The Senate is scheduled to take a procedural vote concerning the nomination of Richard Cordray to head the Consumer Financial Protection Bureau today, and pundits are predicting failure. A group of 44 Republican Senators have pledged to block not just Cordray but anyone President Obama suggests to run the new agency. The losers in this most recent deadlock are consumers, who will miss out on legal protections the bureau needs a director to implement. Right now, the CFPB has limited authority. It’s taking some useful steps, but it’s limited in what it can do without a full-time director. Under the guidance of its temporary leader, Raj Date, it can write rules under existing statutes and supervise big banks, says Lauren Saunders, managing attorney for the National Consumer Law Center. It can also give financial institutions suggestions for making their products and contracts more user-friendly, but it can’t mandate their adoption.
With a director, the CFPB would be able to go after “abusive” practices by financial institutions. Right now, laws ban deceptive or unfair business practices, but there’s nothing to specifically protect consumers from abusive practices.
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What’s the difference? Saunders says there’s a lot of overlap between what’s unfair and what’s abusive, but that unfairness doesn’t really focus on the relationship between the company and consumer. “The abuse standard focuses more on taking advantage of somebody,” she says, whereas the designation of what’s unfair focuses more on whether or not the benefit the customer gets for what they’re paying is appropriate or not. “Taking unreasonable advantage of your power of authority or superior knowledge to push somebody into something that’s inappropriate” would be abusive, Saunders says.
One example of a practice that isn’t technically deceptive or unfair but likely would be considered abusive would be a situation that played out with unscrupulous mortgage brokers and subprime borrowers during the height of the real-estate frenzy, says Kathleen Keest, senior policy counsel at the Center for Responsible Lending. A homeowner with a very high interest rate would be offered the chance to refinance at a much better rate. Although they’d possibly be saving hundreds of dollars a month, there was a catch: The rate would only be that low for two years, then it would skyrocket. In this case, the broker could argue that the deal wasn’t unfair because the homeowner did save money — even though the terms are what any reasonable person would probably consider a seriously raw deal.
“Taking advantage of age, infirmity or ability to understand” would likely meet the criteria for an abusive practice, Keest says. She adds that there are some current practices related to products like prepaid cards and loans that are essentially secured with Social Security benefits that might fall under scrutiny by the CFPB — after it gets a director.
In the meantime, the CFPB has created what are essentially “nutrition labels” for financial products: short, standardized forms in easy-to-read, plain English. Ideally, every lender would adopt these, making it easy for people to shop around. Just like shoppers now can hold up a bag of pretzels and a bag of chips and easily compare how many grams of fat are in each, the CFPB’s models would let them compare, financial rates and fees the same way.
(MORE: Committee Approves Cordray for CFPB, Senate Fight Next)
The CFPB rolled out its newest template in its “Know Before You Owe” series yesterday. It covers credit card terms and conditions, a topic consumers find confusing, based on the complaints the CFPB has been fielding about credit card issuers. The template is here, and the agency is soliciting public comment. One credit union, Pentagon Federal Credit Union, is rolling out the simplified form to its 350,000 credit cardholders.
Right now, the CFPB can’t do a lot of the things its backers say it should be able to do. “The prevailing legal opinion is without a director, they can’t really look at some of the more abusive non-banks that are out there,” says Travis Plunkett, legislative director for the Consumer Federation of America, an advocacy group. The CFPB would place student lenders, payday lenders and even credit reporting agencies under federal oversight for the first time.
But for this to happen, or even for the CFPB to mandate that credit card issuers adopt more streamlined disclosures, Congress has to approve a director. And as long as they keep stonewalling, consumers will never get the protection they deserve.
