Prepared Remarks by Richard Cordray
Director of the Consumer Financial Protection Bureau
2012 Simon New York City Conference
New York, N.Y.
May 3, 2012
Thank you, and I am glad to see so many people from different sectors – academia, industry, and government – all here in the same place, listening to and learning from one another. I especially want to recognize Mark Zupan, now the Dean of the Simon School, who has been my trusted and admired friend since we met in high school (just a few years ago).
This event embodies the kind of dialogue that is critical to the success of each of our various endeavors. Let me emphasize at the outset that we all have certain goals in common: a strong and vibrant financial sector; the ability to earn and maintain the public’s trust and confidence; fidelity to the highest standards of business ethics and excellent customer service; and a highly competitive economy that works for Americans in both the short run and the long run.
In 1902, President Theodore Roosevelt delivered his State of the Union address amidst heated debate about the regulation of corporations. More than a century before anyone was skirmishing over the relative merits of the Consumer Financial Protection Bureau, the one-time New York City Police Commissioner, Governor, and then trustbuster President was, shall we say, “fostering discussion” in this city and this country about the respective roles of government and private enterprise.
In that address, he said, “We can do nothing of good in the way of regulating and supervising these corporations until we fix clearly in our minds that we are not attacking the corporations, but endeavoring to do away with any evil in them. We are not hostile to them; we are merely determined that they shall be so handled as to subserve the public good.”
While the economic arrangements of the early twentieth century were certainly a far cry from our economic landscape today, Roosevelt’s general sentiment continues to ring true. Although some people may have anxieties about how the Bureau will affect the financial marketplace, we are not looking to overburden industry but merely to fulfill a responsibility that a government owes to its citizens, and that good businesses owe to themselves. A responsibility that good businesses feel to the customers they serve: a responsibility of basic consumer protection.
With the recent financial crisis, we learned again, the hard way, a lesson that some had forgotten: that unregulated or poorly regulated financial markets can undermine not only the health of the financial firms themselves, but also the stability of the economy and the welfare of the public. The Consumer Financial Protection Bureau was created, among other reasons, to help ensure that the recent financial meltdown does not repeat itself. Our mission is straightforward: to make consumer financial markets actually work for consumers.
These markets are rooted in the daily lives and the financial and credit needs of individual Americans. There should be no doubt in anyone’s mind that consumer financial products and services have brought broad benefits to many millions of people. Mortgages help people buy homes and pay for them over time. Credit cards give us convenient access to money when we need it. Student loans allow people who lack means but have talent and ambition to pursue their deepest aspirations. Savings accounts are a first step to help people pursue their dreams.
But in the past few years, we have seen all too clearly that these same products and services, when misused or misunderstood, can do real damage to people’s lives and to the broader economy.
It is clear that we need to do all we can to help prevent such a collapse from ever happening again, but how? We know that over-regulation can indeed stifle entrepreneurship, but we also must not forget that under-regulation can also lead to terribly anti-business results. The most mortal threat to many banks, thrifts, and credit unions in our lifetime was dramatically posed by the extreme credit crunch and freezing-up of the financial markets in 2008. In their wake, the ensuing financial meltdown and the enduring consequences of the deep recession continue to dog our economy, particularly the housing market, now four years later and counting.
At the Consumer Bureau, we believe in evenhanded and reasonable oversight of the marketplace. And we are seeking to accomplish that by broadening the regulatory structure to include federal oversight of both banks and the nonbank firms that directly compete against one another in many of these same markets.
We saw with the meltdown in the mortgage market how a partial and incomplete regulatory scheme was doomed to fail. Banks, thrifts, and credit unions were subject to explicit oversight, whereas many other mortgage market participants, such as lenders and brokers and originators, were held to no standards of accountability at all.
The competitive pressure fostered by this regime stimulated a race to the bottom to capture market share. Regulatory arbitrage through charter choice placed further pressures on the system that impeded its effectiveness. The result was a kind of Gresham’s Law for financial regulation: the bad practices drove out the good.
I have heard stories from many community bankers who refused to make ill-considered loans to prospective customers, only to see those people go down the street and get that very loan from someone else who did not uphold the same standards. That other lender often required no documentation of income or assets, engaged in no form of recognizable underwriting, but still managed to sell those bad loans into the secondary market. There they were bundled into securities that eventually crashed the entire financial system and with it the broader economy.
So it is notable that we are the first federal agency authorized to supervise non-bank players such as mortgage originators, mortgage servicers, payday lenders, and private student lenders. We can also supervise “larger participants” in other nonbank markets. There are tens of thousands of these nonbank firms, and their products affect virtually every American.
For example, according to studies and industry sources, nonbank lenders originated almost 2 million mortgages in 2010, nearly 20 million consumers used payday loans, over 30 million people are being pursued by debt collectors, and roughly 200 million Americans rely on credit reporting agencies to report their credit histories accurately.
With so many areas going unsupervised, at least at the federal level, it is no wonder that consumer financial markets are rife with concerns about how well they serve the public. Through our oversight, we are working to level the playing field and make sure that these businesses are playing by the rules and being held accountable for their actions.
We envision a consumer finance marketplace where we can see prices and risks up front; where we can compare the pros and cons of different products; and where no one can build a business model around unfair, deceptive, or abusive practices. Our job is to see that people are treated fairly in this marketplace, and that someone is standing on their side if they are not. Our mission is to see that these markets work for American consumers, honest businesses, and the economy as a whole.
To achieve this goal, we have dedicated ourselves to being an agency that is evidence-based and data-driven. Field hearings, inquiries, rulemakings, bulletins – we are taking an “all of the above” approach to guarantee that we are both sharing and receiving up-to-date information that will inform our policymaking.
The rigorous, sophisticated, analytical techniques that you bring to your businesses are the same techniques we are using to understand trends and developments in the consumer markets. I am proud to say that many of my colleagues at the Bureau are exceptional for their great talent and deep understanding, which was honed and refined by their experience in the financial industry.
We strive to be as rigorous and analytical as the available market information allows us to be while remaining pragmatic in our judgments and decisions. For example, we have announced an initiative to work with banks on overdraft practices. In conjunction with launching a public inquiry into these practices, we are coordinating a study on overdraft with more comprehensive data that a number of the largest banks are providing to us.
We are also consulting closely with our fellow federal agencies to develop a consistent regulatory approach. Through such cooperation, we will be able to increase our understanding of the effects of prior federal regulations and guidance, which will enable us to make the most informed decisions we can about how to address these issues.
We carry our focus on evidence over to our consumer education and disclosure initiatives as well. We know that consumers need better information about consumer products, and especially about the costs and risks of borrowing. Clear and accurate disclosures will benefit the public and the markets by driving competition based on informed customer choice. They will deprive businesses of any unfair advantage gained from opaque back-end pricing that fosters and exploits customer confusion, which has been all too prevalent in the financial industry, among other sectors.
Think about your own mothers and fathers, sisters and brothers, sons and daughters. The financial world they are navigating to manage their own affairs has become more complex in recent years, and the widening gap between their actual capability and what is expected of them is an important problem that should raise deep concerns for us all. The failure to navigate that world successfully, leading to poor choices being made, especially about those rare life-changing decisions that people may confront only once or twice in their lifetimes – such as how to finance an education or a home purchase – can spell disaster for entire families and alter the trajectory of people’s opportunities.
We have launched several initiatives in the vein of our “Know Before You Owe” projects, all of which are pushing to make costs and risks clear up front for consumers. We are doing this in an effort to eliminate the unfair advantages derived from the phenomenon that I have seen referred to in recent economic literature as “confusopoly.” Seriously. Confusopoly. This term was originally coined by Scott Adams, the author of the comic strip “Dilbert,” and was later embraced by some academic economists – less humorously, because the economic literature is typically devoid of amusement – to reflect very real and detrimental aspects of today’s consumer financial markets.
Our signature “Know Before You Owe” mortgage project is focused on simplifying and streamlining the conflicting mortgage forms that reflected no functional need or reality other than the fact that multiple government agencies were involved. These forms have been confusing homebuyers and burdening industry for many years – an all-too-common occurrence in the realm of consumer finance – and we are taking head-on the responsibility to effect meaningful change in this area.
We are also eager to explore alternatives to compulsory regulations where we can make these alternatives work. We are collaborating with the industry on a new approach to credit card disclosures. We released a prototype credit card contract that is significantly shorter and clearer than current credit card agreements. We tried to keep the prototype simple and written in plain language to make it accessible to as many consumers as possible. This prototype is now being piloted at the Pentagon Federal Credit Union and we are spurring similar efforts by other leading financial institutions.
More and more of them appear to be recognizing the value for their customers in consumer-friendly information that is more accessible. The market is clearly moving toward providing the kind of information that our mothers and fathers, sisters and brothers, sons and daughters need and want – information they can truly understand and that is helpful to them as they make their own financial decisions. From our vantage point, this movement is in the right direction.
In the same vein, by working closely with the Department of Education, we have also created a “Financial Aid Shopping Sheet” that is found on our website at www.consumerfinance.gov. The Shopping Sheet presents young people and their families with a uniform, easy-to-understand explanation of the total cost of post-secondary education and the available options for financing it.
Just a few weeks ago, we followed up by launching the next phase of this project with the “Financial Aid Comparison Shopper.” The Comparison Shopper builds on the Shopping Sheet by helping students to compare – in an online, side-by-side format – information about the cost of different schools and how their decisions will affect the level of debt they can expect to incur.
In short, we see financial education and disclosure as a problem of closing the sizeable gap between where consumers actually are in their financial capability and where they need to be to navigate consumer finance markets successfully. We can close that gap in two distinct ways: by striving to elevate people’s capacity to handle matters of personal finance, and by striving to reduce unnecessary complexity in the information provided in that marketplace.
Although either approach can be helpful, at the Consumer Bureau, we are actively pursuing both approaches. We firmly believe that to strengthen and empower the American consumer is to strengthen the future of this country. To adapt a statement originally made by one of President Eisenhower’s Cabinet officials about the General Motors Corporation, we hold that “What is good for the American consumer is good for the United States, and vice versa.”
In a political order such as ours, which is consciously organized around a free market economy based on individual decision-making and personal responsibility, and in an economy powered in turn by consumer spending based on consumer credit, the truth of this statement seems to me to be undeniable.
Moreover, it has very real consequences. It means that the job of consumer protection cannot be regarded as optional. It means that consumer protection is not merely incidental to the broader operations of the financial industry and cannot be treated as tangential to its safety and soundness. And it means that nobody should view a regime of consumer protection as a simple “us versus them” world that pits our families against the financial providers whose business it is to serve them.
The fundamental reality is that we are all “us,” and we have responsibilities to one another that if carried out more effectively will benefit all Americans – and improve the long-term health of the industry itself. This understanding cannot rest on a myopic assessment where people fail to lift their gaze beyond the most immediate quarterly financial results.
A financial marketplace that actually works for consumers must be understood as a long-run proposition, based not on isolated transactions but on lasting relationships between good businesses and their customers. If those customer relationships are not built upon sustainable economics, then the viability of the financial system will be placed at risk, perhaps not today or tomorrow, but inevitably at some point in the future.
Just as consumers need better disclosures, they also need more advanced products and services to meet their needs. Vigorous market competition is the key to better products and services, and in the fast-moving financial industry this is especially so. Our ultimate goal at the Bureau is not to shackle the consumer finance markets, but to provide them with a sustainable structure that fosters innovation, provides access to responsible sources of credit, and rewards excellent customer service.
Thriving financial markets based on real consumer choice is a goal we should share in common with those in the industry. And these markets depend, crucially, on consumer confidence. I use this term here not only as it is usually measured, by the consumer’s level of confidence in his or her current and future economic prospects, but also in terms of whether the consumer financial markets themselves enjoy and justify the confidence of the consumers who participate in those markets.
If customers do not trust their financial providers, then they will be reluctant to provide them with their business and the scope of their participation may be distorted in other ways. Long-term customer relationships depend on a perception of fairness in the relationship that can only be premised in a lasting way on the actual substance of those relationships – namely, whether financial providers do in fact treat consumers fairly. Informed consumers keep the marketplace fair, accountable, and competitive by making their voices heard and, when they decide that they deserve better and nobody is listening, by voting with their feet.
We know that the Bureau and the industries we regulate will not always agree on everything. But I believe we can certainly agree on the basic principles of fair play and the need for an umpire that will call out those who seek an unfair competitive advantage by violating the law. Upstanding businesses benefit the most from oversight when those that cheat their customers are held accountable. Within the boundaries of fair play, businesses can compete aggressively with one another, and if they do then we are confident that their customers – that is, all of us – will reap the benefits through improved products and services.
We want to see both rapid innovation and long term sustainability in these burgeoning markets, and we pledge to do our part. If we are able to do our job well, we will not only improve life for consumers, but we will enable them to regain their trust in the markets once again. Let me close by stressing again that we want to see a thriving consumer financial marketplace based on responsible practices, sound innovation, and excellent customer service. And I invite you all to work together with us to achieve that. Thank you.