What Raj Date had to say on ‘the need for the CFPB’

On Sept. 15, the Consumer Financial Protection Bureau’s Raj Date delivered his first public speech in his role with the agency, titled Lessons Learned from the Financial Crisis: The Need for the CFPB at the National Constitution Center in Philadelphia.

On Sept. 15, the Consumer Financial Protection Bureau’s Raj Date delivered his first public speech in his role with the agency, titled Lessons Learned from the Financial Crisis: The Need for the CFPB at the National Constitution Center in Philadelphia. In his prepared remarks, he focused on the CFPB’s themes for “fixing” the mortgage markets and talked about the need for the Bureau to be involved in credit cards, checking accounts and student loans.

After his speech, Date responded to questions during a 15-minute Q&A session. Reporter Jeff Gelles of the Philadelphia Inquirer asked Date questions of his own and from the audience.

Date’s responses seemed uncharacteristically vague and off point for a former bank executive and former director of the Cambridge Winter Center for Financial Institutions Policy, where he oversaw research on topics such as capital regulations, the future of GSEs, and the Volcker Rule.

In his response to a question on the cost of regulation, for example, he says that “inconsistent regulation” was to blame for the current crisis and that the rules that applied to community banks did not apply to “other players,” yet he didn’t address the regulatory burden and the cost to community banks going forward.

He stepped around a question about when industry participants can expect to see the final version of the proposed Good Faith Estimate/Truth in Lending form. He did say, “We plan for five rounds of that public testing before we develop the proposed rule. We just launched the fourth of those five and so there’s a natural sequencing from there.”

Date – whose title is special advisor to the secretary of the Treasury on the CFPB – also wouldn’t go into specifics on the status of the “large participants” proceedings now that the comment period is over, offering only: “We have been, and we will, evaluate those comments to really inform our thinking about what’s the right and most effective way to move forward.”

Continue reading CFPB’s full transcription of the Q&A session below or watch the video.

Gelles: Many of the current arguments, from Republicans in particular, seem to center on the idea that regulations, particularly the prospect of new regulations, are a drag on the economy and on the prospects for recovery. Can you address why that is or isn’t true?

Date: It is a good question and I’m happy for the chance to get at it squarely. There is a notion, I know, that in general rules require compliance burden, and compliance burden costs money, and therefore that is money that is not used otherwise in the economy. But it also is the case that we have to remember how we got into this state in the first place – which is, we had one of the most important industries in the country, because it provides the lifeblood of credit to other industries, that was allowed to run off the rails principally due to inconsistent regulation. It was quite literally the case that the rules that were applied, say, to community banks, did not in practical terms, because of a lack of supervision apply to other players within the marketplace.

If you have an important industry where only some of the players, in practical terms, have to follow the rules, well then you shouldn’t expect great outcomes. So to my mind, sensible, pragmatic regulation of financial services is a necessary element of a vibrant economy in the United States.

Gelles: Can you describe what specific steps the CFPB plans to take against payday lending and those sorts of non-bank institutions?

Date: Payday lending, which is indeed one of the short-term credit products that in some ways you can view as a rough substitute for checking account overdraft products and otherwise, is one of the product areas that the Congress told the Bureau to exercise supervisory authority over once we have our full authorities. Which is a very important thing because from a consumer’s point of view, at least in some circumstances, you could easily see how payday loans on the one hand or overdraft on the other or other products, to the extent that one is making a decision between them. In general, the same sensibilities ought to inform the rules of the road that cover them. So it is a very important extension of the Bureau’s, of our overall financial regulatory apparatus to make sure that non-depositories are subject to the same kind of supervision as indeed all the banks in the country are.

Gelles: Here’s a straightforward question. When will the people who crashed our economy go to jail?

Date: This is a question that is probably more appropriately addressed to my wife, who is a criminal fraud prosecutor at the Department of Justice. I’ll just ask her. At the Bureau, enforcement is an important part of our mandate, and in some ways our approach to enforcement is going to be better informed – I would argue, more sensible and highly effective – precisely because we have other tools at our disposal. In that way, we’re going to be able to make sure that when enforcement is the right tool to use, I assure you, we will not hesitate to use it. Of course, we will work with our federal and state authorities to make sure enforcement, broadly speaking, is undertaken.

Gelles: Question about student loans – when long-term money is now … very, very cheap … why are student loan rates around 7 or 8 percent? As a parent of a college student, I’d like to know also.

Date: You should have some sympathy for me – I have 2-year-old twins, so if the rate of tuition increases, we either have to have twins who are very, very smart and can be on scholarship or who have no interest in college at all. … The cost of any consumer credit product is driven by a lot of things, but one of the things that really allow you to be confident that you’re getting a really market-clearing price, a “right,” rational price, is when both providers of a product and consumers of a product kind of are looking at the same deal. So I’m not speaking specifically about student lending necessarily, but in general, if providers and consumers aren’t seeing the same sort of terms and understanding the same sort of deal, then you shouldn’t be supremely confident that the market price is the efficient one. That’s generally true and that’s why I think it’s important that we restore some real order to consumer protection regulation.

Gelles: There’s a proliferation of debt settlement operations … many seem to be engaged in a pattern of false promises and outright theft and breach of promised fiduciary duties. Is the CFPB addressing this serious and growing problem?

Date: Debt settlement, to the extent undertaken by non-depositories, is exactly one of the areas that the Bureau uniquely has the ability, over time and if warranted, to be able to exercise authority, where federal banking regulators, for example, have not been able to do that in the past. So again, it’s one of these areas that when people think about financial services in mainstream America, they don’t necessarily think about the very many firms that are not banks or thrifts; they’re not depositories, but in fact, for many people can be an important part of the financial services landscape.

Gelles: Can you expand on that? What’s the status of the “large participant” proceeding? That’s where you might be able to take supervisory authority over debt settlement

Date: Sure. Let me provide a little bit of context around it. The supervisory authority of the CFPB, which is literally the authority to be able to examine institutions with respect to their compliance with federal consumer protection laws, applies broadly speaking to two sets of institutions.

The first is depositories, so banks, thrifts, credit unions greater than $10 billion in assets and at holding company level that’s about 111 different companies, and non-depositories, of which we’re talking about debt settlement companies, payday lenders, etc. … Our non-depository supervisory authority, in turn, you could divide into two big categories. On the one hand, it’s three specifically enumerated markets: mortgage, payday lending, private education lending, for which the Bureau has supervisory authority across the range of institutions, and then for all other non-depository markets, we have supervisory authority for the larger participants in those markets.

What we have tried to do, in the spirit of transparency in which we try to do everything, is reach out to the public to try to get thoughts and perspectives and comments on how we should think about how to define a larger participant in such a market. We have been, and we will, evaluate those comments to really inform our thinking about what’s the right and most effective way to move forward.  

Gelles: This questioner would like you to please comment candidly on what powers the CFPB would ideally have that were not bestowed by Congress.

Date: Candidly, you say. I think that the design of the CFPB is a really striking step forward in the prospect of sensible regulation in financial services in this country. Consumer finance is a gigantically important part of the overall economy. The notion that we put the existing federal regulators, who are staffed by hard-working and diligent people, but we put them in a position where they had a patchwork of authorities, was not an especially promising way to hope for success. The design of the CFPB – I’m very happy – addresses those major problems.

Gelles: This question pertains to the efforts to combine the Good Faith Estimate and Truth in Lending forms. At this point, we’ve seen several examples of draft prototypes. When can we expect to see a proposed rule, and can you tell us anything about what the regulations will look like?

Date: With regard to what the proposed regulations will look like, that’s part of the reason we’re doing all this preliminary work, is so we’ll know what the right shape of those will look like. But you’re right, it’s an important point that the various prototypes that we have put on the site and gathered comment on and have had lots of people into the office to help us with, are before a proposed rule. This is all work that, you know, in the past, in some places, would be done behind closed doors – kind of developing the rough contours of an idea and then proposing it as a rule and only then soliciting comment from the public.

Structurally, as a governance matter and a problem-solving matter, our hope is to be able to avoid the potential problem of having a solution that is so far baked and where you’re so emotionally vested in a proposed rule by the time it finally comes out that you don’t actually end up taking it seriously, as one should, the comments that you hear. So we’re actually inviting the public in before having a proposed rule. We plan for five rounds of that public testing before we develop the proposed rule. We just launched the fourth of those five and so there’s a natural sequencing from there.

Gelles: The crisis may have been caused by bad mortgage practices, but we’re seeing that our clients are increasingly having problems with mortgages because of under- and unemployment. How do you reconcile the work of the CFPB with funding for housing counseling at national and state levels? Might there be some role for regulations requiring financial institutions to contribute back to help clean up the mess?

Date:  First, with respect to housing counselors and the funding that they need in order to do their important work, of course the Bureau doesn’t have any control on that issue. But it is a gigantic issue. Mortgage servicing, broadly speaking, is important at this particular moment in time precisely because mortgage is so big and because the ambient level of delinquencies and the state of loans being somewhere in the process of foreclosure is so dramatically high. There are – unfortunately this is not a case where some tools can be left on the sidelines. It is a problem of such magnitude that, really, it’s important for us to marshal all of our resources. I know at the Bureau we are making it a real priority, to think about what are the common-sense rules of the road that ought to be applied to this very big and very important business.

Gelles: I’ll follow up with one of my own, since we’ve run out of audience questions. But it pertains to the same issue – when you said we got into this financial mess “one lousy mortgage at a time,” at a time when so many people seem to be blaming the financial crisis, and the continuing crisis, on government overspending, can you expand a little bit and connect the dots for us as to why, three years after Lehman Brothers, the economy is in such bad shape because of the things that happened several years ago?

Date: Sure. Consumer spending in the economy, depending on how you think about it, is somewhere between 60 and 70 percent of the economy. Whether you like it or not, consumer spending – the level of it and the sure-footedness of it and the confidence of it – is contingent on the availability of right-minded consumer finance. Consumer finance is simply not something that can be expected to run well without some rules of the road. If you have rules of the road that don’t work, which is what happened during the course of the credit bubble and the ensuing crisis, well then everything falls apart quite quickly.

Consumer finance, as a method of extending credit, fails to work, it starts to break down, and consumers’ confidence in spending naturally begins to break down. It slows the entire economy, which in turn, impacts everything else that we do.

Naturally, although I’d like to say that the CFPB is the entire part of the answer, obviously it’s not. But having right-minded and sensible regulation of consumer finance is a necessary part of the answer to move forward.

Fredrikson & Byron Law