Thank you for having me today. Over the past five years, the Consumer Financial Protection Bureau and the Mortgage Bankers Association have each been working in our own ways to revive a mortgage industry that was devastated by the financial crisis. During the run-up to the crisis, we saw established traditions of responsible lending pushed aside by predatory actors whose misconduct hurt millions of Americans. It led to disruptions in the mortgage markets, transmitted through securitization channels to the broader financial system, which triggered its collapse. In the wake of that crisis, you have been doing the hard work of extending credit at a time when economic activity was greatly impaired by extreme financial conditions. You have undergone intense scrutiny, including from within your own ranks, to diagnose what happened.
Even now, eight years later, we have not yet returned to normal conditions. The secondary market for mortgage financing remains moribund, and interest rates stand at historic lows. Although home foreclosures, mortgage delinquencies, and underwater mortgages have all declined steadily, they still affect millions of consumers who continue to feel the effects of the crisis. The pace of recovery has clearly been uneven around the country, particularly in communities of color. And I agree with Federal Housing Finance Agency Director Mel Watt that the market is not yet supporting access to credit for the full spectrum of creditworthy borrowers; average credit scores for home purchase loans are still above the levels historically viewed as normal from past years.
Nonetheless, we are seeing more and more encouraging signs. New home sales are up 20 percent year over year, while existing home sales are back up to pre-boom levels. Home prices are rising in many areas and positive homeowner equity is now at a record level, pushing $13.5 trillion. By the middle of this year, delinquency rates hit a ten-year low, and foreclosures were the lowest in 16 years. Consumers who had been shut out of the mortgage market for years by prior foreclosures are now returning. And the much-dreaded resetting of troubled home equity lines of credit issued in the years just before the crisis is now being accomplished with minimal disruption.
Notably, the first set of mortgage rules that we adopted took effect in January of 2014. That year, home purchase mortgages rose by 4 percent, according to the Home Mortgage Disclosure Act data. In 2015, they picked up steam, rising by almost 14 percent. Preliminary data for this year indicate that the growth trend continues to advance strongly. Even the millennials, many of whom have put off forming households until they were older, now seem to be starting to enter the market. And we are seeing many lenders willing to make sensible jumbo loans. Some of those are non-Qualified Mortgage loans, as more lenders come to recognize that their initial anxieties over the feared legal risks have not materialized.
We firmly believe that through our work in this area, the Consumer Bureau has played an important part in these developments. We know that sometimes you are focused only on one side of the equation, namely the compliance costs you have incurred in implementing the rules we issued. That is a fact, but it is an inevitable one. No economic sector that precipitates a global financial meltdown could possibly expect to escape far-reaching reforms, as the Congress so dictated. But the safeguards we have put in place around underwriting, servicing, and loan originator compensation have improved industry performance, promoted responsible lending, and helped restore consumer trust that was badly shaken by the events of the past decade. These improvements benefit responsible lenders just as much as they benefit consumers.
By issuing our first set of regulations, we also bought you some crucial time by avoiding the immediate and self-executing directives that Congress had enacted in Title XIV of the Dodd-Frank Act. That could have been a calamity, but it was averted. Instead, our rules helped facilitate the implementation of the new law and reduced the burden you otherwise would have experienced. Through the GSE patch in the Qualified Mortgage definition, we avoided disruption to the fragile mortgage market that existed in the wake of the crisis. By adopting a reasonable “good faith” approach to oversight of the Ability-to-Repay rule, we met industry halfway by working with our fellow regulators to assure that our early examinations would be sensitive to the good faith efforts you made to come into compliance and thus would be diagnostic and corrective. And that is exactly what we have done.
We have also shown our commitment to collaborate with you by our extensive work on regulatory implementation. Through innovative approaches like blog posts, plain-language guides, webinars, and our e-regulations tool, along with more traditional resources like responses to inquiries, we have acted out our philosophy that once we have adopted and finalized a new rule, it is never simply “your problem now.” Instead, we maintain focus on how we can work together to ease compliance and make sure the new rules are implemented successfully. And rather than hide defensively behind a stubborn pride of authorship, we have not hesitated to revisit our rules when we are persuaded that we need to fix unexpected problems, clarify issues, or relieve unnecessary compliance burdens.
So the bottom line is that we have come a long way in a short time. The tasks were immense, and they created real strain, both on your end and on ours. But the mortgage market is now in much better shape because of all our joint efforts. And we remain open-minded, in constant listening mode, about how we can identify further improvements as we move forward together.
About a year ago, I came and spoke with you about our “Know Before You Owe” mortgage disclosure rule. I described our belief that it would empower consumers with the knowledge they need to become satisfied customers with more sustainable mortgages. The rule had taken effect for only two weeks, and there was great concern about how hard it was to integrate IT systems and get multiple players on the same page in dealing with the new forms. As you know, Congress required us to consolidate the overlapping disclosures previously required by the Truth-in-Lending Act and the Real Estate Settlement Procedures Act. We took the opportunity to develop new forms that would improve the process. We think that before consumers take on a mortgage, they should understand its costs and risks and be able to compare them across lenders. This is the largest transaction many consumers will ever make, and we want them to be able to arrive at the closing table already informed about the costs they are being charged. We want them to be prepared to question what they do not understand or what may seem at odds with the information they were given ahead of time.
At this point last year, many of you were experiencing real and legitimate growing pains around the new rule. But we have continued to work closely with the Mortgage Bankers Association and other stakeholders to smooth the implementation process. We have clarified and addressed many issues over the past year, and we have been working with investors, due diligence firms, and the rating agencies to help make sure that any minor or technical errors made on the forms do not pose unnecessary obstacles to purchasing the loans. While yet more work is underway, the kinks are being worked out and the concerns are subsiding. The number of new mortgages declined in the first month under the rule, but bounced back sharply and was up by 18 percent in the second quarter of this year versus last year. Closing times – which had lengthened immediately after the rule took effect – have been shorter for most of this year than they were before the rule. People’s belongings are not sitting out in the street between the sale of one house and the purchase of another, and we have been encouraging exciting new approaches, such as e-closings, to ease the stodgy old paper-heavy process. We are glad to see the mortgage industry finding ways to create more convenience and insight for consumers.
As I told you last year, in our examination work around compliance with this rule, we and the other regulators have pledged to be sensitive to the progress made by lenders that are squarely focused on making good faith efforts to come into compliance with the rule on time. We have also said that our approach would be diagnostic and corrective, not punitive. That is precisely what we are doing. What this means is that we will be evaluating a company’s compliance management system and overall efforts to come into compliance, as well as conducting transaction testing – looking at loan files – which is of course necessary to be diagnostic. If violations are identified, we will work with the entity to determine the root cause of the issue and determine what corrective actions are necessary. As a routine part of our review, we will assess whether tolerance violations have occurred, and where found, we will require reimbursement to consumers as a remedial measure. I am happy to report that our initial examinations seem to indicate, just as we expected, that lenders did in fact make good faith efforts to comply with the rules and generally we are finding that consumers are receiving timely and accurate Loan Estimates and Closing Disclosures.
Most importantly, the reports we hear – from consumers, housing counselors, and real estate professionals alike – indicate that consumers like the new forms, and find them helpful and easier to understand than the old forms. A survey of repeat home buyers confirmed these reports, and a second survey indicates that consumers are indeed paying attention to the Closing Disclosures they receive. Likewise, the Home Loan Toolkit that is presented to every applicant for a home purchase mortgage, in plain language and with a simpler and shorter format than the old settlement cost booklet, is helping them navigate the process with greater certainty and understanding. All of these changes are helping to smooth the closing process and producing customers who are less anxious and more satisfied with how things are being handled.
The process of full compliance is, of course, evolutionary, so in July we proposed further updates to the rule to formalize guidance and give more clarity to assist compliance efforts within the mortgage industry. The comment period on that proposal closed last week, and we will carefully review all of the comments we received before finalizing any changes.
In addition, we are continuing to work side by side with industry on the implementation of new reporting requirements under the Home Mortgage Disclosure Act. As you know, this data tells us how lenders are serving the housing needs of their communities. It gives public officials information to help them decide how best to distribute public-sector investments so as to attract private investment to areas where it is most needed. It reveals lending patterns that could be discriminatory. And it helps lenders understand changing loan patterns in their own local markets. In general, this rule provides better information on the mortgage market, including the reporting of data elements that will help regulators, industry, and the public to understand the effects of the recent reforms.
We recognize this means yet another implementation process for mortgage lenders, so we set a generous lead time to implement the rule. For most of it, the effective date is January 2018, which means the first submission of new data is not due to the Bureau until March 2019. One change, a higher loan-volume coverage threshold for depository institutions that will exempt institutions doing a small number of loans, takes effect this January.
Beyond our efforts to compile better information, we are also easing compliance burdens by developing better ways to collect it, such as aligning much of the data with the Mortgage Industry Standards Maintenance Organization standards used by Fannie Mae and Freddie Mac. We also are working with the Mortgage Bankers Association and others to streamline how you submit this data. We will be launching a new, web-based platform for reporting data that when fully implemented could save the industry between $30 million and $60 million per year. We encourage you to check out the Home Mortgage Disclosure Act implementation page at our website, consumerfinance.gov. There you will find a technology preview, guides to filing and compliance, and other useful resources including a timeline, reportable data summaries, a well-received webinar, and other tools. Time is passing, and nobody should be waiting until the last minute to get ready to implement the rule.
The Bureau also continues to look at ways to address the privacy interests of both borrowers and applicants while also fulfilling the Home Mortgage Disclosure Act’s public disclosure purposes. Early next year we plan to publish our proposed policy on the public disclosure of Home Mortgage Disclosure Act data and we will invite public comments on those issues.
On another point, it is regrettable that much of the damage done during the crisis to consumers and the broader economy could likely have been contained early on by a more adequate system of mortgage servicing. A more effective system might have been up to the task of working with struggling borrowers to find appropriate ways to avoid foreclosure through loan modifications and short sales. But servicers were ill prepared and were unable to address even the best interests of their clients – the investors – let alone the consumers and our communities.
Our mortgage servicing rules took effect in 2014. They were designed to put the service back in mortgage servicing. They provide basic safeguards such as requiring that servicers credit payments promptly and correct errors upon written request. They include strong protections for struggling homeowners, including those facing foreclosure. We have now had a chance to see how they are working in the marketplace. We have made mortgage servicing a priority in our supervisory work, and we have conducted enforcement investigations as well. We also continue to analyze the mortgage complaints we receive – over 50,000 in the past year alone – so that we can better understand trends and the personal concerns raised by consumers.
As we have publicly reported, we have seen some progress, most notably efforts by certain servicers to adequately staff up effective compliance management programs. But many troubling issues persist. While we applaud the investments made in compliance by certain servicers, others have not yet made satisfactory progress. Outdated and deficient servicing technology continues to put many consumers at risk. This problem is made worse by a lack of training to use their technology effectively. Needless errors impose harm to consumers facing delinquency or engaged in loss mitigation processes. These shortcomings can become chronic when servicers do not implement proper system testing and auditing processes.
To spur needed improvements in servicer compliance, we will, in appropriate circumstances, be insisting on specific and credible plans from servicers describing how their information technology systems will be upgraded and improved to resolve these issues effectively.
At the same time, we will be working alongside industry to make sure the updated servicing rules we recently finalized, which generally will take effect in October 2017, are implemented effectively. These rules clarify certain issues, allow more flexibility in some areas, strengthen foreclosure protections, and add some important new consumer safeguards for servicing transfers, for successors-in-interest, and for borrowers who are in bankruptcy.
We also are closely monitoring the efforts being made by mortgage servicers, investors, government housing agencies, and policymakers to address the coming expiration of the Home Affordable Modification Program. This summer, we outlined key consumer protection principles for the development of new foreclosure relief solutions. The assistance that servicers extend to consumers who are facing foreclosure should be accessible, affordable, sustainable, and transparent. That should be true for all loss mitigation options, including loan modifications, repayment plans, and short sales. And consumers should get clear, concise information about servicer decisions.
Let me also address three further points. While compliance with existing laws and rules is, of course, a baseline expectation for all providers, we believe that the industry can better serve consumers by paying more conscious attention to what those consumers themselves have to say. Addressing their complaints effectively and correcting the processes that give rise to these complaints can make for a more efficient and successful business. I am sure that each of you has your own mechanisms to address complaints and inquiries from consumers, which we consider to be a basic component of any successful compliance management system. This input from your customers merits your most careful attention.
Beyond that, there is much to be learned from the complaints consumers raise about your industry, even if the complaints are not directed to you specifically. And the Bureau has a rich resource at your fingertips in our public Consumer Complaint Database. We have now received more than one million consumer complaints, which we study to prioritize our own supervision and enforcement work. We have published more than 646,000 of them, along with data on company responses. We share this data not only to empower consumers and inform the public, but also so that companies can learn from the data and improve their own operations. By closely analyzing complaint patterns, we can identify spikes in specific complaint types, emerging trends, issues with new and evolving products, and patterns across geographic areas, companies and consumer demographics. We urge you to be doing the same thing, not only with our complaints and the feedback you receive directly from your own customers, but also by reviewing complaints made about others in the same markets. This is data you can use to address current problems and prevent issues from arising in the future. All of this work is an important part of sound compliance management.
The second point has to do with redlining in the mortgage market. Although we all could wish that this historical injustice was a thing of the past, we have identified redlining as a priority issue in our supervisory work. We define the term as covering illegal disparate treatment in which a lender provides uneven access to credit, or unequal terms of credit, because of the race, color, national origin, or other prohibited characteristics of the residents of the areas where the consumer resides or the property is located. And we have teamed up with the Department of Justice to bring major public enforcement actions in this area, requiring millions of dollars in relief to consumers who were victimized by these discriminatory practices.
The third point relates to the recent ruling by a panel of the D.C. Circuit Court of Appeals in the PHH matter. The panel rendered a ruling on constitutional grounds and on statutory grounds applying the Real Estate Settlement Procedures Act to captive reinsurance. The case is not final at this point; the Bureau has made clear that it respectfully disagrees with the panel’s decision and is considering its options for seeking further review. In the meantime, we will continue to consider how best to apply the Real Estate Settlement Procedures Act to specific factual situations just as we always do. In particular, we continue to adhere to our 2015 bulletin identifying the substantial risks posed by marketing services agreements as we have encountered them in our enforcement actions and through our supervisory oversight.
In closing, we all are aware that the mortgage market has undergone dramatic change in the past decade. It has traveled a long and winding road from the irresponsible spree that sabotaged the world’s largest economy through a highly restrictive market that excluded many creditworthy applicants from qualifying for reasonable and responsible loans. Under our new rules, what is now emerging is a mortgage market in a steady recovery. Home values are on the rise in many areas, and millions of homes are resurfacing from their previously underwater status. We are able to reaffirm that homeownership is still the most effective engine of wealth accumulation for middle-class Americans. Your efforts to grow your businesses are rebuilding this key market, which is now contributing strongly to our economic recovery, rather than holding it back.
The retail pioneer James Cash Penney – yes, that J. C. Penney – said “Honor bespeaks worth. Confidence begets trust. Service brings satisfaction. Cooperation proves the quality of leadership.” I am encouraged to see you maintaining your leadership in addressing the financial issues at the center of the lives of millions of consumers. We share the ultimate goal of helping consumers thrive and achieve their own version of the American Dream. 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.