Director of the Consumer Financial Protection Bureau
NAFCU Annual Conference
July 11, 2013
Thank you so much for allowing me to join you here today. Since our inception, the Consumer Financial Protection Bureau has enjoyed a relationship with 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.
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.
At the Consumer Bureau, we are well aware 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 more irresponsible lenders. And you sounded the alarm bells well before the growing irregularities in the mortgage market caused the credit crunch that sank the economy.
We have travelled across the country listening closely to you. And you have come to see us and speak with us. 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. Based on what we have heard from you, we just created a new Office of Financial Institutions and Business Liaison to help you 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 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 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 nearly 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.
At the Consumer Bureau, we are working to promote responsible practices in the marketplace, to make costs and risks more clear to consumers right up front, and to make markets work better for consumers. So I would like to tell you more about our work. As Henry Ford once said, “You can’t build a reputation on what you are going to do.” You have to do it.
It is undeniable that the consumer financial marketplace careened off the rails, and Congress created the Consumer Bureau to help get it back on track. I am sure you could tell me, even better than I could tell you, that the mortgage market was the single most dysfunctional market before the financial crisis. 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 to ensure that such widespread harm to consumers and our economy can never happen again. The mortgage rules have been some of our most significant work to date, and I understand they are likely what you want to hear most about from me today.
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, that give consumers better access to their appraisal reports, and that address escrow and appraisal requirements for higher-priced mortgage loans.
In January, 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. Like any rational lender, 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 the worst excesses of the prior mortgage market, we were made keenly aware, from discussions with you and others, 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. Indeed, as you know, the current mortgage market is so tight that lenders are leaving good money on the table by not lending to creditworthy applicants seeking to take advantage of the still 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. Our rule strikes a careful balance on the access-to-credit issues that are prevalent in the market today by enabling more responsible lending and providing more certainty to the mortgage market so that you can proceed to underwrite responsibly and serve more of your members and prospective members.
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 have risky features such as negative amortization, 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 constitute 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. 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 QM 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 almost all credit unions – have no reason to fear the Ability-to-Repay rule. If you maintain the same sound underwriting standards you have developed over many years, and you know the loans you make have demonstrated strong performance, then it should not matter much whether those loans happen to be non-QM rather than QM.
In fact, we have tried to ensure that the risk differential between those categories is not substantial (we have conservatively estimated that the potential liability cost associated with making non-QM loans would add less than one-eighth of a point to the interest rate) so that credit unions and other responsible lenders can continue to make traditional relationship loans regardless of how they are classified for purposes of the Ability-to-Repay rule. I understand that many are anxious on this point, but what I have just told you is the truth, and we are happy to discuss and analyze these issues with you in more detail if you are interested in working through them with us.
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 let me state clearly that we want you to have confidence in your strong underwriting standards, and not to hold back from making loans you know are sound. 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 among their members – who are, after all, their owners, 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.
We have written the Ability-to-Repay rule to reflect this outlook, and we also finalized amendments to the Ability-to-Repay rule that afford considerable leeway for smaller lenders such as credit unions to engage in mortgage lending.
First, the final rule provides that portfolio loans made by small lenders – including those operating outside of rural or underserved areas – are generally to be treated as “Qualified Mortgages” even if the loans exceed the 43 percent debt-to-income ratio, as long as the loans meet the product feature and other requirements for Qualified Mortgages. This exemption 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 in our country.
Second, the final rule also allows small creditors to charge a higher annual percentage rate for certain first-lien Qualified Mortgages and still qualify for a legal safe harbor for the Ability-to-Repay requirements.
Third, the rule exercises limited authority that Congress gave us to extend Qualified Mortgage status to certain balloon loans held in portfolio by small creditors operating in rural or underserved areas. After we did this, many of you felt that the definition of “rural” that we adopted was not broad enough, and we have listened and responded by deeming all of these loans to be QM for two more years (until January of 2016) while we reconsider the issue.
Some of you may still feel restless about the new mortgage rules and how they affect credit unions. But let me emphasize something that it is important to keep in mind. Had we not written these rules – and made the tremendous effort our people put in to finish them on time – you still would have been required to implement new requirements, and in certain respects would have been worse off, because Congress provided that the new requirements of Title XIV of Dodd-Frank would have taken effect on their own terms in the absence of implementing rules issued by the deadline. And the statutory provisions were much less responsive to the special circumstances of smaller creditors, such as credit unions, than our rules have turned out to be. So, in important ways, the Consumer Financial Protection Bureau has been a very positive force for credit unions on these issues.
In the end, therefore, the upshot of big pieces of our new mortgage rules is that the vast majority of 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. 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. 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. For firms that service 5,000 or fewer mortgage loans, which were originated or owned by the servicer itself or its affiliates, there are special provisions exempting them 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 meet these basic criteria will be eligible for an exemption from the escrow requirements.
All of these exemptions express our recognition and acknowledgement that the traditional credit union lending and servicing 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 engaging with stakeholders to help achieve effective and efficient implementation. We know it is in the best interests of the consumer for the mortgage industry to understand these rules and to implement them in a workable manner.
To this end, we have embarked on an implementation plan to prepare mortgage businesses for the rules that take effect next January. We have published plain-English summaries that we will update as necessary. We have also launched a series of videos explaining our rules. We intend these to be especially helpful to smaller institutions 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.
We are also distributing a readiness guide with a checklist of things to do before the rules take effect – like updating policies and procedures and providing staff training. 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. To do this, we are collaborating closely with our fellow regulators and sharing materials with the National Credit Union Administration. We will be publishing our common examination guidelines and standards well in advance of the effective date of the rules, 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 about 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 Ask CFPB on our website at ConsumerFinance.gov, which contains hundreds of common questions that consumers are asking about financial products and services. 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. We invite you to use our website as a resource for your members.
Today I call on you to work with us to address the consumer finance issues that are central to the lives of people all across this country. The people we jointly work for – your members and American consumers – are eager to have a new and improved consumer financial marketplace. And they deserve it.
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.