It is good to be here with you again this year. Thank you for inviting me back.
The Consumer Financial Protection Bureau has enjoyed a great relationship with credit unions. We see eye-to-eye on many things, most of all that we both aim to serve Americans who are not only your “members” but also the consumers we work so hard to protect.
We have traveled all over this country listening closely to you. And you have faithfully come to see us and speak with us. When we have held field hearings around the nation, we have made it a point to spend time meeting with local credit unions. Based on what we have heard from you, we created the Office of Financial Institutions and Business Liaison to help you know how to channel your input to us and to navigate the Bureau more effectively.
We also created the Credit Union Advisory Council to provide information and analysis that better informs our policy decisions and improves our rulemaking process. We want to ensure that we have a consistent way to hear directly from you about what you see and hear in your communities. Because we generally do not supervise credit unions with $10 billion or less in assets – and thus do not conduct examinations on hardly any of you – the Advisory Council helps to fill this gap in our market understanding and keeps the lines of communication open. The more perspective we have about your experiences in the consumer financial marketplace, the better we will be able to figure out what, if anything, we should be doing in response.
Through these channels, we have done good work together. But we have much more good work ahead of us. Last year, I spoke to you about our new mortgage origination rules. Today, I want to give you an update on the implementation of those rules. And I want to share with you some details about our new “Know Before You Owe” mortgage disclosure forms. At the Consumer Bureau, we are working to promote responsible practices in the marketplace, to make costs and risks clear up front, and to make markets work better for consumers.
As you know, last January we put in place new protections to improve the functioning of the mortgage market by preventing creditors from extending loans to consumers who do not have the ability to repay them. The Ability-to-Repay rule protects people who are shopping for a loan by requiring lenders to make a good faith, reasonable determination that borrowers can actually afford to pay back their mortgages. As part of the rule, Congress directed us to define a category of loans where borrowers would have the greatest protections. So we developed criteria for what are called “Qualified Mortgages.”
In writing the Ability-to-Repay rule, we have afforded considerable leeway for smaller lenders such as credit unions to engage in mortgage lending. Indeed, the vast majority of credit unions are covered by special provisions in our new mortgage rules. One special provision allows portfolio loans made by small lenders to generally be treated as Qualified Mortgages even if the loans exceed the 43 percent debt-to-income ratio, as long as they meet the other requirements and product features. This covers all institutions that hold less than $2 billion in assets and, with affiliates, extend 500 or fewer first-lien mortgage loans a year. This comprises the vast majority of the more than 7,000 credit unions throughout the country.
Another provision extends Qualified Mortgage status to certain balloon loans held in portfolio by small creditors operating in rural or underserved areas. After we defined this coverage, many of you told us that the definition of “rural” we had adopted was not broad enough, so we listened and responded by deeming all of these loans to be Qualified Mortgages for two more years while we reconsider the issue.
Since we first announced our new mortgage rules more than 19 months ago, we have been working hard and collaboratively to ensure a smooth transition to compliance. We have coordinated with other agencies, published plain-language guides and other compliance aids, and kept in regular contact with industry participants, consumer advocates, legal aid attorneys, housing counselors, and others to answer their questions and address issues that they raised. We also have produced educational materials to help people better understand the kinds of consumer protections that we have put in place under the new rules.
We have done all this because we believe that consumers will be best served if the financial industry understands and properly implements the rules. The results so far have been very positive: few market disruptions, greater consumer protections, and a more sustainable financial marketplace that will support a stronger economy.
We are taking a similar tack with our next big mortgage project, which has to do with the new mortgage disclosure forms that will take effect in August 2015.
As you know, generally within three business days of applying for a loan, federal law requires mortgage lenders to deliver two different disclosure forms to consumers: an early Truth in Lending Statement and a Good Faith Estimate. At the closing stage of the transaction also, federal law generally requires that two different disclosure forms again be provided to consumers: not only a HUD-1 settlement statement but, most of the time, a final Truth in Lending Statement as well.
Under our new rules, consumers will no longer receive all of these overlapping forms. Instead, consumers will get a single form shortly after applying for a loan (known as the Loan Estimate), and they will get just one form shortly before they finalize their loan (known as the Closing Disclosure). These new forms will enable consumers more readily to spot crucial information that demands their focus, such as the interest rate, monthly payments, and total closing costs, as well as any special risk factors that could lead to payment increases over time.
One of our main goals was to improve consumer understanding. With a simple accounting of payments and fees, these new forms help consumers see just what they are getting into – the terms of the loan, the obligations, and how they could change over time. We have taken pains to present the information in plain language, in a format that is easy to follow, where the costs and risks of the loan are made clear. The key information is labeled in an accessible and obvious manner, so consumers can come to grips with questions like, “Can this amount increase after closing?” And right there, up front on the first page, consumers see what they want to see the most: the loan amount, their monthly payments, taxes, insurance, other property costs, and the total cash required to close the loan.
Another major goal is to improve the opportunities for comparison shopping. Consumers will first get the Loan Estimate within three business days after they apply for a loan. They can take this form, apply for another loan elsewhere, and then make a direct apples-to-apples comparison between the two forms. Consumers will be better able to weigh price differences against the different terms each lender is offering – such as when interest rates are likely to adjust on one loan compared to the other.
Once consumers have decided on a loan, our new rules also require that they must get the Closing Disclosure three business days before the closing occurs. It summarizes the final loan terms and costs, and also provides a detailed accounting of the transaction. Before people arrive at the closing, they can compare this form to their Loan Estimate to see if anything has changed. Our form makes that comparison straightforward, which minimizes the potential for “bait and switch” increases in rates, fees, or settlement costs. And for certain changes that are especially material, consumers must be provided advance notice at least three business days before the closing can occur. This three-day window allows consumers some time to process the information before the transaction is finalized. It also gives consumers time to negotiate over any material changes that may have occurred.
The underlying premise for both the Loan Estimate and the Closing Disclosure is that consumers will be better able to understand the mortgages they are buying and the costs they are paying. They will be better able to shop for the right mortgage that suits their needs.
Importantly, we see these forms as beneficial to industry as well as consumers. We are reducing paperwork and making it possible for honest, good businesses – like most credit unions – to compete on fair terms. Consumers will not be bamboozled by tricky tactics; they will be able to see and understand loan offers for what they really are.
Although these forms are not required until August 2015, mortgage lenders should already be working on the new rule and getting ready for next summer. Implementation of the new rule will require significant changes to business operations and technology platforms, which may require close collaboration with third-party service providers. While many mortgage institutions are already deep into the process of implementing these changes, we want to make sure that everyone understands the need to be focusing on August 2015 right now. We have allowed a very reasonable timeframe – 21 months – for industry to implement these changes, and we are now nearly halfway through that period of preparation.
To help you get to the finish line as easily as possible, we introduced a TILA-RESPA Regulatory Implementation webpage in April, which you can find on our website at ConsumerFinance.gov. There we have posted a Small Entity Compliance Guide explaining the new requirements for disclosing information on the new forms. We have also included a number of samples to show how the forms will look for different loan types.
Recognizing that this rule may require the development of technology to populate the forms, we also developed a guide to walk through the form content, field by field. In addition, we have produced a sample timeline or calendar to demonstrate visually how the timing and disclosure requirements of the rule play out. We have received very positive feedback on these materials and we encourage all of you to take the time to visit our website and make use of them.
We also have been streamlining interpretive guidance on the new provisions and delivering it through a series of webinars hosted by the Federal Reserve Board. The first webinar in June provided an overview of the rule and some basic interpretive questions. A second webinar in August focused heavily on addressing common industry questions. A third webinar covering the Loan Estimate is scheduled for October 1. You can find links to these webinars on our website.
Within the next few months, we will also publish a readiness guide to give industry a broad checklist of things to do to prepare for the rules taking effect – like updating policies and procedures and providing training for staff.
We are also working with our fellow regulators to help ensure consistency in our examinations of mortgage lenders under the new rules and to clarify issues as needed. Ultimately, what we all are working for is to make sure that different financial institutions receive consistent supervisory treatment from their respective regulators. That requires us to consult and collaborate closely with our fellow regulators, which is exactly what we are doing. And so we are already sharing materials with the National Credit Union Administration. We will make public our common examination guidelines and standards so that institutions will know what to expect in advance of the effective date under the new rules.
We are trying to make our rules more understandable and more user-friendly – setting out what you need to know and what you need to do in order to comply with the rules. One goal we share is that everyone will be ready to implement the new disclosure system come August 2015.
As part of our effort to make the mortgage process more transparent for consumers, we just recently announced a mortgage eClosing pilot project.
For a long time, many have come to agree that the stack of closing documents is way too large. Some of these forms were intended to help consumers better understand the costs and risks of their mortgages. Others were devised by lenders as defensive measures to minimize the prospects of future litigation. Still others represent federal, state, and local government requirements, some of which may have become outmoded. The undeniable result is information overload: too much to absorb during the closing process. This burdens lenders without helping consumers. Indeed, it is counterproductive insofar as it causes consumers to zone out and sign documents without properly evaluating and understanding critical information about the largest financial transaction of their lives. And many leave the closing table with a new anxiety, as they find themselves wondering just what was buried in the mound of paper that may create some nasty surprises in the years ahead.
So as part of our “Know Before You Owe” initiative, we are making a commitment to work with industry to improve the mortgage closing experience for consumers through technology. We believe that “eClosings” could represent a positive development along these lines, and we want to know more about how we can foster innovation in this area. By reducing the visual tyranny of the stack of closing documents, we can focus more attention on the new user-friendly Closing Disclosure, which may enable further advances in consumer education and understanding. We recognize that one thing we can do is work to help remove obstacles to this approach, and we will do so. Although the Consumer Bureau only has authority over a few of the forms in the closing stack, we are seeking to work collaboratively with industry, with consumer advocates, and with government officials to take a close look at all the closing documents and identify how they can be reduced or eliminated if they are no longer adding value to the mortgage transaction.
We are very enthusiastic to work with all stakeholders to improve the overall mortgage closing experience. To this end, we have launched a three-month pilot project that will begin later this year. This pilot will explore how the increased use of technology during the mortgage closing process could affect consumer understanding and engagement and save time and money for consumers, lenders, and other market participants.
Our goal is to improve the mortgage market every way we can for consumers. This is a high priority for the Consumer Bureau and for the country, and I think credit unions would agree.
In the end, we believe that credit unions see the world the same way we do: consumers who understand their options, weigh choices appropriately, and make sound decisions are good for responsible businesses and for the economy as a whole. So creating a more educated consumer is also one of the central tenets of our mission. We want people to be in a strong position to make good decisions as they consider mortgages, credit cards, checking accounts, small-dollar loans, and a host of other financial products and services.
At the Consumer Bureau, we are working to become a trusted and helpful resource for people as they seek to navigate the consumer financial marketplace. We have established “AskCFPB” on our website at ConsumerFinance.gov, which contains more than 1,000 common questions that people are asking about financial products and services. We invite you, in this ongoing spirit of cooperation, to check out our website and to use these tools as resources for your members.
We also have begun to create educational modules around the few larger financial decisions that people may make only rarely in the course of their lives, such as buying a home or paying for college. Our “Paying for College” module includes a student financial aid shopping sheet to help college-bound consumers understand different student loan offers. The other modules, like one we are developing for people shopping for a mortgage called “Owning a Home,” will be coming as fast as we can be satisfied that they are ready. And, again, we urge you to direct your members to make use of these tools and give us the kind of feedback that will help us improve them over time.
Last time I spoke here I gave you a Henry Ford quote, so let me end today with another: “Coming together is a beginning; keeping together is progress; working together is success.” Today I am calling on you to work with us to address the consumer finance issues that are so central to the lives of people all across this country. The people we jointly work for are eager to discover a new and improved consumer financial marketplace. And they deserve it. 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.