When you take out a mortgage or open a new credit card account, do you feel confident that you won’t be taken advantage of? Do you believe you’ll be given all the appropriate information about any financial products you may use?
We hope the answer to these questions is always “Yes,” but after the last few years (sub-prime mortgage crisis, increased bank fees, etc.) we know that’s not always the case.
Which is why the new Consumer Financial Protection Bureau (CFPB) was created: to make sure that your dealings with financial institutions will in fact be safer. However, the Bureau needs to take a few important steps right now to get on track to fulfilling its purpose. Last week, President Obama’s appointment of Richard Cordray as the CFPB’s first Director earned a lot of media coverage, but there is still a lack of awareness about what the Bureau can do – and what it should do.
So What is it?
The CFPB is a federal agency that has authority to oversee the financial industry and ensure that consumers are not being misled or taken advantage of. It was created in response to the global financial crisis via the Dodd-Frank Wall Street Reform and Consumer Protection Act, passed by Congress in 2010.
The Bureau will oversee many of the financial entities that consumers deal with every day, including:
- Debt collectors
- Credit unions
- Securities firms
- Payday lenders
- Foreclosure relief services
To carry out this mission, the CFPB has consolidated some responsibilities (and employees) from the Federal Reserve, Federal Trade Commission, Department of Housing and Urban Development, and the Federal Deposit Insurance Corporation.
What Should It Do?
Here at ReadyForZero, we’ve been watching the creation and development of the CFPB pretty closely, and we have a few thoughts on how it can live up to its purpose of protecting consumers:
1. Use data to improve upon existing policies
One of the best ways to create an effective organization of any kind is to set goals and collect data to measure your success (or failure) in progressing toward them. The CFPB should take this to heart and track recent policy changes quantitatively so that it can see what is working and what’s not – and use those lessons to inform future projects.
For example, the CARD Act requires that all credit card statements contain a table showing how long it will take to pay off the card by paying minimum payments only. The table also must show how much you’d need to pay each month to get the card paid off in 3 years. This has helped some people understand their debt situation better. But for other people, especially those who could pay off their card in less than three years, the table may not be helpful – or worse, it may be confusing. Some people might be able to pay off their balance much more quickly than 3 years, so the numbers wouldn’t help them pay off their debt faster. In this case, one size doesn’t fit all.
The CFPB should compile data showing how this has affected people’s behavior and then push to refine the rules to make it even more helpful to consumers. And it should review other policies using a data-oriented approach to make sure the laws and regulations are having the intended affect: protecting consumers.
2. Align incentives with consumers
Even before the CFPB, there were institutions in place that were supposed to protect financial consumers from being hurt by reckless or unscrupulous companies. However, the incentives of many of these “oversight” entities became twisted in such a way that they were no longer aligned with the interests of consumers but were instead aligned with financial institutions.
When there are lots of profits at stake, it’s common to take a short-sighted view and take shortcuts. We believe there are no shortcuts for building trust and the benefits, in the end, outweigh shortsighted modes of doing business. This is especially true within the financial services industry where your money is at risk.
In fact, the global financial crisis was exacerbated in part by the fact that the ratings agencies (that are responsible for accurately rating the quality of public and private debt) were making money from the institutions they were supposed to objectively rate:
“The problem, however, was that neither company had a financial incentive to assign tougher credit ratings to the very securities that for a short while increased their revenues, boosted their stock prices, and expanded their executive compensation”
The CFPB needs to commit immediately to avoiding any kind of relationship with financial entities that could lead to a conflict of interest.
3. Take a Closer Look at Predatory Lending Practices
If you have never gotten a payday loan you might not understand just how predatory these companies can be. Interest rates on payday loans can be as high 400% or more, and these loans are primarily marketed to low-income Americans. Not only that, but the prevalence of payday loans appears to be growing:
Each year, street corner payday loans strip consumers of $4.5 billion. Now, at least four large banks are joining the ranks of those offering one of the most predatory products sold to unsuspecting consumers. Banks like Wells Fargo, U.S. Bank, Regions and Fifth Third Bank are all offering their checking account customers payday loans that typically require full repayment within 10 days with interest rates of 360 percent or higher.
This is a prime opportunity for the CFPB to step in and find solutions that allow companies to continue offering payday loans but with reasonable rates, payment terms, and fees.
What Do You Think?
That’s what we think the government should do. But we’d like to hear your thoughts. What should the CFPB should focus on?
Should it concentrate its energy on securities firms, mortgage lenders, payday loan companies or others on Wall Street? Or something else entirely?
It’s important for us all to observe closely to see whether this new agency will fulfill its promise.
After all, we know there’s a desperate need for someone to look out for consumers. Over the past few years, we’ve seen all too clearly that the financial and consumer credit industries are plagued by bad actors who take advantage of consumers. We’ve seen the many ways that excessive fees, predatory lending, and insufficient safeguards on investment products can ruin families’ bank accounts – as well as the nation’s economy.
Post your ideas below – and share them directly with the CFPB on their website.