Prepared Remarks of CFPB Director Richard Cordray at the Consumer Advisory Board Meeting
Good morning. I would like to thank the Tampa community for hosting us so graciously and all of you for being here today. Since we established the Consumer Advisory Board (or CAB) five years ago, we have made sure that its membership spans the nation. We also make it a point to travel outside Washington, D.C. to learn more about consumers in different parts of the country. Yesterday we learned about this city’s history and visited a retirement community to hear more about the particular challenges facing constituencies such as older Americans.
We have also had the opportunity to hear about how natural disasters affect this community, in particular recent storms such as Irma and Maria. When these catastrophes occur, they can have multiple cascading effects, including financial effects. It can be hard to know whom to trust and where to look for guidance and help, as well as what financial steps to take as individuals and communities begin recovery. We shared that the Consumer Bureau offers various resources and tools, including toolkits for consumers who are victims of hurricanes and other natural disasters. These resources can help consumers figure out how to address their most urgent financial needs and warn them away from common scams and fraudulent schemes.
Our dialogue with our CAB members helps improve the ways that consumer financial markets work for American consumers. The CAB is a diverse group that identifies key issues cropping up around the country and presents broader perspectives on issues that sharpen our approach to consumer financial protection. Today I will share some information about our recent work and we will all seek your input as well.
Issues that affect the financial security of older consumers are of great interest here. Florida is often known as the retirement state, because it is home to over four million Americans who are seniors age 65 and older. In fact, just 60 miles north of here, in Sumter County, over half the residents are seniors. Since the Bureau was established in 2010, we have adopted a consistent framework around much of our work in consumer education and engagement. We call this initiative Know Before You Owe, meaning that before consumers make important decisions and take on more financial responsibility, they should be informed about the costs and risks and terms of those choices. Over the years, this effort has produced useful resources and new consumer-friendly disclosures.
Late this summer, we added to this framework by releasing a report about the costs and risks of using reverse mortgages to delay collecting Social Security benefits. The report responded to the increasing promotion of this strategy by financial writers and those in the reverse mortgage industry, often without discussing the costs and risks involved. The CFPB analyzed this strategy using different scenarios and found that the costs of a reverse mortgage usually exceed the extra benefits that would be gained by delaying Social Security retirement benefits from age 62 until full retirement age. We also found this strategy also can hurt borrowers by diminishing the home equity available to them later in life. As a result, those who follow this strategy to sell their homes may be unable to relocate or to handle a financial shock. We will be discussing this further and, in particular, would be glad to hear from you about how we can get this information across to more consumers around the country who may be facing these same circumstances.
In addition to our focus on reverse mortgages, we will also engage on a topic about which the CAB has provided much feedback, which is our research on measuring and understanding the factors that affect consumers’ financial well-being. These prior conversations have covered two main topics. First was the Bureau’s research to establish a consumer-driven definition of financial well-being. Second was our work to develop a reliable and validated set of questions and create a scale to measure individual financial well-being.
Our most recent milestone in this research, released in September, was our report, “Financial Well-Being in America,” which discusses the results of a nationwide survey that measured this phenomenon. The survey showed that people’s sense of financial well-being varies widely, including within the same age cohorts and racial/ethnic groups, as well as when people are grouped by levels of income and education. The results also reveal the difficult financial circumstances of many consumers, with more than 40 percent of U.S. adults reporting that they struggle to make ends meet in a typical month. We also released an interactive online tool that allows people to measure their own levels of financial well-being, and a data set for public use that allows researchers to explore how financial well-being relates to other factors. All of these matters will be open for discussion today, and we are interested to hear from you about other ideas you may have to further our ongoing research in this important area.
We are also mindful of the financial obstacles faced by Americans with limited English proficiency. In a recent survey, Spanish-speaking Americans identified homeownership as their top financial goal. In fact, Latino-American homeownership has grown steadily since 2010, even as overall homeownership decreased nationwide. At the same time, we know this group of consumers often has thinner credit files and makes less use of banks and credit unions. We want to help these individuals and families achieve their dream of homeownership by equipping them with the information, steps, and tools they need. So we are reaching out to Spanish-speaking Americans who aspire to future homeownership and encouraging them to use banks, credit unions, and financial products to build up their positive credit history. In so doing, we are helping this population lay the foundations for future homeownership. To see our latest offering, Como prepararse para comprar una casa (How to get ready to buy a home), visit our Spanish website at cfpb.gov/es. From consumer advocates around the country, we have been hearing that outreach into immigrant communities is especially important right now, so once again we are interested in your thoughts about how we may enable more consumers and their families to benefit from this resource.
Payday, auto title, and other similar loans have been of continued interest to the CAB over the years. Earlier last month, we issued a new rule addressing widespread debt traps in the credit markets for these products and for longer-term balloon-payment loans. Our rule rests on the basic principle of requiring lenders to make a reasonable assessment upfront of whether people can afford to repay these loans. It also curtails repeated attempts to debit checking accounts that rack up fees and make it harder for consumers to get out of debt on both short-term and longer-term loans. These protections bring needed reform to a market where far too often lenders have succeeded by setting up borrowers to fail.
Payday and vehicle title loans often are marketed heavily to financially vulnerable consumers. Although they offer access to credit for cash-strapped consumers, the requirement that these loans must be repaid in full can make them unaffordable. If a borrower living paycheck to paycheck needs such a loan to cover basic expenses or to recover from a large expense or drop in income, they will probably face the same shortfall when they get their next paycheck. Only now, they have the added cost of loan fees or interest. Faced with unaffordable payments, consumers must choose between defaulting, re-borrowing, or failing to pay their major financial obligations or their basic living expenses.
Many borrowers in this difficult situation end up rolling over or refinancing their loans again and again. More than four out of five payday loans are re-borrowed within a month, usually right when the loan is due or soon thereafter. About one out of four initial loans are re-borrowed nine times or more, as consumers pay far more in fees than they borrowed in the first place. People have similar experiences with auto title loans, and one out of five borrowers end up having their car or truck seized by the lender because they cannot repay the debt.
This cycle of piling on new debt to pay back old debt can turn a single unaffordable loan into a long-term debt trap. It is a bit like getting into a taxi for a ride across town, then finding yourself stuck in a ruinously costly cross-country journey, with no exit ramps. With each renewed loan, the consumer pays more fees or interest on the same debt. The consequences are severe. Even those who renew the loan repeatedly, and at great cost, may still wind up in default and get chased by debt collectors or have their car or truck repossessed. In fact, our research has shown that the business model for payday and auto title lenders is built on miring people in debt. Lenders actually prefer customers who will re-borrow repeatedly rather than simply repaying the loan when it comes due. That way, they can continue collecting fees or interest as long as the borrower does not fully repay. And where lenders make repeated attempts to debit payments from their accounts, that can add significant penalties, as overdue borrowers get hit with multiple fees and may even have their bank accounts closed.
Our rule takes square aim at these practices. They are the subject of intense public interest, as we received about 1.4 million public comments on the proposed rule. We intend to have a conversation that sheds light on the need, as we see it, to ensure that consumers have access to safe products and to ensure they are both supported and protected in using these products. So thank you again for being here and we look forward to all of the discussions today on these issues and any others you would like to raise.
The Consumer Financial Protection Bureau (CFPB) is a 21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives. For more information, visit www.consumerfinance.gov.