Prepared Remarks of CFPB Director Richard Cordray to Corporation for Enterprise Development Assets Learning Conference
Good afternoon and thank you for inviting me today. It is good to be here with so many people who have similar goals and ideals. The thread that ties us together is our shared commitment to the goal of empowering the economically vulnerable among us. At the Consumer Financial Protection Bureau, we understand our ultimate goal is to make sure every consumer counts.
The mission of our new agency is to make financial markets work for consumers, for responsible providers, and for the economy as a whole. We have seen, as you have, the utter havoc that some financial products can cause for consumers. In the past few years, we have been working through the aftermath of the financial crisis. During that crisis, millions lost their jobs, millions lost their homes, and almost everyone lost part of their life savings. We all know from our experience that recovery from the crisis has been inconsistent from one person to another, one family to another, and one community to another. And, as always, the financial marketplace is toughest for those experiencing poverty, who often pay higher prices and get worse treatment as they use financial products and services to manage the ways and means of their lives.
The financial reform law that created the Consumer Bureau mandates that we are to work to empower consumers to make better informed financial decisions. As part of this effort, we have focused on promoting savings among consumers. We want to see a marketplace where everyone has the opportunity to build and sustain prosperity. It is now 50 years since this country launched the War on Poverty. Yet poverty rates remain stubbornly high, and we still have far too many families that struggle just to make ends meet. As the Consumer Bureau is now working to protect families from predatory practices that strip their wealth, we also seek to provide tools to help them become more financially capable and to access products that are fair, safe, and affordable. As we think about saving in particular, however, we know three things. First, saving is hard. Second, saving is important. Third, saving is possible. Let us focus on each of those in turn.
Everyone who works on financial empowerment quickly learns that saving can be incredibly hard for many Americans. So many households live paycheck to paycheck that squeezing some dollars out to be set aside at any given time can seem virtually impossible. Household needs are immediate and intense. The Federal Reserve has found that half of households say their normal spending is equal to or greater than their income. Nearly half say that if they suddenly faced an unexpected expense of $400, they would have to borrow or sell something to pay it off. Not having emergency savings can threaten their access to basic needs such as housing, food, or medical care. Any unanticipated crisis, no matter how small, can be devastating.
The lack of savings is also uneven among our different communities. The most recent Asset and Opportunity Scorecard from CFED shows that 44 percent of all U.S. households are liquid asset poor, meaning they could not cover their expenses at the poverty level for three months. Yet this problem is even more acute for African-American and Hispanic households. The scorecard shows that the average white household has 15 times the median net worth of the average African-American household and 12 times the median net worth of the average Hispanic household.
I first came to learn about these dynamics when I was a local official in Ohio and we got involved with the America Saves program. We created a local version that we called “Columbus Saves,” and we set out earnestly to encourage people to think more consciously about their budgets and cut back on little things to build a bit of a cushion toward the future. As we scratched our heads over the many immediate demands people faced in their lives, however, we could begin to see for ourselves just how hard it can be to get ahead of the financial curve, and how differently this problem was felt among different communities.
Still another challenge, as we found, is that many consumers do not have a formal place to save. The FDIC’s National Survey of Unbanked and Underbanked Households found that about nine million households are entirely unbanked. Trying to save without a bank account or similar vehicle, such as a reloadable prepaid card, can be extremely hard. People also take on enormous risk if they are trying to save in cash. And the same survey found that nearly 30 percent of households do not have any savings account. They often must rely instead on a single checking or prepaid account both for handling day-to-day expenses and for putting money aside, which can make it especially challenging to develop regular saving habits. That is something we at the Consumer Bureau want to change.
Although saving is hard, we also know that it is very important to improving people’s lives. Research has established what common sense suggests – that lack of savings leads consumers to get caught in cycles of debt or end up saddled with financial products they would not otherwise choose. It can send them into a downward spiral where it becomes hard even to hold on, let alone find a way to pull themselves back up.
Our own research on financial well-being reinforces the importance of saving. It reveals that individuals feel empowered and better able to weather financial setbacks if they have some amount of money set aside. Having a cushion they can draw upon creates more financial security for families. It also creates the raw material for potential investments that may allow them to build human capital, avail themselves of opportunities, and plan for the future with greater assurance that they can stay on the right track.
Here it is crucial to make a distinction about some of the different purposes for savings. Long-term savings, such as saving for retirement, is a very different thing from generating savings that will help individuals and families weather unexpected shocks. For those pursuing long-term savings, it will feel like failure if the total amount saved does not continue to grow fairly steadily over time. But for those who are trying to move themselves slightly ahead of the curve, rather than forever falling just behind it, the growing accumulation of wealth is less relevant than avoiding the negative effects of using high-cost debt just to make ends meet. The ability to achieve this goal can have dramatic effects on financial stability. From this standpoint, there is nothing wrong with dipping into savings in order to avoid the potential calamity of falling back on financial products with damaging consequences. So even if the individual’s saving pattern is more erratic and developing on a lower trajectory, the effects on financial stability and financial well-being of using savings to manage around the uncertainty of events can be life-altering.
So if we know that saving is hard and yet important, it is worth asking how it is possible to save and what can be done to help consumers save more. We know from initiatives like America Saves that there are budgeting and spending strategies for people to follow, which can lead to incremental savings across almost any income level. At the Consumer Bureau, we are learning about other ways to accomplish this objective as well. From a study we commissioned with the Urban Institute, we found that financial coaching helps clients improve their financial situations, both objectively and subjectively, and can increase financial well-being.
The study evaluated two different coaching programs – one working with very low-income consumers and one working with low-to-moderate-income consumers – so we could better understand how we can improve financial decision-making. On average, people with low incomes in New York City who were offered access to financial coaching increased savings by almost $1,200 and boosted their credit scores by 21 points over the course of two years, compared to similar people who did not have access to financial coaching. In Miami, those surveyed were low-to-moderate income consumers, who reduced their debt on average by more than $10,000 over the course of two years. They were more likely to pay bills on time. Not surprisingly, they reported an increased sense of confidence in their finances and reduced feelings of financial stress. So what this tells us is that coaching can work and helping people save can work.
But there is more we can do to help people save. Even if consumers are highly motivated to set aside money, the best of intentions can be derailed by not having a convenient, low-cost way to save. To address this concern, over the past several years we have launched a series of initiatives focused on empowering consumers with resources and tools to help increase their financial capability and to build savings. One of those initiatives is our emphasis on financial institutions offering low-risk checking or prepaid accounts that do not offer overdraft and thus do not require screening out people for that risk. The beneficial result can be to expand access to the financial system for those who were previously unbanked. Together with “Bank On” programs around the country, we are working to expand access so that consumers have more avenues to save more effectively.
Our initiatives also include “Your Money Your Goals,” which is a nationwide effort to provide support to social service providers, community volunteers, and others who work with people in low-income communities. We sought their feedback on how to put together this resource, which was immensely helpful. By giving them access to financial education tools, we are helping them expand their services by bolstering how their clients can better manage their financial lives.
Today we are releasing a new “Your Money, Your Goals” resource called Behind on Bills to make it easier for frontline staff and volunteers to share hands-on financial capability tools with the people they serve. Behind on Bills includes tools that can help people set financial goals, manage income and spending, plan for and prioritize their bills and expenses, and understand their rights when they are contacted by debt collectors. They can carry this resource along when they have offsite meetings, which will help them navigate the tools more quickly. We are still developing more learning and engagement opportunities, so if you have not yet signed up on ConsumerFinance.gov to receive “Your Money Your Goals” updates, we encourage you to do so.
The topic of saving is important enough, however, that we also have decided to devote some creative new efforts to exploring this key issue. Over the past three years, the Bureau has launched a series of initiatives as part of what we call “Project Catalyst,” which is designed to encourage consumer-friendly innovations in markets for consumer financial products and services. The goal of several of these initiatives is to help consumers build savings and increase their financial capability.
Today we are releasing the results of a research project focused on the effects of various approaches to encouraging consumers to save. As part of Project Catalyst, we teamed up with American Express to structure a pilot program focused on promoting savings. American Express agreed to test various methods of encouraging consumers to use a product feature that offered them the opportunity to set money aside in a non-interest bearing savings “wallet” that was separate from the funds they used for regular transactions. The pilot focused on low- and moderate-income prepaid card users who often do not have access to traditional savings accounts and who may face unique challenges in trying to build regular saving habits. A follow-up survey was conducted nine months after the project ended to find out how the participants did when their circumstances were measured over a longer period.
The project yielded several key findings. First, we found that offering a small incentive to prepaid card users to put some of their money into a savings wallet doubled uptake of the wallet. Specifically, the research indicated that when the company offered consumers $10 on their prepaid card if they put in $150 of their own money in the savings wallet by a certain date, uptake increased by over 100 percent. Another finding was that customers who were using the savings wallet tended to continue to use it, even when they were no longer being encouraged or incentivized. Indeed, the pilot ran for a period of three months and the usage of the savings wallet was tracked for nine additional months. The study found that the typical maximum balance in the savings wallet among those who chose to set aside funds peaked at $150 but even after nine months was still $100.
And, we found that participants who were offered an incentive to save reported significantly less use of expensive payday loans and paycheck advance products. Specifically, based on responses from the follow-up survey, participants offered an incentive were 20 percent less likely to use a payday loan in the past year. Those participants who were offered a combination of an incentive and various forms of encouragement to set aside funds were 41 percent less likely to use a payday loan in the past year, according to survey responses. Payday loans typically charge annualized interest rates of 300 to 500 percent, making them an expensive option to pay for an emergency. These findings are consistent with what prior research suggests and common sense tells us: savings can put consumers slightly ahead of the financial curve rather than just behind the curve. If consumers can put themselves in a better position to avoid using high-cost credit products, they may improve their financial situations by dipping into their savings as needed. In effect, they may be finding their way to self-funding their own emergency loans.
We are also engaged in research to identify and leverage key moments in the financial lives of consumers in order to increase their opportunities to save. One of those key moments is tax time. For several years now, we have been working with volunteer income tax assistance programs across the country and also with leading tax preparation firms from the private sector. We recognize that a tax refund is the single biggest check some consumers will receive all year. And so it presents a good opportunity for individuals to pay down high-cost debt or set aside even a small amount of savings to help reach their financial goals.
H&R Block, one of the nation’s largest tax preparation companies, has been testing the effectiveness of certain strategies to promote tax-time saving behavior among its customers and has agreed to share its anonymized findings with the Consumer Bureau. Some of these strategies include merely suggesting to consumers that they consider saving some or all of their refund or going further by providing them with informative materials to promote the same outcome. Again, we look forward to analyzing the results and sharing what we learn with the public.
While the American Express pilot project and our tax time initiatives are focused primarily on short-term savings, we are also enthusiastic about the new retirement savings account offered by the Department of Treasury, known as myRA. We are finding many different ways to highlight the myRA product, which is a simple, safe, and affordable way for many consumers to start saving for retirement. A myRA account can be opened with any amount of money, and it has no fees. It also allows access to the funds as needed, which means that it can provide a flexible way for consumers to gain the benefits of short-term savings as well as long-term savings. Many consumers currently have no access to an automatic retirement savings account through their workplace. Yet I am glad to say that this too is starting to change, as more states are enacting legislation to establish their own programs to provide such accounts in the workplace, which can be done in conjunction with safe and sound savings products like myRA.
We have much work ahead of us to address the immense task of helping to improve the financial lives of American consumers. But as James Baldwin once wrote: “The world is before you and you need not take it or leave it as it was when you came in. Not everything that is faced can be changed, but nothing can be changed until it is faced.” All of us share a mutual responsibility to achieve that, individually and collectively. As we work together in various ways to empower the financially vulnerable, we know that promoting and facilitating savings is a key strategy to improving outcomes for them. Like you, we are focused squarely on this strategy and we are seeking to innovate creatively toward that goal. We look forward to working with all of you as we continue our efforts to do so. Thank you.
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.