Ed's Blog

CFPB Faces A "Death of a Thousand Cuts" Today

By Ed Mierzwinski
Consumer Program Director

UPDATE 2 (6/11): The committee has posted the markup roster and recorded votes here. All the bad bills were passed, mostly on party-line votes. The most significant change is probably that when I testified, the Bureau Guidance Transparency Act was simply a discussion draft with no number, listed like this: "______________, Bureau Guidance Transparency Act." It only containing two sections. The first section was a standard introduction. The second section would require all CFPB guidances to comply with administrative notice and comment procedures generally required for formal rules, not guidances.We opposed the bill even then.

On Monday, 6/9, the night before the early Tuesday morning markup, the bill was formally introduced as HR 4811, the CFPB Guidance Transparency Act (Stutzman-IN). But wait. Now, it suddenly had a third section added at the behest of the powerful car dealer lobby (Automotive News story):

SEC. 3. ENSURING TRANSPARENCY AND PUBLIC PARTICIPATION FOR FAIR GUIDANCE. (a) Bulletin 2013-02.--Bulletin 2013-02 of the Bureau of Consumer Financial Protection (published March 21, 2013) shall have no force or effect. (b) Rule of Construction.--This section shall not be construed as prohibiting the Bureau of Consumer Financial Protection from issuing guidance on the same topic as Bulletin 2013-02, so long as such guidance is issued in compliance with section 1022(b)(5) of the Consumer Financial Protection Act of 2010.

What? Why? Section 3 is designed to rescind a bureau guidance supported by the PIRG-backed Americans for Financial Reform that simply "reminds lenders that they must not engage in lending practices that negatively impact minorities or other protected classes." 

Aso, as I discuss below, Rep. Capito (WV) did modify her radical bill, HR 3389, that would have totally eliminated CFPB compensation for victims of deadbeat fraudsters. Now, as long as a bad guy is fined at least $1 in civil penalties, the CFPB can use Civil Penalty Fund monies from other (more solvent) wrongdoers to compensate his (or her) victims. The CFPB could not, however, if this bill becomes law, continue to use excess civil penalty funds for other remedial purposes. By CFPB rule, any excess funds have been proposed only to be used for financial literacy programs to high-risk populations. Currently, for example, the CFPB has allocated, but not yet expended, funds to provide financial literacy to widows and widowers of deceased veterans (here are FAQs on the Civil Penalty Fund generally, see FAQ22 on the secondary use for high-risk populations).

Today's completion of the markup finalized a death by a thousand cuts exercise, but we don't expect any Senate action on these bills.

UPDATE (6/10): Maybe our testimony had an impact. Some, but not enough.  At the FSC committee markup (vote session) today, Rep. Capito offered a substitute to her own bill. I was unable to obtain a copy (the committee will likely post them overnight). As I understood the substitute from her oral representation, she no longer seeks to completely repeal the Civil Penalty Fund, including its use for victim compensation; the substitute will simply eliminate its use for other remedial purposes, such as financial literacy. The committee, on voice votes, rejected a series of amendments from Rep. Keith Ellison (MN) and others, to improve the bill further. Final recorded votes may not occur until tomorrow on HR 3389. Some bills on the markup roster may not be considered until next week. Along with Americans for Financial Reform, we stilll oppose HR3389 and 8 others to be considered later today or next week to weaken the CFPB. We concur with AFR's views in opposition to the 3 anti-investor protection bills and a bill that would increase the risk of financial instability (threatening taxpayers and families) also under consideration in this markup.

ORIGINAL POST: Today, at 10 AM, the U.S. House Financial Services Committee considers a package of over a dozen anti-consumer, anti-investor, anti-taxpayer bills. U.S. PIRG and other members of Americans for Financial Reform have urged a no vote on all the bills targeted at weakening the Consumer Financial Protection Bureau (CFPB).

The worst of the 9 bills targeted at the CFPB, HR 3389, the so-called CFPB Slush Fund Elimination Act (Capito (WV)), eliminates CFPB's ability to compensate victims of so-called "last-dollar" financial fraudsters.

Congress, when it established the CFPB in 2010, established a Civil Penalty Fund so that the CFPB could provide restitution to victims when a financial fraudster had spent all of his ill-gotten gains. It works like this: When a solvent corporate wrongdoer, such as Bank of America, is caught violating the law, the CFPB orders it to pay restitution to its victims. But merely returning ill-gotten gains is not an adequate punishment for corporate wrongdoing. An additional civil penalty provides greater deterrence against further wrongdoing, by that firm, and serves as a warning to others. So, recently, when BofA was ordered by CFPB to refund $727 million to its customers for illegal credit card add-on practices, CFPB also ordered it to pay an additional $20 million civil penalty as a punishment, which was placed in the Civil Penalty Fund. Other firms, including JPM Chase, American Express and Capital One, have made civil penalty fund payments.

The civil penalty fund monies are used to compensate victims of fraudsters that are bankrupt and cannot make restitution or pay their own civil penalty. Often, these are firms that have engaged in "last-dollar" scams. Their common tactics include so-called mortgage "rescue" and debt "settlement" schemes. Consumers who are down to their "last-dollar" but still trying to clear their names are easy prey.

As I argued in my testimony against the bill at a committee hearing several weeks ago:

The fund is intended to help consumers who were harmed by bankrupt entities. The bureau has provided over $13 million in funds to over 4,000 consumers who were harmed by alleged fraudsters with no available assets, including, for example, Chance Gordon and Payday Solutions.

If there are excess funds in the Civil Penalty Fund, the CFPB has directed that the monies be used for financial literacy programs for high-risk populations, such as veterans' widows and widowers. The CFPB has placed funds into an account for these programs, but has not yet disbursed any.

As I further explained in my testimony: "In our view, because the CFPB was established as a remedial agency, it should have broad authority to right wrongs and make markets work." Compensating victims of fraudsters who've spent all the money they allegedly stole and using any remainder to teach financial literacy to high-risk populations are both important remedial tasks for the CFPB.

Congress had a good idea when it established the Civil Penalty Fund. It would be a bad idea to eliminate it through HR 3389.

Congress also, of course, had a very good idea when it established the CFPB itself as a response to the cataclysmic collapse of our economy caused by a decade of unregulation in which Wall Street banks were allowed to run amok. Yet today it faces a "death of a thousand cuts." Borrowing from the late environmentalist Edward Abbey, I concluded to the committee in my testimony: "The idea of the CFPB needs no defense, only more defenders."

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