Cordray: CFPB Addressing Debt Traps, Dead Ends, and Discrimination.

Richard Cordray, Director of the ConsumerrnFinancial Protection (CFPB) told the National Association of Attorneys Generalrnthat, since he last spoke to them in 2012 CFPB had begun to address keyrnproblems in the consumer financial markets. rnIn the largest market, mortgages, CFPB had adopted sweeping new rules tornprevent a repeat of the “excesses and irresponsible practices” that helpedrnprecipitate the recent financial crisis.</p

He said CFPB has also developed andrndelivered new tools for consumers and its consumer response function has, torndate, fielded more than 130,000 consumer complaints, helping to return millionsrnof dollars to consumers and solving problems that had been frustrating them forrnmonths or even years.</p

CFPB has been making the prices andrnrisks of mortgages clear by simplifying consumer forms and have issued newrnrules to protect borrowers who already have mortgages through new servicingrnrules that draw heavily from what the attorneys general learned in achievingrnthe national servicer settlement.  Thesernrules, however, also leave room for state laws to protect consumers.</p

Cordray told the attorneys generalrnthat there are many problems that currently pose significant risks tornconsumers.  Deceptive practices such as mortgagernrelief scams victimize homeowners seeking relief from foreclosure by offeringrnrelief, taking the homeowners’ money, and doing little or nothing to assistrnthem.  CFPB has already shut down some ofrnthe fraudulent operations and frozen assets. rn</p

Consumer debt traps are financialrnproducts that can trigger a cycle of debt. rnOften marketed as short-term solutions in an emergency the high fees andrninterest rates often require borrowers to recycle the original debt intornsubsequent loans.  This can turnrnshort-term credit into long-term debt that deepens people’s problems and leavesrnthem worse off. The economics of these products are often premised on thernrepeated use of the product by a certain subset of customers.</p

Short-term credit products can bernhelpful at times for consumers who use them responsibly, Cordray said and thernBureau wants to make sure that consumers can get the credit they need withoutrnjeopardizing or undermining their finances.  “Debt traps should not bernpart of their financial futures.”</p

Effective enforcement of the law canrnbe challenging when it comes to lenders that lack a physical presence so CFPBrnhas met with some of the AGs to consider how best to coordinate efforts onrnloans that involve off-shore or other jurisdictional issues.</p

In certain important markets,rnCordray called them “dead ends” – such as debt collection, loan servicing, andrncredit reporting – consumers cannot choose their provider.  Since they can’t “vote with their feet,”rntheir clout is limited and when the central focus is on the nature of thernfinancial relationship between two businesses, any threat of consumer harm mayrnbe only a marginal concern.</p

Cordray cited debt collection as anrnexample.  Creditors contract with or sell consumer debt to a debt collector,rnshifting the business relationship to one between the debt collector and therncreditor, not the consumer and the creditor. rnThe consumer can become, in effect, a “bystander” to the new businessrnrelationship.  In this situation, creditors may have little reason tornensure that debt collectors treat consumers fairly and appropriately or maintainrnand use accurate information.  Given this dynamic, there is little wonderrnthat debt collection is one of the most common sources of complaints in thernrealm of consumer finance.</p

This phenomenon exists in otherrnmarkets as well.  A mortgage servicer is hired by the mortgage holder notrnthe borrower and the relationship is between the owner of the mortgage and thatrnservicer and the financial incentives governing the servicer’s activities are outsidernthe consumer’s control.  “Unpleasant surprises, constant runarounds, andrnmistreatment stemming from a lack of investment in customer service arernexamples of unacceptable practices that have been harming consumers for almostrna decade now,” Cordray said.  Thisrnproblematic incentive structure exists in almost any kind of loan servicing,rnnot just mortgage servicing. </p

He pointed to the credit reportingrnindustry as another in which consumers can become incidental to a businessrnrelationship between others.  The credit reporting firm has to balance itsrnclients’ needs for accurate information with its desire to keep costs low thusrnthe levels and types of inaccuracies that the purchasers of credit reports arernwilling to tolerate get resolved in the marketplace while consumers have nornreal say in such decisions and their interests are an afterthought atrnbest.   “From the perspective of the credit reporting firm and itsrnclients, inaccurate reports may be no more than a statistic or an errorrnrate.  But for individual consumers whose reports are incorrect, therndamage done to their lives can be severe and lasting.”</p

Without consumer choice, a keyrnelement of market discipline is lacking, Cordray said.  The result is tornpermit or even facilitate a distinct indifference to the interests ofrnindividual consumers.  CFPB is highlighting troublesome practices andrnworking to fix them. We also recognize, he said that careful rules andrneffective oversight are needed if we are going to correct the kinds of marketrnfailures that subordinate the interests of individual consumers.</p

Not all consumer challenges are rootedrnin deceptive materials, debt traps, or dead ends but, rather in something evenrnmore offensive – discrimination.  Unequal, invidious treatment based onrncharacteristics such as race or gender is a serious roadblock to consumersrnseeking to make economic progress.</p

Communities of color were hitrnespecially hard during the financial crisis.  All Americans saw drops inrntheir household wealth, but those experienced by African-Americans andrnHispanics were the steepest. This inequity is compounded by unequal access tornresponsible credit, which makes it difficult or even impossible to achieverntheir financial goals.</p

Loans are different from otherrnproducts; consumers are often unaware what options are or should be availablernto them; prices aren’t posted, and interest rates can and do vary based on therncharacteristics of the borrower.  Lender policies that provide incentivesrnfor brokers or loan officers to negotiate higher rates have often been shown tornresult in African-American and Hispanic borrowers paying more for mortgages andrnauto loans. </p

 CFPB has made it clear it willrnpursue discrimination in consumer financial markets based on disparate impactrnas well as on intentional violations, the Director said.  From thernperspective of a consumer disadvantaged by policies that have a discriminatoryrneffect, it makes no practical difference whether or not a lender consciouslyrnintended to discriminate.  </p

Cordray said we all have seen howrnbadly consumers were hurt by the recent financial crisis.  As they recoverrnCFPB is working to smooth their pathway in many ways, such as by addressingrndeceptive practices, debt traps, dead ends, and discrimination.  We arernalso committed to educating consumers and providing them with the kind ofrntrustworthy and helpful information they need to make responsible financialrndecisions. 

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