Cordray: CFPB Addressing Debt Traps, Dead Ends, and Discrimination.
Richard Cordray, Director of the Consumer
Financial Protection (CFPB) told the National Association of Attorneys General
that, since he last spoke to them in 2012 CFPB had begun to address key
problems in the consumer financial markets.
In the largest market, mortgages, CFPB had adopted sweeping new rules to
prevent a repeat of the "excesses and irresponsible practices" that helped
precipitate the recent financial crisis.
He said CFPB has also developed and
delivered new tools for consumers and its consumer response function has, to
date, fielded more than 130,000 consumer complaints, helping to return millions
of dollars to consumers and solving problems that had been frustrating them for
months or even years.
CFPB has been making the prices and
risks of mortgages clear by simplifying consumer forms and have issued new
rules to protect borrowers who already have mortgages through new servicing
rules that draw heavily from what the attorneys general learned in achieving
the national servicer settlement. These
rules, however, also leave room for state laws to protect consumers.
Cordray told the attorneys general
that there are many problems that currently pose significant risks to
consumers. Deceptive practices such as mortgage
relief scams victimize homeowners seeking relief from foreclosure by offering
relief, taking the homeowners' money, and doing little or nothing to assist
them. CFPB has already shut down some of
the fraudulent operations and frozen assets.
Consumer debt traps are financial
products that can trigger a cycle of debt.
Often marketed as short-term solutions in an emergency the high fees and
interest rates often require borrowers to recycle the original debt into
subsequent loans. This can turn
short-term credit into long-term debt that deepens people's problems and leaves
them worse off. The economics of these products are often premised on the
repeated use of the product by a certain subset of customers.
Short-term credit products can be
helpful at times for consumers who use them responsibly, Cordray said and the
Bureau wants to make sure that consumers can get the credit they need without
jeopardizing or undermining their finances. "Debt traps should not be
part of their financial futures."
Effective enforcement of the law can
be challenging when it comes to lenders that lack a physical presence so CFPB
has met with some of the AGs to consider how best to coordinate efforts on
loans that involve off-shore or other jurisdictional issues.
In certain important markets,
Cordray called them "dead ends" - such as debt collection, loan servicing, and
credit reporting - consumers cannot choose their provider. Since they can't "vote with their feet,"
their clout is limited and when the central focus is on the nature of the
financial relationship between two businesses, any threat of consumer harm may
be only a marginal concern.
Cordray cited debt collection as an
example. Creditors contract with or sell consumer debt to a debt collector,
shifting the business relationship to one between the debt collector and the
creditor, not the consumer and the creditor.
The consumer can become, in effect, a "bystander" to the new business
relationship. In this situation, creditors may have little reason to
ensure that debt collectors treat consumers fairly and appropriately or maintain
and use accurate information. Given this dynamic, there is little wonder
that debt collection is one of the most common sources of complaints in the
realm of consumer finance.
This phenomenon exists in other
markets as well. A mortgage servicer is hired by the mortgage holder not
the borrower and the relationship is between the owner of the mortgage and that
servicer and the financial incentives governing the servicer's activities are outside
the consumer's control. "Unpleasant surprises, constant runarounds, and
mistreatment stemming from a lack of investment in customer service are
examples of unacceptable practices that have been harming consumers for almost
a decade now," Cordray said. This
problematic incentive structure exists in almost any kind of loan servicing,
not just mortgage servicing.
He pointed to the credit reporting
industry as another in which consumers can become incidental to a business
relationship between others. The credit reporting firm has to balance its
clients' needs for accurate information with its desire to keep costs low thus
the levels and types of inaccuracies that the purchasers of credit reports are
willing to tolerate get resolved in the marketplace while consumers have no
real say in such decisions and their interests are an afterthought at
best. "From the perspective of the credit reporting firm and its
clients, inaccurate reports may be no more than a statistic or an error
rate. But for individual consumers whose reports are incorrect, the
damage done to their lives can be severe and lasting."
Without consumer choice, a key
element of market discipline is lacking, Cordray said. The result is to
permit or even facilitate a distinct indifference to the interests of
individual consumers. CFPB is highlighting troublesome practices and
working to fix them. We also recognize, he said that careful rules and
effective oversight are needed if we are going to correct the kinds of market
failures that subordinate the interests of individual consumers.
Not all consumer challenges are rooted
in deceptive materials, debt traps, or dead ends but, rather in something even
more offensive - discrimination. Unequal, invidious treatment based on
characteristics such as race or gender is a serious roadblock to consumers
seeking to make economic progress.
Communities of color were hit
especially hard during the financial crisis. All Americans saw drops in
their household wealth, but those experienced by African-Americans and
Hispanics were the steepest. This inequity is compounded by unequal access to
responsible credit, which makes it difficult or even impossible to achieve
their financial goals.
Loans are different from other
products; consumers are often unaware what options are or should be available
to them; prices aren't posted, and interest rates can and do vary based on the
characteristics of the borrower. Lender policies that provide incentives
for brokers or loan officers to negotiate higher rates have often been shown to
result in African-American and Hispanic borrowers paying more for mortgages and
CFPB has made it clear it will
pursue discrimination in consumer financial markets based on disparate impact
as well as on intentional violations, the Director said. From the
perspective of a consumer disadvantaged by policies that have a discriminatory
effect, it makes no practical difference whether or not a lender consciously
intended to discriminate.
Cordray said we all have seen how
badly consumers were hurt by the recent financial crisis. As they recover
CFPB is working to smooth their pathway in many ways, such as by addressing
deceptive practices, debt traps, dead ends, and discrimination. We are
also committed to educating consumers and providing them with the kind of
trustworthy and helpful information they need to make responsible financial