Prepared Remarks of CFPB Director Richard Cordray at the National Credit Union Administration Webinar
Hello and thank you for taking time to join NCUA’s webinar today. I would like to personally thank Chairman Matz for allowing the Bureau the opportunity to speak to you directly and hear your experience with our work, most especially our mortgage rules.
I want to start by thanking all of you for your help and your leadership, which has improved our work immensely. In my meetings with credit union executives, several have mentioned that credit unions were the true consumer protectors long before our agency was even conceived. I believe that too, and I address you today in that spirit.
I first want to say something I have said to you before, but will say again to reinforce one of our important beliefs at the Consumer Bureau. We are well aware – and for me this goes back to my tenure as Ohio Treasurer and Ohio Attorney General – that credit unions were not a cause of the recent financial crisis. You were not underwriting the bad loans that brought down the housing market. Instead, you continued to uphold sound underwriting standards even though you lost customers and market share to irresponsible lenders who did not play by the rules. And you sounded the alarm well before the growing irregularities in the mortgage market caused the credit crunch that sank the economy.
The Bureau is working to promote responsible practices in the marketplace, to make costs and risks clearer to consumers up front, and to make markets, particularly the mortgage market, work better for consumers, responsible providers, and the economy as a whole.
To that end, we have incorporated into our mortgage rules some special provisions that provide smaller creditors like most credit unions with different treatment from larger financial institutions, including the large banks. Yet we have not stopped thinking about the challenges that smaller creditors face as they continue their traditions of lending flexibly but responsibly, which has been a key to their support for many consumers, especially in smaller communities around the country. And we have continued to listen to feedback, including your thoughts and concerns, on these issues and to consider whether we can and should do even more to reinforce our perspective and provide support for smaller responsible creditors like credit unions.
To this end, a recent proposal that we have just issued reflects again our favorable perspective on credit unions and other small creditors in this marketplace. We proposed several changes to our mortgage rules in order to facilitate responsible lending by small creditors, particularly in rural and underserved areas. If it is finalized, the proposal would increase the number of financial institutions able to offer certain types of mortgages in rural and underserved areas, and help small creditors adjust their business practices to comply with the new rules.
Among other things, the proposed amendments to the rules would expand substantially the definition of small creditor. Under the proposal, the loan origination limit for small-creditor status would be raised from 500 first-lien mortgage loans by the creditor and its affiliates in the preceding year to 2,000 such loans. It would also, as many of you have suggested in one way or another, provide specific relief for loans held in portfolio by smaller creditors and their affiliates, which would not be counted at all toward the annual limit of 2,000 first-lien mortgage loans. We also propose to add a grace period so that any creditor who exceeded this limit in the prior year would not have their status adjusted until April 1st of the next year. The upshot is that even though the small creditor provisions already covered about 95 percent of all credit unions around the country, we now propose to expand them even further to cover all but about 150 credit unions.
The recent proposal would also expand the definition of “rural” to take account of feedback, including what we have heard from lenders in different parts of the country. To recap the history here, Congress in the Dodd-Frank Act sharply restricted balloon lending other than in “rural and underserved” areas. Congress also provided an exemption to certain creditors that operate predominantly in “rural or underserved areas” from the requirement for the establishment of escrow accounts for higher-priced mortgage loans. Congress delegated to the Board, and after the transfer date, to the Bureau the job of defining what those areas would be. The Federal Reserve developed an original proposal that would have covered approximately 2 percent of the population.
Once the CFPB became a full-fledged agency, this task passed to us and we revised that approach to greatly expand the definition of “rural” to encompass about 9 percent of the population – almost five times the scope of the original Fed proposal. Once we finalized that rule, we heard further from many of you and other smaller creditors that they believed even this broader definition was too narrow, and so we agreed to go back and consider it further. If finalized, the recent proposal would expand on our current definition of “rural” by adding all census blocks that are not in urban areas, which would further expand the coverage of “rural” to encompass about 22 percent of the population. Having seen some of the state maps under this new approach, I am satisfied that it proposes a broad but accurate view of what is a “rural” area around the country for purposes of mortgage lending and would be an appropriate landing place, subject to what we may hear and learn from the public notice-and-comment process.
We have undertaken this extra work and developed this proposal, again, because we strongly believe that smaller creditors such as credit unions play a vital role in assuring access to credit for consumers in many communities – particularly in rural or underserved areas. The proposal will help consumers in those areas access responsible loans while also maintaining important consumer protections.
Our ongoing work to improve the mortgage market, much of which is mandated by Congress, also includes our new Know Before You Owe mortgage disclosure forms that will take effect in August 2015. For more than 30 years, federal law has generally required that within three business days of receiving a mortgage application, mortgage lenders must deliver two different, overlapping disclosures to consumers. This was confusing to the public and was also duplicative and unnecessarily burdensome for mortgage lenders. Congress required us to take on the job of fixing that by integrating the forms so that only one form will be necessary at the application stage and at the closing stage.
Under our new rule consumers will no longer receive these overlapping forms. Instead, they will get a single form three business days after applying for a loan – which will be known as the Loan Estimate. They will get another form, which will be known as the Closing Disclosure, three business days before finalizing a loan. These new forms will enable consumers to more readily spot crucial information 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 with our Know Before You Owe initiative is improving consumer understanding in various consumer finance markets, including here in the mortgage market. We have made it a point 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.
Another major goal is to improve the experience when consumers are comparing various mortgage offers. The design and layout of the form makes it easy for consumers to compare multiple Loan Estimates for different loan offers and lenders. Consumers will be better able to weigh price differences between the terms of each offering – such as when interest rates are likely to adjust on one loan compared to the other. Again, this is not something that the Consumer Bureau did on its own; Congress changed the law to make sure it would be done.
While these forms are not required until August, the mortgage industry has been aware of the final rule for over a year and everyone should be already working to be ready by then. We understand that the new rule involves significant changes to business operations and technology platforms, which requires close collaboration with third-party service providers. While many mortgage institutions are already deep into implementing these changes, we want to make sure that everyone understands the need to be focusing on August 2015 now.
To help you get to August 2015 as easily as possible, we introduced a TILA-RESPA Regulatory Implementation webpage last April on our website at consumerfinance.gov. On that webpage, we have posted the rule and several helpful tools, including a Small Entity Compliance Guide, a guide to the new forms, disclosure timeline examples, and a number of sample forms that illustrate how the forms will look for different loan types. Together, these tools provide a comprehensive explanation of the new requirements and the new forms.
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. We have received very positive feedback on these materials and encourage everyone to use them. In addition to these materials, we also have been streamlining interpretive guidance on the new provisions and delivering it through a series of webinars. A link to the recorded webinars can be found on the Regulatory Implementation page of our website. And coming up tomorrow, the Bureau and NCUA will host another webinar to help institutions prepare for the integrated disclosures.
We also published 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. In sum, we are trying to make this rule, like all of our rules, more understandable and user-friendly – so that you are ready to implement the new disclosure requirements by August.
In additional to these important rulemakings, we recently released a new initiative called “Owning a Home,” which provides great new tools to help consumers throughout the experience of buying a home. The tools 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. These and other tools will be added over the course of the year in order 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 make more informed mortgage decisions. It incorporates information from actual lenders from a variety of large and regional banks and credit unions. This is an important tool to encourage and facilitate consumers in shopping for mortgages, and we will continue to refine and improve it as we go. Our tools also help consumers understand 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 Owning a Home makes it easy to compare different interest rates and to see how much they will cost.
Consumers are able to go to our website and plug in their information, as often as they like, whenever they like, to become more familiar with their options and see the value of shopping. They will gain more confidence about the crucial decisions they need to make about the type of 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. Our goal is to improve the mortgage market and the mortgage experience for consumers. A mortgage is often the biggest financial decision people will ever make. We believe they deserve to be treated fairly during that process. They deserve to be given the kind of accurate and helpful information they need to properly understand all aspects of their loan. Educated and informed consumers are important to ensure the marketplace functions properly. Of course, all of this is also in line with the best traditions of the credit union movement.
Our rules and our initiatives are designed to achieve these goals while promoting responsible business practices. Through these efforts, and our vigilant oversight, we will be able to realize a stronger, more sustainable marketplace. Both consumers and credit unions will be better off if we are able to do that. Thank you for allowing me to join you today.
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.