Richard Cordray

The poorer you are the more the economic crisis will hurt

While the world is struggling to contain the effects of the worst pandemic in a century, we can look to recent history for strong hints on who will be the worst hit and how we can help them former Consumer Financial Protection Bureau director Richard Cordray said. Mr. Cordray, who led the CFPB from 2012-2017 was a featured speaker in the Comply Summit Series, a series of virtual fireside chats with influential speakers discussing the most pressing topics in compliance, risk and regtech. He was interviewed by PerformLine CEO Alex Baydin.

Over the past 20 years society has been hit by three crises – the dotcom crash of the late 90s, the financial crisis of 2008-2009, and now the COVID-19 pandemic. While they had their own unique causes – overvaluations, risky assets and a virus, there are plenty of similarities, Mr. Cordray said.

“The common element is whatever the cause of a financial crisis and economic contraction, consumers end up gearing the brunt of it. We often talk about trickle-down economics and the one place that clearly happens is when you have a downturn in the economy.”

Early on the most marginally employed lose their jobs, and others see reduced hours. The sudden revenue drop places them behind on their bills, and there is no savings cushion to fall back on. Rent and mortgage payments past due place housing at risk and car payments threaten a key lifeline for many Americans.

What makes the pandemic crash so unique is the drop was deep and fast, Mr. Cordray explained. Within six weeks 30 million new unemployment claims were added to 18 million ongoing ones. Double-digit unemployment isn’t the only issue, as GDP drops are worse than estimates.

“This could be very bad and consumers are going to face some tough choices,” Mr. Cordray said.

During his tenure at the CFPB Mr. Cordray helped deliver billions of dollars in relief to Americans over six years. Looking ahead to 2026, how much economic harm will consumers have endured?

It depends on how long the pandemic lasts, and this is shaping up to persist longer than many think, he explained. Consumer spending is two-thirds on the economy, and it dropped five to seven per cent in April reports. It won’t come back fast enough to prop up the economy like it did after 2008. Back then business investment was sluggish and imports and exports were hit by tariff wars. Too many consumers will be without jobs this time to be able to prop up the economy, with the Congressional Budget Office predicting unemployment to be at nine per cent at the end of 2021.

Consumers are generating debt during the pandemic that needs to be paid off before they can even think of spending again. Even if they could, many may be wary of behaving like they did before the pandemic and may curtail social spending. That 60 per cent that cannot work from home will take longer to rebound.

“I think its going to be a sluggish recovery and I think for consumers in particular will be feeling the weight of this for some time to come,” Mr. Cordray said.

Compliance getting trickier during pandemic

Compliance monitoring becomes tricky when staff are working from home, Mr. Cordray said. While there will be long-term benefits, there will be much pain inflicted in the interim, especially as more people contact their financial services companies. In this climate organizations like the CFPB need to be especially stringent in their oversight.

They need to watch mortgage servicers who should be delivering forbearance relief under the CARES Act.

“Consumer finance companies have to be at their best now because consumers are in a bad situation,” Mr. Cordray said.

Mr. Baydin said a counter argument to Mr. Cordray’s statement is consumer finance companies need to get relief into the hands of consumers as fast as possible and more relaxed compliance could help. If the FDA can fast-track trials, can similar actions occur in finance?

Certain regulations, if relaxed, could be disastrous for consumers, Mr. Cordray said. Many financial call centers are becoming overwhelmed with calls and the risk of key information not being communicated runs higher. Is the customer eligible for forbearance relief? If the caller is renting from a landlord who is eligible, are they aware as renters they are also eligible for rent relief?

Companies cannot expect their customers to understand they are under siege and to simply be patient. They must focus on performance optimization so people can get relief as soon as possible. Companies are staffed to handle lower call volumes in a healthy economy. Successful ones will quickly adapt to the increased demand borne of the pandemic. They should have also expected an eventual economic downturn.

“This is a different thing for them to manage,” Mr. Cordray said.

When developing staffing plans companies need to plan for all points in an economic cycle, he added, especially since they do not want to be saddled with lost costs.

“Companies do not staff appropriately for the bottom end of the cycle,” Mr. Cordray said. “They have to expect a cycle has a top and a bottom and they need to be staffed for all contingencies.”

With unemployment levels likely close to double digits at a minimum two years out, companies need to quickly adjust to this new medium-term reality, he added.

The CFPB saw the negative in the aftermath of the last financial crisis, Mr. Cordray said. Many complaints were poorly handled by corporate staff unprepared and in some cases not trained, to handle the volume and type of calls they should have expected.

“There’s a desire to give relief to companies across the board knowing that their businesses are in trouble, that’s true. But when they are serving consumers they have obligations they have to continue to meet,” Mr. Cordray said.

For top companies, gone are the days when their approach to customer service was to deal with complaints as quickly and cheaply as possible, Mr. Cordray said. They learned the news of a bad experience travels fast and changed course.

“There’s a widespread recognition that when a consumer comes to you with a problem that’s an invitation to you to work with them and keep them as a customer.”

The CFPB could do more to educate consumers about the rapid changes and protections being introduced into the marketplace, Mr. Cordray said. They could develop a better store of information for consumers, even on a state-by-state basis where they do not have formal influence, so consumers are aware of all state actions taken to benefit them.

The CFPB’s consumer complaints database is a strong tool, Mr. Cordray said. It keeps a current listing of complaints made against firms and allows stakeholders to see where the pressure points are for consumers. Companies are also using it to assess their performance in comparison to their competitors.

State-level agencies need to fill federal void – Cordray

Cordray advised federal law sets a minimum level of activity state officials need to take, but no maximum, so they can act where the Trump Administration has little interest in doing so, Mr. Cordray said.

“Some of them have become more (active) as they see the federal bureau pull back. They want to protect their citizens and they know they cannot count on this administration to do that.”

The Trump administration has not taken a single fair lending action in its first 30 months and haven’t referred a single fair lending case to the Justice Department, Mr. Cordray said.

“They have not had any vigor in enforcing and I think they’ve missed the boat,” he said.

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