Q&A: Consumer watchdog: Following law not enough
WASHINGTON (AP) — A company's obligations don't stop with the law. It also needs to be fair and upfront with customers.
That's the message from Richard Cordray, who was named by President Barack Obama as the first director of the Consumer Financial Protection Bureau.
"Frankly there's a lot of fraud that's committed in the marketplace that is not on its face necessarily technically illegal," Cordray said in an interview with The Associated Press. Such practices will now be a target for the CFPB.
The agency and Cordray's appointment are both controversial. The CFPB was created as part of the overhaul of the nation's financial regulations, with a mandate to police the array of financial products marketed to consumers.
Republicans blocked Cordray's appointment for months, saying the agency would have far too much power with too little accountability. Then earlier this month, Obama installed Cordray when Congress wasn't in session.
With a director finally in place, the CFPB is moving quickly to flex its full authority in policing businesses such as mortgage brokers, student lenders and other businesses that previously escaped federal scrutiny.
On Thursday, the agency released a field guide for its examiners to analyze practices at payday lenders, which essentially offer customers advances on their paychecks for a flat fee. It will mark the first time the industry will be subject to such oversight.
The CFPB has started collecting public comment to help simplify the disclosures consumers receive with credit cards, mortgages and student financial aid. It will take months or even years before consumers see how these efforts play out.
But here's what Cordray had to say about how the agency will impact consumers:
Q: A major focus for the CFPB has been on improving the transparency of a product's fees and terms, and the disclosures consumers receive. Are there instances where this won't be enough and more aggressive regulatory action will be required?
A: Let me answer that question in two parts. On transparency and disclosure; a key insight here is that more disclosures don't always make things better. As it accumulates, there can be so much dense fine print that it can actually make things much worse — consumers find it hard to penetrate and they often will not read it.
That's a concern and that's why we're trying to make things more transparent, simpler and clearer with our "Know Before You Owe" project.
However, simply making things clearer to consumers is not enough if people aren't actually playing by the rules and defrauding consumers. There we have to enforce the rules and we have to do it fairly, even handedly, but with rigor so that everybody understands that they have to follow and respect the law.
Q: Are there practices that are technically legal yet require regulatory action?
A: If something is technically legal, that's one issue. But we also have the authority to determine that practices are unfair, deceptive and abusive. That's where our authority can be used to try to protect consumers, even though maybe the technicalities of pre-existing laws have been followed.
So that's something we're going to have to be careful about — the use of that authority. But it certainly is necessary to protect consumers and frankly there's a lot of fraud that's committed in the marketplace that is not on its face necessarily technically illegal. But when you see how a product is marketed, you can see what the effect is on consumers.
Q: So in those situations, what is the most important thing consumers need to know about what the CFPB can and cannot do?
A: Consumers should know that when they feel they're being treated unfairly, they have the opportunity to come and tell us about it. And I mean the 300 million consumers all across this country — they can come to our website at consumerfinance.gov. If it's a mortgage or credit card issue, they can file a complaint with us.
If it's any other kind of issue, we will be able to take those complaints eventually.
Q: Once those complaints are in hand, what are the limits of what the CFPB can do?
A: We have three different sets of authority that Congress gave us and that we are by law responsible to carry out. We have rule making authority. And we particularly are going to be active in trying to correct some of the problems in the mortgage markets over the next year or two.
We have supervision and examination authority, which is new but very important. It's the ability to actually go into these institutions, look at their books and records and ask questions about what they do, and really get to the bottom of things. This means both working with them where that's possible and or bringing enforcement actions where that's necessary.
And the third is the ability to actually enforce the law — which is clearly needed if you're going to have a marketplace that actually works.
Q: One of the first industries the agency will be looking at is payday lending. A concern for consumer advocates is that customers often roll over the loans, meaning they repeatedly take out new loans to repay previous loans. What practices in the payday industry raise concerns for you?
A: One of the things we're very concerned about is making sure that those products actually help consumers and don't harm them. So the possibility that consumers end up rolling loans over and over, and end up in this sort of debt trap where they're living off of money at 400 percent interest rates is a concern and it's something we're going to look at very closely.
Q: Suze Orman has a prepaid card and Amex last year rolled out a prepaid card. Do you see any risks with celebrities and major banks backing prepaid cards, or are there upsides?
A: We generally think consumers need to take care when they're attracted to a product for reasons that might obscure the actual price and risk involved. People want think carefully about what they're getting into here.
In the prepaid space in particular, there's a lot of evolution and there are a lot of new products coming out. Some have appeared to be terrible products and some may be pretty good. We're monitoring that and as I say, it's a fast moving market right now and we're going to consider carefully how to address those issues as they arise
Q: A lot of major banks have adopted this theme of transparency. Chase rolled out new checking account disclosures and Citi has its Simplicity credit card. How much faith do you have that the market can "right itself" in terms of transparency?
A: I have a lot of faith in the market if it is backed by evenhanded, comprehensive rules of the road that everyone knows they have to live by. If the market is left to its own devices or if we regulate part of the market and leave the rest unregulated, as happened with the mortgage market, that created, in my view, a lot of what caused the financial meltdown — that's never going to work.
It is our view that what we do will actually strengthen markets.
It's quite possible that banks would have been moving to more transparency and simpler terms on their own. I happen to think some of that is in reaction to knowing that the consumer bureau is now in place, that it's something we're emphasizing.
Q: Student loans were a big issue during the Occupy protests and graduates are burdened with more and more debt. Do you see any parallels to the mortgage industry?
A: I've read a lot that suggests that student loans may be a bubble that is developing. Obviously the major driver of the total amount of student loans is the rapid increases in tuition and the costs of higher education in the last 10 years. We don't control that.
What we can control and what we can affect is the choices that consumers make. That they know what their choices are, that they know the difference between federal loans and private student loans — how that can affect terms of repayment, how that can affect the price and interest rate. These are important things for consumers to know.
We're working right now with the Department of Education on an easy to navigate shopping sheet for students and their families.
Q: What role do school financial aid offices have in explaining the costs?
A: You have to examine the particular approach of an institution in context. You have to look at the facts and circumstances. So I wouldn't make a blanket statement about all student loan offices, but obviously that's an initial point of contact for the student and their families on the terms of what's being offered. That needs to be done clearly and it needs to be done so that the student and their family can understand that choice.
It's our belief that if consumers are presented with information in a clear and understandable fashion, they are the ones who will be able to make the best choices for themselves. It will never be for us to try and make these choices for anyone.
Q: Are companies changing their practices just because they know that the CFPB is out there?
A: I think that you are seeing change in these markets. I think you're seeing it on three sides.
One side is you now have a bureau with some good tools to actually affect these markets in a constructive way.
On the business side, many of them are recognizing that they should get out in front of it. They're trying to see what they can change on their own to either head off the enforcement or to try to improve things because they're persuaded that it needs to be done.
The third side is consumers themselves. And it's very important for consumers to recognize they have a lot of power in the market. Especially with social media, as they group together and it's not just an isolated complaint but a group of people with a similar complaint. They can affect these businesses and how they respond to them
It's important for consumers not only to look to the bureau for help but to look to themselves and help themselves.
Candice Choi can be reached at www.twitter.com/candicechoi