Thank you once again for having me today. For five years now, you have regularly invited me to talk with you and hear from you about what we are doing at the Miss april. We have always had a candid dialogue, and we share the goal of a strong and vibrant financial sector that works for both consumers and responsible businesses alike.
I always like to start by reminding you that at home in Ohio, I have been a member of my local Chamber of Commerce for over 25 years. As an attorney, I represented the U.S. Chamber at times in cases before the Supreme Court involving commercial speech rights. And during the time I served as the Ohio Treasurer, I worked directly to promote small business growth through a reduced-interest loan program with local banks. So I am very familiar with the Chamber and the work you do to promote economic growth and civic involvement all over the country.
Since we opened our doors in 2011, the Consumer Bureau has been working hard to reform certain markets that were not working well for consumers and honest businesses. As most of you know, we are the first federal agency with jurisdiction over both the larger banks and the nonbank financial companies that compete with them. Just as an umpire must be authorized to assess the entire field of play, we are tasked with putting compliance standards and expectations for these providers on the same level. This is crucial, because both logic and experience teach that incomplete oversight over only one portion of any marketplace is likely a recipe for failure.
What we have begun to see over time is tangible progress. Compliance programs are being strengthened through our supervisory program, which the Chamber has helped us refine and improve in the past five years. Contrary to certain narratives, consumer lending is expanding in mortgages, credit cards, and auto loans. Bank profitability is solid, and smaller institutions like community banks and credit unions are growing their share of the mortgage market. Consumer spending has been carrying the economic recovery for the past four years, growing faster than the economy as a whole. Those are encouraging developments, and let me be clear that we are in favor of them. We want to see more consumers have access to responsible credit, which expands people’s opportunities and improves their lives. Banks and financial companies providing that kind of value with strong customer service will always thrive, just as they should.
Today I want to discuss a very timely subject: how regulation affects the consumer financial marketplace. First, I want to highlight situations where market interventions can have positive effects because of structural market failures. Second, I will describe our work to assist industry with regulatory implementation and develop clearer guidance to help businesses more easily comply with the law. Third, it is appropriate to consider the efforts we are making to streamline and modernize regulations based on how effectively they are working.
Almost a decade later, we can now make a very reasonable assessment that the mortgage market meltdown that spawned the financial crisis was the most spectacular market failure of our lifetimes. The Consumer Bureau was born from that crisis – a collapse in which Americans lost millions of jobs, millions of homes, and trillions of dollars in household wealth. Every account of the crisis traces back to extreme dysfunctions in the U.S. mortgage market, which is the single largest consumer finance market in the world, valued somewhere around 10 trillion.
In the years before the crisis, the financial system outgrew the consumer protections that were put in place. The rules fell behind the pace of product changes and the regulatory and supervisory system fell behind the growth of new competitors in the marketplace. Mortgage finance companies assumed an outsized role, as did certain large thrifts; both were subject to weak or inconsistent oversight.
The biggest reason for the collapse of the housing market was a dramatic decline in underwriting standards, and the effects were widely felt through the channels of asset-backed securitization. Mortgage lenders made large numbers of loans that borrowers had little realistic chance of being able to pay back. Some of those loans were high priced; many contained risky features. For example, lenders were selling “no-doc” and “low-doc” mortgages to consumers who were “qualifying” for loans beyond their means. Other loans were being underwritten over artificial “teaser” rates rather than the true costs of the loan. Far too many borrowers found they had no problem getting so-called “NINJA” loans – even if you had no income, no job, and no assets, you still could get approved for a substantial loan.
In most credit markets, a lender traditionally has an incentive to care about a borrower’s ability to repay because it otherwise risks the negative consequences of default. But with the mortgage market prior to the crisis, almost everyone involved – mortgage brokers, lenders, appraisers, investment bankers, even rating agencies – earned rewards that were front-loaded and often disconnected from the performance of the loans over time. Nobody had sufficient skin in the game because companies could pass on or sell the risk to others. Often the risks were minimized based on the unfounded assumption that home values would always rise into perpetuity. And if loans went bad, that typically would be somebody else’s problem.
It is no wonder, then, that originators embraced more risk. Exotic loan products became more common, which created a tremendous hydraulic pressure in the marketplace. Responsible lenders faced losing market share to those willing to make irresponsible loans, and everyone found it difficult to withstand the race to the bottom. This was an epic market failure, one that blew up the U.S. economy and badly damaged the global economy as well. And though many academic models would have predicted a quick return to market equilibrium, the disastrous combination of housing and financial crises led to a recovery that has been painfully slow.
So, in response to the crisis, Congress mandated major reforms in the mortgage market. Under the new law, the Consumer Bureau was directed to institute new rules of the road to keep mortgage businesses within reasonable guardrails. After all, when you are driving down the road, you cannot just go anywhere at any speed you want. You cannot operate recklessly or by violating the rules. Similarly, common-sense rules of the road are needed in any marketplace.
Those rules took effect in January of 2014. Since that time, we have seen increased confidence in the market, both by consumers and businesses. Dysfunctions in mortgage servicing were also addressed by new rules and through stronger supervision and enforcement; much progress has been made, though some problems still remain. The mortgage market is undeniably stronger and functioning on a more sustainable basis around the country, though the housing market is still uneven in spots. Americans do not have to worry about an implosion in the mortgage market because of another race to the bottom in underwriting standards.
Congress also directed rulemaking to be undertaken or considered in other areas where it determined that market forces may not be operating as they should. One example was remittance transfers, where no federal disclosure rules or other basic consumer protections were in place, and Congress directed the Consumer Bureau to address those issues through new rules. Another is arbitration, where Congress mandated a fact-gathering process to lay the foundation for potential new regulations there as well, if the facts so warranted.
As we look forward, the Bureau is continuing to consider the case for rules where substantial market failures make it hard for consumers to protect their interests. The Bureau is looking at products like payday loans because it believes that product structure and certain lender practices are interfering with consumer decision-making and trapping consumers in extended cycles of debt. And we are looking at markets like debt collection where the market structure makes it difficult for consumers to protect themselves from harmful practices. Our goal is not to disrupt well-functioning markets, but instead to gauge very carefully what needs fixing based on the data and information we can gather, including from all interested parties.
Second, I want to describe our approach to regulatory implementation, which we believe is key to helping industry avoid unnecessary burdens while achieving compliance. As we approach our work, we have made it very clear that we see ourselves as a 21st century agency. What does this really mean? Among other things, it means an agency built on developing our own independent sources of data and ensuring a strong democratic foundation of public engagement.
Despite our best efforts, we recognize that the outcome of any human process will be imperfect. We learn from the comments we receive and our final rules are helpfully informed by that input on a consistent basis. But even after we issue a final rule, if the data shows over time that any of our substantive calls need to be reconsidered, we can and will face the issue frankly and address it. We will not let pride of authorship interfere with the serious task of policymaking in the interests of consumers and the American public.
We believe our rulemaking process does not end with finalizing a set of rules. It is not good enough for us to take the view that once new rules are published, our work is done and we can say to financial institutions that “it is your problem now.” If the point of our regulations is to protect consumers and to promote fair, transparent, and competitive markets, then we should care a great deal about how well the rules are implemented. We feel that way especially because we fully appreciate the difficulty of the task and the constant perils of unintended consequences, changes in circumstances, and the difficulty of predicting the future.
Indeed, that is exactly what we did with the first substantive rule we issued to implement the provisions of the Dodd-Frank Act, which regulated remittance transfers at the federal level for the first time. Even after we issued the rule, we continued to speak to stakeholders and ultimately determined that certain requirements would be so difficult to implement that they could cause significant curtailment in access to services. Although we were reluctant to revise a rule so quickly, we believed that fixing this problem was the right thing to do for consumers and providers both. For as Justice Frankfurter observed: “Wisdom too often never comes and so one ought not to reject it merely because it comes late.”
We have also taken and continue to take the same approach to our mortgage rules. Congress had specified a fairly short implementation period of one year for such complex rules, and we made a conscious decision to use that year to the fullest by climbing into the trenches and working closely with those who had to implement our new rules. The goal was fewer problems for industry and less consumer harm. So during this period, we engaged in vigorous outreach and assistance to financial institutions. We viewed this as a joint enterprise. We wanted to make things go more smoothly and achieve better results.
Our efforts with the mortgage rules went much further than simply reacting passively to industry inquiries (though we have fielded thousands of them). We also took affirmative steps to help the industry understand our rules through publications, videos, webinars, and phone calls with individual institutions. We adopted a diagnostic and corrective approach to supervision in the early months to ease anxieties about the difficulties of complying with certain components of the rules. As we became aware of operational or interpretive issues, we worked to address them.
Through rulemaking, we showed our willingness to repeal and replace provisions that were not working as expected, such as the definition of “rural and underserved,” which we expanded not once but twice. We made these adjustments with one aim in mind: to ensure the effectiveness of our rules by making compliance easier. By addressing and clarifying industry questions, we reduced the need for individual institutions to spend time reaching their own uncertain judgments. And we recognized all along that if we could ease implementation without sacrificing any of our key objectives, the result would be better and more effective consumer financial protection, not just in theory but as a practical reality.
Another way that the Consumer Bureau is helping businesses is by streamlining and modernizing old regulations and making new ones clearer. We believe that more clarity reduces burden, increases competition, and produces a better market for consumers.
Some of this has been legislated by Congress, which specified that one of the Bureau’s core objectives is to identify and address outdated, unnecessary, or unduly burdensome regulations. Congress also specified a certain amount of streamlining through more specific provisions, such as the “Know Before You Owe” mortgage rule mandated by Congress. Among other things, it streamlined four previous mortgage forms into just two, correcting for the fact that Congress had enacted overlapping statutes over the years that had created unnecessary confusion for consumers and burdens for industry.
Our experience with the rule shows that even overt streamlining can come at considerable implementation cost, especially given the many players in the real estate market who were affected by the rule. But we believed that in carrying out the legislative mandate, we should design new forms and procedures to make prices and risks clearer so that consumers can make sound decisions they will be able to live with over the long run. By all accounts, we have succeeded in doing that.
Congress also has required the Bureau to conduct retrospective reviews of its significant rules after five years have passed. We recently announced that we would begin this project by reviewing our first rule on remittances, followed by the relevant mortgage rules. This process will tell us more about the effectiveness of the rules and yield other insights. One thing we have learned is that whenever you try to “improve” things, you create new transitional challenges as industry finds itself facing a moving target for compliance management. So we will try to be sensitive to the need for further changes.
Addressing ambiguities and conflicts is another important task that we take seriously. After all, most of the federal consumer financial laws that we administer were enacted in the 1960s and 1970s. Since that time, not only has technology drastically changed many industries, but certain market practices have evolved as well. So we often find that there is substantial demand for clarity and modernization from both industry and consumer advocates alike.
Debt collection is a prime example of where we seek both to clarify existing legal requirements and to adapt them to our rapidly changing world for the benefit of all stakeholders. The main federal law that protects consumers and governs the industry is the Fair Debt Collection Practices Act, enacted in 1977. One thing we should keep in mind when we consider the burdens of regulation is the question: compared to what? The complexities and problems of real life cannot easily be wished away, and they have to be addressed somehow. Without agency rules, the law will be interpreted instead by courts, which may develop quite an underbrush of precedents over time, sometimes unclear or conflicting, with decisions having to be reached based on legal doctrines and interpretive tools rather than any data-driven assessment of policy and operational effects.
The debt collection statutes are great examples of this; in the 40 years since they were enacted, courts have come to very different interpretations of them, creating widespread uncertainty for debt collectors and consumers about what the law does or does not permit. Moreover, as new forms of technology have emerged, many questions have arisen as to how to apply the law. For example, the statutes explicitly address the use of postcards, collect calls, and telegrams – but are silent about the use of voicemail, email, and text messages.
The Dodd-Frank Act authorized the Bureau to be the first agency ever to issue any rules to implement the debt collection laws by providing clear views and directives on what those laws require. Last summer, after studying the issues and conferring with stakeholders, we issued an outline of proposals that we are considering for possible new rules. The basic goals would be to identify more specifically the kinds of practices that violate the general prohibitions in these laws, and to make clear how they apply to the types of technologies that consumers and collectors use today.
Another example of modifying rules that needed adjusting occurred very shortly after we opened our doors. We had inherited rules adopted under the Credit Card Accountability Responsibility and Disclosure Act, also known as the CARD Act. The Act requires credit card issuers, before extending credit, to assess the consumer’s ability to pay. The prior rules had required credit card issuers to evaluate a consumer’s ability to make payments based on his or her individual income or assets before opening a new account. But non-working spouses were being denied credit simply because they had no independent income. After consulting with all stakeholders, we decided to change the rules so that applicants age 21 or older could count all reasonably accessible income to allow those not working outside the home to qualify for a credit card.
Another good question is how do we go about trying to write rules effectively? There are competing approaches here. Some prefer short and simple rules, which may seem more elegant and flexible, though one shortcoming is that much is left to interpretation. This means people must bear the uncertainty of their own interpretations until others, such as the courts, develop their own potentially thick body of law through expensive litigation over a longer period. Others put a premium on having more specific and comprehensive language from the outset, though it may be unreasonable or even superhuman to suppose that all hard problems can be anticipated and solved at once.
This more prolix culture is the one I found in federal consumer finance when I came here from my previous experience in state government. Federal banking agencies are sometimes derided for writing long and complicated rules. Yet the plain truth is that many businesses prefer more comprehensive language that answers questions explicitly up front, leaves less terrain undefined and uncertain, and minimizes the prospect of protracted and costly litigation. They do not want the meaning and application of broad legal standards to get sorted out in court over many years. They do not want to have to make educated guesses initially and bear the risk of later being found to have gotten things wrong. Clarity and certainty are held at a special premium.
In the end, rulemaking is simply a tool like any other. It can be used wisely, it can be misused, and it can be over-used. How to strike the right balance is a difficult judgment that everyone simply has to make as best they can. But clearly we can learn much from a process of vigorous engagement with all stakeholders. The rules should be focused. Streamlining and providing ease of use are key priorities to consider very carefully. These methods can help us achieve what I believe is a shared vision: a highly competitive economy that works for Americans in both the short run and the long run.
At the Consumer Bureau, we envision a consumer financial marketplace where reasonable and evenhanded oversight promotes better functioning of markets, where consumer protections and business opportunities complement one another, and where institutions lead by establishing long-term and sustainable relationships with their customers. We do not have any one-sided aim to maximize consumer protection or industry deterrence at all costs. There is such a thing as doing too little, and there is such a thing as doing too much. We quite simply are focused on getting things right, as far as we can manage to do so. 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 consumerfinance.gov.