Prepared Remarks by Richard Cordray
Director of the Consumer Financial Protection Bureau
U.S. Chamber of Commerce
March 28, 2012
Thank you for inviting me today. I think it is critical for us to maintain a frank dialogue because we have many areas where we can and should be working together. And we have certain goals in common: a strong and vibrant financial sector; a highly competitive economy that works for Americans in both the short run and the long run; the ability to earn and maintain the public’s trust and confidence; and fidelity to the highest standards of business ethics, the kind that the Chamber was founded upon exactly a century ago.
I bring some relevant experience to our work together. At home in Ohio, I have been a member of my local Chamber of Commerce for over 23 years. As an attorney, I represented the Chamber at times in cases involving commercial speech rights. During the time I served as the Ohio Treasurer, I worked directly to promote small business growth through a reduced-interest loan program with local banks.
Through our “GrowNOW” initiative, we put money on deposit with banks on which we took a 3 percent haircut, which in turn subsidized matching loans at 3 percent below the going interest rates to small businesses that made a commitment to create and retain jobs. Gaining that “3 percent edge” was of intense interest to many of Ohio’s small business owners.
The program was failing when we set out to revive it. By consulting closely with the community banks and small businesses, we found that too much bureaucracy had made it impractical. We streamlined the program, and it really took off. Over two years, we went from about $15 million lent to small businesses to over $300 million. We touched thousands of families, helped 1,500 small businesses grow, and affected nearly 15,000 jobs.
The moral of this story is that business opportunity depends crucially on financing availability. People have an immense amount of energy and imagination – those are the forces that unleash what Joseph Schumpeter called the “gales of creative destruction” that are constantly forming and reforming the patterns of our economic life. Innovation has been the hallmark of our nation’s economic edge for many generations, but it is simply stifled in a credit crunch. When the financial system implodes, as it did just a few short years ago, it is business vitality that is the most immediate casualty.
My point to you is that reasonable rules in the marketplace can exert a positive influence on financial innovation. When every competitor has to disclose the actual cost of a credit product, it is easier for a new firm to enter the market and show that it offers consumers a lower price. And though over-regulation can indeed stifle entrepreneurship, under-regulation can also lead to terribly anti-business results. Violations of the law that confer an illegitimate advantage, yet go unaddressed, constitute the worst form of unfair competition.
When I served as a local treasurer in Ohio, I was responsible for the collection of current and delinquent property taxes. I inherited a backlog of unpaid business property taxes, which I viewed as quite unfair to all the law-abiding businesses that somehow managed to find a way to meet their lawful obligations. When I set out to clear off that backlog, the most intense positive reaction came from local business organizations and chambers of commerce.
Their members were not the scofflaws or the brazen manipulators who cynically gamed the system. And they did not want to have to compete against those who were. Lying, cheating, and stealing, as Charles Fried has commented, are not traditional American virtues. Not in life and not in the business arena. Building a better mousetrap, and fostering innovative approaches that deliver value for consumers while competing fairly – that is the American way.
So to foster true competition, we need evenhanded and reasonable oversight of the marketplace. Competition is essential to both your work at the Chamber and our work at the Bureau. When honest and innovative businesses can succeed on the merits, it begets the competition that drives growth and progress. Appropriate market oversight and enforcement empowers the American consumer by ensuring that prices and risks are made clear so that they can decide what is best for them. Informed consumers keep the marketplace fair, accountable, and competitive.
We 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 will benefit the most when those that cheat their customers are held accountable. Within those boundaries, businesses can compete aggressively with one another, and if they do then we are confident that their customers will reap the benefits through improved products and services.
We are here not only to supervise market conduct but also to help restore trust in the American marketplace for household credit and other financial products or services. We want American consumers to feel confident and positive about any financial product or service they use – whether it is their checking account or their student loan or their mortgage. And we want the responsible businesses that sell financial products or services to earn honest, respectable profits for their hard work and their excellent customer service.
Honest business means that consumers should not have to worry about hidden fees, impenetrable disclosure statements, or bait-and-switch schemes. The products as advertised should be the products as delivered.
Consumers also need better information about the costs and risks of borrowing. They need to be able to comparison shop for a good deal. They deserve 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. Honest disclosures are a great equalizer in the markets because they inherently increase competition by depriving any business of an unfair advantage that would result from customer confusion.
We have launched several initiatives in the vein of making costs and risks clear for consumers. Our signature “Know Before You Owe” project is focused on simplifying and streamlining conflicting mortgage forms that have been confusing homebuyers for many years. With the Department of Education we also created a “Financial Aid Shopping Sheet” to help students navigate the complex world of student loans; it allows students to compare financial aid packages and to understand the payments they will face after graduation.
We also released a prototype credit card contract that is significantly shorter and clearer than current credit card agreements. We tried to keep the prototype at a seventh grade reading level to make it accessible to as many consumers as possible.
We need to support the American consumer through such initiatives, while also implementing the types of regulations that allow competition to work. Back in January, your President, Tom Donohue, who has shared with me his friendship and his good advice, said that the Chamber supports “necessary, sensible, and forward-looking regulations.” I could not agree more.
In the years before the financial crisis, the financial system outgrew the framework of consumer protections that were in place. The rules fell behind the pace of product changes. And we indulged the rapid expansion of a parallel financial services market that existed outside of the safeguards in place for banks, credit unions, and thrifts. Our aim is to change that broken model by leveling the playing field among all participants in the marketplace. We do not want to see another race to the bottom in our markets – we want growth and innovation based upon open competition, evenhanded oversight, and fair treatment of customers.
One of the keys to our approach is our new authority over nonbank institutions. We now have the ability to oversee participants in both the bank and nonbank segments of the mortgage market, the private student loan market, and the short-term, low-dollar loan market. We will use both our examination and our law enforcement tools to achieve this result.
This represents a huge shift. 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 financial system ended up in crisis, hindering legitimate businesses and harming many innocent people in the process.
Our duty is to help prevent that type of economic collapse from ever happening again. We are committed to a constructive, transparent, evidenced-based, rulemaking process that will keep markets competitive and hold businesses accountable to reasonable and equal standards.
It is important to note, however, that the consequences of our work together go well beyond the business arena itself. Individual financial problems can become community problems. We saw that most starkly with the mortgage crisis. The foreclosure epidemic turned vibrant neighborhoods into desolate ghost towns, a dynamic that I saw firsthand in parts of Ohio and have now found to be repeated across the nation.
Vacant properties become not only eyesores, but also magnets for drugs and crime. These properties sometimes become a dead loss and need to be razed. Neighbors who have done nothing wrong see their own property values decline, parents worry about their children’s safety, and local businesses may be forced to close up shop. The entire community is harmed. In this manner, irresponsible lending can assault the foundations of stable communities and businesses, with the damage taking many years to repair.
In the run-up to the financial crisis, there was insufficient accountability for those who were responsible for the foreclosure mess. Those who sold and packaged loans illegally or irresponsibly left others holding the bag. We want to lay the groundwork for a mortgage finance system that maintains sound underwriting practices and sound customer service, is transparent to consumers, and does not steer individuals into loans they cannot afford. If we do that, we will post a win for everyone involved – consumers, responsible providers, and the economy as a whole.
That is what we are working toward – a situation in which everyone wins who deserves to win. Whether or not you agree with all of our decisions, we pledge to run a constructive and open process that gives everyone a chance to weigh in. We want your insights. We have sought them out aggressively with our initiative to streamline the regulations that we have inherited from other agencies. We are currently working through the many comments we received on the initiative and look forward to executing these ideas.
At the Consumer Bureau, we envision a consumer financial marketplace where reasonable and evenhanded oversight promotes welfare-enhancing and real innovation, where consumer protections and business opportunities complement one another, and where financial institutions lead by establishing long-term relationships with their customers.
Every step we take that gets us closer to that goal will have a positive impact on our communities by helping honest businesses and consumers make the most of their opportunities. Let us work together to improve people’s financial lives and do our part to help fashion a more resilient economy and a stronger country. Thank you.