Protecting American Consumers in Crisis
The coronavirus pandemic’s economic impact has left many American families in a vulnerable financial state and in need of stronger consumer protections. The Consumer Financial Protection Bureau (CFPB), the agency tasked with protecting consumers from scams and abuse in the financial sector, should take swift actions to help consumers weather the coronavirus crisis. These include strengthening oversight of shadow banks and debt collectors, providing the public with information about threats in real time, and issuing guidance that banks should suspend overdraft fees. Another key area upon which the CFPB should focus is protecting the credit of consumers so they are not subject to a lifetime of spiraling debt following this crisis.
In the 12 weeks leading up to June 11, 44 million Americans had filed for unemployment insurance. Even these alarming numbers are understated, as they don’t reflect unemployment among those who are ineligible for unemployment insurance, including part-time and low-wage workers, freelancers, and self-employed gig workers. Notably, Federal Reserve Chairman Jerome Powell recently said that 40 percent of American households earning less than $40,000 annually lost a job in March. The challenges of meeting basic expenses during this public health and unemployment crisis are widely visible. A troubling recent Kaiser Family Foundation poll found that 3 in 10 Americans have fallen behind in paying bills, and more than one-quarter of Americans said they or someone in their family has skipped meals or relied on charity or government food assistance. The Coronavirus Aid, Relief, and Economic Security (CARES) Act placed a moratorium on evictions and foreclosures for renters living in federally subsidized housing and for homeowners with federally backed mortgages such as those insured by the Federal Housing Administration and those backed by Fannie Mae and Freddie Mac. In addition, expanded unemployment benefits have served as a temporary safety net for many Americans. Although the moratorium on evictions and foreclosures has been extended to the end of August, and homeowners with government-backed loans who have been affected by the pandemic will be able to reduce and delay payments for one year, there is now widespread concern about a potential tidal wave of evictions and loan defaults, including among renters and homeowners who live in housing that is not protected by the CARES Act or other federal protections.
In addition to losing income without employment, many Americans have struggled to access existing aid. High numbers of unemployment claims have exposed many states’ understaffed and technologically outdated unemployment agencies, and delays in filing for unemployment also make it difficult for Americans to access adjacent social services such as Medicaid and Supplemental Nutrition Assistance Program (SNAP) benefits.
With a rise in unemployment and difficulty accessing aid, consumers are much more vulnerable to financial scams and risk seeing their credit damaged as they fall behind on monthly payments for housing, auto loans, and other expenses. When families desperately need to cover expenses, predatory lenders have the leverage to offer loans with high interest rates and contract terms that often leave consumers with skyrocketing, unpayable debt, as it happened during the financial crisis of 2008. Reports have suggested that some major payday lenders have violated stay-at-home orders to continue collecting debt from vulnerable consumers, as these lenders do not typically fall under the umbrella of essential “banks and financial institutions.” A Wall Street Journal investigation also found that payday lenders have bypassed online advertising bans on platforms such as Google and Facebook to target consumers suffering from the coronavirus’s economic fallout. The CFPB received a record-breaking number of complaints over the past three months, as the agency founded in 2011 faces its worst economic downturn yet.
At a time like this, it is essential that the CFPB stands by its responsibility to protect consumers and crack down on bad actors in consumer finance. This is especially important because many of the Americans hit hardest by the coronavirus pandemic and the resultant recession are members of the same populations that payday lenders tend to target—renters, African Americans and other people of color, individuals earning less than $40,000 a year, and young people.
Rollbacks during the past 3 years have abandoned consumers
The Trump administration has taken significant steps over the duration of his term to weaken the CFPB. The bureau has regularly sided with the payday loan industry over which it is supposed to be a watchdog. As of June 2019, enforcement at the CFPB was down 80 percent from its 2015 peak. Other examples of the administration’s undermining of the bureau have included dismissing investigations against payday lenders without reasoning, releasing a strategic plan which would limit its powers, and attempting to defund the agency in 2018.
One key decision the CFPB has made during President Donald Trump’s tenure which leaves consumers at risk is their postponement of an Obama-era payday lending regulation. The rule would have required an underwriting process for a loan that proves the borrower can afford loan payments while meeting basic living costs. This would have effectively made it impossible to offer a predatory loan to low-income borrowers, who often have a poor credit history and are in particularly challenging financial circumstances. In addition to this payday lending change, the CFPB has also weakened its Office of Fair Lending and Equal Opportunity by stripping its key functions, including supervision and enforcement. This change makes it more difficult to enforce crucial civil rights laws affiliated with lending and makes it more likely that consumers will lack access to credit or face discriminatory pricing.
Recently, the CFPB has even relaxed rules designed to protect consumers during the pandemic. Despite record-high levels of complaints, as of June 15, the bureau had not opened a single enforcement case dealing with COVID-19 related abuses. Since the coronavirus began to spread in the United States, the CFPB has relaxed reporting requirements for mortgage lenders and credit card companies, with Director Kathleen Kraninger suggesting this would allow financial companies “to focus their resources on assisting consumers.” In an April memo, the bureau signaled that it will extend the length of time within which credit reporting agencies have to investigate a dispute, which could hurt consumers in rapidly evolving financial situations.
Recent decisions that leave consumers even more vulnerable are a disappointing continuation of this administration’s negligence toward consumer protection. To soften the blow that Americans are facing economically, it is urgent that this course of action be reversed.
How to protect consumers dealing with the coronavirus
There are several ways both the Consumer Financial Protection Bureau and states can move quickly to protect consumers from finding themselves in financial ruin.
First, there are practices the CFPB should implement to monitor consumers’ situations and communicate threats to the public in real time. Given the pace at which the economic situation has changed, it’s imperative that the CFPB has access to as much up-to-date data as possible. In the words of former CFPB Director Richard Cordray, “We can’t expect our public health authorities to resolve the COVID-19 pandemic without adequate testing to see who has the disease. By the same token, the CFPB can hardly do its job without diagnosing the problems in its sphere of work.”
While the CFPB’s up-to-date complaint portal is useful, the bureau can go further to give the public insight into what threats should be of concern. As it has been proven difficult to limit the targeting of vulnerable consumers online, the CFPB should ensure that complaints are analyzed at a level of detail from which certain populations can be notified of risk. Designated groups within the CFPB, including offices focused on special populations and market-monitoring teams, can be helpful in assessing consumers’ current situation, making preemptive recommendations to prevent consumer harm and being part of a coordinated effort with officials around the country to crack down on scams.
Additionally, there are actions the CFPB can take to ensure the economic security of Americans related to credit reporting, housing, and debt collection. Consumer protection is an essential part of preventing evictions and foreclosures, along with ensuring consumers have necessary aid. The CFPB can step up in preventing foreclosures by using its oversight power to ensure mortgage servicers follow CARES Act requirements and by considering ways to assist homeowners and renters who are not covered by the moratorium included in the CARES Act. In addition to mortgage-related consumer protection, the CFPB can partner with states and localities to help renters navigate the varied benefits that are currently available based on consumers’ location and financial situation.
Without action from the CFPB, many Americans could be subject to a lifetime of financial struggles due to COVID-19’s impact on their credit score. The CFPB’s previous guidance that credit reporting agencies will now have a longer period to investigate disputes is harmful to consumers. Simple reporting errors in consumers’ credit files can result in payments being misreported as late when a consumer has already been in communication with their lender about alternative arrangements. The CARES Act allows consumers to ask creditors to add a code to one’s credit report noting that they were affected by a “natural or declared disaster,” but not all credit bureaus take this this guidance into account when scoring a consumer. Without the CFPB encouraging creditors to use the disaster code, this CARES Act provision is less helpful to consumers.
Following mortgages and credit cards, the third-most-common area of recent CFPB complaints is debt collection. Some debt collectors have been laying the groundwork to resume aggressive debt collection when courts reopen. This will leave consumers who are employed with two options: make large payments or have their wages garnished for their debts. As of July 17, the CFPB has refrained from taking any COVID-19-related action to rein in debt collectors, but the bureau can begin by providing oversight to prevent harassment, releasing new guidelines on what constitutes “unfair and unconscionable” debt collection practices during the pandemic, and calling for collectors to stop issuing new debt collection lawsuits, freezing bank accounts, or garnishing wages. Unfortunately, the CFPB’s recent actions on debt collection are set to harm consumers more than they will help; in February, the bureau proposed a rule that could trick consumers into paying time-barred debt that is no longer collectible. Another way to protect consumers who are low on cash would be to issue guidance that banks should suspend charging overdraft fees, which are most often incurred by people living paycheck to paycheck, racial minorities, and young people. Some major banks have announced that they are automatically waiving overdraft charges during the pandemic.
Ultimately, the previous recommendations will be ineffective if the CFPB does not strengthen oversight and enforcement. On July 15, the CFPB filed its first fair lending case since August 2017.While this is encouraging, it is not enough. Over the past three years, the CFPB’s drop in enforcement and relaxing of oversight has sent a message to financial institutions that they do not need to be concerned over adhering to rules and regulations. This has set an extremely dangerous precedent and must be reversed to communicate that bad actors will not get away with breaking the law to deceive and hurt consumers in crisis. As all government agencies face the difficulty of continuing normal work during the pandemic, the CFPB should stop all nonessential rule-making work. In January, the bureau introduced a controversial task force to develop recommendations related to rewriting consumer finance law. The task force already does not include a consumer representative, and gaining appropriate input from consumers will be impossible during the coronavirus pandemic. The CFPB’s staffing resources have already dropped significantly under the Trump administration, and limited resources would be better used in meeting the crisis the current moment poses through more serious oversight and enforcement.
States can also take urgent steps either in addition to CFPB action or in response to the absence of federal help. Fifteen states and the District of Columbia have put an interest rate cap on high-interest payday loans. States that currently lack a cap should implement one of no more than 36 percent on consumer loans, as is consistent with the Military Lending Act. While this is particularly urgent during the coronavirus pandemic, states would also be wise to consider making this a permanent change.
Beyond capping interest rates, states can quickly take action to protect consumers by focusing on overdraft fees and debt collectors. There are more than 4,000 state-chartered banks in the United States, which states can order to suspend overdraft fees. Many of these state-chartered banks are community banks that serve poorer underbanked areas, making this especially important. To relieve consumers from debt collection, states can start by suspending interest accrual on and collection of consumer debt owed to the state. Beyond debt owed to public entities, states can freeze their roles in the process of private debt collection. This includes suspending existing and new debt collection court filings, referrals to debt collection agencies, and other activity that could result in the seizure of assets, wage garnishment, or bank account freezes.
In addition to consumer-friendly policy changes, states must be vigilant in enforcing their local protections. Given the CFPB’s poor track record of enforcement in recent years, the burden of coronavirus-related consumer finance enforcement will likely fall on states. As is the case at the federal level, enforcement is crucial to ensure financial institutions adhere to regulations. Local enforcement and public communication can be particularly effective, as scams will often affect people in the same geographic area. Additionally, local law enforcement agencies can utilize partnerships to notify their peers of ongoing COVID-19-related scams.
There has not been a time in the CFPB’s existence where it is more crucial that the bureau is aggressive in its regulation of malpractices against consumers. Americans are in their most collectively vulnerable state since the 2008 financial crisis, with many families’ situations still likely to get worse before they improve. The last thing Americans can afford is to fall victim to a financial scam or fall into spiraling debt.
To make sure Americans see through this crisis with their personal finances intact, the CFPB must drastically expand its actions to protect consumers and crack down on lenders, debt collectors, and shadow-banking institutions who have violated laws and regulations. States also have a significant role to play in protecting their residents. There will certainly be challenges related to protecting consumers during such a tumultuous period with widespread effects, but government inaction shouldn’t lead to a bad economic situation growing even worse for consumers.
Michela Zonta is a senior policy analyst for Housing and Consumer Finance Policy at the Center for American Progress. Colin Medwick is an intern for Economic Policy at the Center.
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