In a little-noticed speech last month, Consumer Financial Protection Bureau Director Richard Cordray laid out a new, unified way of thinking about several of the hot-button issues the agency is currently tackling.
U.S. consumers do not get to choose the company that services their mortgage, or the firm that collects debts they owe, or the company that gathers information about their credit history, Cordray noted.
Then he added, "When people cannot vote with their feet, their clout is limited, even though these products and services can have a profound influence on their lives."
"Without consumer choice, a key element of market discipline is lacking," Cordray said in the Feb. 20 speech. "The result is to permit or even facilitate a distinct indifference to the interests of individual consumers."
No one is sure yet where this line of thought will take the CFPB. But the agency's supporters and detractors alike say the speech is an important, potentially nettlesome development for the banking industry — because it suggests that the bureau will give additional scrutiny to business relationships that tie consumers to specific companies.
Jo Ann Barefoot, a banking industry consultant, says the speech should serve as a wake-up call inside banks.
"I don't think very many banks have asked themselves, 'Are we in business relationships that could create risks to the consumers?'" says Barefoot, co-chair at Treliant Risk Advisors. "'And if so, what are those risks, and how are we going to avoid or mitigate them?'"
Cordray never said in his speech that consumers should have a say in choosing who banks do business with, but some banking attorneys wonder if that is where the agency is heading.
"The unconventional idea that consumers who aren't paying a loan should choose their debt collector is perhaps a shot across the bow of banks to focus on service providers even more than they are," Thomas Vartanian, a banking lawyer at Dechert LLP, says in an email.
Regulatory scrutiny of banks' relationships with other businesses is nothing new, of course.
Last April, the CFPB issued a bulletin stating that banks and other financial institutions may be held responsible for the actions of the companies they enter into contracts with. The document recommended that banks conduct due diligence on such companies, only sign contracts that lay out clear expectations about legal compliance, and then monitor the other companies' activities.
The bulletin didn't break much new ground — earlier guidance from other agencies had established similar expectations. But it did presage the agency's 2012 enforcement actions against Capital One Financial (COF) and Discover Financial Services (DFS) regarding the marketing tactics of vendors they hired to help sell credit card add-on products.
Cordray's speech last month to the bureau's Consumer Advisory Board goes farther than earlier regulatory edicts. The remarks suggest that the relationship between a bank and a debt collector may be fundamentally unfair to the consumer, no matter how much due diligence the bank does on the debt collection firm.
"When a consumer does not pay back a debt, the creditor may decide to sell it to or contract with a debt collector to secure payment of what is still owed," Cordray noted.
"Once this occurs, the paying business relationship has shifted; it now lies between the debt collector and the creditor, not the consumer and the creditor. This can lead to mistreatment of the consumer, who becomes, in effect, a kind of 'bystander' to the new business relationship. In this situation, creditors may have little reason to ensure that debt collectors treat consumers fairly and appropriately or that they maintain and use accurate information."
Cordray also listed mortgage servicing, student loan servicing, and credit reporting as examples of industries where the interests of consumers can become largely incidental.
"From the perspective of the credit reporting firm and its clients," he said, "inaccurate reports may be no more than a statistic or an error rate. But for individual consumers whose reports are incorrect, the damage done to their lives can be severe and lasting."
Some banking attorneys are taking issue with Cordray's argument.
"I think his reasoning is flawed," says Alan Kaplinsky, a banking lawyer at Ballard Spahr. "If a debt collector mistreats a consumer from whom they're trying to collect a debt, they're going to get sued."
The nascent agency's focus on the consumer impact of business relationships may come at the expense of prudential supervision, says Dechert's Vartanian. "To recast the relationship," he argues, "to one that is consumer-driven impacts traditional business relationships and efficiencies."
Not surprisingly, Cordray's speech is getting a much warmer reception from consumer advocates.
"I was very impressed," says Prentiss Cox, a University of Minnesota law professor who studies consumer protection. Cox is a member of the bureau's Consumer Advisory Board but was speaking only for himself.
Prior to the bureau's creation, much of the emphasis in consumer financial protection was on ensuring that lenders make proper disclosures to borrowers. But the agency's new analytical framework marks a shift in perspective, and one that carries important implications, according to Cox.
"It's not about information asymmetries or consumer disclosures at all, because the consumer's not involved in the transaction," Cox says. "Therefore, the remedy is not about primarily providing more disclosures or information to people. It's about providing fair rules of play."
It is not clear what the CFPB's emphasis on consumer choice will mean for financial institutions. Banks already police the companies that provide services to them.
And under the Dodd-Frank Act, the bureau has the legal authority to supervise directly at least some of the third-party companies that banks do business with. Last week, the CFPB announced that it is expanding its supervision of student loan servicers, using its power to identify larger participants in certain nonbank sectors.
"It will have the ability to go straight to that third party," says John Graetz, a principal at Deloitte, "as opposed to the preexisting regulatory approach, where the only way they could get to the third party was through the financial institution itself."
Still, banks would be well advised to ask themselves some questions regarding how their business relationships with other companies can affect consumers, says Treliant's Barefoot.
Among those questions: Could inaccurate data harm the consumer?
"Another question is: Should there be more transparency in the relationship?" says Barefoot, who also serves on the CFPB's Consumer Advisory Board, but emphasized that she was speaking for herself. "And the third one is: Should we be offering consumers more choice?"