Our focus today is an assessment of the financial reform law that Congress enacted in an effort to address the worst financial crisis in three-quarters of a century. Financial reform is necessary over time because our laws must keep pace with the many innovations in the financial marketplace. The pace of innovation can be rapid in this sector, where the products are intangible objects of human creativity, and the pace has accelerated dramatically in the computer age.
But financial reform, in particular, is a hard subject to legislate because the entrenched interests that spring up around each version of the status quo militate against new efforts to overhaul it. So it seems that our pattern in this country, over the past 150 years, has been to legislate only to meet the effects of a major financial crisis. The Comptroller of the Currency was created to help finance the Civil War; the Federal Reserve System was shaped to respond to the Bankers’ Panic of 1907; the FDIC addressed problems churned up by the Great Depression.
The same is true with the Dodd-Frank Wall Street Reform and Consumer Protection Act. This round of reform was motivated by the worst financial crisis this country has suffered since the Great Depression. Out of this round of reform, some new mechanisms have emerged. I have been invited here today because I serve in a new role as the first Director of the Consumer Financial Protection Bureau, a new agency created by Congress to protect consumers and help avoid any repeat of the conditions that led to the most recent crisis.
Everyone comes to understand from their own experiences how issues of consumer finance deeply affect their lives. All the ways we deal with money, and all the ways we may need to borrow money to create opportunities for ourselves – to go to school, to buy a car, to buy a home, to start a business – are fundamental to our chances in life. Student loans, auto loans, mortgages, credit cards, bank accounts, and other financial products can help people achieve their goals. But we have also seen that these products can pose risks that may undermine or even destroy people’s deepest aspirations.
At the Bureau, we are guided in all our work by our mission statement, which we formulated in our early days. We aim to be, and I quote, “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.” Our vision statement, which I also will quote, foresees “a consumer finance marketplace where customers can see prices and risks up front and where they can easily make product comparisons; in which no one can build a business model around unfair, deceptive, or abusive practices; and that works for American consumers, responsible providers, and the economy as a whole.”
When Congress created the new Consumer Bureau, it made two significant departures from the then-existing financial regulatory regime. First, it created an agency with a singular focus on protecting consumers in the marketplace for financial products and services. Second, Congress determined that the prior federal supervisory regime, which focused predominantly on chartered institutions such as banks, thrifts, and credit unions, was no longer sufficient to the needs of the modern financial marketplace. Nonbank companies had popped up in all sorts of consumer markets – and they were largely escaping federal government supervision. Whatever you may think of government regulation, it cannot work to oversee only part of the marketplace and leave other parts untouched. Some nonbank firms were overseen at the state level, but the resulting system was inconsistent and incomplete. Our aim, and our duty, is to change that.
Accordingly, Congress gave the Bureau regulatory, supervisory, and enforcement authorities to fix these parallel and conflicting worlds of the banks and the nonbanks. This means that we can write the rules. We enforce those rules and all federal consumer financial laws. And, we supervise entities – we conduct internal examinations, visit institutions, require reports from them, and open up their books and operations to scrutiny.
Fundamentally, our oversight not only over big banks but also over nonbank firms gives us a broader cross-market perspective on protecting consumers, who may not even know or care whether products and services they consume are being provided by a depository institution. Indeed, there are plenty of smart consumers out there who see no reason to know the difference.
So the Bureau now has the ability to oversee the activities of participants, whether chartered or not, in the markets for mortgage origination, mortgage servicing, private student loans, student loan servicing, payday lending, debt collection, credit reporting, and international money transfers. This sensible change represents a huge transformation.
Robert F. Kennedy once said, “The challenge of politics and public service is to discover what is interfering with justice and dignity for the individual here and now, and then to decide swiftly upon the appropriate remedies.” Over our brief lifespan, the Consumer Bureau has observed some obstacles that interfere with justice and dignity for consumers – obstacles that we refer to as “the four Ds.” They are problems we see much too often: deceptive marketing, debt traps, dead end markets, and discrimination. I will discuss each of these obstacles in turn.
Deceptive practices are undeniably a problem in many financial markets. If you are trying to sell something to people that they do not or should not want to buy, the temptation always exists to make it sound better than it is, or even entirely different from what it is. People cannot make sound financial choices if they are given false or misleading information.
We faced an epidemic of false or misleading information in the lead-up to the financial crisis. As a result, too many homebuyers ended up with complicated mortgage products that could not be made to work, products they often did not understand. These products were doomed to fail, and chances are that if consumers had known better, they would have avoided them.
So one of our signature projects at the Consumer Bureau has been our “Know Before You Owe” effort to make information about financial products more understandable and more accessible. In the field of student loans, for example, this takes the form of “Paying for College,” which is a set of tools available on our website (consumerfinance.gov) to help parents and students work their way through the issues involved in financing higher education. And in the mortgage market, we have created streamlined, consumer-friendly disclosures both at the loan application stage and at closing time, which will debut for residential real estate transactions late next summer.
But cleaning up deception in the marketplace also requires some tough action. So we have adopted a number of other regulations to protect consumers in the multi-trillion-dollar mortgage market. These rules ban the no-documentation loans that allowed many homes to be sold based on falsified or incomplete borrower information, and they ban misleading mortgages that are marketed and underwritten based on temporary teaser rates rather than the true cost of the loan.
We also have taken strong enforcement actions against a growing number of credit card companies that misled millions of consumers with deceptive sales pitches. And we have brought enforcement actions against other kinds of deceptive practices. We have gone after payday lenders and debt collectors. We have pursued companies that claimed to provide mortgage relief or settle debts but really just took people’s money and left them worse off. In addition to obtaining relief for victims, we have secured court orders, shut down fraudulent operations, frozen assets, and imposed penalties.
We feel a special intensity toward those who lie, cheat, and steal from consumers. We are making it clear that if they do so, they can expect to pay a heavy price.
A second major problem is the debt traps that cause people to get stuck in a downward spiral that can devastate their personal finances. Products marketed as short-term solutions to immediate needs can be risky for consumers. People in a tough situation with nowhere to turn may think their only option is to use such products. But if they get trapped in one of these loans, the fees alone can eat up all the money they can afford to repay, forcing them to keep on borrowing, over and over again.
Payday lending is one area we see as a potential debt trap for consumers. We issued a report earlier this year which found that payday loans put many consumers at risk of turning what is supposed to be a short-term, emergency loan into a long-term, expensive debt burden. Although we recognize that these loans can be helpful to people if they are used responsibly, we must make sure that consumers can get the credit they need without jeopardizing or undermining their finances. So we are now in the late stages of our considerations about how we can formulate new rules to bring much-needed reforms to this market.
We are also the first federal agency to supervise payday lenders and make sure they comply with federal consumer financial law. Last November, we took our first enforcement action against a payday lender, Cash America, one of the largest small-dollar lenders in the country. This summer, we took action against ACE Cash Express, another large payday lender, for pushing payday borrowers into a cycle of debt. And, just last month, we sued an online payday lender, the Hydra Group, which was running an illegal cash-grab scam.
The third D that we are addressing refers to markets that create frustrating and damaging “dead ends” for consumers. These problems occur in markets where consumers cannot exert their influence by “voting with their feet” – markets like debt collection, loan servicing, and credit reporting. In these markets, consumers typically cannot choose the company they work with, and when problems arise they often cannot get answers, leaving them frustrated with nowhere to turn. When we see such problems, it is our job to make sure that consumers are treated fairly.
The best estimates are that over 30 million Americans – one in seven consumers – came out of the financial crisis with one or more debts in collection, for amounts averaging $1,500 per person. Collection of consumer debts is appropriate and helps maintain access to credit. But some debt collection practices have long been a source of frustration for many consumers, generating a heavy volume of complaints at all levels of government. We are supervising and enforcing the law against debt collectors. We have already signaled that we will be writing a comprehensive set of new rules to govern this market. These rules will update federal law, which has not kept up with changes in technology or market practices, and has never before been implemented by regulations to clarify collectors’ obligations and the rights of consumers.
We are also concerned about how sloppy practices by loan servicers can harm consumers. We worked with the banking agencies and Attorneys General in 49 states plus the District of Columbia to order Ocwen, the nation’s largest nonbank mortgage servicer, to refund $125 million to people who lost their homes and provide $2 billion in relief to underwater homeowners who are still in danger of losing their homes. At the beginning of the year, we put in place new mortgage servicing rules designed to prevent servicers from giving people the runaround. And we are giving teeth to these rules by backing them up with our supervision and enforcement authorities. Just a few weeks ago, we took action against Flagstar Bank for violating the new mortgage servicing rules by illegally blocking borrowers’ attempts to save their homes.
In the credit reporting industry, we have used our authority to improve practices that will better ensure the accuracy of information contained in people’s credit reports and their ability to get errors corrected. We also are pushing hard for the Open Credit Score Initiative, which is providing tens of millions of Americans with free credit scores and raising their awareness of how they are affected by a credit reporting system that judges their creditworthiness. This work is ongoing and quite important because these markets affect people’s lives, often in profound ways, whether they realize it or not. We are committed to making sure that consumers are treated fairly in these markets where they risk encountering dead ends because they are unable to exercise the ultimate control of taking their business elsewhere.
The fourth D we are taking on, perhaps the most damaging of them all, is discrimination. The greatest challenges some consumers face are rooted in unlawful treatment based on prohibited characteristics like race or national origin. So we are seeking economic justice and the right to equal treatment in the financial marketplace based on individual merit and responsibility.
Part of this work centers on greater transparency. At the Consumer Bureau, we agree with the first great consumer advocate, Justice Louis Brandeis, who said that “sunlight is said to be the best of disinfectants; electric light the most efficient policeman.” In the same vein, public disclosure of information can be a powerful tool to address discrimination in lending. And so we are taking steps to expand transparency about people’s access to credit in the mortgage market by requiring more information to be disclosed to the public under federal law. This information will help the public know more about how lenders serve their communities, and will allow easier identification of lending patterns that may be discriminatory. And by making this information more readily accessible to the public through new technology, we enable others to help us figure out what the information shows and how it should affect public policy.
We are also keeping a watchful eye on the auto lending market. Last month, at a field hearing in Indianapolis, we discussed the work we are doing to oversee auto lending practices at the larger banks and announced our intention to commence oversight of the larger nonbank auto finance companies as well. We have focused on discrimination in indirect auto lending. Examination and enforcement teams have reached resolutions to address practices that resulted in discrimination at several supervised institutions, which collectively will pay about $136 million to provide redress for up to 425,000 minority consumers.
The upshot is that we want everyone to know that we fully intend to be the “cop on the beat” that was envisioned when the financial reform law was enacted. In the years ahead, we plan to use all of our various tools – our supervision, enforcement, and rulemaking authorities, along with our consumer education initiatives – as appropriate to address issues in the consumer financial marketplace. 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 foundation.
Another aspect of our work is to figure out how we can incentivize actions that go beyond the bare minimum of not violating the law and lead the market forward toward more responsible conduct. We have already begun to see deeper changes in the marketplace as a direct result of our efforts.
Our consumer response function and public complaint database, for example, are playing a tangible role in producing a shift toward more emphasis on excellent customer service. We have handled more than 460,000 complaints thus far. Institutions are indicating that they want to minimize the number of complaints we receive about them and improve their handling of complaints, all of which has a bearing on the quality of customer service. We applaud these conscious efforts as sensible and beneficial developments that will also help earn greater customer loyalty; they are exactly what we are looking for from the financial companies that we oversee.
Our supervision and enforcement work is also driving cultural change that places more emphasis on legal compliance and treating customers fairly.
This change is most notable for the nonbank institutions, but can be seen in many banks as well. Institutions have learned that our supervision and enforcement teams are not interested simply in assuring that all the right boxes have been checked, but are asking more fundamental questions about whether consumers are being treated in a fair and honest manner. We are looking hard at third-party service providers as well as at the providers of consumer financial products themselves. We keep a watchful eye on the consumer complaints we receive and have made clear that the patterns reflected in those complaints can prompt investigations or be the basis for risk scoping that prioritizes supervisory attention. Many financial institutions are responding by building into their compliance management systems an increased attention to the fairness of their practices, the honesty and clarity of their marketing materials, and the actions of their service providers.
In all of our work, we are striving to strike the right balance in writing rules, conducting examinations, and handling investigations. Our efforts reflect concern about access to credit and do not reflect a one-sided perspective to maximize consumer protection or industry deterrence at all costs. There is such a thing as doing too little, and there is such a thing as doing too much. We are aiming instead at doing justice. On the facts of each matter, we quite simply are focused on getting things right, as best we can ascertain it.
At the Consumer Bureau, we also recognize that consumers have to climb the economic ladder on their own – we cannot step into their shoes and do that for them. So not only are we working to patrol the financial marketplace, but we want to put people in position to make good choices for themselves, choices that enhance their lives and empower them to succeed.
We are taking the initiative in consumer education, consumer engagement, and consumer response so that people will know better how to climb the economic ladder, even as we strive to hold it steady for them as they go. People need to be able to avoid problems in the first place and they need to know what to do when they do experience a problem.
To this end, we are busy developing a number of good tools and resources to help. In addition to raising their personal concerns through our consumer complaint system, people can find over a thousand answers to frequently asked questions about consumer finance, through a feature we call “Ask CFPB.” They can view our Spanish language website, learn how to prevent elder financial exploitation, find protections for servicemembers, calculate how to pay for college and estimate their student loan burden, and much more. All of these tools and resources are available on our website at consumerfinance.gov.
I know many of you share our long-term goal of making broad-based improvements in consumer finance markets, a goal to which we have dedicated ourselves and that drives our efforts every day. We want people to have the chance to take part in a financial marketplace where consumer protections and business opportunities work in tandem; where financial firms lead through responsible business practices; and where educated consumers can make well-informed decisions. We believe that is the right outcome for all involved, and that it will lead to more stable and sustainable financial conditions that strengthen the future of this country. 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.