Thank you for having me today and I bring all of you good tidings of great joy for the new year. If you are like me, change comes hard and I will still find myself mistakenly writing “2013” on documents such as personal checks for another few weeks. But there will be big differences between last year and this year in the mortgage market, with the advent of new mortgage rules that Congress required our new agency to write against a hard statutory deadline. That was a great deal of work for us and I know it has meant a great deal of work for many others as well. So I will focus very closely on those issues in my remarks to you today.
The Consumer Financial Protection Bureau and the National Association of Realtors share an important piece of common ground: an improving housing market will help both of us achieve our primary goals. For you, this is your lifeblood; the core of what you do is to help people achieve their dreams of homeownership by matching them up with a home they can love and sustain for as long as they choose to live there. But for us too, the central point is to improve life for consumers, which requires not just sound legal protections, but also reasonable access to responsible credit.
In the real estate market, in particular, most people cannot grow into a brighter future for themselves and their families without borrowing against the future to fulfill their deepest aspirations. We all recognize that very few families can buy a house with ready cash; so drying up access to credit is neither in our interest nor in yours. What we do seek, however – and, again, I believe we share this goal in common – is a world in which mortgage transactions can be expected to turn out successfully for both borrowers and lenders. We insist that the terms of the deal be made clear right up front and that they be described accurately. And we insist that those involved must care about and document how the deal will be sustainable over the long run. These simple principles will help us ensure that the mortgage market never melts down again the way it did just a few short years ago, making people’s lives miserable in the process – including both realtors and consumers. We are putting that sorry chapter behind us and reaching out for better days ahead. Achieving these goals will mean satisfied customers for every realtor in America and successful consumers who are benefiting by the work done by our new agency.
So where exactly are we now as we ring in the new year in 2014? Five years after the worst financial crisis most of us have ever known, the economy is growing again. People are getting back on their feet. The job market is rebounding, as are the opportunities those jobs can bring. And, best of all, we are poised for greater progress in the year ahead.
The Consumer Financial Protection Bureau is still in its infancy, just two and a half years old. We are helping to resolve complaints, many of them long standing, submitted to us by tens of thousands of consumers. We are also helping Americans make smarter financial choices when it comes to managing savings and credit and to dealing with products like mortgages, bank accounts, and student loans. Each day, we try to put our best foot forward for American consumers.
But most relevant to those of you in this audience is the work we have been doing to improve the functioning of the mortgage market. So let me describe the implementation of our new mortgage rules, which are designed to make the housing market work better for all Americans, including all of you realtors and your customers.
As we look back over the past few years, we can start with something that Frank Lloyd Wright once said: “There is nothing more uncommon than common sense.” That quotation epitomizes the heady years preceding the financial crisis of 2008. Reason and sound judgment were absent when many banks and other mortgage businesses lent to consumers without even considering whether they could pay back the money. The supposedly rational market had become wildly irrational.
Then it all blew up. And you and all your colleagues saw your business drop like a rock. You have ridden the waves of financial booms and busts before, but nothing like what we saw five years ago. The collapse of the housing market destroyed jobs across every economic sector and in the communities you serve throughout the country.
Out of this mess came demands for financial reform, and among other things the creation of the new Consumer Bureau. Consumers want – and need – someone to stand on their side and provide safeguards against bad mortgage deals that ruin their credit, cost them their homes, and saddle them with additional problems. Of course, consumers have to bear responsibility for their own choices, and they have done so – in fees and other charges they cannot afford, in foreclosure proceedings that upend their lives, and in marred credit that hangs over them for years into the future. But more comprehensive action was needed, and as I stand before you today, we are now three days away from returning to a “back to basics” approach to mortgage lending practices. No debt traps. No surprises. No runarounds. These are bedrock concepts backed by our new common-sense rules that take effect on January 10. These changes will help each of you in the real estate business by creating a more stable and sustainable marketplace.
The first back-to-basics approach addressed by our new mortgage rules is no debt traps.
As you know, if a potential client comes to you wanting to buy a home, they need to assess their choices carefully before signing up for a long-term debt. The proposed terms of the mortgage deal should be clear and understandable. If they do their homework and follow plain logic, they should be positioned to make a responsible decision that they can live with for decades. What they should not have to worry about is getting lured into a loan that will bring them ruin.
For most people, their mortgage may well be the largest financial obligation of their lifetimes. But it can be difficult to figure out how much house – and how much mortgage – is the right amount. Consumers can easily be confused by the intricacies of taxes, escrows, interest rates, private mortgage insurance, changing monthly payments, and various fees. Most people – at all levels of income – rely on real estate professionals to tell them how it all works. And they assume that the lender will not lend them money unless the lender is confident they will be able to repay the loan.
But if the lender does not check on the important facts, like income, savings, and debt load, it is impossible for the lender to know how much the consumer can spend each month on a mortgage. And the lender cannot know whether the consumer can truly afford a loan if the lender only looks at whether the consumer can afford monthly payments under an introductory teaser rate, which may be irrelevant after the cheaper rate expires. In the lead-up to the crisis, we saw this happen over and over again. Some mortgage businesses stopped their inquiries well short of the kind of due diligence needed to lend money responsibly. Some joined their customers to engage in wishful thinking. Some tricked people into believing they could afford loans they could not. Some actually falsified the numbers to make them look like they would work. Certainly some consumers should have known better and made very bad choices. But too many others did not even recognize the risks they had taken on until it was too late.
Realtors were on the front lines. We are all now familiar with “low doc” and exotic mortgages. We know people took out loans they could not afford, or could only keep up with for the first year or two. We know people signed onto complicated terms with no real comprehension of how the transaction worked. We know loan originators got kickbacks for putting families in higher-cost loans than they actually qualified for.
Our new mortgage rules put a stop to all that. Our Loan Originator Compensation rule bars yield spread premiums, which created financial incentives to push people into loans with higher interest rates than they actually qualified for under their credit history. And under our Ability-to-Repay rule (also known as the QM rule), lenders must now make a reasonable, good-faith determination that the consumer can actually afford the mortgage before they take on the debt. Now, obviously, mortgage lenders do not have a crystal ball: they cannot predict if someone will lose a job or have an unexpected financial emergency. But they must look at a consumer’s income or assets, and at their debt, and must weigh them against the monthly payments over the long term – not just a teaser rate period. Lenders then can offer any kind of mortgage they believe the borrower can afford to pay back. This is, in fact, the very foundation of responsible lending. But the financial crisis happened because some irresponsible lenders chose a different path, and many others followed suit to compete with them.
Of course, certain types of mortgages are more likely to become a trap for the borrower. So our rule lays out basic criteria for loans known as “Qualified Mortgages,” which must follow some general debt-to-income guidelines. They also cannot have certain risky features, such as paying interest only or even negatively amortizing so that each month the consumer owes more than they did before. And they must have relatively reasonable points and fees. Lenders can choose not to follow these guidelines and simply make a loan based on their reasonable, good-faith determination that the consumer is able to repay it. But either way, they cannot trap consumers in loans that the lenders should recognize are unaffordable.
Of course, consumers are dealing with different problems now than they did leading up to the crisis. Today, as millions of Americans continue to struggle to pay their mortgages, millions more are waiting for the market to recover more fully before they consider buying a home or selling one that is still underwater. For many, the problem is access to credit, which has become achingly tight. Since 2008, most mortgages have been priced on very attractive terms. But access to credit has become so constrained that many consumers cannot borrow to buy a home even with reasonable credit histories. So, importantly, our rule also takes careful account of these access-to-credit issues.
Indeed, those lenders that have long upheld strong underwriting standards have little to fear from the Ability-to-Repay rule. Qualified mortgages cover the vast majority of loans made in today’s market, but they are by no means all of the mortgage market. This point is quite important, and it should not be misunderstood. These lenders, including many of our community banks and credit unions, have seen the strong performance of their loans over time. Many of them keep loans in portfolio and so they have every incentive to pay close attention to the borrower’s ability to repay. Nothing about their traditional lending model has changed, and they should continue to offer such mortgages to borrowers whom they evaluate as posing reasonable credit risk – whether or not they meet the criteria to be classified as Qualified Mortgages. We all benefit by recognizing and sustaining responsible lending wherever we find it in the mortgage market – realtors as much as anyone else.
So let me just take a moment to dispel some myths about what our Ability-to-Repay rule does and does not do, because rumors continue to circulate. The rule does not mean consumers, realtors, and lenders will have to jump through unreasonable hoops to get a loan. The truth is that lenders likely will be asking of a potential homebuyer just what responsible lenders have been asking for all along – basic things like proof of income or assets. And the rule does not mean only Qualified Mortgage loans will be allowed; lenders can continue to use their own reasonable judgment when looking at a consumer’s ability to repay. Nor does this rule restrict down payments; it says nothing about how much of a down payment the consumer has to make on the house, but leaves that entirely up to the homebuyer and the lender. Finally, for the millions of Americans who already own their homes, the Ability-to-Repay rule does not change anything about a consumer’s current mortgage; it only applies to new mortgages that people apply for on or after January 10, 2014.
In the end, our Ability-to-Repay rule is straightforward. It puts behind us once and for all the kind of irresponsible lending that disrupted the housing market and so badly damaged our economy. And it provides strong new consumer protections while preserving needed access to mortgage credit.
Our second back-to-basics approach affects the mortgage servicing market, which performed so poorly in recent years. The central principles are no surprises and no runarounds. Simply put, consumers should not be hit with surprises by those responsible for collecting their payments. If a consumer buys a home and is paying back the mortgage, our rules require servicers to keep the homeowner informed about their loan and to investigate and fix errors. Consumers should be able to see how payments are credited. They should not be caught off-guard when interest rates adjust. And they should not be slammed with fees that seem to come out of nowhere.
Our new rules will help every borrower. Consumers will not have to guess how much money they owe or when they owe it, because servicers now must send monthly statements showing how they credited the monthly payment. The statement puts all the important information in one place, showing the interest rate, loan balance, escrow account balance, and where the payments are going. And consumers will get ample notice when interest rates adjust. This is valuable, practical information to guide people’s choices and actions – exactly what they need.
For consumers in trouble, getting the runaround is not just frustrating, but can mean the loss of their homes. They need good information and actual help. Our rules require mortgage servicers to provide consumers with available options to save a home or to work out a problem making payments. For example, we restrict “dual tracking” by barring servicers from starting foreclosure proceedings until the borrower has been delinquent for at least 120 days. Once borrowers have missed payments, servicers must inform them about available options and how to get more information. These rules should help prevent needless foreclosures, which is best for borrowers, lenders, and our entire economy.
Our servicing rule has also spawned an erroneous myth that these new measures will bog people down in red tape. On the contrary, these measures are not new at all. They are exactly what good community banks and credit unions have been doing for many, many years. They amount to little more than taking the time to work directly with customers to address their circumstances. In short, our rule means simply that mortgage servicers must now do their jobs. You know very well how much difference this makes. Over the past year, we have heard plenty from realtors around the country who are just as frustrated as consumers at poor mortgage servicing practices. They have told us how the failings have interfered with their ability to close on solid real estate deals to buy and sell homes. Positive improvements in this area will benefit you and your businesses as well as consumers.
We mean to end a failed process in which too many struggling homeowners have been kept in the dark about where they stand. Too many Americans have been forced to roll this rock up the hill only to see it roll down again, repeatedly. People deserve better; they are entitled to be treated with respect, dignity, and fairness. Our new servicing rules will help ensure that happens.
Importantly, these new mortgage rules will have to be followed by nonbanks and banks alike. So it no longer matters whether a loan is made by a bank or by some other kind of financial firm. It also no longer matters whether a bank or nonbank is playing the role of the mortgage servicer: the same basic rules will apply. And our mortgage rules are backed by the full supervisory and enforcement authority that Congress vested in the Consumer Bureau. We will be vigilant about overseeing and enforcing these rules.
As we saw in the lead-up to the financial crisis, common sense turned out to be not so common. By bringing back these basic building blocks of responsible lending and servicing the customer, we will improve conditions for consumers seeking to enter the market, for you realtors who are seeking to arrange the purchases and sales of their homes, and for all those still struggling to pay down their existing loans.
It means a great deal to our new Consumer Bureau to know that the National Association of Realtors has members with boots on the ground in communities both small and large all across the United States. We urge you to help us spread the word about how consumers can make the most of this new agency. Make sure they know they can submit consumer complaints about problems they are experiencing with mortgages, credit cards, student loans, auto loans, and bank accounts. Work with us to help educate your clients about the specific ways they can look forward to a new and better marketplace, and share with them that they can find impartial, expert answers to their frequently asked questions at “Ask CFPB.” For all of these resources, please direct them to our website at consumerfinance.gov. Common sense, after all, serves the common good.
And make no mistake about it: the Consumer Bureau wants to see the real estate market thrive. We are united by our strong desire to put the American housing market on a sustainable path fueled by responsible lending. You deserve it, and American consumers deserve it. 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.