Deputy Director of the Consumer Financial Protection Bureau
FDIC Advisory Committee on Economic Inclusion
October 9, 2013
Thank you Chairman Gruenberg. The Bureau enjoys an outstanding working relationship with the FDIC. On behalf of Director Cordray, thank you for your continued leadership on matters concerning the unbanked. I appreciate the opportunity to be with you all today to talk about the important mission of expanding and improving services for some of the most vulnerable among us—the unbanked and underbanked. We all witnessed the toll the recent financial crisis took, particularly on the underserved populations. By way of background, I am a career bank regulator having started in this line of work over 23 years ago as an entry-level bank examiner. In my prior capacity, I had a mandate to ensure compliance with safety and soundness, consumer protection, the Community Reinvestment Act, and fair lending.
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.
The Bureau is a data driven agency whose mission is to help consumer financial markets work by making 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 market where consumers can see prices and risks up front, where they can easily make product comparisons, and where no one engages in unfair, deceptive, or abusive acts or practices. We believe such a place will work for American consumers, responsible providers, and the economy as a whole.
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.
In order to promote responsible business practices, Congress directed us to write sweeping new mortgage regulations. Two of these rules will be extremely important in addressing some of the most serious problems that undermined the mortgage market. First, the Ability-to-Repay rule (also known as the Qualified Mortgage or QM rule) is designed to end many irresponsible lending practices by making sure that consumers are getting mortgages they can actually afford to pay back. Second, our servicing rules contain provisions designed to clean up many sloppy and unsatisfactory practices and to ensure fair and effective processes for troubled borrowers who may face the loss of their homes.
These rules will take effect this coming January. Since the rules were first published, we have made it a point to engage directly and intensively with both financial institutions and consumer organizations on a project that we call regulatory implementation. We believe successful implementation of the rules is good for everyone – consumers, industry, and regulators. We also believe that working together makes the process go more smoothly, attains greater certainty and understanding, and helps achieve better results. Our rulemaking process is designed to produce rules that enhance the financial markets and deliver tangible value to consumers; that will only happen if implementation goes well.
We believe that educated and informed consumers are important to ensure that the financial marketplace functions properly. In order to get to that place, we will continue to complete our mortgage work. But we also need to address what we have come to call the “Four Ds” that plague consumers—particularly the underserved—deceptive marketing, debt traps, dead ends, and discrimination. I’d like to talk to you a bit more about each of these problems.
First, deception. Consumers cannot make sound financial choices if they are given false or misleading information. Unfortunately, this happens surprisingly often in the financial marketplace. In the lead-up to the financial crisis, some lenders marketed mortgages with misleading teaser rates that misrepresented the real cost of the loan. One result was that too many homebuyers ended up with complicated mortgage products they did not understand and could not afford.
Sometimes the problem that consumers face is not necessarily deception, but confusion about crucial product information. This also happens in a variety of markets. Information may be buried in pages of fine print or written in legalese. Various providers may describe the same fee very differently, making comparisons difficult. Consumers need to have key terms highlighted so the most important risks will stand out and can be easily comprehended.
One of our signature projects at the Consumer Bureau has been our “Know Before You Owe” effort – a campaign to make information more accessible and more understandable. But cleaning up deception in the marketplace requires more than just this kind of improved disclosure, so we have also taken action. We went after credit card companies that misled consumers with deceptive sales pitches, and have put more than $700 million back in the pockets of over 8 million consumers. We have also gone after companies that claim to provide mortgage relief and debt-settlement services, but really just take people’s money and do not deliver.
A second major problem is debt traps that undermine consumers’ personal finances. These are products that are marketed as short-term solutions to immediate needs but that can be risky for consumers in the long run. People in a tough situation with nowhere else to turn may think their only option is to use such products because the fees may seem small compared to their need for cash.
But when the payment comes due, or when repayment is automatically taken from their accounts, consumers may not have enough money to repay the debt and the accumulated fees and still meet their living expenses. So they need to borrow again to avoid defaulting and to keep making ends meet. For a considerable number of consumers, the fees will pile up and leave them worse off. It can be a vicious cycle.
We have been analyzing these products and their markets. We have also begun supervising payday lenders for the first time at the federal level. We are working to determine how best to protect consumers while preserving access to responsible credit. There is an obvious demand for small-dollar credit products, which can be helpful for consumers who use them responsibly when they are structured to facilitate repayment. We want to make sure that consumers can get the credit they need without jeopardizing or undermining their finances.
Another “D” we are addressing refers to markets that create frustrating and damaging “dead ends” for consumers. When consumers cannot choose the businesses they must deal with, they lose the power to walk away and take their business elsewhere.
In mortgage servicing, millions of people have faced unwelcome surprises and constant runarounds, leading to improper fees and the needless loss of their homes. Our new mortgage servicing rules target these practices.
Let’s also consider debt collection. While there are many legitimate debt collectors, we all have heard horror stories about constant phone calls; employers and co-workers being told about debts; false claims of facing arrest if the debt is not paid. These tactics are shameful. Accordingly, we have begun taking complaints against debt collectors. We have also released new tools for consumers, including sample action letters for use when corresponding with debt collectors.
Similarly, consumers do not control the information that goes into their credit reports and can have difficulty correcting the errors they find in them. For consumers with errors in their reports, the damage done can be severe. We recently issued a bulletin putting companies that supply information to consumer reporting agencies on notice of their obligations to review consumer disputes and correct inaccurate information. We have also completed larger participant rulemakings for the markets for consumer debt collection and consumer reporting companies. Accordingly, larger players in both of these critical markets are now subject to oversight through the Bureau’s supervision and enforcement programs. Our enforcement oversight extends to all debt collectors and consumer reporting agencies.
The fourth “D” that is a clear focus for us is combating discrimination. We have all seen too many instances of consumers getting unequal treatment based on protected characteristics such as race or gender. When consumers sit down at the table to discuss their prospects for a loan, they often do not know the options available to them. All too often, hidden incentives for brokers or loan officers to negotiate higher rates have resulted in African-American and Hispanic borrowers paying more than they should have for mortgages and auto loans.
Last year, we put companies on notice that we will pursue discrimination in consumer financial markets based on disparate impact as well as disparate treatment. Earlier this year, we made it clear that we have the authority to pursue auto lenders whose policies harm consumers through unlawful discrimination.
We also have established that lenders are responsible for the operation of their lending programs, even if they are structured to work with some sort of middleman who stands between them and the borrower. The bottom line is that every consumer should have fair, equitable, and nondiscriminatory access to credit, as required by law. We recently launched a set of web-based tools to provide consumers with easier access to public mortgage data collected under the Home Mortgage Disclosure Act. The new tools will help maximize the impact of this tremendous public dataset by providing a user-friendly tool to enable consumers to explore mortgage application and loan data at a local level.
We plan to use all of our various tools – our supervision, enforcement, and rulemaking authorities, along with our consumer education and consumer response initiatives – as appropriate to address the “Four Ds” in the financial marketplace while continuing to study the other issues that consumers are facing.
We are also taking specific steps to help those who work with low-income and economically vulnerable consumers. We recently launched a program called “Your Money, Your Goals.” We designed the program to be used by social services staff to help their clients manage their financial affairs more effectively by identifying financial challenges and goals, creating savings plans, managing debt, choosing financial products, and accessing consumer protections.
As the head of our supervision, enforcement, and fair lending team, I would also like to tell you a bit about how those specific tools work. The Bureau’s jurisdiction is unlike a traditional prudential bank regulatory agency. We have regulatory oversight for banks, thrifts, and credit unions with assets over $10 billion, as well as their affiliates. These large 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 subject to the Bureau’s supervisory jurisdiction is likely 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 a product market; (2) a regulated entity’s market share in that product market; (3) the potential for consumer harm related to a particular product market; 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 have the ability to utilize our enforcement tools independent of our supervisory or examination process. We do this by listening to and analyzing 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 touch a wide variety of markets with our enforcement authorities, including: mortgage origination, mortgage servicing, student loans, auto loans, payday lending, debt collection, debt relief and credit counseling, credit cards, prepaid cards, electronic fund transfers, remittances, consumer credit reporting, and deposit products.
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.
On the whole, we are dedicated to making markets work better for consumers and to fostering a market characterized by sustainable, responsible practices—and I look forward to working with you all to achieve that.
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.