Prepared remarks of Richard Cordray Director, Consumer Financial Protection Bureau
Mortgage Bankers Association Annual Convention
SAN DIEGO, CA (October 19, 2015) — Thank you for inviting me today. As we continue to emerge from the Great Recession, the housing market is finally rebounding in many areas around the country. It is a very positive development, one that is good for consumers, good for the mortgage industry, and good for the United States of America. Just to be very clear, we share with each of you and with all the members of the Mortgage Bankers Association the same view: that we are strong advocates and supporters of sustainable home ownership. Much of the work we have done to date has been done with this goal in mind, of making the mortgage market better and safer for consumers and for the responsible providers that make it a point to serve them well.
Protecting consumers must be a priority for everyone in this room, and I believe you know that very well. Our first major task as a brand-new agency was to address the serious problems in the mortgage market that caused the crisis in the first place. We sought to take a balanced and measured approach to this task. We recognized that if we did not put rules in place by January 2013, the new provisions of Dodd-Frank would automatically take effect immediately, and they could have restricted the mortgage market in ways that would not have fit the tight conditions of the post-crash marketplace. So we stepped up and got the job done, which enabled us to account for the new market conditions and to extend the effective date by one year. The result is a set of rules that protect prospective homebuyers in a manner that never existed in the past, while supporting responsible lenders against those who led a race to the bottom in underwriting standards. We now have a system in place that consumers can trust in a way they could not trust in the marketplace a decade ago. We should all share credit for this outcome, as it takes much hard work by you as well as us to build and sustain that trust.
When we put those new regulations in place, some were critical of our work. For example, the “Ability to Repay” rule requires lenders to make sure that borrowers actually have the ability to repay their loans before extending them a mortgage. Some enjoyed describing this rule, which was also known as the “Qualified Mortgage” or QM rule, as the “Quitting Mortgages” rule. They made scary predictions that our rules would cause mortgage costs to double and would cut the volume in half. They said that no one would make any non-QM loans because the risk of litigation was too great. They lamented that our rules would lead to the demise of community banks and credit unions, which would have to withdraw from the mortgage market altogether. We all recognize that change is hard, but we never believed any of this unsupported hyperbole.
And it turns out we were right. The rules have now been in place for almost two years, and none of those anxious concerns have come true. In fact, recent Home Mortgage Disclosure Act data from the Federal Financial Institutions Examination Council confirms the very opposite. In 2014, the first year of our new rules, home purchase mortgages increased by 4.6 percent. For jumbo loans, most of which are non-QM loans, the rate of increase was substantially higher and, so far as we can tell, there has yet to be a single case brought against a lender for making such a loan. The overall upward trend appears to have accelerated over the first half of this year. And while we saw minor consolidation in some parts of the mortgage market, there is no evidence of any mass exodus, as the doomsayers predicted. In fact, after adjusting for merger activity, the number of lenders that reported having originated mortgages showed an increase in 2014. And in particular, the number of community banks and credit unions that originated home-purchase mortgages last year was higher than the year before. So let me say again plainly, from my standpoint as the Director of the Bureau, that is great news. It means more opportunity for more consumers, and a renewed pathway to the American dream in a mortgage market that has been strengthened by the changes we have made.
There is no reason to be surprised at this outcome, because the main thrust of our rules was merely to impose common-sense requirements that lie at the heart of all responsible lending. It stands to reason that sensible regulations providing protections for consumers should foster greater trust in the financial marketplace. Confident and prepared consumers, along with sound lending, are the key ingredients in the recipe for an improved housing market.
It is important to acknowledge what the revival of the mortgage and housing market means for so many people. Most immediately, it means that for those who lost so much during the economic crisis, buying a house may again be within reach. A home is the most important financial investment that many families will ever make. At the same time, homeownership remains the sturdiest foundation for building wealth among the middle class. Beyond that, as we all know very well, a house that becomes a home is much more than four walls and a roof. Instead, it is a special place to raise a family and create lasting memories, a place to hold up as a source of pride and accomplishment.
The Consumer Bureau is here to work with the Mortgage Bankers Association and its members to ensure that consumers’ experience of the financial marketplace and the promise of the American Dream are one and the same. The rules we put in place in January 2014 were an important first step. As I have already noted, they secured sensible underwriting practices, such as documenting income to ban NINJA loans (as you recall, loans made even when there was no income, no job, and no assets) and so-called “liar loans.” They also do not allow underwriting based on misleading teaser rates rather than the true cost over the life of the loan. And they addressed some of the worst practices by mortgage servicers.
Of course, no set of rules is perfect, and one of the hallmarks of the Consumer Bureau is our openness to learning about the impact of our rules and making adjustments where the evidence indicates that we may have missed the mark. For example, just last month we amended our mortgage origination rules to broaden the definitions of “small creditor” and “rural area” because we were persuaded that we had drawn those lines too narrowly. In a similar vein, we continue to monitor the market and remain open to your feedback about particular concerns you may have. Indeed, within the next year we will be launching a formal “look-back process” for certain rules.
After getting through that first set of new mortgage rules, we turned to finalizing another important task assigned to us by Congress. We integrated and streamlined multiple forms that consumers receive at the application and closing stages of the mortgage process, to make the forms easier to use and understand. This regulation is what we call our “Know Before You Owe” mortgage disclosure rule, and it took effect earlier this month.
We had three primary goals in developing this rule. First, of course, we wanted to consolidate the overlapping mortgage disclosures to reduce burden on lenders and confusion for consumers. Second, we wanted to make the information presented to consumers more comprehensible to them, both at the time of application, and at closing, so that consumers would better understand the costs and the risks of the loan. And third, we wanted to make comparison shopping easier so that consumers are better able to take control of their financial lives and choose the mortgage that is right for them.
The Bureau recognized that the mortgage industry needed to make significant systems and operational changes to adjust to all these new requirements, and that implementation requires extensive coordination with third parties. So we allowed for a long implementation period – almost two years, which was toward the outer limit of what industry requested – for this very reason. Even so, it has become apparent that the implementation process was not as smooth as we would have hoped. Quite frankly, I have been disturbed by reports I have been hearing about the vendors on whom so many of you rely. Some vendors performed poorly in getting their work done in a timely manner, and they unfairly put many of you on the spot with changes at the last minute or even past the due date. It may well be that all of the financial regulators, including the Consumer Bureau, need to devote greater attention to the unsatisfactory performance of these vendors and how they are affecting the financial marketplace.
In the meantime, we recognize that the mortgage industry has already dedicated substantial resources to understand the rules, adapt systems, and train personnel. We know that you are just trying to get it right and that there is no particular advantage to playing fast and loose with these disclosures. And so we and the other regulators have made clear that our initial examinations for compliance with the rule will be sensitive to the progress you have made. In particular, our examiners will be squarely focused on whether you have been making good-faith efforts to come into compliance with the rule. This is the same approach we took in our oversight of the QM rule, which has worked out well for all concerned over the past 21 months. And both HUD and the FHFA – the two key housing regulators whose principal leaders are speaking before and after me today – have announced that the FHA, Fannie Mae, and Freddie Mac will apply the same basic approach in dealing with mortgage loans that are made under the new rule.
Now, just as we heard prophets of doom bemoaning the effects of the QM rule before it took effect, so too we are hearing some of the same voices bemoaning the effects that the “Know Before You Owe” mortgage disclosure rule will have. They say that by requiring closing disclosures to be provided three days in advance, the rule will delay and disrupt closings. They say that consumers will be forced to buy longer rate locks, which will drive up their costs.
These claims reflect a failure or perhaps a refusal to understand what the rule actually says. The rule does require that the consumer receive the Closing Disclosure three days in advance. This is necessary to avoid one of the abuses that led to the financial crisis, which was the harm done by unwelcome ambushes launched by irresponsible and predatory lenders at the last minute. In response to this problem, we are making sure that consumers have a chance to review the closing costs and compare them to the Loan Estimate before they get to the closing table, so they can rest assured that the deal they were promised is the deal they are actually getting.
But this does not mean that closing costs must be known to the penny three days before closing or that any changes of any kind will spell delay. Rather, subject to very limited exceptions, the Closing Disclosure can be corrected right up to the point of closing, and in some cases even afterwards, based on new or updated information. Only three circumstances would require the closing to be delayed. First, if the basic loan product has been changed, such as from fixed-rate to adjustable rate. Second, if as a result of the corrections the annual percentage rate on the loan increases by more than one-eighth of a point for a regular transaction or one-quarter of a point for an irregular transaction. Third, if a prepayment penalty is belatedly added to the loan.
In those very limited circumstances we want consumers to be able to reconsider their options. Any other changes, such as modifications made after the walk-through or adjustments requiring seller’s credits, do not affect the closing date, and in fact can be made using an updated Closing Disclosure without having to cancel or delay the closing. We are quite confident that the mortgage industry will be able to accommodate itself to these common-sense requirements.
For consumers, to further help homebuyers with their mortgage shopping experience, the Bureau is also developing and providing unbiased tools and resources as part of our “Know Before You Owe” mortgage initiative. We believe knowledge is power, and that empowered consumers are good for the marketplace.
In March, we released our Home Loan Toolkit, which guides consumers through the process of shopping for a mortgage and buying a house. Creditors must provide a copy to all home purchase mortgage applicants within three business days of receiving an application, which means millions of consumers will get this document each year. The toolkit, which you formerly knew as the Settlement Cost Booklet, has been streamlined, shortened, and recast in plain language that is easy to read. We think it will greatly aid you in helping consumers to better understand the choices they face, which should make for happy and satisfied customers. That will be good for you and good for them.
Another way we are helping consumers is through “Owning a Home” – an online, interactive set of tools and resources to help consumers navigate the home-buying process and make sound decisions. This helps consumers shop for a mortgage and it helps them go about buying a home, from the very start of the process all the way to the closing table. It can be found on our website at consumerfinance.gov, and it incorporates some changes we made based on feedback that we received from you and your leadership.
The last major homework assignment that Congress gave us with respect to the mortgage market was to update the reporting requirements of the Home Mortgage Disclosure Act. This was a statutory mandate, not an optional item, and last week we met it by finalizing our HMDA rule.
As Louis Brandeis, America’s original consumer advocate and later a distinguished Supreme Court Justice, famously observed, “Sunlight is said to be the best of disinfectants; electric light the most efficient policeman.” In this way, HMDA is a “sunlight” statute intended to provide the public and policymakers with information about how lenders are serving the housing needs of their communities. It helps lenders understand what is happening in their local markets. It gives public officials information that helps them make informed policy decisions. And it reveals lending patterns that could be discriminatory.
The final rule provides for more robust HMDA data. This will make it easier to identify new consumer protection concerns as they develop, and to assess whether consumers have equal and fair access to mortgages. For example, while home equity lending surged leading up to the mortgage crisis, it is currently optional for lenders to report home equity lines of credit. While older Americans are often targeted by unscrupulous contractors peddling costly loans and shoddy home improvements, lenders have not been required to report the age of the borrower. Teaser interest rates proliferated before the crisis, but current HMDA data contains limited information about the rates and fees that lenders charge. These and other gaps can hinder everyone’s ability to determine whether borrowers have access to affordable loans or to identify discriminatory targeting of borrowers for riskier or higher-priced loans.
So our rule will change some of the data financial institutions are required to provide. We have modified certain existing data elements to further the purposes of the statute and align with industry standards or other regulations; added a set of new data elements that Congress required; and used our discretionary authority to add some other data elements to help us better understand specific markets or practices, like the dynamics of manufactured housing. Some of these new data points include the total loan costs, the term of the loan, the duration of any teaser interest rates, and the borrower’s age and credit score.
We recognize that this will mean yet another implementation process for mortgage lenders on top of the last two rounds of new mortgage rules. For that reason, we were mindful to provide generous lead time to implement HMDA. We have set the effective date for most provisions for January 2018, meaning the first reports with the new data will not be due until early in 2019.
Beyond our efforts to collect better information, we are also building a better collection system. From the start, a primary goal of this effort was to find ways to reduce the burden on industry and streamline and modify the reporting requirements. We have done this in four main ways.
First, in many instances the final rule aligns definitions with prevailing mortgage industry data standards, known as the MISMO standards. We know that if we all speak the same language we can achieve two goals: improve the quality of the data and reduce costs over the long run.
Second, we are working with the Federal Financial Institutions Examination Council and the Department of Housing and Urban Development to modernize the data submission process to collect information more efficiently. By implementing modern technology, we can reduce the manual and paper-based systems used today and ultimately reduce the associated compliance costs. We estimate that this new system will save industry somewhere between 30 and 60 million dollars per year.
Third, the final rule exempts institutions that originate fewer than 25 closed-end mortgage loans or 100 open-end lines of credit from reporting HMDA data. We estimate that approximately 1,400 depository institutions will be relieved from their current reporting requirements as a result. And, of course, community banks and credit unions outside of metropolitan areas will continue to be exempted, just as they are today.
Fourth, to help industry understand the new changes, we already have issued our first set of plain-language implementation materials. Soon we will release our compliance guide for small entities. We are also considering changes to the Bureau’s resubmission standards to account for the increase in the number of data points being reported. We encourage you to check out the resources available on the HMDA regulatory implementation page on our website.
In short, we strongly believe in working with industry to smooth the way for necessary changes that will make the market work better for consumers. This goes beyond HMDA and relates to all our work. So we have created a new unit at the Bureau to see that the regulatory implementation process receives the same level of attention as the process of crafting or amending our rules.
At the same time, we want to make sure that our expectations as a supervisor and regulator are clear. For example, we continue to issue bulletins to provide clarification of both the rules we are in charge of and the changes we are implementing. Earlier this month we issued a bulletin regarding marketing services agreements or MSAs. The document offers an overview of the RESPA statute and its ban on mortgage kickbacks and referral fees, and describes examples from the Bureau’s enforcement experience. Our conclusion from that experience is that many MSAs necessarily involve substantial legal and compliance risk for the parties to the agreements – whether they are lenders, brokers, title companies, or real estate professionals.
We believe those risks are greater and less capable of being controlled by careful monitoring than mortgage industry participants may have recognized in the past. MSAs appear to create opportunities for parties to pay or accept illegal compensation for making referrals of settlement service business. The Bureau also found that it is inherently difficult to adequately monitor activities that are performed in turn by a wide range of individuals pursuant to such agreements. Especially in view of the strong financial incentives and pressures that exist in the mortgage and settlement service markets, the risk of behaviors that may violate the law are likely to remain significant. That can be true even where the terms have been carefully drafted to be technically compliant with the provisions of the law.
In sum, the Bureau’s experience in this area gives rise to grave concerns about the use of MSAs in ways that evade the requirements of RESPA. In consequence, we have reiterated that a more careful consideration of legal and compliance risk arising from these agreements would be in order for anyone that participates in the mortgage industry, including but not limited to lenders, brokers, title companies, and real estate professionals. This review is especially warranted insofar as whistleblower complaints about legal violations with MSAs have been increasing. Our enforcement actions against companies and individuals for violations of RESPA have resulted in more than $75 million in penalties to date, almost all of that arising from the payment of improper kickbacks and referral fees. We will remain active in scrutinizing the use of such agreements and related arrangements in the course of our enforcement and supervision work.
These bulletins are our way of trying to make crystal clear our expectations. We intend for everyone to pay careful attention to what we are saying and act accordingly. We do not want to play “gotcha” with industry. We want industry to follow the rules – because that is good for consumers, honest businesses, and the economy as a whole.
As we move forward, we will continue to look for ways to make the mortgage process easier. This includes our work on the closing experience. We are well aware that the sheer volume of the documents can be overwhelming to people who are generally unfamiliar with the process. So we have been evaluating electronic closings and how improvements in technology can benefit consumers and lenders alike. We recently conducted a pilot project which found that those who closed their mortgage using an electronic platform showed higher measures of understanding, efficiency, and feeling empowered than borrowers who used only paper forms. The project was not part of a rulemaking process, but rather was initiated to promote best practices in the marketplace. Based on the results, we are strongly encouraging further industry action and innovation around “e-closings.”
The mortgage market has experienced dazzling changes in the past decade. It has gone from being the overheated, increasingly irresponsible market that blew up the largest economy in the world, to retrenching dramatically into an overly tight and restrictive market where many good, creditworthy applicants cannot qualify for reasonable loans. Lack of effective regulation that fostered a race to the bottom in underwriting standards has been replaced by strong new rules designed to protect and support both consumers and responsible businesses. The result is a mortgage market that is steadily recovering, with home values increasing in many areas and millions of homes emerging from their previous underwater status.
It has been a difficult decade, but MBA members have joined us in our efforts to make the marketplace fairer and more transparent for all Americans. Change is never easy, and adversity always presents a test of strength, but you have risen to the challenge, and we appreciate all of your extensive efforts to get it right. Together we are building a more solid foundation so that you can thrive and so that families across the country can make the American Dream their reality. Thank you.
About Consumer Financial Protection Bureau (CFPB)
The Consumer Financial Protection Bureau (CFPB) is a 21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives. For more information, visit www.consumerfinance.gov.