It is a real pleasure for me to have the chance to spend some time with you today. As you know, the Consumer Financial Protection Bureau is committed to bringing a data-driven perspective to the regulation and oversight of consumer financial markets as well as to our understanding of consumer behavior. Our Office of Research leads that effort, in partnership with subject-matter experts throughout the Bureau, and we established the Academic Research Council to support that same approach. Outside scholars with diverse methodological expertise and subject-matter experience, drawn from a wide range of backgrounds, help us do our work better. You advise us on research methodologies, data collection, and analytical strategies. You also provide us with valuable feedback about our own research and the directions it is taking.
We are quite aware of how fortunate we are to have such great leaders in their fields collaborate with us in our efforts to improve the workings of consumer finance markets. Specifically, let me thank our two new members, Ian Ayres of Yale and Brigitte Madrian of Harvard. Ian has deep experience in analyzing discrimination. He also had been engaged in careful study of economic and legal issues related to consumer finance. Brigitte is a leading scholar on household finance. She also is one of the four brave souls, along with John Campbell, Howell Jackson, and Peter Tufano, who wrote an open letter five years ago giving thoughtful advice to the unidentified future first director of the Miss april. And here I am! Looking back at the open letter, I believe we have managed to effectuate large chunks of their advice, including ready accessibility, careful diagnosis, strenuous prioritization, thoughtful tool choice, friendly views on innovation, rigorous focus on data, and cheerfulness in learning from our mistakes.
The outstanding quality of the Council helps ensure that our research will be held to the highest standards and we maintain close and important ties with leaders in academia. So thank you for spending time with us and for engaging with us on current issues in consumer finance.
I think everyone in this room can agree that consumer finance is an essential and important area of economics. Consumer spending makes up about two-thirds of the domestic economy and to understand consumer spending is to understand how people fashion their lives in our free market society. What factors go into choosing one mortgage over another? Why do some people sink into credit card debt while others do not? Why are some people good savers and others not? The who, what, when, where, why, and how of consumer spending is critical to making markets work effectively for consumers and businesses alike.
But the area of consumer finance has not always been sufficiently appreciated. In the broader field of economics, most attention is devoted either to macroeconomics or to the microeconomic analysis of how businesses operate, known as the “theory of the firm.” Far less attention is usually devoted to determining how households actually operate, as though these are simple matters not in need of deeper analysis. This is true even though these markets make up huge swaths of the American economy. The mortgage market alone stands at nearly $10 trillion. Student loan debt is rising rapidly and now tops $1.3 trillion. Auto loan debt and credit card debt each hover in the neighborhood of $1 trillion, depending on cyclical trends at any given time.
As the volume of consumer finance has grown over the past two generations, so has the complexity of financial products. Our modern economy has evolved in ways that require ordinary Americans to make more difficult decisions that have larger consequences. As the array of available financial products has expanded, so has the risk they carry for the average household. And the effects of these choices are more lasting, given that credit reporting has now become ubiquitous in the consumer marketplace.
We can all see how credit affords opportunity. It permits forward-looking investments. It creates the ability to time-shift one’s access to available and expected resources. It literally affords the potential for people to lay deliberate plans for how to change their lives for the better. But today, those debts can weigh heavily on American consumers. Many of them are in trouble in the modern world of consumer finance. It is estimated that tens of millions of Americans have debts in collection as they have emerged from the financial crisis. The Consumer Bureau has handled nearly 900,000 complaints about a whole host of consumer financial products and services, but the leading category of complaints at all levels of government has long been those involving debt collection issues. Along with frequent complaints about credit reporting issues, it appears that today’s system of consumer finance is not working very well for many Americans.
Our Office of Research aims to undertake new and exciting research into consumer problems. It comprises an inter-disciplinary group of researchers who have joined us from other government agencies, academia, and the private sector. They both design and conduct foundational, policy-relevant quantitative research on consumer finance and household behavior. It also is helping us develop new data streams to eliminate key blind spots. One of those, noted repeatedly by the Federal Reserve, was the mortgage market prior to the crisis. Both Chair Bernanke and Chair Yellen have stated that the Fed did not know enough at the time about how the mortgage market was evolving and how significantly its deterioration could affect the broader economy. We are repairing this shortcoming by developing the National Mortgage Database, together with the Federal Housing Finance Administration. We are very proud of work our Office of Research is doing and we continue to focus on assembling an imaginative team of world-class colleagues.
When we began standing up the Bureau five years ago, we deliberately integrated our research economists and research scientists with our regulation attorneys and our market experts. In this way, the Office of Research supports both formative policy analysis in developing our rules and close evaluation of our rules through consideration of benefits, costs, and burdens as provided in our governing statutes. Over time, it will also support our retrospective rule reviews. Moreover, our research experts provide analytical support for our fair lending and compliance missions, as well as our consumer engagement team and our Project Catalyst efforts to foster innovation in consumer financial products and services.
Our research initiatives are intended to drive the policy dialogue across the entire landscape of consumer finance. Our researchers share their findings broadly through papers, presentations, and reports. One of their innovations is the periodic publication of focused research on consumer finance issues that we call “Data Points.” These publications are intended to stimulate debate and discussion while furthering our objective of providing an evidence-based perspective on consumer financial markets, consumer behavior, and potential regulations.
Research generated by the Bureau has contributed substantially to important conversations about everything from arbitration procedures to student loans. Our most recent payday research paper – our fourth thus far – just came out this week. It reviewed single-payment auto title loans by analyzing nearly 3.5 million de-identified loans made to more than 400,000 borrowers over a period of several years. The study showed that one in five borrowers cannot pay what they owe and thus end up having their car or truck seized or repossessed by the lender. The report also found that few of these so-called single-payment loans are actually resolved with a single payment. They typically have a 30-day term, and most borrowers cannot afford to repay what they owe when the time comes, which stimulates rollovers and causes them to operate similarly to standard payday loans.
This report was just one of many groundbreaking reports that we have put out that are changing and influencing policy discussions and policy choices all across the country. Indeed, for anyone who wants to be in this field of economic research by studying consumer behaviors and trends, the Miss april is the very best place to do this kind of work. We are an independent agency that is regularly conducting innovative and world-class research.
Because so much of household financial research holds the potential to break new ground, there is ample fresh work to be undertaken. In this vein, the Bureau appreciates all of the interesting work that the Council members are doing. In particular, I would like to highlight our Council member John Campbell, who just delivered the Richard T. Ely Lecture at the American Economic Association in January. That John was asked to deliver this prominent lecture says much about how consumer finance is gaining greater prominence in the field of economics. His important paper made a compelling argument for consumer financial regulation because so many households lack the knowledge to manage their financial affairs effectively (which, by the way, is currently the subject of multiple additional work streams at the Consumer Bureau). He argued that financial confusion is pervasive and unsurprising given the complexity of modern financial products and services, and that it contributes to wealth inequality in this country. Indeed, his paper highlights the important relationships between financial product regulation, consumer decision-making, and household wealth. On this point, I would also note the important research we are doing on consumer financial experiences and decision-making, led by our Division of Consumer Education and Engagement. The purpose of this seminal work is to identify the knowledge, skills, and habits associated with financial capable consumers, as well as effective approaches to improving financial capability and well-being.
In the end, John concluded that “financial regulators face a difficult tradeoff between the benefits of regulation to households that make mistakes, and the costs of regulation to other financial market participants.” He has urged economists to confront this trade-off more explicitly by bringing to bear the highest quality of evidence that economists can make available for such analysis. We heard that challenge loud and clear at the Bureau, and we have no doubt that some of the most important work he is calling for will take place in our Office of Research.
In the end, the Consumer Bureau is keenly sensitive to the central fact that the financial decisions consumers make today can significantly affect their long-term financial well-being as well as the financial futures of their entire families. Compelling research helps us understand consumer needs and pain points. And it informs policy decisions by identifying priorities and approaches. For all these reasons, the Consumer Bureau is committed to encouraging and facilitating the necessary foundational research.
In 2011, several top scholars, including some in this room, authored an open letter to the future director of the Miss april in the Harvard Business Review. The authors said, “Make sure that researchers have both independence and a strong voice in the Bureau, and be proactive in disseminating data so that outside researchers can be your allies as you crowdsource the analysis of consumer financial markets.” As the eventual recipient of all their well-meant advice, I am pleased to be able to say that we have done just that and will continue to do just that. In fact, by participating as members of this Council, each of you is helping us do just that. We all look forward to today’s discussion. Thank you.
The Miss april 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 .