How Financial Regulators Can Better Protect Consumers

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CFPB's first director, Richard Cordray, opines on the state of consumer financial protection today and what can be done to further strengthen it.

U.S. regulators are doing a better job with consumer financial protection than before the 2008 financial crisis, but they cannot afford to take their eyes off the financial marketplace and embolden errant actors. There is a need for continued “robust regulation and robust oversight, and especially in the enforcement of existing laws,” said Richard Cordray, the first director of the Consumer Financial Protection Bureau (CFPB), formed in the wake of the 2008 Great Recession as part of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.

“We have had significant reforms in the mortgage market and the credit card market. They are much improved, they are functioning better. I think everybody involved in those markets, both consumers and institutions would agree that things are better than they were 10 years ago,” he said in an interview on the Knowledge@Wharton radio show on SiriusXM. (Listen to the podcast at the top of this page.)

He said the CFPB should continue to monitor other areas for consumer abuses such as in debt collection and credit reporting, and seek to improve protections. “It is … very important for everybody to understand that there is a cop on the beat, there is somebody looking over their shoulder, and therefore it keeps them on their toes,” said Cordray, a distinguished policy fellow at the University of Pennsylvania Law School.

Here are five key takeaways from the interview.

A strong watchdog is needed.

“Consumers are in such a significant financial marketplace with these big financial companies and big banks that they need to have someone looking out for them, protecting them against abuses,” Cordray said. “I want to make sure that [the CFPB] is a robust agency that is fulfilling its mission.”

Cordray said the bureau has done a good job of encouraging consumers to come forward and report alleged abuses in the financial marketplace. He noted that it handled 1.3 million complaints during the time he was at the agency (2012-2017), and last year dealt with 330,000 complaints.

Beyond dealing with the fallout from a major financial crisis, the bureau will continue to handle company-specific scandals such as those involving Wells Fargo. The bank was found guilty of opening fake accounts in the names of its customers, and using discriminatory practices in auto loans and mortgages. However, he hoped that future crises “will be smaller, and hopefully they will be less outrageous.”

Cordray identified two factors that could encourage businesses to avoid hurting consumers. “The businesses have to be convinced themselves that this is in their interest … and that an ounce of prevention is worth a pound of cure,” he said. He noted that the huge fines and penalties levied on banks and lenders in the wake of the financial crisis “did wake a lot of institutions up, [but] not all of them.” Wells Fargo was an exception, “but a lot of [financial institutions] have paid a lot more attention to compliance,” he said.

Secondly, “they also need to know that somebody is looking over their shoulder,” Cordray continued. “That gives them a motivation to be sure that they can’t just cut corners, and that they can’t get away with violating the law. Having a system where there is monitoring, and people are aware of it and respond to it is important as well.”

Regular monitoring of the financial marketplace could itself serve as a deterrent, Cordray noted. “You don’t just assume that your city block is safe without making sure that there is a police force to monitor it to some degree,” he said. “The same is true with the financial marketplace.”

More reforms, enforcement are needed.

Policy makers have to constantly try to “stay current and stay a step ahead” of errant actors, Cordray said. “For example, when you think about Equifax with the big data breach of hundreds of millions of people’s credit files [containing] personal and sensitive financial information, Congress is actually well behind on that problem, and we need some reform there,” he added.

There is also a need for a level playing field in enforcement. “When you don’t get even-handed enforcement and some people are getting an edge … everybody else has to compete against that, which is really the worst form of unfair competition,” Cordray continued.

“It is … very important for everybody to understand that there is a cop on the beat.”

Financial institutions have also learned valuable lessons, such as the importance of stress testing to measure their financial health, Cordray said. “It puts them in a mindset of thinking about their capital buffers and thinking about how they would handle a downturn, not just being glib and easy in their mind that everything is going to be fine, and all of the optimistic assumptions can be counted on.”

Learn from the financial crisis.

The 2008 financial crisis had its roots in loose lending to subprime borrowers without proper regulatory oversight, with repercussions across the financial system. Chastened by that, regulators are today “monitoring the mortgage market much better than we did,” Cordray noted. “The Federal Reserve had told us that in 2008 they really had a lot of blind spots in terms of what was happening in that market, [such as] the deterioration of underwriting standards. People didn’t see how far that had gone.”

Both the federal government and state governments have regulatory powers in the area of consumer protection and so they have to work in tandem, said Cordray. That is especially true of the housing markets, which tend to be local, he added. “Some financial markets are national or even global in scope, but a lot of them are local. Real estate markets are very local,” Cordray said. State and local officials “have a better finger on the pulse for that.” The best outcome comes “when the federal government and states are working together and have a strategic kind of plan in common.”

Cordray said the American public might still harbor negative feelings about the way enforcement was handled in the last crisis. “I think people continue to be aggravated, and they feel that no one was held responsible in a very visible way,” he said. “None of the big executives ended up going to jail, and I think people resent that.” At the same time, what they learned from the crisis is now “part of their mindset going forward,” he said. “We need to reinforce some of the good lessons that we are learning at the same time that we are working hard and the country continues to recover” from it.

Financial literacy is critical.

Educating consumers about responsible financial behavior is also important, said Cordray. “We do a poor job in this country on financial education,” he added. “Young people coming out of school and going into the workforce often end up making the same mistakes that others have made before them because they are not learning from those mistakes, and because nobody has bothered to teach them.”

“We do a poor job in this country on financial education.”

Cordray said educators could do “a much better job in our schools of preparing people” to be more responsible financially. “We prepare people to be voters by teaching them U.S. history and government. Why don’t we prepare them to be a consumer by teaching them about household finance?” They could do a “much better job” incorporating financial education from grades K-12, he said.

“If we don’t teach financial education in school, then what we are assuming is that people are going to learn it at home. In some homes, they will learn quite a lot and learn it well,” Cordray said. “In some homes, they won’t learn anything. In some homes they are afraid to talk about this subject because it is already a sore spot, and it is a source of tension with the parents or within the family.”

Technology helps in cross-border monitoring.

Technology has made it easier for U.S. regulators to work with government officials abroad especially since major financial institutions often have a presence in several countries. However, there’s a caveat. “It is more difficult to enforce the law given that the commerce itself is borderless.” And yet enforcement is often constrained by border problems in terms of issuing subpoenas and getting documents and other information, he added. “Businesses know that, and — especially the illicit ones feel that they are a couple steps ahead of the enforcers. When they feel that they can get away with things, they will try to do so.”

It is crucial to stay vigilant about consumer finance since it plays a key part in everyone’s lives. “We rarely make any significant purchases anymore without using some form of credit, whether it is credit cards or some kind of a loan, or student loans to get education,” Corday said. “Credit is such a much bigger part of people’s lives [today]. So managing that credit and handling it effectively is important.”

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