Consumer protections and business opportunities, working in tandem

Toward a sustainable financial marketplace

Thank you so much for inviting me to speak this morning as part of your discussion about how to spur economic recovery. We appreciate the productive working relationship that we have had with the American Bankers Association and its members and affiliates. We see a lot of you, and we are glad of it. We also share your goal of an economic recovery that will strongly support the responsible credit aspirations of consumers and also will benefit all those financial providers that seek to serve their customers well. And so we look forward to continuing to work with you to build a sustainable financial marketplace.

Just a few short years ago, we all witnessed the devastating blows that the financial crisis rained down on our economy. The sharp credit crunch and the broad collapse in the housing market cost Americans trillions in household wealth. Many lost their jobs; many lost their homes; almost everyone saw their retirement savings shrivel. In the aftermath of the crisis, Congress responded by passing the Dodd-Frank Wall Street Reform and Consumer Protection Act. As you well know, that law covers a broad range of topics to address the problems we experienced and help make sure they would not recur in the future. Among the significant steps taken in the law was the creation of the new Consumer Financial Protection Bureau.

Five years ago, the authority to administer and enforce various federal consumer financial laws was strewn across seven federal agencies. For each of those seven agencies, consumer financial protection was only one of its many responsibilities. Consequently, no single agency was primarily focused on protecting the everyday users of financial products and services—and consumers paid the price when the financial crisis hit. Similarly, there was no federal agency overseeing the nonbank firms that had grown so rapidly and were competing against you bankers in many of your markets, most notably the mortgage market. Mortgage originators, mortgage servicers, private student lenders, payday lenders, and others were allowed to compete with banks without the same oversight and without playing by the same rules. Whatever you may think of government regulation, it is clearly a recipe for failure to oversee only part of a market, while leaving other parts largely untouched.

All of that changed with the Consumer Bureau. We are the only federal agency with the sole mission of protecting consumers and with the mandate to regulate and supervise nonbank financial firms. And we recognize that a key element of our mission is to help ensure that the financial meltdown never repeats itself, with all the immense harm it caused for consumers that is still being felt today, more than five years later. The events that led to the financial crisis are inconsistent with the fair, transparent, and competitive markets that we are directed to promote.

The Dodd-Frank Act reflected a recognition that malfunctions in the mortgage market were the principal cause of the financial crisis and thus directed the Bureau to write sweeping new mortgage rules against a short eighteen-month deadline. This was a severe challenge. The American mortgage market is sprawling and complex, and valued at more than ten trillion dollars it is the largest single consumer financial market in the history of the world. I am proud to say that our staff rose to meet the challenge by issuing the new mortgage rules in January, at some real cost to themselves. 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 end 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 unsatisfactory practices and to ensure fairer and more effective processes for troubled borrowers who may face the loss of their homes.

These rules become effective this coming January, and I want to make sure you understand several things about that. First, the rules we put in place were desperately needed by the financial industry, because if we had failed to complete them, the status quo would not have remained in effect. Instead, the new law contained an entire chapter (Title XIV) that largely would have taken effect in its own right in January 2013—nine months ago today. So you already would have been living under those provisions for quite some time with no guidance to resolve ambiguities and subject to whatever interpretations the courts might eventually arrive at through litigation. Second, in many respects those requirements would have been impractical and more difficult for you to carry out than our mortgage rules. For example, under the statute you would not have been permitted to charge any points or fees on any loan on which you paid compensation to any loan originator, regardless of whether that was your own employee or a mortgage broker. The law also would not have provided a clear safe harbor against litigation to all prime QM loans, as our rules now do. And the law made no special provision for small creditors (those with $2 billion or less in assets and making 500 or fewer mortgages per year) by deeming as qualified mortgages all the loans they keep in their portfolios. We made this change in our rules to reflect our deeply held view that community banks did not engage in the kinds of irresponsible practices that gave rise to the financial crisis.

Third, Congress basically specified the effective date of the mortgage rules we were required to write to be January 2014, and with good reason, for there are many moving parts that are dependent upon them, and the mortgage market cannot attain certainty going forward if those parts continue to move. Both the Department of Housing and Urban Development and Federal Housing Finance Agency have responded with actions taken to conform and adapt to the QM rule, and the proposed Qualified Residential Mortgage risk-retention rule drafted by the prudential regulators may now be melded closely to the provisions of our QM rule. Many of you and your colleagues have told us that you need certainty in order to plan and in order to execute. In no single market is certainty more important than in the recovering mortgage market.

We have not been idle in the meantime. It would have been a classic governmental approach for us to say, once the mortgage rules were published, “Well, that’s your problem now.” We could have said we have plenty of other things to do—which is true—and so we will not see you again until our examination teams arrive to gauge whether you are getting it right or we bring an enforcement action contending that you did not get it right. We could have left you entirely on your own. Instead, we have chosen to handle things very differently. All 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.

The central concept behind this project is our belief that compliance with regulations is a concern we all share, because successful compliance is good for everyone—consumers, industry, and regulators. We believe that working together makes the process go more smoothly, attains greater 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; that will only happen if implementation goes well. So we have put out plain language versions of the rules, created and posted video guidance, met with all major market players (including vendors), and made further tweaks to respond directly to industry input about points needing to be clarified or modified to take account of practical and operational concerns. We worked with our fellow regulators to publish inter-agency examination procedures on the new rules, a full six months before the implementation date, to familiarize you with our expectations.

We believe it is critical to move forward so these rules can deliver the new protections intended for consumers and the certainty the industry has been seeking. We understand this poses a challenge for industry, just as the writing of such a substantial set of mortgage rules by last January posed a significant challenge for our new agency. We are all in this together, and so we appreciate the urgency that is being felt and the resources that are being mobilized to prepare for the approaching effective dates. Let me also assure you that our oversight of the new mortgage rules in the early months will be sensitive to the progress made by institutions that have been squarely focused on making good-faith efforts to come into substantial compliance on time—a point that we have also been discussing with our fellow regulators.

From our perspective, sensible rules of the road, appropriate market oversight, and evenhanded enforcement empower the American consumer. We want consumers to be able to make sound decisions they will be able to live with over the long run. Those kinds of decisions improve people’s lives and support a strong economy.

More broadly, we use all of our tools—our supervision, enforcement, and rulemaking authorities, along with our consumer education initiatives and consumer response function—as appropriate to address problems in the marketplace while continuing to study other issues that consumers are facing. 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 basis.

We have already begun to see other changes in the marketplace as a direct result of our efforts. Our supervision and enforcement work is driving cultural change. This is especially true for the nonbank institutions that have to place more emphasis on compliance and treating customers fairly, though we have seen various changes in your institutions as well. Our consumer response function and public complaint database are also playing a tangible role in producing a shift toward more emphasis on excellent customer service. We have accepted over 225,000 complaints thus far. Institutions are indicating that they want to minimize the number of complaints we receive about them, and some of them 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 the financial companies operating in these markets.

Institutions also know, or should know, that our supervision and enforcement teams are keeping a watchful eye on the consumer complaints we receive; the patterns reflected in those complaints can prompt investigations or be the basis for prioritizing supervisory attention through the risk scoping of examinations. More firms are therefore building into their compliance management systems an increased attention to the broader trends revealed by their analysis of consumer 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, our joint efforts are bringing new levels of accountability to the consumer financial marketplace.

At the same time, we recognize that consumers bear their own share of responsibility for how they participate in the financial marketplace. I know you share this view and many of you have launched your own financial education initiatives. We welcome and encourage your efforts to educate students about the importance of lifelong savings habits and of building good credit. Consumers need to put themselves in position to make sensible decisions that they can live with over the entire course of their lives. They need to recognize that the best form of consumer protection is self-protection: avoiding problems before they occur and the damage is done.

But as the financial marketplace has grown more complex, we have made an enormous mistake in this country by not placing a consistent and sustained emphasis on financial education. Every year, we send thousands of young people out into the world to survive on their own, with little or no training in the kinds of decisions they must make to succeed financially. That is a self-defeating approach in any free society ordered around a free market economy, and we simply have to face up to our current failures and insist on doing better—in our schools, in our workplaces, and in our houses of worship. At the Consumer Bureau, we will be working very hard to bring more visibility and a greater sense of urgency to this topic and to insist on making tangible progress for the American people in the years ahead.

The vision we have before us, and that we are working toward every day, is a market where consumer protections and business opportunities work in tandem; where financial institutions lead through responsible business practices; and where educated consumers can make informed decisions. These same principles offer a strong foundation for a thriving banking system that can serve consumers well over the long run. We believe that such a marketplace is the right outcome for all involved, and will lead to more stable and sustainable financial conditions that strengthen the future of this country. I ask you to work with us to achieve these mutual goals.

Thank you.

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