The bureau could make a big difference here, some advocates say. By forcing loan servicers to stop wrongful foreclosures, the CFPB could help millions of Americans modify their loans and stay in their houses, says Mike Calhoun President, Center for Responsible Lending.
"Unfortunately for consumers, financial abuses continue today, making the CFPB's success as important as ever," Calhoun said in testimony to the Senate Banking Committee. "The CFPB, with its consumer protection mission, is in the best place to establish basic rules of the road to enhance both consumer protection and a robust competitive market."
If it Smells Like a Bank…
Many companies that don't look like banks function like banks, such as payday lenders and private education lenders. For example, some private universities have come under fire in recent years for fraudulent marketing practices, and for the schools' failure to help students graduate and find jobs. Many lending companies specialize in making loans to students at private universities, and these loans are often made with variable interest rates that soar to as high as 18%, according to a report by the U.S. Public Interest Research Group.
Under the Dodd-Frank Act, the CFPB is to create a private education loans ombudsman, charged with collecting and studying complaints from borrowers about such loans and identifying patterns of abuse. Over time, that could lead to lower interest rates and cheaper loans, which could help more students graduate, some consumer advocates say.
"The agency has authority over all private student lenders, including both banks and non-banks," according to a report by the Project on Student Debt. "Consumer advocates have called on the CFPB to require mandatory school certification along with other important consumer protections for private loan borrowers."
Problems also exist with payday lenders, many consumer advocates say. While payday lenders advertise their loans as ways to deal with occasional financial emergencies, their high fees often trap consumers in a cycle of debt, Calhoun says, often leading to credit card delinquencies and bankruptcies.
The new consumer protection bureau could play a major role in reducing those fees and helping consumers get lower-cost loans from banks that, unlike payday lenders, are regulated by federal law.
"The CFPB will play a critical rule in ensuring a fair, equitable, and transparent consumer marketplace for credit in general, including payday loans," says Calhoun.
Fixing System-Wide Problems
More broadly, all types of consumer lending still suffer from systemic discrimination against ethnic and racial minorities, says the NAACP's Shelton. Predatory and payday lenders are far more likely to target African-American and Latino neighborhoods, and race plays a role in dragging down the credit scores of non-white consumers even after legitimate credit issues like income and debts are excluded, Shelton says.
Since discrimination happens across all types of credit, Shelton says, the centralization of consumer protection functions from seven different federal agencies into the CFPB is a big step forward. "In short, a robust, functioning CFPB will work through rule making, enforcement, and research to ensure a more fair and equitable financial playing field," Shelton says.