These Four "D's" Plague Consumers Seeking Credit -Cordray

There are "Four Ds" that plague consumers, the Director of the Consumer Financial Protection Bureau told an audience of Bankers on Tuesday; deceptive marketing, debt traps, dead ends, and discrimination.    Richard Cordray, speaking to the American Banker Regulatory Symposium, said that from the perspective of the Bureau, sensible rules of the road, appropriate market oversight, and evenhanded enforcement empower the American consumer.  In order to ensure that the financial marketplace functions properly consumers need to be educated and informed, CFPB needs to complete the work it has started with mortgage regulations, and it needs to address those Four Ds.   

Consumers cannot make sound financial choices if they are deceived by false or misleading information which Cordray says happens with surprisingly frequency in the financial marketplace.  It happened, for example in the years leading to the financial crisis when some lenders marketed mortgages with misleading teaser rates and many homebuyers ended up with complicated mortgage products they did not understand and could not afford; products they might have avoided had they known better.

Sometimes consumers are confused rather than deceived because relevant information is buried in pages of fine print or written in language that requires an advanced degree to decipher.  "Various providers may describe the same fee very differently, making comparisons numbingly difficult," he said.

In response the CFPB's "Know Before You Owe" effort is attempting to make information more accessible and more understandable.  However disclosure is only half the solution so the Bureau has taken action against deceptive sales pitches, notably against credit card companies and has put more than $700 million back in the pockets of over 8 million consumers so far. 

The Director said debt traps can put consumers into a downward spiral that deeply undermines their personal finances.   People in a tough situation with nowhere else to turn may think their only option is to use products marketed as short-term solutions where the fees can seem small compared to the pressing need for quick cash.  But when the payment comes due or is automatically taken from their accounts, they may not have enough money to repay the debt, the fees and their living expenses so they borrow again, initiating a vicious cycle.

CFPB has been analyzing these products and their markets, Cordray said, and payday lenders are now supervised for the first time at the federal level.  There is an obvious demand for small-dollar credit products and the challenge is how best to protect consumers while preserving access to them.   

Another "D" are markets that create frustrating and damaging "dead ends" where consumers cannot chose the businesses they must deal with and thus lack the control of being able to sever their ties, even though those markets and can have a profound influence on their lives.  Debt collection is one example. There are many legitimate debt collectors, Cordray said, but we have all heard the horror stories about constant phone calls or falls threats of arrest.  These tactics are indefensible, he said; people deserve to be treated with dignity, even if they do owe a debt.

There are other markets in which consumers face problems because they cannot "vote with their feet."  Mortgage servicing has presented millions of people with unwelcome surprises and constant runarounds, improper fees, and needless loss of their homes.  Credit reporting agencies also hurt consumers who have little or no say in decisions made about their credit reports.  "At the Consumer Bureau, we recognize that effective oversight through supervision and enforcement is needed to help protect consumers against these potential dead-ends," Cordray said.  "We plan to achieve just that.  And where we determine that regulations are the appropriate tool for addressing these issues, we will act accordingly."

Combating the fourth "D," discrimination is a clear focus for the Bureau. There are too many instances of consumers being treated unequally because of characteristics like race or gender and from the perspective of a consumer, it makes no practical difference whether the discrimination that harmed him was intended or not.   The Bureau has made it clear we will pursue discrimination in financial markets based on disparate impact as well as disparate treatment and that lenders are responsible for the operation of their lending programs even if there is a middleman between them and the borrower.  The bottom line is that every consumer should have equal access to credit, as required by law.  Cordray said the Bureau will also be examining the way financial institutions provide information under the Home Mortgage Disclosure Act (HMDA), both to improve the categories of information that are gathered and to ease the operational and technological burdens on industry to comply with this law.

The Bureau plans to use all of its tools, supervision, enforcement, and rulemaking, along with consumer education initiatives to address the Four Ds in the financial marketplace as well as continuing to study other issues consumers are facing.   But at the same time, Cordray said, we recognize that consumers bear their own share of responsibility for how they participate in the financial marketplace.  They need to position themselves to make sensible decisions that they can live with over the 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." 

Cordray concluded by emphasizing the need for 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".  He said the Bureau will be working very hard to bring more visibility and sense of urgency to this topic and to insist on making tangible progress for the American people in the years ahead.