Washington, D.C. — Five years ago, in the wake of the financial crisis that almost decimated the American economy, Congress established the Consumer Financial Protection Bureau, or CFPB, to protect consumers by carrying out and enforcing consumer financial laws. As the CFPB marks its five-year anniversary this month, the Center for American Progress released a new report that outlines principles to ensure a system that works for parties on both sides of the transaction and primes borrowers for success rather than failure.
“In the run up to the financial crisis—and even in the years since—the American economy has seen the rise of lenders that have profited not despite borrower failure but because of it. Usurious financial products that come laden with excessive fees and gotcha penalties are virtually designed only to maximize profits for lenders,” said Joe Valenti, Director of Consumer Finance at the Center for American Progress. “As we learned from the Wall Street meltdown, the relationship between borrowers and lenders can impact not just individuals but families, communities, and the entire U.S. economy. The good news is that it is possible to design a lending system that encompasses responsible lending principles and that ensures that both borrowers and lenders can succeed.”
Unsustainable mortgage lending to consumers was at the heart of the predatory subprime mortgage crisis. Policymakers and regulators have acted to tighten and improve lending standards for mortgages and credit cards, but as CAP’s report notes, harmful practices continue to lurk among other consumer financial products. CAP outlines the components of a loan origination system that puts borrower success at the forefront instead of on the sidelines, including documented income and expenses; reasonable interest rates; appropriately aligned originator incentives; and complete, accurate, and relevant credit scoring as part of the approval process.
CAP’s report also outlines practices that would help encourage the long-term success of a loan, recognizing that lenders should not be off the hook for irresponsible lending practices once the loan is made. Clear and transparent loan terms, reasonable loan fees, fully amortizing loans, and the elimination of penalties for prepayment would help contribute to borrower and lender success.
Finally, recognizing that borrowers can and do often face changes in economic or family circumstances that can jeopardize their ability to make payments, CAP’s report encourages a system in which lenders are prepared for contingencies. CAP recommends the following account management practices: regular printed or electronic statements; payments at the borrower’s discretion, so that borrowers are notified of upcoming automatic payments and provided with clear options to stop the transaction; effective communication with the borrower; quick and responsive error correction; working with borrowers who are experiencing short-term hardship; and fair debt collection practices.
Read “Lending for Success” by Joe Valenti, Sarah Edelman, and Julia Gordon.
For more information or to speak with an expert, contact Allison Preiss at [email protected] or 202.478.6331.