My speech today is intended as an incremental contribution to the year-long conversation on civil and human rights that Michigan State University has commenced through the project known as 60/50. Across the country, this year has marked significant anniversaries for civil rights milestones. It is the 60th anniversary of the Supreme Court’s decision in Brown v. Board of Education, which held that segregated schools in America are unconstitutional and struck down the previously accepted doctrine of “separate but equal.” And it is the 50th anniversary of the Civil Rights Act of 1964, which banned discrimination in public accommodations, employment, and other areas.
Notably for our work at the U.S. Consumer Financial Protection Bureau, this year also marks a further related anniversary: the 40th anniversary of the Equal Credit Opportunity Act, otherwise known as ECOA. This statute expressly prohibits discrimination in all manner of financial credit transactions, thus affirming that economic rights are civil rights. So in my mind, this is really a celebration of 60/50/40, particularly for those of us who work in consumer finance.
Let me begin with some general background to locate our new agency, the Consumer Bureau, and its place in the federal government. Just a few short years ago, our country suffered through the worst economic catastrophe in most of our lifetimes. The financial crisis and ensuing great recession caused severe hardship for large numbers of Americans. Millions lost their jobs; millions lost their homes; and almost everyone lost a considerable portion of their household wealth. As so often seems to be the case, communities of color were hit the hardest, with their net worth being approximately cut in half.
It is now recognized, though many missed it at the time, that the root cause of the financial crisis and economic meltdown was found in irregularities that infected the multi-trillion-dollar mortgage market. The market was hit hard by rampantly irresponsible declines in underwriting standards and the widespread offering of exotic mortgage products that turned out to default at spectacular rates. Transmission of these weaknesses to the financial markets through the channels of mortgage securitization – and hence to the broader economy – spelled disaster for the mainstream economy and many innocent bystanders.
In the wake of this tragic set of events, the Congress responded by passing a substantial financial reform law, known as the Dodd-Frank Wall Street Reform and Consumer Protection Act. As part of this law, Congress created a new federal agency designed to have a singular focus on protecting consumers in the financial marketplace. That is the Consumer Bureau. As the first director of this new agency, it has fallen to me and my excellent team to undertake the hard task of making sure that the marketplace for consumer credit and household finance is made to work better for all Americans – rich and poor, rural and urban, sophisticated and unsophisticated. Our mission is to stand on the side of consumers and see that they are treated fairly by some of our largest and most powerful banks and financial firms.
With that in mind, allow me to say that we have been quite hard at work. In our brief lifespan of three years, we have built a federal agency from the ground up that now employs over 1,400 people who are deeply dedicated to our mission of protecting consumers. We have written historic regulations for the mortgage market to ensure that the irresponsible practices that blew up our economy can never repeat themselves. We have taken enforcement actions against a range of banks, companies, and individuals that have put almost $5 billion back into the pockets of consumers so far. We have fielded and handled complaints from more than 460,000 consumers, leading to relief in many instances and leading to investigations or examinations of harmful practices where such action is warranted. And we have projects underway – with partners ranging from the military to students to libraries to nonprofits to state and local officials – that are building financial education and financial capacity that will empower consumers and thereby strengthen our economy and our nation.
This work is important because of all it can do to help Americans manage the ways and means of their daily lives. And with just a moment’s thought, we can recognize that these individual efforts are at the core of what it means for each of us to engage in “the pursuit of happiness” in a democratic society structured around a free market economy. At the level of the individual – where we take the responsibility of making our own choices, controlling our own lives – it is clear that the marketplace that looms so significantly above and beyond us all must be made to work fairly for each one of us. The foundations of justice and equality are essential in our economic affairs if we are each to find our way toward earning the fulfillment of our goals and aspirations. And in this context, I will encapsulate the main thesis of my talk for you today, which is that if we are to attain a true and full understanding of civil rights in this country, it must encompass not only political and legal rights, but also economic rights.
Turning again to the two events that provide the impetus for the conversation I am taking up with the University and this audience today, what do we make of the Brown decision and the Civil Rights Act? With each of these landmark actions, the United States continued a forward arc of prolonged evolution toward a more fair and equitable society. The problems of how to create and ensure diversity and inclusion among all people have been and remain hard problems around the globe. They are intellectual problems; they are moral problems; and they are most distinctly human problems. In American life, these two events laid cornerstones of fundamental change. At the ballot box, in the legislative chambers, in our courts, in our neighborhoods, and in the marketplace as well, we wrestle to this day with the dilemma of how to reach a better and fuller understanding of what it truly means to be “created equal.”
Abraham Lincoln, for example, stoutly resisted the crude notion that equality meant a kind of sameness, and argued instead that it denoted a conceptual notion of intrinsic worth. As he explained in his first speech opposing the Dred Scott decision: the authors of “that notable instrument,” the Declaration of Independence, “did not mean to say all were equal in all respects,” but said instead that all were created equal “in ‘certain inalienable rights, among which are life, liberty, and the pursuit of happiness.’” And in so doing, he concluded: “They meant to set up a standard maxim for free society, which should be familiar to all, and revered by all; constantly looked to, constantly labored for, and even though never perfectly attained, constantly approximated, and thereby constantly spreading and deepening its influence, and augmenting the happiness and value of life to all people of all colors everywhere.”
All too often, however, this is a maxim that we have failed to live by as a nation. More than a century later, Dr. Martin Luther King, Jr. noted that despite the Declaration’s guarantee of equality, in many places he could not stop at a motel, could not get a hamburger or a cup of coffee at a lunch counter, could not get a seat on the bus, and could not enable his children to attend an integrated school. Even now, more than 150 years after President Lincoln restored the luster to the Declaration’s “standard maxim for free society,” we cannot claim that America has yet realized the fundamental promise of equality and freedom that will indeed augment “the happiness and value of life to all people of all colors everywhere.”
At the outset, I suggested that the Equal Credit Opportunity Act should be added as a further landmark to Brown and the Civil Rights Act. The addition of the “40” to the “60/50” theme is important to my thesis today. For the principle of “fair lending” that underlies this statute is crucial to upholding and enforcing the kinds of economic rights that ensure freedom and equality to the people who constitute our society. One of those rights is the right to access credit on fair and equal terms – to borrow money now for repayment at a future date, so as to have the use of it for purposes of one’s own choosing. Our pursuit of happiness is enhanced when the government helps to ensure that the opportunities that free markets and fair lending make possible are available to us all.
The time-shifting nature of credit is that it enables us to transform the circumstances of the present into our aspirations for the future. With it, we have opportunities; without it, most of us would be locked into narrowed and constrained pathways for our lives. So together with the related rights to obtain money, to hold money, and to deploy money on fair and equal terms, the right to credit or fair lending becomes a basic pillar of the economic rights that are intertwined with civil rights in this particular society.
At this point, it is worth taking a broader look at how we understand the concept of civil rights. The manner of defining our notions of freedom and equality in American law and society has taken two central forms: first, to define those characteristics in which our differences do not denote our inequality as human beings; and second, to define those rights that we are judged to possess on an equal footing simply because we are human beings. The first task has been fertile ground for civil rights advocates throughout our history, yielding by now an established consensus on certain attributes and an emerging consensus on others. Which characteristics matter and do not matter to our intrinsic humanity is a defining idea for our society and our nation. But it is the other task that draws my attention today, which concerns an understanding of the nature of the rights that our intrinsic notions of equality and liberty should safeguard for us insofar as we are quintessentially human beings.
I would propose that we focus here on at least three distinct categories of the most fundamental rights that American law affords us: political, legal, and economic. Human rights, grounded in moral claims that transcend national boundaries, are also basic to these inquiries by informing the criteria we use to gauge the intrinsic worth of our claims to humanity; for as William Seward famously proclaimed, “there is a higher law than the Constitution.” But our horizon is more limited here. Suppose we accept, as we all do in principle, the language of the Declaration of Independence that all are “created equal,” and suppose we embrace some societal consensus around our conception about what characteristics are and are not germane to that equality. The further question presented is this: Just what difference does this equality make? What does it guarantee us the right to do or not to do as individuals in American society? And what role should our government play in either letting us alone to enjoy those rights or assisting us to attain them more fully?
When we look to models like Brown v. Board of Education and the Civil Rights Act of 1964 (and the Voting Rights Act that followed the next year), we find that we tend to answer these questions most naturally in terms of our political and legal rights. If we hearken back to the Civil War amendments to the Constitution – the Thirteenth, Fourteenth, and Fifteenth – we find that they were addressed most prominently to political and legal attributes and recognition: the right to citizenship, the right to vote, the right to “due process of law,” and the right to “equal protection of the laws.”
Similarly, the Civil Rights movement that pressed forward almost a century later resulted in achievements that are framed significantly around notions of how to ensure the fulfillment of those rights. And once again, the focus was placed on legal and political rights: the right to integration or freedom of association; the right to legal status as a citizen, such as in the use of public accommodations; improved access to the right to vote; and the right to fair legal process in the civil and criminal courtroom.
But it was always the case, also, that the movement and aspiration toward equality in American life was almost as fundamentally economic as it was political and legal. This was well understood in the African American community, as reflected in Dr. King’s 1963 March on Washington for Jobs and Freedom and his later involvement in the “Poor People’s Campaign” for economic justice. In the end, it seems to me that these three categories of rights – political, legal, and economic – are inextricably intertwined in our society. Because we chose to build our political structure around a free market economy, we inevitably found it necessary to supplement our bare political and legal equality with some more robust measures of economic equality and economic rights as well.
This is visible both in the successes and the failures of the civil rights first conferred during and after the Civil War. The abolition of slavery itself – though deeply a political and legal step – was very much an economic step as well. Lincoln himself said this over and over: in addition to the moral arguments he articulated to oppose slavery, he consistently explained the objective of abolition in economic terms. During the Lincoln-Douglas debates, for example, he repeatedly argued that enslaved Americans were entitled first and foremost to the freedom of their labor and its fruits: “in the right to eat the bread without the leave of anybody else, which his own hand earns, he is my equal, and the equal of Judge Douglas and the equal of every living man.” In the same debates, Lincoln also observed in opposition to slavery that “each individual is naturally entitled to do as he pleases with himself and the fruit of his labor” and that the bankruptcy of the pro-slavery position lay in “the same old serpent that says you work and I eat, you toil and I will enjoy the fruits of it.”
The Civil War amendments carried out this vision of economic rights in part, at least on paper, by abolishing “involuntary servitude” and guaranteeing not only life, but “liberty and property” in accordance with due process of law. It also conferred, somewhat more mysteriously, the right to enjoy all “the privileges or immunities of citizens of the United States.” The Civil Rights Act of 1866 likewise guaranteed the intertwined legal and economic rights “to make and enforce contracts . . . and inherit, purchase, lease, sell, hold, and convey real and personal property.”
Yet these federal rights were ultimately subverted by the eclipse of Reconstruction, the enactment of Black Codes, and the introduction of a system of economic subordination that replaced ostensibly free labor with forced labor, essentially replicating a system of involuntary servitude by creating and enforcing chronic and unceasing debt obligations. A special report by the Department of Justice in 1907 found that the system of peonage that had developed across the South rested on various state laws including “vagrancy laws, some contract labor or employment laws, some fraudulent pretense or false promise laws, and there are divers [sic] others [such as] absconding debtor laws” all used “for the purpose of enslaving workmen.”
By the same token, when we examine the initiatives of the modern civil rights movement, again they are often just as much economic at their core as they are political and legal. The right to pursue an education to build one’s own human capital, the rights to public accommodations to make productive use of transport and lodging, and ultimately the rights relating to the terms and conditions of employment as guaranteed by Title VII of the Civil Rights Act of 1964 – all of these are economic rights essential to our notions of what it must mean to be free and equal in an evolving America. All of these economic rights are now believed to be necessary as we strive to attain that “standard maxim for free society” in the Declaration of Independence of which Lincoln so eloquently spoke.
But the Civil Rights movement continued to refine our notions of freedom and equality by pushing for further legislation designed to remove barriers to equality of economic opportunity. The Fair Housing Act of 1968 was enacted to address enforced segregation in residential housing, which curtailed access to improved education, job opportunities, and the accumulation of wealth through the purchase, ownership, and sale of real property. And the Equal Credit Opportunity Act of 1974 (again, the “40” of our 60/50/40 motif) was written into law to recognize that people need to have access to credit on fair and equal terms. If they cannot get credit at all, or if they can get it only on overpriced or unfavorable terms, then they will be hindered from pursuing the opportunities that sometimes can only be facilitated by borrowing money on credit.
We can also make a more tangible effort here to illustrate the importance of these economic rights. Let us try to look back at what conditions led to the mighty struggle to pass these modern civil rights laws.
At the time I was born, much of the country was still segregated by law or custom and many forms of discrimination were rampant. Children of different races – not just whites and blacks, but also Hispanics, Asians, Native Americans and others – often could not go to school together. Hotels, restaurants, movie theaters, toilets, even drinking fountains were often not available if you were in a racial minority. Discrimination in the workplace was legally sanctioned. Many classified postings read “colored need not apply,” and want ads in a number of newspapers were segregated by gender.
For those who may not appreciate that this was happening all over this country, and not just in certain parts, consider the following vivid and local example, which occurred here in the state of Michigan. In 1960 it came to light that a local brokers association was using a point system to assess prospective home purchasers by their “way of living” and “general standing” in the community. A minimum passing grade was 50. Polish Americans, however, had to score 55, Greek Americans had to score 75, and Jews had to score 85. Those identified as black, Hispanic, or Asian were entirely eliminated from consideration. With that history, it is hardly a surprise that the population of that city is still about 93 percent white to this day. So though these kinds of patterns and practices once were commonplace before the Fair Housing Act of 1968 was passed to address them, we would be naïve to think that the law’s objective has been fully met. As we see in the news day in and day out, vestiges of racism, sexism, and other forms of stereotyping often remain the defining features of many people’s lives.
Indeed, some of this deplorable legacy was reinforced by government policy itself. African Americans, in particular, have long suffered from exclusionary lending practices. Because they could not get a standard mortgage, many were offered homes on contract, a predatory agreement where the seller kept the deed until the contract was paid in full and the buyer could not get equity in the meantime. A buyer who missed even a single payment could forfeit his down payment, all his monthly payments, and the property itself. Contract selling drove these neighborhoods into even deeper poverty.
In the 1930s and 1940s, the Federal Housing Administration exacerbated these issues by refusing to extend loan guarantees to many black neighborhoods. This practice is known as redlining, a term that derives its name from the literal red line that was drawn on a map to show where banks or the government would not provide loans. Through redlining, the government actively promoted segregation. With its official endorsement, and certainly without any meaningful enforcement of any anti-discrimination laws, this practice became the norm for the mortgage industry in the private sector as well. Restrictive covenants and other contractual limitations became potent weapons of discrimination against African Americans, Latinos, Asians, and Jews. At that time, it was often difficult for consumers in these groups to obtain a mortgage at all.
As an interesting sidelight, it is notable that in 1963 then-Governor George Romney actually took part in a civil rights march through Grosse Pointe, the city mentioned earlier, to protest housing discrimination there. He also successfully campaigned for ratification of a state constitutional provision that banned discrimination in housing. Just a few years later, Romney served as the first Secretary of Housing and Urban Development to administer and enforce the new provisions of the Fair Housing Act, where he worked to expand housing to minorities and the poor.
Coming up to the present day, while segregation is no longer so directly sanctioned, it does stubbornly persist. According to a study of 2010 Census data, most whites live in a neighborhood where three out of every four people are also white, whereas African Americans and Hispanics tend to live in neighborhoods where fewer than half the residents are of their own race. Neighborhoods that were once redlined also find that their isolation is compounded by the lack of real estate investment, which may lead to a dearth of jobs, inadequate schools, and widespread poverty. These struggles often are exacerbated by higher levels of arrests and police intervention.
The legacy of such problems is hard enough on consumers, but the recent financial crisis was also fueled in part by a different problem, known as reverse redlining. While redlining cut off mainstream credit for communities of color, reverse redlining filled that void with predatory loans. This is not a new phenomenon in minority communities, as we saw with contract loans, for example. But the last decade was marked by new innovations such as ugly loans made on terms that led to frequent defaults, including loans made at higher interest rates and often rates that could rise sharply over time. When I served as the Ohio Attorney General, we found these types of loans were especially prevalent in urban minority neighborhoods. I saw first-hand in many Cleveland city blocks that the foreclosure problem, already historic in its proportions, was made dramatically worse by wealth-stripping mortgage loans and home equity loans that people were not able to repay. The housing wealth that had accumulated in these communities was a magnet for those who peddled exploitative loans, causing extensive harm to individuals and entire neighborhoods.
The numbers tell the sorry tale. The wealth gap in this country is strikingly obvious and has worsened since the crisis. According to the Census Bureau, in 2011 the middle 20 percent of whites had an average net worth of $110,531. The same segment of blacks had an average net worth of $6,349 and for Hispanics the figure was $7,683. These striking differentials, in the range of approximately 15 to 1, are the worst we have seen in thirty years. And the crisis utterly walloped the accumulated wealth in minority communities. White consumers lost just an estimated one percent of their wealth during that time, but blacks and Hispanics lost 23 percent and 25 percent respectively. One reason was that a considerable amount of wealth in certain minority communities was largely concentrated in homeownership, and the foreclosure crisis decimated housing values in most areas of the country. By 2010, in fact, blacks and Hispanics were almost twice as likely as whites to be in foreclosure.
Nor is there any mistaking the principal cause of this tragic outcome. In 2006, roughly every other mortgage for Hispanics and blacks was subprime, whereas only one-quarter of mortgages to white consumers were subprime. Even if black and Hispanic consumers qualified for a prime loan, many were offered only subprime loans. We saw this plainly at the height of the boom. In 2006, black and Hispanic families making more than $200,000 a year were more likely, on average, to be given a subprime loan than a white family making less than $30,000 a year.
These black and Hispanic families made perfect targets for predatory lenders because they could actually afford to pay their loans and the exorbitant fees that went with them. In the wake of the financial crisis, the Justice Department took substantial enforcement actions against Wells Fargo Bank and Countrywide Mortgage for steering African-American and Hispanic borrowers into subprime mortgages, which resulted in them having to pay higher fees and rates than white borrowers. It is noteworthy that this occurred without regard to their creditworthiness but because of their race or national origin.
In the same vein, the Consumer Bureau joined the Justice Department to take an enforcement action against National City Bank for charging higher prices on mortgage loans to African-American and Hispanic borrowers than similarly creditworthy white borrowers. The bank paid $35 million in restitution to the harmed borrowers. People often try to downplay discrimination in lending by blaming poor outcomes on lower overall credit scores, but that explanation is incorrect. Even when they have the same credit score, many consumers end up paying more for it simply because of the color of their skin, their accent, or their nationality.
The Consumer Bureau also has the duty to enforce the fair lending provisions of the Equal Credit Opportunity Act in the auto lending market. Typically, when a consumer finances a car loan through an auto dealership, banks and other lenders grant the dealer discretion to determine how much to charge the borrower for the loan. These discretionary pricing policies are conjoined with financial incentives for the dealer to “mark up” the rate in return for taking a cut of the resulting rate spread. The way in which this discretion is exercised often results in African-American and Hispanic borrowers paying more for their auto loans than similar white borrowers. Unless the lender can prove it has a legitimate business reason for those higher charges, such conduct is against the law. Indeed, the same type of lending problem existed in the mortgage market, where it was known as the “yield spread premium.” Yield spread premiums have now been made illegal across the board, whether or not they result from discrimination.
Many studies show that people of color pay more than whites do for their car loans when the loans are financed through auto dealers. Research done by the Center for Responsible Lending showed that minority borrowers attempt to negotiate and comparison shop just as much as, if not more than, their white counterparts – suggesting that the disparity cannot be pegged to a lack of bargaining. Other research has shown that blacks and Hispanics get better deals when they negotiate auto loan pricing online, rather than in person. Moreover, when researchers have sent test buyers into dealerships, they found that dealers quoted significantly lower prices to white males than to black or female test buyers. These are recent examples, and they indicate that the problem of discrimination has not disappeared from our society.
But what recourse is open to borrowers who are charged more to finance an auto purchase than their creditworthiness would have justified? The initial “buy rate” that lenders quote to the dealers is not disclosed to consumers, and so when that initial rate is marked up by the dealers to a higher rate of interest, many consumers do not even realize they are paying more, let alone why. Where statistical or other evidence indicates that this higher pricing of credit is occurring based on the consumer’s race or national origin or other prohibited characteristics under the Equal Credit Opportunity Act, then there are legal remedies available. Whether or not consumers avail themselves of those remedies, it is also within the Consumer Bureau’s power to take direct action to enforce the law as well.
Under established law, the statute operates according to either of two prongs, and the Consumer Bureau has the authority to pursue lenders whose policies and practices either create disparate treatment or have an illegal disparate impact on communities of color. Although these are two distinct theories by which to prove discrimination, in many ways the cases are very similar. A disparate-treatment claim often will be grounded on evidence that presents some overt indication that the consumer was targeted for differential treatment based on prohibited characteristics. A disparate-impact claim, by contrast, may not present any such evidence, but will be based instead on statistical evidence of differential treatment among a larger universe of consumers. The second prong, which has been settled law for over two decades, is under some pressure right now.
But the distinction between the two prongs is not as clear as it may sound. The statistical evidence that plays a central role in disparate-impact cases is also probative evidence that is quite relevant in disparate-treatment cases as well. So it is not clear how much difference there is in practice between cases brought under either prong. Barring some more overt evidence of discrimination, which is now rarely found in lender files, the same kind of statistical evidence would tend to bear strongly on discrimination claims framed under either approach.
Moreover, it is not clear how much the distinction between treatment and impact would necessarily matter to a consumer. Certainly any more overt indicator of discrimination would likely add “insult to injury,” to borrow a common phrase. But if instead an auto lender simply set up its lending program in such a way as to systematically overcharge both this consumer and other members of the same minority group, then essentially the same injury would have occurred. Accordingly, the same legal relief would appear to be justified in both instances if the consumer’s access to credit on fair and equal terms is to be protected under the law.
We have a duty to enforce the law, and the Equal Credit Opportunity Act has been the law of the land for forty years. So where we have seen problems, we have taken action. Last December, we worked with the Department of Justice to resolve the largest set of auto loan discrimination claims in history. Ally Bank was required to pay $98 million to address their discriminatory pricing practices (including an $18 million penalty), which had caused more than 235,000 minority consumers to pay more for their auto loans than white consumers who were similarly situated. The bank also was required to implement a robust compliance management system to prevent such problems from recurring.
We have since announced that $56 million of consumer relief will be distributed to approximately 190,000 more consumers for discriminatory practices by other major auto lenders since the Ally matter was resolved. This relief has come about as a result of work we do in our supervisory role over the larger banks, where Congress has authorized us to send in teams of examiners to monitor their operations for compliance with fair lending laws, including the Equal Credit Opportunity Act. All of this enforcement and supervision work in auto lending is important and it remains ongoing.
So to recap, I have offered the outline of an argument that economic rights, no less than the political and legal rights with which they are intertwined, are central to our efforts to secure the civil rights of all Americans. And I have also sought to locate the work of our new federal agency against the backdrop of the kind of financial oversight needed to vindicate those rights in today’s economic and social climate. At the Consumer Bureau, we are keenly aware of our responsibility to do whatever we can, within our authority, to combat the persistent evil of discrimination, and we understand the importance of doing this work steadily and tenaciously.
So as we look back over our country’s history, we can observe a prolonged struggle to give meaning to the central principle that all are created equal and all should be treated fairly. We continue to hold to that principle today. As the numbers show us, life still is harder and more expensive for many people of color. Despite the pivotal legal changes adopted over the past 60 years, these communities still face tremendous social and economic challenges. In the face of difficulties, they are entitled to count on the essential principle of fairness in all of their ordinary economic dealings.
As a nation, we need to join in more open dialogue along the lines of Project 60/50/40. By doing so, we can deepen our commitment to diversity and inclusion and come to a fuller understanding of how action according to these principles can improve our life together. It has always served us well to face hard truths and think as carefully as we can about how best to address them. And one thing we have learned is that every time we manage to expand opportunity to a broader group of Americans, we make this country better and stronger in an admirable and enduring way. Thank you.
The Consumer Financial Protection Bureau is a 21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives. For more information, visit consumerfinance.gov.