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Director of the Consumer Financial Protection Bureau
Mortgage Bankers Association Annual Convention
October 28, 2013
Thank you for asking me to come and speak to the convention. Those of you here today represent the single biggest consumer financial market in our nation and also in the history of the world, with the mortgage market topping $10 trillion. You know firsthand how closely tied the mortgage market is to our overall economic stability and well-being. Just over five years ago, we saw this all too clearly, as disruptions in the housing market precipitated the financial crisis that caused so much damage to the people of this country. And the current economic recovery is occurring in large part because the housing market is showing increasing signs of recovery.
The credit crunch, the financial collapse, and the ensuing deep recession will likely stand as the most significant financial events of our generation. They cost Americans trillions of dollars in household wealth. Many lost their jobs; many lost their homes; almost everyone saw their retirement savings shrivel. You had the graphic view from the front lines as history unfolded with the boom and bust in the housing market. Severe dysfunctions in the loans supporting mortgage-backed securities sent profound shocks reverberating throughout the financial system.
The crumbling of the housing market destroyed jobs across every economic sector and in communities throughout the country. The dimensions of the failure were astounding. The American dream of homeownership was shaken to its foundations. People lost hope and confidence in the future. The housing collapse crippled our economy in ways not seen for generations. In the aftermath of the crisis, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act. As you well know, that law covers a broad range of topics to address the problems that led to the crisis and ensure they would not happen again. Among the steps taken in the law was the creation of the new Consumer Financial Protection Bureau.
Part of our mission therefore is to ensure that the recent economic meltdown does not repeat itself. The developments that led to the financial crisis are inconsistent with the fair, transparent, and competitive markets that we are directed to promote. The aftermath of the crisis severely compromised consumers’ access to credit, which we are also directed to promote. To accomplish these objectives, Congress gave us a number of tools to assure evenhanded oversight of consumer financial markets and to prevent bad practices from taking root. When honest and innovative businesses can succeed on the merits, it begets the kind of fair competition that drives growth and progress. Appropriate market oversight and evenhanded enforcement empower consumers to make sound financial decisions they can live with over the long term.
We kept all of this in mind as we worked to develop and complete the mortgage rules we issued last January. As I am sure you are well aware, two of our mortgage rules will be extremely important in addressing some of the most serious problems that had undermined the mortgage market. The Ability-to-Repay/Qualified Mortgages (QM) rule is designed to end many irresponsible lending practices by making sure that consumers are getting mortgages they can actually afford to pay back. Our servicing rules contain provisions designed to ensure, among other objectives, a fairer and more effective process for troubled borrowers who face the potential loss of their homes.
At the Consumer Bureau, we are committed to open, inclusive, transparent decision-making. Before we finalize our rules, we conduct research and solicit input from all stakeholders – consumers, advocates, industry members, and public officials. The best decisions will be those that are best informed. There is no question that our processes, including the many meetings we took and the broad input we received, led to better outcomes on the mortgage rules. Throughout the process, we heard overwhelmingly that the mortgage market in 2012 was vastly different from the mortgage market of 2006, and required even more focus on access to credit than would be true in more normal circumstances.
The constrained mortgage lending so prevalent today was quite critical to our thinking about how to contour our mortgage rules, especially the Ability-to-Repay/QM rule. By paying close attention to this input, and by obtaining and analyzing more up-to-date data, we came to more balanced conclusions about how to define a so-called Qualified Mortgage and tailor its legal consequences.
One further illustration of our approach is our treatment of smaller creditors under the rule. Through extensive discussions with community banks and credit unions, and analysis of performance data for loans originated during the boom years, we came to recognize that most of their traditional lending practices should not be put in question by the Ability-to-Repay rule. Especially where smaller institutions make loans that they keep in their own portfolios, they have every incentive to pay close attention to the borrower’s ability to repay the loan. They are more immediately subject to community norms, and their underwriting standards did not deteriorate in the heady days before the financial crisis; indeed, they often lost market share to those engaged in the more irresponsible lending practices of that era. So the rules contain provisions that avoid a “one-size-fits-all” approach by extending specific provisions to meet the special circumstances of smaller mortgage lenders.
Qualified Mortgages cover the vast majority of loans made in today’s market, but they are by no means all of the mortgage market. This point is important and it should not be misunderstood. There are plenty of good loans made every year – for example, loans made to a borrower with considerable other assets or whose individual circumstances and repayment ability are carefully assessed – that are non-QM because they do not meet the 43 percent debt-to-income ratio or are not eligible for purchase by the government-sponsored entities (GSEs), but nonetheless are based on sound underwriting standards and routinely perform well over time.
Lenders that have long upheld such standards have little to fear from the Ability-to-Repay rule; the strong performance of their loans over time demonstrates the care they have taken in underwriting to ensure that borrowers have the ability to repay. Nothing about their traditional lending model has changed, and they should continue to offer the same kinds of mortgages to borrowers whom they evaluate as posing reasonable credit risk – whether or not they meet the criteria to be classified as Qualified Mortgages. Last week, we took another step to address industry concerns about fair lending risks associated with offering only Qualified Mortgages. Together with the other banking agencies, we explained our joint viewpoint that we do not anticipate that a creditor’s decision to offer only Qualified Mortgages would, absent other factors, elevate an institution’s fair lending risk.
Another issue that some consultants and lawyers have raised is whether the law and our rule will deliver the assured and predictable legal protections even for QM loans. We believe strongly that they will do so. There are two key points here: the size of the QM space and the effectiveness of the legal safe harbor.
First, by expanding the definition of QM for a period of years to include not only loans that satisfy the 43 percent debt-to-income test but also loans that are eligible for purchase by the GSEs while they are in conservatorship (or eligible for guarantees or insurance from the Federal Housing Administration, the Department of Veterans Affairs, or the Department of Agriculture), the QM space has been drawn quite broadly. Indeed, the small creditor provision expands the rule’s coverage even more. And though no data is available to model the precise impact of the three percent threshold for points and fees mandated by the statute, that threshold is more than three times the average lender origination fees reported by Bankrate.com in its most recent annual survey, and our rule provides an even higher threshold for smaller loans.
Based on the other elements of the QM definition, we estimate that more than 95 percent of the mortgage loans being made in the current market will be Qualified Mortgages, as Mark Zandi of Moody’s Analytics recently confirmed. Some, such as CoreLogic, have put out much lower figures, but by their own admission, those figures were not intended to take account of the expanded definition of QM that will actually take effect in January but instead were offered as projections of a distant future when the temporary expansion expires. Indeed, CoreLogic acknowledges that as long as the temporary expansion remains in effect, which may well be for several years, the “impact of the regulations will be minor.”
Second, our rule does apply the legal safe harbor to all prime QM loans, which affords effective protection against legal challenges for loans that satisfy the QM criteria. The key point here is that we left little room for legal challenges to whether a given mortgage is a QM. We purposely drew bright lines to define the contours of a Qualified Mortgage, such as a 43 percent debt-to-income ratio, or eligibility for purchase by the GSEs while they remain in conservatorship, or portfolio loans made by small creditors. A large number of industry commenters asked for those bright lines, and we agreed that approach made sense. If those lines were not drawn as sharply as they are, then much would have remained to be fought out in the courts for years and years before the definitions were clear. We crafted the rule to avoid that result, which is why critics are now forced to dream up hypothetical factual disputes about whether debts and income were correctly calculated in their efforts to criticize the rules or sow anxiety about them.
The main provisions of our mortgage rules will take effect in January, and we have a team devoted to the regulatory implementation process. We are engaged in vigorous outreach and assistance to financial institutions. We view this as a joint enterprise, and we are interested in learning how we can make things go more smoothly and achieve better results.
We believe that the Bureau’s responsibility for the rules we promulgate does not end with simply finalizing a set of regulations. It is not good enough for us to take the view that once these new rules are published, our work is then done and we can say to financial institutions that “it’s your problem now.” If the whole point of our regulations is to protect consumers and promote fair, transparent, and competitive markets, then we should care about how well the rules are understood and implemented, how operational issues can be more easily addressed, and the amount of effort required. And we have shown that we do care deeply about these things.
Our regulatory implementation project goes further than simply responding to industry inquiries, as we are doing many times every day. We have also taken more affirmative steps to help the industry understand our rules. We published plain-language compliance guides that we will update as necessary. We launched a series of videos explaining our rules. We worked closely with the other financial regulators to develop examination guidelines that reflect a common understanding of what the rules do and do not require, which were published well in advance of the effective date. Our goal with all of these efforts has been to provide as much advance notice as we could about what you should expect from the financial regulators as they engage in supervisory oversight on the mortgage rules.
This work reflects close cooperation between the Consumer Bureau and the prudential regulators and our mutual desire to conduct examinations consistently. We distributed a readiness guide with a checklist of things to do before the rules take effect – like updating policies and procedures and providing staff training. We have produced a joint agency statement addressing Qualified Mortgages and fair lending concerns. And we are consulting with consumer groups to determine how best to educate consumers with understandable information about how the new rules will affect them.
As we became aware of critical operational or interpretive issues with our rules, we have addressed them. We made a commitment to respond to substantial interpretive questions that significantly affect implementation decisions in writing through amendments to the official interpretations and, if need be, to the rules themselves. We issued various amendments over the course of the year with a single aim in mind: to ensure the effectiveness of our rules by making it easier for industry to comply. By addressing and clarifying industry questions, we reduced the need for individual institutions to spend time reaching their own uncertain judgments on these matters.
We understand that even though these beneficial amendments have responded to your requests to remove obstacles to implementation, they have required you to make further adjustments. But we do not believe the Bureau’s regulatory implementation project should slow the readiness process at any lender or servicer. Congress established a specific deadline for the effective date of the rules it directed us to write, and we set the effective date to reflect that deadline. The Ability-to-Repay rule, in particular, has been broadly expected since the passage of the Dodd-Frank Act in July 2010 and actually requires little more than the sound underwriting practices that have become standard in the years since the crisis. And the general contours of the mortgage servicing rules track the problems that have been identified in this industry for more than five years, most of which were squarely addressed in the standards set by the National Mortgage Servicing Settlement adopted in 2011.
We believe it is critical to move forward so these rules can deliver the new protections intended for consumers and the certainty that the industry has been seeking. That will encourage consumers to take part in the mortgage market with improved confidence about how the market will function, even as responsible lenders will be enabled to conduct their mortgage businesses profitably.
We understand this poses a challenge for industry, just as the writing of such a substantial set of mortgage rules by last January posed a significant challenge for our new agency. Had we failed to do so, many key statutory provisions that Congress had enacted in Title XIV of the Dodd-Frank Act would have taken effect in their own right, which everyone recognizes would have been much harder on industry and much worse for the mortgage market. We are all in this together, and so we appreciate the urgency and the resources that the mortgage industry is bringing to bear in preparation for the approaching effective dates. Let me also say that our oversight of the new mortgage rules in the early months will be sensitive to the progress made by those lenders and servicers who have been squarely focused on making good-faith efforts to come into substantial compliance on time – a point that we have also been discussing with our fellow regulators.
Our rulemaking process is designed to produce rules that deliver tangible value to consumers and make the financial markets work better. But as we have shown over the past year, we recognize that without effective implementation, that cannot happen. That is why we share the industry’s focus on putting these rules in place successfully and why we have rolled up our sleeves and worked alongside you to help get it done. When our rules can be understood consistently and applied effectively, that will produce better outcomes for consumers, for honest businesses, and for the economy as a whole.
At the Consumer Bureau, we envision a consumer financial marketplace where reasonable and evenhanded oversight promotes welfare-enhancing innovation, where consumer protections and business opportunities complement one another, and where financial institutions lead by modeling responsible, honest practices that benefit consumers and provide excellent customer service. We believe that such a marketplace will be beneficial to all those involved, and will lead to long-term sustainable financial conditions that strengthen the future of this country. Thank you.
The Consumer Financial Protection Bureau 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 consumerfinance.gov.