Sept 25 - In a speech given at the American Banker Regulatory Symposium on Sept. 24, 2013, Consumer Financial Protection Bureau Director Richard Cordray said going forward the organization will address what he has come to call the “Four Ds” that plague consumers. His full speech is below.
Thank you so much for having me here today as you discuss the aftermath of the financial crisis and the future of banking regulation. I know many of you are interested to know what is on our agenda at the Consumer Financial Protection Bureau, so I would like to describe where we have been and where we are going.
During the financial crisis, we all witnessed the devastating blows to our economy. Credit froze up; the housing market collapsed; and Americans lost trillions in household wealth. Many lost their jobs; many lost their homes; almost everyone saw their retirement savings shrivel. In the aftermath of the crisis, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act. As you well know, that law covers a broad range of topics to address the problems we experienced and make sure they would not recur in the future. Among the steps taken in the law was the creation of the new Consumer Bureau.
Five years ago, authority for administering and enforcing the various federal consumer financial laws was strewn across seven federal agencies. For each of those seven agencies, consumer protection was only one of its many responsibilities. Consequently, no single agency was primarily focused on protecting the everyday users of financial products and services – and consumers paid the price when the financial crisis hit.
With our creation, Congress made two departures from the existing regulatory regime. First, it created a new agency with a singular focus on protecting consumers in the marketplace for financial products and services. Second, Congress determined that the existing supervisory programs, which exerted oversight only over depository institutions, were insufficient to control irresponsible practices in the marketplace. The mortgage market, in particular, had become much more complex, and supervising only a part of it – leaving many participants without oversight and held to no standards at all – not only was unfair, but it was doomed to be ineffective. This supervision gap led to an uneven playing field between banks and nonbank firms that helped precipitate the financial crisis.
Part of our mission, therefore, is to help ensure that this kind of meltdown does not happen again. The events that led to the financial crisis are inconsistent with the fair, transparent, and competitive markets that we are directed to promote. So, in an effort to prevent these kinds of problems in the single largest consumer finance market, Congress directed the bureau to write sweeping new mortgage rules against a relatively fast eighteen-month deadline. This was a severe challenge, but our staff rose to meet it by issuing the new mortgage rules in January. Two of these rules will be extremely important in addressing some of the most serious problems that undermined the mortgage market. First, the Ability-to-Repay rule (also known as the Qualified Mortgage or QM rule) is designed to end many irresponsible lending practices by making sure that consumers are getting mortgages they can actually afford to pay back. Second, our servicing rules contain provisions designed to clean up many sloppy and unsatisfactory practices and to ensure fairer and more effective processes for troubled borrowers who may face the loss of their homes.
These rules will take effect this coming January. All this year, since the rules were first published, we have made it a point to engage directly and intensively with financial institutions on a project that we call regulatory implementation. The concept underlying this project is that compliance with regulations is a mutual concern because successful compliance is good for everyone – consumers, industry, and regulators. We believe that working together makes the process go more smoothly, attains greater certainty and understanding, and helps achieve better results. Our rulemaking process is designed to produce rules that enhance the financial markets and deliver tangible value to consumers; that will only happen if implementation goes well.
From our perspective, sensible rules of the road, appropriate market oversight, and evenhanded enforcement empower the American consumer. The goal is to make prices and risks clear so that consumers can make sound decisions they will be able to live with over the long run. We believe that educated and informed consumers are important to ensure that the financial marketplace functions properly. In order to achieve that, we will continue to complete our mortgage work. But we also need to address what we have come to call the “Four Ds” that plague consumers: deceptive marketing, debt traps, dead ends, and discrimination. Let me describe each of these problems more carefully.
The Four Ds
The first problem is deception. Consumers cannot make sound financial choices if they are given false or misleading information. Yet this happens surprisingly often in the financial marketplace. In the lead-up to the financial crisis, for example, some lenders marketed mortgages with misleading teaser rates that misrepresented the full cost of the loan. One result was that too many homebuyers ended up with complicated mortgage products they did not understand and could not afford, which were doomed to failure – products they may well have avoided if they had known better.
Sometimes the problem that consumers face is not necessarily deception, but confusion about crucial product information. This also happens in a variety of markets. Information may be buried in pages of fine print or written in language that requires an advanced degree to decipher. Various providers may describe the same fee very differently, making comparisons numbingly difficult. Consumers need to have key terms highlighted so the most important risks will stand out and can be easily comprehended.
So one of our signature projects at the Consumer Bureau has been our “Know Before You Owe” effort – a campaign to make information more accessible and more understandable. But cleaning up deception in the marketplace requires more than better disclosure, so we have also taken action, as we have been doing against credit card companies that misled consumers with deceptive sales pitches. As a result, we have put more than $700 million back in the pockets of over 8 million consumers so far. We have also gone after companies that claim to provide mortgage relief and debt-settlement services, but really just take people’s money and do not deliver. These are just the main examples to this point of our efforts to protect consumers against deceptive practices.
A second major problem is debt traps that cause people to get stuck in a downward spiral that deeply undermines their personal finances. Products marketed as short-term solutions to immediate needs can be risky for consumers in the long run. People in a tough situation with nowhere else to turn may think their only option is to use such products. At first glance, the fees can seem small compared to the pressing need for quick cash.
But when the payment comes due, or when repayment is automatically taken from their accounts, consumers may not have enough money to repay the debt and the accumulated fees and still meet their living expenses. So they need to borrow again to avoid defaulting and to keep making ends meet. For a considerable number of consumers, the fees will pile up and leave them worse off. It can be a vicious cycle.
We have been analyzing these products and their markets. We have also begun supervising payday lenders for the first time at the federal level. We are working to determine how best to protect consumers while preserving access to responsible credit. There is an obvious demand for small-dollar credit products, which can be helpful for consumers who use them responsibly when they are structured to facilitate repayment. We want to make sure that consumers can get the credit they need without jeopardizing or undermining their finances.
Another “D” we are addressing refers to markets that create frustrating and damaging “dead ends” for consumers. When consumers have limited clout because they do not choose the businesses they must deal with, they lack the ultimate control of being able to sever their ties. This is true even though what goes on in those markets can have a profound influence on their lives.
Take, for example, debt collection. While there are many legitimate debt collectors, we all have heard horror stories about constant phone calls; relatives tracked down; false claims of facing arrest if the debt is not paid. These tactics are indefensible. People deserve to be treated with dignity, even if they do owe a debt.
In other markets where consumers cannot vote with their feet, they experience similar problems. In mortgage servicing, millions of people have faced unwelcome surprises and constant runarounds, leading to improper fees and the needless loss of their homes. People also find they have little or no say in decisions made about their credit reports, and it seems that nobody will bother to listen to them if they do complain. For consumers with errors in their reports, the damage done to their lives can be severe and lasting. At the Consumer Bureau, we recognize that effective oversight through supervision and enforcement is needed to help protect consumers against these potential dead-ends. We plan to achieve just that. And where we determine that regulations are the appropriate tool for addressing these issues, we will act accordingly.
The fourth “D” that is a clear focus for us is combating discrimination. We have seen too many instances of consumers getting unequal treatment based on characteristics such as race or gender. When consumers sit down at the table to discuss their prospects for a loan, they are often unaware of the options available to them. In many instances, hidden incentives for brokers or loan officers to negotiate higher rates have resulted in African-American and Hispanic borrowers paying more than they should have for mortgages and auto loans. Nobody believes that is right.
We made it clear last year that – like the other banking regulators and the Justice Department – we will pursue discrimination in consumer financial markets based on disparate impact as well as disparate treatment. From the perspective of a consumer disadvantaged by policies that have a discriminatory effect, it makes no practical difference whether a lender consciously intended to discriminate. We also have made it clear that lenders are responsible for the operation of their lending programs, even if they are structured to work with some sort of middleman who stands between them and the borrower. The bottom line is that every consumer should have equal access to credit, as required by law. We also will be revising the process by which the financial institutions provide information about the mortgage market under HMDA, the Home Mortgage Disclosure Act – both to improve the categories of information that are gathered and to ease the operational and technological burdens on industry to comply with this law.
We plan to use all of our various tools – our supervision, enforcement, and rulemaking authorities, along with our consumer education initiatives – as appropriate to address the “Four Ds” in the financial marketplace while continuing to study the other issues that consumers are facing. We are dedicated to making markets work better for consumers and seeing that the relationship between providers and consumers is placed on a more sustainable basis.
We have already begun to see other changes in the marketplace as a direct result of our efforts. Our supervision and enforcement work is driving cultural change that places more emphasis on compliance and treating customers fairly, a change that is perhaps most notable for the nonbank institutions, but for many banks as well. Our consumer response function and public complaint database are also playing a tangible role in producing a shift toward more emphasis on excellent customer service. We have accepted over 200,000 complaints thus far. Institutions are indicating that they want to minimize the number of complaints we receive about them, and they are stepping up their customer service as a result. We applaud these conscious efforts as sensible and beneficial developments that will also help earn greater customer loyalty; they are exactly what we are looking for from financial companies operating in these markets.
Institutions also know that our supervision and enforcement teams are keeping a watchful eye on the consumer complaints we receive and that the patterns reflected in those complaints can prompt investigations or be the basis for risk scoping that leads to prioritizing supervisory attention. Many are therefore building into their compliance management systems an increased attention to the broader trends revealed by their analysis of consumer complaints. We applaud this sensible response as well, which will tend to minimize litigation risk, reputational risk, and regulatory risk. Through all of these means, we are bringing new levels of accountability to the consumer financial marketplace.
At the same time, we recognize that consumers bear their own share of responsibility for how they participate in the financial marketplace. Consumers need to put themselves in position to make sensible decisions that they can live with over the course of their lives. They need to recognize that the best form of consumer protection is self-protection: avoiding problems before they occur and the damage is done. But as the financial marketplace has grown more complex, we have made an enormous mistake in this country by not placing a consistent and sustained emphasis on financial education. Every year, we send thousands of young people out into the world to survive on their own, with little or no training in the kinds of decisions they must make to succeed financially. That is a self-defeating approach in any free society ordered around a free market economy, and we simply have to face up to our current failures and insist on doing better – in our schools, in our workplaces, and in our houses of worship. At the Consumer Bureau, we will be working very hard to bring more visibility and sense of urgency to this topic and to insist on making tangible progress for the American people in the years ahead.
The vision we have before us, and that we are working toward every day, is a market where consumer protections and business opportunities work in tandem; where financial institutions lead through responsible business practices; and where educated consumers can make informed decisions. We believe that such a marketplace is the right outcome for all involved, and will lead to more stable and sustainable financial conditions that strengthen the future of this country. Thank you.