Cordray Goes to Congress

Job creators, job creators, job creators. That's all you hear from Mitt Romney and Congressional Republicans these days. For the most part, Republicans trot out the job creator (a figure spoken about with great veneration, but in fact a term coined and crowd-tested by GOP talking-point guru Frank Luntz) whenever large discussions on government spending or tax cuts come into play. But a quiet little hearing Wednesday on Capitol Hill showed that this veneration trickles down to the most minute details of policymaking.

The House Small Business Committee had summoned Richard Cordray, director of the upstart Consumer Financial Protection Bureau (CFPB), to testify on a series of regulations the agency proposed to drastically simplify the forms you see before you close a deal on a mortgage. Theoretically, the hearing was a chance for the representatives to scrutinize these regulations and propose subtle (or not-so-subtle) tweaks if things weren't working. But the types of changes Republicans really want to make—like calling a complete halt to the consumer agency’s new rules—won't go anywhere with a Democratic Senate and White House. So the hearing served as one more way to air and exaggerate the reasons that Republicans have bitterly opposed the new federal department devoted to protecting consumers.

The committee members, having lost the battle of Dodd-Frank—the bill that birthed the CFPB—took the opportunity to fume about the very existence of the bureau. Chairman Sam Graves used his opening statement to set the theme: "Many of my colleagues here today, including myself, question the wisdom of the Dodd-Frank Act and many of the provisions within it, including the creation of the CFPB," the Missouri rep said, peering down at Cordray over his glasses. He then promised that this specific hearing wouldn't be a retread of Republican objections to the Dodd-Frank bill that overhauled the way the government regulates the financial sector. But Graves and his fellow Republicans raised broad philosophical questions about the imposition of any regulations. "Even with the sluggish economy," Graves said, "the CFPB is expected to issue many more rules, some as a direct mandate from the Dodd-Frank Act and others at its discretion." And rules are, no matter their content, a bad thing for the job creators.  

As mandated by Dodd-Frank, the CFPB proposed a new regulation in July to replace the two disclosure forms currently required by the Truth in Lending Act and the Real Estate Settlement Procedures Act. That pair of laws resulted in the current morass of legalese presented to mortgage applicants—the massive documents that, while intended to offer a fully array of information, in fact obfuscate the key facts under reams of irrelevant small print. As part of its "Know Before You Owe" project, the CFPB wants to boil the mortgage application down to a three-page document that clearly highlights the most important information in plain English and must be handed out by the lender within three business days of a mortgage application. In simple boxes, the new document includes digestible information on things like the total loan amount, the interest rate, monthly payments on principal and interest, costs associated with the close—and, crucially, it makes clear whether these numbers can change over the duration of the mortgage.

Sounds pretty reasonable, right? Not for members of the job-creator cult. In an oh-so-clever play on words, Republicans had  called the hearing "Know Before You Regulate," and they grilled Cordray on the impact the new contracts will have—not on consumers, but on the operating costs of small lenders. The CFPB's new rule means these businesses have to change their record-keeping practices and retrain their employees. The total one-time compliance cost has been estimated at $100.1 million. The calmly poised, on-message Cordray nimbly ducked and dodged before finally naming that number at the insistence of Colorado Representative Scott Tipton. But Cordray had a compelling counter-argument: $100 million might seem like a grand sum to regular folks, but it is dispersed in this case over a market that runs in the trillions. "It's not like there's a million dollars falling on each business,” Cordray said. “That's not what we're talking about here.” In the end, he added, the new disclosure should save lenders time, racking up slow but subtle time savings for each closing that should offset that compliance cost. That did nothing to satisfy Tifton or the other Republicans.

The gap between Cordray and Tipton in assessing the costs of the rule highlighted a chasm separating how they measure cost-benefit analysis. This is nothing new. Congressional Republicans have opposed the very notion of the CFPB from the start, and they did everything they could to derail its creation. Senate Republicans filibustered Cordray's nomination—it wasn't anything personal, they'd simply pledged to block anyone from leading the new agency—and President Obama had to make him a recess appointee to get the bureau fully up and running. House Republicans would certainly attempt to zero out the CFPB's budget if they had control over the bureau’s appropriations. (Instead, CFPB draws its funding from the Federal Reserve.)

It’s a clash of philosophies, and the differences are stark. For the CFPB and its advocates, the starting point for a regulation is measuring what is best for consumers. For Republicans, any regulation that inconveniences a business is inherently intrusive and unwise, even if it produces a net good for businesses as well as consumers.



A report by the committee’s staff highlighted the one tangible example of possible damage the new regulations will do: the high costs a tiny subsection of small businesses will face. The primary brunt of the costs will fall on small lenders who maintain their own software systems. For the vast majority of small lenders, who rely on outside venders to provide their software—95 percent of the market—the changes will just fall in normal software updates and cost nothing. But that did not seem good enough for the committee. Its report decried the “significant costs” for the other 5 percent of lenders. Just how many “job creators” fall into this 5 percent? Seven hundred and eighteen nationwide. It would be a bad thing, for sure, to inflict pain on that small slice of the lending market; but does that cost outweigh the advantages to millions of others?

Republicans on the panel also trotted out a favorite attack, one that they used frequently during the debates around the Affordable Care Act: The regulation is just too damned long. The CFPB's rule that radically shortens mortgage disclosures clocks in at 1,099 pages. The irony did not escape Tipton, who questioned Cordray about that seeming contradiction.

"That seemed counterintuitive to me,” Cordray said. “I prefer to have short simple rules, but these are complicated matters.” He noted that the extended length was actually a result of requests from the small businesses the bureau consulted while drawing up the new regulations, not a decision driven by the CFPB's initial logic. "They have asked for more detail, more specificity ... in order that they won't have more questions afterwards. If we issued a short rule, a simple rule, but left things vague, what happens is everything still has to be figured out, but gets worked out on the back end. It often involves litigation, it involves going into court to get it to get a court to tell you what it actually means. That's expensive for businesses, it obviously takes time, there's uncertainty during all that time." Besides, he noted, the actual regulation takes up only around 200 pages.

This was the first time Cordray testified before the Small Business Committee, and it certainly won't be the last time a CFPB official is hauled up to Capitol Hill to let the Republicans blow off steam about the new bureau. The hearing was cut short as House members rushed across the street for a vote. Cordray surely didn't mind cutting things off at the 50-minute mark, as he left, he was surely thanking the authors of Dodd-Frank for making sure Congress can't take away his funding.

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