How The Law Can Protect Consumers When Making Large Financial Decisions
May 27, 2019
Knowledge@Wharton: Great meeting you. Thank you for coming on here today.
Cordray: My pleasure.
Knowledge@Wharton: Thank you. I would imagine that with some of the things that have been going on in the last few months, and with the investment that you have with the CFPB, that you have a sense of hesitancy and worry about what has been going on with the CFPB over the last couple of years.
Cordray: Yes, I do have some worry. I think that what we have seen is consumers are in such a significant financial marketplace with these big financial companies and big banks – some of the largest companies in the world – that they need to have someone looking out for them, protecting them against abuses – but also helping them figure out how to deal with their problems, which is something the Consumer Bureau does. And I want to make sure that it is a robust agency that is fulfilling its mission. Yes.
Knowledge@Wharton: I would think from your perspective, having been in this realm for five years, and the way it plays out, that you’ve probably heard from a lot of consumers about the fact that we are 10, 11, 12 years out from the recession, and yet we still have things pop up like what happened with Wells Fargo in the recent past.
Cordray: We do. We do. And probably we will always have some things pop up. Hopefully they’ll be smaller, hopefully, they’ll be less outrageous, but it’s important – You know, you don’t just assume that your city block is safe without making sure that there’s a police force to monitor it to some degree.
Cordray: And the same is true of the financial marketplace. No different there.
Knowledge@Wharton: When you jumped into the role leading the CFPB, and obviously in that place and time, a couple of years out from the Recession, you take on that role – and what are your thoughts in terms of the issues that you really have to tackle, because, at that point, the economy was still really starting to try and gain its footing again?
Cordray: Yes, it certainly felt like we had a very big job. One of the things we knew we had to do was to create reforms in the mortgage market, which had blown up the economy. In 2008, you’ll remember the terrible, irresponsible mortgages, no-documentation loans where they didn’t even bother looking at people’s incomes and assets, but they were giving loans that were going to ultimately fail in the long run but could be sold under Wall Street, and it ended up cratering the entire economy. That was one of the problems that we had.
We also knew that we had to build a robust arm to enforce the law so that financial institutions took us seriously and thought carefully about how they complied with the law and thought more carefully about how they treated their customers. And I do think there’s been some institutional change there that is for the good.
We also wanted to build a way for consumers to have their individual voices be heard, to file individual complaints, to get individual situations rectified. And we did that by the hundreds of thousands. In fact, there were 1.3 million complaints taken during the time I was there that we handled. And I see that the agency does continue to do a very robust set of work there. They just issued a report – they dealt with 330,000 complaints last year, so consumers have a lot to say. They have a lot of problems, and the agency is in a position to help them. And I think that’s quite important.
Knowledge@Wharton: How do we try to get to the point where, as you said, we will always deal with various levels of these issues. But how do we get to the point where the businesses themselves have a much better understanding, where they will try to avoid situations that do impact the consumer that way?
Cordray: I think it’s two pieces. I think one piece is, as you say, the businesses have to be convinced themselves that this is in their interest – that an ounce of prevention is worth a pound of cure. And I think that the hundreds of billions of dollars that were levied in fines and penalties in the wake of the financial crisis did wake a lot of institutions up – not all of them, as you say.
Cordray: The Wells Fargo mess is surprising, in light of all of this, but a lot of them have paid a lot more attention to compliance, and that’s important. They need to get it.
But the second piece is they also need to know that somebody’s looking over their shoulder. That gives them the motivation to be sure that they can’t just cut corners, that they can’t get away with violating the law, that it’s going to cost them more problems in the long run, and therefore it’s worth avoiding those problems up front. And I think having a system where there is monitoring, and people are aware of it, and people respond to it is important, as well.
Knowledge@Wharton: For people who don’t know, how much of a partnership is there with a lot of these policy actions and policing of banks and institutions, between the agencies and the government here in the United States and in Europe? And I ask that because obviously there have been numerous stories of banks in Europe that have had many similar issues to what we saw here in the United States, as well.
Cordray: Yes, and also there are big banks in the United States that operate in Europe, and there are big banks in Europe that operate in the United States. Obviously, the European banks have bigger operations over in Europe than they have here, but they’re sizeable here, as well.
Cordray: So for example, we would cooperate quite a lot with the British regulators and with the European regulators to some extent – probably not as much as we could have, but as you say, financial transactions have become more and more globalized. There was a time years ago when interstate banking was a novelty, and people didn’t really bank much across state lines. That has entirely changed, and the same phenomenon is happening worldwide more and more. It’s not quite that far along worldwide, but it is something that is relevant, and I think that the better we can cooperate, the better we can see problems that they’re having that we can avoid here, and vice-versa – the more we can help one another.
Knowledge@Wharton: How does the advent of technology in the last couple of decades impact those issues, as well, because I would think you’re talking about the speeding up of the process of transactions, obviously it’s much quicker now than it was, say 20 or 25 years ago. The technology obviously has to play a role here, as well.
Cordray: You’re absolutely right. The technology has made a huge difference. First of all, it has made it easier for us to cooperate and to work back and forth with the regulators from other countries and across the Atlantic. But at the same time, for the institutions, the technology has changed the game enormously. And much of what is happening now is borderless. And it is more difficult to enforce the law, given that the commerce itself is borderless – lending and banking. And yet the enforcement often is still constrained by different problems with borders, in terms of issuing subpoenas and getting documents and getting information. And the businesses know that. And they sometimes – especially the illicit ones – feel that they’re a couple of steps ahead of the enforcers. And when they feel that they can get away with things, they will try to do so.
Knowledge@Wharton: Yes, because I was thinking as you were saying that, that part of this also lies in the lap of governmental bodies like Congress here in the United States, British Parliament – you know, you can go around the globe and find those specific entities.
Knowledge@Wharton: Of those entities themselves – and it’s one thing for an agency like the CFPB to tackle a lot of these problems on their own – but it’s also a responsibility of Congress, of Parliament, of all these different entities – to be aware of all these issues and to be able to pass the legislation necessary –
Knowledge@Wharton: – obviously in part with Dodd-Frank, to be able to try and prevent this.
Cordray: To stay current and to try to stay a step ahead. And it is not easy in today’s very fast-paced financial marketplace. As you say, technology has been a game-changer, not just in pretty much every workplace in America, and increasingly around the globe, but especially in financial services – where things are often instantaneous. And if the enforcers are one, two, three steps behind, if Congress is one, two, three steps behind – as happened, for example, when you think of Equifax with the big data breach of hundreds of millions of people’s credit files being breached, and personal and sensitive financial information – Congress is actually well behind on that problem, and we need some reform there.
Knowledge@Wharton: If we are going to move forward with consumer protection, what are the areas that you think we need to continue to focus on moving forward? Because this is part of what you’re going to be talking about here at the University of Pennsylvania today – the actual state of consumer protection and the role that law can play.
Cordray: So I think that number one, it’s important for there to continue to be robust regulation and robust oversight and especially enforcement of the existing laws. We don’t necessarily need a lot of new regulations. There are places where we could probably improve things, and as you say, staying current with the changes in the marketplace is important. But even-handed enforcement of the law is significant. When you don’t get even-handed enforcement, some people are getting an edge. They’re feeling like they can take an edge by violating the law.
Cordray: Everybody else has to compete against that – which is really the worst form of unfair competition when you think about it. And so that’s important. But I would say that as we stand, we’ve had significant reforms in the mortgage market and in the credit card market. They are much improved. They are functioning better. I think everybody involved in those markets, both consumers and institutions, would agree that things are better than they were ten years ago. We should continue looking at other markets like debt collection and credit reporting, and see what improvements we can make there.
Cordray: And it’s an ongoing process. But it’s also very important for everybody to understand that there is a cop on the beat, there’s somebody looking over their shoulder, and therefore it keeps them on their toes.
Knowledge@Wharton: I think it’s important with the housing market, specifically, because of how massive that bubble was, and the impact that it had on the economy – that the changes that have been made over the last several years to tighten up the processes to be able to qualify for a mortgage – they are important to stay as close to as where they are now as possible so we don’t fall into another massive housing crisis.
Cordray: I strongly agree with that. I also think that what we’re doing now is we’re monitoring the mortgage market much better than we did. The Federal Reserve has told us that in 2008, they really had a lot of blind spots in terms of what was happening in that market – the deterioration of underwriting standards. People didn’t see how far that had gone. And when you’re not aware of a problem, or if you’re not on top of it, it’s very difficult to head it off and address it. It’s hard enough to address it when you are aware of it, but we’re in a better position to know what’s going on in that market – that critical market, as you say – at a time when it’s heated up in various parts of the country, although the recovery has been very uneven in different parts of the country.
Knowledge@Wharton: Richard Cordray joining us in the studio. Your comments are welcome. I mentioned the role that Congress needs to take. What about the state governments and the roles that they need to take moving forward?
Cordray: Well, that’s an interesting point that you’re raising, because we do have a federal state system – a system of federalism here. States have authority over consumer protection, as does the federal government, and we work best when we’re working in tandem when we’re kind of strategically cooperating. It doesn’t mean we’re doing the same things. It doesn’t mean – certainly, we don’t want to be duplicating things.
Cordray: But at the same time, if we have a strategic vision, we can talk to one another, we can cooperate with one another. Law enforcement never has enough resources to chase down all the problems that are existing out there, and so by cooperating and coordinating, we’re going to do a better job.
Right now, the states are stepping up. A lot of them are getting more aggressive about consumer protection. The federal government has backed away to some degree, and that’s a natural ebb and flow. I was in California last week, testifying. They’re working on putting together an analog of the Consumer Financial Protection Bureau at the state level, to make sure that Californians are protected at a time that they’re concerned whether the federal government is retreating in this area. And that’s a very natural thing in our system.
Knowledge@Wharton: That was going to be my next question. How natural is it to have the states looking over a lot of these issues, as well, because they are there at the local level, really having a better understanding of something may be different in California than, say, in Georgia or Alabama?
Cordray: That is certainly true, and it’s true of a lot of different –
Some financial markets are national or even global in scope, but a lot of them are local. Real estate markets are very local – housing markets. I would say that things like payday lending and debt collection can vary enormously from one place to another, and the state and local officials are closer to that. They have a better finger on the pulse for that. So there’s an argument that we always should have pretty robust state enforcement of consumer laws. And as I say, “best” is when the federal and states are working together and have a strategic kind of plan in common. But the states can do a lot, and they can do it in many ways, and as you say, more effectively.
Knowledge@Wharton: What is the state of the payday lending industry right now? This is one of those industries that certainly has gotten a lot of publicity – especially over the last few years – about the practices that they have put in place where in many cases it really does put somebody who needs a short-term loan in a significant negative position when they have to pay it back.
Cordray: Yes, well that was what the research showed that we did at the Consumer Bureau. The state of payday lending in America is very mixed. We have about one-third of the states who don’t really allow payday lending. They have interest rate caps, and they don’t allow these 400, 500% interest rate loans to be made. About two-thirds of the states do allow them, although they have various different regulations in place. And it’s interesting to see which regulations maybe work better, and which work worse. And that’s one of the ways the states can be helpful. They provide experiments for us to see what does and doesn’t work. But I would say that at this point, there is a significant problem for a number of consumers who get trapped into what they think are short-term loans, but they end up stuck in them for long periods of time. It’s never going to build your financial future to be living your life off of 400, 500% rates of interest.
Cordray: We know that. And the question is how most effectively to address it.
Knowledge@Wharton: In your speech today here on campus, what is it that you really want to try and bring across? What are the most important things that you think need to be addressed in this day and age surrounding consumer protection?
Cordray: One thing is how important consumer finance is in our lives today. We rarely make any significant purchases anymore without using some form of credit – whether it’s credit cards or some kind of a loan – or student loans to get an education, as you know, you see all around you here on the campus.
Cordray: You know, credit is such a much bigger part of people’s lives, so managing that credit and handling it effectively is important. I think we do a poor job in this country on financial education, so that young people coming out of school and going into the workforce often end up making the same mistakes that others have made before them because they’re not really learning from those mistakes because nobody has bothered to teach them. I think that we could do a much better job in our schools by preparing people. We prepare people to be a voter by teaching them U.S. history and government. Why don’t we prepare them to be a consumer by teaching them about household finance? We used to do that years ago.
Cordray: We’ve kind of given that up, and we need to get back to it. That’s important. But also while I’m here on campus; there are a lot of great students here, and I want them to think a little bit about public service and how that could be a part of their life, perhaps, for a few years in their life – or at least have respect for those who do it, because it sets the framework and tone for our society and makes a lot of leadership decisions that matter.
Knowledge@Wharton: It is an important factor to what we have here, and it has always been kind of an important component to what we see here in the United States, of some level of public service. Obviously, there are other countries that actually require your having a 2-year, 4-year – whatever that stint may be – public service before you can go out into the public.
Cordray: That’s true. Yes.
Knowledge@Wharton: I don’t know if that’s something that could work here in the United States, or if we would want to even tackle it, to begin with, but because of the fact in many cases it’s a voluntary element, it’s a personal decision to go down that route.
Cordray: Yes, I’ve always favored something like that. You see some societies require military service. Some require some sort of community service. I think more and more you have a lot of young people who are engaged in some kind of community service because they understand that it helps build their resume, and it also helps them get experience in life outside of school – which is one kind of experience. But it’s only one kind, and it doesn’t prepare them for a lot of the challenges they’re going to deal with in life. So I do think that’s important.
Knowledge@Wharton: So do you think as we have seen the generations develop – and baby boomers have passed onto millennials, and now Gen Z is going to be in the mix, as well – that the understanding, and maybe not fully understanding, but at least the interest in knowing more about an issue like consumer protection has grown in recent years because of, obviously, the Recession and some of the issues that banks have been involved with?
Cordray: I know that it has. I have seen that it has captured people’s attention more and more. People saw – you know, it was ten years ago – but only ten years ago, people saw how this affected family members, and it affected whole communities.
Cordray: And people – I think there was always a Depression Era mentality to people who grew up in and lived through the Depression, like my father.
Cordray: And I think that there’s something of that happening with the generations coming through that was affected by the crisis and whose families were affected by the crisis. I think they will probably be more careful consumers throughout their lives.
Cordray: I hope that’s true. I believe that’s true. But I think we can do a lot to reinforce that, as well.
Knowledge@Wharton: And unfortunately, for a lot of those kids, they saw it firsthand happen to their parents, with the loss of retirement savings, and the loss of houses, as well.
Cordray: And the loss of savings that had been put aside to help them get through school.
Knowledge@Wharton: And that, too, yes.
Cordray: And then, of course, those who, coming out into the workforce is that era, the difficulty in getting jobs, and how that set them back sometimes two, three, four years in terms of their own trajectory and hopes for how the pattern of their lives would be. So I think people were deeply affected by this. I think people continue to be aggravated, that they feel that no one was held responsible in a very visible way. None of the big executives ended up going to jail. And I think people resent that. But I also think they saw how much this affected their lives – and it’s part of their mindset going forward, and we need to reinforce some of the good lessons that we’re learning at the same time that we’re working hard, and the country continues to recover out of that.
Knowledge@Wharton: Could there have been more done regarding some of the executives that were –
Cordray: I definitely think so. I think two things that could have been done that would have been different is holding some individuals responsible for things that happened.
Cordray: And also when we put all the money into the banks, we should have required that to be loaned on into the economy to small businesses and job creation.
Cordray: And that happened very, very slowly. I think it could have happened faster.
Knowledge@Wharton: How important has been the implementation of stress testing?
Cordray: I think it’s quite important – again, for two reasons. One is you can’t really address what you aren’t in a position to see and monitor and know. So for the regulators, it’s been quite important. But I think for the institutions themselves, it puts them in a mindset of thinking about their capital buffers, thinking about how they would handle a downturn – not just being glib and easy in their minds that everything is going to be fine and all the optimistic assumptions can be counted on. That’s what got us into some of the problems at the time of the financial crisis. And for us to keep those institutions more attentive to what they need to do to remain healthy over the long run is quite important – not caught up just in quarterly earnings, but thinking about the long term.
Knowledge@Wharton: So because of your work in the past with the state of Ohio, how can the states and the treasuries at the local level, then, play a role in terms of trying to make sure that their consumers are in a better fashion – in terms of working with the federal government and overseeing a lot of the issues at the local level.
Cordray: Well, again in two ways. One way that I think at the state and local level we could do a much better job is through financial education in the schools, and making sure that’s a bigger part of what happens with our kids, going through K through 12.
But I also think that state and local authorities could be strategizing about consumer protection better. There are things that they can be doing. A lot of the things that we did at the federal level could be done at the state level, as well, and often they were being done. And when we worked together on things, we were much more effective.
Knowledge@Wharton: It is important to be able to provide that level of education for our youth, in terms of financial literacy moving forward because of how important it is, even when you get into high school, to be able to have components of financial literacy, in terms of if you have a job and being able to put money away and put money in the right places so that you have money to spend when you go to college.
Cordray: And we all know that lots of young people are aimed at buying that first car – whether new or used. And that’s a big investment for them. But think about it. If we don’t teach financial education in school, then what we’re assuming is that people are going to learn it at home. And in some homes, they’ll learn quite a lot, and learn it well. In some homes, they won’t learn anything. In some homes, they’re afraid to talk about this subject, because it’s already a sore spot, and it’s a source of tension with the parents or within the family.
Cordray: And so if people don’t get that, they’re going out on their own, and they’re learning it in the school of hard knocks, which is not education at all. And it means they’re going to suffer their mistakes, rather than be able to move past them without having to deal with bad consequences.
Knowledge@Wharton: Are we going to see you on Jeopardy at any point in the future?
Cordray: I’m always glad to be invited back to Jeopardy. I’ve been invited back a couple of different times.
Knowledge@Wharton: What’s that experience like when you go through that?
Cordray: Oh, it is high pressure, but really stimulating and interesting. And I’ve got to say, although Alex Trebek, when you miss a question, sometimes can sting a little bit, he is quite a force of personality. He has been in people’s living rooms for 35 years.
Cordray: He has really made that show a success. And I think everybody who’s aware of his cancer diagnosis is wishing him really well, and I think that’s buoying him quite a bit, because he’s, I think, always surprised to learn how much he’s beloved around the country.
Knowledge@Wharton: Is that more pressure than running the CFPB?
Cordray: In a very short period, yes.
Knowledge@Wharton: We should also let people know that you were a fair basketball player in your day, as well, playing semi-pro from what I understand?
Cordray: Yeah, over in England in the early 80s, where they really weren’t very good.
Knowledge@Wharton: Right, but you enjoy a pick-up game, as well? Enjoy your time on campus today, Richard. Nice to meet you, and I look forward to seeing you back here on campus down the road.
Cordray: My pleasure.
Knowledge@Wharton: Thank you. Richard Cordray, as we mentioned, Distinguished Policy Fellow here at the University of Pennsylvania Law School, and also former Director of the Consumer Financial Protection Bureau.