On July 21 of last year, the Consumer Financial Protection Bureau came into existence. It was born of the chaos that followed the 2008 financial meltdown and its charter became perhaps the most well-publicized and contentious aspect of the Dodd-Frank Wall Street Reform Act. For the first half of its life, it was without a director as opponents voiced their opposition to its creator, Elizabeth Warren. A political stalemate ensued, but ended when President Obama made a recess appointment, and installed former Ohio Attorney General Richard Cordray in the director’s seat. Elizabeth Warren, meanwhile, decided to take her fight to the Senate, and she is now embroiled in the most expensive Senate race ever.
The CFPB, despite being in its infancy, has been aggressive in fulfilling its mandate. They solicit complaints from the public about all manner of financial products. They’ve proposed revised agreements for mortgages, credit card and student loans. And just a few days ago, it issued its first fine against a big bank for the manner in which it marketed services to credit cardholders.
A year in, the agency is still a lightening rod. Republicans in the House and Senate have tried to restructure the way the bureau is governed and funded, and the future of the CFPB is likely to be a significant issue in the upcoming presidential election. President Obama obviously supports it, whereas Gov. Romney has said he’d dismantle the CFPB and repeal Dodd-Frank.
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In recognition of the big day, Credit.com reached out to a number of CFPB aficionados from across the ideological spectrum and from different financial sectors, and asked for birthday wishes and reflections on the CFPB, where it has been and where it’s going. Thanks to those who participated (you’ll notice that most are CFPB boosters, though we asked plenty of detractors too). First up, the CFPB’s creator, Elizabeth Warren.
Democratic Candidate for Senate in Massachusetts and Former Assistant to the President and Special Advisor for the Consumer Financial Protection Bureau
This week marks the one-year anniversary of the Consumer Financial Protection Bureau (CFPB) opening its doors.
The new agency was built on the idea that markets work when people can evaluate the prices and risks of different products, then pick the best ones for them. But when the terms of the deal are hidden, competition doesn’t work—either for customers or for the businesses offering the best products.
After the financial crisis, restoring a working consumer credit market was among the most urgent challenges. The broken market needed to be repaired by ensuring that consumers had the right information and could use it effectively.
The CFPB was designed to level the playing field for small players—families, students, community banks, credit unions—by cutting complexity out of the system, mowing down fine print that hid bad surprises, and using easy-to-read forms. It was also designed to be a cop on the beat to guarantee that even the biggest banks follow the rules.
The big banks and their lobbyists fought against the consumer agency, but it was passed into law.
Now, a year after officially opening its doors, the CFPB is already moving toward clearer prices and risks—with a new student financial aid shopping sheet, the prototype of a shorter credit card agreement, and rapid progress toward a simpler mortgage disclosure form. And just this week, the CFPB announced its first public enforcement action, requiring Capital One to compensate two million customers for the company’s deceptive and misleading credit card practices.
Despite all the progress, the fight over the CFPB’s existence continues. Big banks, their lobbyists, their congressional allies, and even Mitt Romney have pushed to repeal the agency. The CFPB should keep staying focused on securing a level playing field. That’s a good thing for consumers—and not a moment too soon.
As the CFPB celebrates its inaugural year of protecting consumers from predatory financial practices, it’s fitting that the new agency has officially begun overseeing consumer credit reporting agencies. Credit reports and the credit scores on which they are based are the most important and influential measure of a consumer’s creditworthiness.
During debate of the Dodd-Frank Wall Street Reform and Consumer Protection Act, I successfully fought to include a provision providing consumers with free access to the exact credit score a lender used in evaluating their credit risk. The CFPB will now be an invaluable ally for millions of Americans who continue to repair their credit status in the wake of the nation’s worst financial crisis since the Great Depression.
While many have complained about the politics of the CFPB, many both inside and outside the industry have long known that some centralized basis for enforcement and policy could be worthwhile. The key determination of the usefulness of the CFPB is whether it adheres to a strict regulatory and enforcement agenda or whether it steps outside that into a more activist role. Fortunately, the CFPB seems to be taking the former path.
Back in early 2007, Federal Reserve Governor Kroszner was heading some creative investigations into consumer borrowing habits and leading informative forums to get attention on consumer issues. The sad fact is that it has taken five years to get back to those issues. The good news is that the CFPB is taking up the charge.
The CFPB is picking up the pieces in HOEPA and TILA reforms, which regulate disclosures to mortgage borrowers. Whether you attribute the recent mortgage market troubles to bad banks or bad borrowers, such disclosures are sorely needed. Still, the most lucrative margins will always be made on the products that the buyer understands the least.
HOEPA and TILA still focus on the “non-price” terms of mortgage lending. Standard MBA textbooks teach that the total loan price is a function of the non-price terms, the fee-based terms, and the stated interest rate. When the borrower agrees to forgo something (i.e., prepayment flexibility) or maintain something (i.e., escrow balances) they are giving up the option of acting otherwise. Commitments that reduce credit risk are valuable to the lender. Hence, non-price terms lower interest rates by the value of the commitment.
New state-of-the-art products like reverse mortgages and REX mortgages (in which the lender gives the homeowner an up-front cash payment of 12 to 17 percent of the house’s existing value in exchange for half of the increase in value of the house when it is eventually sold) pose risks that are not yet fully understood as they reduce monthly payments to zero and beyond. Thankfully, the CFPB is now turning its attention to this marketplace.
None of these new products are, in and of themselves, undesirable but they can all be misused. The challenge, therefore, becomes how to help borrowers understand the value of the non-price features and decide which loan is right for them. Financial education in the U.S., even at the K-12 level is woefully inadequate. Even with education, however, consumers may have difficulty understanding the value and importance of non-price terms that are appropriate for their transaction. The problem is the complexity of the transaction, itself, combined with the relatively rare incidence of home-financing during one’s lifetime. The CFPB will always, therefore, have to balance financial product innovation with borrower protection in a manner beneficial to both.
Bankers probably long for the good old days. You know, back in the early part of this century, when they could design all kinds of tricks and traps into their products to squeeze extra profits from their customers. Ultimately those tricky products—including dangerous mortgages—helped blow up the economy and led to reforms, including the Consumer Financial Protection Bureau.
Banks hate the CFPB, but they shouldn’t. Finally there’s a cop on the beat that has the power to make sure financial businesses play fair in their dealings with consumers. Ultimately, this should help ensure that the most efficient and customer-oriented companies come out ahead—rather than the ones most willing to take shortcuts and deceive their customers. That’s a good thing, and something that might even help restore the public trust that the banks so callously squandered.
Happy Birthday, CFPB!
In your first year of “official” operation, you faced a six-month battle to confirm a director and incessant attacks by Congressional opponents on your authority and independence. Hard to believe you could get anything else done, but you have.
Here’s a list of my favorite CFPB accomplishments: special offices to address the financial problems facing military service members and seniors; “Know Before You Owe” simplified mortgage disclosures; encouraging — and acting on — consumer complaints about financial deals; and tackling important issues like student loans, overdraft protection, reverse mortgages, credit reporting and fair lending. You’re also working to make lending rules fair and consistent for all kinds of financial institutions: big banks, community banks, credit unions and non-bank firms like payday lenders. And you’re doing all this based on careful listening and thoughtful discussion among all sides. Your work’s not done, but you’re off to a great start.
Happy Birthday, CFPB! You’ve made a lot of progress in a very short amount of time, especially given the headwinds you’re facing in Washington and around the country from organizations that don’t want change.
I know you have a lot on your plate, but I hope in the coming years you’ll consider the following: For the 26 million consumers that have no credit history, 100% of the bills they pay have no bearing on their creditworthiness. There are another 62 million with not enough information in their traditional credit file to create a credit score, resulting in their lack of access to affordable financial services and products. We need to bring these consumers into the mainstream financial system and expand the American economy. That’s a big win for consumers and for businesses.
Your recent announcement regarding supervision of Credit Reporting Agencies is welcomed with open arms. As a former senior executive with one of the big three credit bureaus, I know there is room for improvement, and I applaud your efforts take on this important initiative!
Image: nubobo, via Flickr