Director Kraninger's Remarks During “Current Priorities in Consumer Financial Protection Seminar” At Harvard Kennedy School
Good afternoon, and thank you, Joe, for that introduction. I am delighted to join you today – such an esteemed audience from academia, business, and government. I want to take a second to thank, also, the Harvard Kennedy School’s Regulatory Policy Program for organizing this seminar and inviting me to participate. As the New Directions in Regulation seminar series highlights, regulatory policy is a vast space. This series covers everything from consumer financial protection to energy and the environment. It also includes dynamics with cross-cutting implications like artificial intelligence, which is overhauling consumers’ interactions in the financial marketplace. As such, these types of forums offer excellent opportunities to learn from, and interact with, one another. I’m excited for the opportunity to share some of the important and innovative work we are doing at the Consumer Financial Protection Bureau. During my time with you today, I am going to focus primarily on the role of economic analysis and evidence-based policymaking at the Bureau. I will also address the role of research to measure the effectiveness of our rulemakings, as well as the role of research in our supervisory and enforcement work. I will close by talking about how researchers like you can contribute to the Bureau’s work. I hope this presentation acts as a starting block for us to explore the various opportunities and connections among us today.
At the CFPB, we are always looking to effectively utilize our tools to protect consumers.
Some of you may be very familiar with our work, but, to others, the CFPB may sound like four letters of Washington alphabet soup. In short, the Bureau works to prevent consumer harm in consumer financial markets, such as home mortgage and student loan markets. We strive to prevent consumer harm by working to ensure that consumer financial markets operate transparently, efficiently, and fairly. Our mission also includes promoting innovation in and access to such markets.
The Bureau employs four main actions to support its mission:
- We empower consumers to make informed decisions about financial transactions through financial education;
- We issue regulations that provide clear rules of the road for companies to follow;
- We supervise financial companies to support a culture of compliance with consumer financial laws; and
- We enforce violations of the law to hold bad actors accountable and to deter potential future bad acts.
When it comes to developing and implementing policy, laws like the Administrative Procedures Act require agencies to outline their rationale for implementing or changing policy and undertake a transparent process to take comment on such changes. The law also dictates those reasons rest on solid evidence, including evidence of costs and benefits. At the Bureau, we adhere to and support good cause and evidence-based policymaking not only to the extent it is required, but also because the approach lays the groundwork for well-developed, thoughtful, and relevant policies.
Role of Researchers in CFPB’s Policymaking
Researchers play an important role in economic analysis and evidence-based policymaking at the Bureau. The Office of Research is focused on providing the Bureau, and its leadership, with a picture of how our policy choices affect consumers, firms, and the economy. Our researchers have access to necessary data resources to develop a full understanding of what is happening in consumer financial markets. Most importantly, our researchers are integrated into policy teams to help us connect economic analysis with policy decision making.
Of course, our policy-relevant research does not exist in a vacuum. Evidence-based policymaking means engaging with researchers outside the Bureau. We want to incorporate the distinct and unique perspectives of this outside research into our own work and policy development. We recognize the negative effects of research silos, so our academic outreach is meant to prevent the building of silos.
Examples of How Research Informs the Bureau’s Work
Let me provide you with some examples of how our researchers support our work. Since I arrived at the Bureau, I have focused on actions we can take to make sure consumers are better prepared for financial shocks. The Bureau’s “Start Small, Save Up” initiative is designed to help educate consumers about building an emergency savings account. To succeed in this effort, we need to understand the challenges consumers face in their financial lives. These issues have become more urgent this year as the financial lives of millions of Americans have come under stress.
Our research in the areas of emergency savings and consumer challenges in building emergency funds has been informed by a unique data source, our Consumer Credit Panel. The Consumer Credit Panel is nationally representative, with a 1 in 48 sample of de-identified consumer credit information. Building on this dataset, we recently conducted a unique consumer survey we refer to as “Making Ends Meet.” We asked a nationally representative sample of consumers about their preparation for financial setbacks. We also asked about financial shocks they had experienced and how they responded.
We conducted a second wave of the Making Ends Meet survey in the spring. Through this second wave, are looking at what the results tell us about how current financial stressors have affected consumers’ financial lives. We are also planning another wave of the survey that will tell us more about consumers’ financial preparedness as well as their financial experiences during this current period.
Role of Research in Rulemaking Process
Next, I’d like to talk about the role of research in the rulemaking process. The Bureau’s economists are an integral part of each rulemaking project. Economists, on any given rulemaking project, identify, develop, and analyze evidence relevant to the costs and benefits of rules under consideration.
Disclosures in the debt collection market is one area where a rulemaking project is underway. We face important questions about how to effectively disclose to consumers debt-related statutes of limitation rules. As you may know, statutes of limitation define when an unpaid debt is old enough that a debt collector may not be able to enforce the debt in court. To determine if, or what type of, debt collection disclosures would be effective, the Bureau used a tool you know well: quantitative testing. Specifically, we conducted a large, randomized, online survey in which we showed participants versions of disclosures. We then asked questions to test their understanding of the information in the disclosures. The level and specificity of testing we conducted demonstrates the Bureau’s commitment to investing the time and resources necessary to develop the evidence we need to answer policy questions.
In addition to the testing, it’s important that the Bureau be as transparent as possible in how it conducts research that can directly impact our policy decisions. This transparency helps us avoid the research silos I mentioned earlier. This year, the Bureau introduced a process of peer review for studies it expects will play an integral role in policy making. In the case of debt collection disclosures, we sent the study for external peer review. While this peer review process will be familiar to you, it is important to emphasize the CFPB is using this process to aid in the policymaking process. The referee report from the external peer review is publicly available on our website. Currently, we are working on a response to the referee report, which we will also make available on our website. Going forward, this transparent process will give all stakeholders more confidence in the research that informs our decisions.
Role of Evidence and Research in Determining Effectiveness of Existing Rules
Next, I want to talk about the role of evidence and research in understanding whether our existing rules are effective. As background, the Dodd-Frank Act requires us to review some of our rules within five years after they take effect. These formal reviews are called assessments. Thus far, we have conducted four assessments of some of the Bureau’s most important rules.
In the most recent assessment, released earlier this month, we looked at the Bureau’s TRID rule. This rule was designed to streamline the information consumers must receive in the process of obtaining a mortgage loan. Congress required the Bureau to consolidate the overlapping disclosures previously required by TILA and RESPA. In response, the Bureau developed new forms with the goal of improving the process. The assessment provided us the opportunity to dig deeper into ways that the rule has and has not been working for consumers and the market.
Assessments as Opportunities
I want to emphasize that we see the assessments as opportunities. Among other benefits, they permit us to take a more careful look at the benefits and costs of key requirements. I’d like to emphasize three points about our assessment program.
First, assessments are not pro forma exercises. For this most recent assessment, a team of economists began their work in early 2019. The assessment included careful analysis of multiple administrative datasets on mortgage lending. In addition, the Bureau collected new data specifically to support the assessment.
Second, when we conduct assessments, we are transparent about our approaches and methodologies. For this most recent one, we published a notice in the Federal Register inviting comment on, among other things, our approach to the assessment and considered the public’s input as we designed the study. When we published the assessment report, we published details of our methodology to allow members of the public to see how we came to our findings.
Third, the research conducted for our assessments can act as an input into our ongoing policy work. My staff is evaluating the findings from the most current assessment; however, the evaluation is already providing valuable policy insight. Specifically, the integrated disclosures may be a good candidate for our Trial Disclosure Sandbox. The Trial Disclosure Sandbox is a program designed to improve disclosures through community testing. For example, the program would permit a community bank or other mortgage creditor to test, for a limited time, an alternative to current disclosures. The larger point here is our assessments are not agency busy work. Instead, they are informative exercises meant to test the effectiveness of current rules and to inform us as to the development and updating of future and current policy.
Assessments Informing Policy
To give a sense of how our assessments can inform policy, let me give you an example from another mortgage rule. You may know that we are considering amendments to the Bureau’s “qualified mortgage” rules. The qualified mortgage rules are meant to ensure mortgagees can repay their mortgages. The Bureau first issued, in 2013, a rule addressing consumers ability to repay their mortgages, and we published an assessment report on that rule in early 2019. When we proposed amendments this summer, we cited some of the findings from the assessment among the evidence supporting the proposed changes to the QM. In this case, the assessment provided the Bureau with a clearer understanding of the rule’s effects, which continues to be important as we evaluate public input on the proposals.
Role of Research in Supervision and Enforcement
Finally, I want to discuss the role of research in supervision and enforcement. Specifically, I want to discuss the work our economists do to support the Bureau’s fair lending mission.
The Bureau is responsible for ensuring compliance with two fair lending laws, the Equal Credit Opportunity Act and the Home Mortgage Disclosure Act. We do this through supervisory work and enforcement. The Bureau’s fair lending supervisory exams cover a wide variety of markets, including mortgage, auto, credit cards, student loans, and small business lending. Examiners review multiple parts of a lender’s business. They conduct transaction testing where examiners review loan applications in granular detail to ensure that all regulations are followed. Fair lending exams also involve statistical analysis of a financial institution’s transactions, and this part of the process is the one in which our economists are most heavily involved.
One important purpose of the Bureau’s fair lending analyses is to determine whether legitimate differences in creditworthiness across demographic groups explain disparities in the outcomes we observe and if the disparities in prices or other outcomes are explained by legitimate factors. During our supervisory work, we explore all legitimate explanations for lending outcomes to fully understand disparities.
Our economists are involved in fair lending exams from beginning to end. Our economists conduct initial analyses of the financial institution’s data to identify areas of risk and narrow the focus of the exams. Through these efforts they identify specific loan applications that the exam team will review. Additionally, they conduct statistical analyses to estimate statistical disparities, and, if needed, identify harmed consumers and estimate restitution amounts. Our economists have access to a lender’s policies and procedures. As such, they know exactly what factors the lender should be considering when making decisions, and how the lender should consider these factors. I emphasize “should” because the problem is sometimes the institution’s lack of adherence to its own policies and procedures. Our economists also have access to the lender’s application-level electronic data. The significant extent of the information and data available to our economists allows for thorough statistical fair lending analyses.
Given the importance of economists’ analyses in our supervisory work, it’s vital that institutions understand what we look for in fair lending exams. Our efforts to maintain transparency include publishing the methodology we use so that financial institutions can do their own analyses to identify any issues that may need correction.
Examining a company’s data for fair lending purposes is something done by us and by economists at other U.S. government agencies, as well. Our work, and these other agencies’ work, will be better if we share and receive ideas to improve our methods. To that end, the Bureau began conversations with other agencies that conduct similar work. The result of those conversations was a recently signed Memorandum of Understanding with eight other agencies. The MOU launches a working group where economists at these agencies can voluntarily share information with respect to analytical methodologies used to understand and assess compliance with fair lending laws. As those of you in academia know, testing ideas with other experts is essential to improving methods and analyses.
Before concluding my remarks, let me come back to what I was saying earlier about the how researchers can engage with the Bureau.
First, there are opportunities to work directly with our researchers. As I’ve said, the Bureau faces a range of open, policy research questions, and has access to unique data to explore these questions. First, we have the Academic Research Council. I’ve mentioned the ARC as one way outside experts work with us. We also have a program through which academic researchers can spend part of their time working directly for us on research problems important to the Bureau. We have opportunities for post-doctoral fellowships, where you can collaborate and co-author with Bureau researchers.
Second, we are keenly interested in research conducted outside the Bureau that is relevant to the policy questions we face. From our perspective, there is not enough research on many of these issues. Just a few examples: What information about financial products is most important to consumers, and how can it be disclosed effectively? Why do many consumers have less emergency savings than they think they need? Is there information creditors can use to assess creditworthiness that will improve access to credit for consumers who appear “credit invisible?” What drives the continuing age, gender and racial disparities we see in financial outcomes? How can we better detect and measure the benefits of consumer financial protection rules in order to conduct effective cost-benefit analysis? We want to encourage academic researchers to pursue these questions. We want you to know that new knowledge in these areas can have an impact on the decisions we are making right now. One way we do this is by regularly hosting a research conference where scholars present the latest research in consumer financial protection. Our next conference is scheduled for May 6 and 7, 2021. The call for papers was posted last week and we are looking forward to a wide range of submissions.
Finally, let me mention that we are hiring. The Bureau currently has open postings for economists in our Office of Research, and we will be conducting interviews in connection with the ASSA meetings in January. Please encourage interested students to give us a close look. As I’ve tried to convey today, the Bureau offers economists a tremendous opportunity: not only great data resources and phenomenal colleagues, but it also offers the special opportunity to have a direct impact on policies that can help millions of consumers across our nation.
Thank you very much for your time today, and I look forward to your questions.