. 2013, the CFPB requested data from the nonprofit on payday lenders “to help focus these efforts," as it was researching regulations. In December, a worker with the Center for Responsible Lending requested a copy of the agency’s overdraft analysis “so that CRL could make sure ours was as parallel as possible.”

David Silberman, associate director for research, markets and regulations at the CFPB, requested an outline on payday lending from CRL President Mike Calhoun.

“Feel free to improve it!” was Calhoun's response to the request.

It also, arguably, maybe got a little weird somewhere in there.

"It’s been almost three weeks. Starting to have withdrawal pains,” the CFPB's Silberman wrote in April 2014 as he asked to set up another meeting.

The CFPB does not deny the collaboration but did note that it is not out of the ordinary or improper.

"That outreach includes discussions with consumer advocates, industry trade groups, individual financial institutions, academics, state, tribal and local governments and others," CFPB spokesman Sam Gilford said. "The request by CFSA was for the bureau’s correspondence with a specific consumer organization and its affiliates, so the documents do not provide context regarding similar dialogue with other stakeholders. Nor do they reflect the broad range of ongoing engagement that we have with all of our stakeholders."

However, it is worth noting that Self-Help Credit Union, which is affiliated with CRL, was, at the same time, in talks with the CFPB about a new financial product it was calling the “just right” loan. Self-Help reported $25.8 million in profit last year, and it demonstrably participated in fall 2014 emails and conference calls with CFPB staffers to discuss the payday lending alternative.

It is also worth noting that CRL and Self-Help are two separately incorporated entities and that CRL has noted pretty explicitly that it does not use its position on the payday lending regulations to push a FinServ product.

“We haven’t gone in and said, ‘You should look at this product, and this is what it should be,’" CRL's Gary Kalman said. “What we’ve argued for is much looser than the Self-Help product,” referring to the requirements for loans.

However, the CFPB has been criticized in the past for being too insular and secretive, and this new batch of emails will likely do little to quell that claim. And, with Congress apparently in a mood to quash some of the CFPB's power, it might not be a good time for the negative attention. Last week, during a Republican presidential primary debate, the group was already presented as a Big Brother stand-in in a televised ad.

But then again, the CFPB doesn't think the takeaway from these emails is all that bad.

"Perhaps the only real takeaway from these documents is that we respect the work that consumer advocates do, and we value their insight into the challenges facing consumers in today’s financial marketplace," the CFPB's Sam Gilford noted.



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