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Prepared Remarks of Richard Cordray, Director of the Consumer Financial Protection Bureau at The Clearing House Annual Conference
Two points that stand out to me about The Clearing House are, first, that your member banks represent some of the largest institutions in the American financial system. Together, these relatively few banks command substantial market share in some of the largest consumer financial markets that the Bureau now oversees. So this is a very efficient forum for me to come and address any pertinent remarks. Second, from what I have seen, you do not shy away from taking on hard and complex problems. Many of us were impressed over the past two years at your extensive and thorough work assessing the new resolution authority under the Dodd-Frank Act. The Consumer Bureau, too, has some hard problems of its own to confront – problems that must be addressed and analyzed in a data-driven manner if we are to gauge the issues properly and arrive at sensible results.
One of the most challenging issues that the Consumer Bureau has been tasked with is to address and resolve the serious concerns raised by the mortgage market. The financial crisis, the credit crunch, and the ensuing collapse of our economy cost Americans trillions of dollars in household wealth. Every account of the crisis traces back to extreme dysfunctions in the mortgage market. In the aftermath of the crisis, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act. That law covers a broad range of topics to address the problems we experienced and make sure they would not happen again. With this central goal in mind, Congress took a number of steps that included not only the creation of the Consumer Bureau, but also an explicit statutory mandate for us to write new rules to reshape the mortgage market.
This is the single largest consumer finance market in the world – valued somewhere between nine and ten trillion dollars. It is a complex and sprawling market, yet Congress directed the Bureau to write sweeping new mortgage rules against a relatively fast eighteen-month deadline. That posed a severe challenge, but our staff rose to meet it by issuing the new mortgage rules in January of this year. Two of these rules will be extremely important in addressing some of the most serious problems that undermined the mortgage market. First, the Ability-to-Repay rule (also known as the Qualified Mortgage or QM rule) is designed to prevent the return of many irresponsible lending practices by making sure that consumers are getting mortgages they can actually afford to pay back. Second, our servicing rules contain provisions designed to clean up many sloppy and reckless practices and to ensure fairer and more effective processes for troubled borrowers who may face the loss of their homes.
Some have said that these new rules represent a fine example of locking the barn door after the horse has gone. They point out that the market has adjusted greatly in the wake of the crisis, and the kinds of problems that led to the financial meltdown are no longer endemic to the current market. We can all agree that the market has shifted dramatically in the past five years; indeed, that is why we worked so hard to balance concerns about access to credit with the new consumer protections when we wrote the QM rule. But putting a lock on the barn door is still important; after all, there are other horses to worry about. And in any event, I think we can all agree that “market implosion and market recoil” is not a desirable regulatory strategy going forward. In the academic economic models, all will come back to equilibrium in time, but we are now five years into the aftermath of the financial crisis and we are still digging through the rubble. The Fed funds rate is still near zero and the housing market is rebounding but only very slowly toward normal levels. The externalities of this crisis were severe – millions of Americans lost their jobs, millions lost their homes, and many lost trillions in investments and retirement savings. The lost growth trajectory for the American economy and the world economy is staggering and continues to haunt us to this day. These are not matters to be brushed off lightly.
These new mortgage rules will take effect on January 10, 2014, which is now on the immediate horizon. Throughout this year, since the rules were first published, we have made it a point to engage directly and intensively with financial institutions on a project that we call regulatory implementation. Rather than say, “We have finished our work and it’s your problem now,” we have climbed into the trenches to work alongside industry to make sure the rules are made operational. This includes continued efforts to respond to industry concerns by clarifying uncertain points and addressing practical concerns. The key concept underlying this project is that compliance with regulations is a mutual concern because successful compliance is good for everyone – consumers, industry, and regulators. We believe that working together makes the process go more smoothly, attains greater certainty and understanding, and helps achieve better results. Our rulemaking process is designed to produce rules that enhance the financial markets and deliver tangible value to consumers, but that will only happen if implementation goes well.
It is also important to keep moving forward to deliver a greater degree of certainty for those engaged in the mortgage market. This is a goal that industry has emphasized to us time and again. It is timely now to climb out from under the existing regulatory overhang as other pieces of the mortgage reform puzzle are being contoured around our QM rule. Those other pieces include the Department of Housing and Urban Development’s and the Department of Veterans Affairs’ related QM rule, the Federal Housing Finance Agency’s various adjustments to the QM rule, the other agencies’ work on the Qualified Residential Mortgage risk-retention rule, and ultimately some form of GSE reform that Congress may devise. All of these pieces are starting to fall into place, and delaying this process would disserve Congress’s purposes in imposing its hard deadline to complete the main mortgage rules, including the QM rule.
From our perspective, sensible rules of the road and appropriate market oversight empower the American consumer. The goal is to make prices and risks clear so that consumers can make sound decisions they will be able to live with over the long run. We believe that educated and informed consumers are important to ensure that the financial marketplace functions properly. In order to achieve that, we will continue to complete our mortgage work. This week we took a further step by delivering on Congress’s directive to merge the overlapping and duplicative mortgage forms under the Truth in Lending Act and the Real Estate Settlement Procedures Act. These efforts will enhance consumer understanding and help people avoid making the kinds of bad choices about their mortgages that helped bring down our entire financial system just a few short years ago.
Let me turn now to another central objective that Congress laid out in the Dodd-Frank Act, one that is of great importance to banking institutions. That objective is evenhanded oversight in consumer financial markets that is not dependent on charter choice or the identity of the regulator. The Consumer Bureau is working steadily to create a stronger and more resilient marketplace by ensuring a level playing field for the first time between banks and their nonbank competitors.
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 system fell behind the growth of new competitors in the marketplace. A shadow market for consumer financial services emerged and expanded outside the framework that encompassed traditional banks, credit unions, or thrifts. Some of these nonbank firms were overseen at the state level, but that coverage varied based on differences in state laws and the depth of state regulatory regimes – and there was no federal supervision whatsoever. Our aim, and our duty, is to change that. We do not want to see another race to the bottom in the financial markets at the expense of the American public.
This is a key premise of the new consumer financial protection law. We now have the ability to examine participants in both the bank and nonbank segments of the markets for mortgage originators, mortgage servicers, private student lenders, and payday lenders. This represents a huge transformation. Before the crisis hit, for example, only part of the multi-trillion-dollar mortgage market was subject to federal oversight. Bad practices drove out the good, and the whole economy eventually collapsed, harming many innocent people in the process. Whatever you may think of government regulation, any regime in which only part of the market is covered, while the remainder is not covered, is a clear recipe for failure.
We also have the ability to issue rules that will authorize us to supervise and examine the larger nonbank participants in other financial markets. We have exercised this authority to establish our supervisory program for debt collectors and credit reporting agencies. We have a proposal pending to cover student loan servicers, and we will continue to build out our nonbank supervision program over other areas as needed to protect consumers.
It is critical for the stability of the marketplace and the well-being of consumers to ensure that everyone is playing by the same rules, including your nonbank competitors. In order to do that, we need your help. We need to hear from you about what you see going on in the marketplace. Where do you see corners being cut? Where do you see standards being bent or stretched? Where do you see the law being violated? We have learned that we need evenhanded oversight to make the marketplace work. If the cheaters are not allowed to prosper, then the honest businesses will regain their natural advantage.
So a critical element of leveling the playing field is to make sure that we are scrutinizing this parallel market and, more importantly, that we are acting to deter fraud and abuse that undercuts your position in the financial marketplace. When we see that federal consumer financial laws are being violated, we will not hesitate to take action to rectify the wrong that is being done. We will remain focused on the fact that in doing this work not only are we protecting consumers, but we are also supporting all those providers who act responsibly and treat their customers well.
To this end, I want to mention one area of particular interest for members of The Clearing House. Our bank-driven payment systems have evolved in impressive ways. Using automated clearing house (ACH) transactions, people can sign up for direct deposit of their paycheck and automatic debits for various bills. The Clearing House, which is the system operator for many of these payments, deserves great credit for having achieved these benefits for consumers, along with the Fed. But as consumer financial life has become more complex, and thus harder for people to manage and control, and as third parties take on a larger role in the financial matters of individuals, we need to remain vigilant to protect the safety and integrity of these systems for consumers. We are all aware of consumers who find unexpected debits on their bank statements, or are victimized by third parties who may take inappropriate advantage of the efficiency and trust on which these systems are built. We all know that consumers do not fully understand how these systems work, which leaves them vulnerable to abuses.
As you have seen happening more and more lately, various regulators are trying to figure out how they can more effectively police the nonbank realm. They are increasingly focusing some of their efforts on how predatory operators sometimes manage to get themselves paid through these payment systems. The focus of these law enforcement actions may create burdens that fall disproportionately on individual banks that are participants in the payment systems. But that may not be the most efficient or effective approach. Indeed, there is a need to think further about how these systems are designed and how they function for all of the institutions that participate in them. We are aware, of course, of the proposals recently published by the National Automated Clearing House Association, or NACHA, whom I spoke to last week on this same subject. And we know there are other potential developments on the horizon.
This is an important area, and one in which the Consumer Bureau and The Clearing House may be able to work usefully together – along with others, perhaps –- to share concerns, knowledge, and perspectives. We are very interested, for example, in improving our understanding of how enhanced computer analytics and communications could be used to map patterns in the payment systems. Finding such patterns could enable us to identify outliers that are unusually frequent sources of irregular or failed claims for payment or that may be causing other problematic effects. Working together, we would be better able to identify and enforce the law against illegitimate firms that are otherwise able to reduce their own costs by hitching a free ride on the payments system. We would also be in a better position to consider changes in law or practice that may be needed. And we would be better able to protect the consumers who are your customers. We look forward to discussing these matters further with you, and with others as appropriate, to see if we can make headway on these ideas. In this manner, you would be squarely in position to help us deliver on one of the central advances made in the Dodd-Frank Act: leveling the playing field between banks and nonbank firms.
In the years ahead, we plan to use all of our various tools – our supervision, enforcement, and rulemaking authorities, along with our consumer education initiatives – as appropriate to address issues in the consumer financial marketplace. We are dedicated to making markets work better for consumers and seeing that the relationship between providers and consumers is placed on a more sustainable foundation.
Yet another aspect of our work is how we can incentivize conduct that does not simply meet the bare minimum of not violating the law, but actually leads the market forward toward more responsible conduct. We have already begun to see changes in the marketplace as a direct result of our efforts. Our consumer response function and public complaint database are playing a tangible role in producing a shift toward more emphasis on excellent customer service. We have received over 230,000 complaints thus far. Institutions are indicating that they want to minimize the number of complaints we receive about them, and they are stepping up their customer service as a result. We applaud these conscious efforts as sensible and beneficial developments that will also help earn greater customer loyalty; they are exactly what we are looking for from financial companies operating in these markets.
Our supervision and enforcement work is also driving cultural change that places more emphasis on compliance and treating customers fairly. This change is most notable for the nonbank institutions, but for many banks as well. Institutions have learned that our supervision and enforcement teams are not interested simply in assuring that all the right boxes have been checked, but are asking more fundamental questions about whether consumers are being treated in a fair and honest manner. We are looking at third-party service providers as well as at the institutions we directly supervise. We keep a watchful eye on the consumer complaints we receive and have made clear that the patterns reflected in those complaints can prompt investigations or be the basis for risk scoping that leads to prioritizing supervisory attention. Many financial institutions are therefore wisely building into their compliance management systems an increased attention to the fairness of their practices, the honesty and clarity of their marketing materials, and the actions of their service providers. They are also attending more closely to the broader trends revealed by their analysis of our consumer complaints and their own customer complaints. We applaud this sensible response as well, which will tend to minimize litigation risk, reputational risk, and regulatory risk. Through all of these means, we are seeking to bring new levels of accountability to the consumer financial marketplace.
In doing our work, we are striving to strike the right balance as we write rules, conduct examinations, and handle investigations. Our goal is not some 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 are aiming instead at doing justice. On the facts of each matter, we quite simply are focused on getting things right, as far as we can manage to do so. And as we have laid out explicitly in our recent “responsible conduct” policy, we are quite willing to take into account proactive compliance efforts by institutions that take the initiative to identify and correct problems without having to be prompted. We can and will consider such conduct within our discretion in deciding whether a particular matter justifies a public enforcement action, assessing what level of civil penalties should be levied, and crafting our public messaging about how the matter was resolved. In fact, we have done so in several matters already.
The members of The Clearing House are some of the largest and most powerful financial firms in the history of the world. And, as a consequence, you bear some of the largest responsibilities. I believe that many of you share much of our long-term vision for consumer finance markets, a vision to which we have dedicated ourselves and which we are working towards each day. That vision is of a market where consumer protections and business opportunities work in tandem; where financial firms lead through responsible business practices; and where educated consumers can make well-informed decisions. We believe that such a marketplace is the right outcome for all involved, and that it will lead to more stable and sustainable financial conditions that strengthen the future of this country. That must be our common ground, and we ask you to work with us to achieve these mutual goals. Thank you.
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The Consumer Financial Protection Bureau 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.