Director of the Consumer Financial Protection Bureau
March 22, 2013
Thank you so much for inviting me to be here with you today. Because of what you do every day – fighting to improve the lives of the nation’s most vulnerable and underserved consumers – you are my personal heroes and you set an important example for everyone at the Consumer Financial Protection Bureau.
Fair and equal access to credit is ingrained in both the Consumer Bureau’s mission and your own. All of us in this room know and have seen the price people pay, often unwittingly, when they are victims of discriminatory practices. When someone is unlawfully denied a loan or overcharged for a loan to go to school, buy a home, or start a small business, our nation’s commitment to opportunity shrinks and the inequality gap yawns a little wider.
The fact of the matter is that the economic marketplace can be quite hostile to those in poverty or those whom society marginalizes for any reason. In today’s economy, almost two-thirds of our households of color are “liquid asset poor,” meaning they have little or no savings to fall back on if they have to face a financial emergency.
While nearly all Americans saw drops in their household wealth during the financial crisis, African-Americans and Hispanics experienced the steepest drops. When this inequity is compounded by unequal access to credit, including small business lending, it is no wonder that communities of color are struggling to rebound in the wake of the financial crisis.
This nation was founded on the principle that if you work hard and conduct yourself responsibly, you can get ahead in life. But when you cannot access credit, it can be nearly impossible to move forward – you cannot find ways to qualify for the basic means of self-improvement. At the National Community Reinvestment Coalition, we know you work day in and day out to propel working families forward despite these obstacles.
Likewise, at the Consumer Bureau, we are fierce advocates for a consumer financial marketplace that allows people to pursue a path to opportunity. We are working to ensure that path is not disrupted by deceptive marketing or products that land consumers in debt traps. We have a new role to play to help consumers avoid dead ends or discrimination. We want to do what we can to enable Americans to live out that fundamental principle of working hard and getting ahead.
Leading up to the financial crisis, the consumer financial marketplace was characterized by many irresponsible lending practices. Too many borrowers were set up to fail with mortgages they could not afford to pay back. The ensuing collapse of the housing market had broad consequences, devastating businesses and causing jobs to disappear across every economic sector and in communities all across the country. This country has a tremendous need to restore confidence and reliability to the mortgage market, which as you know is the single largest market for consumer finance.
So Congress directed us to take action, and we have delivered – on time and under budget, as they might say of the occasional construction project. In January, we released our Ability-to-Repay rule, also known as the Qualified Mortgage rule. The concept of this common-sense regulation is simple enough: lenders must take care to make sure that borrowers will be able to pay back their loans.
Put differently, consumers should only be offered mortgages they can actually afford. It is a strange world indeed in which such a rule would be necessary, but we all know from harsh lessons learned that the mortgage market prior to the financial crisis failed this minimal measure of basic responsible lending.
Gone are the no-doc loans, gone are the so-called “Ninja” loans, gone are loans deceptively underwritten only over the introductory teaser rate, and much more. For the most part, those loans are not being made in the current market because the easy money from securitization has dried up. Some might say that is the genius of the market at work, and more regulation is not necessary.
But the kind of extreme disequilibrium that resulted from inadequate oversight in a market that was only partially regulated is nothing to brag about, and it hurt millions of innocent people caught up in a disaster they could not understand or control, which should have been avoided. So we want to be certain that when the mortgage market recovers, as it surely will, we will never see these shoddy practices ever again.
Another task that Congress placed before us was to write new mortgage servicing rules to protect consumers from deficient practices that have plagued the industry for some time. These practices have resulted in profound consumer harm and brought us countless foreclosures that could have been avoided. Although Congress only required the Consumer Bureau to write certain specified rules in this area, we undertook to do more because many of us have seen first-hand the kind of misery that has been visited upon our communities. We saw wrong, and we wanted to right it, as much as we could do so.
When we came out with our original proposal, however, you put your hands on our shoulders and urged us to consider further refinements to our approach, in particular to address the harms of dual tracking. And we paid attention to your input by taking further action to restrict dual tracking and improve the rules in other ways. Importantly, the new servicing rules will cover both banks and non-banks for the first time ever. And they are backed by the strong powers Congress gave us to engage in supervision and enforcement.
We also wrote new rules addressing loan originator compensation and high-cost loans. Our changes to the HOEPA rules, in particular, included expanding the legal protections for high-cost loans to purchase-money loans and home equity lines of credit. On appraisals and other valuations, we provided greater transparency by making it much easier for a consumer to understand the value of the home being purchased. Copies of this important information must be provided free of charge to the consumer before closing.
With all of these new rules, the Bureau is intent upon helping to bring more clarity and stability to the mortgage market. Consumers need strong protections to regain confidence and trust in that market. And lenders need to move beyond the uncertainty and fear that has led to a severe tightening of credit. The pendulum had swung too far. We believe our mortgage rules will help to improve access to credit for all borrowers while creating a more secure market.
In our quest to fulfill our mission of fair and transparent markets, we are working to expand access to credit not only in the mortgage market, but across other consumer financial markets as well. When I spoke to you last year, I announced that the Consumer Bureau was giving fair notice on fair lending, and that we would continue to apply the disparate impact doctrine.
We cannot afford to tolerate practices, intentional or not, that unlawfully price out or exclude whole segments of the population from the credit markets. Yesterday, we took another step to hold lenders accountable for potentially discriminatory actions that can cause considerable consumer harm. Here our focus is on potentially discriminatory conduct in the auto lending market. We released a bulletin advising lenders that offer indirect financing of auto loans that they can be held responsible for complying with fair lending laws.
When consumers set out to buy a car, they are often unaware of what their financing options are. They may think that everyone like them is offered the same interest rate and do not realize that the rates may be marked up. Indeed, markup occurs in a substantial number of auto finance transactions. This markup is often applied after the lender has already quoted the dealer an interest rate that considers factors like creditworthiness and collateral. Our experience indicates that there is a significant risk that this discretion may result in pricing disparities on the basis of race, national origin, and potentially other prohibited bases.
Consumers can easily comparison shop for the price of the car, but less so for the financing. If an interest rate is quoted, consumers often cannot easily ascertain whether that quote accurately depicts their position in the loan market. Dealers play an essential role for car buyers nationwide. They provide value, and they deserve fair compensation for their work. But lenders are responsible for ensuring that the compensation system they are using does not result in unlawful discrimination.
When lenders have policies that provide incentives to charge higher interest rates, it can lead to unequal, discriminatory access to credit. We saw similar issues in the mortgage market with yield spread premiums. Discretionary markup policies create a significant risk of pricing disparities, and research indicates that such policies may result in African-American and Hispanic borrowers paying more for auto loans than other customers. We are also concerned that similar risks may exist for pricing disparities based on other prohibited bases under federal fair lending laws.
Such discrimination may not be consciously intended, but for consumers who are disadvantaged by these policies, the result is the same. Every consumer, regardless of race, gender, national origin, or other characteristics protected by federal law, should have equal access to credit and loan pricing that is free from unlawful discrimination. People deserve the chance to finance a car purchase at a fair price.
Dr. Martin Luther King, Jr. once said, “The time is always right to do what is right.” At the Consumer Bureau, we are working to promote economic justice, and we seek to uphold the fundamental dignity and self-respect of every consumer.
We have come a long way in less than two years. John, I have heard you say that data drives the movement of social justice – and we believe that too. We are a data-driven agency and we try to take our bearings from the facts as we can best make them out – from our sweeping new mortgage rules to our efforts to promote fair lending. By this approach, we are making real progress to improve the financial marketplace and smooth the path to opportunity for consumers.
All of us want to put consumers in a position where they can make good choices for themselves, choices that enhance their lives and empower them to succeed. You are our strong allies in these efforts. We are grateful that we have colleagues like you who are so deeply dedicated to our shared mission. Keep your hand on our shoulder, and push us to move ahead. Thank you.
The Consumer Financial Protection Bureau 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 consumerfinance.gov.