Prepared remarks of Richard Cordray Director of the Consumer Financial Protection Bureau
WASHINGTON, D.C. (July 19, 2016) —
NAACP Annual Convention
July 19, 2016
Thank you and let me welcome you all to my home state, the Buckeye State of Ohio. In particular, I thank President and CEO Cornell William Brooks and Chairman Roslyn Brock for inviting me to be with you today. I am also glad to be here with your Washington Bureau Director, Hilary Shelton, who has become a close friend from our work together. We have something important in common, as your efforts to protect and educate consumers often mirror our own work at the Consumer Financial Protection Bureau. Because of you, we have learned how to do our job better and, together, to find more ways to improve people’s lives. We have come to understand that our ultimate goal must be to make sure every consumer counts.
We must first recognize, however, that these are difficult days for our nation.
We have seen horrifying events unfold in Baton Rouge, St. Paul, and Dallas. They are tragic, searing reminders of how we must constantly strive to put our broken pieces back together through mutual support and understanding. Some people do things that are just plain wrong. Others are made to suffer despite their innocence. All of us wonder why, as we ponder questions about the causes and effects of hate, prejudice, and violence. The bonds of our society are frayed by fear and anxiety. And we cannot help but question our basic American concepts of justice and fairness as we survey these inexcusable acts of inhumanity.
We must recognize, however, that police shootings of civilians, specifically African-American civilians, and even civilian shootings of police, unfortunately are not new events in the history of this country. For our officers and our citizens alike necessarily reflect all of the same attitudes that are present in our society as a whole, including prejudice, misunderstanding, anxiety, and suspicion. We can and do try to rise above such attitudes. But try as we might, all of the training and procedures and protocols – which I know well from my days as Ohio Attorney General, where I was responsible for directly overseeing the training of most new peace officers across the state – cannot push aside the frailties and imperfections of human nature and our society.
What is new, however, is the heightened visibility of these events, which is due partly to changes in everyday technology but also to growing levels of public attention and concern. Justice Brandeis of the U.S. Supreme Court famously captured the transformative power of transparency in our government when he observed that “Sunlight is said to be the best of disinfectants; electric light the most efficient policeman.” We must have the courage to confront and diagnose what is happening in our society before we can hope to agree on common facts and work together to find positive resolutions to our problems. As James Baldwin wrote: “The world is before you and you need not take it or leave it as it was when you came in. Not everything that is faced can be changed, but nothing can be changed until it is faced.” We must recognize evil wherever it is found to exist, so that we can determine how best to take it on and root it out. All of us share a mutual responsibility to do that, individually and collectively.
The same commitment to transparency – to the investigation and analysis and identification and exposure of wrongdoing wherever we find it – must also mark our work at the Consumer Bureau if that work is to succeed in achieving our mission. Discrimination on prohibited grounds in the financial marketplace is by no means a thing of the past, but it is squarely against the law. In some instances, discriminatory practices have grown more subtle; often they now tend to be more hidden in the face of evolving social and generational norms. But the undoubted fact of slow change cannot breed complacency. Nor is slow change good enough to fulfill our essential American ideals of justice and equality. Not until we can see that we are making every consumer count will we realize our goal of economic justice.
The fair lending laws that Congress enacted and that the Consumer Bureau is charged to enforce and embody the fundamental promise from the Declaration of Independence that each of us is entitled to life, liberty, and the pursuit of happiness. Yet economic injustice breaks that promise by cutting off opportunities in ways that can make our personal journeys incredibly difficult and perhaps even impossible. In short, economic rights are civil rights, and without securing them both, we fall short of a just society.
Over the brief five years of our existence, however, we have found that various practices continue to interfere with opportunities for African Americans and other people of color. I will talk today about three such practices. The first is redlining in mortgage lending. Far from a vestige of a bygone era, we have found it to be very much alive in too many places. Second is discrimination in auto lending, most notably the practice of discretionary dealer markup that often leads to disparate and negative impacts for minority borrowers. Third is another practice that affects the African-American community: the relatively modern practice of making high-cost payday loans. Although these loans are marketed as short-term relief, they frequently end up trapping consumers instead in re-borrowing cycles of six or eight or ten or more loans that undermine people’s finances. In each instance, as we will see, it is crucial that we seek out the truth about such practices and then fearlessly expose their defects to find lasting solutions.
One of our most cherished ideals is the American dream, which offers the opportunity for every hard-working person in this country to achieve prosperity and provide a leg up to the next generation. Access to affordable, responsible credit can put us on this pathway to success. A mortgage can allow people to afford to buy their own home, which is a key way to build and pass along wealth in our economy. But for African-American communities in this country, credit is often unavailable, may be quite expensive, or is offered through predatory practices. For too many consumers of color, the pursuit of prosperity can be difficult or even ruinous. Active discrimination, fueled by conscious or unconscious prejudice, has hindered millions of African-American consumers from getting ahead, or even keeping up.
These economic injustices deny opportunity, drain wealth, and desecrate communities. They prolong and heighten already significant disparities between white and African-American families. For white households in America, median income is $60,000; for African-American households, it is $35,000. White households in America have an average net worth of $134,000, but for African-American households, it is $11,000. Home ownership among white consumers is about 71 percent; for African Americans, it is about 42 percent. And the median house owned by a white homeowner is worth over $85,000, compared to $50,000 for African Americans. Small wonder that many feel trapped in a system that seems to barricade every avenue for economic advancement.
At the Consumer Bureau, we can see how systemic injustice against African Americans is reflected across consumer financial markets. Communities of color have been besieged by a cycle of inequity throughout our history. Housing policies once pushed African Americans into segregated communities where they were shut out of the mainstream banking system. Government regulators and private lenders both literally drew red lines around these communities and turned them into banking deserts. Those who lived inside the lines were denied access to local financial institutions with connections to the community and a stake in its success. To this day, the lines of segregation remain evident and their impact persists. Names and neighborhoods still telegraph race, and lenders can use these markers to deny credit altogether or to price it on worse terms.
Nonetheless, many things are changing and evolving in our society. What about redlining? Can we safely assume that such practices from longer ago are now a thing of the past? Unfortunately, as we have seen quite clearly, the answer at times is still “no.” Redlining is no longer legal but neither has it vanished. Just a few weeks ago, we joined the Department of Justice in taking action against BancorpSouth for discriminatory practices in mortgage lending that harmed African Americans and communities of color, including illegal redlining in the Memphis area. We filed a complaint alleging that, in addition to redlining, the bank denied certain mortgage loans to African Americans more often than to white applicants in similar circumstances. They charged African-American customers more for certain mortgage loans than white borrowers. And they had an explicitly discriminatory policy on loan denials. We have intervened to set things right, asking the court to order BancorpSouth to pay over $10 million, including a $3 million civil penalty designed to deter them and other institutions from doing these things again.
In another joint action that we brought with the Justice Department last year, we again identified redlining – in this case, by Hudson City Savings Bank in some areas of New York, New Jersey, Pennsylvania, and Connecticut. Our investigation found that the bank structured its business to avoid and discourage residents in predominantly African-American and Hispanic communities from getting mortgage loans. Hudson City was ordered to pay over $27 million through various programs designed to increase access to mortgage credit in those same communities, as well as a $5.5 million civil penalty aimed at deterring further violations by this bank and by other institutions.
We also have identified a different sort of problem from geographic redlining. Our research shows that a higher share of African Americans and Latinos are shut out of mainstream credit markets. Last year, our analysis of data from one of the three nationwide credit reporting companies showed that 26 million Americans have no credit history at all. We call this “credit invisibility.” We found that the share of African-American consumers who are credit invisible is almost 50 percent higher than for non-Hispanic whites.
When consumers lack a credit report, the consequences can be profound. If you cannot access credit, it becomes nearly impossible to build wealth. It may become difficult even to pass a background check to get a job. Our report last year found that of the consumers who live in low-income neighborhoods, almost 30 percent experience complete credit invisibility and another 15 percent have insufficient credit histories to generate a credit score of the type that lenders typically use. If we are going to succeed in making every consumer count, we must understand and address the problem of credit invisibility that strands these millions of consumers on a barren shore of economic deprivation.
Even where credit is not denied outright, it may be offered at higher cost or on more unattractive terms because of discrimination. When some mainstream lenders do offer credit in communities of color, the playing field can be slanted, making the goals of establishing creditworthiness and building wealth that much harder to achieve.
In 2013, for example, we filed a complaint along with the Department of Justice against National City Bank for discriminating in the pricing of mortgage loans. Our investigation found that the bank charged African-American and Hispanic borrowers more than white borrowers in similar situations. Those held responsible paid $35 million in relief to compensate minority borrowers for the amounts they had overpaid.
Notably, we have also found similar abuses in the business of auto lending. When consumers buy a car or truck, they may get financing through an auto dealership rather than directly from a financial institution. The dealer then turns around and sells the loan to a bank or credit union. This is known as “indirect auto lending.” Although the financial institutions remain in the background, what the consumer typically does not know is that these lenders usually authorize the dealer to charge higher interest rates not based on the consumer’s creditworthiness. The dealer is allowed to keep much or all of the premium on the rate, meaning that they have a clear financial incentive to mark up the price of the loan.
There are many reasons why dealers might decide to mark up some loans higher than others. Some may make an impressionistic assessment of their customers, trying to gauge who will drive a harder bargain and leaning in more aggressively on others. This eyeballing of customers can easily degenerate into stereotyping based on observed characteristics such as race or national origin. Such dealer discretion can lead to pricing disparities based on race or other prohibited factors that may violate the federal fair lending laws. Our extensive research has indicated that unfettered discretion in pricing the markup on loans frequently leads to African Americans and Hispanics being charged higher rates than white consumers in similar financial circumstances.
Nobody likes being accused of unlawful discrimination. And the industry has strongly resisted our work in this area. They have challenged our view of the law, our statistical methods, our case-by-case analysis, and our specific conclusions. But we remain steadfast. A year ago, the U.S. Supreme Court resoundingly upheld our view of the law in this area. We are aligned with the Justice Department in our joint approach to the problem. And while we are receptive to how we can further refine and improve our approach, we are confident that we have uncovered real problems of discrimination in the auto lending market that should not exist under a correct application of the law. So we will continue to move forward.
To date, we have announced four public enforcement actions, in tandem with the Justice Department, which have addressed these issues and ordered restitution to be made to hundreds of thousands of consumers who were wronged by violations of the law. Ally Financial and Ally Bank had to pay $80 million in consumer restitution and $18 million in civil money penalties. American Honda Finance Corporation is paying out $24 million in consumer restitution. Fifth Third Bank is paying out $18 million. Toyota Motor Credit is paying out up to $21.9 million.
In the first of these cases, we required Ally to adopt an aggressive compliance management system to prevent discrimination from recurring. One year in, Ally was required to provide an additional $39 million for consumers to remedy additional discrimination that had occurred. Our more recent resolutions seek to avoid these results by requiring lenders to substantially reduce the discretion dealers have to mark up the rates. More such work is already in the pipeline.
The monetary relief we are obtaining for consumers who were victimized by discrimination is only incomplete at best. We cannot fully calculate or compensate for all the harm done to consumers and to entire communities by systematic practices that hold them back by distorting the credit market and impeding their opportunities. That is why we simply cannot tolerate practices, whether they are intentional or not, that unlawfully result in consumers paying more for credit based on their race or ethnic origin. We firmly believe that all Americans are entitled to economic justice in the form of equal treatment in the financial marketplace. That is what it means to make every consumer count.
Let me turn now to payday lending, an issue which, as I noted earlier, disproportionately affects communities of color. Consumers who live from paycheck to paycheck sometimes need access to credit to deal with drops in income or spikes in expenses. But credit products marketed to these consumers should help them, not hurt them. And our research tells us that instead of patching over an emergency, too many of these loans trap borrowers in unaffordable debt.
These short-term loans often pack sky-high annualized interest rates of 390 percent or more. Usually, the note comes due at the next payday. But most borrowers cannot meet the deadline, so they have to borrow again. Our research shows that almost four in five loans are re-borrowed within a month. About one in four borrowers slides unavoidably into a sequence of at least ten loans, taken out in an increasingly desperate and often futile bid to stay afloat. Indeed, the very basic economics of payday lending depend on a large number of customers needing to borrow again and again at high interest rates, piling up fees all the while. And who are their customers? Almost half of payday and online borrowers have a family income of under $30,000. And they are disproportionately African American or Hispanic, with borrowing rates that are two to three times higher than non-Hispanic whites.
I know I am preaching to the choir here, but that is still worth doing. The NAACP has taken on predatory lending for many years. Your late chairman Julian Bond memorably said that “payday lending stores open their doors in low-income neighborhoods at a rate equal to Starbucks openings in affluent ones.” As he explained to us: “This is hard-earned cash being siphoned out of the wallets of working people. . . . Money that should be helping people stay firmly in the middle class, rather than keeping them trapped in the quicksand of poverty.”
We are seeking to reform this market by ending long-term debt traps that undermine the financial lives of consumers. Our work is extensive and ongoing. For the first time at the federal level, we are supervising payday lenders to ensure that they are complying with the law. We have taken enforcement actions against a number of payday lenders, securing injunctive relief and penalties to deter harmful practices. And last month we proposed a new rule that would cover payday loans, auto title loans, and certain installment and open-end loans. It would require lenders to determine whether borrowers can actually afford to pay back their loans before they are made. And it would curb repeated attempts by lenders to debit consumer accounts in ways that rack up fees and make it harder for people to climb out of debt. Our approach would allow those who can afford to borrow to get the credit they need without falling into a destructive cycle of perpetual debt. We will be taking comments on our proposed rule all through the summer, and then we will be working to finalize an effective rule that offers new federal protections to consumers for the first time.
At the Consumer Bureau, our goal is a financial marketplace that is fair and transparent, one that offers equal justice to all Americans. You can see from this discussion today that our two organizations aim to combat some of the same problems. We are taking on systemic efforts to deny credit to minority populations. We are taking on credit that is offered on worse terms than those extended to others in similar circumstances. And we are taking on credit that is offered on terms that consumers cannot afford to repay and that leaves them substantially worse off. These problems are intertwined, and they can choke off the ability of entire communities to build and sustain opportunity and prosperity. They perpetuate inequality. And they conspire to block many African Americans from pursuing the American dream, steering them instead into the quicksand of debt that Chairman Bond so eloquently described.
These are stubborn issues. We know how hard it is to address them in a satisfactory way, but we also know that we must be just as stubborn and steadfast in pursuing our work. We remain determined to keep our shoulder to the wheel to change the circumstances that people confront every day. This work is worthy of our efforts, just as the work of the NAACP has been worthy of your admirable efforts for more than a century now.
We look forward to continuing to work closely with the NAACP to make this change a reality. We have committed ourselves to pursue fairness and equal justice in the financial marketplace, and we will continue to bring that same commitment to every single community throughout this country. We will seek to attain the same dignity and respect for every one of us that each one of us deserves. Because that is what America must be about – making every consumer count. Thank you again for having me here today.
About Consumer Financial Protection Bureau (CFPB)
The Consumer Financial Protection Bureau is a 21st century agency that implements and enforces Federal consumer financial law and ensures that markets for consumer financial products are fair, transparent, and competitive. For more information, visit consumerfinance.gov.