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Opinion, commentary and analysis on everything that makes the U.S. housing economy tick -- not to mention the ghosts in the machine, too. Written by HW's team of editors and reporters each business day.

Cordray's 'New Normal': We know your business better than you

But who watches the watchmen?

May 9, 2014

I never miss a chance to walk you through a Richard Cordray speech.

When you know you’ll likely get to hear something like how founding the Consumer Financial Protection Bureau evokes Abraham Lincoln at Gettysburg, you know you’re in for a treat.

Cordray spoke at the Federal Reserve Bank of Chicago Friday. It was everything I’d hoped.

Our mission at the Bureau is to reach for a “new normal” in the consumer financial marketplace and we seek some fairly basic things. We seek to hold financial companies accountable for being up front about the costs and risks of their products. We intend to ensure that predatory lending does not set consumers up to fail. And we are working to see that throughout the financial marketplace consumers are treated fairly and with the dignity and respect they deserve.

All noble goals, sure, but the execution in too many cases suggests the new normal is having to raise your hand to go to the bathroom. And having to run the hall pass through legal and compliance. And having no real avenues for appeal. And knowing your duly elected congress member has no oversight.

Whatever you think about government regulation, it cannot work in a piecemeal or patchwork manner, by having a system that addresses some competitors while leaving others alone. 

Hoo-boy. But that’s not on the CFPB alone.

The most glaring example is the race to the bottom with underwriting standards in the mortgage market, which caused the entire financial system to teeter on the brink of collapse. Evenhanded oversight of all industry players, not only across the mortgage market but across all consumer financial markets, is a better and more enduring formula for economic stability.

Yes, guilty. And yes, such evenhanded oversight would be a nice change.

The supervision authority of the new Consumer Bureau requires a focus on compliance with consumer financial law and on whether people are being subjected to unfair, deceptive, or abusive acts and practices. 

I think one of the chief complaints though, is that the CFPB is not also considering whether businesses and whole industries are subjected to “unfair, deceptive or abusive acts and practices” by the CFPB.

I firmly believe that our new Consumer Financial Protection Bureau will also one day be championed by the financial industry as well as consumers, because accountability creates a better marketplace for all who take part in it.

So let’s talk about the CFPB’s accountability to Congress. No? Still no?

Since we opened our doors for business in July 2011, we have not only built a new agency from the ground up, but we have also addressed hundreds of thousands of individual consumer problems.  We have pursued companies that have taken advantage of people and held them to account for treating consumers unfairly, deceptively, and abusively in violation of the law. 

Yes, let’s talk about numbers.

The CFPB reports that it received 163,700 consumer complaints in 2013, nearly double the total 90,000 they received in 2012. Of that, 59,900 are mortgage related, and since we’re HousingWire, let’s focus there.

There are about 50 million active mortgages in the United States. So in total in 2013, only 0.119% of all mortgage holders in the United States filed a complaint with the CFPB.

So, rounding off, that means there were almost 60,000 complaints about mortgages filed in one year.

Of all those, 77% are closed with a simple explanation or clarification to the consumer, without relief of any sort. Another 3% are closed without relief or explanation. Right at 5% involved an administrative response. The company in question was reviewing the complaint in 6% of the cases, and in less than 1% of the cases, the company did not provide a timely response.

In less than 2% of the cases, the company was demonstrably wrong and monetary relief was provided. In 7% of the cases, non-monetary relief was provided. That means 4 out of every 5 complaints get closed with an explanation, or dismissed without even bothering with an explanation, much less relief to the consumer complainant. That’s of the 0.119% of mortgage holders who filed a complaint at all.

I’m just saying it’s not like the CFPB is the Dutch boy holding back a dam that’s about to break.

We have put in place new rules to bring landmark changes to the multi-trillion-dollar mortgage market, so that it works better for consumers and responsible providers. 

And the compliance folks. It really works for them.

We have been charged by Congress to assure that the markets for all of these consumer financial products are fair, transparent, and competitive. 

“And that was the last order we ever followed from Congress…” (He didn’t actually say that.)

We expect a marketplace where companies are honest and clear so that consumers know the key terms and conditions of financial products up front, including pricing. We expect a marketplace where quality customer service is standard. And we expect a marketplace where financial products are designed to help consumers, not harm them.

This is a staggering, courageous blow to all the companies whose business model is built on harming their clients.

A certain professor once noted that just as companies are not allowed to sell faulty toasters to consumers that may endanger their lives, neither should they be allowed to sell faulty mortgages to consumers that may endanger their financial futures.

I have no doubt a certain professor made this kind of analogy.

Consumers are also entitled to the fundamental tenets of good customer service. Companies should be responsive to customers who seek to communicate with them. Companies should fix errors when they occur. They should process documents properly rather than lose them repeatedly. They should not lie to consumers. They should not ambush people with unexpected fees or penalties. These kinds of problems create unfairness and harm for consumers. Good customer service should be a straightforward relationship. It should not be marred by constant runarounds or unwelcome surprises that the consumer could not anticipate.

What’s bothersome here is the implicit and the tone – it’s like none of this would have occurred to greedy business owners and entrepreneurs, and that such actions are the default mode for those engaged in the free market.

 All of this accountability, ultimately, is about improving the consumer experience. And the best way to know if companies are being accountable to their customers is to hear it straight from the horse’s mouth. 

Or to look at the company’s bottom line. Since, you know…

In the olden days, the mantra for good businesses was that “the customer is always right.”  That was never literally true, but it reflected a steadfast attitude and an abiding frame of mind. And for our new agency, it is consumers themselves who are our customers.

Or, as you can see by the stats above regarding the validity of the mortgage complaints the CFPB got in 2013, it’s more like “the customer is right about 9% of the time, but we’re going with ‘always right’ anyway.”

(Wait, if one side in a dispute is assumed to be always right, what does that mean about the assumption of the other side?)

And this is important, because if you are a trillion-dollar bank – and we have four in this country – or even a multi-billion-dollar bank, it becomes increasingly difficult to manage or even understand your customers at such a high level. 

Big businesses don’t understand their customers; the CFPB does though.

From an analytical perspective, some might deride consumer complaints as mere anecdotes. And it is certainly true that not every complaint makes out an actual violation of the law. But the aggregation of individual data points begins to create a broader pattern yielding more meaningful data. Thus far, we have received more than 350,000 complaints from consumers, and we have worked directly with companies to address these complaints appropriately.

One, two, trend. Because seriously, 350,000 complaints out of how many millions of financial transactions conducted every day?

We will march steadily forward to help usher in this “new normal” of essential accountability, and we are glad to join with everyone who is likewise determined to work with us to achieve this goal.

While you’re marching, may I go to the bathroom?

 

(The full text of Mr. Cordray's speech -- sans snark -- can be read here.)

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