Ten Years Later: CFPB, the Financial Crisis, What Have We Learned?

Samuel Ellis, principal consultant, Auto Experience Inc.

I know it’s hard to put an exact date at the beginning of the financial crisis but think most “scholars” would agree things started going south rapidly in the Fall of 2008. A celebratory feeling at this approximately 10-year anniversary mark is likely a stretch, but it’s worth acknowledging what happened, how to prevent or at least minimize damage in the future, and better understand how people are affected in financial services. Each of us can have our own quiet moment of reflection, and think about what you have learned to commemorate the anniversary of the event.

Now in contrast to no exact date for the start of the global crisis, institutions springing out of the crisis, like the Consumer Financial Protection Bureau (CFPB), do have specific start dates.  According to Wikipedia, the CFPB officially began operations on July 21, 2011.  Even though it may feel like it’s been around decades to some, CFPB will have to wait a few more years for its first two-digit birthday celebration, the one many of our kids yearn for.  Now along the lines of learning, I have been in the auto finance business for over 20 years now.  I am as likely as anyone to be grabbed by a headline stating, “Subprime losses increase”, or “CFPB cracking down on predatory lending”, or “Rampant discrimination cited in auto finance pricing”.  These are serious issues, always have been, but I now think about them differently after experiencing the financial crisis and its impact.

My opinion may surprise many of you when I say, the CFPB was and still is, a net benefit to overall consumer lending because they are for all intents and purposes, a true consumer advocate.  Nothing like this had existed before. The conventional wisdom pre-crisis and pre-CFPB was that the lender had to look at “the document” to see what they could do, if anything, benefit the consumer.  The finance contract,  credit agreement or whatever document governed the relationship between the consumer and the institutional creditor was infallible.  Legal counsel for all related parties in the securitization world made this crystal clear —  there were to be NO deviations from documented servicing mandates. The thought of any reasonable exceptions, modifications, forbearances, or any other deviation from the strict language of the contractual agreement was prohibited.

Looking back now, that was a ridiculous stance.  A $1 trillion corporation telling a hard-working individual they had no grounds to have even considered common sense suggestions for repayment of their loan for it was simply un-democratic. Just so we are clear, I’m an advocate of paying back what you owe — you finance a car and can’t pay for it, you have to give it back, immediately.  Same thing with a boat, house, or even a plane (just so you know, “Airplane Repo” aired 3 seasons on Discovery Channel and peaked at 1.24 million viewers).    But fair treatment and respectful interaction with the debtor is absolutely reasonable to request, and it is also reasonable to have someone looking on from time to time to ensure it’s enforced.  Blind, strict adherence by to terms of the finance agreement, for example, a $375 late fee on a mortgage payment made an hour past the cutoff time due is a little overreaching.  And if an institution felt that they had no rights whatsoever to waive it for a consumer, then the rule of contract law was enslaving the lender as much as the consumer.

So ‘yes’, the CFPB did bring some common-sense reasonableness to the table.  A late fee may certainly be warranted if the consumer has evaded contact from the institution he or she owes, and costly search is required, but the institution should certainly have lee-way to decide what makes “common sense” for the borrowing consumer customer, not just what is “common sense” to SIFMA, FINRA, ABS, S&P or any other institution guarding the letter of the law in the two or three hundred pages of a given consumer finance/loan receivables-backed security.  Given that many of the purchasers of the highly-rated securities backed by consumer debt are non-profit institutions, government retirement funds, highly rated private institutions that publicly advertise how much they care for consumers, it makes sense that the originator/servicer of the obligations should give some thought to acting in consumers’ interests.  The CFPB has certainly not been perfect,  they too possibly over-reached and over-fined, but if the new, kinder, and less-sharp teethed CFPB has learned from the early experiment, hopefully, most of us will see their net benefit to consumer lending.  Happy seven year birthday, CFPB, maybe you’re growing up to be a nice kid after all.

Samuel Ellis is a principal at Auto Experience inc, a tech strategy consulting group focused on auto finance.  Previously, Ellis was co-founder and CEO at DriverUp and Exeter Auto Finance. Prior to that, he served in Senior Risk Management and Analytics roles at GM Financial and Summit Acceptance, the predecessor company to Capital One Auto Finance. Ellis holds a BS and MA in Economics from Southern Methodist University and is a CFA charter holder.

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