Tuesday, Feb. 15, 2011, 3:30 pm
Thank you, Jim, for that kind introduction.
Seventy-five years ago, when an economics professor teamed up with an engineer and several consumer advocates to establish Consumers Union, they probably did not imagine what the world would look like in 2011. When CU published the first of its Reports in 1936, it evaluated milk, soap, stockings – and credit unions. Some of the products have changed since then, but the vision for consumer protection has remained the same: when consumers can make apples-to-apples comparisons among products, when costs and risks are clear, competition is stronger and market forces can drive down prices and spur innovations that are valuable to customers.
For three-quarters of a century, CU has worked to make the financial marketplace function better by providing clear, objective evaluations of products. From its early assessments of credit unions, to its current scrutiny of credit cards, to its ongoing efforts to improve financial literacy, CU has worked hard to empower consumers.
It is a great pleasure to be here to celebrate this anniversary and to thank you for all you have done to make markets work for consumers, for lenders that want to offer value to their customers, and for the whole economy.
But I’m here to thank you for something else as well: Your participation in making the new Consumer Financial Protection Bureau (CFPB) a reality.
You don’t need me to remind you how improbable a victory this new consumer bureau represents. Barney Frank said that, at the beginning, the idea wouldn’t even qualify as a pipe dream. Aggressive, no-holds-barred lobbying from some big Wall Street players combined with intense campaigns launched by special interest groups with massive budgets for one purpose: to stop the creation of the consumer bureau. But we pushed back. CU was part of a coalition of more than 200 organizations that came together in the wake of a huge financial crisis and that pushed hard for new safeguards, particularly the establishment of the CFPB.
CU helped its members across the country join informal groups – bloggers, concerned citizens who wrote letters to the editor, people who spoke up at town hall meetings and signed petitions. In the end, American families won. They got the financial watchdog they need. And I’ll tell you who else won: responsible financial services providers who are willing to compete fairly for consumers’ business. These are the companies that want to make prices clear and risks clear because they believe they can put forward the best products and services and they want people to know that. Getting the consumer agency was an important victory for consumers and for anyone who believes that well-informed consumers make markets work.
David beat Goliath, but make no mistake: Goliath is not down for the count. Families can and should be proud of their new watchdog, but they would be wrong if they take its future security and independence for granted.
Many of those who have opposed the CFPB are still trying to chip away at its independence by subjecting it entirely to Congressional appropriations without any dedicated funding from the Federal Reserve. Politicizing the funding of bank supervision would be a dangerous precedent, and it would deprive the CFPB of the predictable funding it will need to examine large and powerful banks consistently and to provide a level playing field with their nonbank competitors. While the banking regulators charged with preserving the safety and soundness of financial institutions and ensuring consumer protection compliance by smaller banks would continue to receive independent funding, the agency in the financial regulatory system with lead responsibility for protecting consumers would face a different set of rules – rules that threaten its independence.
Today, we live in a time of austerity, strained budgets, and deep deficits in part because of a financial crisis that started one lousy mortgage at a time. Under the caps on dedicated funding that currently govern the CFPB, it would take nearly 20 years to invest as much money in protecting consumers and consumer financial markets as it cost the government to resolve IndyMac – a single institution that failed in the financial crisis of 2008. Reducing the CFPB’s funding is asking the American people to believe that a pound of cure is worth an ounce of prevention. Increasing the risk of financial crisis won’t reduce our deficits.
So where do we go from here? How can we – the new consumer bureau and CU and all the other organizations and institutions and individuals who support the CFPB’s mission – continue working side-by-side for American families?
Over the past six months, the consumer bureau has been hard at work setting initial priorities, building infrastructure, and engaging with the American public and various stakeholders. We have learned more about the consumer financial markets and gotten thoughtful advice about our stand-up effort. As Jim Guest suggested to me the first week I was on the job, we’ve gotten outside Washington and heard from people around the country – and we’re still doing that. Two weeks ago, we launched our first website at ConsumerFinance.gov, which invites public participation and comment. In the months ahead, the CFPB will provide a platform for financial education, helping advance more ways to make consumers stronger. The bureau will be charged with enforcing the rules of the road in the consumer financial marketplace. And it will have special offices dedicated to protecting servicemembers and older Americans from abuse.
The CFPB will also use a variety of tools to push for a market that works both for consumers and for responsible credit unions, banks, and other kinds of financial services providers.
For the new consumer bureau to succeed in that last effort, we need to start by recognizing some of the unique features of the modern financial marketplace. That’s what I want to explore today.
In the markets for physical products, CU has been on the forefront of empowering consumers. For example, Consumer Reports provides reviews of a wide range of products from cars, cameras, and computers, to cribs and coffeemakers. These products come in all sorts of shapes and sizes, but thanks to CU and other groups that test and report on products, quality and price can pretty much be compared straight up. Through the years, as a consumer, I have made a lot of good decisions about what I bought, guided by a clear and objective analysis of the products.
But today, credit markets work differently. With credit, the product is, in an important sense, the contract itself. And lengthy credit agreements written in overly legalistic language too often make it difficult for families to compare costs, benefits, and risks. Certain lenders have taken advantage of this lack of transparency. Too many profit models have been built around keeping customers confused or uncertain, pretending to sell at one price on the front end and knowing that the real profits will be made on fees, penalties and re-pricing on the back end – when it is too late. Too many profit models have been built around steering customers into products they can’t understand and may not be able to afford. All this was a way to boost profits by avoiding head-to-head competition on features that customers could easily understand.
CU is leading the way in addressing this issue. You have supplemented the traditional product comparison approach by calling for changes with a clear and important purpose: get rid of dense legal jargon in loan contracts and replace it with simple and straightforward language. You know how strongly I stand behind that goal, and the new consumer bureau will do everything it can to advance it.
CU’s call for comprehensible contracts is an important start, but the challenge for consumers in navigating credit markets runs even deeper. When a retailer sells a car, a camera, or the like, the price is the same regardless of who buys it. If you can get to the store or find it online, then you can get the product at the offered price, regardless of who you are. And for most products, search engines can enable you to find the best price for any given make and model – a price that is available to all comers. In other words, the market works in an open and transparent way.
But when it comes to credit, the price for you may not be the price for me for products that otherwise seem very similar. The reasons for these differences are often known only to the lender. And the story gets even more complicated because the price for any one of us – or all of us – can change over time. When you buy a toaster, the price – and the toaster – stays the same after purchase. But in many credit contracts, the lender can change the credit terms at least prospectively just by sending out a notice in the mail, a notice that is packed with more fine print and legalese.
The fine print and the ability to change products and prices in subtle and not-so-subtle ways creates layers of complexity that stand in the way of direct, apples-to-apples comparisons among credit products. The kind of comparisons that drive competition around lower prices and better features for cameras and toasters is too often missing for credit cards and checking accounts. How does a consumer compare two credit products based on an advertisement when the true cost won’t be clear until months later? And how does a consumer draw comparisons when there are so many different components of cost in each product? How does a consumer keep track of the continual evolution of the products being offered across the entire market by different providers? And, finally, how does a consumer draw comparisons among products without knowing the nature or likelihood of changes that are likely to occur after the deal is struck?
The result of all this uncertainty is that it can be very difficult for Consumer Reports or anyone else to rate credit products in a way that is reliable over the long term. The information CU and others collect and publish about credit is a source of decision-making information for consumers. These ratings and product summaries can help the consumer understand what the best deals and companies are, and the range of deals that are available in the marketplace. But to make a good decision on credit, an individual consumer needs more to comparison shop effectively.
That’s where the new consumer bureau comes in.
We believe in comparison shopping. We want the price and the risks to be clearer, so that consumers can see what is being offered and decide the products that are best for them. We want to see innovations, lots of innovations. But innovations need to be around real product differences that consumers can see and understand – not around misleading advertising and new tricks buried in the fine print. Our goal is simple: We want the credit market to work better for consumers, for responsible providers, and for the whole economy.
Congress has already begun to change credit markets. The new CARD Act changed certain elements of credit card pricing, and the mortgage reform provisions of Dodd-Frank will alter some of the ways mortgages are sold. It is too soon to tell how much these new rules will push the markets in the right direction, but the consumer bureau is already beginning the work of trying to assess how the market has reacted to changes in the credit card landscape and to watch out for consumers.
One week from today, the consumer bureau will host a conference on the Credit CARD Act at the Treasury building in Washington. Congress indentified a number of unfair practices in the credit card industry and outlawed them in the CARD Act, and it will be the one-year anniversary of the implementation of most of the provisions that law. Our plan is to find out how much has changed in that year. To do that, we are going to take a hard look at the data – interest rates, re-pricing and the like. We will bring together academics, industry leaders, consumer advocates, and voices from within government to look at the data from multiple directions, and to analyze how the industry has reacted and how consumers are responding. The idea is to establish a fact base upon which the CFPB can improve our understanding of the impact of the CARD Act and to help us understand how we can make credit markets work better.
We will be working hard for consumers across the country, but we cannot and will not go it alone. We can do our part to help level the playing field, to cut out the tricks and traps, to make it possible to master a credit card contract or a mortgage closing without needing an army of lawyers. In tandem, CU can do what it has always done – help consumers make informed decisions. And as the credit products get clearer, the impact of what CU does will get stronger. When prices and risks are clearer, CU can help consumers make comparisons among products and make the financial decisions that are best for them.
CU helped make the new consumer bureau a reality, and for that I offer my deepest thanks. Now we can play complementary roles in realizing our shared goals of a marketplace where consumers have the information to make the decisions that are best for them. CU’s goals are clear in its mission statement: “a fair, just, and safe marketplace for all consumers” and to “empower consumers to protect themselves.” Together, we can help inform and empower consumers so that credit markets work for them.
Happy birthday, Consumers Union. Congratulations on 75 years of support for American consumers. You have a proud history of past service, and great new opportunities in the years ahead.