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CFPB Director Challenges House Financial Services’ Report on Bureau’s Role in Fraudulent Accounts Scandal Investigation
On June 14, CFPB Director Richard Cordray issued a letter to Rep. Jeb Hensarling (R-Tex.) in response to the House Financial Services Committee’s (Committee) June 6 interim majority staff report on the investigation of the role federal financial regulators played in detecting and remedying a major national bank’s practice of opening unauthorized bank accounts. As previously covered in InfoBytes, the Bureau issued a consent order to the bank last September over allegations that the bank employees’ improper sales practice of opening unauthorized accounts as part of an incentive compensation program was unfair and abusive. In his letter, Director Cordray defended the CFPB’s role in the investigation and detailed inaccuracies and errors in the Committee’s report.
The Committee’s report notes that immediately after the September 8 CFPB announcement, the House Financial Services Committee began a “comprehensive investigation” to answer two questions: (i) “how and why [the bank] allowed these fraudulent activities to occur at a disturbing scale across the [b]ank for well over a decade”; and (ii) “whether or not federal financial regulators were effective in detecting and remedying [the bank’s] fraudulent branch sale practices.” According to the report, “[o]ver the course of six months, the CFPB only produced 1,010 pages of records comprised almost entirely of records easily obtainable from [the bank] or the OCC”—both of which, the report contends, have cooperated fully with the investigation. In April 2017, the CFPB received a subpoena but allegedly provided records previously produced by the bank. Due to a lack of cooperation, the Committee staff recommended the possibility of issuing deposition subpoenas to CFPB employees to investigate Director Cordray’s alleged failure to respond, as well as the suggestion of bringing contempt proceedings against Director Cordray to enforce compliance with the subpoena.
Director Cordray responded that, among others things, the majority staff of the Committee refused to receive a September 2016 follow-up briefing from Bureau staff and failed to respond to his offer to publicly testify at a Committee hearing. Furthermore, Director Cordray states that the CFPB has submitted over 57,000 pages of records “in an effort to comply with the Committee’s broadly worded requests.” He notes the complaint about the documents in the CFPB’s production being “redundant of documents received from either [the bank] or the OCC, though the same point could be made in reverse,” and that his staff has repeatedly sought guidance from the Committee to narrow the scope but has yet to receive a response.
In response to the Committee’s query as to why it took more than a decade to uncover the bank’s practice of opening unauthorized accounts, Director Cordray responded that the Bureau opened its doors in 2011—more than 10 years after the bank’s activities commenced according to the Committee’s report—and wasn't fully operational until 2014.
House Financial Services Committee Advances Two Flood Insurance Measures, Delays Action on Other Bills
On June 15, the House Financial Services Committee announced it had passed two flood insurance measures during a meeting to consider several bills to reform and reauthorize the National Flood Insurance Program (NFIP).
The Committee approved the 21st Century Flood Reform Act of 2017 (H.R. 2874) by a vote of 30-26. The bill, sponsored by Rep. Sean Duffy (R-Wis.), is designed to (i) improve the financial stability of the NFIP; (ii) improve the development of more accurate flood risk estimates through new technology and better maps; (iii) “increase the role of private markets in the management of flood insurance risks”; and (iv) “provide for alternative methods to insure against flood peril.”
Also approved by a vote of 53-0 was the National Flood Insurance Program Policyholder Protection Act of 2017 (H.R. 2868). The bill, sponsored by Rep. Lee Zeldin (R-N.Y.), is designed to protect NFIP policyholders from “unreasonable premium rates” and require FEMA to analyze “the unique characteristics of flood insurance coverage of urban properties” such as cooperative housing projects.
The Committee will consider additional measures the week of June 19.
House Passes Financial CHOICE Act of 2017
On June 8, by a vote of 233-186 with no Democrats voting in favor of the bill and one Republican voting against, the House passed the Financial CHOICE Act of 2017 (H.R. 10), as amended, which would repeal or modify provisions of Dodd-Frank and restructure the CFPB. Committee Report 115-163 accompanying House Resolution 375, which provided for consideration H.R. 10 and recommended that the resolution be adopted, outlines the provisions introduced to overhaul existing financial regulations. Included were five additional amendments incorporated into H.R. 10 introduced by members of Congress:
- Rep. Jeb Hensarling (R-Tex.): “Revises provisions subjecting certain FDIC and National Credit Union Association functions to congressional appropriations, relating to appointments of positions created by [H.R. 10], and providing congressional access to non-public [Financial Security Oversight Council] information”;
- Rep. Joseph Hollingsworth (R-Ind.): “Allows closed-end funds that are listed on a national securities exchange, and that meet certain requirements to be considered ‘well-known seasoned issuers’”;
- Rep. Lloyd Smucker (R-Pa.): “Expresses the sense of Congress that consumer reporting agencies and their subsidiaries should implement stronger multi-factor authentication procedures when providing access to personal information files to more adequately protect consumer information from identity theft”;
- Rep. Martha McSally (R-Ariz.): “Requires the Department of Treasury” to submit a report to Congress regarding its efforts to work with Federal bank regulators, financial institutions, and money service businesses to ensure that legitimate financial transactions along the southern border move freely”; and
- Rep. Ken Buck (R-Colo.), “Requires the [General Services Administration] to study the [Consumer Law Enforcement Agency’s] real estate needs due to changes in the Agency’s structure. It would then authorize the GSA to sell the current CLEA building if CLEA’s real estate needs have changed and there is no government department or agency that can utilize the building.”
See previous InfoBytes here and here for additional coverage.
The bill now advances to the Senate where it is unlikely to pass in its current form—a fact acknowledged by both Democrats and Republicans.
White House Issues Statement Supporting Substitute Amendment to H.R. 10; CBO Releases Cost Estimate
On June 6, the White House Administration issued a statement supporting the Substitute Amendment to the Financial CHOICE Act of 2017. In the statement, the White House announced it is “committed to reforming the Nation’s financial system” and believes the substitute amendment drafted by House Financial Services Committee Chairman, Jeb Hensarling (R-Tex.) reflects the Administration’s Core Principles in a number of ways. Specifically, the Administration supports the following provisions outlined in H.R.10: (i) eliminating taxpayer bailouts; (ii) simplifying regulations and holding regulators accountable; (iii) facilitating capital formation to encourage economic growth; (iv) allowing identified financial institutions to “opt out of certain regulatory requirements”; (v) reducing the independence of the CFPB; (vi) increasing the use of cost-benefit analysis by financial regulators; and (vii) easing regulatory burdens for community banks.
“The administration supports these provisions, and looks forward to working with Congress to undo additional mandates from the Dodd-Frank law that unnecessarily raise costs and limit choices for consumers,” the White House asserted in the statement.
On the same day the White House issued its statement, the Congressional Budget Office (CBO) released a requested analysis of Hensarling's amendment for H.R. 10. The CBO discovered that the changes from the version the House Financial Services Committee initially approved would reduce deficits by an additional $9.5 billion, for a total reduction of $33.6 billion over the 2017-2027 period. CBO stated the majority of the budgetary savings comes from “eliminating the FDIC’s authority to use the Orderly Liquidation Fund and changing how the [CFPB] and certain other regulators are funded.” However, CBO noted it would cost an estimated $11.6 billion over the referenced time period to implement the bill.
House to Consider Financial CHOICE Act of 2017 the Week of June 5
On May 26, the House announced that the Financial CHOICE Act of 2017 is scheduled to hit the House floor the week of June 5. House Financial Services Committee Chairman, Jeb Hensarling (R-Tex.), drafted a Substitute Amendment and a corresponding summary of changes, which clarify that “rules promulgated under provisions of law repealed by H.R. 10 are no longer in effect.” Notably Hensarling agreed to strike Section 735, which would repeal the Durbin Amendment from the second discussion draft of the Act. The Durbin Amendment—an amendment to the EFTA added by section 1075 of the Dodd-Frank Act—requires the Federal Reserve Board to cap interchange fees that banks with assets of $10 billion or more may receive from payment card networks in debt card transactions. The decision to strike the Durbin Amendment happened despite bank support for the repeal.
Changes to the bill also include the following, among others: (i) Section 341 will be amended to clarify that “gaps or ambiguities found by a reviewing court in a statutory or regulatory provision are not to be construed as a delegation of rule-making authority to an agency, and that a reviewing court is not to use such a gap or ambiguity as grounds for expansively interpreting the agency’s authority or deferring to the agency’s interpretation of law;” and (ii) Section 571’s amendment will suspend HMDA data reporting requirements until January 1, 2019. Looking ahead, the House Rules Committee set a June 2 deadline for lawmakers to file amendments.
House Democrats Seek Full Review of Financial CHOICE Act by Appropriate Committees; Investor Group Claims Act Will Undercut Shareholder Rights
As previously covered in InfoBytes, on May 4 the House Financial Services Committee approved the revised Financial CHOICE Act of 2017, H.R. 10, in a party-line vote, 34-26. Earlier this month the Ranking Members of two House committees sent letters to their respective Chairmen, urging their committees to not waive their jurisdiction over H.R. 10 and allow their respective committees to debate and vote on the legislation given its wide ranging effects on the U.S. economy. Ranking Member Bobby Scott (D-Va.) of the House Committee on Education and the Workforce stated in his letter that Democrats on the Education and the Workforce Committee “have expressed great concern over the attempts to weaken oversight and enforcement power of the [CFPB] and the important role it plays regarding the integrity of student loan finance services.” Ranking Member John Conyers Jr. (D-Mich.) of the House Committee on the Judiciary urged the Chairman in his letter that “[i]t is particularly critical that our Committee examine and vote on this legislation given numerous provisions squarely within our Rule X jurisdiction that will prevent government agencies from protecting the rights of consumers and hold the financial marketplace more accountable.” As reported previously in InfoBytes, Rep. Elijah Cummings (D-Md.) also called for the House Oversight and Government Reform Committee to assert jurisdiction over H.R. 10.
Additionally, on May 17, an advocacy group of institutional investors called upon the House of Representatives to oppose H.R. 10, saying the bill will undercut shareholder rights. The Council of Institutional Investors (CII) submitted a letter to all members of the House, urging them to oppose the bill. It was signed by CII and 53 institutional investors that collectively hold more than $4 trillion in assets, including representatives from the California Public Employees’ Retirement System, Colorado Public Employees’ Retirement Association, and New York State Teachers’ Retirement System. The letter said the bill would rollback curbs on “abusive” executive pay practices, restrict shareholder rights in board elections, and raise the cost of proxy advisers. The letter also cautioned that the bill would impede the SEC’s oversight of financial markets by requiring “excessive cost-benefit analysis” and including “unwise limits on enforcement.”
Legislation Reintroduced to Make CFPB Spending Accountable to Congress
On May 19, Rep. Andy Barr, (R-Ky.) reintroduced legislation that would amend the Consumer Financial Protection Act of 2010 to make the CFPB’s budget subject to congressional appropriations. As set forth in a press release issued by Rep. Barr’s office, the Taking Account of Bureaucrats’ Spending Act (H.R. 1486), first introduced in March 2015 to the House and referred to the House Financial Services Committee, would give Congress power over what Rep. Burr terms an “unaccountable agency.” “I am reintroducing the TABS Act because the Bureau deserves the same scrutiny and the same checks and balances as any other federal agency,” said Rep. Barr. “Congressional oversight and accountability will ensure that the Bureau stays true to its mission of consumer protection, and avoids politically motivated overreaches, wasteful spending, and unnecessary regulations.” Currently, the CFPB is funded directly by the Federal Reserve. As previously covered in InfoBytes, House Republicans are also trying to overhaul existing financial regulations with the approval of the Financial CHOICE Act (H.R. 10) by the House Financial Services Committee, which would subject the Bureau to greater congressional oversight and tighter budgetary control.
Rep. Cummings Calls for House Oversight Committee to Assert Jurisdiction Over Financial CHOICE Act
As covered in last week’s InfoBytes, on May 4 the House Financial Services Committee approved the revised Financial CHOICE Act of 2017, H.R. 10, in a party-line vote, 34-26. In a May 3 letter to House Oversight and Government Reform Committee Chairman Jason Chaffetz, Rep. Elijah Cummings (D-Md.), the Ranking Minority Member on that Committee, urged the Committee “not to waive its jurisdiction over the Financial CHOICE Act, H.R. 10”—which he argues includes “numerous provisions that clearly fall within the legislative jurisdiction of the Committee.” Rep. Cummings also states in his letter that the proposed legislation would “destroy key financial regulations and consumer protections” and “place our economy at greater risk of another crisis.” Accordingly, he argues that “[i]t is imperative that the Committee review and vote on [H.R. 10’s] dangerous proposals.”
Financial CHOICE Act of 2017 Approved by House Financial Services Committee
On May 4, GOP efforts to overhaul existing financial regulations took a step forward as the House Financial Services Committee approved H.R. 10, a revised version of the “Financial CHOICE Act of 2017” in a party-line vote, 34-26. The vote concluded a two week period that included both a three-day markup, of the GOP-backed legislation—during which several Democrat committee members sought, unsuccessfully, to remove various provisions of the bill—and, a two-day hearing that included testimony from 18 different witnesses.
Originally introduced by Committee Chairman Jeb Hensarling (R-TX) in September 2016, the main focus of the CHOICE Act was to give financial institutions the option of avoiding many of the rules set up by the 2010 Dodd-Frank law if they maintain a high level of capital and are “well-managed” as defined in the bill. The legislation, if enacted, would also end the Dodd-Frank Act’s taxpayer-funded bailouts of large financial institutions and would impose greater penalties on those who commit fraud and insider trading, while also demanding greater accountability from banking regulators. A summary of changes incorporated in the latest iteration of the proposed legislation—recently referred to as “CHOICE Act 2.0”—was released by the Committee last week and included, among other things:
- the elimination of the CFPB supervisory and examination authority;
- a restructuring of the CFPB, FHFA, OCC, and FDIC into bipartisan commissions appointed by the President;
- an opt-out of many regulatory requirements for banks and other financial institutions if they maintain a 10% leverage ratio (among other conditions);
- subjecting the federal banking regulators to greater congressional oversight and tighter budgetary control;
- reforms in bank stress tests;
- materially reducing the authority of the Financial Stability Oversight Council (FSOC) and the establishment of a new process of identifying financial institutions as "systemically important";
- a repeal of the Orderly Liquidation Authority and the creation of a new bankruptcy process for banks;
- a repeal of the Volcker Rule; and
- facilitated capital raising by small companies, including through crowd-funding.
Looking ahead, the House could vote to pass the bill later this month. While a party-line vote would pass the House, the bill will likely need to pick up a minimum of 60 votes—including support from several Democrats—in order for it to pass in the Senate.
Following Hearing, House Financial Services Committee Chairman Formally Introduces Financial CHOICE Act of 2017
On April 26, the House Financial Services Committee held a hearing to discuss The Financial CHOICE Act – a GOP proposal to “reform the financial regulatory system” that was initially introduced and considered, though differing in a number of respects from the current version, but not adopted in the last Congress. The hearing debated the merits of a discussion draft, which was released on April 19 by Committee Chairman Jeb Hensarling (R-TX). Shortly after Wednesday’s hearing, Chairman Hensarling formally introduced H.R. 10, The Financial CHOICE Act of 2017. An Executive Summary of the proposed legislation has also been released.
The April 26 hearing – a video of which can be accessed here – included testimony from the following witnesses:
- Mr. Peter J. Wallison, a Senior Fellow and Arthur F. Burn Fellow, Financial Policy Studies with the American Enterprise Institute
- Dr. Norbert J. Michel, a Senior Research Fellow, Financial Regulations and Monetary Policy, with the Heritage Foundation
- The Honorable Michael S. Barr, a Professor of Law at University of Michigan Law School
- Mr. Alex J. Pollock, a Distinguished Senior Fellow with the R Street Institute
- Dr. Lisa D. Cook, an Associate Professor of Economics and International Relations at Michigan State University
- Ms. Hester Peirce, a Director in the Financial Markets Working Group and Senior Research Fellow at the Mercatus Center at George Mason University
- Mr. John Allison, Former President and Chief Executive Officer with the Cato Institute
On April 28, Democrats held a separate hearing pursuant to Clause (d)(5) of Rule 3 of the Committee rules, which entitles members of the minority party to call its own hearing on any matter that is the subject of a majority hearing. The second hearing day – a video of which can be accessed here – included testimony from the following witnesses:
- The Honorable Elizabeth Warren, United States Senator
- Rohit Chopra, Senior Fellow, Consumer Federation of America
- Corey Klemmer, Corporate Research Analyst, Office of Investment, AFL-CIO
- Rev. Willie Gable, Pastor, National Baptist Convention USA, Inc.
- John C. Coffee Jr., Adolf A. Berle Professor of Law, Columbia University
- Rob Randhava, Senior Counsel, Leadership Conference on Civil and Human Rights
- Melanie Lubin, Maryland Securities Commissioner, North American Securities Administrators Association
- Emily Liner, Senior Policy Advisor, Economic Program, Third Way
- Amanda Jackson, Organizing and Outreach Manager, Americans for Financial Reform
- Ken Bertsch, Executive Director, Council of Institutional Investors
- Sarah Edelman, Director, Housing Policy, Center for American Progress (CAP)
Ranking Minority Member Maxine Waters (D-CA) also used the hearing to express her strong disapproval of what she has dubbed the “Wrong Choice Act.” Among other things, the ranking member alleged that the proposed legislation would “destroy[] Wall Street reform, gut[] the Consumer Financial Protection Bureau, and returns us to the financial system that allowed risky and predatory Wall Street practices and products to crash our economy.”