Director of the Consumer Financial Protection Bureau
Credit Union National Association
February 27, 2013
Thank you, Bill, for that generous introduction. For two years now, the Consumer Financial Protection Bureau has enjoyed a relationship with the credit unions based on mutual respect and a common understanding of who it is we serve: the people of this country. To you, they are not simply your customers, but instead are your “members.” To us, they are the honored consumers that give our agency its name. We have done good work together, and we have much more good work ahead of us. And so I want to start by thanking all of you for your help and your leadership, which has improved our work immensely.
More than one credit union executive has said to me that credit unions were the true consumer protectors long before our agency was even just a twinkle in Elizabeth Warren’s eye. I believe that too, and I address you today in that spirit.
The Consumer Bureau is well aware that credit unions were not one of the causes of the recent financial crisis. You were not underwriting the bad loans that brought down the housing market. Instead, you were sounding the alarm bells well before the sinking of the economy. And you were upholding sound underwriting standards even though you lost customers and market share to the financial predators.
We have travelled across the country listening closely to you. And you have come to see us and speak with us. In the last six months alone, we have met with 28 state credit union associations. When we have held field hearings around the nation, in places as diverse as Sioux Falls and St. Louis, we have made it a point to spend time meeting with local credit unions.
We also created the Credit Union Advisory Council to provide information, analysis, and recommendations to better inform our policy decisions and our rulemaking process. We want to ensure that we have a consistent way to hear directly from you about what you are seeing and hearing in your communities. Because we generally do not supervise credit unions with $10 billion or less in assets – which means that we do not conduct examinations on nearly any of you – the Advisory Council fills this gap in our day-to-day contact and helps to ensure that the lines of communication remain open at all times. The more perspective we have about your experience in the consumer financial marketplace, the better we will be able to figure out what, if anything, we should be doing in response.
A year ago at this conference, I told you how the Consumer Bureau was working to make costs and risks more clear upfront, to bring greater accountability to consumer finance markets. Today I want to bring you up to date on what we have been doing. We have been busy. As Henry Ford once said, “You can’t build a reputation on what you are going to do.” You have to do it.
The essential response to a consumer financial marketplace that has careened off the rails is to get it back on track. I am sure you could tell me, even better than I could tell you, that the single market that was the most broken and dysfunctional before the financial crisis was the mortgage market. Unfortunately, it is also the largest consumer financial market, worth about $10 trillion. So, after much study, discussion, analysis, and public input, we have produced new mortgage rules to fix what was broken and see that the widespread practices that so deeply harmed consumers can never happen again. These rules have been some of our most significant work to date, and I understand that they are likely what you want to hear most about from me.
We have adopted mortgage rules that will help consumers throughout their mortgage experience, from signing up for a loan to paying it off. We have written rules that deal with loan originator compensation. We have written rules that give consumers better access to their appraisal reports. And we have written rules that address escrow and appraisal requirements for higher-priced mortgage loans.
Last month, we unveiled the Ability-to-Repay rule, sometimes known as the Qualified Mortgage rule. It protects consumers shopping for a loan by requiring lenders to make a good faith, reasonable determination that borrowers can actually afford to pay back their mortgages. I know that such a regulation probably sounds quite foreign to credit unions. You typically pay close attention to whether your members can repay the money you lend them. But in the run-up to the crisis, you also saw that many of your irresponsible competitors were selling so-called “NINJA” loans – loans you could get even with no income, no job, and no assets. Because we have all seen with our own eyes how badly underwriting standards can deteriorate in a poorly regulated market, these rules have proven to be necessary.
Even as we set about the task of eliminating some of the worst excesses of the prior mortgage market, we were keenly aware that the current mortgage market is quite different. The pendulum has swung full force, and the extreme looseness of credit prior to the financial crisis has now given way to credit that is achingly tight. So our rule also strikes a careful balance on the access-to-credit issues that are so prevalent in the market today by enabling more responsible lending and providing greater certainty to the mortgage market.
As part of the Ability-to-Repay rule, Congress directed us to define a category of loans where borrowers would have the greatest protections. So we have drawn criteria for what are called “Qualified Mortgages.” Loans meeting these criteria are the least risky mortgages, so borrowers who receive them should be able to make their house payments steadily, barring some quite unforeseen turn of events.
Under our new rules, Qualified Mortgages cannot contain certain features that have historically harmed consumers. For example, they cannot have excess points and fees. They also cannot be risky loans such as negative-amortizing loans, where the principal amount actually increases for some period because the borrower is not even paying the interest on the principal.
And under the general standard for a Qualified Mortgage, they cannot be loans that place a particularly large financial burden on the borrower. The consumer’s total monthly debts – including the mortgage payment and related housing expenses such as taxes and insurance – generally cannot add up to more than 43 percent of their monthly gross income. No standard is perfect, but this standard draws a clear line that will provide a real measure of protection to borrowers and greater certainty to the mortgage market. And on all prime loans that are Qualified Mortgages, which is the vast majority of loans being made in the current market, we have conferred a safe harbor from ability-to-repay liability.
I know that complying with our new regulations is a worry for many of you. So allow me to make a few points clear. First, the criteria for Qualified Mortgages are intended to describe only the least risky loans that can be offered to consumers. But plenty of responsible lending remains available outside of the Qualified Mortgage space, and we encourage you to continue to offer mortgages to those borrowers you can evaluate as posing reasonable credit risk. Those that lend responsibly – like credit unions – have no reason to fear the Ability-to-Repay rule.
Indeed, as you know, the current mortgage market is so tight that lenders are leaving good money on the table by not lending to low-risk applicants seeking to take advantage of the current favorable interest rate climate. This actually creates a window of opportunity for credit unions that helped “write the book,” so to speak, on what it means to underwrite responsibly.
Of course, we understand that some of you – or your boards or lending committees – may be initially inclined to lend only within the Qualified Mortgage space, maybe out of caution about how the regulators would react. But you should have confidence in your strong underwriting standards, and you should not be holding back. So let me talk about some of the special rules defining Qualified Mortgages for smaller creditors and how they relate to you, in particular.
I start again from the traditional model of relationship lending that credit unions are known for. This model has been beneficial for many people across the country, especially in rural areas and in small towns like the one in Ohio where I was born and raised. Credit unions find ways to make loans that respond to personal situations and cannot be captured by generic metrics. Credit unions depend on keeping a good reputation in the communities where they live and work, and they often hold those loans in their own portfolio. Accordingly, credit unions have strong incentives to pay close attention to the borrower’s ability to repay.
There are two ways in which we have written the Ability-to-Repay rule to reflect this outlook. First, Congress gave us a limited ability to extend Qualified Mortgage status to certain balloon loans held in portfolio by small creditors operating in rural or underserved areas. This option is intended to preserve access to credit for consumers located in these areas, where creditors may offer balloon loans to hedge against rate risk for loans held in portfolio. Many credit unions operating in these areas will be covered by this exemption.
Second, the Consumer Bureau has also proposed amendments to the Ability-to-Repay rule that go considerably further to create room for smaller lenders such as credit unions to engage in mortgage lending. Under the proposal, portfolio loans made by small lenders – including those operating outside of rural or underserved areas, because it would cover small lenders operating throughout the country – would be treated as “Qualified Mortgages” even if the loans exceed the 43 percent debt-to-income ratio. This would be true as long as the lender considered debt-to-income or residual income before making the loan, and as long as the loans meet the product feature and other requirements for Qualified Mortgages.
To be specific, this proposed exemption would cover 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 approximately 7,000 credit unions in our country. And under the proposal, both the balloon loans and the other portfolio loans made by small creditors that are Qualified Mortgages would have a safe harbor from ability-to-repay liability if the interest rate is within 3.5 percentage points of the average prime offer rate.
Our comment period on the proposal ended just a few days ago. We look forward to assessing all the feedback we received and then finalizing this measure, as appropriate.
As you can see, there are certain big pieces of our new mortgage rules where the end result may be that most credit unions will be covered by special provisions. That seems quite appropriate to me since, as we all agree, it was not the traditional lending practices of credit unions that caused the financial crisis. We will continue to keep you posted on our actions, and keep in mind that you can always visit our website, ConsumerFinance.gov, for all the latest information.
Another big task that the Consumer Bureau took on this year is adopting mortgage servicing rules to protect consumers from practices that have plagued the industry for some time. These practices have resulted in profound frustration, foreclosures that could have been avoided, and severe consumer harm. Our rules address these problems with common-sense requirements, such as making sure that servicers consider all alternatives permitted by the loan holder before they proceed to foreclose on a consumer’s home. Servicers also must provide clear monthly mortgage statements, warn consumers before their interest rate adjusts, and promptly credit a consumer’s account when payment is received. These rules ensure fair treatment for borrowers and provide them with clear information to help them stay on track. For borrowers in trouble, our rules provide for early intervention, continuity of contact, and loss mitigation efforts that include restrictions on dual tracking.
Once again, for these servicing rules, we have recognized that credit unions and other smaller servicers typically operate according to a very different business model based on strong customer service. In their own way, each offers the kind of high-touch service that their members have come to expect, making extensive efforts to avoid foreclosures.
So again, we have provided exemptions for smaller institutions like credit unions from many of the provisions of the rules. Specifically, firms that service 5,000 or fewer mortgage loans that were originated or owned by the servicer itself or its affiliates, are exempted from large chunks of our servicing rules. We estimate that this covers about 98 percent of credit unions, exempting them from, among other provisions, the periodic statement requirement, the general servicing policies and procedures, and most of the loss mitigation provisions.
In addition, our escrow rule, like our Ability-to-Repay rule, contains an exemption for small creditors in rural or underserved areas that have less than $2 billion in assets and that, with affiliates, originate 500 or fewer mortgages a year. Small creditors that basically meet these criteria and do not generally have escrow accounts for their current mortgage customers will be exempt from the escrow requirements.
All of these exemptions express our recognition and acknowledgement that the traditional credit union lending model is deserving of respect and should be treated differently under our rules. You are member-focused, and you carefully protect the people you serve. This is just the kind of service-based model that we want to encourage in the consumer financial marketplace.
We know that the new law and our new rules will bring great changes to the mortgage market. So we are committed to doing everything we can to help achieve effective, efficient, and comprehensive implementation by engaging with stakeholders in the coming year. We know that it is in the best interests of the consumer for the mortgage industry to understand these rules – because if the industry does not understand the rules, they cannot properly implement them.
To this end, we have announced an implementation plan to prepare mortgage businesses for the new rules which generally will take effect next January. We will publish plain-English summaries. These will be especially helpful to smaller institutions, like yourselves, where regulatory burden weighs more heavily on fewer employees. 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.
We will also publish readiness guides 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 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 should want is for different institutions to get consistent supervisory treatment from their 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 short, we believe that credit unions and the Consumer Bureau see the world the same way: 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 at the Consumer Bureau. We want consumers to be in a strong position to make good decisions when it comes time to 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 seeking to navigate the markets for consumer finance. We have established “AskCFPB” on our website at ConsumerFinance.gov, which contains hundreds of common questions that consumers are asking about financial products and services. We invite you, in this ongoing spirit of cooperation, to check out our website and to use us as a resource for your members.
We also have begun to create educational modules around the few larger and rarer financial decisions that people may make in the course of their lives, such as paying for college, owning a home, and the like. Our “Paying for College” module is already in service at our website, including a student financial aid shopping sheet to help college-bound consumers decipher different student loan offers. The other modules will be coming as fast as we can be satisfied that they are ready. And, again, we urge you to direct your members to use them and give us the kind of feedback that will help us improve them over time.
Today I am calling on you to work with us to address the consumer finance issues central to the lives of people all across this country. The people we jointly work for – your members and American consumers – are eager to discover a new and improved consumer financial marketplace. And they deserve it.