I would like to thank the Association of Military Banks and Andy Egeland for inviting me to be with you here today.
As the Director of the Consumer Financial Protection Bureau, I recognize the importance that community banks play in the lives of many consumers and in many neighborhoods and small towns across the United States. When I joined the Consumer Bureau, I came with a strong viewpoint that community banks were not among the causes of the financial crisis. I saw this when I was a county treasurer, then the State Treasurer of Ohio. You did not underwrite the bad loans that brought down the housing market. Instead, you worked to keep your own customers in sound and sustainable loans. You were sounding the alarm bells well before the sinking of the economy. And you were upholding sensible underwriting standards even though you may have been losing some of your customers and your market share to the financial predators who were not held to the same standards of responsible lending.
As our troops come home and we enter a new chapter for our military of less time in deployment and more time on the home front, local community banks are going to be playing an even more important role in the lives of servicemembers. You may help young people with their first car loans. You may help a young couple with a Permanent Change of Station move. Or maybe you will help a family secure a new credit card. You will provide important financial support to this unique and vital population of Americans.
At the Consumer Bureau, our Office of Servicemember Affairs has been instrumental as a sounding board both for our military consumers and for the community banks that make it a point to serve their needs. In the past year, Holly Petraeus and her staff have traveled to bases all over the country and to military installations overseas to listen to the financial concerns of our men and women in uniform. This direct contact with our troops has led to enforcement actions to uphold the law. It has led to policy decisions that take account of servicemembers and their needs. And it has, importantly, helped educate thousands of men and women in uniform about their rights under the federal consumer financial protection laws.
I am told that in many cases, your representatives have been present at these Servicemember Affairs roundtables and town halls to understand concerns raised by servicemembers, veterans, and their families. We appreciate that engagement, and we thank you for the time and effort you spend to make it work.
Since the Consumer Bureau first opened its doors in July 2011, we have been committed to make financial markets work better for consumers and honest businesses alike.
Before our creation, the authority to administer and enforce various federal consumer financial laws was strewn across seven federal agencies. For each of these seven agencies, consumer financial protection was only one of its many responsibilities. Consequently, no single agency was primarily focused on protecting the everyday users of financial products and services – and consumers paid the price when the financial crisis hit.
In addition, there was no federal agency supervising the nonbank firms that had grown so rapidly and were competing against your banks in many of your markets, most notably the mortgage market. Mortgage originators, mortgage servicers, private student lenders, payday lenders, and others were allowed to compete with banks without the same oversight and without playing by the same rules. Whatever you may think of government regulation, it is clearly a recipe for failure to oversee only part of a market, while leaving other parts largely untouched.
All of that changed with the Consumer Bureau. We are the only federal agency with the sole mission of protecting people in the consumer financial marketplace and with the mandate to regulate and supervise nonbank financial firms. And we recognize that a key element of our mission is to help ensure that the financial meltdown never repeats itself, with all the immense harm it caused for consumers that is still being felt today.
To assist us in our mission, we developed the Consumer Advisory Board, where most notably we have heard from Bill Nelson, a former Navy Commander and military family financial planner who served most recently as the Executive Director of USA Cares, a nonprofit that provides support for military families in financial need. We also established a Credit Union Advisory Council and a Community Bank Advisory Council. Because we generally do not supervise banks with $10 billion or less in assets, these boards and councils have given us much-needed insight into the perspective and operations of smaller lenders around the country. These are very important and valuable assets. They provide us with feedback and recommendations to inform policy development, research, rulemaking, market oversight, and consumer education.
Some of the concerns these groups have raised and discussed with us include auto lending, the CARD Act study, ACH transactions for payday lenders, and our implementation of the new mortgage rules required by the Dodd-Frank Act. The military banking community has been instrumental in providing us with key feedback on financial issues facing the industry and our servicemembers. On this note, I want to give special thanks to Don Giles of Armed Forces Bank and Larry Wilson of First Arkansas Bank and Trust for their input and contributions while serving as members of the Community Bank Advisory Council.
Broadly speaking, at the Consumer Bureau, we use all of our tools – our supervision, enforcement, and rulemaking authorities, along with our consumer education initiatives and consumer response function – as appropriate to address problems in the marketplace while continuing to study other issues that consumers are facing. We are dedicated to making markets work better for consumers and seeing that the relationship between providers and consumers is placed on a more sustainable basis for both.
We have already begun to see changes in the marketplace as a direct result of our efforts. Our supervision and enforcement work is driving cultural change. This is especially true for the nonbank institutions that are now having to place more emphasis on compliance and treating customers fairly, though we have seen various changes in traditional banks as well. Our consumer response function and public Consumer Complaint Database are also playing a tangible role in producing a shift toward more emphasis on excellent customer service. We have handled more than 400,000 complaints thus far about a range of companies, including larger banks and nonbank financial companies. Institutions are indicating that they want to minimize the number of complaints we receive about them, and some are stepping up the quality and effectiveness of their customer service as a result. We applaud these conscious efforts as positive developments that will help earn greater customer loyalty; exactly the kind of improvements we are looking for from the financial companies operating in these markets.
Institutions also know, or should know, that our supervision and enforcement teams are keeping a watchful eye on the consumer complaints we receive. As we have made clear, the patterns reflected in these complaints can prompt investigations or lead to prioritizing supervisory attention through the risk scoping of examinations. More firms are therefore building into their compliance management systems an increased attention to the broader trends revealed by their analysis of consumer complaints. We applaud this sensible response as well, which will tend to minimize litigation risk, reputational risk, and compliance risk.
Through all of these means, our work together is helping to bring new levels of accountability to the consumer financial marketplace.
One of the key messages we have heard from small businesses and community banks – and something that we have been very attuned to since we first opened our doors – is that a “one-size-fits-all” approach usually does not make sense when it comes to financial regulation. So let me give a few examples of how we have taken this input into account in our work.
First, we amended our remittance transfer rule to allow financial institutions to estimate certain fees and taxes imposed on transactions. We made this change in response to comments that the rule would not be practicable without this change, and we were persuaded by those comments. The final rule protects the overwhelming majority of consumers while making the process easier for community banks, credit unions, and other small providers to send remittance transfers.
Second, we also built in provisions to our new mortgage rules to accommodate small providers. As you know, because you had first-row seats on the unfolding drama, the most broken and dysfunctional market before the financial crisis was the mortgage market. Notably, it is also the largest consumer financial market, worth about $10 trillion. So, after much study, discussion, analysis, and public input, we produced new mortgage rules to try to fix what was broken and to prevent the widespread practices that so deeply harmed consumers from happening again. These rules represent some of our most significant work to date.
In writing these rules, we took into account how our rules would be implemented by not just the bigger players, but the smaller ones as well. We were committed to upholding and safeguarding the traditional model of relationship lending that served our community banks so well even during the worst financial crisis of our lifetimes. This model has been beneficial for many people across the country, especially in rural areas and in small towns like the one in Ohio where I was born and raised.
And so we wrote the Qualified Mortgage or QM rule (which we call the Ability-to-Repay rule) to reflect this understanding and create more room for smaller lenders such as community banks to engage in mortgage lending. Under the rule, any loans made by small lenders and held in portfolio are deemed “Qualified Mortgages” as long as the lender considered debt-to-income or residual income before making the loan and it meets the product feature and other requirements. This special provision for smaller creditors thus reflects a “two-tier” approach to regulation in appropriate circumstances.
We took a similar approach to the mortgage servicing rules we adopted to protect consumers from practices that have plagued the industry for some time. Once again, for these rules, we recognized that community banks and other smaller servicers typically operate according to a very different business model based on strong customer service. So we exempted from large chunks of these rules firms that service 5,000 or fewer mortgage loans, all of which are originated or owned by the servicer itself or its affiliates. This provision covers the vast majority of community banks and exempts them from, among other provisions, the periodic statement requirement, the general servicing policies and procedures, and most of the loss mitigation provisions.
The approach we have taken in formulating our mortgage rules reflects our recognition that the traditional lending model followed by community banks deserves respect and should be treated accordingly under our rules. You are focused carefully on protecting the people – most notably, the military – that you serve. This is just the kind of service-based model that we want to encourage in the consumer financial marketplace.
In the end, the Consumer Bureau is committed to a mission and a vision that works toward a financial marketplace where consumer protections and business opportunities work hand-in-hand. The military banking community is an important partner in this relationship and shares many of our same principles. One of the most important of these principles, which is especially near and dear to my heart, is to educate consumers when it comes to financial literacy.
We welcome and encourage your efforts to educate our troops about the importance of lifelong savings habits and of building good credit. Consumers need to put themselves in position to make sensible decisions that they can live with over the entire course of their lives. They need to recognize that the best form of consumer protection is self-protection: avoiding problems before they occur and preventing the damage from being done in the first place.
The vision we have before us, and that we are working toward every day, is a market where there is a strong foundation for a thriving banking system that can serve consumers well over the long run. We believe that such a marketplace is the right outcome for all involved, and will lead to more stable and sustainable financial conditions that strengthen the future of this country. I ask you to continue to work with us to achieve these mutual goals. 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.