Prepared Remarks of Richard Cordray, Director, Consumer Financial Protection Bureau to the National Association of Realtors:
September 17, 2015
Thank you for inviting me today. That renowned philosopher from the Garden State of New Jersey, Bruce Springsteen, once said, “I have spent my life judging the distance between American reality and the American dream.” For the past few years, we have all been judging that distance for ourselves, and we have seen how the worst financial crisis of our lifetimes caused the gap to widen for far too many people. But as we continue to emerge from the Great Recession, we are now starting to see things turn around. The housing market is finally breaking out in many areas around the country. It is a very happy development, one that is good for consumers, good for real estate professionals, and good for the United States of America.
In the wake of the financial crisis, Congress created the Consumer Bureau with the sole purpose of protecting consumers. We do that by working to ensure that people have access to consumer financial products and services; that these markets work in a fair, transparent, and competitive manner; and that consumers are empowered to take more control over their financial lives. To begin with, 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.
Since opening our doors four years ago, the Consumer Bureau has been hard at work to put new rules in place to encourage common-sense, consumer-friendly business practices. We have sought to take a balanced and measured approach to this task, mindful of the concerns of many stakeholders. When Congress required us to finalize several substantial mortgage rules within our first eighteen months, we stepped up and got the job done.
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 aggressive predictions that our rules would cause mortgage prices to double and would cut the volume in half. They offered dire predictions 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 never believed any of this unsupported hyperbole.
And it turns out we were right. The rules have now been in place for the better part of two years, and none of those heated claims has come true. In fact, recent data confirms the very opposite of the fears that were voiced by our critics. In 2014, the first year of our new rules, mortgage originations for owner-occupied home purchases increased between 4 and 5 percent. The 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. Let me say plainly, from my standpoint as the Director of the Consumer Financial Protection 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 our rules merely imposed common-sense requirements that lie at the heart of all responsible lending. In addition, we have been taking pains to create some special rules to protect community banks and credit unions, which had amassed the lowest default rates right through the wreckage of the financial crisis. Reasonable regulation of financial markets, which includes evenhanded oversight and enforcement of the law, should always tend to benefit the most responsible providers. By taking on and rooting out unfair competition that gobbled up market share by driving down sound underwriting standards, the Consumer Bureau is supporting responsible lenders. The market leaders of today are those that have remained focused on providing sustainable homeownership rather than just making a quick buck, no matter how.
At the same time, sensible regulation that includes substantial consumer protections should foster greater trust by consumers in the financial marketplace. If people believe they will be treated fairly rather than becoming victims of predatory lending, they can develop a renewed sense of consumer confidence. And in the past few years, as consumers have improved their own financial health and seen their home values stabilize in many parts of the country, those sentiments are gradually returning. Steady and prepared consumers, along with sound lending, are the key ingredients in the recipe for an improved housing market. And what that means for everyone here is that you now have the chance once again to show America what you do best: provide excellent customer service and help put people in the right homes for the right price.
It is hard to appreciate fully what that 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. Although many people intend to create a nest egg for the future, the mechanism that most reliably causes it to happen for many Americans is making the monthly payments on an amortizing mortgage. 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 call your own, a place to rest and feel safe, a place to raise a family and create lasting memories, a place to hold up as a source of pride and accomplishment.
The National Association of Realtors represents more than one million hard-working members – brokers, salespeople, property managers, appraisers, housing counselors, and more. You suffered greatly during the crisis and its aftermath. The new Consumer Bureau is here to work with you to ensure that consumers’ experience of the financial marketplace and the promise of the American Dream are one and the same.
In that spirit, to improve the mortgage market we are making sure protections are put in place at every stage of the process, from shopping for a mortgage to closing on the house to paying back the loan. As I have already noted, in January 2014, our first set of mortgage rules took effect. They restored sensible underwriting practices (such as documenting income to ban Liar Loans) and addressed some of the worst practices by mortgage servicers. By the way, we have heard all over the country from real estate professionals who have been frustrated – and lost countless sales – by poor practices from mortgage servicers. We have come to understand that your interest in improving servicer performance is directly aligned with the interests of consumers, and of the Consumer Bureau. We will continue to work with you and listen to you about how we can improve these features of the mortgage market.
After getting through the first set of new mortgage rules, we turned to another important task imposed by Congress. We integrated and streamlined multiple forms that consumers received at the application and closing stages of the mortgage process, to make the forms easier to use and understand. This regulation was completed almost two full years ago, but will finally take effect on October 3. Among other things, what we call our “Know Before You Owe” mortgage disclosure rule makes it easier to shop for a mortgage.
In essence, what we have done is to replace four overlapping mortgage disclosure forms and put in their place just two forms that consumers have told us are much easier to understand. The first form is the Loan Estimate, which provides a summary of the loan offered along with the estimated costs associated with the mortgage such as taxes and insurance and closing expenses. The second form is the Closing Disclosure, which offers a detailed accounting of the transaction. With a simple accounting of payments and fees, these new forms show what people are getting into – the price and key terms of their loan and how its terms could change over time. They present the information in plain language, in a format that is easy to follow, where the costs and risks of the loan are made clear. And right up front on the first page, shoppers can see what they want to see the most: the loan amount, their monthly payments, taxes, insurance, other property costs, and the total cash required to close the loan. Our consumer testing shows that when borrowers use our new forms, they will end up with a better understanding of the final terms of their mortgage before they close on the loan.
The changes we have made also are designed to make comparison shopping easier. Our efforts here have centered on reducing the information gap between lenders, who understand mortgage pricing inside and out, and consumers, to whom the process can often feel like a mystery. We want to encourage consumers to focus on “shopping for a mortgage” instead of just “getting a mortgage.” Consumers have much more power than they realize to shop for the best deal. The power to comparison shop allows them to take more control of their financial lives and make better choices that will make a difference for themselves and their families.
Homebuyers will get the Loan Estimate no more than three business days after they apply for a loan. If they apply for loans with multiple lenders, they will receive all the information in a common format to make a direct comparison between them. Consumers will be able to see directly and immediately who is offering them better rates or cheaper fees. Consumers will then be better able to weigh those price differences against other factors that matter to them.
When consumers have decided on a loan, our new rules also require lenders to give them the Closing Disclosure three business days before the closing occurs. It summarizes the final loan terms and costs and presents a detailed accounting of the transaction. Before people arrive at the closing, they can compare this form to their Loan Estimate to see what has changed. Our form makes that comparison very obvious, which minimizes the potential for nasty surprises such as “bait and switch” increases in rates, fees, or settlement costs. Should the Closing Disclosure become inaccurate due to three very limited sets of changes that are especially crucial – changing the loan product (say from fixed-rate to adjustable-rate), increasing the APR beyond certain limits, or adding a prepayment penalty – consumers must be given a revised Closing Disclosure at least three days before the closing. Some have been spreading misinformation about this point, claiming that last-minute changes based on walk-throughs or similar circumstances will cause frequent three-day delays in the closing process. That is simply wrong. Sellers’ credits and the like will never require a new Closing Disclosure that delays the closing date. Only the three very limited circumstances just described relating to changes in the loan terms will require a new Closing Disclosure. This rule will reduce paperwork, remove confusion, and make the process more transparent – all changes that will help promote home sales, not hinder them.
To further help consumers with their mortgage shopping experience, the Consumer 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 “Your Home Loan Toolkit,” which provides a step-by-step guide to help consumers understand the nature and costs of real estate settlement services, define what “affordable” means to them, and find the best mortgage to fit their personal circumstances. 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 streamlined, plain-language document each year. We encourage all industry participants, including the real estate professionals in this room, to provide it to potential homebuyers as early as possible in the home-buying process so they can use this information most effectively.
Another signature offering we are developing and refining for consumers is called “Owning a Home” – an online, interactive set of tools and resources to help consumers navigate the home-buying process and make sound decisions. Right now we are greatly expanding this section of our website to help consumers shop for a mortgage and 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.
While many people want to buy a home, getting their finances ready for homeownership can be a challenge. Owning a Home helps people assess their spending, learn how to check their credit, and figure out how much they can spend on an affordable mortgage. The site also guides them through the process of meeting with lenders and getting a prequalification or preapproval letter, helps them know what questions to ask when meeting with lenders, and assists them in gathering the paperwork they need to move forward. Gene Koo, who serves as the head of Consumer Engagement at the Consumer Bureau, will be giving us a demo of some of these Owning a Home features here very shortly.
We also recently launched a real estate professional’s guide to our Know Before You Owe rule and our supporting tools. This guide summarizes the key facts you need to know and provides handy tips for achieving smooth closings on time. We encourage you to check it out on our website.
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. Based on those 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 could not qualify for reasonable loans. Lack of effective regulation that fostered a race to the bottom in underwriting standards has now led to strong new regulations designed to protect and support both consumers and responsible businesses. The result today 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. Through these sometimes bewildering changes, the National Association of Realtors has hung tough and worked toward better times ahead. It has been a difficult decade, but you have embraced change as we have worked to make the marketplace fairer and more transparent for all Americans. Adversity always presents a test of strength, but you have risen to the challenge. 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. At the Consumer Bureau, we salute you and thank you for doing what you do.