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Consumer Financial Protection Bureau 101: Why We Need a Consumer Watchdog
11:13 AM EST
The Consumer Financial Protection Bureau (CFPB) is a central part of President Obama's historic Wall Street reforms. Their job is to make markets for consumer financial products and services work for Americans — whether they are applying for a mortgage, choosing among credit cards, or using any number of other consumer financial products. Many people have expressed confusion about this agency, so we put together answers to some of the questions we've been asked.
The Consumer Financial Protection Bureau (CFPB) was created to make sure that the financial products and services that Americans depend on every day —including credit cards, mortgages, and loans—work better for the people who use them.
Established by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, CFPB is charged with overseeing the Federal financial laws that specifically protect consumers—people who keep their money in banks and credit unions, pay for goods and services with their credit cards, and rely on loans to buy homes or pay for college, among other services.
The Bureau is tasked with making sure people understand the fine print that explains the risks involved in using these services, and ensuring the banks, credit unions, and other financial companies that provide them play by the rules.
Before CFPB was established, seven different Federal agencies were responsible for various aspects of consumer financial protection. No single agency had effective tools to set the rules or oversee the whole market, and that is part of what led to an economic crash of epic proportions. As President Obama explained in his speech in Osawatomie:
We all know the story by now: Mortgages sold to people who couldn’t afford them, or sometimes even understand them. Banks and investors allowed to keep packaging the risk and selling it off. Huge bets – and huge bonuses – made with other people’s money on the line. Regulators who were supposed to warn us about the dangers of all this, but looked the other way or didn’t have the authority to look at all.
Moving forward, CFPB will be the single, consumer-focused regulating authority, consolidating the existing authorities scattered throughout the Federal government under one roof. And, the Bureau’s oversight includes the large banks and credit unions that had historically been regulated by the Federal government, as well as independent and privately owned “non-bank financial institutions” that had never been regulated before.
This means that for the first time, the Federal government will be able to regulate the activities of independent payday lenders, private mortgage lenders and servicers, debt collectors, credit reporting agencies, and private student loan companies.
Non-bank institutions offer important services like access to credit and access to payment systems for many people who are unable to rely on banks. But, these entities haven’t typically been subject to Federal supervision, and providers are often less clear about costs, terms, and penalties than better-regulated alternatives. As a result, hidden fees and undisclosed fines can make these services more expensive for the people who use them.
Regulating these industries will restrict the use of unfair, deceptive, and abusive practices against consumers and ensure providers offer clear, upfront information about the rights and responsibilities of the people who depend on them.
Not regulating these providers, on the other hand, is bad news for individual consumers, many of whom are already financially vulnerable.
- Nearly 20 million Americans use payday lenders. Studies have found that payday lenders charge their clients, on average, $16 for a $100, two-week loan—a 400 percent annual percentage rate. If borrowers miss payments they begin to accumulate huge penalty fees and can fall into a debt-and-fee spiral that may be hard to escape, and end up with even fewer funds to pay for essentials.
- In the run-up to the financial crisis, unregulated, non-bank lenders were among the largest originators of subprime mortgages. The default rate on subprime mortgages issued in 2006 now exceeds 50 percent.
- Nearly 50 percent of claims made against debt collectors cite harassment. Currently there is about $1.2 trillion of delinquent consumer debt, and many people who fall behind on their debt payments lack the resources to protect themselves from predatory collection behavior, which can lead them to make financial decisions without having all the facts.
- One in five Americans over the age of 65 has been the victim of a financial scam.
- Twenty-nine percent of young people between the ages of 22 and 29 report delaying or not pursuing further education because of their debt.
The Wall Street Reform Act gave CPFB a wide array of tools to promote fair, transparent, competitive markets. CFPB’s duties fall into three main buckets:
CFPB provides financial education to consumers and ensures people are able to get the information they need to make sound financial decisions.
A fair, efficient, and transparent market depends upon consumers’ ability to compare the costs, benefits, and risks of different products effectively—and to use that information to choose the product that is best for them. Fine print and overly long agreements can make it difficult for consumers to understand and compare products.
Like a cop on the beat, CFPB is responsible for rule-making, supervision, and enforcement of Federal consumer financial protection laws and restricting unfair, deceptive, or abusive acts or practices against consumers.
No provider, regardless of size or type, should be able to build a business model around a set of practices that target consumers unfairly. With consistent rules that apply across the marketplace, consumers receive strong protections regardless of whether they deal with a bank or a nonbank financial company.
The Bureau also takes consumer complaints, researches consumer behavior, and monitors financial markets for new risks to consumers.
Monitoring financial institutions and analyzing how people respond and interact with them gives CFPB more information about hazards consumers encounter when dealing with various companies and entities and also provides a comprehensive look about the health of the entire system.
Prior to the passage of the Wall Street Reform Act (LINK), no single agency had effective tools to establish standards for and oversee the whole market, and consumer financial protection was no one’s top priority. The result was a system where no one was sufficiently accountable for getting the job done. We saw the outcome of this structure—both in the 2008 financial crisis and in its aftermath.
Among CFPB’s many accomplishments since its launch a little more than a year ago, the Bureau introduced three “Know Before You Owe” campaigns focused on redesigning the materials people use to make decisions about mortgages, student loans, and credit cards.
When people take out a loan to purchase a home or refinance their mortgage, they receive two key disclosure forms that explain the final terms and costs of the loans.Unfortunately, the technical and legal jargon used in these forms may be more confusing than helpful. Complicated and lengthy disclosures can make it hard to answer or even ask the right questions. Many buyers don’t know what they don’t know until it’s too late.
CFPB launched Know Before You Owe to replace these two forms with one disclosure that is easier to use and understand. Throughout the process, the Bureau solicited feedback on their web site about how to make the form as clear and simple as possible.
To learn more, click here.
The increasing cost of higher education, the financial crisis, and continuing tough economic times mean that more students will rely on loans to pay for tuition and make ends meet while in school. Students should be able to understand the costs, risks, and benefits of the loans they will use to help pay for the educations.
CFPB created a sample financial aid shopping sheet as an example of how schools might improve the information they present to prospective students and their families that helps them better understand available financial aid options and repayment costs.
The shopping sheet is only a “thought starter” and CFPB is asking for feedback on how to best present the information students and their families think is most important. Check out the sample and let CFPB know what you think here.
Credit cards are the most commonly used form of consumer credit. Almost two out of three families now have at least one credit card, and almost half of all families carry a balance.
To help the millions of Americans who use credit cards better understand their card agreements, CFPB developed a prototype shorter, simpler credit card agreement that clearly spells out terms for the consumer.
To see the prototype agreement, and leave your comments, click here.
- Learn what protections you have against credit discrimination through the Equal Credit Opportunity Act and the Fair Housing Act.
- If you think you've been discriminated against in a credit-related matter, file a mortgage loan complaint or a complaint about a credit card transaction.
- Information for servicemembers, veterans and their families: Military life can have some extra challenges that can sometimes have powerful financial repercussions, and servicemembers should be able to accomplish their mission without worrying about illegal or harmful financial practices. CFPB's Office of Servicemember Affairs ensure that military personnel and their families have a voice at the Consumer Financial Protection Bureau.
- Information for older Americans: Older Americans face many financial challenges as they age. They have opportunities to travel, explore new fields of work or hobbies, or spend time with family and friends. But often scam artists or bad advice take away these opportunities. CFPB's Office of Financial Protection for Older Americans offers seniors information and tools to navigate safely through financial challenges.
- Information for homeowners having trouble paying their mortgage: CFPB can help you get connected to a HUD-approved housing counselor. At no cost to you, the counselor can help you work with your mortgage company to try to avoid foreclosure. A housing counselor can help you organize your finances, understand your mortgage options, and find a solution that works for you.
- Don't see what you're looking for? Visit consumerfinance.gov or explore their resources for getting help now.
Read about President Obama's appointment of Richard Cordray to head the Consumer Financial Protection Bureau.