Remarks of Deputy Director Steve Antonakes at the GMU Attorneys General Education Program
Acting Deputy Director of the Consumer Financial Protection Bureau
George Mason University School of Law
Attorneys General Education Program
Good afternoon. It is a pleasure to have the opportunity to join you today.
Over five years removed from the onset of the financial crisis, we stand at a unique moment relative to the future of our nation’s system of consumer finance. I know there remains keen interest, curiosity, and even skepticism relative to the Consumer Financial Protection Bureau in terms of our areas of focus and how we will regulate these markets. My hope is that my remarks today will provide greater insight into how we are continuing to approach our varied responsibilities.
By way of background, I am a career bank regulator having started in this line of work nearly 23 years ago as an entry-level bank examiner. I later served for seven years as the Massachusetts Commissioner of Banks. Under this purview, I had a mandate to ensure compliance with safety and soundness, consumer protection, CRA, and fair lending. Moreover, I have supervised banks, credit unions, and non-banks throughout my career.
While the Bureau does not have a safety and soundness mandate, we very much care about the financial health of banks and non-banks. As a veteran of two banking crises, I can tell you unequivocally that, in my view, consumer protection is not in conflict with safety and soundness. Consumers benefit from a healthy, competitive and diversified financial services system through greater access to credit and competitive pricing.
Ultimately, both financial and consumer compliance performance are dependent on strong management. Seldom do institutions excel in one and not the other. No business built on deceiving its customer base will be sustainable. Moreover, when businesses underinvest in compliance management systems it can pose significant reputational and financial risks. There is no better evidence than the banking industry’s ongoing recovery from a significant underinvestment in internal control systems relative to mortgage origination and servicing.
By way of background about the Bureau, we are a data driven agency whose mission is to help consumer financial markets work by making marketplace rules more effective, consistently and fairly enforcing those rules, and empowering consumers to take more control over their economic lives. Our vision is a consumer financial marketplace where consumers can see prices and risks up front and where they can easily make product comparisons. We want a marketplace where no one engages in unfair, deceptive, or abusive acts or practices. And we believe in a marketplace that works for American consumers, responsible providers, and the economy as a whole.
Congress gave us five key tools to do our job: supervision, law enforcement, rulemaking, consumer engagement and education, and consumer complaint response. These functions are informed by the knowledge of experts in our markets and research offices who examine historical and cutting-edge developments in the products and markets on which the Bureau focuses.
Our work is centered upon a belief that an educated consumer is a more capable and effective consumer. We also hold that banks and non-banks should be treated alike and receive similar oversight if they offer the same types of financial products and services. Accordingly, we want responsible businesses playing by the rules to succeed, free of unfair pressure from predatory competitors.
This afternoon, I will discuss our recently published white paper on payday loans and deposit advance products, our recently released mortgage rules, and how we engage banks and non-banks through our supervisory and enforcement functions.
Last week, we issued one of the most comprehensive studies yet on payday loans and deposit advance products.
The report found that payday loans and deposit advance loans, offered by a small but growing number of depository institutions, are generally similar in structure, purpose, and the consumer protection concerns they raise. Both are typically described as a way to bridge a cash flow shortage between paychecks or other income. They offer quick and easy accessibility, especially for consumers who may not qualify for other credit. And, they generally have three features: they are small-dollar loans; borrowers must repay them quickly; and they require that a borrower repay the full amount or give lenders access to repayment through a claim on the borrower’s deposit account.
The report found many consumers repeatedly roll over or take out additional payday loans, often on the same day as a previous one is repaid. The average deposit advance user has breaks of less than two weeks between borrowing spells. Two-thirds of payday borrowers in our sample had seven or more loans in a year. Likewise, over half of deposit advance users in our sample took out advances totaling over $3,000. The result is that many borrowers incur significant costs over time. And, accordingly, while payday and deposit advance products are structured as products designed to meet short-term credit needs, the report found that many consumers are at risk of using them to make up for chronic cash-flow shortages. This turns what is described as a costly short-term bridge into a very expensive, long-term loan.
Our findings thus raise substantial consumer protection concerns. The Bureau intends to continue its inquiry into small-dollar lending products to better understand the factors contributing to their sustained use. As we look to next steps, we will be determining how to exercise our authorities to best protect consumers while preserving access to responsible credit.
In January, we issued our Ability-to-Repay or Qualified Mortgage rule to protect consumers by requiring lenders to make a good faith, reasonable determination that borrowers actually can afford to pay back their mortgages.
As we all know, in the lead up to the financial crisis, many consumers were sold mortgages they could not afford or understand. Lenders sold, and consumers purchased, no-doc and low-doc loans where consumers qualified for loans beyond their means. Lenders also sold and consumers purchased risky and complicated mortgages like option and hybrid ARMS.
During this time, credit underwriting standards significantly deteriorated. Uneven supervision and a widely held view that we had entered a new era in which property values would constantly increase contributed significantly to these practices. All of this ultimately culminated in a dramatic increase in mortgage delinquencies and foreclosures.
I witnessed firsthand widespread reckless and fraudulent activity in the form of forged 1003s, whited-out paystubs, falsified verifications of employment and deposit, and applications submitted to automated underwriting over 10 times a day until the income figure was just right.
The Ability-to-Repay rule builds into the law common-sense underwriting processes and considerations. It protects consumers from risky practices that helped cause the financial crisis and it ensures lenders can extend credit responsibly – without worrying about competition from unscrupulous companies. Under the new Ability-to-Repay rule, lenders will have to make a reasonable and good faith determination of the consumer’s ability to pay back both the principal and the interest, and any other mortgage related costs such as taxes and insurance. And they will have to consider the consumer’s ability to repay the mortgage over the long term − not just during an introductory period when the rate may be lower.
We have also issued mortgage servicing rules. Generally, as you know, consumers are not in a position to choose their mortgage servicer. Before the onset of the financial crisis, the servicing industry – or at the very least the larger players that dominated the industry – developed a low-cost, high-volume business model. Unfortunately, this system was not designed for and was easily overwhelmed by significant increases in delinquencies and foreclosures.
Accordingly, we have seen far too many instances of servicers failing to provide basic levels of support that borrowers need and deserve. Borrowers’ calls have gone unanswered, documents have been lost, and accounts mishandled. Communication and coordination have been poor. Considering all this, our new servicing rules seek to achieve two primary objectives. First, they help prevent borrowers from being hit by surprises or getting the runaround. Second, they provide special protections for borrowers who are having trouble making their mortgage payments.
These rules were shaped by vigorous input from the public. That input came from people all around the country who have first-hand experience of the issues we are addressing. It came from consumers and it came from industry.
Since before we opened our doors, many have asked how our approach will be different. Through our supervisory tool, our examiners conduct on-site examinations, review files, transaction test, and interview personnel. We issue examination reports and utilize the existing interagency rating system. As findings warrant, our examination reports include necessary corrective action. Moreover, we utilize informal and formal enforcement actions when necessary.
Our examinations are intended to be rigorous and heavy on data analysis, with the important goal of also being fair and reasonable. We will focus on substantive consumer harm and, as such, ensure that our response to more technical violations is appropriate. Our examination process will strive for transparency, efficiency, and fairness. It will not be about “gotcha” or issues du jour. We communicate with institutions throughout the examination cycle. In most instances, institutions are advised of upcoming examinations well in advance of the start of our work. We also seek to keep the institution informed of the examination’s status and findings during the course of our review.
There are two key differences from other traditional prudential bank regulators that I would like to highlight. First given the mission of the Bureau, our focus is on potential risk to consumers rather than risk to institutions. Second, eventually, our oversight work will become increasingly product-centric.
The Bureau’s jurisdiction is also unlike any traditional bank regulatory agency. We have oversight for banks, thrifts, and credit unions with assets over $10 billion. These institutions and their smaller depository affiliates total less than 200 but on a combined basis account for $10 trillion in assets or nearly 80 percent of the nation’s banking market. The number of non-bank entities that eventually could be subject to the Bureau’s supervisory jurisdiction will likely number in the thousands.
A specific charge of the Bureau is to attempt to level the playing field between banks and non-bank entities relative to compliance with federal consumer financial laws. This dual authority provides the Bureau with the opportunity to oversee consumer financial products and services across charters and business models. Consequently, charter or license type is becoming less relevant in determining how we will prioritize and schedule our examinations and investigations.
Accordingly, we have begun to implement a prioritization framework that allocates our examination, investigation, and fair lending resources across product types. This strategy intentionally moves us away from static examination cycles.
Our supervisory approach encompasses an assessment of potential consumer risk, as well as a number of qualitative and quantitative factors. These factors include: (1) the size of the product; (2) a regulated entity’s market share; (3) the riskiness of the product; and (4) field and market intelligence that encompasses a range of issues including, but not limited to, the quality of a regulated entity’s management, the existence of other regulatory actions, default rates, and consumer complaints.
We are also very much committed to coordinating our examinations with other regulators to reduce the burdens on supervised entities for their time, space, and resources. Some of that is prescribed by law, and some of it is good old-fashioned common sense. To this end, we have executed appropriate information-sharing agreements and communicate regularly with federal and state regulators about the scheduling of examinations and other supervisory activity. We will continue to coordinate closely with our fellow regulators above and beyond the minimum requirements.
Given the early stages of our supervisory program, we have intentionally employed a strong quality control function. As we go forward and as we hire more staff, we expect to see significant increases in efficiency while maintaining the quality of our supervisory findings.
Finally, our approach of having enforcement personnel involved in the examination process has garnered a great deal of attention. So I will take a moment to address that specifically. Our Division of Supervision, Enforcement, Fair Lending and Equal Opportunity was strategically built to integrate the examination, enforcement, and fair lending functions. We have intentionally developed a coordinated approach to ensure that we get the best results for consumers. We are as efficient as possible. We create consistency in our approach to interpreting legal standards among our offices. And, we reduce unnecessary burden on the entities we supervise by consolidating their interactions with the Bureau.
This division works toward comprehensive integration by assigning Enforcement attorneys to support the work of each examination team, as well as by assigning Fair Lending attorneys to participate in examinations as appropriate. This physical presence is generally limited and intended to enhance coordination, as well as to ensure that our attorneys have a first-hand understanding of the issues arising in examinations. The presence of attorneys is not intended to be taken as a signal that an enforcement action is planned or even likely. Similarly, when enforcement matters arise out of examination activity, the supervision staff who conducted the underlying examination will remain involved to provide continuity and share relevant knowledge about the institution and its compliance history.
We also have the ability to utilize our enforcement tools independent of our supervisory or examinations process. We do this by listening to and investigating consumer complaints, industry whistleblower tips, and information from government agencies, industry, and consumer groups. If we find possible violations, we have enforcement authorities that are both inherited and new.
As with our supervisory tool, we have the ability to touch a wide variety of markets with our enforcement authorities, including: mortgage origination and servicing, student loans, auto loans, debt collection, credit cards, deposit products, and consumer credit reporting.
We have the choice of pursuing our enforcement actions through two different tracks: administrative proceedings or actions in the federal courts across the country. We have independent litigating authority, so we don’t need to rely on the Justice Department to bring actions on our behalf. And since the remedies available to us are the same through the administrative and court tracks, we are able to choose the forum that best fits the circumstances of each case.
Indeed, in order to provide the best outcome for American consumers, we have a range of remedies available to us when legal violations are uncovered. Our available remedies are both monetary and non-monetary and include: asset freezes, monetary restitution and damages, and civil money penalties.
Finally, we are often asked about what our enforcement priorities are and we’ve approached that question in what we think is a careful and thoughtful way. Given the breadth and depth of the laws the Bureau enforces and the markets we touch, we must make smart, strategic decisions about how best to use our resources. The bottom line is that we are taking a proactive approach to making resource allocation decisions aimed at trying to remediate harm that has already occurred while also trying to prevent significant consumer harm from occurring.
In conclusion, our mission at the Bureau is fundamentally designed to improve the markets for consumer financial products and services for both consumers and businesses operating within the law. A renewed and appropriate focus on consumer protection will go a long way toward preventing the problems that gave rise to the financial crisis. Our goal is that this will allow substantial opportunities for all companies to innovate and compete in the marketplace.