Prepared Remarks by Richard Cordray
Director of the Consumer Financial Protection Bureau
National Council of La Raza
Las Vegas, Nevada
July 9, 2012
No Más: Restoring Trust in Home-buying
Thank you very much for your warm welcome to the NCLR annual conference. It is an honor to be here alongside Secretary Donovan and Nevada’s Attorney General Cortez Masto. Both are friends of mine and both have advocated consistently for struggling homeowners who need other people – and public officials most of all – to understand how the difficulties in the housing market have had deep effects on their personal lives and those of their families.
Many people worked shoulder to shoulder to pass the important financial reform law that created my new agency, the Consumer Financial Protection Bureau. NCLR was always in the forefront of the effort, and we learned once again that the affiliates and leaders of this organization do not shy away from hard fights to protect people. Members of the Congressional Hispanic Caucus, such as Senator Menendez of New Jersey and Congressman Gutierrez of Chicago, stood up strongly for reform because they understood how the financial crisis hurt so many members of the Latino community. We thank each of you for pushing this country forward and sharing our sense of purpose to make life better for all Latinos and all Americans.
Latino homeowners have been some of those hardest hit by the housing mess of the past few years. The foreclosure crisis had a devastating impact on median wealth in this community in particular. And now you and everyone else are dealing with a dried-up credit market that is making it especially difficult to secure a home loan.
These consequences are being felt because from 2007 to 2008 this country went through the biggest financial crisis of our lifetimes. Irresponsible underwriting of mortgages, magnified by the effects of securitization, led to the credit crunch and the collapse of our broader economy. Entire neighborhoods have been swamped by foreclosures, affecting even people with sensible mortgages who had been faithfully making their payments on time. After a half-century of steady appreciation in home values, many saw home values go down the drain. For almost five years now, we have been coping with a troubled housing market and wondering when it would begin to recover.
In Washington, we know that the mortgage market – the single biggest market for consumer finance, worth trillions of dollars – is a complex market and that regulating it is a complex job. So, at the Consumer Bureau, we want to make sure that the rules we write to address the various problems in the mortgage market are soundly grounded in actual consumer experience. We have been studying the reports that have analyzed these issues, meeting with stakeholders from all perspectives, and most importantly listening to consumers about their struggles and frustrations.
What we have learned is something that should be obvious: that the mortgage decision is one of those few big decisions that can shape the direction and trajectory of people’s financial lives. Homeownership is a key element of the American dream, but that dream becomes an enduring nightmare if you make a poor decision or one that turns out badly. And at each stage of the mortgage process, we have seen major problems that hinder people from making these decisions in ways that are best for them in their particular circumstances. There are basic problems in shopping for a mortgage. There are special risks, often hidden from view, in closing on a mortgage. Even once you get past these hurdles and are underway in your new home, if you experience any bumps in the road – as many people inevitably do – too often you are unable to get any reasonable help.
This month, the new Consumer Bureau will mark its one-year anniversary. One of the primary reasons for creating the Bureau is to help restore trust in the mortgage market. Over the next six months, as Congress directed us to do, we will be proposing and finalizing clear rules of the road to address each stage of the mortgage process. Clear rules of the road help support responsible decision-making, but consumers must ultimately make the right decision for themselves.
When it comes to shopping for a mortgage, buying a home, and making their mortgage payments, we want people to be able to trust the system. We want a mortgage market that is fair – one where people can get a fair shake and businesses compete fairly with one another.
The key to restoring trust is fixing what was broken. People need to be able to understand the prices and risks clearly, and to make informed decisions. People need to know that buying a house does not mean signing up for mortgage products that are set up to fail, with heartbreak in their wake. People need to know that this big investment is not a big gamble with their futures and those of their children on the line. People need to know that someone is standing on their side to make sure they will be treated fairly with all the basics of reasonable customer service.
I am here today to say about the mortgage market: “No Más.” No more costs and risks buried in the fine print that do not become clear until it is too late. No more mortgages designed to fail – mortgages that benefit originators but not borrowers. No more last-minute shocks at the closing table that leave consumers stuck with fees they did not know about or plan for. And no more costly surprises and runarounds by mortgage servicers that leave people with nowhere to turn when they need help the most.
Congress determined that the American people deserve better. They gave us at the Consumer Bureau the responsibility to see that it happens. And we are going to carry out this important task. So today I want to talk with you about how we are working to improve life for consumers from the moment they begin shopping for a mortgage until they pay their last mortgage bill.
Let me start with the process of shopping for a home loan, a process that can be intimidating for people who are inexperienced. After all, people do not buy a home very often.
Yet a home loan is the biggest financial obligation that most consumers will ever take on. They may spend their entire life savings on the down payment. For many, it is a commitment they are making thirty years into the future. Although exhilarating, it brings significant stress and worry.
The choices are complex. There are many costs and risks to navigate. People have to make a judgment about how much house they can afford to buy. They must decide whether they should have one interest rate for the life of the loan or a low initial rate that could increase over time. They have to figure out how much money they can spare for a down payment. They have to make sure they can afford the taxes and insurance for the home on top of the loan payments. And they have to assess whether paying upfront fees will make their overall costs cheaper in the long run. All of these choices are wrapped up in the bigger decision of whether purchasing a home is the right choice for them and their families at this point in their lives.
Given the enormity of these decisions, it is essential that all the terms of the deal are clearly disclosed and understood. But for too long, mortgage disclosures have done a poor job of presenting the key terms that matter most for consumers. The paperwork is full of jargon. The forms overlap. Costs and risks are sometimes disclosed in small type, and sometimes they are not disclosed at all. In particular, explanations of how rates and payments can change over time are not always made clear. As a result, consumers have had trouble even understanding the deal they are making, let alone being able to compare loan offers.
So we at the Consumer Bureau are saying “no más” to costs and risks buried in the fine print.
Today, we are proposing a new rule that overhauls the current “good faith” estimates that lenders are required to provide within three days after someone applies for a mortgage loan. It builds on some good work that HUD had initiated to improve these estimates, and I thank Secretary Donovan and his staff for the help they have given us to address these challenges.
Our proposal presents the costs and risks of the loan in clearer terms on a single form. Lenders should like it because it cuts down on redundancy. Consumers should like it because it uses clear language and a simpler design that will help them sort through the confusion and complexity.
Our new Loan Estimate highlights the information that is most important to consumers. Interest rate, monthly payments, and closing costs will be clearly presented on the first page, along with information about whether and how these terms can change during the life of the loan.
We are also saying “no más” to mystery points and fees in other rules we will soon be proposing. When people buy a home, they often pay different kinds of points and fees without having much idea of what they are paying for. Often they are told that these points and fees will lower their monthly mortgage payments. Sometimes this is true; some points and fees can be a good deal for consumers. But sometimes they are a terrible deal, and consumers may not realize that until it is too late, if ever. So we are considering common-sense changes. For example, we are requiring that, when you pay for “discount points,” you actually do receive a discount.
At the Consumer Bureau, we are also saying “no más” to last-minute closing shocks.
When a consumer goes to sign the final paperwork on a mortgage, it is a stressful experience. There are stacks of paper to read right there on the spot, often with the real estate agent and settlement agent hovering over them. The consumer often is seeing much of this paperwork for the first time. Numerous signatures are required. Words swirl. It is a daunting experience.
At this point, it is not easy to object, to ask questions, or to walk away from the deal. The unspoken understanding is that by now, everything is set in stone – except that typically the consumer had little to do with the masonry, and this is the biggest financial decision of her life. With so much money on the line, and often lacking any longstanding relationship of trust with the professionals involved, the consumer must take a giant leap of faith that this is, in fact, the right thing to do.
But this is not what closing on a home should be like. Consumers should know what they are getting into. They should be able to trust that no unseen traps are lurking in their path. They should be clear on the price paid at closing and how much they will be paying in the future.
We are working hard to eliminate surprises at the closing table. We are proposing rules that would require lenders or settlement agents to provide the critical information three days before closing, instead of at the closing table. This means consumers will have time to review the loan terms and the costs and ask questions about anything they do not understand or that does not seem right.
We are also proposing new closing documents designed to match the format of the Loan Estimate that consumers are given when they first apply for a mortgage loan. Making these forms comparable makes it possible for consumers easily to see what, if anything, has changed in the meantime. If the deal has become more expensive, consumers would be able to question and even to negotiate over the changes.
We are also saying “no más” to mortgages that set up consumers to fail. In the years leading up to the financial crisis, lenders offered mortgages to consumers who could not afford them, often paying little attention to whether consumers had the ability to repay their loans. This was highly irresponsible and it proved to be bad not only for consumers, but for the broader economy as well. By the end of the year, we plan to finalize a rule requiring lenders to determine that borrowers have the ability to repay their loans.
In addition, we are saying “no más” to certain loan features and practices that can trap consumers in high-cost mortgage loans. We are proposing rules today that would expand the definition of a “high-cost mortgage” loan under federal law, and the consumer protections that go along with that status. These protections include a requirement for housing counseling and limits on certain risky features, like prepayment penalties and most balloon payments, which can cause great harm to consumers.
Finally, we are saying “no más” to the kinds of surprises and runarounds that consumers have experienced time and again as they struggle to make the payments on their mortgages.
Since the financial crisis, consumers too often have found that their mortgage servicers let phone calls go unanswered, repeatedly lose their paperwork, and fail to provide accurate information. The recordkeeping can be slipshod or incredibly confusing. Some mortgage servicers have piled unexplained or unjustified fees on struggling homeowners. The results can be disastrous, leading to bankruptcy or foreclosure.
Mortgage borrowers deserve full transparency in dealing with their servicers. They should not be confused about how their payments are applied, when or how their interest rates will change, or why they are being subjected to unexpected insurance charges. And when mortgage servicers make mistakes, they should be held responsible rather than consumers bearing the brunt.
So we are proposing common-sense solutions to these problems. Above all, we will require firms to put the “service” back into mortgage servicing. This includes providing clear monthly mortgage statements and earlier warnings about adjustments in interest rates. We think mortgage servicers should have to keep reasonable records, fix errors, inform struggling consumers about their options, and provide ready access to someone who is in a position to help. These changes will go a long way to eliminating the kinds of costly surprises and runarounds that have marred the mortgage market for many homeowners. Let me say it one last time: “No más.”
In short, consumers deserve much better in all of these areas, and the work we are doing is part of a larger effort to reform the mortgage market in a lasting way. Restoring confidence in this market is critical to consumers and industry alike, and to our broader economy. People need to have trust that they can take this important step up the economic ladder. This applies to more than 50 million Latinos in this country just as much as it does to everybody else. You play a powerful part in the consumer marketplace, and you will play a big role in the housing recovery.
In a reformed and improved system, people will no longer be afraid to put their hard-earned savings toward a down payment. They will be able to reach an informed decision on a loan to buy a home, make a sound investment in their future, and build toward a prosperous tomorrow. Investment in communities will grow. That is good for each of us. That is good for all of us. And that is good for America.