The Covid-19 crisis has reinforced many truths about the structure of the American economy. Low-income workers, and particularly communities of color, have felt the impact of the pandemic the hardest due to the economic and health disparities. Government functions, unemployment insurance and social safety net payment systems, have been gutted while Americans remain particularly vulnerable to sudden financial shocks. Even before Covid-19 closures resulted in massive job losses, household debt had reached over $ 14 trillion, unpaid consumer loans were increasing, and almost 40% of adults did not have the money to cover an emergency expense of $ 400.
In times of financial shock, consumers are vulnerable to the whims of service agents, credit bureaus, and collectors who take their payments, report them to lenders, and sue them if they fall behind. It doesn’t have to be that way. The Dodd-Frank Wall Street Reform and Consumer Protection Act created a consumer watchdog, the Consumer Financial Protection Bureau (CFPB), which can step in and, without new legislation, provide consumers with a security net protectionswhen they are going through difficult times. Yet it is not being used the way it was designed.
During its first decade of existence, the CFPB often focused on collecting billions of dollars from cheated consumers. The office also instituted rules for consumer products, including better information that helps people buy financial products. These rules did not apply to loan servicing, collection issues, or credit reports. Under the Trump administration, the CFPB largely abdicated its responsibilities by focusing on tangential issues such as financial literacy. But the CFPB, from its original design, was supposed to be another type of government agencywith robust tools to address consumer market failures. A CFPB under new management could take an important step towards fulfilling the agency’s original promise by using its broad power to protect consumers from abusive practices.
Even though the CARES (Coronavirus Aid, Relief, and Economic Security) law has addressed some of these issues, including the temporary withholding of required monthly payments for mortgage and student loans, there are significant gaps in protection. Only loans held by the federal government are covered, and borrowers are protected against additional interest charges on student loans, but not on mortgages. Credit reports Errors To disinformation still abound. There are no federal restrictions on debt collection, leaving those living in states without specific protections subject to increasingly aggressive rules. collections, wage garnishment, and prosecution.
People shouldn’t have to push for a law of Congress to receive basic financial protections every time they run into trouble, whether it’s a job lost, a death in the family. or a national or global crisis. Even in normal times and without a pandemic, millions of Americans experience disruption every year, leaving them to navigate the problematic credit ecosystem with few substantial protections. According to a report I wrote, released today by the Great Democracy Initiative, data from the CFPB Consumer Complaints Database shows that credit reports, debt collection and mortgages are the three financial products that consumers use. complain the most since 2013. The fact that almost 1.4 million complaints were filed against companies in these three sectors suggests that something was wrong at all. And that was before complaints skyrocketed during the Covid-19 pandemic, with rates 50% higher from March to June than at the same time last year.
The root of the problem is that loan officers, debt collectors, and credit reporting firms work for lenders, not borrowers, so they have little incentive to help. Consumers are effectively caught in a trap from which they cannot escape, unable to choose or steer away from these companies. As a result, they lack a basic set of protections for the inevitable times when life events suddenly alter their personal finances.
As with so many aspects of society, the structure of this broken system disproportionately harms blacks and browns. Disproportionate debt collection targets Black Americans in particular, with aggressive tactics and lawsuits. Blacks and Browns are most affected by the credit rating system because it is based on foundation racial disparities that permeate our financial system. Accordingly, the credit is less available and the services are more expensive for people of color, exacerbating a racial wealth gap that is due in part to predatory loan. A consumer safety net could be a first step towards solving this problem.
The CFPB can help remedy the situation by offering consumers the right to: hire or fire any service agent, collector or credit reporting company that manages their financial accounts; and buy back any consumer debt before it is sold to a third party, at the same cheap rates available to debt buyout companies. Just as workers enjoy a set of public benefits such as unemployment and social security disability insurance that form the social safety net, consumers deserve basic protections from private financial service providers. when faced with similar circumstances.
Building a safety net for consumers requires understanding that people actually bear very little responsibility for the financial challenges they face. They don’t choose when a pandemic strikes, just as they don’t choose to have serious illness, lose their jobs, or die in their families. It also requires a CFPB run by officials who are willing to use their existing legal powers to aggressively protect people from a predatory financial industry. Policymakers shouldn’t let the current crisis go bad and they shouldn’t wait any longer to provide a safety net for millions of consumers.
Graham Steele is the director of the Corporations and Society Initiative at the Stanford Graduate School of Business, and the former chief minority counsel for the US Senate Committee on Banking, Housing, and Urban Affairs.