Director Cordray Remarks at the American Mortgage Conference
Director of the Consumer Financial Protection Bureau
American Mortgage Conference
September 11, 2013
Thank you for having me. Those of you in this room today represent our nation’s biggest consumer financial market. Topping $10 trillion, the mortgage market is intricately tied to our economic stability and well-being. We saw this all too clearly with the recent financial crisis, which took a dramatic turn when Lehman Brothers filed for bankruptcy five years ago. The economy could not begin to return to form until the housing market began to show increasing signs of recovery, as it is now doing in many parts of the country.
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 first-hand view from the front lines as history unfolded with the boom and bust in the housing market. Severe dysfunctions in mortgage-backed securities sent profound and largely unanticipated shocks that reverberated 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 know, that law covers a broad range of topics to address the problems that we saw and make sure they would not recur in the future. 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 market 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. To that end, 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 their merits, it begets the competition that drives growth and progress. Appropriate market oversight and enforcement empowers the American consumer by ensuring that prices and risks are made clear so that they can make sound decisions they will be able to live with over the long term. Educated and informed consumers are important to ensure the marketplace functions properly.
We kept all of this in mind as we worked to develop and release the mortgage rules we published 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 rule (also known as the Qualified Mortgage or 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 a data-driven agency. Before we finalize our rules, we conduct research and solicit input from all stakeholders – consumer 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 that we received, led to more informed and better outcomes on these 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 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 data-driven decision-making is our treatment of smaller creditors under the rule. Through extensive discussions with community banks and credit unions, we came to recognize that most of their traditional lending practices should not be put into 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 we avoided a “one-size-fits-all” approach by proposing and then finalizing 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 that are non-QM. For example, loans made to borrowers with considerable other assets may not meet the 43 percent debt-to-income ratio, be eligible for purchase by the government-sponsored enterprises (GSEs), or qualify under the small creditor exemption, 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 demonstrates the care they have taken in underwriting to borrowers who 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.
Another issue that some consultants and lawyers have raised is whether the law and our rule will deliver the desired outcome for QM loans. 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 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 remain in conservatorship, as well as those meeting the small creditor provision, the QM space has been defined quite broadly. Based on the data we have analyzed to date, we estimate that over 95 percent of the mortgage loans being made in the current market will be QMs, as Mark Zandi of Moody’s Analytics recently confirmed. Some, such as Core Logic, 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; instead, they were offered as projections of a distant future when the temporary expansion expires. Indeed, CoreLogic acknowledges that so long as the GSE provision is in effect, the “impact of the regulations will be minor.” We were conscious of the extreme tightness of credit in the current market and shaped the specific provisions of our rules to address the concerns we heard from many about access to credit.
Second, our rule does apply the legal safe harbor to all prime QM loans, which affords effective protection against legal challenges. The key point here is that we 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 commenters from all sides – industry, academia, and consumer groups – asked us to draw these kinds of 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 clarified. We crafted the rule purposefully to avoid that result. So you should keep this perspective in mind if you hear people dreaming up hypothetical factual disputes in an effort to sow anxiety about potential litigation under the rule.
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.
Our regulatory implementation project goes further than simply responding to industry inquiries, as we are doing every day. We are also taking more affirmative steps to help the industry understand our rules. We have published plain-language guides that we will update as necessary. We have launched a series of videos explaining our rules. We have 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, and these have been published well in advance of the implementation 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 also 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. 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 become aware of critical operational or interpretive issues with our rules, we have been addressing 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 one set of amendments over the summer and expect to issue a second set any day now. We have made these adjustments with one 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 are reducing the need for individual institutions to spend time reaching their own uncertain judgments on these matters.
We do not believe that the Bureau’s regulatory implementation project should slow down the implementation process at any lender or servicer. Congress established an unusually 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 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 that it is critical to move forward so that 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 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.
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.
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.