By: Martha C. White
January 6, 2012
A long to-do list awaits the CFPB and its new director
Now that the Consumer Financial Protection Bureau has a director (albeit one whose appointment could be challenged in court), it has quite the to-do list. At the top, according to newly installed bureau head Richard Cordray, is federal supervision of non-bank entities that include debt collectors, payday loan operations, and mortgage lenders.
"We will begin dealing face-to-face with payday lenders, mortgage servicers, mortgage originators, private student lenders, and other firms," Cordray said in a speech on Thursday. These companies provide financial services but to date have not been subject to broad federal supervision -- a situation that has led to a host of sneaky, manipulative and tremendously harmful practices, according to consumer advocates.
Here are a few categories of non-banks the CFPB aims to oversee (and rein in, if necessary), along with comments from advocates on why new oversight is necessary:
"The whole payday model -- what they rely on is trapping a subset of people and getting those people on a debt treadmill," says Kathleen Day, spokeswoman for the Center for Responsible Lending. "If a product intended to make ends meet bankrupts you, that's not a benefit."
For people lucky enough to not know what they are, payday loans are small loans, maybe a few hundred bucks, typically extended for a few days or a couple of weeks. But they come with fees that are outsized in proportion to the size of the loan, generally between $15 and $30 per $100 borrowed.
In theory, they're supposed to be paid back by the lendee when the next paycheck arrives. In practice, however, one payday loan often begets another, potentially making a bad situation worse as people fall further and further behind on their bills.
"If you don't have $300 today, you're unlikely to have $345 in two weeks," says Lauren Saunders, managing attorney at the National Consumer Law Center. "They're set up and designed to be unaffordable and get people trapped in a cycle of debt." Payday lenders let borrowers roll their debt into a new loan, but that means paying those fees again, so the amount owed can quickly balloon.
Cordray says the CFPB will immediately be taking a closer look at several parts of the mortgage industry. "Novel and exotic mortgages battered housing markets and triggered the financial crisis that wrecked the economy and hurt millions," he said in his speech. "Many subprime loans during the housing bubble were made by nonbank mortgage brokers."
The CFPB has been collecting consumer complaints related to mortgage issues since last month, and it's clear that the fallout for homeowners related to sketchy, confusing loans has been tremendous, says Cordray. What's more, after the real estate collapse, many homeowners have tried to obtain mortgage modifications and been turned down without any explanation, or been given erroneous information about how to apply and what paperwork to submit. Some have applied only to have their paperwork disappear, or have the bank foreclose on them anyway.
Before the CFPB had a director, it could only supervise large banks with $10 billion or more in assets. Now, though, with Cordray in place, the bureau is empowered to supervise smaller players in the mortgage industry as well.
Ruth Susswein, deputy director of national priorities for Consumer Action, predicts that the CFPB will start creating new rules for mortgages and mortgage modification plans as soon as this year. "Now the [CFPB] can go ahead and actually create mortgage servicing standards that can apply to the marketplace as opposed to just the big banks," she says. "It shouldn't matter who sells the product to decide if it's a safe product, fairly offered and reasonably priced."
The National Consumer Law Center's Saunders says debt collection, a multibillion-dollar industry nowadays, is another corner of the financial services universe often corrupted by companies willing to cut corners or flout the law to make a buck. "I think it will be a priority to set up an examination process of the largest debt collectors to find out if they're complying with the law," she says. Based on the complaints Saunders' organization hears about regularly, it seems laws are routinely broken by debt collectors today. "Now the CFPB has a chance to get inside those companies," and get a close look at collection agencies' books, training materials and guidelines for agents.
"What we're really hoping the CFPB will look at is how they're processing all of these accounts," says Suzanne Martindale, staff attorney at Consumers Union. "What are they doing to verify that they have the right person, the right calculated amount, and that the debt that's legally recoverable before they go to court to get a judgment?" In the recent past, some unsuspecting consumers have even been slapped with judgments without ever being served with papers beforehand, an illegal practice known as "sewer service" that led to a class-action lawsuit in New York.
One final hot-button topic advocates hope the CFPB will dig into is credit reporting bureaus. "There are so many problems around credit reporting agencies," says Ira Rheingold, executive director of the National Association of Consumer Advocates. "We think they've acted in ways that have been pretty damaging to consumers."
The CFPB could take steps such as examining bureaus' protocol when a consumer reports an error. While the credit reporting industry says most of the mistakes people find on their credit reports don't actually hurt their credit scores, advocates say there's too much at stake to gloss over the issue, since a consumer's ability to get a good rate on a credit card or loan or obtain credit at all depends on their credit score. In some cases, details in a person's credit history may dictate whether he or she can rent an apartment or even get a job.
Regulation of credit reporting agencies is especially crucial lately, advocates say, as companies in the credit industry become more creative in their hunt to find personal -- some say invasive -- details about consumers, right down to their DNA.
While the CFPB will start by merely supervising non-banks, the agency now has much broader authority to not only set standards, but to establish rules. For homeowners stuck in a foreclosure nightmare or consumers hounded by bill collectors for a debt they don't owe, better protection can't come soon enough.