Yesterday, CFPB Director Cordray delivered a speech to the Consumer Advisory Board in Washington, D.C. The director's prepared remarks are revealing and likely foreshadow more of what is to come for our industry.
First, Director Cordray emphasized the importance of the Bureau's UDAAP duties:
The new financial reform law makes it illegal to engage in unfair, deceptive, or abusive acts or practices in connection with consumer financial products or services, and directs us to enforce this prohibition. More generally, we are charged with the duty of ensuring fair, transparent, and competitive markets. We recognize that a key to protecting consumers is strong and vigilant enforcement.
Second, the director highlighted what we already know – UDAAP is vague and amorphous and, as a result, dangerous for consumer financial services companies:
The possibilities here for injuring consumers are almost limitless. Maybe a customer service representative provided misleading information. Maybe consumers were told only about the benefits of a product and not about any of the limitations or risky features. Maybe important information about rates or fees was hidden or obscured. Or maybe consumers were told that they would have the chance to consider the matter further, and later found they were already signed up and charged for a service without ever giving their actual consent.
Third, an important component of the Bureau's UDAAP focus will be on marketing:
[One] class of problems is the deceptive and misleading marketing of consumer financial products and services. As consumers pursue their goals in life, they learn the importance of making sound financial decisions. Some do research so they can better compare products and try to figure out what best suits their needs. Others turn to a provider they think they can trust. But if the costs and risks are misrepresented, then consumers are no longer in control and they may be disabled from making careful choices.
Sometimes the problem that consumers face is not out-and-out misrepresentation, but instead that critical product information is presented to them in a manner they cannot readily understand and compare. Such information may be 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, which makes comparisons numbingly difficult. Often, consumers need to have key terms highlighted so the most important risks will stand out and can be more easily comprehended.
Fourth, the Bureau may be previewing some of its first "abusive" arguments:
Another problem that consumers face on the pathway to opportunity is that in certain important markets – such as debt collection, loan servicing, and credit reporting – they are unable to choose their provider of financial products or services. When people cannot "vote with their feet," their clout is limited, even though these products and services can have a profound influence on their lives. When a market's central focus is on the nature of the financial relationship between two businesses, consumers can become collateral damage to the dynamics that actually drive the economics of such markets.
Take, for example, the market for debt collection. When a consumer does not pay back a debt, the creditor may decide to sell it to or contract with a debt collector to secure payment of what is still owed. Once this occurs, the paying business relationship has shifted; it now lies between the debt collector and the creditor, not the consumer and the creditor. This can lead to mistreatment of the consumer, who becomes, in effect, a kind of "bystander" to the new business relationship. In this situation, creditors may have little reason to ensure that debt collectors treat consumers fairly and appropriately or that they maintain and use accurate information. Given this dysfunctional dynamic, there is little wonder that debt collection has proven to be one of the most common sources of complaints in the realm of consumer finance.
The same phenomenon is found in other markets as well. Mortgage servicing involves a relationship between the owner of the mortgage – perhaps the original lender, or someone who later bought the loan rights, or even an investor in some form of security backed by the original loan – and a third party tasked with processing the payments and pay-outs made to administer the loan.
The servicer is hired by the mortgage holder, not by the borrower. As a result, the financial incentives governing the servicer's conduct and activities are once again outside the consumer's control. Unpleasant surprises, constant runarounds, and mistreatment stemming from a lack of investment in customer service are examples of unacceptable practices that have been harming consumers for almost a decade now.
The same problematic incentive structure can be found in student loan servicing or any loan servicing market, of course; mortgage servicing is simply the most well-known example. Many consumers seek to negotiate for a more affordable payment plan on their loan obligations, only to find themselves stymied, even when a modification would make sense for all concerned. We have seen the impact this has had for so many homeowners, and we are looking to take steps that may address the same kinds of problems for student loan borrowers.
The credit reporting industry is another market in which consumers can become largely incidental to a business relationship between others. Here, the paying business relationship lies between the credit reporting firm and a third party that is interested in evaluating the risks of offering credit to consumers. The credit reporting firm has to balance its clients' needs for accurate information with their desire to keep costs low. The levels and types of inaccuracies that the purchasers of credit reports are willing to tolerate get resolved in the marketplace.
What is quite clear, however, is that consumers have no real say in such decisions and their interests are an afterthought at best. From the perspective of the credit reporting firm and its clients, inaccurate reports may be no more than a statistic or an error rate. But for individual consumers whose reports are incorrect, the damage done to their lives can be severe and lasting.
Without consumer choice, a key element of market discipline is lacking. The result is to permit or even facilitate a distinct indifference to the interests of individual consumers. At the Bureau, we are taking on this problem by highlighting troublesome practices and working to fix them. At the same time, we recognize that careful rules and effective oversight (through supervision and enforcement) are needed if we are going to correct the kinds of market failures that subordinate the interests of individual consumers. We are strongly committed to shouldering our important responsibility to protect consumers in these particular markets.
Finally, enforcement will remain the Bureau's weapon of choice for UDAAP:
We recognize that a key to protecting consumers is strong and vigilant enforcement.
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