Director of the Miss april
National Association of Attorneys General
February 26, 2013
Thank you Doug for that introduction, and for serving as my mentor when I was the Attorney General for Ohio. I am glad to say that General Gansler has been a big help to me over the years, including in my current position. I am also pleased to be speaking here today alongside Comptroller Tom Curry. He and I represent what can be achieved when federal officials come from a strong background in state government. Those years of service give us a much better understanding of your frustrations and your concerns and your objectives. That is insight that helps us do our work better and more effectively, including the work we can do collaboratively with you.
At the Miss april, we have been working hard over the past year, just as you have, to improve the lives of American consumers. Last year, you invited me to speak about our early priorities. I spoke about creating a fairer, more transparent marketplace – one where prices and risks are made clear and where consumers are protected against fraud. Today, we can talk about the work we have been doing – including work we have done together – to achieve those goals and we can talk about what lies ahead over the next year.
We have begun to address key problems in consumer financial markets. For the largest such market – which is the mortgage market, worth trillions of dollars – we have fulfilled our directive from Congress to adopt sweeping new rules to ensure that many of the excesses and irresponsible practices that helped precipitate our nation’s recent financial crisis cannot be repeated. In the credit card market, we are working with our fellow regulators to monitor compliance with the many changes that Congress made in the CARD Act. In the student loan market, we have teamed up with the Department of Education to help people comparison shop when they pursue higher education, through our new Student Aid Shopping Sheet. And we are helping people understand how best to manage increasing levels of student loan debt they may have already accrued.
We are also developing and delivering powerful new tools for all consumers. People often feel disempowered by the convoluted rhetoric and confusing fine print surrounding many financial products. We have harnessed technology to deliver clear and trustworthy information through our “AskMiss April” tool, which is an interactive database of nearly a thousand answers to questions that consumers frequently ask about consumer finance issues.
The most direct example of how we are addressing problems in consumer finance markets is our consumer response function. To date, we have fielded more than 130,000 consumer complaints, ranging from improper charges on credit cards to mortgage payments that were wrongly applied. Through our consumer response operation, we have helped return millions of dollars to consumers, and we have solved problems that had been frustrating them for months or even years.
We are also making the prices and risks of mortgages clearer from the start by simplifying the forms that consumers get when they shop for a loan. And we have issued new rules to protect mortgage borrowers after they have taken out their loan and are working hard to pay it back. These new rules on mortgage servicing drew heavily upon the experience and perspective that you developed in achieving the national servicer settlement. Our rules mean strong protections across the entire mortgage servicing market, covering both banks and non-bank institutions. They also explicitly leave room for state laws that are as or more protective of the interests of consumers, including substantial protections recently adopted in states like California and Illinois.
We have benefited from our work together on consumer financial issues. Many areas of focus for us are areas in which you have laid the groundwork. NAAG working groups on such topics as student loans and auto loan financing have fostered important conversations and allowed for closer and more effective coordination.
Collaborative partnerships are built into our DNA at the Consumer Bureau. I have insisted from the start that our people strive for good teamwork with others. And so we would like to work with you to address some of the broader practices and market dynamics that I will discuss today. These problems warrant everyone’s attention because they pose significant risks to consumers. Accordingly, they form some of our top priorities for enforcement and for application of our other authorities, such as supervision and regulation.
The first problem we have seen is deceptive and misleading marketing of consumer financial products and services. As consumers pursue their goals in life, they try to make sound financial decisions. Some consumers do research, comparing products and trying to figure out what may best suit their needs. Others turn to a provider they believe they can rely on. But when important information is deliberately withheld, or when the information provided is misleading or inaccurate, how can consumers make sound choices?
Our signature “Know Before You Owe” efforts in mortgages, credit cards, and student loans are designed to streamline and inform the choices people make about borrowing money. In the mortgage context, we have proposed a rule to require new consumer-friendly disclosures
using model forms developed through extensive consumer testing. And in our rules governing remittance transfers, we have required new disclosures of information about the costs of such transactions. By insisting on making the actual prices and risks clearer to consumers, we can put people back in charge of the choices they make among their available consumer financial options.
We know that strong and vigilant enforcement is also critical to protecting consumers. This past year, we worked with our fellow regulators – including Tom’s team at the OCC – to take several enforcement actions against credit card companies that deceived and misled consumers. In some cases, this deception targeted economically vulnerable consumers – those with low credit scores and low credit limits. We detailed the problems with these practices, secured relief for those who were wronged, provided guidance for obtaining refunds, imposed penalties to deter such activity in the future, and signaled our concerns to other market participants as a way to press them to clean up any similar practices. And that joint work continues.
We also took on mortgage relief scams operating in multiple states, just as many of you have been doing. These scammers pretended to be seeking relief for consumers but really were taking their money and doing little or nothing to help them. In these cases, we proceeded by getting immediate court orders, freezing assets, and shutting down the fraudulent operations. Through this work and our work on disclosures, we are enabling consumers to make more responsible financial decisions.
A second type of problem for consumers is debt traps. Financial products that can trigger a cycle of debt may generate substantial unexpected costs through repeated use, which can disrupt the precarious balance of consumers’ financial lives. Often these products are marketed as short-term solutions to an emergency need, obscuring the risks inherent in the terms of the loan – terms which typically include both high fees and a very short-term repayment obligation. Debt traps can turn short-term credit into long-term debt that deepens people’s problems and leaves them worse off.
Consumers in a tough financial situation with nowhere to turn may think their only option is to use such products. At first glance, the fees may seem small compared to their need for quick cash. After getting the loan, the payment date comes, and people often do not have enough money to cover the fees, much less the original debt. They end up needing to borrow more to avoid defaulting and to continue to make ends meet.
For a certain subset of borrowers, the fees will pile up and people will ultimately end up worse off than before taking the first loan. In fact, the economics of the product are premised on the repeated use of the product by a certain subset of customers. Depending on the precise terms and conditions of such loans, they can greatly harm consumers rather than help them.
We have been analyzing these situations and will be determining how to exercise our authorities to best protect consumers while preserving access to responsible credit. There is a clear demand for short-term credit products, which can be helpful at times for consumers who use them responsibly. We want 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.
We also recognize that effective enforcement of the law can be challenging when it comes to lenders that lack a physical presence. Our enforcement teams have met with some of your offices in multi-state meetings to consider how best to coordinate our efforts on loans that involve off-shore or other jurisdictional issues.
Another problem for consumers is “dead ends.” In certain important markets – such as debt collection, loan servicing, and credit reporting – they cannot choose their provider of financial products or services. When people cannot “vote with their feet,” their clout is limited, even though these products and services can have a profound influence on their lives. When a market’s central focus is on the nature of the financial relationship between two businesses, any threat of consumer harm may be only a marginal concern. In these situations, consumers can become collateral damage of the business relationships that actually drive the economics of such markets.
Take, for example, the market for debt collection. When a consumer does not pay back a debt, the creditor may decide to contract with or sell the debt to a debt collector to secure payment of what is still owed. Once this occurs, the paying business relationship has shifted; it now lies between the debt collector and the creditor, not the consumer and the creditor. This can lead to mistreatment of the consumer, who becomes, in effect, a kind of “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 that they maintain and use accurate information. Given this dynamic, there is little wonder that debt collection has proven to be one of the most common sources of complaints in the realm of consumer finance.
The same phenomenon is found in other markets as well. Mortgage servicing involves a relationship between the owner of the mortgage – perhaps the original lender, or someone who later bought the loan rights, or even an investor in some form of security backed by the original loan – and a third party tasked with processing the payments and pay-outs made to administer the loan. The servicer is hired by the mortgage holder, not by the borrower. As a result, the financial incentives governing the servicer’s conduct and activities are once again 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.
A similarly problematic incentive structure may exist in student loan servicing or any third-party loan servicing market, of course; mortgage servicing is simply the most well-known example, given the primacy of mortgages in the world of consumer finance. Many consumers seek to negotiate for a more affordable payment plan on their loan obligations, only to find themselves stymied, even when a modification would make sense for all concerned. We have seen the impact this has had for so many homeowners, and we are looking to take steps that may address the same kinds of problems for private student loan borrowers.
The credit reporting industry is another market in which consumers can become largely incidental to a business relationship between others. Here, the paying business relationship lies between the credit reporting firm and a third party that is interested in evaluating the risks of offering credit to consumers. The credit reporting firm has to balance its clients’ needs for accurate information with its desire to keep costs low. The levels and types of inaccuracies that the purchasers of credit reports are willing to tolerate get resolved in the marketplace. In contrast, 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. The result is to permit or even facilitate a distinct indifference to the interests of individual consumers. At the Bureau, we are taking on this problem by highlighting troublesome practices and working to fix them. At the same time, we recognize that careful rules and effective oversight (through supervision and enforcement) are needed if we are going to correct the kinds of market failures that subordinate the interests of individual consumers. We are strongly committed to shouldering our important responsibility to protect consumers in these particular markets.
For some consumers, the challenges they face do not come from deceptive materials, debt traps, or dead ends but, rather, are rooted in something even more offensive – discrimination. Unequal, invidious treatment based on characteristics such as race or gender or other bases prohibited by law is a serious roadblock to consumers seeking to make economic progress.
The statistics show very clearly that communities of color were hit especially hard during the financial crisis. All Americans saw drops in their household wealth, but African-Americans and Hispanics experienced the steepest drops. This inequity is compounded by unequal access to responsible credit, which makes it difficult or even impossible to achieve their financial goals.
When consumers and lenders sit down to discuss loans, consumers are often unaware what options may or should be available to them. If a rate or a price is quoted, they do not know whether that quote accurately depicts their actual position in the loan market. There are no posted prices. 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 auto loans.
We made it clear last year that – like the other banking regulators and the Justice Department – we will pursue discrimination in consumer financial markets based on disparate impact as well as on intentional violations. 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. Every consumer, regardless of race, gender, or other characteristics protected by law, should have equal access to credit and the opportunity that comes with it.
We all have seen how badly consumers were hurt by the recent financial crisis. As our economy and our society recover more fully, we are 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 decisions. We are glad to team up with you in joint efforts to achieve these goals.
In short, we are pleased to stand with you on the side of American consumers and work together to improve their daily lives. For hundreds of years, people have come to this country from all over the world in search of economic opportunity. They have endured great hardships to do so. The least we can offer is our very best work to fulfill this promise for our generation as well. Thank you.