Director of the Consumer Financial Protection Bureau
National Association of Realtors
May 14, 2013
Thank you all for inviting me here today. Ten years ago, I was serving in Ohio local government as the Franklin County Treasurer. My work there involved dealing with the collection of current and delinquent real estate taxes, and we were beginning to see the first indicators of a foreclosure crisis we did not understand. So we decided that I would embark on a speaking tour of the local realtor associations, and we found to our surprise that there were seventeen distinct associations in the central Ohio area alone. I assume you have heard the old adage that all politics is local? Well, it turns out that so is all real estate. So I set out on a round of early morning breakfasts that just about killed me, because, let me tell you, I am not a morning person. But I learned that you realtors are hard-working professionals who understand plainly that the early bird gets the worm. So it is a pleasure for me to speak before the National Association of Realtors today, and it is a special pleasure to be invited to speak to you in the afternoon!
From those breakfasts we developed a close association between my office and the realtors, who came to appreciate the various improvements we were trying to make that affected their work: developing an automatic escrow program for the payment of real estate taxes; speeding up tax collections; clearing off a large backlog of unpaid tax delinquencies; speeding up the process for resolving valuation appeals; promoting financial literacy in schools and places of worship; and establishing an aggressive outreach program to make the complex local property tax system more understandable and accessible for the public. Through this work, we developed a mutual respect, and you helped to see that I received more of the education you can never get in school.
Maybe most important of all, I learned a great deal from you and your colleagues about the increasingly disturbing situation that was developing in the housing and mortgage markets. We now know it as the foreclosure crisis. Over time, we have come to a fuller understanding of how rampant underwriting deficiencies eventually brought about the credit crunch, the financial meltdown, and the deep recession that have so dramatically affected this country for five years now and counting.
Out of that foreclosure crisis, which for several years spotlighted Michigan, Ohio, and Indiana before it later spread to the sand states and beyond, I came to see how critically important our real estate market is to the health and well-being of our communities. People who were in danger of losing their homes were at risk not only of slipping down the ladder of economic success, but also of having their entire lives upended in ways that go far deeper than a mere economic concern. And so we began to create “Save Our Homes” task forces, first locally and then all over the state after I became the State Treasurer in 2007. These task forces brought together leaders from the private sector (including realtors), the public sector, and the non-profit sector to address the severe problems that were overwhelming families and communities. We tried to work with mortgage servicers to seek relief for people in trouble and experienced the same frustrations as millions of Americans have encountered over the past decade. Each year, I have wondered when we would finally put those problems behind us, but they have proven to be more difficult and protracted than anyone had expected.
These are some of the kinds of experiences I have brought to the new Consumer Financial Protection Bureau. For members not as familiar with us, the Consumer Bureau is a new federal agency whose mission is to help consumer financial markets work by making the rules of the marketplace more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives. Just like the Consumer Product Safety Commission ensures that products from toys to toasters are safe, or the Federal Aviation Administration makes sure that the airlines properly maintain their airplanes, the Consumer Bureau protects people when it comes to matters of household credit and other consumer financial products and services.
We were created in the aftermath of the financial crisis, which had a profound effect on realtors and everyone else involved in the housing market. Indeed, you had the view from the front lines as history unfolded in the housing boom fueled by increasing numbers of “low doc” and exotic mortgages. You saw people taking out loans they could not afford to pay back, or could only keep up with for the first year or two. You saw people signing onto complicated terms with no real comprehension of how the transaction worked. You saw loan originators getting kickbacks for putting families in higher-cost loans than they actually qualified for. You saw it all.
Then it all began to blow up. And you saw your business drop like a rock. As realtors, you have ridden the waves of financial booms and busts before, but nothing like what we saw five years ago. The collapse 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 their jobs. People lost their homes. People lost hope and confidence in the future. The housing collapse crippled our economy in ways not seen since the Great Depression, three generations ago.
The aftermath of the financial crisis has left a tremendous mess for us all to clean up. Today, as millions of Americans continue to struggle to pay their mortgages, millions more are waiting for the market to get better before they consider buying a home. For many people, the problem is access to credit, which has become achingly tight. Since 2008, most mortgages have been priced on very attractive terms. But access to credit has become so highly constrained that many consumers cannot borrow to buy a home even with strong credit histories.
We know that you are all dealing with these problems in your respective markets, and you will be for some time to come. And, we share your deep concern about the far-reaching effects on your profession and on your communities. The good news is that the Consumer Bureau was created to help prevent these kinds of problems from recurring in the future.
In the Dodd-Frank Act, Congress gave us a broad range of tools to address problems in the financial marketplace, and to fix them. We are learning how best to utilize these tools and we are working hard to make a real difference for American consumers in the years to come.
These tools include rulemaking, which is authority delegated by Congress to fill in the details of how consumer financial laws will apply in different circumstances. Through our highly capable research team, we analyze what is happening with consumer financial products from mortgages to credit cards to payday loans and more. Through our supervision team, we are able to go on-site and examine banks with more than $10 billion in assets, as well as their affiliates, to determine whether they are complying with the law in areas such as mortgage origination and mortgage servicing. We also have begun to examine nonbank providers of other consumer financial products and services, such as debt collectors and credit reporting companies, many of them for the first time at the federal level.
Our enforcement team can commence actions against those who cheat consumers – and unfairly undermine their competitors – by not following federal consumer financial laws. We also have a fair lending office working to ensure that individuals receive fair and nondiscriminatory access to credit. We have offices focused on consumer education and empowerment, including offices dedicated to protecting specific consumer groups with unique issues and challenges, such as servicemembers, students, and older Americans.
With this array of tools, we can pick and choose those best suited to solve the problem at hand. Sometimes consumers simply need to Know Before You Owe, which is our signature initiative to make clear the prices and terms on mortgages, credit cards, student loans, and other products. Sometimes writing new rules to address substantive problems makes the most sense. Sometimes our supervisory authority can identify and correct problems before they get out of hand. And sometimes holding a bad actor accountable through investigation and enforcement action is necessary to address the problem.
One of our central tenets – a belief that underscores everything we do – is that an educated consumer is a more capable and effective consumer. We want consumers to have the knowledge and information they need to select the products and services that are best for themselves and their families. And we want them to benefit from resources that help them ask the right questions and make sound financial decisions that are sustainable over time.
So we are helping consumers by developing new resources for them. For example, people often feel disempowered by the complex and confusing fine print surrounding many financial products. So we have harnessed technology to deliver clear and trustworthy information through our “AskCFPB” tool, an interactive database of more than a thousand answers to questions that consumers frequently ask about consumer finance issues. We also are helping consumers deal with their problems and concerns through our Consumer Response team. Currently we are accepting and handling complaints about mortgages, credit cards, auto loans, student loans, bank accounts, and credit reporting. We urge you to encourage your clients to use these resources, which they can find at www.consumerfinance.gov.
We also are making a conscious push for more personal finance education all over this country. It is a scandal, and a grave mistake, that we do so little in our schools to prepare young people to manage their affairs once they go out on their own, as every young person inevitably will do. Our economy, and our society, cannot be as strong as we need them to be if people cannot make sound financial decisions about their lives – including decisions about key investments like an education and a home, which will help to determine their financial futures and the course of their lives. All of us must raise our voices to insist on this change, not only in our schools, but in the workplace and among our faith communities as well.
In describing our new responsibilities, let me turn specifically to the work we are doing in the mortgage market – work that is very important to you and your colleagues. Congress gave us substantial responsibilities for fixing the problems that led to the financial crisis, and nowhere were the problems as grave as in the disintegration of the $10 trillion mortgage market. Congress required us to write new rules to address many of these issues, against a demanding deadline for completing the job. A major difficulty was that the housing market before the crisis could not be more different from the housing market after the crisis. We were tasked with imposing new consumer protections on mortgage products without restricting access to credit in a constrained market where even creditworthy buyers are now having a hard time qualifying for a loan.
The Ability-to-Repay rule, sometimes known as the Qualified Mortgage rule, is the most important of our new mortgage rules in striking this balance. It protects consumers shopping for a loan by requiring lenders to make a good faith, reasonable determination that borrowers actually can afford to pay back their mortgages. Some of the worst abuses that occurred in the last decade, such as no-doc loans and so-called “NINJA” loans – no income, no job, no assets, but you could still get a mortgage loan anyway – will now be prohibited when the rule takes effect in January. Irresponsible underwriting practices, like making loans based only on introductory teaser rates rather than the full cost over the life of the loan, are also banned. Had these provisions been in effect ten years ago, I believe the financial crisis would not have occurred with the same severity, and people would not have suffered as deeply as they did.
But our rule also takes careful account of the access-to-credit issues so prevalent in the market today by enabling more responsible lending. Congress required us to define the criteria for a category of loans known as “Qualified Mortgages,” which are presumed to satisfy the ability to repay requirements of the statute. These loans cannot contain certain features that have historically harmed consumers. For example, they cannot have excessive points and fees. They cannot have certain risky features such as negative-amortization, where the principal amount actually increases for some period because the borrower does not even pay all of the interest that accrues each month. And they cannot place an undue financial burden on borrowers, whose total monthly debts generally cannot add up to more than 43 percent of their monthly gross income for many (but not all) Qualified Mortgages. No standard is perfect, but this standard provides real protection to borrowers and greater certainty to the mortgage market.
These 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 quite important, and it should not be misunderstood. Those lenders that have long upheld strong underwriting standards have little to fear from the Ability-to-Repay rule. These lenders, including many of our community banks and credit unions, have seen the strong performance of their loans over time. Nothing about their traditional lending model has changed, and they should continue to offer such mortgages to borrowers whom they evaluate as posing reasonable credit risk – whether or not they meet the criteria to be classified as Qualified Mortgages. We all benefit by recognizing and sustaining responsible lending wherever we find it in the mortgage market – realtors most of all.
I would like to close by asking you for something today. Please stay engaged with us. Share with us your perspective about the progress and problems you see in the marketplace. Help us educate your clients. And make no mistake about it: the Consumer Bureau wants to see realtors thrive. We are united by our strong desire to put the American housing market on a sustainable path fueled by responsible lending. You deserve it, and American consumers deserve it. Thank you.
The Consumer Financial Protection Bureau is a 21st century agency that implements and enforces Federal consumer financial law and ensures that markets for consumer financial products are fair, transparent, and competitive. For more information, visit www.consumerfinance.gov.