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75–523 PDF 2012

CREDIT CRUNCH: IS THE CFPB RESTRICTING 

CONSUMER ACCESS TO CREDIT? 

HEARING 

BEFORE THE

SUBCOMMITTEE ON TARP, FINANCIAL SERVICES 

AND BAILOUTS OF PUBLIC AND PRIVATE PROGRAMS 

OF THE

COMMITTEE ON OVERSIGHT 

AND GOVERNMENT REFORM 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

JULY 24, 2012 

Serial No. 112–166 

Printed for the use of the Committee on Oversight and Government Reform 

( 

Available via the World Wide Web: http://www.fdsys.gov 

http://www.house.gov/reform 

(II) 

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM 

DARRELL E. ISSA, California, Chairman 

DAN BURTON, Indiana 

JOHN L. MICA, Florida 

TODD RUSSELL PLATTS, Pennsylvania 

MICHAEL R. TURNER, Ohio 

PATRICK T. MCHENRY, North Carolina 

JIM JORDAN, Ohio 

JASON CHAFFETZ, Utah 

CONNIE MACK, Florida 

TIM WALBERG, Michigan 

JAMES LANKFORD, Oklahoma 

JUSTIN AMASH, Michigan 

ANN MARIE BUERKLE, New York 

PAUL A. GOSAR, Arizona 

RAU ́ L R. LABRADOR, Idaho 

PATRICK MEEHAN, Pennsylvania 

SCOTT DESJARLAIS, Tennessee 

JOE WALSH, Illinois 

TREY GOWDY, South Carolina 

DENNIS A. ROSS, Florida 

FRANK C. GUINTA, New Hampshire 

BLAKE FARENTHOLD, Texas 

MIKE KELLY, Pennsylvania 

ELIJAH E. CUMMINGS, Maryland, Ranking 

Minority Member 

EDOLPHUS TOWNS, New York 

CAROLYN B. MALONEY, New York 

ELEANOR HOLMES NORTON, District of 

Columbia 

DENNIS J. KUCINICH, Ohio 

JOHN F. TIERNEY, Massachusetts 

WM. LACY CLAY, Missouri 

STEPHEN F. LYNCH, Massachusetts 

JIM COOPER, Tennessee 

GERALD E. CONNOLLY, Virginia 

MIKE QUIGLEY, Illinois 

DANNY K. DAVIS, Illinois 

BRUCE L. BRALEY, Iowa 

PETER WELCH, Vermont 

JOHN A. YARMUTH, Kentucky 

CHRISTOPHER S. MURPHY, Connecticut 

JACKIE SPEIER, California 

LAWRENCE J. BRADY, Staff Director 

JOHN D. CUADERES, Deputy Staff Director 

ROBERT BORDEN, General Counsel 

LINDA A. GOOD, Chief Clerk 

DAVID RAPALLO, Minority Staff Director 

SUBCOMMITTEE ON TARP, FINANCIAL SERVICES AND BAILOUTS OF PUBLIC AND

PRIVATE PROGRAMS

PATRICK T. MCHENRY, North Carolina, Chairman 

FRANK C. GUINTA, New Hampshire, Vice 

Chairman 

ANN MARIE BUERKLE, New York 

JUSTIN AMASH, Michigan 

PATRICK MEEHAN, Pennsylvania 

JOE WALSH, Illinois 

TREY GOWDY, South Carolina 

DENNIS A. ROSS, Florida 

MIKE QUIGLEY, Illinois, Ranking Minority 

Member 

CAROLYN B. MALONEY, New York 

PETER WELCH, Vermont 

JOHN A. YARMUTH, Kentucky 

JACKIE SPEIER, California 

JIM COOPER, Tennessee 

(III) 

C O N T E N T S 

Page 

Hearing held on July 24, 2012 ............................................................................... 1 

WITNESSES 

Mr. Richard Cordray, Director, Consumer Financial Protection Bureau 

Oral Statement ................................................................................................. 4 

Written Statement ............................................................................................ 7 

Mr. Douglas Fecher, President and CEO, Wright-Patt Credit Union, Inc. 

Oral Statement ................................................................................................. 43 

Written Statement ............................................................................................ 46 

Mr. Steven I. Zeisel, Executive Vice President & General Counsel, Consumer 

Bankers Association 

Oral Statement ................................................................................................. 58 

Written Statement ............................................................................................ 60 

Mr. Michael D. Calhoun, President, Center for Responsible Lending 

Oral Statement ................................................................................................. 72 

Written Statement ............................................................................................ 74 

Dr. Mark A. Calabria, Director of Financial Regulation Studies, CATO Institute 

Oral Statement ................................................................................................. 85 

Written Statement ............................................................................................ 88 

APPENDIX 

Mr. Fred R. Baker, Jr., Statement on behalf of National Association of Federal Credit Unions ............................................................................................... 106 

Monetary Policy Report to the Congress ............................................................... 108 

(1) 

CREDIT CRUNCH: IS THE CFPB RESTRICTING 

CONSUMER ACCESS TO CREDIT? 

Tuesday, July 24, 2012, 

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON TARP, FINANCIAL SERVICES, AND

BAILOUTS OF PUBLIC AND PRIVATE PROGRAMS, COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM, Washington, D.C. 

The subcommittee met, pursuant to call, at 10:03 a.m., in Room 

2247, Rayburn House Office Building, Hon. Patrick T. McHenry 

[chairman of the subcommittee] presiding. 

Present: Representatives McHenry, Guinta, Buerkle, Amash, 

Meehan, Quigley, Maloney, Welch, and Speier. 

Also Present: Representative Cummings. 

Staff Present: Brian Blase, Majority Professional Staff Member; 

David Brewer, Majority Counsel; Katelyn E. Christ, Majority Professional Staff Member; John Cuaderes, Majority Deputy Staff Director; Howard A. Denis, Majority Senior Counsel; Linda Good, Majority Chief Clerk; Christopher Hixon, Majority Deputy Chief Counsel, Oversight; Cheyenne Steel, Majority Press Assistant; Noelle 

Turbitt, Majority Assistant Clerk; Jaron Bourke, Minority Director 

of Administration; Kevin Corbin, Minority Deputy Clerk; Ashley 

Etienne, Minority Director of Communications; Jason Powell, Minority Senior Counsel; Dave Rapallo, Minority Staff Director; and 

Davida Walsh, Minority Counsel. 

Mr. MCHENRY. The Committee will come to order. The Subcommittee on TARP, Financial Services, and Bailouts of Public and 

Private Programs. Our hearing is entitled Credit Crunch: Is the 

CFPB Restricting Consumer Access to Credit? 

We have two panels today. First, Director Richard Cordray of the 

Consumer Financial Protection Bureau; and then in the second 

panel we have four individuals that are both from think tanks and 

from the private sector. 

The tradition of this Subcommittee is to begin with the Oversight 

and Government Reform Committee’s mission statement. 

We exist to secure two fundamental principles: first, Americans 

have a right to know that the money Washington takes from them 

is well spent and, second, Americans deserve an efficient, effective 

government that works for them. Our duty on the Oversight and 

Government Reform Committee is to protect these rights. Our solemn responsibility is to hold government accountable to taxpayers, 

because taxpayers have a right to know what they get from their 

government. We will work tirelessly in partnership with citizen 

watchdogs to deliver the facts to the American people and bring 

2 

genuine reform to the Federal bureaucracy. This is the mission 

statement of the Oversight and Government Reform Committee. 

I will now recognize myself for the purposes of an opening statement for four minutes. 

Today’s hearing on this Subcommittee will examine how regulatory actions of the CFPB can restrict access to credit, as well as 

the metrics and tools the Bureau employs to consider the availability of credit in the course of its supervisory rulemaking and enforcement work. 

The American people deserve consumer protection regulations 

that discourage and discipline financial fraud without compromising access to credit for consumers and small businesses. As our 

Country continues to exhibit sluggish job growth and the possibility 

of slipping back into a recession, it has become more important 

than ever to ensure that our markets encompass adequate liquidity 

and credit for American businesses and families. 

Mr. Cordray’s unprecedented appointment earlier this year has 

already resulted in a lawsuit that, if successful, could invalidate all 

of the CFPB’s actions since his appointment. Such legal wrangling, 

as well as the regulatory actions of the CFPB itself, creates uncertainty that may restrict credit as financial institutions brace for 

full implementation of Dodd-Frank. 

Mr. Cordray has been a great public servant over his career. We 

may disagree on policy, but he has a strong reputation. The appointment and the process of appointment does raise a lot of concerns outside of that. 

Mr. Cordray’s own testimony before this Subcommittee has not 

helped to alleviate much of the concern about uncertainty, as he 

and the Bureau have been vague, and continue to be vague in 

many regards, about the definition of ‘‘abusive practice’’ by market 

participants. 

Since the Subcommittee last met with Mr. Cordray in January, 

the CFPB has proposed or finalized rulemaking that will increase 

the regulatory burden for financial institutions and consumers 

without conducting what I believe is necessary, which is a thorough 

and robust cost-benefit analysis. 

The Bureau’s consideration of the Qualified Mortgage rule has 

been met with dismay from lenders and experts who believe the 

rule could make consumer borrowing more expensive. That is a 

great concern. Many experts also believe that the QM rule could 

make it harder for consumers to compare mortgage options and reduce consumer choice. That is a major concern as well. I would 

urge Mr. Cordray and the CFPB to consider these consequences as 

the housing market is finally beginning to see some daylight. 

In addition, the finalized rule to regulate international remittance transfers sent from consumers in the United States has already resulted in a reduction of services for consumers. State National Bank of Texas has stopped offering the service and estimates 

that roughly 3,000 to 4,000 other community banks will exit the remittance transfer business because of the rule. 

In light of these negative consequences to certain CFPB regulatory actions, the Bureau should join other independent regulators 

that have taken steps to improve their cost-benefit analysis. Both 

the CFTC and the SEC have, of recent, undertaken efforts to imVerDate Aug 31 2005 10:15 Aug 23, 2012 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 C:\DOCS\75523.TXT APRIL
3 

plement vigorous cost-benefit analysis of the likely economic consequences of new regulations. With our fragile economic situation, 

now is not the time for overly aggressive, shortsighted rulemaking 

by the CFPB. 

Today’s oversight hearing represents this Subcommittee’s commitment to ensuring that government regulators strike the appropriate balance between protecting consumers and ensuring that 

there is sufficient access to credit. That is the purpose of today’s 

hearing. 

I thank Mr. Cordray for returning before this Subcommittee and 

for his willingness to submit to oversight from Congress. I certainly 

do appreciate that. 

With that, I will now recognize Mr. Quigley of Illinois, the Ranking Member, for four minutes. 

Mr. QUIGLEY. Thank you, Mr. Chairman, for holding today’s 

hearing, and thank all of our witnesses for participating this morning. 

Congress created the CFPB in the wake of the financial crisis 

when it became painfully obvious to everyone that credit markets 

were not working for American consumers. Unscrupulous lenders 

were able to take advantage of consumers by selling them faulty, 

fraudulent, and deceptive financial products. This reckless lending 

poisoned the financial system and directly contributed to the credit 

crunch and the mortgage meltdown. 

We explicitly created the CFPB to protect Americans against 

these fraudulent and abusive products, and we know too well that 

the accumulation of faulty products in our financial system is as 

much a risk to the system as a whole as it is to the borrower and 

the lender. 

I would like to read from the CFPB’s mission statement: To 

make markets for consumers financial products and services work 

for Americans, whether they are applying for a mortgage, choosing 

among credit cards, or using any number of other consumer financial products. 

Markets work best and access is enhanced when regulators reduce the risk of fraud and deception. 

Director Cordray, I would like to welcome you back to the Subcommittee and thank you for testifying today. This is the fourth 

Oversight Committee hearing, by my count, to focus on the CFPB. 

Director, in January you testified before the Subcommittee that 

upon your swearing in as Director the CFPB gained ‘‘its full authorities to investigate and bring enforcement actions.’’ 

Earlier this month the CFPB announced its first public enforcement action, which focused on credit card marketing. Specifically, 

on July 18th, 2012, the CFPB found that the vendors of Capital 

One Bank engaged in deceptive marketing tactics to pressure or 

mislead consumers into paying for add-on products. Capital One 

was ordered to refund approximately $140 million and pay an additional $25 million in penalties. 

The type of action is important, as you stated in January, to ensure that financial providers are held accountable if they violate 

the law and that the rules of the road governing banks and nonbanks are applied evenhandedly. This is exactly why we created 

4 

CFPB, so I am glad to see it actively protecting consumers through 

enforcement actions. 

I am also glad to see CFPB taking action on student loan debt. 

In March the Federal Reserve of New York reported that the total 

outstanding student loan balance is $870 billion. That is greater 

than the total credit card debt and auto loan debt combined. The 

Federal Reserve also reported that Americans over the age of 60 

currently owe $36 billion in student loans, highlighting the unique 

longevity of student loan debt. The sheer amount of outstanding 

student loan debt demands attention, especially as we look to finance our children’s education. 

In July, the CFPB rolled out a tool to help students who have 

fallen behind on their payments so that they understand their options for going forward. This is a welcome step forward in an area 

of the economy that has previously received too little attention. I 

look forward to further CFPB engagement on the student loan debt 

issue. 

Thank you, Mr. Chairman, and I yield back. 

Mr. MCHENRY. I thank the Ranking Member. 

Members will have seven days to submit opening statements for 

the record. 

We will now recognize our first panel. The Honorable Richard 

Cordray is the Director of the Consumer Financial Protection Bureau. 

It is the policy of this Committee that all witnesses be sworn before they testify. You have testified regularly before Congress and 

I appreciate that, but if you would please rise and raise your right 

hand. 

Do you solemnly swear or affirm that the testimony you are 

about to give will be the truth, the whole truth, and nothing but 

the truth? 

[Witness responds in the affirmative.] 

Mr. MCHENRY. Thank you. You may be seated. 

Let the record reflect that the witness answered in the affirmative. 

We will now begin with five minutes of testimony before this 

Subcommittee, then we will go to a round of questions, as you well 

know. You are very aware of the lighting system that we have. You 

have five minutes to summarize your opening statement. Green 

means go, yellow means hurry up, and red means stop. So, with 

that, we would certainly like to give you every opportunity to testify. Mr. Cordray. 

WITNESS STATEMENT 

STATEMENT OF RICHARD CORDRAY 

Mr. CORDRAY. Thank you, Chairman McHenry, Ranking Member 

Quigley, and members of the Subcommittee. Thank you for inviting 

me back today to talk about the importance of the availability of 

credit. 

At the Consumer Financial Protection Bureau we know that access to credit means access to opportunities. Mortgages allow people to buy a home and spread the payments over years; student 

loans give people access to further education; and credit cards give 

5 

people immediate and convenient access to money when they need 

it. These products can help people achieve their dreams. 

Unfortunately, the financial crisis of 2007, 2008 caused investors 

to flee lending markets. Most of these markets have recently shown 

some signs of improvement. Credit card originations are growing at 

a modest pace and we are seeing a more significant growth in auto 

and student lending. But it concerns us, as it surely concerns you, 

that many consumers today are shut out of certain credit markets, 

especially the residential mortgage market. 

Lending standards are quite tight and it appears that many creditworthy borrowers are having trouble buying homes. This is making it tough on consumers and it is making it tough on a broader 

economy. 

At the Consumer Bureau, we are working to help change this for 

the better. The Dodd-Frank Wall Street Reform and Consumer Protection Act directs us to use our authority to achieve two broad 

purposes: first, we are to ensure that the markets for consumer financial products and services are fair, transparent, and competitive; second, we are to ensure that all consumers have access to 

these markets. Because credit can create opportunity, we think 

these two goals work in tandem. 

This means we work with the industries we regulate to come up 

with the best, most common sense solutions to problems. We want 

to increase opportunities for consumers, not diminish them. This 

means we are coordinating our rules to reduce unnecessary burdens and we are holding small business review panels to help us 

gather input from small providers in particular, such as community 

banks and credit unions. 

Indeed, the Dodd-Frank Act specifies that in our rulemakings we 

must explicitly consider the potential effects of our rules on access 

to credit. We do that by consulting with industry and with consumer groups, and we work hard to consider all the evidence when 

analyzing the issues. 

Before we propose a rule, a team of attorneys, economists, and 

market experts evaluates alternatives in terms of their potential 

consequences for consumers, providers, and the market. This team 

conducts quantitative and qualitative research wherever possible. 

They obtain and analyze data and review relevant studies. They 

consult extensively with industry experts, consumer advocates, and 

stakeholders from small and large firms, banks and nonbanks. 

Industry veterans on our staff help us understand how the market really works and how a rule might affect consumers and providers, both substantively and operationally. For example, our 

work on the ability-to-pay mortgage rule illustrates how seriously 

we take our obligation to consider effects on credit availability. 

Later this year we will finalize rules to implement this new statutory requirement that, before making a mortgage, lenders make a 

good faith and reasonable determination that borrowers have the 

ability to repay the loan. Lenders will have to verify and document 

that point. 

In implementing this statute, we want to fulfill its purpose of ensuring that consumers are not sold mortgages they cannot afford, 

and we want equally to ensure that consumers who can afford to 

repay loans can find those loans are available to them in the marVerDate Aug 31 2005 10:15 Aug 23, 2012 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 C:\DOCS\75523.TXT APRIL
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ket. We will seek to define these lower risk loans, known as qualified mortgages, carefully so that, as the market stabilizes, every 

segment of the market is competitive and investors will have an incentive to participate in the lending market. We will strive to craft 

a sensible rule that works for the market throughout the credit 

cycle, while being attentive to just how fragile and risk-averse the 

market seems to be today. 

We recently reopened the comment period to be as transparent 

as we can about the data we are using in this rulemaking and to 

see if lenders or others have any more pertinent data to share with 

us. Through these additional efforts, we hope to muster the best 

available evidence to help us decide how to implement the statute 

in a manner that will both prevent unaffordable loans and preserve 

access to credit. 

In sum, Mr. Chairman, we are keenly aware that the market is 

waiting to see the precise shape that our rules take. That is why 

we are working to put in place our regulations by the deadlines 

that Congress set, and that is why we are being as transparent as 

we can in doing so. We want to help provide the mortgage market 

with the clarity needed to improve performance. 

At the Consumer Bureau, our goal is to make consumer financial 

products and services work better for Americans, for the honest 

businesses that serve them, and for the broader economy as a 

whole. An effective marketplace means access to credit, which is essential to providing the opportunity that consumers need all across 

this Country. 

Thank you, and I look forward to your questions. 

[Prepared statement of Mr. Cordray follows:] 

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Mr. MCHENRY. Mr. Cordray, thank you so much for your testimony and thank you for your public service and your long career 

in public service. 

I now recognize myself for five minutes. 

Mr. Cordray, I know that you are aware of this, but the National 

Bureau of Economic Research outlined that roughly half the American people couldn’t come up with $2,000 within 30 days to meet 

some unexpected challenge. I think that is proof positive both of 

the depth of this economic downturn, these tough economic times 

we are facing, but also the limitation in the credit markets. We 

have 25 percent of the American people that are either unbanked 

or underbanked, and as such we see some limitations with credit 

products available to the American people. 

So, in your estimation, how do you resolve this and what obligation does the CFPB have to ensure access to credit products and 

a greater access to credit products? 

Mr. CORDRAY. Thank you, Mr. Chairman, for the question. It is 

something that we have been focused on in a number of our community field hearings and other events where we get outside of 

Washington. We have been considering the payday lending industry, the overdraft issue, and prepaid cards, which are various 

means by which the short-term need for credit is being met in our 

economy. 

I would agree with you that there has been—not only has it been 

documented by research, but we hear it from people all over the 

Country as we go out and talk to people face to face, and we hear 

it from them as they submit stories to us, that they need shortterm access to credit. 

One of the really great insights that is embodied in the Consumer Financial Protection Bureau is that we both are overseeing 

large banks, the very largest banks, and also nonbanks, so that we 

don’t have a bank-centric view of this. If people are pushed outside 

of the banking system and they have to survive on financial products such as payday loans and other types of things, we care a 

great deal about that because we have to oversee those providers 

as well. 

So for the unbanked and also the underbanked, the many people 

who have a bank account but still use many alternative financial 

services to meet their needs, it is very important to us to understand exactly what those needs are, how they can be met better, 

how they can be met by products that don’t further deepen the hole 

that many Americans find themselves in as they try to meet their 

needs day-to-day, and it is something that, as I said, is a focus of 

quite a bit of our efforts, so I appreciate your attention to it as well. 

Mr. MCHENRY. So the answer is yes, CFPB does have an obligation to ensure that there is access to credit products for the average 

American. 

Mr. CORDRAY. I think that is part of our mission, absolutely, yes. 

Mr. MCHENRY. Okay. And we discussed this before and I have 

asked you this before, but inherent in regulation is both a cost and 

a benefit, and it depends your point of view of said regulation on 

whether or not you think we should focus more on the cost or more 

on the benefits. But certainly, whether or not your view of regulaVerDate Aug 31 2005 10:15 Aug 23, 2012 Jkt 000000 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 C:\DOCS\75523.TXT APRIL
12 

tion is proper and good or improper and destructive, you need to 

weigh both the costs and the benefits. 

As you go through ongoing rulemaking, the cost and the benefits, 

will they be accounted for, and is that a major concern that you 

have? 

Mr. CORDRAY. So the answer, briefly, is yes, it is a major concern 

for us, and for a number of reasons. First of all, at a minimum, at 

a baseline, it is legally required that every time we adopt a rule 

we have to consider, under our statute, the burdens, the impacts, 

and the benefits of the rule, and we have to size those up, and, 

frankly, if the burdens are not outweighed by the benefits, it is not 

the kind of rule we should be going forward with. 

Second, I just think that is common sense and, as you say, if you 

are doing more harm than good, then you shouldn’t be doing what 

you are doing. But it requires a careful assessment. Sometimes 

these can involve lengthy analysis. Some of our rules are longer 

than I would like because, in part, we are engaging in careful costbenefit analysis. Moreover, the courts require and are increasingly 

requiring the ability to review very careful analysis on this subject. 

So for all those reasons I think it makes sense for us to do that. 

I think it is essential for us to do that, and if we don’t do it, it puts 

our rules in jeopardy. 

Mr. MCHENRY. Do you believe there is a linkage between overregulation and a lack of credit availability? 

Mr. CORDRAY. I think that if you look at the history of this times, 

the thing that has most constricted credit to consumers and has 

most hamstrung lenders has been the credit freeze, the credit 

crunch, the financial collapse, and the ensuing recession that started in 2007, 2008. That has been what has dried up credit across 

this economy. 

Now, sensible regulations, we think, had they been in place, 

might have averted that problem. You can say the same thing 

going back to the 1920s and the 1930s. What caused credit to be 

tight in the 1930s? It was a financial collapse and an ensuing depression. Did the SEC dry up credit because it got created in 1933? 

I just don’t think anybody would think that historically. 

Mr. MCHENRY. Well, to that point, I certainly understand, and 

that is not exactly answering my question. Friedman and Schwartz 

and Bernanke determined the finite and eventual causes of the 

Great Depression; it was both Fed policy and bank failures. I understand that. And we understand the storm that we have just 

gone through. The concern I have is getting an insight into your 

world view on regulation. I certainly understand your view that enhanced regulation is better than less regulation, but what I am 

asking is is there a point by which overregulation does restrict access to credit. 

Mr. CORDRAY. So what I would say is better regulation is always 

better than worse regulation, but, of course, that is somewhat in 

the eye of the beholder. I think that regulating an entire market 

rather than part of a market, which is part of what was done before the crisis and before the financial reform law was passed, is 

not a good recipe for success. But I would agree with what I think 

is the tenor of your question, which is can the pendulum swing too 

far in the wake of a crisis like this? Can people overreact and can 

13 

they potentially compound the problem? I think that is always a 

possibility, so it is important for us to be thoughtful and careful 

about what we are doing; not just assume that because it is meeting a problem that existed before, that everything that everybody 

could think to do is necessary and helpful. 

And I think that, again, I find that coming here and having these 

sessions, where you all have input into what we are doing, is helpful for shaping our perspective, but I do think you can’t look at 

what happened in 2007, 2008 without realizing that we need common sense reforms. And yet I would also agree that if the pendulum swings too far, you could compound the problem. I would 

agree with that. 

Mr. MCHENRY. Thank you. I certainly appreciate the fact that 

rather than touting the line I have heard over and over again, that 

the huge fallout of the financial crisis was due to a lack of regulation, it was bad regulation that was the driving force of that, and 

I certainly appreciate your willingness to be precise when you are 

discussing that. 

With that, I will recognize the Ranking Member, Mr. Quigley of 

Illinois. 

Mr. QUIGLEY. Thank you, Mr. Chairman. 

Well, let’s talk about that a little more. There was a lack of regulation to a certain extent, wasn’t there, Mr. Cordray, on certain aspects that got us into this mess? We can always do regulations better, but there were aspects that just weren’t there that helped create this crisis. 

Mr. CORDRAY. I actually intended to say it was both lack of regulation and bad regulation in different respects. Let me take an example. If you look at the mortgage market before the financial reform law was passed, only part of the market was regulated. Inevitably, that leads to irrationalities because you have certain players 

in the market who are held to certain standards and others who 

are not. That encouraged a race to the bottom, where the irresponsible lenders were crowding out the responsible lenders like community banks and credit unions. That was both—you know, I guess 

you can define these things various ways. That was due to a lack 

of regulation in significant parts of the market and, overall, that 

reflected bad regulation because an incomplete regulatory system 

is not going to work because it is going to encourage some to do 

things that other people cannot, the very things you are trying to 

constrain among the regulated entities. So I think there was a combination of things. 

Mr. QUIGLEY. And, Director, you just mentioned community 

banks. Illinois probably has as many as any State in the Union. I 

think they are feeling the pinch as much as anyone in that fine line 

that your agency is trying to walk, but I think you would acknowledge that there isn’t necessarily a level playing field in a lot of 

things that have happened and the rules that are in place for 

them. Our concern is how you handle that regulation; how you 

handle that concept tiered regulation notion. This is a different 

business model; the complexity matters more to them. How do you 

balance that with community banks? 

Mr. CORDRAY. So this is an issue that comes up over and over 

again for us. When we go around the Country, we always make it 

14 

a point to have a roundtable with community banks and hear from 

them, and those are interesting. I find them very helpful sessions. 

They are pretty candid with us; they talk about some of their anxieties and fears. Some of those fears are misplaced. We do not enforce the law or examine any institutions with less than $10 billion 

in assets. But when we talk also candidly about their concern 

about the regulatory regime and how complicated that can be for 

them. They have fewer employees to spread that burden over, and 

it is something that I have heard again and again, and I feel sensitive to. 

So, as I have said and as we have demonstrated, you know, the 

first rulemaking we undertook was the remittance rule that we finalized, that we inherited from the Federal Reserve. We immediately issued a supplemental proposal to consider setting a threshold below which institutions would be exempt from complying with 

that rule if they don’t do remittance transactions in the ordinary 

course of business. And we are going to set a threshold on that and 

it will exempt some number of institutions from the rule, and I 

think that is—I know in my case the reason we are doing that, in 

part, is because we have heard and we are persuaded by the notion 

that smaller community banks have a model of serving their customers in the community where most of them live and reside; that 

they are very high-touch with their customers, and they don’t necessarily have to be held to all the same requirements and standards that larger institutions that are more remote from the community would be. 

And that is something that we will bring to our thinking about 

all of our rules. It is a case-by-case matter, obviously; it depends 

on facts and circumstances of what kind of issue we are talking 

about and how that plays out for them. It is also something we 

hear quite a bit about in the small business review panels that we 

have been doing on our rules. That is a special requirement that 

the Bureau has imposed upon it by Congress. No other banking 

agency is subject to that additional process. We have found that it 

has been useful to us. We are getting insight from that process; it 

is helping us write better rules. So although it is more burdensome 

for us than for others, we are also finding that it is advantageous, 

and we have begun to see the wisdom of Congress imposing that 

requirement. 

Mr. QUIGLEY. And, as you said, you are committed to those panels, and there are several that apply directly to the community 

banks issues, and you are committed to fulfill those requirements. 

Mr. CORDRAY. And I also have committed to creating a special 

advisory board of community banks and a separate one for credit 

unions. We are in the process of doing that; we are getting close 

to announcing that, which I think will help give us insight, because 

we don’t have the day-to-day contact with them. We don’t examine 

them, as I said; we don’t have any law enforcement authority 

against them, so it is important for us to find other ways to make 

sure we have that strong line of communication, and we are trying 

to do that. 

Mr. QUIGLEY. Thank you, Mr. Director. 

I yield back. 

15 

Mr. MCHENRY. We will now recognize the Vice Chairman of the 

Committee, Mr. Guinta of New Hampshire. 

Mr. GUINTA. Thank you, Mr. Chairman. 

Thank you, Mr. Cordray, for being here this morning. I just want 

to follow up on something you just said, and correct me if I am 

wrong. You said you don’t have any legal authority, I think you 

said, against, you used the word against community banks and 

credit unions. That, to me, sounds like you are on one side and 

community banks and small banks and credit unions are on the 

other side, as if there is a relationship that is more negative, as 

opposed to one that is more positive. Was that your intent in that 

remark? 

Mr. CORDRAY. Sir, that is not my view. I think what I said, very 

specifically, was we do not have any enforcement authority against 

community banks. I think it is kind of hard to characterize enforcement authority as anything other than if you are enforcing the law 

against someone, you are potentially finding them in violation of 

the law. We don’t have that authority. We don’t have the authority 

to examine community banks, either. We do have the authority to 

write rules that could affect the community banks, and that is 

where we are trying to make sure we take plenty of input and are 

sensitive to the difference in their business model, which I tend to 

agree is a different traditional positive working business model 

that did not in any way lead to the financial crisis in this Country; 

and, therefore, as I spoke earlier about making sure the pendulum 

doesn’t swing too far, I think that that is something we should be 

very mindful, and we are trying to be mindful of it, and when I 

come up here I find that you all remind us of it, helpfully. Thank 

you. 

Mr. GUINTA. Well, I come from a small State, New Hampshire, 

1.3 million, and we very much are small communities throughout 

the State rely very much on the positive relationship between the 

individual, the small business owner, the job creator, with that 

community bank, and with that credit union. The reason I ask this 

is, as I have met with that group of people, those small business 

owners—and when I say small, I am talking about somebody who 

might employ under 100 people. I know the definition can go up 

as high as 500, but I am talking about, really, the individual who 

has maybe 50 employees or less, 100 employees or less, who are 

telling me now that they don’t have access to credit. But they are 

not saying it for the reasons you are saying it. What they are expressing to me is a concern of an overregulatory burden. So I want 

to try to figure out how does the CFPB deal with what I am sure 

you are hearing in field hearings, or at least that is what I hear, 

maybe you don’t. If you hear in a field hearing that a small business owner can’t get access to credit because the community bank 

or the credit union is saying, look, we are small; we have stifling 

regulatory responsibilities, stifling regulatory burdens that are 

really stopping us from taking that reasonable risk to lend money 

to a small business owner so they can expand. How do you deal 

with the creation of this new entity, the CFPB, the responsibility 

of new regulation, but also take into account that part of these regulatory burdens could in fact have a negative impact on job growth, 

on economic growth, and on job creation? 

16 

Mr. CORDRAY. So we try to take account of that by getting a lot 

of input from the entities involved. But I want to go back and—— 

Mr. GUINTA. But you haven’t put together—you said you were 

going to put together a group of community banks and credit 

unions—— 

Mr. CORDRAY. I have committed. It is not required by law, but 

I thought it would be very helpful for us to have an advisory group 

of—— 

Mr. GUINTA. Will you do that before any new regulation is put 

in place by the CFPB? 

Mr. CORDRAY. We are going to be doing that within the next 

month or so. So we are doing it right away. But let me—— 

Mr. GUINTA. But would it be before, though—let me get an answer. Would it be before any new rule or regulation is authored by 

the CFPB? 

Mr. CORDRAY. I think between now and then the only rule that 

we will be finalizing is the exemption threshold on remittance 

transfers, which is actually a burden-reducing measure for small 

institutions. 

But let me go back. Small businesses were constrained in being 

able to get loans in the wake of the financial crisis of 2008. That 

is when the credit dried up. That is when the credit freeze occurred. All through the rest of 2008, all through 2009, all through 

2010, the small businesses were dried up from access to credit. 

Dodd-Frank wasn’t even passed at that time. The CFPB was not 

even created at that time. That is when they started to feel the severe credit crunch. Now it continues as the fallout from that continues. But the CFPB has only finalized one rule at this point, and 

it relates to international money remittance transfers. So the notion that we have created this immense burden on smaller institutions is absolutely factually incorrect. 

Mr. GUINTA. Well, it is the uncertainty that people have, and 

there is great concern with new rules, on top of existing rules, that 

I continue to hear from business owners and from community 

banks and credit unions. I mean, I go and visit every time I am 

back in New Hampshire, and I consistently hear this. So it is an 

issue that I have been asked to bring back and ask you about, and 

suggest to you, if you are going to create that advisory group of 

credit unions and community banks, that the have real, real input; 

not just a letter of consideration, but real input on how the new 

rules and regulations are going to impact their ability to lend; and 

that is really the point that I wanted to make sure that you were 

hearing, at least from the people that I represent in New Hampshire. 

Mr. CORDRAY. Yes. 

Mr. GUINTA. But I see my time has expired. I yield back. 

Mr. MCHENRY. The Ranking Member of the full Committee, Mr. 

Cummings, is recognized for five minutes. 

Mr. CUMMINGS. Thank you very much. 

Director Cordray, it is good to see you again. A Majority witness 

on the other panel, Mark Calabria from the Cato Institute, makes 

a very curious assertion in his written testimony, and he writes, 

‘‘As an educated guess, I would say that the CFPB has likely inVerDate Aug 31 2005 10:15 Aug 23, 2012 Jkt 000000 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 C:\DOCS\75523.TXT APRIL
17 

creased the cost of consumer credit by at least two full percentage 

points.’’ 

Have you issued any regulations that could have caused the tremendous impact the Cato witness is asserting, and do you anticipate doing that? 

Mr. CORDRAY. As I said, the only rule that we have—well, we 

have finalized two rules at this point. One was the AMTA rule, 

which merely kept in place the status quo while we assessed that 

issue, kind of a non-event; and the second was the remittance 

transfer rule, which was finalized in February, does not actually 

take effect until next February. No other rules have been finalized, 

so when you describe this as an educated guess, I guess I would 

put the emphasis on guess. But I don’t think that there is anything 

tangible that that rests on at this point in time. 

Mr. CUMMINGS. Do you see that coming, adding two percentage 

points, from anything you can see? 

Mr. CORDRAY. We actually think that much of what we are contemplating, and, frankly, most of it is required by Congress, not 

discretionary—— 

Mr. CUMMINGS. By us. 

Mr. CORDRAY. Yes. 

Mr. CUMMINGS. Okay. 

Mr. CORDRAY.—on the mortgage rules should improve the functioning of the mortgage market, and that is something that we all 

know the mortgage market performed abysmally in the runup to 

the financial crisis and helped create the financial crisis. So improvements in the mortgage market should be good for consumers, 

should be good for lenders. Credit dried up in the mortgage market 

because of the crash of the economy and because of the crash of the 

financial system. That is what dried up the credit. And, again, that 

happened in 2008, it endured through 2009, it endured through 

2010, all before Dodd-Frank was enacted, all before the Consumer 

Bureau was even created, and now we continue to be in the residue 

of that. So that is the real timing here. 

Mr. CUMMINGS. I don’t know where Mr. Calabria pulled this 

number from; I am sure he will let us know. 

Now let’s turn to an informed industry viewpoint. Last week the 

House Financial Services Committee held a hearing on the DoddFrank Wall Street Reform and Consumer Protection Act. One of 

the witnesses, Ms. Del Rio, who is the board chairman of a credit 

union in New York, testified regarding Dodd-Frank and the CFPB’s 

impact on credit availability and this is what she said: The DoddFrank Act and other financial reforms have not impeded our credit 

union’s ability to provide low-cost loans and services to our members. In fact, our credit union’s lending has increased in recent 

years. 

Director, have you heard similar accounts from other financial 

service providers and do you think this is an isolated assessment? 

Mr. CORDRAY. I think that the data vary by institution. Different 

institutions are in different places. But I think what actually happened in the financial crisis and the wake of that is there was an 

awful lot of non-bank, non-credit union shadow lending, shadow industry lending going on, financing of non-bank lending; a lot of it 

was securitized, a lot of it was you make this loan and then you 

18 

sell it to someone else. Money was coming essentially from Wall 

Street. Most of that has dried up. That is a vast amount of funding 

in the sector. 

So there are a lot of people who think that community banks, 

credit unions haven’t been lending. They are still lending. They are 

pretty much adhering to the same traditional business model that 

they had before. They found it harder, sometimes, to get financing 

themselves. They have found that they are subject to capital reserves that can be constraining. But they are still plugging away 

with the same traditional business model that has worked for decades in this Country. What has happened is that some of the irresponsible money that was in the market has dried up and, therefore, lending as a whole is down, and that has been hard on a lot 

of people, but it is a fairly natural adjustment coming out of the 

kind of financial crisis that we had in 2007, 2008. 

Mr. CUMMINGS. Ms. Del Rio said something else. She said there 

are times where we have to update a disclosure to comply with new 

regulations. We welcome these regulations; we want to be a transparent institution. This is our mission, so for us it is not a cost. 

I know everybody wouldn’t say that, but she did, and she is a 

credit union. I am just wondering, the transparency, how do you 

see that affecting lending? 

Mr. CORDRAY. Well, we know with everything that is updated 

and even simplified there are transitional costs that occur. But 

then, going forward, with every transaction, the transaction should 

be more likely to be successful; it should be, in the aggregate, we 

are helping to stave off the kind of threats to the financial system 

that we saw crash the system in 2007, 2008. It is better for consumers; it makes the market work better. That feels like it is an 

appropriate and positive way forward. 

Mr. CUMMINGS. Thank you very much, Mr. Chairman. 

Mr. MCHENRY. We will now recognize Mr. Meehan of Pennsylvania for five minutes. 

Mr. MEEHAN. Thank you, Mr. Chairman. 

And thank you, Mr. Cordray, for your return again. I appreciate 

your collaboration with us and looking on this issue. I want to follow some of the issues that have been identified by some of my colleagues, because I too have been spending a significant amount of 

time back in my community, talking with largely small business 

owners and small institutions, banks and credit unions, things 

which you have identified, if I am correct in your testimony, as not 

really being outside or inside the scope of the problem; that a lot 

of the outliers, you know, the kind of non-bank kind of lending participated in the creation of the a lot of the problems. What I am 

concerned about is the regulation that now attempts to deal with 

the issue, reaching back and really affecting some of these institutions. 

Let us take as a point, I think, which would be consistent 

through most of these institutions. Many in my area, about 100 

employees, most of them probably maybe one compliance officer. I 

talked to one bank president; he is the compliance officer. And the 

fact of the matter is you talk about the timing of the activities that 

are coming out, so this small bank already they are dealing with 

the Basel requirements. There was documentation that went out to 

19 

these small bankers, 250 pages of documentation which identifies 

what they must do within their small institutions with regard to 

retention of capital. Then in the same month of June we had the 

qualifications that came out for what is a qualified mortgage. This 

was something small banks have been doing for years. The paperwork that identified what a small—has been put in the Federal 

Register, it is about 115 pages that, again, all of the fine print, 

what concerns me is that is 150 pages. With that kind of fine print, 

it looks to me like a litigator’s dream to begin to try to codify all 

the things the bankers have been doing for years. 

But the real concern that I have, in talking with my small community bankers, was took the 10 pages that were part of the Truth 

in Lending Act and the Real Estate Settlement Procedures Act, and 

I understand the implications of trying to make it simpler for the 

buyer, but in the act of creating what it means to take 10 pages 

now, and we have reduced it to 8 pages so that the borrower can 

understand what is before them. But for the banker, this, this right 

here, 1,099 pages of regulations, 1,099 pages that one single compliance officer is going to have to go through to understand what 

it means to be able to interpret a document which has been in existence, you know, the Real Estate Procedures Act, for years and 

interpreted many times by the law. It is not the document; it has 

been the abuse of the document. 

How are we going to take into impact trying to draw a distinction so that these small community bankers aren’t pulled into the 

overregulation problem in an effect in which I am concerned we are 

going to drive the ability of these small banks to continue to service 

the community? 

I asked my question. Let me just give you one other observation. 

One of the bankers that I talked with was discussing the fact that, 

when you have 100 people, you are very tight with regard to what 

you can task each to do. There was enough cash on hand to consider one or two new employees in the coming year. Do they hire 

lending agents that can go out in the community and negotiate 

loans, or do they hire compliance people? In both cases it was compliance people. We are spending money on oversight, particularly 

in institutions that may not need the same degree of oversight as 

those who were the abusers in the process. 

Can you tell me how we are going to approach the ability to try 

to be fair and effective in the engagement with the small community banks so as not to dry up the very objective of creating credit 

in the first place? 

Mr. CORDRAY. So I appreciate the question, Congressman. I appreciate the chance to address what I think has been much misunderstood about the rule that merges the Truth in Lending Act 

and Real Estate Settlement Procedures Act forms, which is something, by the way, Congress has been complaining about for 20 

years. They wanted those forms integrated; they wanted them simplified. It is actually much more than 10 pages to 8 when you see 

the other things we are dealing with that go into that. But it is 

something that is now being accomplished by the Bureau for the 

first time in 20 years, after 20 years of failure. 

But the notion that there is a 1,099-page rule is not a correct 

statement of fact. Much of what is in that rule involves detailing 

20 

the efforts the Bureau has made to reach out to smaller institutions, SBREFA panel and so forth. Much of it is detailing the costbenefit analysis. Much of it is providing what industry tells us they 

want, which is some detailed guidance. It is not the rule itself, but 

it is additional guidance on how you can comply with the rule. 

So it feels to me that you can’t, one and the same time, complain 

that the Bureau doesn’t engage in sufficient extensive cost-benefit 

analysis and then complain when we devote a lot of pages in our 

proposal to the cost-benefit analysis that you have told us that you 

want. It doesn’t feel right to complain that the Bureau doesn’t do 

enough outreach to small institutions, and then complain when we 

do the outreach and it actually results in a lot of summarizing in 

the proposal that actually we have done that. 

Mr. MEEHAN. So is this guidance, then, that is going to be directed to the small community bankers, who is going to have to 

look at this and interpret the 1,099 pages to be able to determine 

what the terms of that Real Estate Settlement Procedures Act document mean? 

Mr. CORDRAY. Well, they have had extensive input into the 

forms, which are—— 

Mr. MEEHAN. What is the purpose of this? What will the small 

community banker do with this document? Because we know, with 

1,099 pages, there is an expectation, or at least litigators will expect there is an expectation that they have read and reviewed and 

understand the implications of every term within it. 

Mr. CORDRAY. Only a small portion of that is the actual rule. 

Much of it is the kind of explanation, procedure, detail, analysis 

that Congress has told us they want to require before we can write 

a rule. So when we go and do all of that detailed analysis and 

present it, cost-benefit analysis, I don’t think that a small bank has 

to be conversant with our cost-benefit analysis, but it is something 

required of us to justify the rule. So, again, to complain that the 

agency needs to be very careful and thorough in its process of developing the proposals for rules—and this is a proposal, it is not 

the final rule—and then to complain because all of that amounts 

to a lot of pages, you can’t have it both ways. 

Also, we are told over and over again by industry that they 

would prefer specificity. They don’t want us to write a small rule. 

It is kind of counterintuitive for me. They don’t want us to write 

a short rule where there are lots of things that have to be interpreted and end up going into the courts and have to be interpreted 

how? Through litigation, through hiring lawyers and having them 

bring cases that obviously puts years—— 

Mr. MEEHAN. I don’t want to step on your explanation, because 

I appreciate this and I do think it is—and I know my time is up, 

but as an attorney, my concern is it is just this which will create 

more litigation, because you know yourself, as a former government 

attorney, the ability to look at specific cases and then find distinctions and ask why we didn’t apply those particular circumstances 

to the decision that was made creates a litigator’s dream. 

Mr. CORDRAY. Again, a short rule that is general and vague will 

leave a lot of things mushy, and there will be a lot of things that 

will have to be litigated because it is the only way you can get 

things resolved. Industry tells us they want us to avoid that, they 

21 

want us to be very specific. Specificity often means greater length. 

It is a dilemma; it is a challenge. It is something that we are working through, but we are trying to work it through, I want to stress, 

with a lot of input from the small providers you are talking about, 

thinking about how these rules affect them, thinking about when 

we can impose exemptions or thresholds. Ultimately, you are the 

one—you were a referee, right? 

Mr. MEEHAN. Right. 

Mr. CORDRAY. Ultimately, we do the best we can. We have to 

make a call. People are going to criticize us on both sides of it. 

Were we too thorough and, therefore, too long? Were we not thorough enough and, therefore, subject to challenge on that front? 

But—— 

Mr. MCHENRY. The gentleman’s time has expired. 

Mr. CORDRAY.—we will take this input back and it is something 

we wrestle with everyday. 

Mr. MCHENRY. Thank you. I appreciate your willingness to answer completely, but from this side of the dais, a 1,000-page rulemaking in order to get a 3-page disclosure document seems a little 

more than on the excessive side. 

We will recognize Mr. Welch of Vermont. 

Mr. WELCH. Thank you very much, Mr. Chairman. 

Mr. Cordray, I remember your first appearance before our full 

Committee and I asked you about rulemaking and whether you 

preferred simple and understandable to complex and confusing Any 

change in heart about that? 

Mr. CORDRAY. I still prefer simple and understandable. When 

you have complex subjects, what industry tells us is sometimes 

they prefer more specific, nailing everything down so that there is 

less uncertainty and less to litigate about. 

Mr WELCH. Good. I find myself in sympathy with a lot of the concerns that were expressed by Mr. Guinta and Mr. Meehan, but I 

think in Congress we are mixing up some of the issues here. On 

this question of the Dodd-Frank regulations there are two issues. 

One is I think all of us recognize that what makes sense for a regulatory regime for Wall Street and these huge institutions is quite 

a bit different than our small community banks that really didn’t 

contribute to the problem. So I think all of us would much prefer 

to not have these regulations be over-broad so the banks that are 

just doing their local work and didn’t cause the problem don’t get 

swept up. 

But, second, one of the questions that we duck here is on these 

big banks, whether in fact they are too big to regulate. Will they 

find, no matter what we write, no matter what we do, they will 

find some way to get around it, and I, for one, think that on things 

like derivatives, where JPMorgan, for instance, had an exposure of 

$77 trillion, instead of regulating, would it make sense to require 

them to put more cash into the transaction so that there would just 

be a very compelling institutional interest to minimize risk, rather 

than great risk? And I say that for my colleagues because I actually think that is one way to try to deal with these institutions that 

are too big to regulate. 

But the third point is that my understanding of your institution 

is that it is going to be there to try to protect consumers against 

22 

some of the practices that have really hurt them, and I have talked 

to small businesses and heard things that Mr. Guinta heard, but 

I suspect you have talked to individuals who have also explained 

to you how confusing it is for them to deal with banks, or parents, 

how confusing it is to deal with student loan forms. And I just 

want to go over a couple of things that your organization did do 

that I think are terrific. 

The CFPB created a new student loan assessment tool to help 

students and their families evaluate the cost to college, and that, 

I think, is really good. Can you tell us a little bit about that and 

what its reception has been? 

Mr. CORDRAY. Sure. In fact, there have been institutions across 

the Country, representing over a million students already, who 

have adopted the Financial Aid Shopping Sheet, which is a simplified version and a uniform and comparable version of what kind 

of financial aid offer you are getting when you are trying to decide 

where to go to college and trying to understand, which has been 

difficult for people to understand, exactly what it is going to cost; 

what kind of payment schedule you are going to come out of college 

with, whether you are going to be able to afford that; what kind 

of rights you may have if you have trouble with repaying the loans 

and the like. So I think that has been a success. It is the kind of 

thing that we are trying to do, where I think most people, if they 

have a young person in their family who has recently been trying 

to finance a higher education, understand and have dealt with. 

They need to know very clearly, before they make the decision, 

what they are getting into so they won’t have regrets. 

Mr. WELCH. Right. And let me go on to one other. In addition to 

your settlement with Capital One, where there really was revealed 

ripoff practices and you were successful in getting return to consumers, over $150, $160 million in addition to the penalty, is your 

organization working to simplify credit card contracts so folks don’t 

have the blizzard of eye-popping and bone-tearing contract provisions to read, so it is just all simple and understandable? 

Mr. CORDRAY. We are trying to do that and we are having some 

success with that, and I think industry is beginning to see the merits of that as well. We are not proceeding by a compulsory rulemaking there; we have model forms that we are proposing for people, and more and more are moving in that direction. Maybe at 

some point we would need to regulate, but the idea is to keep it 

simple for people that can’t absorb a 60-, 70-page credit card agreement; they end up getting ambushed and trapped by the fine print. 

Mr. WELCH. And one of the things that some of my small bankers who have been the backbone in our community lending program have told me is, Peter, just tell us what the rules are and 

then we will compete on what those rules are. So simplification 

works, in their view, for them as well as for consumers. Any comment about that? Then my time will be expired. 

Mr. CORDRAY. It is my instinct from my background as a treasurer at the county and State level that if community banks are 

able to compete on a level playing field with the larger banks, they 

will do better because they have superior customer service, and 

that is what people really want from a financial institution. So I 

think it is important for us to keep that playing field level and also 

23 

recognize, as was noted earlier, that compliance burdens fall more 

heavily on a small institution and, therefore, to the extent we can 

lighten the load or exempt them at times from things, we should 

look for opportunities where that is appropriate. 

Mr. WELCH. Thank you. 

Thank you, Mr. Chairman. 

Mr. MCHENRY. Mr. Amash of Michigan is recognized. 

Mr. AMASH. Thank you, Mr. Chairman. 

And thank you, Mr. Cordray, for coming back to Oversight. I am 

going to yield my time back to the Chairman. Thanks. 

Mr. MCHENRY. Certainly appreciate that. 

Mr. Cordray, in April of this year, in Bulletin 2012–04, the CFPB 

outlined their views on fair lending and how to pursue actions related to that. You are familiar with this memo? 

Mr. CORDRAY. I am. 

Mr. MCHENRY. Okay. And in this memo the CFPB adopted the 

legal doctrine of disparate impact. Many view this as a controversial legal theory that takes intent out of viewing discriminatory actions and simply uses statistical research to prove out discriminatory actions. Is that right, the CFPB intends to use disparate impact? 

Mr. CORDRAY. We adopted the same position that all of the bank 

regulators have taken for 20 years, but the CFPB, being a new 

agency, had not yet spoken on that issue, so we wanted to clarify 

that we do join our fellow regulators in viewing disparate impact 

as the law of the land that we should follow. 

Mr. MCHENRY. And you are familiar with press reports about the 

City of St. Paul’s court case and the Department of Justice perhaps 

pressuring the City of St. Paul to withdraw that lawsuit? 

Mr. CORDRAY. I don’t know how familiar I am with all the details 

of that, that is sort of outside our ambit; it was not a case under 

one of the statutes that we enforce, but I understand there was a 

case and ultimately it was resolved through a settlement is my understanding. 

Mr. MCHENRY. Okay. Well, you know, this Subcommittee is investigating whether or not the Department of Justice pressured the 

City of St. Paul to withdraw that lawsuit—— 

Mr. CORDRAY. I see. 

Mr. MCHENRY.—through intermediaries of sorts because of the 

Department of Justice’s concern that the court would have struck 

down disparate impact as a legal doctrine, a valid legal doctrine for 

the government to use. 

Mr. CORDRAY. I see. That would involve overruling prior decisions, but, of course, that is the court’s prerogative. 

Mr. MCHENRY. So have you or any of your staff had contact with 

Assistant Attorney General Perez about disparate impact? Actually, let me start by saying have you had any contact with Assistant Attorney General Perez about disparate impact? 

Mr. CORDRAY. I happen to know Assistant Attorney General 

Perez; he is related by marriage to a woman who worked with me 

when I was Ohio attorney general, so that is when I first heard his 

name, and we have had dealings with him as our agency deals with 

fair lending matters, and I believe he is the head of civil rights, so 

24 

I think there probably has been a fair amount of contact there in 

the normal course of the work that we do, yes. 

Mr. MCHENRY. Okay. I would ask you to submit for the record 

those contacts and whether or not they have entailed discussions 

of the use of disparate impact in dealing with fair lending practices. 

Mr. CORDRAY. I am sure our staff will be happy to work with 

your staff on that. 

Mr. MCHENRY. You know, as it relates to all this, because disparate impact requires showing no intent to discriminate, lenders 

have no way of knowing whether or not their practices could be 

subject to future fair lending suits. So do you think that that adds 

to uncertainty? And is there any way for the CFPB to allay those 

fears? 

Mr. CORDRAY. Does it add to uncertainty? I think it has been the 

law of the land for more than 20 years, so to the extent it is adding 

to uncertainty, it hasn’t really changed in the last 20 years, maybe 

25 years. This is the same test that is used, it is called the effects 

test, that is used in employment discrimination cases as well; it is 

the same framework. I think it was adapted into the fair lending 

context, again, more than 20 years ago, so I think it is established 

law. I don’t know that that is adding to uncertainty. I think uncertainty would be about whether the established law is going to be 

changed. As you say, it is always within the prerogative of the Supreme Court to change the law if they see fit to do so, but that 

would be a change in law and that would, I guess, be a subject of 

uncertainty if that were to occur. 

Mr. MCHENRY. Mrs. Maloney of New York is recognized for five 

minutes. 

Mrs. MALONEY. Well, thank you, Mr. Chairman, for calling this 

hearing. 

And welcome, Director Cordray. I was reading the testimony of 

one of the panelists that is to come, and that is the Cato Institute, 

Mark Calabria’s testimony, and on page 3 he says, ‘‘that the spread 

of rates on credit card loans has remained wide since the end of 

2008 in part because of price adjustments made in response to provisions in the CARD Act.’’ But he failed to acknowledge the Federal 

Reserve’s footnote. He was talking about a Federal Reserve report 

that I have here, in which the Federal Reserve says the widening 

of these spreads is due to the restrictions the CARD Act placed on 

issuers’ ability to impose certain fees and protecting consumers. 

I would like unanimous consent to place in the record the Federal Reserve’s full statement on this, highlighting the fact that I 

just said. 

Mr. MCHENRY. Without objection. 

Mrs. MALONEY. It also goes on to say that stopping such abuses 

such as raising rates any reason retroactively on balances, giving 

the consumer the power to opt-in to higher rates if they so approve, 

stopping certain tricks and traps of changing the rates of charging 

on interest that has already been paid and other things that were 

happening. I would say that the CARD Act has gone a long way 

towards protecting consumers from abusive, unfair, and anti-competitive actions, and that in some cases the industry has raised 

rates in order to raise their own revenues. 

25 

I would like your comments on that. I would also say the CARD 

Act has given many consumers many more choices to go to providers that have a lower interest rate. But would you comment 

from your own experience on how the CARD Act is impacting 

issuers, consumers, the overall economy? I can say, from my point 

of view, I don’t get complaints from consumers anymore about their 

credit cards; they seem better able to manage their credit. Apparently there are fewer people walking away from their credit cards 

and leaving that burden on the issuers, and that it has, overall, 

been a success. 

But your comments, please, Mr. Cordray, on what you are finding in your new position. And congratulations on the transparency 

that you are bringing to consumers. 

Mr. CORDRAY. Thank you, Congresswoman. On the CARD Act in 

particular, we gathered together credit card issuers and had a 

transmittal of information for them early in our time to assess how 

the CARD Act had affected the credit card industry, and we judged, 

based on the evidence we were able to amass, that it has had a 

positive effect on the industry, positive effect for consumers. It is 

not unduly constrained access to credit card credit. Those initiations are growing. Again, tremendous amount of solicitation going 

on out in the market. I think credit card issuers have adapted to 

that. 

I didn’t quite understand, but I guess you are going to submit for 

the record the notion that the CARD Act would have widened 

spreads in 2008, given that the CARD Act didn’t pass until 2009, 

so I am not sure how all the dates work together in that. But, in 

any event, in our view, the CARD Act, from what we have seen so 

far, has been both successful in reigning in some of the excesses 

that were hurting consumers, but at the same time the credit card 

issuers have been able to work with that, have implemented it successfully, and are initiating a tremendous amount of credit card 

availability of credit for individual consumers in the market place 

as we speak. And, as you noticed, delinquencies have been down. 

Mrs. MALONEY. Delinquencies are down. But still there is over $1 trillion in credit card debt in our Nation, which speaks to many 

Americans being in debt. Do you believe that over time the Credit 

CARD Act will bring down that indebtedness, or do you believe it 

will—— 

Mr. CORDRAY. It may. I don’t want to speculate too much as to 

cause and effect. I think the crisis has brought down credit card 

as the savings rate has jumped up again and people have been paying down debt. I also think we should note that credit cards are 

a tremendous convenience for consumers. The ability to engage in 

a transaction without having ready cash, because credit cards are 

the medium and the means of effectuating those transactions. It is 

very important for people and has created a tremendous amount of 

convenience for consumers that they appreciate, that they value, 

that they are willing to pay for. Again, they should pay for it in 

a clear-eyed way; they should understand the prices and risks of 

their credit card account. Much of that has been achieved, greater 

transparency through the CARD Act. We, again, view it as a success. We will continue to monitor its effects. We are, as you know, 

taking credit card complaints on our website and compiling those 

26 

and taking a look at those, and I would say that there are many 

areas that we are not getting many complaints on that I think 

that, before the CARD Act, we would have received a tremendous 

number of complaints on. 

Mrs. MALONEY. There were 60,000 responses to the Fed’s questions on it during the review process. Thank you for your hard 

work. 

Mr. MCHENRY. Ms. Buerkle of New York is recognized. 

Ms. BUERKLE. Thank you, Mr. Chairman, and thank you for 

holding this hearing. 

And thank you to Mr. Cordray for being here this morning. My 

first line of questions has to do with retrospective analysis, and 

whether or not the CFPB is going to conduct or if it is currently 

conducting any retrospective review of its regulations just in order 

to determine the consequences on the consumers, as well as any 

regulated entities. 

Mr. CORDRAY. Retrospective analysis? Yes, this is one of the 

things that I testified in front of this Committee before, and others, 

I think was missed by the regulators previously, and it is something we should be attentive to, which is you can keep adopting individual rules, and in each case it is well meaning and in each case 

there are reasons why it would make sense that that would be protective of people, and you can kind of forget, over time, about the 

aggregate burden those rules create. And you add more and more; 

how much does that do for people? 

So that is why—— 

Ms. BUERKLE. I don’t mean to be rude. I have never seen five 

minutes go by so quickly when one is answering questions. So that 

is a no. You are acknowledging that they should be done, but they 

are not being done? 

Mr. CORDRAY. No, no. One of the things we did—we are not required to do this, but we thought it would made sense, was we 

launched a streamlining initiative to consider all the rules that we 

inherited. We didn’t write the rules that we inherited from other 

agencies, so we are not invested in them; and we have asked people 

to give us their input into what do you think could be streamlined, 

what could be cut back, what could be eliminated without hurting 

consumer protection. In what ways could the same protection be 

delivered at less burden for institutions? We have gotten a lot of 

good input on that. We are digesting that and we will be looking 

to streamline rules. I think that is important. 

Ms. BUERKLE. My concern is that you are looking at the entities 

that are affected by this and you are making sure that those—and 

that is really my concern, not whether it is coordinated in the aggregate, but whether these rules are affecting either the consumer 

or the affected entity by Dodd-Frank. So is that being done or is 

it considered, is it going to be considered? 

Mr. CORDRAY. So as we go forward with new rules, yes, that is 

a consideration that we have and are required to undertake. We 

are conducting small business review panels so that we hear directly from small providers and get their input at a very early 

stage, when we are still formulating proposals, and that has been 

useful for us. I would say we weren’t sure what to make of that 

27 

to begin with, it was an additional burden for us, but I think it actually has been positive. 

Ms. BUERKLE. So if I could, for the purposes of this hearing this 

morning, would you commit to adopting formal procedures for a 

retrospective review of all of the CFPB rules, including a specific 

review of how the rules are affecting credit access? 

Mr. CORDRAY. I see. I should have said this earlier. In our law— 

and I am glad it is in our law, I think it makes sense—we are required, with any rule we adopt, to review it again after five years 

to consider whether it is actually having the impact that we intended for it to have; whether there are unintended consequences; 

whether there are burdens we didn’t appreciate at the time. We 

will be hearing from the institutions. Obviously, we hear from them 

all the time as we go, but, at a minimum, every five years we have 

to do that so there won’t be just a sort of mindless accumulation 

of rules over time, without regard to what that does for institutions. I think that is what you are getting at. 

Ms. BUERKLE. I am concerned that there is not going to be a look 

at these new rules that are going into place and have gone into 

place because of Dodd-Frank; whether the CFPB is willing to and 

will agree to, today, to make sure that those rules, that you understand and you do a retrospective review—not going forward, not 

trying to figure out how you should proceed in the future, but actually looking at what has been done, the rules that are in place, and 

how they are affecting not only the consumer, but also the agencies 

that are being affected by this law. 

Mr. CORDRAY. So again, in terms of our corner of the world, we 

both are engaged in a streamlining initiative looking retrospectively at rules we inherited and, with every rule that we propose, 

not only do we get tremendous input as we work through it, but, 

at a minimum, every five years we will engage in that retrospective 

analysis of those rules. So I do think it is built into the process for 

us. But, again, if I am not quite satisfying your line of questioning, 

I would be happy to have our staff work with your staff to understand further just what you would like to see from us. 

Ms. BUERKLE. Yes. I would like to see in the statute the five-year 

commitment, but also is five years too long a period of time? 

Mr. CORDRAY. I think for some it may be; for others it may be 

even too quick. But I think it is probably a good compromise. It is 

hard to draw those lines. Congress drew it. I don’t have a quarrel 

with the way they drew it. 

Ms. BUERKLE. I see my time has expired and I didn’t get to my 

last two questions. Thank you, Mr. Cordray. 

Mr. MCHENRY. Thank you, Mr. Cordray. 

We will now recognize Mr. Kelly of Pennsylvania for five minutes. 

Mr. KELLY. I thank the Chairman. 

Mr. Cordray, nice to have you in front of us again. Mr. Meehan 

had talked about this and I did, we printed out this Get to Know 

Your Borrower information that is 1100 pages. You said 1099, so 

we are not going to make a big deal about one page. But the people 

that I get a chance to talk to when I go back in the 3rd District 

of Pennsylvania are small banks. And while it may be easier for 

big banks to comply with this because they have huge numbers of 

28 

people onboard that can go through this stuff and sift through it, 

today’s hearing was the Credit Crunch: Is the CFPB Restricting 

Consumer Access to Credit? Actually, 40 pages of this are actually 

the cost-benefit analysis, but the rest of it these people have to 

know. So for the small banks, we may say, listen, they are going 

to be okay, they are going to get through it; and I have gotten to 

the point where the too big to fail means you are too small to survive. And for anybody to suggest that there is any way that small 

banks and small lending institutions can go through this same 

process and come out the other end, being able to offer the products 

they have offered before, is ludicrous. 

Now, where I come from, we rely on the small banks and the 

credit unions, and I am looking at this and I am talking to guys 

who I grew up with, went to school with, our wives know each 

other, our kids know each other, and yet they have to sit down and 

get to know who their borrower is and what a qualified borrower 

is. Does this make any sense to anybody? You talk about these are 

common sense solutions or reforms that are going to make it easier. It is not making it easier; it is making it more difficult. Access 

to credit can’t be done over a long period of time; people need it 

now. If you need a transfusion of capital, you need it now. When 

you go to these small institutions and these small banks, and they 

say, you know what, I am not sure that I can do this for you. They 

are opting out of offering products that they have always offered 

before, and the reason they are doing it is because they are not 

sure that they can survive what we are putting them through right 

now. 

I am not blaming you for this, but I am saying while the patient 

is waiting for the people to do the diagnosis, they are dying. Access 

to capital is critical to small businesses. We are talking about an 

environment where we are trying to get job creators back online. 

You know what is keeping them away? Uncertainty. They don’t 

even know if they can borrow money anymore. Heck, I am automobile dealer. I don’t know, my covenant changes every quarter. 

My collateral changes all the time. What used to be acceptable collateral is no longer accepted collateral. The people I used to go to 

for money right now say, you know what, sorry, we can’t help you 

because we are still trying to sift through the regulations. 

So while this may have been well intended to start with, where 

you are sitting, please tell me is it going to be easier for access to 

credit or harder? Is this easier or harder? 

Mr. CORDRAY. Okay, so, first of all, I think there is some apples 

and oranges here. 

Mr. KELLY. Easier or harder? No, it is not apples and oranges; 

it is access to credit. Is it easier or harder for small banks to lend 

money right now? 

Mr. CORDRAY. Okay, the reason it has been difficult for small 

banks to lend—— 

Mr. KELLY. My question is it easier or harder? I am just asking 

is it easier or harder, Mr. Cordray. I don’t need—I am just asking 

you what the time is; I don’t want you to build me a watch. 

Mr. CORDRAY. Okay. Since 2008 it has been harder for small 

banks to lend money—— 

Mr. KELLY. It is much harder. It is much harder. 

29 

Mr. CORDRAY. Since 2008—— 

Mr. KELLY. So they are merchants. Banks are merchants. They 

have money on the shelf to lend to people. That is what they do. 

So when we make it harder for people like me, small businessmen, 

to have access to credit, if it is harder to get credit, it is harder 

to stay alive. And that is my whole point about this. In an environment where we want people to survive, we want people to go ahead 

and take that jump, go out and borrow the money, they can’t go 

to the traditional lenders because the traditional lenders cannot 

sift through this. 

Mr. CORDRAY. That is not the cause, I don’t believe, sir. Since 

2008 it has been hard for smaller banks to lend. That is because 

we had a financial crisis and a crash of the system—— 

Mr. KELLY. Mr. Cordray, I exist in that world, okay? I know how 

hard it is to survive in the real world. Only inside this Beltway do 

we come up with solutions that are so difficult that nobody can pull 

the trigger anymore. So the purpose of this hearing was are we restricting consumer access to credit, and the answer is yes, we are. 

We are making it so hard for the small banks and the credit unions 

to lend money. The rest of this is we are just tap dancing around 

the outside of this. It is so difficult for these people. They are going 

out of business. 

Mr. CORDRAY. Would you like me to respond or just listen? 

Which would you prefer? 

Mr. KELLY. Well, I would like you to listen, and I would like this 

Administration to listen, because I will tell you what, they have a 

deaf ear when it comes to what is really going on in the private 

sector. I can appreciate where you came from. In my business, we 

have to survive every day. We go in hand-to-hand combat every 

day to survive. I do not need 1100 pages from a guy that I have 

known all my life to tell me whether I am qualified or not. That 

is the whole purpose of this. 

There is no answer to is. 

Mr. CORDRAY. Okay—— 

Mr. KELLY. It is government red tape that is keeping this economy from recovering. And I am out of time, I am out of time, but 

I am not out of energy. I came here to fight for people who are out 

in the common world, the private world, and that is what we have 

to continue to do. 

Mr. Chairman, thanks for having this hearing. 

Mr. MCHENRY. The gentleman’s time has expired. 

Mr. Cordray, if you wish to respond, I will give you the time. 

Mr. CORDRAY. Sure. We are not asking anybody to give you 1100 

pages. This is making forms simpler and clearer so that people can 

understand the prices and risks of credit. That should be good for 

the system. We did not do that in 2006, 2007, and 2008. The system crashed and burned. All these form institutions were hurt; a 

number of them failed. We now need to improve that process. What 

you are telling me and what I need to hear from you is, as we improve the process, don’t make things worse for these institutions; 

it is already hard enough. We are trying to be mindful of that every 

day. But people who want us to go through a very, very thorough 

rulemaking process, it becomes a lengthy process, then want to 

complain that it is a lengthy process and it is a lot of pages. In the 

30 

end, the rule part of that is a small part of that pile. The forms 

are going to be simpler and clearer and more uniform, and that is 

what we are trying to accomplish, something Congress has been 

asking for for 20 years. The agencies weren’t able to do it; we are 

now doing it. I hope that is a step forward, but I am interested in 

your input; I appreciate it and we are happy to hear it any time 

as we go. We hear from the same institutions you are hearing from 

and I hear the same things. 

Mr. KELLY. Well, while we debate, they are dying. 

Mr. MCHENRY. We will now recognize for a second round the 

Vice Chairman, Mr. Guinta. 

Mr. GUINTA. Thank you very much, Mr. Chairman. 

Mr. Cordray, I am not sure that Congress, for the last 20 years, 

has been asking for 1,000 pages of guidance to a rule. I think what 

maybe Congress has been asking for is a term that was used by 

Mr. Welch and by you as well: a simpler process. So while the form 

might have been contracted to one to two pages, the guidance with 

that form, in many circumstances, appears to be 1,000 pages; and 

that, I think, is the concern that community banks and credit 

unions have moving forward, is where will the guidance, along with 

these forms, be so large that they have a choice between dealing 

with the regulator as they hire, hire a compliance officer, or hiring 

someone who can grow and expand their business. So when you say 

that you want to listen to our input, our input would be if you are 

trying to make things simpler in terms of the forms, that is a good 

goal, but the guidance also needs to be simpler, I think is probably 

what you are hearing from both sides of the aisle. 

I want to read from testimony that will be given later by Mr. 

Fecher, who represents the Credit Union National Association. On 

page 3 of his testimony he says, ‘‘Every dollar a credit union 

spends complying with these changes is a dollar that is not spent 

to the benefit of credit union members.’’ And he goes on to say, ‘‘Because credit unions are member-owned financial cooperatives, the 

entire cost of compliance is ultimately borne by credit union members.’’ 

So my concern is that additional compliance, overregulation will 

feed into a credit union or a small community bank’s inability to 

lend in the future. Can you just talk to me again about how you 

will balance what you view as Congress’s mandate to the CFPB in 

consumer protection and the reality of those consumers needing 

that direct access to those community banks and those credit 

unions? 

Mr. CORDRAY. So one of the ways in which we are trying to balance that is by getting direct input from the community banks and 

credit unions to understand their circumstances, and I know from 

my dealings with them that there are quite a number of credit 

unions in particular that involve very, very few employees, maybe 

less than 10; not even less than 100, less than 10. And it is our 

view that where we can potentially exempt them from burdens, 

that we should look for the opportunity to do so; that they follow 

a traditional business model that is very high-touch with their customers that isn’t necessarily requiring making it subject to all of 

the things that we do for the larger, more remote, more volume 

31 

banks. So that is something that we are trying to keep in mind as 

we draft regulations and we figure out how they should apply. 

But we are also, again, keeping a very open line of communication. I think we hear from the same institutions that you hear 

from. I invite the community banks to come see us and we go see 

them as we go around the Country, and we are trying to be mindful of this as we go. But at the same time the cost of a failure of 

compliance was a financial crisis, a crash of the system that killed 

a lot of banks and a lot of credit unions that folded up because you 

can’t operate within a system when credit is not flowing anywhere. 

And, again, that happened in 2007, 2008, long before the CFPB 

came on the scene—— 

Mr. GUINTA. But was it the entire system or were they individual 

actors? Because right now the CFPB seems to be going after the 

entire system, rather than necessarily individual bad actors. 

Mr. CORDRAY. That is a good question, actually, but I think it is 

a combination. I think there were a lot of bad actors. Many of them 

were enabled by a system that allowed them to operate fairly freely 

because we were regulating part, for example, of the mortgage 

market and not regulating part at all. I think that obviously what 

you are suggesting is we want vigorous enforcement of the laws to 

weed out the bad actors. But at the same time the question is what 

additional regulations are needed? Are they really need—— 

Mr. GUINTA. Let me clarify what I am saying, then, because that 

is not necessary. I don’t have it in front of me, but I read earlier 

somewhere that part of the focus of Dodd-Frank—here it is. Congress has directed the Bureau to identify and address outdated, unnecessary, and unduly burdensome regulations in order to reduce 

unwarranted regulatory burden. That is Section 1021(b)(3). 

Mr. CORDRAY. Yes. 

Mr. GUINTA. I would love it if you focused on that, because I do 

continue to hear from those community banks and those credit 

unions about particularly—and I am talking about the smaller individuals who are helping those people that are our friends, our 

neighbors who live in our communities. And I am glad that you 

mentioned the size of credit unions. We have 7200 credit unions. 

Half of them are 10 or less. You are seeing up to 300 a year merge 

into larger credit unions. That doesn’t help the consumer get greater access and greater flexibility to the market, it constricts it. So 

the idea here is, going back to that one component of Dodd-Frank 

that says, look, we have a responsibility to reduce regulation, is 

where I would like to see the CFPB focus its attention. 

I yield back. 

Mr. MCHENRY. I thank the Vice Chairman. 

I will now recognize Mr. Quigley, the Ranking Member. 

Mr. QUIGLEY. Thank you, Mr. Chairman. 

Mr. Cordray, just to review let’s just—we are all concerned about 

community banks and their unique roles in our communities, but 

let’s just let you restate. What do you see the exact role your agency has in addressing the issues that you were created for as it relates to community banks and how that is different from the larger 

banks? 

Mr. CORDRAY. So our job is to protect consumers, but in the financial marketplace, which is a difficult marketplace for the averVerDate Aug 31 2005 10:15 Aug 23, 2012 Jkt 000000 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 C:\DOCS\75523.TXT APRIL
32 

age consumer, but we intend and wish to do that in a balanced 

way. We want to both make it possible for consumers to better understand the decisions they are making, make prices and risks 

clear, allow them to make more informed decisions, because the 

consumer will make the best decision if they have the information 

to do so. Nobody can do that for them. 

As for the providers, they have to be able to provide credit, that 

is important, and they have to be able to do it in an easily understandable way. And the conditions under which smaller banks and 

credit unions operate are very different, I think it has been my experience, from the largest volume banks, the very large banks that 

we immediately oversee and enforce the law against, that have $10 

billion in assets or more and a multitude of employees. 

So what we are trying to do is to balance both a regulatory regime that is taking account of the problems that consumers have 

had in these different financial markets, but is also trying to understand that if community banks and credit unions are following 

a traditional business model, a very high-touch, very knowledgeable about their customers, good customer service to their customers, that they may or may not have to be subject to all the 

same requirements as the larger banks that operate at more of a 

distance, somewhat more of an anonymous and volume-driven, statistical-driven models of lending. So that is a balance that we need 

to try to strike, and we are trying to strike in particular with lots 

of input from the institutions that are affected. 

Mr. QUIGLEY. And, so far, what have you put in place as it relates to small banks? Have any other rules passed, have you completed? 

Mr. CORDRAY. We have only had two final rules: one was a status 

quo placeholder while we consider the matter further; the other is 

the remittance rule, which was finalized in February, does not take 

effect until February of 2013, so it hasn’t even gone into force for 

any institution yet. All the rest of it is anxiety and concern and hypothetical. Nonetheless, I take that it is very real in a lot of bankers’ minds, so we take it seriously; we are trying to understand it. 

But we have tangible rules that have been put into effect. There 

has been minimal impact on institutions to date. 

Mr. QUIGLEY. Thank you, Mr. Chairman. I yield back. 

Mr. MCHENRY. We will now recognize Mr. Meehan of Pennsylvania for five minutes. 

Mr. MEEHAN. Thank you, Mr. Chairman. 

Mr. Cordray, I do accept the objective of trying to simplify things, 

but I am just in the brief the few moments that I have been looking 

at this. It reminds me of trying to build a gas grill. We have all 

been through that once. 

Mr. CORDRAY. I don’t like the construction booklets myself, no. 

Mr. MEEHAN. Here is H24A, mortgage loan transaction loan estimate. This is the blank form. This is a blank loan estimate that 

illustrates the application of the content requirements of Section 

1026.37, which implies there is about 1,000 other section before 

that. This form provides two variations of page 1, four variations 

of page 2, and eight variations of page 3, reflecting the variable 

content requirements in 1026.37. Then I have to go back to 

1026.37. 

33 

What I am suggesting to you is the complexity of his is overwhelming. But that is not where I think I want to use a couple of 

the minutes. Many of the local bankers are concerned about the 

qualified mortgage definition and whether we are going to get into 

new kinds of litigation possibilities, and I think you have spent 

some time and I would like to ask for your help in defining where 

we think this is going to go on the definition regarding whether 

there is going to be a safe harbor interpretation or whether or not 

there is going to be a rebuttable presumption. My reading of what 

the rebuttable presumption is that in addition to the factual information, there is a series of almost extrinsic evidence that could be 

introduced about the nature of that transaction. So where do we 

think this is going to be going with regard to the definition of a 

qualified mortgage? 

Mr. CORDRAY. So the qualified mortgage rule, which is about the 

consumer’s ability to repay the mortgage, which was something 

that far too little attention was paid to in the lead up to the financial crisis, and it led to many bad mortgages being peddled that 

failed, that failed in securitizations, that brought down the financial system. The idea here, Congress has required that this rule be 

adopted. The Federal Reserve put forward an initial proposal that 

then transferred to us, which we have inherited and we are working on to finalize. The idea is that there will be a realm of qualified 

mortgages that if they meet certain characteristics, there doesn’t 

have to be any attention to ability to repay because the protective 

features of those mortgages themselves should accomplish that. 

And then there will be other mortgages outside of that definition, 

the non-qualified mortgages, if you will, where they will have to 

document attention to the consumer’s ability to repay. 

It has been conveyed to us loudly and clearly by people across 

the spectrum that if the qualified mortgage realm is drawn too narrowly, that could upset the mortgage market. That would be a notable example of a rule itself potentially restricting access to credit. 

We are very concerned about making sure that we don’t do that, 

so we have actually backed up our timing on this rule to consider 

it further. We gained quite a bit of data from FHFA about mortgages. There is a lot of law that if you gain significant new data 

and you are going to rest a rule on that, you should give people 

an opportunity to have input and comment on it, which we have 

been doing over the course of the summer. 

Mr. MEEHAN. Do you expect much lending outside of the category 

what you would call a qualified mortgage? 

Mr. CORDRAY. It is hard to know what may happen in the long 

run with the mortgage market, but what has been conveyed to us 

and what we are pretty much convinced by is that in the short run, 

in the next couple, three years, which, of course, we are all living 

in the short run, there is unlikely to be a lot of lending done outside of the qualified mortgage circle; and, therefore, it is pretty important for us to be more inclusive in terms of what comes within 

that circle, and that is all input that we are digesting and trying 

to take into account as we finalize that rule before the end of this 

year. 

Mr. MEEHAN. There is a provision in the bill that talks about a 

three-day window and terms changing during the course of a transVerDate Aug 31 2005 10:15 Aug 23, 2012 Jkt 000000 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 C:\DOCS\75523.TXT APRIL
34 

action requiring a new disclosure. I am concerned and have discussed with bankers that you may get to a point where you are getting towards the end of a transaction, what could be the normal 

discussion in the course of a negotiation about who may be responsible for fixing a basement or something could change the terms, 

which would require a whole new period of disclosure that may 

start the process ticking again, which may impact the availability 

of credit that is guaranteed on that particular day. Is there a way 

in which there is going to be some flexibility created to allow there 

to be some movement within the terms of a transaction without 

having it be triggering a whole new set of disclosures? 

Mr. CORDRAY. So thank you, Congressman. Now you are talking 

about a different rule, which is the Know Before You Owe Truth 

in Lending Act-RESPA Form Rule, and part of the proposal there, 

and it is merely at a proposal stage at this point, we are going to 

get people’s input on it, is that people not be ambushed at the closing table; that they get these disclosures three days before they 

close so they have time to actually review it. You know how the 

pressure comes at the closing table; there is all the information 

there, much of it is required by State law, not by the feds; much 

of it is required by the lending institutions themselves for protection; and people are being pushed, pushed to sign, sign, sign, not 

read it, not understand it. The notion here is that if people can 

have the information, the key information three days before, that 

gives them a better ability to understand and gage the transaction 

they are entering into. 

We want to try to minimize the impact that that could have on 

potentially tying up a transaction from occurring on the date, the 

expected date, so that is something we are trying to take account 

of and get input on through the proposal stage, which is where we 

are right now. So your comment, which is similar to comments we 

have heard from others, are things we are trying to take account 

of and understand how we can avoid having that effect. Although 

we do think it is very important for consumers to have some time 

to look at this; it is the biggest single transaction likely they are 

ever to engage in, and if they do it in a confused basis or a rushed 

basis, where they don’t quite understand what they are getting 

into, they can make bad decisions that will harm them the rest of 

their lives and will lead to a bad transaction. 

Mr. MEEHAN. Well, thank you. I hope that you will look for flexibility with regard to that. 

Now, just one last issue that I ask that you spend time considering is the implication on small-and medium-sized institutions 

with regard to requirements for machine readability of documents 

and the cost that may be associated with whole new kinds of information systems that will have to be obtained in order to do that. 

I am hearing a lot about that question. 

Mr. CORDRAY. Thank you, Congressman. We are too, and we are 

going to look for how we can try to accommodate those concerns. 

Mr. MEEHAN. Thank you. 

Mr. GUINTA. [Presiding.] The gentlelady from New York is recognized, Ms. Buerkle. 

Ms. BUERKLE. Thank you, Mr. Chairman. 

35 

I just have to comment, because as I have been sitting here listening, there are two tones that really concern me, and one is condescension that the American people and the consumers and the 

small businesses who are trying to consume services from banks 

just can’t do it without the Federal Government, just can’t do it 

without 1,000 pages directing them. And I think, first of all, it is 

condescension, but, second of all, it is such 180 degrees from what 

this Country is about. We don’t need the Government, we don’t 

need the Government to take care of us. There are consumers and 

this is the most well-informed consumer world out there, with the 

Internet, with people doing their legal services online. Yes, there 

are bad players, and I will just go to my colleague’s comment about 

this regulation and this whole approach looks at all of the institutions as if they are the enemy and they are the cause of this meltdown that we had in 2008, and it is what Government does best, 

it is one big, fat footprint. We can’t pick and choose the ones who 

were the offenders and the ones who hurt the consumer versus the 

whole industry itself, and that has always been my argument about 

government, because it doesn’t have the ability; it is 1,000 or 2,000 

pages at the whole industry and it impacts everyone. 

But the condescension that we can’t do it without the Federal 

Government, we can’t do it without Dodd-Frank I find particularly 

offensive, and I think the American people out there, the American 

businessmen are far more sophisticated than the Federal Government gives them credit for. 

I want to just—— 

Mr. CORDRAY. May I respond? 

Ms. BUERKLE. Sure. 

Mr. CORDRAY. With respect, I don’t think there is anything condescending about my attitude toward these issues. I have been in 

these meetings in the community where people have lost their 

homes, lost their jobs because of the financial meltdown we worked 

through in 2007, 2008. These are very real human problems for 

people; they are tragic problems. And that is where the system got 

us before. We are now trying to clean it up. So the notion that everything is working just fine and just get the Federal Government 

out of the way I think is not something that can be squared with 

the facts. But there is nothing condescending about my attitude toward these problems; these are people’s lives. People have been 

harmed and affected by what went on in a financial crisis that was 

not of their making; they were innocent bystanders. Many people 

paid faithfully on their mortgages and found their homes under 

water because there were 10 other foreclosures in their community 

because of bad lending, and that is the kind of problem we are 

looking to fix And people need us to do that and they want us to 

do that, and we are going to work hard to do it. But I will do it 

with your input and your thoughts and your perspective, and try 

to keep them very much in mind. 

Ms. BUERKLE. Thank you. And I think we can probably debate 

the rest of the morning what actually caused the meltdown and the 

fact that Dodd-Frank doesn’t handle Fannie and Freddie, and those 

were a big piece of what happened in 2008, and I think that that 

should be of concern to everyone. 

36 

I just want to harken back to when you were here in January. 

As we know, the CFPB is empowered to prevent unfair, deceptive, 

and abusive practices. In January we asked—and as you know, deceptive and unfair have been clearly defined in the statute. But as 

we get into the term abusive, and I will just read you what you 

testified to in January: ‘‘We have determined that this is going to 

have to be a fact and circumstance issue. It is not something we 

are likely to be able to define in the abstract.’’ And that was when 

we asked you about the definition for abusive practices. Do you recall that statement? 

Mr. CORDRAY. I do. And, in fact, Congress defined the term abusive; it is in the Dodd-Frank Act. Congress provided a definition 

with multiple prongs as to what abusive means. So I don’t think 

the Bureau needs to redefine that; Congress told us what it means. 

If Congress says something, we accept it; we follow the law. In 

terms of how that applies in individual circumstances, obviously it 

has to be done with an eye to what those individual circumstances 

are. 

Ms. BUERKLE. My time is running out. However, the CFPB Examination Manual clearly defines deceptive, clearly defines unfair 

practices, pages and pages and pages, and yet there is only a paragraph on abusive; and that is what led to the question in January. 

And my concern with that vagueness, which is what the regulators 

do, they define and they drill down into the law, my concern is that 

has a chilling effect. When you can’t define what abusive practices 

are, how are the lenders supposed to know, the credit unions and 

the banks? How are they supposed to know what constitutes abusive practices? In my mind, and my colleague mentioned it earlier, 

the uncertainty, the chilling effect that that vagueness will have on 

the industry. 

I see I have run out of time, so I yield back. 

Mr. MCHENRY. [Presiding.] We will now recognize Ms. Speier of 

California. 

Ms. SPEIER. Mr. Chairman, thank you. 

Mr. Cordray, my applaud out to you for an outstanding job you 

have done as the Director. You know, for the longest time we have 

had a Consumer Product Safety Commission that could give us 

confidence that if we bought a toaster, it wasn’t going to blow up 

in our faces. But we have not had that same confidence when it 

came to credit card, mortgages, and the like. 

The credit reporting agencies have been pretty mystifying to the 

American people. They are not government entities; they are independent. And yet their numbers and the way they come up with 

their numbers says a lot to the consumers about whether they are 

going to get credit or not, and 700 used to be a great credit score 

and now it is not good enough for most mortgages. The FICO score, 

which we have known about for a long time, has also become the 

FACO score of some because, in fact, it is very unclear what scores 

are being used, and that many of these credit reporting agencies 

have different scores depending on what product is being anticipated or what you are paying for that score. 

So my first question to you, Mr. Cordray, you pointed out in a 

hearing last Monday in Detroit, ‘‘Up to this point, no single Federal 

Government agency could access all the information necessary to 

37 

generate a complete picture of what was happening inside these 

companies.’’ Isn’t it true that your supervision of credit reporting 

agencies has the potential to create a huge positive impact on some 

individuals’ ability to access credit? Could you explain? 

Mr. CORDRAY. Thank you, Congresswoman, I appreciate that 

angle on things. I do think, and we found as we held this field 

hearing in Detroit, that there are many people who don’t fully understand or maybe are even entirely unaware of how much impact 

on their lives the credit reporting agencies have. They are keeping 

score, they are keeping a file on you all the time, every bill you pay 

or don’t pay, whether you pay late or pay on time, and that is now 

being used to determine whether you have access to credit at all; 

what kind of interest rate you have to pay to get access to credit, 

which may be very different for you than it is for me or for Mr. 

Kelly or anyone else; and also can affect things like whether you 

get hired for a job, as that is part of background checks, now, increasingly, in a lot of workplaces. 

So to the extent we can deliver more transparency, more accuracy in credit report files, that should be good for consumers and 

it should be good for lenders. You know, they pay for this service, 

they pay for the credit report information. And if it is not accurate, 

then lenders are harmed by that because they are making loans on 

terms that aren’t the terms they would have used had they had the 

accurate information. So I think it is a very good point that as we 

can work with the credit reporting agencies, make sure that their 

processes are as they should be, that they are accurately pinpointing information and maintaining it, and that they are cleaning up errors that consumers bring to them in their file, that is 

good for consumers and lenders. It should be a win-win. 

Ms. SPEIER. All right, on July 17th, in The Washington Post column highlighting the importance of your work in this area, the column notes ‘‘For years, consumer advocates have complained that 

the information collected often includes errors. Under the Fair 

Credit Reporting Act, the Bureau and any businesses supplying 

them with data must correct inaccurate information. However, surveys have shown that getting erroneous information removed from 

credit files can be an exasperating experience.’’ And let me tell you 

I have personal experience with this issue, and it takes years. It 

shouldn’t take years to correct an inaccurate credit report. Is this 

something that you are going to be able to address, now having jurisdiction over the credit reporting agencies? 

Mr. CORDRAY. We will. And, frankly, I have had experience with 

that too, and we had some legislative efforts in Ohio that I was involved in, and people have brought in their huge boxes full of all 

the information and all the contacts that they had to try to get 

things corrected on their credit report, in many cases because they 

were victims of identity theft, so, by definition, through no fault of 

their own, but it still can take months or even years to get this resolved, and a lot of hours of time sunk into this and lots of frustration. 

So I do think that we are going to be working with the credit reporting companies on three areas of concern that we have identified: the kind of information they receive from others, which often 

can be inaccurate or polluted in various ways; how they actually 

38 

maintain and assemble that information; and what kind of error 

resolution procedure is in place for consumers so that they aren’t 

having to go through laborious hoops in order to get problems fixed 

that they did not create themselves. 

Ms. SPEIER. Mr. Chairman, can I ask one follow-up question? I 

realize my time has expired, but it will be a very short question. 

Mr. MCHENRY. Go right ahead. 

Ms. SPEIER. Thank you. 

In California we actually passed a law that required that if an 

employer was going to access your credit report as an applicant, 

that you had to be notified of that. Do we have a federal law that 

does that? 

Mr. CORDRAY. That if someone is accessing your credit report, 

you have to be notified of it? 

Ms. SPEIER. If you are an applicant for a job and an employer 

is accessing your credit report, that you have to be notified. 

Mr. CORDRAY. I don’t believe that that is addressed in federal 

law. 

Ms. SPEIER. Thank you. 

Mr. CORDRAY. I could be wrong. If so, we will clean it up, but 

I don’t believe so. 

Ms. SPEIER. I thank the Chairman. 

Mr. MCHENRY. We have a lot of federal statutes, so it is certainly 

a challenge, but I will now recognize myself for questions. 

The head count of the CFPB is roughly, at this point, around 

1300 people, is that about right? 

Mr. CORDRAY. No, actually, we are not at that level. We plan to 

grow to at least that level, but I think right now we are at more 

like 950. 

Mr. MCHENRY. Okay, 942 was the 2012 estimate and I wasn’t 

sure if you had moved into the 2013, what you outline is about 

1359 in your budget justification. So, with that, I do want to ask 

a couple questions about economic analysis. 

The SEC, the FDIC, the FTC all have a chief economist. Do you 

have a similar position within the CFPB? 

Mr. CORDRAY. So what we have is we have a research division 

that is composed of various people, including economists. We also 

have, separately, a markets division, which also engages in a lot 

of analysis, but maybe with something more of a direct practical 

eye to the operations of industry and how they work and how different markets for products work. So those are two different 

sources of information, wisdom, and insight for the rest of the Bureau. 

Mr. MCHENRY. But there is no comparable to a chief economist 

within the CFPB? 

Mr. CORDRAY. I don’t know that we have something we designate 

as chief economist. We have economists at different levels, including those who supervise others, and maybe you could characterize 

someone in that hierarchy as the chief economist. I don’t know that 

we have actually used that title. 

Mr. MCHENRY. So who is the final say when you have a cost-benefit analysis? 

Mr. CORDRAY. Well, we have an experienced regulations team, 

many of whom came from the Federal Reserve. We have the reVerDate Aug 31 2005 10:15 Aug 23, 2012 Jkt 000000 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 C:\DOCS\75523.TXT APRIL
39 

search and the markets people. We tend to work on a cross-team 

basis on the cost-benefit analysis because it is time-consuming, 

somewhat elaborate, and we want to make sure that we get it right 

in terms of how all of that then gets processed through the Bureau. 

Ultimately, that would go up to the Associate Director for the division, which we call RMR, which is Research, Markets, and Regulations. They sort of combine together. Ultimately, I would have signoff on all of that. 

Mr. MCHENRY. Okay, so that is a wholly different process than 

what we have just gone through with the SEC, trying to make sure 

that you have a group of economists that actually have the opportunity to affix a cost and a benefit analysis before final rulemaking 

is issued, so the public has some proper knowledge of that. I certainly understand that you don’t have much clarity on what that 

process is in terms of being two hours in on your testimony. 

Mr. CORDRAY. You mean the SEC process? 

Mr. MCHENRY. No, no, no, your process that is similar, that 

would be the counterpart to what the SEC or the FDIC or the FTC 

does for a cost-benefit analysis. 

Mr. CORDRAY. I see. So we developed our process after consulting 

with those other agencies, because they obviously had years of experience with cost-benefit analysis—— 

Mr. MCHENRY. And a number of lawsuits. 

Mr. CORDRAY. Not all of it, right, exactly. So we tried to learn 

from them both what they did that they thought worked, what they 

did that they understood had not worked very well, and we drew 

up our process accordingly. I don’t know that our process mirrors 

exactly what is done at other agencies, and there is probably some 

uniqueness in each of the processes, but—— 

Mr. MCHENRY. Would you provide for me in written response 

outlining this procedure and practice within the CFPB? 

Mr. CORDRAY. Sure. We would be glad to do that. 

Mr. MCHENRY. I certainly appreciate that. Now, in terms of behavioral economics, how does the CFPB utilize behavioral economics? 

Mr. CORDRAY. Well, we are trying to build behavioral economics 

into what we do. We are trying to understand, not make judgments 

in the abstract, in a somewhat academic way, but think about how 

consumers actually behave and how our rules and other activities 

should take account of what kind of things consumers actually do. 

By the way, industry does this very well. They have been attentive to the new behavioral economics. They think about that as 

they market products; they think about that as they design products; they think about that on the kind of products that they are 

looking to deliver. So it feels like we need to keep up with industry, 

and also we need to be practical about how our rules actually 

apply. It is one thing to write a rule in the abstract and you can 

write lots of pretty text and put it in the Federal Register, but if 

it isn’t really coordinated with how consumers actually behave, 

then it is not very helpful. 

One of the ways this has shown up for us is we are doing a lot 

of consumer testing around, for example, the forms in the combination of the Truth in Lending Act-RESPA forms. There has been a 

lot of testing with consumers to try to see what they are taking 

40 

away, what they are understanding, what they are not understanding, what they are stumbling over, what they are getting. 

That did lead us, and there has been some disagreement about 

this, to take the APR, annual percentage rate number, and put it 

on page 3 of our form, rather than page 1, because we found that 

consumers typically were confused by that. It was, in practice, not 

as easy for them to understand that as maybe people thought theoretically would be the case. So we are trying to respond to what 

consumers actually do, to what they actually know, to what they 

understand, and we are trying to use that to build our forms. 

Mr. MCHENRY. So the concern I would have is your use of behavioral economics is to inform regulators, as a regulator, how consumers make decisions. There is also a tension within that in that 

there is a substantial part of behavioral economic theory that 

would tell you that you need to limit choices, limit the choice set 

and choice architecture of decisions consumers make. 

So that tension between a regulator understanding how consumers make decisions versus limiting products is a great concern 

from my perspective here on the Hill, because it shouldn’t be a regulator’s policies and procedures that lead to limiting choices for 

consumers; it should be to inform how consumers make decisions 

so the regulator understands that, not for the regulator to proscribe 

that limitation of options for consumers. Do you agree or do you 

disagree with what I have just said? 

Mr. CORDRAY. I think what you just said is a great insight and 

it is something that we wrestle with. Certainly, much of what we 

have been doing has been targeted at addressing clearer, simpler, 

straightforward disclosures so that consumers can know what 

choices they are making. Are there times where certain acts, and 

I tend to focus on products, per se, I mean, I think I tend to share 

some of your skepticism about us banning products. What the statute speaks to is us addressing acts or practices. 

So, for example, the enforcement action that just was completed 

had to do with deceptive marketing of products, which, again, I 

think interferes with consumers making fair and sensible choices 

for themselves if they are deceived or misled, but we have really 

not, I think, been thinking in terms of banning products, per se. 

So to the extent that you think that may be some portion of the 

behavioral economics school of thought—and I would confess that 

I am not an expert in it, I have been learning about it, been learning many things since I took this position—I don’t know that that 

is a focus of our attention so much as trying to understand consumer behavior, understand some of the things that are not necessarily obvious or rational in consumer behavior, for example, 

once you have something, there is a greater concern about losing 

it than there was about obtaining it in the first place. There is 

some time frame constraints where consumers may tend to downplay things that occur more in the long-term than things that occur 

right away; various ways that consumers actually think and behave that may not be obvious to people who think that we are all 

perfectly rational. 

But I don’t tend to think and I don’t think we are approaching 

this from a standpoint of limiting choices, but I am not sure I fully 

41 

understand the entire school of behavioral economics. In fact, I 

know that I don’t. 

Mr. MCHENRY. Well, I certainly appreciate your humility in that 

answer, implicit in that answer. I just wanted to understand your 

frame of reference for this process, obviously. So if I can close by 

just asking a couple, and if you would just keep it brief, as the time 

is short. 

Again, this question of abusive practices, do you have an intention to lay this out in rulemaking, in a formalized way, clear examples and clarifications on what that definition is and how the Bureau sees it? 

Mr. CORDRAY. So, again, I am not close-minded on that subject. 

I think at the moment we have no present intention to launch a 

rulemaking on that issue. We are pretty tied up through the remainder of this year with the mortgage rulemakings; we will be 

hard pressed to meet those deadlines, although I believe that we 

will. We have been examining institutions around the UDAP procedures. I don’t know that we, to date, have identified specific abusive practices, although much of that is in process, so I don’t think 

we have an intention to launch an abusive rulemaking at this time. 

Mr. MCHENRY. Okay, so the answer is no. 

Mr. CORDRAY. I think that is correct as of this moment. 

Mr. MCHENRY. Would you commit to formalizing the process for 

evaluating, well, let me restate this. Would you commit to formalizing the process for evaluating credit access in rulemaking and 

examinations? 

Mr. CORDRAY. I think that it is part of our process now. 

Mr. MCHENRY. But would you commit to formalizing that process? 

Mr. CORDRAY. I am not sure what you mean by formalizing. 

Mr. MCHENRY. As in outlining it so there are expectations from 

the private sector. 

Mr. CORDRAY. I see. So in our examination process we have an 

examination manual. Again, it borders on the long side, but it is 

on our website. Much of it is adapted from procedures that other 

banking agencies have used. And we have also given more specific 

guidance about particular products that we are examining around. 

Those modules are also on our website; they are publicly transparent for institutions and others to assess, so that is a way in 

which we have formalized that process. 

Our rulemaking process is very stylized in terms of the law; we 

have the SBREFA panels, we have the proposal stage, we have a 

notice and comment procedure—— 

Mr. MCHENRY. I understand. Not to cut you off, but to get to the 

point of this hearing, it is access to credit. 

Mr. CORDRAY. Yes. 

Mr. MCHENRY. The availability of credit and the access to it. The 

availability of credit is one thing. The financial crisis proved out, 

as you outlined, that when institutions lose their rears, so to speak, 

if I may be overly technical—— 

Mr. CORDRAY. Appreciate your cleaning that up. 

Mr. MCHENRY. When institutions fail or have to be bailed out by 

the Government for bad decisions they made in loaning people 

money or investing, that constricts credit for everyday consumers, 

42 

yes, absolutely. Also, as a part of that, that is the availability of 

credit becomes constrained. Access to credit can be constrained as 

a result of less availability of credit, yes. 

So that can be a decision made by businesses or banks; it can 

also be as a result of government regulation. That is our discussion. That is our intention today, is to get to the heart of that. So 

what I would like you to address, and if I may say it that way, I 

would encourage you to look at access to credit and to mention this 

in terms of your rulemaking, the impact that your rules will have 

on access to credit as you see it, because, as I see it, there is this 

opportunity to overregulate and thereby constrain access to credit. 

Mr. CORDRAY. I see. I see your point. 

Mr. MCHENRY. Maybe not explicitly banning products, but having the results of products not being offered. That is my concern 

I would like to express to you, and I would certainly appreciate it 

if you would take that into account. I think the American people 

would appreciate that as well. 

Mr. CORDRAY. I understand your point now, and I didn’t get it 

before. We do in fact, that is one of the things we consider in the 

cost-benefit analysis, is what the potential effect of a proposed rule 

would be on access to credit. There is only a handful of specific 

statutory mandates that we have, the objectives laid out by Congress in creating the Bureau. One of them is to give careful consideration to access to credit, and my understanding of how this 

makes sense is it is great to protect consumers with all the elaborate protections you can think of, but if they can’t get a loan, then 

you are really not helping consumers. 

So they have to have access to credit and then the credit needs 

to be presented in terms that are understandable, clear, so forth. 

Both of are objective. And I do think we uniformly, as we consider 

rules, having a discussion of that and a consideration analysis of 

that, but I appreciate the comment, and we will make sure our 

process reflects that. 

Mr. MCHENRY. Well, Mr. Cordray, thank you for submitting to 

congressional oversight. I certainly appreciate the responsiveness 

you have personally presented in your time as Director of the 

CFPB. As I mentioned and I have expressed to you personally, the 

means of your appointment I found suspect, but your actions serving in this position have been honorable. Even if at times I disagree with the actions you have taken, you have done so in an honorable fashion, and we can disagree about policies, procedures, and 

even sometimes results, but I certainly appreciate your willingness 

to be open about that. That is a very welcomed thing. And thank 

you for your willingness to be here today. 

Mr. CORDRAY. The sentiment is mutual, Mr. Chairman. Thank 

you. 

Mr. MCHENRY. Thank you. 

We will now dismiss this panel and we will recess for about a 

moment or two before we begin our second panel. 

[Recess.] 

Mr. MCHENRY. The Committee will return to order. 

We will now recognize our second panel of witnesses. Thank you 

for waiting so patiently through the first panel. 

43 

Mr. Douglas Fecher is the President of Wright-Patt Credit Union 

in Fairborn, Ohio; Mr. Steven Zeisel is the Executive Vice President and General Counsel of the Consumer Bankers Association; 

Mr. Michael Calhoun is the President of Center for Responsible 

Lending; Mr. Mark Calabria is the Director of Financial Regulation 

Studies at the Cato Institute. 

Thank you so much for being here. It is the policy of this Committee that all witnesses be sworn before they testify. If you will 

please rise and raise your right hand. 

Do you solemnly swear or affirm the testimony you are about to 

give will be the truth, the whole truth, and nothing but the truth? 

[Witnesses respond in the affirmative.] 

Mr. MCHENRY. Thank you. You may be seated. 

Let the record reflect that the witnesses answered in the affirmative. 

We will now begin with Mr. Fecher for his testimony. As you 

have heard, the light system is very simple for opening statements: 

green means go, yellow means hurry up, and red means stop. You 

will have five minutes to summarize your opening statement. 

Mr. Fecher. 

STATEMENT OF DOUGLAS FECHER 

Mr. FECHER. Thank you, Chairman McHenry, Ranking Member 

Quigley, members of the Subcommittee. Thank you for the opportunity to testify at today’s hearing. My name is Doug Fecher, and 

I am President and Chief Executive Officer of Wright-Patt Credit 

Union, a federally-insured, State-chartered credit union serving 

over 225,000 members with total assets of $2.5 billion, 

headquartered in Fairborn, Ohio. 

Credit unions are not-for-profit financial cooperatives owned by 

their members, and our job is to help our members improve their 

financial well being. Today, credit unions face a crisis of creeping 

complexity with respect to regulatory burden. This burden will ultimately, in my opinion, have a negative impact on credit unions’ 

ability to extend credit to members at reasonable costs. 

It is not just one new law or revised regulation that challenges 

credit unions, but the cumulative effect of all regulatory changes. 

Every hour and dollar that is diverted to deciphering these new 

regulations is a resource that cannot be spent working with our 

members and will have to be paid for out of the interest we earn 

from consumer loans. 

It was the actions of the larger financial institutions that created 

the need for stronger consumer protections. We understand this. 

However, it is important that the CFPB recognize that the cost of 

compliance does not vary much by asset size and is a much greater 

burden for smaller institutions. 

The Dodd-Frank Act required the CFPB to review all the statutes and regulations under its jurisdiction. As part of this process, 

the CFPB has routinely reached out to the credit union system to 

seek our perspective and input on their rulemaking process. We appreciate their effort and look forward to continuing to work with 

them. 

However, because of the scope of the review, there could be dozens, if not hundreds, of additional operating changes that credit 

44 

unions will be required to make. To help give the Committee an 

idea of what credit unions are facing, in just the past six months 

the CFPB has issued a 300-page remittance rule, an 1,100-page 

proposal on RESPA–TILA, a 293-page proposed HOEPA proposal, 

and we are quite apprehensive about the qualified mortgage regulation and other related rules the CFPB is working on. 

The fact of the matter is it is not necessary for credit unions to 

be subjected to a substantial increase in compliance costs. Congress 

granted CFPB the authority to exempt credit unions and other parties from a number of the regulations the Bureau is developing. We 

are very concerned that instead of exempting credit unions, the Bureau seems to be picking and choosing when to use the statutory 

flexibility Congress provided. 

We believe the Bureau has more authority to extend relief to 

credit unions from certain compliance responsibilities that it has 

not exercised. If we want credit unions to maintain and expand access to reasonably priced consumer loans, Congress should, at the 

very least, aggressively urge the CFPB to utilize its exemption authority so that regulations that are intended for abusers and the 

largest of financial institutions do not have the unintended consequence of overburdening credit unions and other smaller financial institutions. 

The RESPA–TILA proposal is massive and reviewing of the document will be a problem for most credit unions. I am personally concerned that things like this proposal, along with all the other 

changes occurring in the mortgage market, may make many smaller credit unions simply throw up their hands and quit making 

mortgage loans. 

The proposed rule would change many aspects of the current way 

of doing business. While it is difficult to assign a dollar figure to 

the cost of compliance for these changes, when a regulation is 

changed, make no mistake, there are costs to be paid: staff time 

and credit union resources must be used to comply with the 

changes; forms and disclosures must be changed; data processing 

systems must be reprogrammed. It also takes time to discuss these 

changes with credit union members, and at times members get 

frustrated because of everything they are being put through. 

Regarding the definition of a qualified mortgage, or QM, the Bureau was given broad flexibility to define QMs. We agree with this. 

The Bureau’s broad jurisdiction in this important matter will undoubtedly reshape the mortgage process and determine the cost for 

borrowers and liability exposure for lenders. The CFPB should consider the broadest possible QM definition that balances the needs 

of responsible lenders and consumers to ensure maximum access to 

credit and minimal market disruption. 

A common element of all the new rules emanating from the Bureau is a significant increase in cost to credit unions. Faced with 

increased compliance costs, we will be forced to reduce some other 

costs that we can control. As an example, one of our most controllable expenses is loan losses. The only way we can lower loan 

losses is to tighten credit standards, which will impact creditworthy borrowers on the margin. This will be particularly harmful 

to those Americans hurt most by the recent financial crisis and recession. 

45 

Chairman McHenry, credit unions respect the idea of strong consumer protection. Such protection is in our DNA. As a matter of 

public policy, I believe we should be encouraging responsible community-based lending, rather than discouraging it through costly 

compliance burdens for groups that were never part of the problem 

in the first place. We urge the Subcommittee to ensure the Bureau 

exempts credit unions and other small financial players in their 

communities to the greatest extent possible. 

Thank you for allowing me to testify today. I would be happy to 

take any questions. 

[Prepared statement of Mr. Fecher follows:] 

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Mr. MCHENRY. I certainly appreciate the summary of your testimony and certainly appreciate your full written testimony as well. 

Mr. Zeisel. 

STATEMENT OF STEVEN I. ZEISEL 

Mr. ZEISEL. Chairman McHenry, Ranking Member Quigley, and 

members of the Subcommittee, my name is Steve Zeisel, and I am 

Executive Vice President and General Counsel of the Consumer 

Bankers Association. We appreciate the opportunity to present our 

views today. 

As the trade association of retail banks of all sizes, we are very 

focused on the CFPB. We recognize the importance of maintaining 

an ongoing dialogue with our new regulator. CBA has been pleased 

with the Bureau’s accessibility in that regard and we have met 

with them on numerous occasions. 

Consumers are best served by a health and innovative financial 

services market. It is critical that, as the Bureau embarks on its 

mission, it does not act as a brake on the development of creative 

products, or limit access to credit. 

As banks observe the CFPB’s development during this transitional period, they may become cautious in developing new products and services. The Bureau must always recognize the potential 

impact its actions can have on access to credit for consumers, and 

how over-burdensome regulations will only increase compliance 

costs and stifle product innovation. 

One particular area of industry and consumer concern is the 

Qualified Mortgage or QM proposal. This may be the most important rule the CFPB issues in its first 18 months, given the significant impact it will have on consumers’ ability to access mortgage 

credit. We have two major concerns. 

First, the CFPB needs to define a QM as broadly as possible, 

using objective standards. If the Bureau is vague or subjective, 

legal uncertainties will mount, as will costs for consumers. Second, 

the CFPB also needs to provide a safe harbor which would result 

in lower risks for lenders, and allow a larger group of consumers 

to receive safe and affordable mortgages. 

Thankfully, the CFPB is taking a deeper look before issuing the 

final QM rule later this year. If the Bureau misses the mark, consumers could see a significant reduction in the availability of mortgage credit. 

The CFPB has also devoted a significant amount of time and resources over the last year combining and simplifying mortgage disclosures. CBA applauds these efforts to simplify disclosures for consumers, since we have long been supporters of more streamlined 

RESPA and TILA disclosures. But we are concerned the CFPB has 

proposed other significant changes to the RESPA–TILA rules that 

are not directly related to the new disclosure forms. We will be reviewing and commenting on the 1,100 page proposal over the next 

several months. 

One of the few rules the CFPB has finalized will have a significant impact on consumers who transfer money abroad. That is the 

remittance rule. The way it was written, it may cause many banks 

to exit the business entirely, since they may be unable to comply 

with the new requirements. This is to the detriment of those conVerDate Aug 31 2005 10:15 Aug 23, 2012 Jkt 000000 PO 00000 Frm 00062 Fmt 6633 Sfmt 6633 C:\DOCS\75523.TXT APRIL
59 

sumers whom this rule was meant to help. The CFPB needs to take 

a second look and study the impact of this rule before it is implemented next year. 

The CFPB has also indicated its intention to regulate prepaid 

cards. This is a product that has seen tremendous innovation and 

development in recent years and currently serves the needs of 

roughly 60 million Americans. 

These cards, prepaid cards, have proven to be an attractive, safe, 

and convenient method of conducting financial transactions at retail locations or online, and have opened the door to financial inclusion to many who were previously underserved. It is important that 

future regulations adopted by the CFPB do not increase costs, decrease availability, or stifle the innovation of this product. 

In conclusion, we appreciate the CFPB’s mission of protecting 

consumers; however, we believe the Bureau has the responsibility 

to ensure that the new rules at issue will not adversely impact the 

availability of credit. Indeed, the Dodd-Frank Act requires it. 

It is important the Bureau continues to keep the dialogue open 

with all market participants. This will ensure it has the information necessary to understand how theoretical rules and regulations 

will impact consumers once they are applied in a real world environment. It is also important the Bureau takes the right approach 

as it moves forward and provides enough time to implement any 

required changes and to coordinate the timing of such changes with 

other rules. The more certainty the Bureau can give to the financial services community, the better we can innovate and provide 

the products and services that consumers need. 

We appreciate the opportunity to share our views and I look forward to answering any questions you may have. 

[Prepared statement of Mr. Zeisel follows:] 

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Mr. MCHENRY. Well, thank you. Even with the little speed bump 

we have given you, you handled that very well. 

Mr. Calhoun. 

STATEMENT OF MICHAEL D. CALHOUN 

Mr. CALHOUN. Thank you, Chairman McHenry, Ranking Member 

Quigley, for the opportunity to talk today about the need for both 

consumer protection and broad access to credit. 

At the height of the mortgage boom and resulting crisis, what 

were previously small niche products came to dominate the market. 

No-dock loans, loans with deep teaser rates and exploding payments, were marketed without a determination of the sustainability of those loans. As a result, the U.S. had some of the worst 

quality loans, highest default rates, and worse consequences. In addition, investors who purchased AAA paper, rated AAA experienced 

losses often exceeding 40 percent on their investments. Understandably, they were scared away. 

The CFPB was created to address the failure of other regulators 

who had the authority to establish safeguards, but did not do so 

because they were focused on other mission priorities. While some 

have argued the CFPB has constrained credit, credit constriction 

followed the mortgage crash and predated the CFPB. Indeed, the 

CFPB rules we are talking about today, such as the mortgage 

rules, have not yet been finalized and would not take effect for another year and a half from now. 

I would also point out that while there has been widespread litigation in the mortgage market, these have not been borrower 

claims, which have remained rare, despite widespread abusive 

lending. Instead, these have been so-called put-back claims, where 

investors who purchased loans have sued originators based on the 

terms of those sales contracts that the loans did not meet the represented standards. We have seen not just claims, but tens of billions of dollars of payments on those put-back claims, and that is 

a major driving force in constraining credit right now. 

I will focus my oral testimony here on the mortgage market, because it is so important to families and the overall economy. 

One of the most important rules the CFPB will produce, as has 

been noted, is the Qualified Mortgage rule. There are three interrelated issues regarding that rule. The first is do you have a broad 

or narrow QM market. We have argued strongly for a broad QM 

market, and we are heartened by the comments that Director 

Cordray made today that that seems to be the direction they are 

headed. 

The second is do you have bright line standards or more subjective standards. We initially, in our filed comments with the Federal 

Reserve, were concerned about bright line standards constricting 

credit. We have changed that position based on input from lenders, 

who said that they needed bright line standards so that they felt 

certain, when they wrote a loan, that they knew that it was a 

qualified mortgage. 

However, one of the consequences of bright line standards is no 

matter where you set those standards, if you want a broad market, 

you will allow a significant number of unaffordable loans to meet 

that standard. So, for example, it is widely proposed that one of the 

73 

core measures be debt-to-income, and that be set in the mid-40s. 

That works for a lot of families, but a family on a smaller, fixed 

income, a loan with a 45 percent so-called debt-to-income ratio we 

have seen is often unaffordable. We consequently support a rebuttable presumption, and we note that these are very tough claims 

to make. You have to prove there was no ability to repay the loan 

at the time it was made, not based on later events. These are individual, not class, actions, and you must prove causation, not just 

a technical violation. 

We have submitted joint comments setting out this structure 

with lending institutions who originate the majority of the loans in 

this Country supporting this three-part structure. 

Two other quick important points. We support simplification. The 

QRM, which determines risk requirements, risk retention, should 

be the same as QM for simplification and to provide broad access 

and regulatory reduced burden. Lastly, on the HOEPA rule, I 

would note the statutory reforms did not change the HOEPA interest rate trigger. It changed how it is calculated, but it left it at the 

same place, which in today’s market is over 10 percent interest 

rate on a first lien mortgage. The points were revised in a way that 

followed State law such as North Carolina. 

Thank you again for the opportunity to testify today, and I look 

forward to your questions. 

[Prepared statement of Mr. Calhoun follows:] 

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Mr. MCHENRY. Thank you. 

Dr. Calabria. 

STATEMENT OF MARK A. CALABRIA 

Mr. CALABRIA. Chairman McHenry, Ranking Member Quigley, 

distinguished members of the Subcommittee, I thank you for the 

invitation to appear at today’s hearing. 

Before I begin, I would like to really commend the Chairman’s 

efforts to bring oversight to the Consumer Financial Protection Bureau. Given the unusual structure of the CFPB, one that I believe 

reduces transparency and accountability, and the questionable 

manner in which its leadership was put into place, diligent and 

constant congressional oversight is badly needed. 

In my opinion, had Congress fulfilled its responsibilities in previous years in regards to such entities as Fannie Mae and Freddie 

Mac, we might have avoided the financial crisis altogether. As the 

CFPB runs the same risk of politicizing our consumer credit markets in a manner similar to which our mortgage markets were so 

highly politicized, I believe aggressive congressional oversight is 

needed in order to avoid both future crises and to maintain a 

healthy economy. 

A particular focus of my experience has been in the area of federal mortgage finance. As housing remains one of the largest drags 

on the economy and is particularly sensitive to credit conditions, I 

will place the bulk of my testimony on CFPB’s activities in this 

area. I will emphasize, however, the point has been repeatedly 

made that I agree with that the CFPB has not issued a whole slew 

of regulations. I see the larger problem as the whole body of regulations and law which the CFPB inherited. 

The problem facing our housing market is a combination of weak 

demand and excess supply. One of the constraints on demand is 

mortgage availability. If your borrower is prime and can make a 

substantial down payment, the mortgages are both cheap and plentiful. If one is not, then a mortgage is difficult, if not impossible, 

to get. 

This decline in mortgage availability drives from a variety of factors, some good and some bad. For instance, the most irresponsible 

lending, with the exception of FHA, in my opinion, is gone, at least 

for the moment. I think that is a good thing. Unfortunately, most 

of the Alt-A and higher quality subprime is also gone. That is not 

such a good thing. By my estimate, about a fifth of the mortgage 

market has disappeared, holding back housing demand. I would 

again emphasize we don’t want all of that to come back. 

As I noted in my written testimony, the Federal Reserve has 

made the same observations in relation to our mortgage market. 

One of the factors contributing to that disappearance, in my 

opinion, is Federal Reserve interest rate policy as it combines with 

mortgage regulation. Under HOEPA, which was mentioned, there 

are two triggers: one is the HOEPA and one is the higher-cost, 

which was created under Federal Reserve regulations. Under the 

HOEPA trigger, with the Federal Reserve’s current interest rate, 

any mortgage over 5.5 percent is considered high-cost. These mortgages now carry considerable regulatory regulation and litigation 

86 

risk. I think it is fair to say that historically 5.5 percent is a great 

rate, not a predatory one. 

While one should always keep in mind that economics does not 

offer the luxury of a natural experiment, we cannot hold all equal, 

I believe the expansion of consumer finance regulation since the financial crisis has increased consumer credit costs while decreasing 

its availability. 

This expansion has also reduced the effectiveness of monetary 

policy. While the Federal Reserve can lower its target rate, its ability to impact the economy is limited by the willingness of lenders 

to extend credit. One area that appears adversely impacted has 

been the area of credit cards. Despite a 5 percentage point decline 

in the federal funds rate since 2007, the interest rate on credit 

cards has fallen by only 1 percentage point. As the credit card market, in my opinion, is fairly competitive and rates can be adjusted 

to cover interest rate, the increased spread of rates over other 

benchmarks suggests increased credit and legal risk. The largest 

declines in credit card lending did not occur during the depths of 

the financial crisis, but since the implementation of the CARD Act. 

Economists Josh Wright at George Mason University and David 

Evans at the University of Chicago predicted in 2010 that the 

CFPB would raise the cost of consumer credit by an average of 160 

basis points. Examining the spread of various forms of consumer 

credit, especially that in the credit card market, over the treasury 

rate, it would seem to me that that estimate is too low. Again, as 

mentioned earlier in the earlier panel, my guess is that the CFPB, 

given its inherited body of regulation, has increased consumer credit by at least 2 full percentage points. 

Evans and Wright use that estimate to say that the CFPB will 

likely decrease job creation by 4.3 percent. Accepting that their predicted increase in borrowing cost is likely low, we can surmise that 

net job creation has been reduced by about 5 percent. This translates to about 150,000 fewer jobs that would have been created that 

were not. 

Further evidence that regulatory and litigation risks are holding 

back lending and other sectors less subject to regulation, I think 

if you compare those other markets. For instance, take the auto 

loan market. Subprime credit is readily available for auto loans, 

and despite seeing a similar decline to that in the housing market, 

the auto market has rebound. Of course, the auto market is not 

subject to the same consumer protections as the mortgage market. 

If you don’t pay your car loan, for instance, they take your car. It 

is not the situation that if you don’t pay your mortgage, you can 

be in your house for years on end without ever making a payment. 

While some would claim that by being able to drag out these obligations is consumer friendly, the result is clearly a reduction in 

credit and a weaker economy. 

In closing, I would like to emphasize that I think CFPB is only 

one of many obstacles. In fact, I think I should emphasize that 

much of the problems at CFPB were created by Congress and Congress deserves probably far more burden of the blame than does 

the CFPB. So, again, I should emphasize that I think our entire 

body of financial protection laws needs to be reexamined, rewritten 

87 

in a way that would be both protective of consumers and the economy. 

Thank you. I look forward to your comments and questions. 

[Prepared statement of Mr. Calabria follows:] 

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Mr. MCHENRY. Thank you for your testimony. 

I certainly appreciate the panel being here. I know you are all 

busy individuals, but I certainly appreciate you taking the time, either traveling across town or traveling to Washington especially for 

this. 

I will begin by recognizing myself for five minutes. 

Mr. Zeisel, with the Consumer Bankers Association, when you 

are talking to your members, what are their biggest concerns? 

What are the biggest issues that they are facing with the CFPB? 

Mr. ZEISEL. Thank you, Mr. Chairman. In many ways there are 

two aspects of our attention that is relevant to this Committee’s 

oversight. One is the potential for actions by the CFPB. And as has 

been noted, only one significant substantive regulation has been 

issue to date. A lot of it is uncertainty about what the CFPB is 

likely to do going forward as it regulates products and services 

using the powers that have been given to it under the Dodd-Frank 

Act, but also through the examination process itself. 

A lot of our members are examined by the CFPB, they are banks over $10 billion, and the examination process is new, a lot of new 

examiners who are under a new boss, as it were, and operating 

with a new set of supervisory guidelines, and there is a lot of learning process going on there. So banks are facing it on the exam side; 

they are facing sort of the uncertainty about the future on the regulatory side. 

I will add that the one regulation that they have issued, the remittance rule, already seems to have an impact on the products 

that they can offer, so there is some very real concern there as 

well. 

Mr. MCHENRY. Mr. Fecher, have you seen that with the question 

of remittances? 

Mr. FECHER. Yes. Actually, as was stated before, that was the 

one rule. Credit unions look at the CFPB with a great amount of 

uncertainty also, and the first clues that we get are the remittance 

rule. Now, there is an exemption built into that rule, but that exemption is so low as to not really—the only people it exempts are 

the people that weren’t doing it in the first place. 

My own credit union makes about 25 remittance payments a 

month. It is quite likely we will discontinue that service because 

the cost of the regulation simply won’t support such a small number. We were hoping for our larger exception. 

And then the next clue we get is an 1,100 page document, and 

with all due respect to the Director when he said that most of it 

is just justification, the fact of the matter is we ignore most of that 

at our own peril. We have to read the whole thing. There are parts 

of that thing that we just can’t take the risk of not understanding 

what is in that. So while the comment and point was made earlier 

that these regulations, very few of them have been put out yet, the 

amount of uncertainty and, frankly, fear among small credit unions 

that this thing will roll up on them is real, on the street real. 

Mr. MCHENRY. So how large is your credit union? 

Mr. FECHER. We are a large credit union, we are $2.5 billion in 

assets. 

Mr. MCHENRY. And how many folks do you employ? 

Mr. FECHER. We have about 490. 

97 

Mr. MCHENRY. Okay. Substantial. So in terms of transactions, 

you do 25 remittances a month? Is that a very small, give me some 

sort of understanding of is that a significant number of transactions or very insignificant? 

Mr. FECHER. It is not even a decimal place in terms of our total 

number of transactions. And the reason it is so small is most credit 

unions are community-based. We are in the heartland of Ohio. We 

don’t do a lot of remittance outside of the Country, but we do some. 

Mr. MCHENRY. But some, because you have some folks, Wright 

Patterson Air Force Base right there. 

Mr. FECHER. Correct. 

Mr. MCHENRY. Okay. So that would be discontinued. 

Now, Dr. Calabria, in terms of this question about access to credit, two of my Democratic colleagues mentioned your testimony. 

Congratulations, they read it. 

Mr. CALABRIA. I am touched. 

Mr. MCHENRY. Unfortunately, they didn’t agree with it, and I 

wanted to see if you had any response. One question was directed 

to the availability and the cost of credit that you outline as a direct 

result of the CFPB, meaning, as you outline, there is less credit 

available and it is more costly as a direct result of the CFPB. Will 

you outline? 

Mr. CALABRIA. Let me first, because I am not sure that I think, 

certainly Mrs. Maloney and I might have put different emphasis on 

it, but I certainly agree, and I guess I should say as a broad matter, all of these things have costs and benefits. The question is 

whether the costs outweigh the benefits. So I would never be one 

to say that the CARD Act has not had some benefits, but I would 

say that consumers have had to pay for those benefits; they did not 

come free. We didn’t turn lead into gold here. 

So the question is whether, again, those costs outweigh those 

benefits. So I wouldn’t disagree with anything she actually factually said; I would just say consumers are paying for those benefits, 

and they are not necessarily given a choice whether to pay for 

those benefits or not. So that is part of it. 

The other part of it, in terms of the interest rate increase, is, 

again, looking at the spreads that we have seen, and as I detailed 

in my testimony, a lot of this is from regulations that preexisted 

the CFPB, that transferred to the CFPB. As I also note in my testimony, the increase in spreads for the credit card market was after 

the CARD Act was implemented. You saw an initial increase in the 

recession and a very large increase, there is a nice chart in there 

that I like to think anybody could understand. 

So, again, very duet that these are costs. We have seen interest 

rate increases. I put it this way, if we believe that the Federal Reserve lowering interest rates creates jobs, then we must, therefore, 

believe that interest rate increases destroy jobs. So if we believe 

that these things have costs and those costs are going to be borne 

in interest rates, then we must believe, of course, that they have 

job consequences. 

Mr. MCHENRY. So you are not from the south, are you? 

Mr. CALABRIA. Well, I will say that I was very fortunate that all 

of my mother’s family grew up in Guilford County in North Carolina. 

98 

Mr. MCHENRY. That is amazing. You are the fastest talker I 

have heard. 

Mr. CALABRIA. Well, my father was from Brooklyn, so they kind 

of split the difference. 

Mr. MCHENRY. Okay. There we have it. No, I certainly appreciate that. 

With that, I recognize the Ranking Member, Mr. Quigley. 

Mr. QUIGLEY. Thank you, Mr. Chairman. 

Mr. Calhoun, the financial crisis, coupled with housing mortgage 

crisis that went with it, and the topics that you alluded to, much 

has been said about the quality of lenders that was the principal 

reason that they were borrowing to people who couldn’t afford the 

product and that led to this problem. To what extent do you credit 

that? To what extent do you credit the features of the loans in this 

process? And, generally, how would you rate the two in terms of 

how important they are, the terms of the loan products determining loan performance versus the quality of the lender? 

Mr. CALHOUN. Thank you. We have done extensive research in 

this area and published it late last year, and one of the striking 

things you find is one of the primary determinants of how a loan 

performed is what type of loan the borrower got after controlling 

for the borrower profile, credit score, loan-to-value, et cetera. Same 

apples-to-apples borrowers, one gets a subprime loan with lots of 

abusive practices, much, much higher default rates than the same 

borrower who is put in a better loan. And one of the real challenges 

is, and I think for all the industry representatives here are part of 

the responsible industry, and they found that they had to compete 

with those folks who were offering the deceptive and abusive products, and it is hard to do. 

If somebody comes and offers a tricked-up loan for $1,000 a 

month payment, you see ads for these still on the Internet today, 

that doesn’t have escrow, that has a teaser rate that jumps after 

a year, it is hard to offer a sustainable loan that would have maybe 

a $1,300 or $1,400 initial payment. That is a hard loan to offer to 

compete with. 

And if I may just quickly, I want to respond on the credit cards, 

where we have also done extensive research. I want to point out 

three things, and these reports are also on our website. 

First is the main change that you saw following these reforms 

was there was a change in the rates that people paid and it moved 

by close to 2 percent. People started paying the rate that they were 

being offered. Before there was about a 2 percent gap between the 

rates that people were being offered and then you measured the 

rates they were actually being charged, and that gap has almost 

entirely disappeared. 

Second, we looked at impact on credit. So there is a bit of an experiment out there. We looked at how business cards performed, 

and consumer cards did as well or better than business cards, 

which is noteworthy, because the CARD Act protections don’t apply 

to business cards but do apply to consumer cards. 

And, third, our most recent study looked at what happens to the 

credit card lenders. If you look at the credit card lenders, those who 

offered the most abusive products suffered the greatest losses in 

this downturn and, in fact, a number of them went out of business. 

99 

So I think the CARD Act is a good example of how consumer protection, if done carefully, helps consumers, responsible industry 

people, and the overall economy. We want to acknowledge, though, 

it is very hard to get this stuff right, and everybody wants the easy 

answer, but this stuff is hard to get right because there are huge 

impacts on consumers and businesses. 

Mr. QUIGLEY. Doctor, if anyone can squeeze in a reaction to that 

in a minute, you can. 

Mr. CALABRIA. I am trying to be respectful of time, which is the 

speed of talking here to some extent. 

Most of that I agree with. I mean, I think it is very hard to get 

right. I spent a number of years working at staff on Senate Banking and my walking away from seeing the reaction of, all due respect, much of Congress and Washington during the crisis was they 

are not going to get it right, and so some of my sense of having 

that constrained, Mike Ensign mentioned bright lines earlier. I 

think part of the problem with our vast array of consumer protection, both pre-and post-crisis, is it is expost, it is a lottery; it is 

somebody finds a technical violation without actually giving clear. 

I think it is reflected in my bio. I spent some time at HUD running 

the RESPA office, which has since transferred to CFPB. I would be 

the first to say it, our concern the disclosures work horribly. I spent 

fair amount of time trying to fix them so they would work with consumers. But the tension was I found many of the consumer advocates didn’t want simpler disclosures because they wanted to be 

able to sue under various deal or reasonable tests, and they wanted 

a whole lot of detail because they—— 

Mr. QUIGLEY. Just one second. 

Mr. Chairman, can he be allowed to answer without—I don’t 

want you to feel as rushed as you perhaps might feel. 

Mr. CALABRIA. Okay. 

Mr. MCHENRY. Sure. Absolutely. I ask unanimous consent for, 

how much time do you want, two minutes? 

Mr. QUIGLEY. Two more minutes. 

Mr. MCHENRY. I ask unanimous consent for two more minutes. 

Mr. CALABRIA. So let me mention a couple of things that I think 

I very much agree with and will emphasize. 

As Mike mentioned, many of these worst businesses went out of 

business, and that is part of our financial system, is any market 

that works, if you have bad practices, you take losses, you go out 

of business. Now, if we are going to bail people out and protect 

them, then of course bad practices are going to proliferate. So the 

first thing should be no bailouts, and we will weed out the bad 

characters, which do eventually get weeded out. 

Mike also mentioned in terms of looking at mortgages, that they 

held constant credit in LTV. I would say that there is nothing more 

predictive of the performance of a mortgage than credit and loanto-value. So I would be the first to say all those little other things 

do matter, but they matter far less than whether someone has equity or not. For instance, it was mentioned the ability to pay, and 

Michael mentioned the number 45 percent. 

Well, FHA, today, you can get up to 42, 43 percent debt-to-income with 3.5 percent down. That is reckless lending, to me. That 

is predatory lending. But the Federal Government is pushing it beVerDate Aug 31 2005 10:15 Aug 23, 2012 Jkt 000000 PO 00000 Frm 00103 Fmt 6633 Sfmt 6633 C:\DOCS\75523.TXT APRIL
100 

cause, God forbid we ask—wanted to come up with a down payment and put their own skin in the game. 

So what I would say is my skepticism is, and I think this is particularly important when the CFPB has on its agenda, later in the 

year, to roll out small business data that mirrors the home-to-collection, is that we have seen this pressure over the years. The regulators were foremost. I mean, if you haven’t read the Boston Fed 

study and the Boston Fed guidance from the early 1990s, where 

they said look at things like reduce the debt-to-income, more flexible underwriting. 

So my concern is that where we have seen this play out in the 

past is that you have seen the pressure to get more people the 

loans that, in my opinion, were predatory features because they did 

not protect the borrower. And, of course, there are some things we 

will disagree on. For instance, I think the fact that most of our 

mortgage market is non-recourse is problematic. You go to France, 

socialist France of all places, if you don’t pay your mortgage there, 

they garnish your wages. And guess what? They have much lower 

default rates. 

So if you want to avoid a crisis, we have to ask the consumer to 

actually live up to their obligations as well. I know that that is 

never going to be politically popular, but if you give people a free 

option to walk away and bet on the housing market, they will take 

it; and that is how we get into these gambles as well So I would 

say there was absolutely fraud; absolutely predatory lending, but 

I disagree that I think that those were the main drivers. I think 

those were the result of the bubble, rather than the driver of the 

bubble. 

Mr. QUIGLEY. Thank you, Mr. Chairman. 

Mr. MCHENRY. I thank the Ranking Member; it is a solid set of 

questions. 

Mr. Kelly of Pennsylvania is recognized. 

Mr. KELLY. Thank you, Chairman. 

And thank you all for being here. 

I am in the automobile industry, so I have really watched over 

the years what has happened. I think the number one thing that 

happened to us was the ability to finance negative equity and putting people out there 48 months and 60 months and 72 months on 

something that depreciates very quickly. But the great realization 

was when we would sell somebody a car and then they come in and 

they say, wait a minute, this doesn’t make sense. And I would say, 

well, you have negative equity from your trade, and they would 

say, what does that mean? You owe more than it is worth. 

I also sat on a bank advisory board. I used to watch them okay 

loans and I would say, you can’t possibly do this; this isn’t going 

to work. They would say if we want to participate at the government level, we have to with Fannie Mae and Freddie Mac. 

So a lot of what we are experiencing are just market fluctuations 

and people allowing people to do bad things. I often thing that if 

we had followed the 5 Cs as carefully as we should, and you all 

know what those are, I don’t want to go into them now. 

But what concerns me, because the hearing today was on the restriction of consumer access to credit. Please tell me, as you go 

through this process and as you look, and I know some of the 

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things aren’t on paper yet, but it is the uncertainty, truly. If this 

economy is to get back on track, access to capital is the same as 

the body needs blood; and, unfortunately, there is a transfusion 

that is necessary right now, and most people don’t have access to 

it. 

The cost of credit, Mr. Fecher. 

Mr. FECHER. Well, I think that is a great point that is to be 

made. As a practical matter, what the average credit union will do 

as they seek to try to figure out how to absorb these increased regulatory costs into their operation, is they won’t just raise the interest rates on the loans or increase their fees, A, because the market 

won’t let them and, B, because it is simply against what we try to 

do. 

What we will do instead is try to control the cost that we can 

control. You can’t control the regulatory cost, but you can control 

who you lend to. So, again, as a practical matter, as this crisis unfolded at my credit union, we increased our credit standards; we 

just stopped lending to people on the credit margin, because we 

wanted to control our loan loss cost in the end, and it worked. Our 

loan loss cost went down, and that is the way we managed that 

whole crisis. But by doing that we stopped making loans to people 

that probably would have paid the loans; we just couldn’t take the 

risk anymore. 

So when you talk about what happens when the cost of your operation goes up, it is not as if it is obvious in the rate of the loan, 

at least at first, or in the fees that you charge; you make other 

changes to try to absorb those, and those changes very often result 

in a reduction of service to the member. That was one example I 

gave. 

My other, frankly, favorite example is, I believe, my opinion, the 

reason pay-day lending got such a great start in this Country is because we made it so expensive for traditional lenders to make 

small dollar loans that they just stopped making them. So as soon 

as they stopped making them, it created a market void that was 

filled by people who exploited that void. 

So we couldn’t be stronger supporters of strong consumer protection, but it has to be balanced with the cost of providing that because the result is not necessarily going to be higher loan rates, at 

least at first; it will be a reduction in access to products that, 

frankly, people need. And it does play out and, again, I say as a 

practical matter, because that is what has happened at our credit 

union. 

Mr. KELLY. Mr. Zeisel? 

Mr. ZEISEL. Yes, absolutely. When the access to credit is constricted, people at the margin are the ones who suffer, and they are 

the first to lose availability of products and the first to be unable 

to afford the products that are charged. For the most part, costs 

that go up do get passed on in one form to the consumer. 

Mr. KELLY. Well, they have to. 

Mr. ZEISEL. There is no other way to operate a business. Eventually somebody pays. The customer will pay in one form or another 

or the product gets dropped and the customer loses the availability 

of something that is valuable, that is a valuable product or service 

that they need and they end up going elsewhere to find it. 

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Mr. KELLY. Dr. Calabria? 

The reason I wonder about this, truly, because competition truly 

does drive quality and cost, and whenever we start eliminating 

smaller banks and credit unions and the ability to compete, then 

all of a sudden it goes to one place, and that is why I said earlier 

too big to fail means too small to survive. You can game this thing 

to the point that you take people out of the market that they were 

in before. So I really think that sometimes we lose the fact of that 

down here. 

Mr. CALABRIA. I absolutely agree, and I think one of the things 

we did not fix was too big to fail. If you look at the largest banks 

and institutions, before 2008, the largest banks had a higher cost 

of funds than the smallest banks. Now they have a lower cost of 

funds than the smallest banks, and they will be able to gain market share and they will become even bigger. 

Another element of that, as I mentioned before, if you have bad 

business practices, you should go out of business. But that doesn’t 

happen when people think you are going to be bailed out. There is 

no market discipline; there is no constraint on use. One of the real 

problems in our mortgage market is an absolute lack of market discipline on our largest lenders; not just Fannie and Freddie, but 

Bank of America and the whole slew of them were just not subject 

to market discipline, and that, to me, should have been the first 

and last objective of financial reform. 

Mr. KELLY. Really, if there is no consequences for bad business 

practices, then keep doing them. Why would you stop if someone 

is going to bail you out? I know in our business, you do the wrong 

thing, you can do it for a while, but you can’t do it for too long because you are out of business. I think that is what we are witnessing now and my real fear is this cost of capital and the availability of capital, the access to it, is really hindering our recovery 

right now. I know we talk about we want to make sure it doesn’t, 

we are protecting consumers, but what we are really doing is we 

are limiting the access of capital to people who need it. 

Mr. CALABRIA. And we shouldn’t. We give capital to those who 

look like they are going to be backed by the Government. 

Mr. KELLY. Thank you, Mr. Chairman. 

Mr. MCHENRY. I certainly appreciate the member, my colleague 

from Pennsylvania and his line of questioning. 

I have just a small set of questions left. 

Mr. Zeisel, based on your experience, and this is what I want to 

get to the heart of. In my questioning I asked Director Cordray 

about the term abusive. Now, unfair and deceptive have been well 

defined legal terms. There has been a significant amount of legislation and litigation to define those terms. Very costly terms to define. But we have a body of law to look at now. There is an understanding by the private sector, there is an understanding by regulators what those two terms mean. 

Abusive, however, as the Director testified before this Subcommittee at the beginning of this year, they don’t intend to, they 

are going to use fact and circumstance to determine that. It is not 

something we are likely to be able to define in the abstract, which 

is interesting. 

What is that effect? 

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Mr. ZEISEL. Well, that goes directly to the issue of uncertainty 

that we have been talking about, and the expectations of financial 

institutions as they are being either supervised by the CFPB or enforcement or simply rule-writing. 

So, as you say, unfair and deceptive have been around for a long 

time; they are defined terms; they have been through the courts 

and they have sort of been vetted for the system, so financial institutions have a sense of what that means and how they can develop 

strong compliance management systems to deal with that and to 

anticipate and make sure that they are not in violation of the law. 

You have a new term here, and that new term is in Dodd-Frank 

and there is, as he said, sort of a three-part or a multi-part—— 

Mr. MCHENRY. But in their manual they only discuss about a 

half of a page to define abusive. 

Mr. ZEISEL. That is right. And the manual actually has sort of 

language throughout that addresses issues involving general risk to 

consumers and that appear to go to issues—— 

Mr. MCHENRY. So how does that affect—— 

Mr. ZEISEL.—that might be UDAP related, and I think it raises 

a lot of doubts and uncertainties in the minds of financial institutions. How do you prepare, how do you plan, how do you develop 

your products and services and know that they won’t later be found 

to be in violation? It is a difficult problem. 

Mr. MCHENRY. So what does that mean for access to credit? 

Mr. ZEISEL. Inevitably, as everybody has said, the products and 

services that are being developed by those financial institutions to 

meet consumers’ needs are the ones that get affected and the ones 

at the margin are the first to get affected. 

Mr. MCHENRY. Sure. 

Now, my questions for the whole panel is on the qualified mortgage, the QM and this definition, its importance. Tell me how you 

would get it right? If everybody could very briefly summarize your 

view on how we get this thing right so mortgages can still be made 

by large and small institutions and there is still a competitive marketplace for consumers. 

Mr. FECHER. That QRM is one of the biggest fears that we have. 

Getting it right is going to be critical, especially to the small institution. Just to make my remarks short, I think the safe harbor portions of it are going to be really important, especially for the smaller institution that is going to want to be serving their member with 

mortgage loans and not wanting to be looking over their shoulder 

the entire time they are doing it that somehow they have tripped 

over some trip wire in a regulation that will get them in trouble 

at some point. So the safe harbor provisions, to me, are one of the 

most important aspects of that entire regulation. 

Mr. ZEISEL. Well, I would have to agree. I think that, again, to 

keep it brief, we are dealing here with the need for a broad standard. This is essentially a box and people aren’t going to make loans 

outside of the box, for the most part. So if there is going to be lending done, and even I think I hard Mr. Cordray say he didn’t expect, 

at least in the short run, that there should be a lot of lending outside of QM. 

That makes it all the more important that QM be broadly defined in a way that it makes sure that lenders can make safe loans 

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to the widest number of people possible; and the clarity of those 

rules are also critical. The safe harbor is important because there 

is a great deal of liability risk associated with getting it wrong, and 

that will happen. It will come up in the foreclosure stage and it will 

involve a great deal of cost to litigate, at the very least. 

So if you are going to create some kind of sense of certainty 

around what it is you are doing and feel comfort that you will have 

and met, that meet the ability to repay test by using the QM 

standard, you really need to have a safe harbor. 

Mr. CALHOUN. I think there is good news on this issue in that 

there is broad consensus on the goals and a lot of the specifics. 

There is agreement that mortgage credit is too constrained. I don’t 

hear any groups arguing otherwise on that, so there is broad consensus that it should be a broad QM market. Second, I think the 

industry has convinced others that there should be bright line 

standards, although there are some down sides to that. 

The Fed raised the question of maybe it should be just a general 

bar do you meet, generally recognized underwriting standards. 

That was going to be the test of whether or not it was a QM, but 

I think now there is a consensus. There is still disagreement on the 

rebuttable presumption. I think, though, there is a lot of consensus 

around that. People want litigation to be very rare. Fixing mortgages is not that helpful for borrowers and is very inefficient. It 

should be a deterrent, but not by any means a frequent occurrence. 

And I think there is positive news there, too. The liability and 

standards proposed under QM are much less than those that are 

in the North Carolina Mortgage Act. That has been on the books 

for over a decade and has produced virtually zero litigation. So I 

think there is some assurance in that because CRL has not supported any State or federal laws that have generated widespread 

litigation; we just don’t think it is effective. It is not politically sustainable, either, so we are not going to advocate that. 

Finally, there is, I think, consensus again on the relationship between the QM and the QRM. The QRM, as everyone knows, was 

written by six different agencies jointly. Those agencies are given 

it must contain all the same standards as QM, but then they have 

authority to add on to that; and, quite frankly, their original proposal piled onto that with deep restrictions that our analysis 

showed would knock out about 25 percent of people who should be 

in the mortgage market. 

We think there is no basis for that, that particularly at this time 

they should get the QM, get it right, preserve raw credit, and make 

the QRM no additional requirements. If you meet QM, you meet 

QRM. Take a look at it in five years and adjust it whichever way 

you need to. That is what we would recommend. 

Mr. CALABRIA. I think there is a tremendous amount of consensus here. I would echo some of the very same things. I do think 

it needs to be broad and I do think that anything outside of the 

box will disappear, at least for a few years, if not permanently. I 

will echo that I do think you need bright lines. As a general matter, I think a basic principal of law should be you should know 

whether you are in conformity with the law ahead of time or not. 

There shouldn’t be a lot of ambiguity with that. 

105 

Again, I think safe harbor is a very important part of this, particularly during the foreclosure stage. I don’t think we want to 

move to a world where mortgages become unsecured lending. That 

will very much see rates go up. 

One of my concerns, and I would echo, I think the QRM and the 

QM should be coordinated and made as close as possible. One of 

my concerns is that in the QRM we have exempted some government loans, so as someone who doesn’t want to see us put hundreds of billions into another bailout again for Fannie, Freddie, or 

FHA coming down the line, I would suggest that the CFPB treat 

government loans equally, as it treats other loans, and show no 

preference and no exemptions for that, because again, ultimately, 

the taxpayer stands behind those. 

Mr. MCHENRY. Thank you. Thank you for that. 

Does the Ranking Member have any additional questions or comments? 

Mr. QUIGLEY. No. Thank you, Mr. Chairman. I thank our panelists. 

Mr. MCHENRY. Mr. Kelly, do you have anything additional? 

Okay. 

I thank the panel. Thank you for your patience and waiting 

through the questions this morning. It is refreshing to have a 

panel, a diverse panel actually find some agreement on QM. That 

is very encouraging and refreshing, and I don’t want to describe it 

further, but—— 

[Laughter.] 

Mr. MCHENRY.—let’s just say it is rare. So thank you so much 

for your testimony. Your interest in these issues and your willingness to engage in an adverse array of questions as it relates to access to credit. Thanks so much. 

This meeting is now adjourned. 

[Whereupon, at 1:05 p.m., the subcommittee was adjourned.] 

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