Prepared Remarks by Richard Cordray
Director of the Consumer Financial Protection Bureau
Consumer Bankers Association
March 21, 2012
Thank you, Consumer Bankers Association, for inviting me to speak with you today. And thank you for your willingness to work with us and give us valuable insight over the past year.
In March of 1962, President John F. Kennedy delivered a speech to Congress on protecting the interests of the consumer. He said that government needs to meet its responsibility to consumers in the exercise of their rights. These rights include: the right to safety; the right to be informed; the right to choose; and the right to be heard.
At the Consumer Financial Protection Bureau we stand by President Kennedy’s statements from a half-century ago. They continue to define broad principles of responsibility that a government owes to its citizens. We believe those protections are particularly appropriate when it comes to consumer financial products and services.
In that same speech, President Kennedy said, “Excessive and untimely use of credit arising out of ignorance of its true cost is harmful both to the stability of the economy and to the welfare of the public.” Unfortunately, President Kennedy was also right about that. We learned that lesson again, the hard way, when the recent financial crisis hit our country so hard, undermining both the stability of the economy and the welfare of the public in ways that we continue to grapple with as we seek to move forward.
While there is no doubt that the financial crisis occurred because the financial system failed the American people, we also recognize that the regulatory system failed – that the vision of a government watching out for the consumer failed. This is a key reason why the Consumer Financial Protection Bureau was created. We are here to provide evenhanded oversight that will renew trust in the financial marketplace. We want American consumers to feel confident and positive about the household credit products they use – whether it is their mortgage, student loan, or checking account. We want those products to help people achieve their aspirations and climb the ladder to opportunity and financial security. And we want those businesses that provide responsible financial products or services to American consumers to earn honest, respectable profits for all of their hard work and for their excellent customer service.
Our new role in the regulatory landscape is to create a marketplace for consumer finance that is stronger and more resilient so that honest businesses can succeed. I would like to talk to you today about how we are doing this by promoting transparency, lowering consumer risks, and ensuring a level playing field between banks and their non-bank competitors.
Any good financial business should be highly transparent with its customers. After all, markets work best when consumers have all the information they need to make the best decisions for themselves and their families, and are able to choose among highly competitive alternatives. When information is obscured or pricing is too complex to be easily understood, the barriers to consumer comprehension create obstacles to effective competition. Clarity about the choices available makes markets work better.
So we can take from that certain general principles. No one should hide fees. No one should pull bait-and-switch schemes on customers – the products advertised should be the products delivered. No one should advertise high loan amounts or low interest rates when few people actually qualify for such terms. And no one should be writing jargon-laden, difficult-to-read disclosure documents that confuse consumers rather than inform them.
Through the data and experience we are developing at the Consumer Bureau, we have seen that consumers need better information about the costs and risks of borrowing. They need to be able to make comparisons so they can shop around for a good deal. They also need the peace of mind that comes from knowing that the deal they were promised is the deal they are actually getting, not just tomorrow, but next month and next year as well.
We have already been hard at work developing better disclosures for consumers – disclosures that are more strategically effective at helping consumers identify key terms and make useful comparisons. Because people have a hard time understanding the terms of a deal when they have to pore over reams of fine print, we launched our Know Before You Owe campaign to provide consumers with easy-to-understand disclosures that make clearer the prices and risks of financial products up front.
We started our Know Before You Owe campaign by tackling the good faith estimate you get when you apply for a home loan. Then, together with the Department of Education, we released a “Financial Aid Shopping Sheet” that makes it easier to compare aid and loan packages and to understand the payments students will be facing after graduation. We also released a sample credit card agreement that is short and written in plain language to explain the key prices and terms in a manner that is more accessible to consumers.
We strongly believe that financial institutions can and should speak to their customers in terms that are simple and clear. This kind of straightforward transparency promotes more informed and more responsible decision-making by consumers across a number of financial markets.
Again, two basic premises of a well-functioning market are: first, that buyers and sellers understand the terms of the deal, and second, that buyers are able to compare possible alternatives. Honest businesses want to compete in such a market, and they are satisfied to win market share based on fair competition and excellent customer service, not through deception or fraud. It is the American way for responsible businesses to be straightforward and upfront with their customers, giving them all the information they need to make informed decisions. This is good for the honest businesses themselves and it is good for the overall economy.
At the Consumer Bureau, we are also working to lower the risks that consumers face in the financial marketplace. And we are doing our part to provide the mortgage market with clear rules of the road that will help it to revive, serve consumers as it should, and avoid the kinds of destabilizing events that caused the financial crisis which wrecked our economy.
In most lending markets, lenders have an incentive to care about a borrower’s ability to repay – after all, they quite reasonably want to get their money back. But almost everyone involved in the mortgage market leading up to the crisis – mortgage brokers, lenders, appraisers, investment bankers, and even rating agencies – earned up-front rewards that were insufficiently related to the performance of loans over the long run. In mortgages, unlike in credit cards, it was even possible for a loan originator to sell all of the credit risk. You could sell it all. For cash. Well before anyone could know the loan’s ultimate performance. Under conditions like that, it is no wonder that mortgage originators chased risks like never before. And when those risks were exposed and borrowers began defaulting, the whole house of cards came tumbling down.
Consumers had taken on risks they did not recognize or could not understand. Sometimes they were misled. Other times they made some very bad decisions. The ultimate results were terrible for consumers, for businesses, and for the overall economy.
Many of these consumers are now struggling with the consequences of these problems and they will continue to do so for years to come. In the wake of the financial crisis, more than 30 million Americans are now being pursued by debt collectors. Many are experiencing such severe credit problems that they are paying very high interest rates or even are barred from borrowing money at all. Some find that they are having trouble getting a job because when potential employers do a check of their credit history, the problems that show up are blocking them from being hired.
With the stakes so high, consumers deserve to have someone who will stand on their side, protect them against fraud, and ensure they are treated fairly in the financial marketplace. The Consumer Bureau will do that, and if we are able to do our job well, then the benefits will be widely felt. Lowering consumer risks helps firm up the stability of the entire financial marketplace. It also will help restore all-important public confidence in the financial system.
The Consumer Bureau is also working to create a stronger and more resilient marketplace by ensuring a level playing field between banks and their non-bank competitors. This aspect of our work is extremely important for you and your colleagues.
In the years before the crisis, the financial system outgrew the consumer protections that were put in place. The rules fell behind the pace of product changes in the marketplace. And a shadow market for consumer financial services emerged and expanded outside the supervisory framework that encompassed traditional banks, credit unions, and thrifts. Our aim is to change that by providing evenhanded oversight of all competitors regardless of their charter status. We are working to prevent another race to the bottom in consumer financial markets, which came significantly at your expense as you lost market share to those who were not held to the same standards or principles of legal compliance.
This is a key premise of the new consumer financial protection law. We now have the ability to examine participants in both the bank and non-bank segments of the mortgage market, the private student loan market, and the market for low-dollar, short-term loans. This represents a huge transformation. Before the crisis hit, for example, only part of the multi-trillion-dollar mortgage market was subject to federal oversight. Bad practices drove out the good, and the whole economy eventually collapsed, harming many innocent people in the process.
We also have the ability to propose rules that will authorize us to supervise and examine the larger participants in other consumer financial markets. We recently proposed a rule to include debt collectors and credit reporting agencies in our non-bank supervision program. After we receive feedback from all segments of the public on this proposal, we will consider how best to go ahead and finalize the rule.
Over the next year, the Bureau will also be implementing new mortgage standards that Congress adopted in the Dodd-Frank Act. One of our most important rulemakings will implement a new statutory requirement that lenders must make a good faith and reasonable determination that a borrower can repay the mortgage. Other rules about mortgage origination include statutory standards for loan originator compensation and the origination of high-priced mortgages. These rules will apply to all participants in the mortgage markets, again without regard to charter status.
So we believe it is very important for the stability of the market and the well-being of consumers to ensure that everyone is playing by the same rules, including your non-bank competitors. In order to do that, we need your help. We need to hear from you about what you see going on in the marketplace. Where do you see corners being cut? Where do you see standards being bent or stretched? Where do you see the law being violated? We have learned from the recent crisis that we need evenhanded oversight to make the marketplace work. If the cheaters are not allowed to prosper, then the honest businesses will regain their natural advantage.
So a critical element of leveling the playing field means introducing reasonable and evenhanded oversight across all segments of the market, and more importantly, to deter fraud and abuse that undercuts your position in the financial marketplace. When we see that federal consumer financial protection laws are being violated, we will not hesitate to take action to rectify the wrong that is being done. We will remain focused on the fact that in doing this work we are not only protecting consumers, but we are also supporting all those who treat consumers well.
In the aftermath of the financial crisis, there is much work to be done and much care is needed as we institute essential reforms. Many have remarked upon the novel premise of the new law that regulation of financial institutions from the standpoint of consumer protection is distinguished from regulation of the same institutions from the standpoint of safety and soundness. We think the two vantage points go hand in hand. No institution can be safe and sound if it does not treat its customer base in a manner that is sustainable over the long term.
Our mission at the Consumer Bureau is fundamentally designed to improve the markets for consumer financial products and services. 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 banking system once again. We want to see a consumer financial marketplace based on responsible practices, sound innovation, and excellent customer service. We want to see a solid foundation for establishing and maintaining long-term customer relationships. And I frankly believe that you want and should want exactly the same things.
To return again to President Kennedy’s seminal speech about consumer rights, he observed that a better system “can yield rich dividends in strengthening our free competitive economy… and our traditionally high ethical patterns of business conduct. Fair competition aids both business and consumer.” We can all agree on the truth of that observation, and it means that we have common ground to build upon as we find ways to work together.