Will CFPB Leadership Follow Where the Data Lead and Protect Debt-Laden Consumers from Predatory Settlement Companies?
The CFPB’s own debt settlement report suggests consumers are in trouble. The CFPB could, if it chose, get to the bottom of who is in trouble and why.
The Consumer Financial Protection Bureau’s (CFPB) career economists have again put up a red flare, warning of heightened risk to consumers in the current economy. The CFPB’s recent report on debt settlement shows that consumer delinquencies on credit cards and other unsecured debt were increasing in 2019, while the many consumers facing financial distress were more exposed than ever to predatory debt settlement companies. Whether the CFPB will follow those warning lights to do more than pursue a few bad actors remains to be seen. Congress should take advantage of its upcoming hearings with the Director of the CFPB to push for more data as a necessary first step to provide meaningful consumer protections against predatory settlement companies
Debt settlement, as the report explains, happens when creditors agree to write off a portion of the debt. Generally, creditors only do this when they see no realistic prospect of recovering the money. In 2019, the total amount of debt settled was again increasing above the 2007 levels, at the inception of the Great Recession. At the same time, the share of consumers working with credit counseling agencies (CCAs) has shrunk to a fraction of what it was in 2007, leaving consumers increasingly to either settle their debts on their own or pay debt settlement companies (DSCs) to do so for them.
CCAs are generally nonprofits that provide a range of tools, including individualized counseling, to help individuals manage their debt burden. The CFPB actively encourages consumers having trouble paying their debts to contact a CCA . In contrast, the CFPB’s consumer education materials warn, “Dealing with debt settlement companies can be risky” and “Debt settlement may well leave you deeper in debt than you were when you started.” But CCAs, like other nonprofits serving distressed consumers, including housing counselors and legal services programs, saw a drop in their funding levels in the wake of the Great Recession as both government and foundation funding meant to combat the foreclosure crisis moved on.
There is so much more we should know before deciding on how and if to intervene:
- Have delinquency rates and debt settlement rates continued to climb post-COVID? Are consumers maxxed out on debt or are they, as the CFPB has suggested, seeking more credit?
- Do debt settlement rates vary by income or race? The dataset relied on by the CFPB doesn’t include demographic information, but it does include location information that allows observation at the neighborhood level.
- Are low-income communities or communities of color more or less likely to use CCAs for help managing their debt burden or to turn to DSCs?
- How much has the shift from CCAs to DSCs cost consumers and how does that cost vary by the income and racial composition of a neighborhood?
That this work has not yet been done is not a criticism of the report or its methodology. Good research always points to the next set of questions. But the CFPB, as an institution, has an obligation to do more. Congress charged the CFPB with researching and reporting on the risks to consumers and particularly on the experiences of traditionally underserved consumers—the low-income communities and communities of color that were so disproportionately harmed by the Great Recession.
The CFPB’s failure to advance a research agenda here, as with its stalling on the small business lending data collection rulemaking and its clawback of mortgage data used for fair lending analysis , has the result of hiding from view both the problem and the potential solution. As long as we shroud the exact contours of the problem, we can continue to pretend that cases against individual bad actors (even if they settle for less than one-hundredth of the consumer harm identified), convenings to discuss debt relief options for consumers, and consumer education are sufficient. But none of those will protect most consumers. We must know who is harmed and how.
We see now a renewed urgency to questions about our collective accountability for racial justice and equity and widespread uncertainty and strain due to the COVID-19 pandemic. Adopting an aggressive, public-facing research agenda to look at the intertwined questions of race, access to credit, and economic justice in the time of COVID could do much to advance the public discourse and allay questions about the commitment of the current leadership, notwithstanding legitimate policy differences, to the CFPB’s statutory mission.
The CFPB’s own debt settlement report suggests consumers are in trouble. The CFPB could, if it chose, get to the bottom of who is in trouble and why. If it continues to leave unanswered the fundamental questions of who is harmed and by how much, Congress must hold it to account.