As the first director of the Consumer Financial Protection Bureau, Richard Cordray is building a new regulatory regime from scratch.
The undertaking is no small feat considering the vast terrain of the financial services industry that the bureau must cover: payday lending, debt collection, mortgages, prepaid cards, student loans, auto loans, credit cards and more.
Although the CFPB has hammered away at these issues since its inception in 2011, the prolonged fight over Cordray’s Senate confirmation at times overshadowed the bureau’s efforts. His confirmation over the summer cleared the way for the agency to take more-aggressive steps to police the industry.
In an interview, Cordray laid out his vision for the bureau, which has issued a series of rules to govern mortgage lending and handed down enforcement actions against big banks for abusive lending practices. An edited transcript of his remarks follows:
You’ve become known for your research-driven approach, which is a bit different than other regulatory agencies. How would you describe the bureau’s style of supervision?
We have a new challenge that’s different from other agencies, which is we’re building a program from scratch and supervising non-bank institutions. That’s a very interesting phenomenon in several respects, and it’s one of the key insights in the consumer protection part of [the] Dodd-Frank [financial reform law].
It recognizes that only supervising chartered institutions is not a very workable model because in the actual marketplace for several of these products — mortgage origination, mortgage servicing, small dollar lending — you have chartered institutions and non-chartered institutions competing against each other. That model really failed us in the mortgage market and in the lead-up to the crisis. And it was a lot of the unsupervised areas where some of the most irresponsible practices occurred. We have line of sight now across markets, which is critical for regulatory success.
We have to institute our supervision program for financial institutions that are used to being regulated, but not necessarily used to being regulated with a focus on consumer protection. It’s an adjustment for them.
But in the non-bank sphere, they’re often not used to being regulated at all, or only on the state level. In that area, there has been a real shift toward more of a compliance mentality. And our being on the scene and doing this work has caused that shift. And it’s an important one if we’re going to get to where we have a leveled playing field in these markets.
How do you manage the industry’s fear about the broad power of the CFPB?
It’s an adjustment [for companies], one that needed to be made. It’s the right perspective that an institution needs to merge the short-term and long-term thinking about its business model. It’s not a long-term business model to take advantage of your consumers in ways that are not sustainable. That’s what brings safety and soundness regulation and consumer protection regulation back together and really makes them harmonious.
I understand there has been a lot of anxiety. People aren’t sure what to make of it. They’re worried about a new agency and how it will exercise its authority. But we’ve been reasonable, open-minded, accessible and genuinely focused on trying to get this right.
What are the next steps for payday-lending and debt-collection supervision?
We will be undertaking rulemaking in the debt-collection area. The work on that will get started later this fall. Debt collection is an area that is in need of revision and updating. It’s a very problematic area, one of the most complained-about areas by the public. It’s only gotten worse in the wake of the financial meltdown because so many people owe debt. An estimated 30 million Americans have a debt collector chasing after them now, so it’s a very salient issue now for the public.
The Fair Debt Collection Act was passed in 1977, and there were never any provisions for rules to be written under it, so it hasn’t kept pace with the times. It’s now 35 years old, and there is room for us to update the act to take account of various court decisions, changes in the industry, changes among the consumer public to improve coverage so people are protected and treated fairly. That’s an important area for us and an area where we’ve already had some activity moving toward rulemaking.
We’re also examining debt collectors. We’ve done some enforcement actions involving debt collection, and there will be more. We’ve put out a bulletin on first-party debt collectors, making clear that they’re also covered under existing law. And we’re starting to provide some tools for consumers to use, such as the template letters they can use to try and avoid undue harassment and abuse from debt collectors.
And payday lending?
We put out the white paper on payday lending and the deposit advance products in late spring. That is leading us toward policy work in the area. There is some follow-up research work we’re doing that has been underway since the first paper came out. But there will be activity in this area in the near future.
The issue coming out recently of online payday lenders who are relying on financial banks to be the mechanism for financing and collecting the money really has been interesting. Frankly, the work in that area involves coordination with both federal regulators and state officials, and it can even be international, with some online lenders originating from outside of the United States now. It’s an area where we’ve been building partnerships as well as thinking about the policy work that we need to do, and we’re making progress.
The prepaid-card market is booming, but the product does not have the same consumer protections as debit or credit cards. What’s being done to remedy the problem?
The fact that prepaid cards are not covered by consumer-protection laws at the moment is a compelling need for us to write regulations to get them covered. We’re moving forward to write rules to make sure they are protected under [the Electronic Fund Transfer Act]. It’s a real front-burner issue for us.
Any plans to replicate the ability-to-pay model used in the mortgage rules in other areas of lending, like auto-title lending?
It’s possible. It’s something that we are thinking about. Some of the most interesting issues for me have been the ones where we start to see some of the same philosophical issues extending across different markets, but potentially in different ways. So ability to pay in the mortgage market is arguable at its zenith because it’s a huge dollar transaction. You can justify more demands on the lenders and the borrower to make sure that transaction works.
In the credit card context, under the Card Act, there is an ability-to-repay provision in there. But it operates in a somewhat different way for credit cards than it should for mortgages. They’re different kinds of transactions, different size, different scope. You can get in and out of credit cards in a hurry. Not so easy to get in and out of mortgages. How it applies to smaller-dollar lending is a further differentiation. It’s something that we’re having to think about.
The general principle, though, of ability to repay as the basis for making loans is just common sense. The lender should care about whether the borrower can repay because they’re the ones lending the money. They’re the ones at risk. The market is no longer so straightforward. With mortgages, for example, the ability to repay was arguably lost if you could sell into the secondary market.
There are a number of consumer groups that have been pushing [the ability-to-repay model] as a broad principle across markets. There is quite a bit to what they’re saying. How it would apply from one market to another is worth further analysis, and that’s something we’re engaged in analyzing.