September 8, 2014

Markets for financial services often don’t work well for consumers. The trial and error technique that consumers rely on in navigating many markets, such as food and clothing markets, does not work well when transactions are large and infrequent.  Financial firms who expect to see a customer only once may have little incentive to provide good service.   Because of the complexity of many financial products, consumers often have less information about the products than those who sell it. The new consumer complaint facility created by the Consumer Financial Protection Bureau (CFPB) can be viewed as an attempt to offset these factors so that financial markets will work better for consumers.

The “Submit a Complaint” Facility

The new facility is deployed on CFPB’s web site, where consumers can lodge a complaint against any financial service provider from whom they have obtained a loan, lease or other financial service. The consumer registers the complaint with CFPB, who forwards it to the service provider, who responds to CFPB, who delivers the response to the consumer who accepts or disputes it.

CFPB records each complaint with the name of the firm involved, the product, the consumer’s state and zip code, the date the complaint was received, the date it was sent to the firm, the firm’s response and whether it was timely, and whether the consumer disputed the firm’s response. While similar complaint programs exist at the state level, the CFPB program is unique in its use of the internet as its principal communication device, and in developing a data base of complaints that is available to the public. The data base includes a filtering system that allows users to sort data into the specific categories they want to examine.

The data base grows by the day and the growth will accelerate as consumers become increasingly aware of the facility. On August 24 when I accessed it, there were 279,498 complaints about the following products or services:  mortgages 116, 335, credit cards 38,536, debt collection 36,231, bank accounts or service 34,905, credit reporting 34,625, student loans 8,509, consumer loans 7,896, and  payday loans 2339. (Yes, I know the components don’t quite add to the total, but write your complaint to CFPB).  

Not Much Data on Why Consumers Complain

Each complaint delivered to the CFPB is placed in an issue category and the number of complaints is shown for each category. Unfortunately, the categories are so broad that they reveal nothing about the reasons for complaints.  For example, 65,744 of the 116, 335 mortgage complaints were classified as “Loan modification, collection, foreclosure.”

Hopefully, over time CFPB will enlarge the number of complaint categories in ways that reveal the major sources of problems faced by consumers. Even better would be to disclose the individual complaint narratives, without identifying the complainers. I understand that a proposal to do that is out for comment.

Involvement of CFPB in Individual Cases

The program is designed so that the firms involved bear the burden of responding to complaints, but CFPB can intrude itself into the process if that appears appropriate in connection with its regulatory responsibilities. Such a situation could arise if, e.g., there are multiple complaints about a particular firm that suggest that the firm may be violating a law. Evidently CFPB has already used it for that purpose.

Redress For Disgruntled Consumers

Consumers who have purchased a financial service and are seeking redress for sins of commission or omission committed by service providers are now in a stronger position. By channeling their complaints through CFPB, they have assurance not otherwise available that their complaint will be taken seriously, and that the firm will respond.

The consumer may also learn something from the process. More than two-thirds of the complaints are “Closed with explanation”, which suggests that the consumer may have misunderstood or misinterpreted something about the process, and that the only thing needed was a clarification by the firm. Consumers disputed about one-fifth of these explanations, with the other four-fifths at least satisfied enough with the explanation that they did not dispute it.

The Complaint Data Base Does Not Help Consumers Decide The Best Firms to Shop

It is quite easy to sort the CFPB data base by company and product in order to see where complaints are concentrated. It would be a mistake, however, to use such data as a way of deciding which companies to shop and which to avoid.

For example the Bank of America had 28,348 complaints connected to mortgages whereas M&T Bank had only 834. But the inference that it  would be safer to deal with M&T is false. Bank of America has more mortgage-related complaints than M&T Bank because it makes many more mortgage loans. To make valid comparisons between companies, complaints must be related to the number of transactions that might result in a complaint, and that information is not in the CFPB data base. Until it is, CFPB should warn users that differences between companies in the number of complaints are not meaningful.