Richard Cordray, Director of the Consumer Financial Protection (CFPB) told the National Association of Attorneys General that, since he last spoke to them in 2012 CFPB had begun to address key problems in the consumer financial markets.  In the largest market, mortgages, CFPB had adopted sweeping new rules to prevent a repeat of the "excesses and irresponsible practices" that helped precipitate the recent financial crisis.

He said CFPB has also developed and delivered new tools for consumers and its consumer response function has, to date, fielded more than 130,000 consumer complaints, helping to return millions of dollars to consumers and solving problems that had been frustrating them for months or even years.

CFPB has been making the prices and risks of mortgages clear by simplifying consumer forms and have issued new rules to protect borrowers who already have mortgages through new servicing rules that draw heavily from what the attorneys general learned in achieving the national servicer settlement.  These rules, however, also leave room for state laws to protect consumers.

Cordray told the attorneys general that there are many problems that currently pose significant risks to consumers.  Deceptive practices such as mortgage relief scams victimize homeowners seeking relief from foreclosure by offering relief, taking the homeowners' money, and doing little or nothing to assist them.  CFPB has already shut down some of the fraudulent operations and frozen assets. 

Consumer debt traps are financial products that can trigger a cycle of debt.  Often marketed as short-term solutions in an emergency the high fees and interest rates often require borrowers to recycle the original debt into subsequent loans.  This can turn short-term credit into long-term debt that deepens people's problems and leaves them worse off. The economics of these products are often premised on the repeated use of the product by a certain subset of customers.

Short-term credit products can be helpful at times for consumers who use them responsibly, Cordray said and the Bureau wants 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."

Effective enforcement of the law can be challenging when it comes to lenders that lack a physical presence so CFPB has met with some of the AGs to consider how best to coordinate efforts on loans that involve off-shore or other jurisdictional issues.

In certain important markets, Cordray called them "dead ends" - such as debt collection, loan servicing, and credit reporting - consumers cannot choose their provider.  Since they can't "vote with their feet," their clout is limited and when the central focus is on the nature of the financial relationship between two businesses, any threat of consumer harm may be only a marginal concern.

Cordray cited debt collection as an example.  Creditors contract with or sell consumer debt to a debt collector, shifting the business relationship to one between the debt collector and the creditor, not the consumer and the creditor.  The consumer can become, in effect, a "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 maintain and use accurate information.  Given this dynamic, there is little wonder that debt collection is one of the most common sources of complaints in the realm of consumer finance.

This phenomenon exists in other markets as well.  A mortgage servicer is hired by the mortgage holder not the borrower and the relationship is between the owner of the mortgage and that servicer and the financial incentives governing the servicer's activities are 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," Cordray said.  This problematic incentive structure exists in almost any kind of loan servicing, not just mortgage servicing.

He pointed to the credit reporting industry as another in which consumers can become incidental to a business relationship between others.  The credit reporting firm has to balance its clients' needs for accurate information with its desire to keep costs low thus the levels and types of inaccuracies that the purchasers of credit reports are willing to tolerate get resolved in the marketplace while 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, Cordray said.  The result is to permit or even facilitate a distinct indifference to the interests of individual consumers.  CFPB is highlighting troublesome practices and working to fix them. We also recognize, he said that careful rules and effective oversight are needed if we are going to correct the kinds of market failures that subordinate the interests of individual consumers.

Not all consumer challenges are rooted in deceptive materials, debt traps, or dead ends but, rather in something even more offensive - discrimination.  Unequal, invidious treatment based on characteristics such as race or gender is a serious roadblock to consumers seeking to make economic progress.

Communities of color were hit especially hard during the financial crisis.  All Americans saw drops in their household wealth, but those experienced by African-Americans and Hispanics were the steepest. This inequity is compounded by unequal access to responsible credit, which makes it difficult or even impossible to achieve their financial goals.

Loans are different from other products; consumers are often unaware what options are or should be available to them; prices aren't posted, and 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.

 CFPB has made it clear it will pursue discrimination in consumer financial markets based on disparate impact as well as on intentional violations, the Director said.  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. 

Cordray said we all have seen how badly consumers were hurt by the recent financial crisis.  As they recover CFPB is 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.