Director Cordray Remarks to the Exchequer Club

The Exchequer Club

Washington, D.C.
June 19, 2013

Thank you. It is a privilege to speak to this group, which touches nearly every sector of our economy. One thing we share in common is that we all have been profoundly affected by what occurred in the financial marketplace in recent years.

The credit crunch, the financial crisis, and the ensuing deep recession will stand as the most significant financial events of our lifetimes. They cost Americans trillions of dollars in household wealth. Many lost their jobs; many lost their homes; almost everyone saw their retirement savings shrivel. Congress sought to address these problems by passing the Dodd-Frank Wall Street Reform and Consumer Protection Act, which covers a broad range of topics. But my focus today is on the new agency created by the new law: the Consumer Financial Protection Bureau. Although the agency is still quite new, we are working hard to formulate our approach and carry out our statutory responsibilities.

When Congress created the new Consumer Bureau, it made two departures from the existing regulatory regime. First, Congress created a new agency with a singular focus on protecting consumers in the marketplace for financial products and services. In exercising its authority to oversee financial institutions, the Bureau would consider how the conduct of the business affects consumers, keeping in mind that the long-term health of any financial institution is bound up with how it treats its customers. Poor treatment of customers is generally not a sustainable business practice, and institutions that rely on such practices may have both less stable revenues and riskier asset portfolios. Indeed, the dramatic deterioration of mortgage underwriting standards in the run-up to the financial crisis is a vivid example of how the mistreatment of customers ultimately imperiled the survival of the institutions themselves.

Second, Congress determined that the prior federal supervisory regime, which focused predominantly on chartered institutions such as banks, thrifts, and credit unions, was no longer sufficient to the needs of the modern financial marketplace. Here the essential insight was that the prior oversight regime had failed in part because it was incomplete. Whatever one thinks of government oversight, it is quite clear that supervising only part of a market, while leaving the rest of it to operate largely in the shadows, cannot be expected to work to anyone’s satisfaction.

As financial products and services evolved over time, depository institutions found themselves competing more directly against nonbank entities – in markets for mortgage origination and mortgage servicing, remittance transfers, short-term loan products, and other areas as well. The mortgage market, in particular, was squarely involved in causing the financial crisis and the ensuing economic meltdown, so this supervisory gap had to be closed. Accordingly, Congress authorized the Consumer Bureau to exercise oversight also over nonbank institutions that provide consumer financial products and services. This gives us a broader cross-market perspective on protecting consumers, who often may not even know or care whether products and services they consume are being provided by a depository institution. One of the purposes of the new agency is thus to level the playing field between banks and nonbanks under the consumer financial laws.

We strongly believe that the evenhanded enforcement of reasonable rules exerts a positive influence in the marketplace. It not only protects consumers, but also supports honest and responsible businesses that should not have to compete against those who violate the law to gain an improper advantage.

The classic notion of “unfair competition” at the common law was developed through the oversight of the courts. But at the common law, principles and standards typically are developed only after the fact, in reaction to circumstances, and thus many have championed the view that this approach falls short in providing advance notice and clear guidance about how to avoid liability. The result has been increased legislation, including more precise statutory codification, along with the rise of the modern administrative state and the extensive production of agency regulations.

This point has direct ramifications for agency rulemaking, which is another significant element of the Bureau’s work. For businesses that want to know how to comply with the law, and at times may care as much about the clarity of the law as about its substance, the rulemaking function can serve to accomplish this goal. But the rulemaking project must take on a certain form to do this effectively, putting a premium on more specific and comprehensive rules. Agencies are sometimes derided for writing long and complicated rules, but the plain truth is that many businesses prefer comprehensive rules that answer more questions up front, leave less terrain undefined and uncertain, and minimize the prospect of protracted and costly litigation.

In several respects, however, I would take issue with the view that our rules must particularize every potential application of the statutes we are charged with administering and enforcing. First, for some concepts it is difficult to provide this kind of detailed and specific guidance, and more specificity may become an invitation to evade and circumvent the law. Second, sometimes principles and standards can operate effectively by allowing the parties to exercise discretion in areas where painstaking exactitude does not clearly further any particular interests, and the parties themselves may have sufficient incentives to cabin potential misconduct. Third, though a forest of intricate regulations may offer more comfort about the requirements of the law than a vague directive to act generally “in the public interest” so familiar in other areas of agency regulation, it also comes at a cost, imposing substantial compliance burdens on smaller entities.

Putting those larger issues aside for now, let us turn to how Bureau rulemaking actually works. The Consumer Bureau has engaged in two significant rulemaking projects to date: mortgage rules and remittance rules. Both were developed in response to specific direction from Congress, and those familiar with our processes have seen that our approach has been marked by an unusual degree of openness and accessibility. Where the rules we are contemplating can significantly impact a substantial number of small businesses, we begin the rulemaking process with small business review panels, which allow smaller entities to provide initial input on our ideas before we formulate a formal proposal.

Concurrently, we solicit the input of other stakeholders, including larger institutions and consumer advocates. Then comes the standard measures prescribed under the Administrative Procedure Act, including publication of a proposal, the notice-and-comment process, and finalization of the rule. We have been willing to meet frequently with parties who among them represent a broad spectrum of views on the issues at hand, as long as those parties are willing to include in our administrative record a summary of the meeting so that our processes remain transparent. And we have made some effort to open up the comment process, which may have become something of an “insider’s game” over time, seeking more input from the broader public in line with our new role as an agency designed to protect consumers.

The rulemaking process can be thwarted by at least three principal shortcomings (among others): lack of information, lack of imagination, and mistaken judgments. On each of these points, we find it beneficial to cast a wider net to hear more perspectives. Good information and data about the markets we regulate are also quite helpful on each of these fronts. For this reason, the Consumer Bureau is not only reaching out for more information as we develop specific proposals (as we did with the QM rule), but also taking on the task of developing better data to inform the agency’s efforts in the future.

As for imagination, one of the admittedly difficult parts of writing new rules is to anticipate the unexpected. Unforeseen consequences can loom large, and broader consultation through an open and accessible process helps us mitigate this concern. Finally, as to mistaken judgments, no foolproof system can be devised to prevent them, but again, an open and accessible process managed by our highly competent staff provides some assurance that we will hear and test conflicting viewpoints before reaching our conclusions – thereby subjecting our rules to the rigors of the proverbial “marketplace of ideas.”

Despite our best efforts, however, it is important for us to recognize that the outcome of any human process will be imperfect. If we find over time that any of our substantive calls need to be reconsidered, we can and will face the issue frankly and address it. That is exactly what we did with our remittance rules, where we determined that our initial conclusions about how to address foreign fees and taxes and sender liability for consumer errors would be highly impractical to implement. Although we were reluctant to revise a rule so quickly, far better that we should get things right on the second try than stand fast out of a misguided sense of our infallibility. For as Justice Frankfurter observed: “Wisdom too often never comes and so one ought not to reject it merely because it comes late.”

There is no question that our processes led to better, more informed results on the mortgage rules. In developing these rules, we heard overwhelmingly that the mortgage market in 2012 was vastly different from the mortgage market of 2006, and likely required even more focus on access to credit than would have been thought necessary when Title XIV of the Dodd-Frank Act was enacted in mid-2010. The constrained mortgage lending so prevalent today was quite critical to our thinking about how to contour our mortgage rules, especially the QM/Ability-to-Repay rule. By paying close attention to this input, and by obtaining and assembling more up-to-date data to analyze its validity, we came to more balanced conclusions about how to define a so-called “Qualified Mortgage” and tailor its legal consequences.

One further illustration is our treatment of smaller creditors under the rule. Through extensive discussions with community banks and credit unions, we came to recognize that most of their traditional lending practices should not be put in question by the Ability-to-Repay rule. Especially where smaller institutions make loans that they keep in their own portfolios, they have every incentive to pay close attention to the borrower’s ability to repay the loan. They are more immediately subject to community norms, and their underwriting standards did not deteriorate in the heady days before the financial crisis; indeed, they often lost market share to those flaunting the more irresponsible lending practices of that era. So we proposed and have now finalized provisions that avoid a “one-size-fits-all” approach to smaller mortgage lenders. We took the same more nuanced approach to our escrow and mortgage servicing rules as well.

Let me now turn to another aspect of the new agency’s approach to the rulemaking process that is commanding a great deal of our time and attention this year. It is a project we call “regulatory implementation,” and a large team is devoting much time to this effort, focusing on the new mortgage rules.

The philosophy of this project is premised on the notion that the rulemaking process itself does not end with finalizing a set of rules. It is not good enough for us to take the view that once new rules are published, our work is then done and we can say to financial institutions that “it’s your problem now.” If the point of our regulations is to protect consumers and to promote fair, transparent, and competitive markets, then we should care about how well the rules are implemented and the amount of effort required. Virtually all substantive agency rules now provide an implementation period between publication and effective date, and in that period an opportunity arises to facilitate the implementation of new rules. We are using that time to work closely with those who must implement our new rules. Eventually, we will be supervising and enforcing these new provisions, and it will go better for us and for consumers if we can foster consistent compliance, which should mean fewer problems and less consumer harm.

Accordingly, during the implementation period of our rules, we are engaged in vigorous outreach and assistance to the financial institutions now at work on implementation. We view this as a joint enterprise, and we are interested in learning how we can make things go more smoothly and achieve better results. One way of looking at the matter is that just as original legislation sets broad policy goals that are implemented by agency rulemaking – a process that some courts refer to as “filling in the details” of the statutory framework – even so, the completion of a rulemaking gives further occasion to address narrower operational issues that will help make the new regulatory regime work. Once an agency rule is in place and the larger policy calls are made, those issues have been settled, at least for a time. A new opportunity then emerges to offer guidance about how to effectuate practical implementation of the rule, particularly in response to inquiries from those tasked with its implementation.

But, our regulatory implementation project goes further than simply reacting passively to industry inquiries. We are also taking more affirmative steps to help the industry understand our rules. We have published plain-language guides that we will update as necessary. We have launched a series of videos explaining our rules. We are working closely with the other financial regulators to develop examination guidelines that reflect a common understanding of what the rules do and do not require, which are on track to be published well before their effective date next January. This work reflects close cooperation between the Consumer Bureau and the prudential regulators and our mutual desire to conduct examinations consistently. We are also distributing a readiness guide with a checklist of things to do before the rules take effect – like updating policies and procedures and providing staff training. And we are consulting with consumer groups to determine how best to educate consumers with understandable information about how the new rules will affect them.

As we become aware of critical operational or interpretive issues with our rules, we will address them. We have made a commitment to respond to substantial interpretive questions that significantly affect implementation decisions in writing through amendments to the official interpretations and, if need be, to the rules themselves. We pledge to work with the industry to resolve ambiguities, to discuss obstacles to implementation, and to work through any serious, unintended consequences.

We have already begun to make good on that pledge with certain proposed changes to the mortgage rules and commentary. We expect to issue a second round of proposed changes shortly. If we are to continue to facilitate the implementation process, there may be more adjustments at the margins over the coming months. We would make these adjustments with one aim in mind: to ensure the effectiveness of our rules by making compliance easier. By addressing and clarifying industry questions, we are reducing the need for individual institutions to spend time reaching their own uncertain judgments on these matters. We do not believe that this process should slow down the implementation process at any lender or servicer. Congress established an outside deadline for the effective date of the rules it directed us to write, and we set the effective date to reflect that deadline. We fully expect all institutions to be in compliance by next January.

In short, our rulemaking process is designed to produce rules that deliver tangible value to consumers and make the financial markets work better. But without effective implementation, that cannot happen. So, we share industry’s focus on successful regulatory implementation. Consumers and industry both win – as does the Bureau – when our rules can be understood consistently and applied effectively.

At the Consumer Financial Protection Bureau, the vision we have adopted is for “a consumer financial marketplace where customers can see prices and risks up front and where they can easily make product comparisons; in which no one can build a business model around unfair, deceptive, or abusive practices; and that works for American consumers, responsible providers, and the economy as a whole.” We recognize this vision is shared by many of our diverse stakeholders. We are glad to work with each of them to make that happen.

Thank you.