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Lessons Learned from the Financial Crisis: The Need for the CFPB

Raj Date
Special Advisor to the Secretary of the Treasury for the Consumer Financial Protection Bureau
Lessons Learned from the Financial Crisis: The Need for the CFPB
National Constitution Center
Philadelphia, Pennsylvania
September 15, 2011

First, I want to thank David Eisner for hosting us in this amazing facility. And thank you, Mayor Nutter, for that introduction and for your hard work on behalf of the people of Philadelphia.

You know, the last time I saw the Mayor was on television, as he prepared his city for the potential impact of Hurricane Irene. Due to a lot of planning by the Mayor and a little luck, the city was spared the worst of the storm.

Today, exactly three years after Lehman Brothers filed for bankruptcy, it’s useful to remember that not every disaster is a natural disaster. Some disasters are manmade. But whether they’re created by nature or by people, disasters are painful to live through and hard to clean up.

The failure of Lehman was the largest bankruptcy filing in our history. Its collapse was among the most dramatic events of the financial crisis. I remember very well just how dangerous those days were, and just how close we were to financial collapse.

Three years later, most banks have returned to profitability. And for the long-term economic health of the nation, that’s a good thing.

But we all know that families haven’t been so lucky. Economic pain continues for far too many Americans. Three years after Lehman, unemployment hovers around 9 percent nationally and it’s only a touch lower here in Philadelphia. African Americans and Latinos have been hit even harder. Together, Americans have lost trillions of dollars of their hard-earned savings. And with nearly 13 percent of mortgages delinquent or in the process of foreclosure, most of us personally know people who are at risk of losing their homes.

Anniversaries, even unhappy ones like this one, give us a chance to look backward, but also forward. We should look back to remember how the financial crisis happened in the first place. And we should look ahead to make sure that we are heeding the lessons that we have learned.

The Consumer Bureau

Prior to the crisis, no single agency had effective tools to regulate and oversee the whole consumer finance market, and consumer protection was not anyone’s top priority. The result was a system where no one was sufficiently accountable for getting the job done. At the Consumer Financial Protection Bureau, we’ve been given that important responsibility.

The consumer agency was established last year when President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act. We are the first agency accountable for making sure that consumer finance markets work for American families. To carry out that mission, the law gives us a wide range of tools – from supervision, to rulemaking, to research, to financial education, to enforcement, to the ability to handle consumer complaints.

Our work will benefit the entire economy. We’ll help give families the confidence they need to borrow for a home or for a child’s education. We’ll help give our nation’s financial institutions the confidence they need to innovate and to compete. If we get this right, the Bureau will support the work of rebuilding our economy and it will promote a better financial future for every single one of us.

The Mortgage Meltdown

The consumer bureau officially opened for business on July 21. The Wall Street Reform Act requires us to tackle some tough problems with tight deadlines. In particular, in the first stages of the Bureau’s life, the law lays out a specific agenda in a specific market – mortgages. And that makes sense.

First, the mortgage market is enormous. At some $10.4 trillion, it’s more than ten times the size of the next biggest consumer lending market, and more than twice the size of the consumer deposit market.

And almost everyone agrees that the mortgage market – while not the only problem – was at the epicenter of the global financial crisis. The simple truth is that we got into this mess one lousy mortgage at a time.

Fixing a mortgage market that is so big and so broken will take a lot of work. That’s why we’ve already hit the ground running at the CFPB.

For starters, we are working to ensure that borrowers can understand what they’re signing up for. Most Americans want to own homes. Most Americans have to borrow to make that happen. And most Americans don’t have any realistic chance of reading – much less understanding – the giant stack of legalese they get in the mortgage process. That’s why we’re working hard to streamline mortgage forms into short, readable documents. We call it our Know Before You Owe project.

And so far we’re off to a great start. More than 10,000 community bankers, mortgage brokers, consumer advocates, and interested American families have logged on to to give us their feedback on the draft forms. Just this week, we launched our fourth round of public testing, this time focused on comparison shopping. The ideas and concerns we’ve heard through this open process have tested our assumptions and are helping us create a better mortgage disclosure document.

Beyond disclosure, we want to establish some common-sense safeguards to prevent bad practices from harming consumers. That’s why we’re developing new rules to help borrowers get loans that make sense for them – loans that they can reasonably expect to repay. And that’s also why we’re working with other federal agencies to develop some basic standards for mortgage servicing. Sometimes ordinary, responsible people deal with difficult financial times. People lose jobs, they get sick, they have to take care of loved ones, and they fall behind. When that happens, it is simply not acceptable to cut corners. The law still applies.

Finally, rules only work if everyone follows them – and that requires consistent supervision and smart enforcement. Borrowers don’t necessarily know whether their lender is a bank, a credit union, a thrift, a finance company, or an investment bank. For consumers, a mortgage is a mortgage – and the rules should apply to all mortgages, and all mortgage lenders. Unfortunately, for a long time, they didn’t.

And without a level playing field, even honest businesses can feel pressured to lower their standards, to avoid losing market share or losing money. Fortunately, Congress gave the Bureau the authority to regulate and oversee both the big banks and key non-banks. This will create competition that benefits both consumers and responsible lenders.

Lessons Learned

So you can see that, while our actual work to fix the mortgage markets will be quite complicated, the basic themes are pretty simple.

Number one: People should be able to know before they owe. More paperwork doesn’t mean better disclosure.

Number two: Common-sense rules can prevent bad practices from harming consumers.

Number three: The rules of the road should apply to everyone – and they should be consistently monitored and enforced.

The lessons I have outlined are not unique to the mortgage market though. These lessons can be applied to the other consumer financial markets that the CFPB regulates. We’ve assembled a great team at the Bureau, with the analytical talent to make fact-based decisions on how to prioritize our efforts. As in the mortgage market, our work in these other markets will be targeted toward product transparency, common-sense rules of the road, consistent oversight, and smart enforcement.

Today, I’d like to focus on three consumer markets that impact a lot of Americans: credit cards, student lending, and checking accounts.

Credit Cards

First, let’s talk about something I bet most of us have in our pockets right now – a credit card. Although mortgage balances dwarf credit card balances, there are actually more consumers with a credit card than with a mortgage. Just last year, Americans opened more than 40 million new credit card accounts.

The CARD Act, which was signed into law more than two years ago, addressed many of the worst practices that had infected the credit card market. Before the CARD Act, credit cards suffered from problems similar to those seen with mortgages. Low front-end pricing – often hyping so-called “fixed” rates – obscured the true cost of credit. Hidden within the fine print were penalty fees and rate re-sets that made using the card much more costly over time.

The early results after the CARD Act’s implementation show that smart regulation benefits everyone. For consumers, credit card costs are more transparent and more reliable – with less risk of unexpected rate increases or other charges. For credit card issuers, it’s easier to compete on price and on value.

Despite this progress, credit cards remain complicated – with many disparate moving parts. It is not clear if consumers are truly able to understand and compare different credit card offers. That’s an issue that the Bureau has been focused on over the past year, and one that we will continue to evaluate.

But having good laws like the CARD Act on the books isn’t enough. We need to study their impact and make sure they’re being followed. That’s why one of the Bureau’s most important jobs is building a smart, effective, and credible supervision program. We will be up front with the financial institutions we supervise so that there are no surprises. Banks and other firms will find that we are fair-minded. But we’re tough-minded too. Make no mistake: When we find unjustified practices that cause substantial consumer harm, we will take the necessary action to put an end to them.

Student Lending

Student lending is another big consumer market. College education is a crucial part of the American dream. It was certainly a part of my American dream. At the Bureau, we want to make sure that education finance truly helps students obtain opportunities they otherwise could not.

As most American families can attest, after buying a home, paying for a college education is probably the biggest investment that they make. And over the past decade, the cost of attending a four-year public college has increased dramatically. At the same time, the financial crisis has eroded the wealth that families were counting on to pay for college. Students must rely on loans more now than ever before.

Student loans are complicated and they’re difficult to navigate. For months, the Bureau has been hearing from students, parents, school counselors, servicemembers, and consumer groups about the difficulties that families face in figuring out how much debt to take on. Because tuition has grown so quickly, many students are finding that, in addition to federal student loans, they must also take on private student loans to fill the gap. Assessing the full costs of federal loans, private loans, and other aid options can be a big challenge.

To enhance transparency, in 2009, the Federal Reserve put in place new disclosure requirements for private student lenders. At the Bureau, we will monitor those requirements to determine how effective they are. We will also collaborate with the Department of Education to undertake a comprehensive study of the private student loan market. Our research will begin this fall and we’ll submit our report and recommendations to Congress next year.

We will be on the lookout for problems in the student loan market. For example, some lenders might be offering loans that they know many students won’t realistically ever be able to repay. In some cases, for-profit institutions may even push their own high-cost private loans and use questionable tactics to recruit our nation’s veterans to collect more federal dollars. We owe more to our young people, and especially to those who risked their lives in the service of our country. If problems in this market warrant action – we will not hesitate to use the tools that Congress has given us.

Checking Accounts

Finally, let’s talk about checking accounts. Almost 90 percent of American households have at least one checking account. These accounts provide consumers with real value, and cost banks real money to deliver. In a functioning market, that would lead to a product that customers pay some transparent price to obtain.

But over the past decades, so-called “free checking” accounts emerged as one of the fastest growing checking products. With these free checking accounts, much of the costs to the consumer were buried in overdraft fees. The brunt of these overdraft fees has been borne by a small segment of consumers who may be unable to afford the resulting shocks to the family budget. The FDIC conducted a landmark study where they found that 84 percent of overdraft fees were paid by just 9 percent of checking account customers.

Now, many of the concerns about overdraft practices are being addressed. In 2009, the Federal Reserve stepped in with new rules to make overdrafts more transparent. Since then, some banks have gone even further and eliminated overdrafts on ATM and debit transactions. Other banking regulators have either proposed or issued supervisory guidance governing the banks that they oversee.

There is understandable concern about the inconsistency that may result from separate supervision regimes. We also recognize that there are a variety of products which are targeted at consumers who have a short-term need for cash – including products offered outside of the traditional banking sector. The consumer agency has the capacity to address this range of products in an even-handed way.

Going forward, the Bureau will carefully assess how we can best ensure that the overall market for short-term credit is fair, transparent, and competitive. We will be monitoring the impact of the recent regulatory and supervisory interventions. If we find that these interventions are not working as intended, we will adjust. And if we find that additional action is needed, we will act.

Our Approach

While the policy areas I have outlined today are far-reaching, they are by no means exhaustive. After all, consumer finance is a $20 trillion business – larger, in asset terms, than our country’s entire annual GDP. The products in this market vary by size and they vary in complexity. As do the players.

I can’t predict today everything that CFPB will do in the years to come. But I can tell you how we will approach every issue that we work on.

First, we are committed to basing our judgments on research and data analysis. We won’t shoot from the hip. We won’t reason from ideology. We won’t press a political agenda. Instead, we’re going to be fact-based, pragmatic, and deliberative. And I’m proud to say that we are building a team that is eminently capable of making good on that promise. We’ve hired top-notch researchers, lawyers, and market practitioners.

Second, once we understand a problem and its causes, we’ll be careful to use the right policy levers to address it. As I mentioned earlier, we have a wide range of tools at our disposal. We will strive to use each of them in the smartest way possible, matching policy solutions to policy problems. And we’ll use all of our tools in ways that enhance the others. So for example, smart supervision practices will lead to well-chosen enforcement actions, and both of those will inform a sensible rulemaking agenda.

Finally, and perhaps most importantly, we will tackle our mission knowing that we are singularly accountable for it. Consumer protection in financial services is a hard job. And Congress recognized that if you don’t make someone singularly accountable for doing a hard job, you shouldn’t expect it to get done well. You can count on us to make sure consumer finance markets actually work – for families, for the honest firms that serve them, and for the economy as a whole. Because some mistakes we can’t afford to make again.