Richard Cordray, former director of the Consumer Financial Protection Bureau and author of “Watchdog: How Protecting Consumers Can Save Our Families, Our Economy, and Our Democracy”
Congress provided borrowers a lifeline when it passed the CARES Act. Whether it will deliver significant relief to consumers remains to be seen.
The $2.2 trillion coronavirus relief bill included a range of measures aimed at helping Americans hold on to a few of their dollars while they faced the prospect of joblessness and falling incomes.
Those measures included allowing affected homeowners to delay mortgage payments on federally backed loans by up to 12 months and a six-month pause on payments toward federal student loans.
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Though good intentions underlie the protective measures in the CARES Act, it will be up to federal regulators — namely the Consumer Financial Protection Bureau — to ensure that institutions follow through on the relief.
“In Washington there’s a very myopic mindset in the CARES Act: You wave a magic wand and suddenly everyone gets what’s promised,” said Richard Cordray, former director of the bureau and author of “Watchdog: How Protecting Consumers Can Save Our Families, Our Economy and Our Democracy.”
“I don’t necessarily think that’s the experience for most of the country,” he said.
Cordray sat down with CNBC to discuss how the coronavirus pandemic will ultimately affect consumers’ bottom lines and the efficacy of the debt relief provisions in the CARES Act. (Condensed from a longer conversation.)
CNBC: Given the broad temporary relief measures within the CARES Act, where are consumers are most likely to get burned?
Richard Cordray: Part of the problem is that the broad availability of relief is somewhat complex for the average consumer to work through. I’m concerned that some of them aren’t getting the relief that’s being promised.
Take some of the different pieces under the CARES Act. There’s mortgage forbearance relief available to a substantial number of homeowners.
It’s only for people with federally backed mortgages through Fannie Mae, Freddie Mac [and] Ginnie Mae, which is somewhere between 60% and 65% of the market. That’s leaving out 35% to 40% of consumers.
The other issue is whether all of those who are eligible for relief are aware that they’re eligible. Are they obtaining the relief?
That depends on who their mortgage servicer is and whether that servicer is competent and capable of dealing with what is now a very high call volume. People aren’t getting through and aren’t able to get the relief that’s promised.
The other aspect that I’ve seen is that some mortgage servicers don’t want to grant that relief. It puts them in some financial jeopardy if they aren’t getting the payments they’re expecting.
Some of them are discouraging people by saying things like, “Once we’re through with this, you’ll have to repay what you owe in a lump sum.” Which isn’t the way that’s supposed to be handled.
That’s a deterrent for people to seek relief.
CNBC: How helpful is the six-month reprieve on student loan payments?
RC: Student loan balances have grown considerably over the last 12 years. It was a greater problem to begin with going into this recession. Therefore, we’ll have bigger consequences this time than before.
Certainly, temporary help is helpful. But it’s likely to be too temporary to really address the problem, because it’s not like unemployment is going to be back down to 3.5% in six months. It’s going to remain at high levels for probably a couple of years at least.
Young people are going to have a harder time getting hired. They may lose the jobs they had or have their hours reduced. It’s going to be harder for them to deal with their student loans.
The temporary relief that was given suggests Congress is more open to a more lasting solution to this problem.
CNBC: What could the CFPB be doing to protect consumers through the rollout of the CARES Act?
RC: There’s a whitepaper that I and two others put out on what the CFPB should be doing during the crisis.
The bureau has oversight authority over these companies. They should be holding them accountable right now to make sure they’re delivering the kind of performance that consumers need in this crisis.
For example, if the mortgage servicer doesn’t step up and provide relief to customers, and the bureau doesn’t look over their shoulder and make sure they’re doing it right, there will be a lot of slippage and leaking between the promises of the CARES Act and the actual delivery out there.
The bureau has to be aggressive about enforcement.
(Editor’s Note: The CFPB did not immediately return an emailed request for comment.)
CNBC: What consumer concerns are keeping you up at night?
RC: Right now, debt collectors are a dangerous industry for consumers. As people don’t have money coming in, they’re going to have more debt.
Debt collectors are going to become increasingly insistent and increasingly vehement. They’ll potentially go over the legal lines they’re not supposed to cross in terms of pursuing debt collection.
It’s one thing to fall behind on your bills and potentially have some time to figure it out and catch up on payments.
It’s another thing to have huge disruptions that come from losing your home or your car or being forced into bankruptcy or having your credit ruined, which will start happening to consumers as this persists over time.
What we saw was that the new unemployment claims, which have been filed at very high levels in the last few weeks, are going to turn into more persistent unemployment.
People are losing their jobs and having their hours cut dramatically. This could last for a long time, and if that’s true, consumers really need to have somebody looking out for them.
CNBC: How does this crisis stack up against the 2008 recession?
RC: This crisis has different causes and a different trajectory to it. The speed of this has been breathtaking to anyone who’s ever seen an economic collapse.
Usually it happens somewhat more slowly and it’s more telegraphed. This has been so sudden.
Over time, the effects on consumers [are] of being without a job, of not having enough money coming in and falling behind on your bills and building up debt. Those are the same kinds of ramifications.
Consumers will be in as much or more trouble this time as they were the last time, which was an epic collapse in itself.
Many people thought it was going to be a once-in-a-lifetime thing. Here we are now, twice in this lifetime for many people.