Remarks as Prepared for Delivery
Tuesday, March 1, 2011
Thank you, Gene, for that kind introduction, and thank you, Daniel and the members of CUNA, for inviting me to join you today. I have been a proud member of a credit union for years. Gene is the CEO of my credit union and he is an example of how financial services institutions can provide real value for their customers and their communities. He takes time from his busy schedule to teach money management classes to employees and students. He also has taken a lot of time to teach me about the internal workings of various credit products and business practices—both good and bad. For that, I am very grateful.
I am here today because I believe I share a goal with you: I am committed to building a consumer credit market that works—a market that works for American families, works for the financial services industry, and works for our economy.
For 30 years, as a law professor and an empirical researcher, I studied the pressures facing middle-class families. These are families who worked hard, played by the rules, and then found themselves squeezed by an economic system that too often seemed tilted against them. I tried to talk with anyone who would listen about what was happening to middle-class families. Research showed that millions of families had been stretched to the breaking point by the one-two punch of rising core expenses—such as housing and health care—and flat wages. In particular, I studied families who turned to debt to pay for an education, to cover the costs of medical bills, to cover a job loss, or just to make it to the end of the month. And I studied the fine print and legalese that too often hid costs in consumer credit agreements and that confused customers about who put out cheaper products.
I have spoken out for hard-working, middle-class families—and I will keep doing so. And that is what brings me to America’s credit unions.
The foundation of the American credit union is deeply rooted in the history of hard-working, middle-class families. Edward Filene is considered one of the fathers of the American credit union. The son of two working-class German immigrants, Filene grew up in Massachusetts learning the meaning of hard work. He turned down his acceptance to Harvard to help bring money home for his family. His entrepreneurial spirit led him to great commercial success with the creation of Filene’s Department Stores in the early 1900s, a storied chain that lives on today as Filene’s Basement.
With his success, Filene sought to help others in his community with shared upbringings. Filene was inspired by employee cooperatives formed in India and Europe, and he worked to create a similar model to help ordinary American workers obtain more affordable loans and have a safe place to store their savings. Filene coined the term “credit union” to capture the importance of creating a financial bond within a community of Americans.
From these humble beginnings, the movement that promoted thrift and provided access to credit for the working class spread across America. By 1935, 39 states had credit union laws and more than 3,300 credit unions were in operation. That was right around when CUNA was formed as a national association for credit unions. That was also the approximate time when a motto for credit unions gained currency: “not for profit, not for charity, but for service.”
We see the valuable role credit unions play in our economy every day. A few years ago, I learned first-hand the real impact of a credit union when my much-loved, newly married niece got into financial trouble. She called in tears, frightened and deeply embarrassed by having fallen into a financial trap. After I heard what was going on, I said, “You have a credit union at work. Go see them. They will help you.” And she and her husband did just that. I won’t do the details here, but I’ll put it this way: That credit union will forever be an important and trusted member of our family.
Credit unions continue to provide high-quality services, and they continue to operate more to serve their members than to treat them as sources of revenue. But the truth is that in the past two decades, the larger financial landscape has shifted. The world that existed when credit unions flourished has changed radically. For decades, the prices of financial services—credit cards, checking accounts, mortgages, and signature loans—were pretty easy to see. Both borrowers and lenders generally understood the basic terms of the deal.
But those days are behind us. Consumers see complicated deals with a dozen different moving parts, and they wonder what something really costs. They see pages of fine print and they wonder what’s hiding amid all those legal terms and long paragraphs. Too often, customers have no realistic chance of reading their credit agreements and figuring out the real terms of the deal.
As that landscape shifted, a different form of pricing became all too prevalent. Use a low, low advertised price on the front end, and plan to make it up with fees and charges and penalties and re-pricing on the back end. This sort of front-end back-end pricing is bad for families. If the cost isn’t clear, it is a lot harder to answer the basic question: Can I really afford this? And it’s even harder to figure out what the best deal really is.
But it is also bad for competition—and that means it is bad for credit unions. My niece who got in trouble hadn’t borrowed money from her credit union. In fact, she didn’t have a checking account or any other kind of relationship with her credit union. She had seen their brochures, but she had taken her business elsewhere because she thought other lenders were cheaper. Why not? The advertising said, “Low cost!” and “Special deal!” Some of the companies said they were making loans for free. It was only later on that she discovered the real costs of those deals. Her credit union advertised the full price up front, and, to her, that made it seem more expensive, so she stayed away. And that’s a real problem in the market. When only some of those in a market make the costs and the risks clear up front, then it is almost impossible for good competitors to beat out bad ones. When we repair the market for consumers, we also repair the market for lenders who are committed to serving those consumers.
This is the central mission of the new consumer agency: making one of your business practices—clarity up front—the norm for all financial service providers. When that’s the case, the effort you invest in creating a valued partnership with your members becomes a real competitive advantage.
I recognize that some of the problems facing credit unions and community banks and others who want to serve their customers—who want to offer innovative and beneficial products in a transparent way—have been exacerbated by government regulation. I get it. I know that some of the complicated papers that consumers must sign, at a real estate closing for example, are required by government regulations. I know that complicated, duplicative paperwork forces small financial institutions to reallocate precious resources away from serving customers and toward filling out more forms. I’ve heard from many representatives of credit unions and community banks about the high cost of regulatory compliance. I understand the frequent difficulty of determining what is or is not required by a particular regulation. I appreciate the widespread anxiety and frustration over the future of credit unions and other small financial institutions.
The new consumer agency has an opportunity to cut back on regulatory costs. Our first initiative aims in exactly that direction: consolidating the information in the TILA and RESPA forms in mortgage origination and creating a smaller, cheaper form that consumers can understand—and that can you can fill out more quickly and easily. More broadly, we’re committed to ensuring that all providers—including credit unions, large banks, mortgage brokers, check cashers, and payday lenders—must follow the rules for offering consumer financial products, and that the tens of thousands of non-bank lenders are subjected to meaningful federal oversight.
These are our initiatives, and we’re going to work hard to make sure we follow through because we believe it is good for families. And what’s good for families, when done in the right way, is good for credit unions, small banks, and others who want to serve those families. We know that over time, even good intentions can go awry, so we are trying to build a structure and an approach that keeps the new consumer agency in partnership with those who serve consumers.
For middle-class families who have been squeezed for years, who are unable to cover the expense of serious medical problems or other unforeseen occurrences because they have spent all their income and all their savings, who have taken on debt to pay for college, their home, and other needs, the latest economic crisis has been one more blow in an increasingly dangerous economic world.
The new consumer bureau is here to serve those families, to make the financial marketplace less dangerous by making it more transparent, fairer, and more competitive. We understand that, in the long-run, families will not be better off if only a handful of big banks are left standing. Let me say it clearly: This country needs a robust, diversified consumer financial services industry. To serve American families, the new consumer bureau needs to work with America’s credit unions, community banks, and other small financial providers to ensure that a range of services and options remains available to the American people.
Tomorrow, the Financial Institutions Subcommittee of the House Financial Services Committee will hold a hearing on the effect of the Dodd-Frank Act on small financial institutions. Bill Cheney will testify to represent the views of CUNA’s members. I look forward to reading testimony from Bill and other witnesses at tomorrow’s hearing, and I look forward even more to discussing these issues when I testify before the same subcommittee on March 16.
In particular, I look forward to testifying about what I have discussed today – how the consumer bureau’s focus on transparency can make the markets work better for consumers and small providers alike. And I look forward to discussing how we have worked hard to make outreach to small institutions—credit unions and community banks—part of the new consumer bureau’s DNA.
Since I started my current job in September, I have spoken directly with small providers from nearly 40 states. These conversations have informed our thinking about our stand-up efforts and the functioning of the consumer finance markets. We intend to maintain an ongoing conversation—both in Washington and outside the Beltway – with credit unions and community bankers to be certain that you are included in our initiatives from the beginning.
And we also encourage you to send your thoughts and suggestions to our team dedicated to credit unions. Elizabeth Vale serves as our Assistant Director for Community Banks and Credit Unions. Her office is open to you and I encourage you to contact her directly.
For this consumer bureau to succeed, credit unions must remain a major presence in the economy. The tens of millions of Americans who are currently members of credit unions must continue to have the option of receiving their financial services from organizations that are “not for profit, not for charity, but for service.” The inspiration and hallmarks of the credit union movement—a desire for fair access to legitimate credit, an alternative to abusive lenders, and high-quality service—must remain in our hearts and in our minds. Credit unions have set the goals, and we want to be partners in making those goals a reality.