Deputy Director of the Consumer Financial Protection Bureau
The Greenlining Institute Conference
Los Angeles, California
April 20, 2012
Thank you so much for that introduction. It is great to be back here in Los Angeles. I know this city pretty well, and I’ve known it for a long time, and I’ve always found it deeply, deeply . . . implausible. Implausibly dynamic, implausibly energizing, implausibly diverse. And this event is remarkable in those same ways. This room is full of people of every background and every walk of life. Community leaders, business leaders, and elected officials from every level of government. Needless to say, it takes a special event to get a group like this together, and I am honored to be a part of it. So thank you, Greenlining, for having me.
Los Angeles is quite special to me. I went to high school 30 miles south of here, in Anaheim. My first paying job was down there, at Disneyland. I was a Jungle Cruise guide. “Welcome aboard the world famous Jungle Cruise. My name is Raj and I’ll be your fearless skipper for the next 8 minutes and 15 seconds as we journey down the simulated tropical rivers of the world.” Unfortunately for you, my skills as a public speaker haven’t really progressed since then.
My parents, by the way, are still down in Anaheim. They live in the same house that we lived in when I was a kid. My parents are very lucky. (And not just because they have me as a son. I always used to tell them, “You know, you’re very lucky to have me as a son.” They never really believed it).
But they really are lucky. As immigrants from India, they have lived the American dream — building a new life on new soil through hard work, education, and no small measure of perseverance. Part of that American dream, for them, was owning a home. Shortly after we moved to California, they dealt with a local bank, made a small down payment, and got a 30-year fixed rate mortgage. Today, some 30 years later, they own that house free and clear. And today, some 30 years later, that house in Anaheim is still what my brothers and I mean when we say, “We’re going home for Thanksgiving.” And to my parents who are here today, sorry, I’m not coming home for Thanksgiving this year.
The availability of mortgage finance, for my parents, unequivocally made life better. But for too many others, mortgage finance hasn’t made life better, it has made life worse. As of last December, there were 4.5 million seriously delinquent mortgages in this country. Nearly a quarter of all mortgages are underwater. The American mortgage business was supposed to be the single largest, deepest, most sophisticated consumer finance market in human history. And it failed us. The mortgage market failed to make good credit decisions; it failed to take smart risks; and, maybe worst of all, it failed to clean up its own mess.
It is within that context, within that devastation, that the Consumer Financial Protection Bureau was born. It would be tempting, and maybe even understandable, if we allowed the tragic legacy of the past several years to completely dominate the agenda at our new agency. But that would be a mistake. It’s obviously important that we and other policymakers make sure that the same exact problems don’t arise in exactly the same way again. Obviously. But we cannot fixate solely on winning the last war. We have an obligation to be smarter than that; we have an obligation to do more. We have an obligation to make sure our eyes are open, so that we can help prevent consumer crises before they unfold. We cannot just solve the particular problems of the immediate past. We have to help consumer finance markets actually work for American consumers.
Now, this is a difficult mission. But it can be done. A financial regulator doesn’t need to be a magician; we don’t need a crystal ball. But we do need to work immensely hard, we have to have some considerable backbone, and we have to use some common sense.
The calamities of the last decade, even the crisis caused by the calamity in mortgages, do not make us, at the Bureau, doubt the value of free and competitive markets. Quite the contrary, the failures of the mortgage market underscore just what functioning, efficient markets are supposed to be all about in the first place. They’re supposed to be fair; they’re supposed to be transparent; they’re supposed to create incentives for hard work and smart decisions.
We shouldn’t expect the mortgage market to really work unless, and until, it has those qualities – fairness, transparency, aligned incentives.
Let me start with basic fairness. One of the common sense steps we can take to promote fairness in finance is to fight illegal discrimination. Now, make no mistake: I firmly believe that discrimination is considerably less prevalent in America today than it was when my parents arrived here (46 years ago), or when I was born (41 years ago), or even when I started my career in finance (which feels like a million years ago). We have made some progress.
And that’s not by accident. That’s because consumer groups, civil rights groups, regulators, law enforcement agencies, and bankers themselves have all made fair access to credit a priority. But there is more work to do. After all, it’s called a credit “cycle” for a reason. And in a tight credit market like today’s, the unfortunate reality is that we need to pay particular attention to credit access issues to ensure that discriminatory practices cannot take root and flourish.
The Bureau wants to ensure that lenders are not creating conditions that make loans more expensive, or access more difficult, for certain populations. Earlier this week, our Director, Rich Cordray, reaffirmed our support of what is called the “disparate impact” doctrine. The Bureau will monitor lenders’ practices. And if those practices have an unintentional but unlawful discriminatory impact on a segment of the population, the Bureau will intervene. Simple as that.
America’s fair lending laws are focused on fairness among consumers. But fairness among financial services firms matters too. That’s part of why the Consumer Financial Protection Bureau is such a dramatic step forward. It shouldn’t matter what type of financial institution you are or what consumer product you sell.
If you want to participate in consumer financial services, well then you should follow the same basic rules as everybody else. And you should expect those rules to be enforced. If you allow different players to play by different rules, you encourage a destructive race to the bottom. Critically, the Bureau is the first federal agency to have supervisory authority over non-depository financial firms — and we take that responsibility very seriously.
So fairness is core to our agenda. But so is transparency. Markets don’t work well if both parties to a transaction don’t understand what they’re getting into. I hope that some of you already know about our efforts to bring better substantive transparency to the mortgage origination markets. We are working to streamline, integrate, and simplify two needlessly complicated federal disclosure forms — one under the Truth in Lending Act, and the other under the Real Estate Settlement Procedures Act — so that borrowers have a better chance to actually understand the price and risk profile of their obligations.
But transparency isn’t just about the front end of the mortgage business — it matters at the back end too, in mortgage servicing. Earlier this month, the CFPB previewed a series of common-sense rules that we’re considering in mortgage servicing. They include practical ideas on improving transparency, like: maybe servicers should give borrowers better information about how much they owe every month; or an earlier heads-up that their adjustable rate mortgage payments are about to change; or warn them that they are going to be force-placed into a potentially expensive insurance policy. We’re just at the early stages of those particular rulemakings, but I’m optimistic that we can find a common-sense path forward.
So we’re trying to take a common-sense approach to fairness. And to transparency. And, perhaps most fundamentally of all, to financial incentives.
You know, I’ve spent the vast majority of my career in consumer finance. I’ve been in and around finance companies, commercial banks, and investment banks. And through all of that, I learned one thing above all others. Although there are bad mistakes, there are some bad people, and there are occasional bad breaks, fundamentally, when all is said and done: people are generally good, but they generally do what they are paid to do.
So if we want businesses to do the right thing, they shouldn’t be paid to do the wrong thing. Bankers shouldn’t win when customers lose.
Let me give you an example from the mortgage bubble. Too often it was the case that mortgage brokers were paid more to give borrowers a worse deal. If a borrower could qualify for a loan at, say, 6 percent, a broker might be paid a special bounty — called a “yield spread premium” – to juice that rate from 6 percent up to 8 percent. As a result, the most important, most visible person in the mortgage process for many borrowers — the mortgage broker — had a financial stake that was confusingly and perversely in direct opposition to the interest of the consumer himself. If people are paid to treat customers poorly, it shouldn’t be surprising when they do.
The Federal Reserve Board and then Congress took important steps in this area, and it’s our job at the Bureau to propose and finalize regulations that end these practices. We’re working hard to do just that.
Financial incentives matter. Ideally, lenders’ and borrowers’ incentives should be aligned; both of them win when borrowers can afford their loans. At some tacit level, ordinary people know that. When they sit down at the closing table, there is a certain element of trust that your lender isn’t setting you up to fail. And that is the underpinning of another substantial policy effort that we have underway at the Bureau: Dodd-Frank’s “ability to repay” requirement in mortgages.
Again, let me hearken back to my days as a banker. Here’s what should be the least surprising lending advice you’ve ever heard: If you are going to lend money, you should probably care about getting paid back. And if you care about getting paid back, you should probably inquire about, and evaluate, a borrower’s ability to pay you back.
That should not be controversial. And it isn’t — not to the vast majority of big banks and community banks, credit unions and thrifts that actually held on to some of the risk of the mortgages that they were originating during the bubble. Nor is it surprising to any banker trying to build or sustain a customer franchise — after all, a customer franchise only endures and thrives if its customers win.
But unfortunately, because of misaligned incentives in the mortgage business, millions of borrowers were set up to fail. Borrowers were sold increasingly exotic, non-traditional mortgages that they didn’t understand and couldn’t afford. Lenders did that because the risk was separated from the reward. Lenders could make money by repackaging and selling off your loan.
Congress tackled this problem through a number of complementary provisions in Dodd-Frank, including the so-called “ability to repay” provision. Put in its simplest form, Congress has required that lenders reach a good-faith determination that a mortgage borrower has a reasonable ability to repay the loan. If lenders don’t do that, the law lays out real consequences. As part of the broader ability to repay mandate, Congress also designated so-called Qualified Mortgages, which are structurally safer and pose lower risk for borrowers, and which are underwritten according to standards that make it reasonable to expect that borrowers have an ability to repay.
The Federal Reserve Board proposed a regulation last year that would give definition and effect to the “ability to repay” provisions, and we inherited that proposal when we opened for business last July. We have had the benefit of extensive public comment on the proposal, and we have ourselves undertaken a significant analytical effort — with a cross-functional team of economists, lawyers, and market experts.
We are considering a wide range of issues. First and foremost, we want to ensure that consumers are not sold mortgages they do not understand and cannot afford. We want to minimize compliance burden where possible, in part through the careful definition of those lower-risk “qualified mortgages.” We want to ensure that, as the market stabilizes over time, every segment of prudent loans has the benefit of sufficient investor appetite and a competitive market. We want to avoid any inappropriate disincentive that would prevent lenders from making prudent, profitable loans in seemingly higher-risk or non-traditional segments — like loans to self-employed borrowers.
We want to enable the mortgage market to do what other free and efficient markets do as a matter of course: take smart, prudent, profitable risks; treat customers fairly; and serve customers well. We want consumer finance markets to work.
I’ve gone through a lot of policy talk, but I’d like to close by giving you a sense of the CFPB itself. I joined the Bureau more than 18 months ago. I joined, just like everyone joined, because the mission was so clear, and so clearly important.
I am immensely proud of the good work we are doing. I suspect that probably came out in my comments today.
I am proud of the talented team we have assembled. A commitment to exceptional talent is built into the very DNA of the Bureau.
And maybe most of all, I am proud of the institution we are building. And key to building the institution is embracing a core set of values — those non-negotiable items that guide not just the work we do, but how we do it, now and in the future. My shorthand for our values: service, innovation, and leadership.
By “service,” I mean that we at the CFPB know that it is our privilege to serve our country. I do not exaggerate when I say that I want the Bureau to be the best place to serve your country if you aren’t wearing a uniform.
By “innovation” I mean that the CFPB should embrace the promise of never resting on our laurels, never letting up, never being afraid to do things better merely because they have been done well enough before. It also means that when something new doesn’t work, you stop doing it and find another way.
And by “leadership” I mean something special. Leadership means a lot of different things to a lot of different people. And let me tell you, all of those people are wrong. The right definition of leadership is that when you see a problem, you get off of the sideline, you get into the game, and you make a difference. At the Bureau, we are getting off of the sidelines, we are getting into the game, and we are going to make a difference. And we thank you for doing the same. You wouldn’t be in this room if you didn’t understand the importance of leadership in these times.
Greenlining, I’d like to thank you for your help as we work to achieve our goals. Like I said, this mission requires hard work, backbone, and common sense, but together we can do it, and I think we are all on our way. Thank you.