Prepared Remarks of CFPB Director Richard Cordray at Operation HOPE
Thank you for your kind words. I also want to express my appreciation to the indefatigable John Hope Bryant, his advisor Jena Roscoe, and the entire Operation HOPE team. We are deeply grateful for their invaluable support of our work at the Consumer Financial Protection Bureau and for all they do to help those who struggle with their finances.
Cesar Chavez once said, “We need to help students and parents cherish and preserve the ethnic and cultural diversity that nourishes and strengthens this community – and this nation.” I believe that statement applies not only to individuals and organizations, but also to the entire consumer financial marketplace. Operation HOPE’s “silver rights” empowerment, which is dedicated to making free enterprise work for everyone, is fundamentally grounded in a mission that reflects our own. That harmony provides the basis for a successful partnership, and together we have seized the opportunity to create one.
We share your commitment to ensuring that all communities can access safe and affordable credit. Indeed, last year we implemented important new mortgage rules that make sure lenders offer only mortgages that consumers can actually afford. Our Ability-to-Repay rule, also known as the Qualified Mortgage rule, created new protections for consumers. These rules put in place guardrails to make sure lenders do not stray into dangerous areas. They will ensure that the reckless lending that became so commonplace leading up to the financial crisis does not happen again. As memories of the crisis may fade over time, we are taking important steps to ensure that history will not repeat itself.
A core purpose of this work has been to help restore reliability to the mortgage market. When people take out a loan to buy a home, they deserve to have confidence that they are not being set up to fail. With such confidence, they can be more actively engaged in the process of seeking a good outcome. This brings me to my topic for today.
At the Consumer Bureau, we have been working with the Federal Housing Finance Agency to find out about new mortgage borrowers. Our first survey, at the beginning of last year, found that nearly half of all consumers do not shop around for a mortgage when buying a home. So this week we released a new “Know Before You Owe” initiative called Owning a Home. It is designed to empower consumers with the information they need to shop for one of the biggest financial purchases they will make in their lifetime: their mortgage.
Our report this week is based on results from the National Survey of Mortgage Borrowers. Fundamentally, it found that almost half of consumers seriously considered only a single lender or broker before making their mortgage decision. That is too many consumers, given what is at stake, and it is of great concern to us.
Just think about the effort most consumers put into considering what house to buy. They weigh the most basic questions, such as what town to live in, how many bedrooms or bathrooms they think they will need, do they want to have a yard to enjoy and care for. Given the importance of this major purchase, almost nobody looks only at one house and decides to stop right there. The same should be true of choosing a mortgage. Consumers should ask themselves what down payment they can afford and what terms fit their unique financial needs. But consumers do not seem to be as careful or as confident in weighing this decision.
Our study found that consumers get much of their information about mortgages from sources that have a vested interest in the outcome. For example, 70 percent report relying on their lender or broker “a lot” to get information about mortgages, while only 20 percent rely “a lot” on websites and only 2 percent rely “a lot” on housing counselors. Certainly lenders and brokers can be valuable resources. But it is worth recognizing that they also have an important personal stake in selling the mortgage. What is best for them is not always going to be best for the consumer.
People may well put more time and effort into shopping for smaller products such as TVs and computers than they do in shopping for the right mortgage. This failure to look around can mean real money lost for consumers. For example, on a conventional mortgage for borrowers with a good credit rating and a 20 percent down payment, the range of interest rates can span a half-percent or even more.
When you are spending a lot of money, you are literally betting the house on the choices you are making, and it can be highly beneficial to shop around. For a borrower taking out a 30-year fixed-rate loan for $200,000, getting an interest rate of 4 percent instead of 4.5 percent translates into $60 in savings per month. Over the first five years, the borrower would save about $3,500 in mortgage payments. In addition, the lower interest rate means the borrower would pay off more principal in the first five years, even while making lower payments. By not shopping around, consumers often are throwing good money down the drain.
An important and interesting finding from our survey was that consumers with more confidence in their knowledge about the mortgage process were more likely to shop. This was especially true for those who said they were very familiar with available interest rates. They were almost twice as likely to shop as those who were unfamiliar. So clearly we need to try to instill more confidence in consumers. We need to empower them to shop.
At the Consumer Bureau, we are working to reduce the information gap between lenders, who understand mortgage pricing inside out, and consumers, to whom the process can often feel like a mystery. It is time to start changing the culture of how people obtain their mortgages. We need to change the process from one of “getting a mortgage” to one of “shopping for a mortgage.” Consumers have much more power than they may realize. They can use that power to take control of their financial outcomes.
To help consumers become better and more informed shoppers, we are improving mortgage disclosures. This summer our Know Before You Owe forms will become the new reality in the mortgage market, helping consumers to understand their options, choose the best deal, and avoid costly surprises at the closing table. We also will soon be bringing out a more consumer-friendly edition of the booklet people receive when they apply for a mortgage to buy a home.
Although our new regulations limit various risky products, mortgages can still have different terms and features. Key components of a loan include the loan term, loan type, and interest rate. Loan terms typically vary between 15 and 30 years. Loan types include conventional loans, among others. Interest rates can be fixed or adjustable, and the upfront costs for mortgages often vary across lenders, even for the same consumer on the same kind of loan.
Shopping for a mortgage can occur at different points in the process, but consumers are well advised to cast a wide net early on. The consumer may begin by researching different loan options. Once the consumer knows more, she may be ready to meet with lenders and ask questions about the products they offer. Then she is ready to apply for a loan from different lenders. Finding the best deal depends on comparing the available offers, which may vary based not only on the interest rates but also on other costs and terms.
Our Owning a Home initiative has great new tools to help consumers throughout the home buying experience, from the very start all the way to the closing table. They include a guide to loan options and a closing checklist, written in plain language. If consumers need help understanding the difference between a fixed-rate and adjustable-rate mortgage, our tools will be able to assist. If people need help deciding how much they can borrow, our tools will be able to help with the calculations. Or if they need help understanding the new mortgage disclosure forms, Owning a Home will be able to explain all that. We are working to add these and other tools over the course of the year to give people a comprehensive and comprehensible picture of the entire home buying process.
One critical feature contained in Owning a Home is the Rate Checker, a tool currently in beta release that helps consumers understand what interest rates may be available to them. It incorporates information from lenders’ internal rate sheets, information they use to calculate what interest rate is available for a particular consumer. In other words, we are giving consumers direct access to the same type of information that the lenders themselves have.
Borrowers looking to buy a single-family home can use the Rate Checker to input their own information and find out what interest rates they are likely to be offered from lenders in their area. By plugging in their credit score, their location, and information about the loan they are seeking, they can see the rates that lenders are offering to borrowers like them. This is different from other websites that usually quote potential rates based on averages for borrowers with great credit and a large down payment. That can be misleading because of course not all consumers have high credit scores or can afford a large down payment. The result is that many consumers go to lenders and are quoted surprisingly different rates, which can leave them confused and uncertain about whether the quoted rates make sense.
And, of course, many of those websites focus primarily on soliciting prospective customers. Thus they require people to surrender their personal information, perhaps an email address but often much more – sensitive information that may be used for marketing or sales purposes. Owning a Home has no hidden agendas and the Bureau does not retain any personal identifying information. Instead, it simply enables consumers to be savvy shoppers and get the best deals they can.
Our new set of tools also offers an understanding of how lower rates translate into dollars saved. It can be hard to know what an extra quarter or half percent of interest means in real money. So our tool makes it easy to compare different interest rates and to see how much they will cost.
Consumers will be able to go to our website and plug in information, as often as they like, whenever they like, to become more familiar with their options. Understanding what rates they can expect to be quoted will help them see the value of shopping. They will gain more confidence about the crucial decisions they need to make about which mortgage to choose. And it is worth noting again from our survey findings that as consumers gain more confidence about the process, they become more likely to shop for a mortgage.
When consumers actively shop for a mortgage, they will be in a better position to make the best decision they can about what is probably the single largest financial transaction of their lives. The set of tools contained in Owning a Home, complete with the critical Rate Checker feature, will help consumers do that more effectively.
I know Operation HOPE works hard to help consumers improve their credit scores. So let me take a second to debunk a popular myth: You can shop around for a mortgage and it will not hurt your credit score. Within a certain window of time – generally between 14 and 45 days – multiple credit checks from mortgage lenders or brokers are treated as a single inquiry. This is because other creditors realize that you are only going to buy one home at a time. You can shop around and even submit multiple applications to obtain multiple initial estimates. The effect on your credit will be the same no matter how many lenders you consult.
For these reasons, it is vital that consumers meet with several lenders early on and ask lots of questions. And, they should wait until they receive official loan offers to make a final selection.
By demystifying the jargon and bringing in a layer of transparency, we are making it possible for consumers to have conversations with lenders that are better informed and more productive. This will build their confidence and ultimately empower them to make the right decisions for themselves and their families.
Maya Angelou once said, “I’ve learned that you shouldn’t go through life with a catcher’s mitt on both hands; you need to be able to throw something back.” This work is all about throwing something back for consumers so they are in a better position to improve their financial lives. At the Consumer Bureau, we want to help consumers protect themselves. We want consumers to be informed, to take control. And we want consumers to be given all the tools possible to make the right decisions. So we urge you to check out consumerfinance.gov/owning-a-home.
Consumers are now better protected from the pitfalls that hurt so many of them, and that led to the financial crisis. But when people fail to shop because they are intimidated by the process, they are putting themselves in harm’s way. At the Consumer Bureau, we are seeking to change the culture of how consumers go about obtaining mortgages in this country. People should walk away from the mortgage process feeling secure that they have made a sound and sustainable decision about their future, and they should be right to feel that way.
We also urge you to let people know that anyone who believes they have been mistreated can submit a complaint with us about consumer financial products or services, including mortgages, credit cards, student loans, auto loans, bank accounts, credit reporting, debt collection, payday loans, and more. They can do so on our website or by calling 855-411-CFPB, where they can receive assistance in many different languages. It is quite an easy and fast process, and more than 500,000 people have done it so far. In appropriate cases, we are able to get people some monetary relief; in other cases, they may get an error fixed on their credit report or relief from harassing debt collectors. Bringing us these complaints helps us see the pattern of what consumers are saying to us, in real time, all over the country, which is very valuable to our work.
Also on our website, consumers can tell their stories – either positive or negative – about a consumer financial product or service. They can find more than one thousand answers to frequently asked questions about consumer finance, through a feature called “Ask CFPB.” They can view our Spanish language website, analyze our public database of complaints, learn how to prevent financial fraud against the elderly, find out about options when it comes to student loan debt, see new remittance rights, and much more.
We are building a fairer marketplace characterized by responsible business practices. Your engagement with us helps improve our work to protect consumers. So thank you again for having me here, and for all you do. And let me close by quoting President Theodore Roosevelt, who said something we all should take to heart: “More and more it seems to me that about the best thing in life is to have a piece of work worth doing and then to do it well.” Much remains to be done before we can say that about ourselves, but together we can dedicate our efforts to that worthy aspiration. Thank you.
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.