Remarks of CFPB Acting Deputy Director Steve Antonakes

Prepared Remarks of Steve Antonakes
Acting Deputy Director of the Consumer Financial Protection Bureau
Consumer Bankers Association

Phoenix, AZ
March 12, 2013

I would like to thank Richard for the kind introduction. It is a pleasure to have the opportunity to join you all here at CBA Live. The Consumer Bankers Association and the Consumer Financial Protection Bureau have enjoyed a cooperative working relationship since the Bureau’s inception which I believe has benefited us both.

Over five years removed from the onset of the financial crisis, we stand at a unique moment in time in regards to our nation’s system of consumer finance. I know there is keen interest and curiosity in how the Bureau will regulate. And I want to assure you that our goal is to be fair and reasonable.

As you know, the Bureau’s jurisdiction is unlike any traditional prudential bank regulatory agency. We have regulatory oversight for banks, thrifts, and credit unions with assets over $10 billion. These institutions and their chartered affiliates total less than 200, but on a combined basis account for $10 trillion in assets or nearly 80 percent of the nation’s banking market. The number of non-bank entities that eventually could be subject to the Bureau’s supervisory jurisdiction will likely number in the thousands.

A specific charge of the Bureau is to attempt to level the playing field between banks and non-bank entities relative to compliance with federal consumer financial laws. This dual authority provides the Bureau with the opportunity to oversee consumer financial products and services across charters and business models. Consequently, charter or license type is becoming less relevant in determining how we will prioritize and schedule our examinations and investigations.

As much of our contact with the banks represented in this room comes in the form of examinations, I want to assure you that we have an integrated approach to oversight. This allows us to coordinate with prudential and state regulators to ensure that we do not impose inappropriate or excessive burdens on regulated institutions.

Our exams are intended to be rigorous and heavy on data analysis. We focus on substantive consumer harm and as such, ensure our response to more technical violations is appropriately proportional. Similarly, we take a fair and reasonable approach in determining when public enforcement is the most effective tool to mitigate consumer harm. In all instances, we seek to conduct ourselves with humility.

By way of background, I am a career bank regulator having started in this line of work nearly 23 years ago as an entry-level bank examiner. In Massachusetts, I had safety and soundness, consumer protection, CRA, and fair lending mandates. Moreover, I have supervised banks, credit unions, and non-banks throughout my career.

While the Bureau does not have a safety and soundness mandate, we very much care about the financial health of banks and nonbanks. As a veteran of two banking crises, I can tell you unequivocally that, in my view, consumer protection is not in conflict with safety and soundness. Consumers benefit from a healthy and competitive financial services system through greater access to credit and competitive pricing.

As you know, both financial and consumer compliance performance are dependent on strong management. Seldom do institutions excel in one and not the other. No business built on deceiving its customer base will be sustainable. Moreover, when businesses underinvest in compliance management systems it can pose significant reputational and financial risks. There is no better evidence than the banking industry’s ongoing recovery from a significant underinvestment in internal control systems relative to mortgage origination and servicing.

Over the next several minutes, I will focus on our new mortgage rules – some of the most significant rulemakings we have made to date. I hope that my remarks will provide greater insight to how, with these rules, the Bureau is not only providing new consumer protections but is also restoring a greater level of certainty to the market.


First, in January we issued our Ability-to-Repay rule to protect consumers from irresponsible mortgage lending by requiring lenders to ensure prospective buyers have a reasonable ability to repay their mortgage.

As we all know, in the lead up to the financial crisis, many consumers were sold mortgages they could not afford or understand. Lenders sold, and consumers purchased, no-doc and low-doc loans where consumers qualified for loans beyond their means. Lenders also sold and consumers purchased risky and complicated mortgages like option and hybrid ARMS. During this time, credit underwriting standards significantly deteriorated. Uneven supervision and a widely held view that we had entered a new era in which property values would constantly increase contributed significantly to these practices. All of this ultimately culminated in a dramatic increase in mortgage delinquencies and foreclosures.

I witnessed firsthand widespread reckless and fraudulent activity in the form of forged 1003s, whited-out paystubs, falsified verifications of employment and deposit, and applications submitted to automated underwriting over 10 times a day until the income figure was just right.

In short, there was broad disregard for the ability of many consumers to be able to repay loans.
Now, we have a different problem on our hands. Access to credit has become so constrained that even consumers with strong credit cannot borrow.

The Ability-to-Repay rule strikes a balance between our recent past and our current predicament. The rule builds into the law common-sense underwriting processes and considerations. It protects consumers from risky practices that helped cause the financial crisis and it ensures lenders can extend credit responsibly – without worrying about competition from unscrupulous lenders.

Under the new Ability-to-Repay rule, lenders will have to make a reasonable and good faith determination of the consumer’s ability to pay back both the principal and the interest, and any other mortgage related costs such as taxes and insurance. And they will have to consider the consumer’s ability to repay the mortgage over the long term − not just during an introductory period when the rate may be lower.

As part of the Ability-to-Repay rule, Congress directed us to define a category of loans where borrowers would have the greatest protections, and where lenders will be presumed to have complied with the rule. So we have drawn criteria for what are called “Qualified Mortgages.” Loans meeting these criteria tend to be less risky mortgages, so borrowers who receive them should be able to make their house payments steadily, absent some unforeseen circumstance.

Qualified Mortgages must meet certain requirements including those which prohibit or limit the features that harmed consumers in the recent mortgage crisis. They generally will be provided to people who have debt-to-income ratios less than or equal to 43 percent. This cap on debt provides a bright line for defining a category of loans which can be presumed to be affordable. Those with higher debt-to-income ratios may get Qualified Mortgages by meeting other alternative QM definitions. For example, 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.

Lenders that choose to originate Qualified Mortgages will receive certain protections from potential legal liability associated with the Ability-to-Repay requirements. We have conferred the strongest legal protection on safer prime loans, while permitting borrowers to rebut the presumption of ability to repay for subprime loans.

We have limited the opportunities for unnecessary litigation, however, in three ways: 1) by drawing bright-line criteria to define a Qualified Mortgage; 2) by specifying that sustained payment over a reasonable period is strong evidence that the borrower had the ability to repay the loan when it was made; and 3) by specifying the circumstances under which a borrower can rebut the presumption for subprime loans.

Let me talk about these two distinctions more specifically:

First, qualified mortgages with rebuttable presumption: These are higher-priced loans typically for consumers with insufficient or weak credit history. For first liens, these are loans that have an APR that is greater than the Average Prime Offer Rate (APOR) plus 1.5 percent. For second liens, these are loans that have an APR that is greater than the Average Prime Offer Rate (APOR) plus 3.5 percent. Either affirmatively in the first three years or at any time as an offset in a foreclosure proceeding, the consumer can seek to rebut the presumption that the creditor properly took into account their ability to repay the loan. The consumer would have to prove that, at the time the loan was made, he or she had insufficient income or assets to meet living expenses after the creditor considered the consumer’s mortgage and other recurring expenses.

Second, qualified mortgages with safe harbor: These are loans that are typically made to borrowers receiving prime loans who pose fewer risks. Consumers can bring an ability-to-repay claim in the same circumstances—in an affirmative suit within the first three years or at any time as an offset in a foreclosure proceeding. If the lender demonstrates it has satisfied the Qualified Mortgage requirements, however, the lender receives a conclusive presumption – a safe harbor – that it has met the Ability-to-Repay requirements.

Let me reiterate: To offer assurances for lenders, we have conferred a legal safe harbor from ability-to-repay liability on all prime loans that are Qualified Mortgages. This represents the vast majority of loans being originated in the current market. While no standard is perfect, this draws a clear line that will provide a real measure of protection to borrowers and greater certainty to the mortgage market.

In the end, our new regulation represents nothing but a return to common-sense underwriting. The first basic tenant of safe and sound lending is determining one’s ability to pay. The Ability-to-Repay rule will help ensure that lenders and consumers share the same basic financial incentives. By providing this common-sense discipline in the housing market, this rule creates a level of assurance for all participants that will open up more access to credit for consumers. And, we believe this rule will provide businesses with certainty on which to build their future success.


I also want to talk to you today about our mortgage servicing rules, also set to go into effect in January 2014.
Generally, as you know, consumers are not in a position to choose their mortgage servicer. Before the onset of the financial crisis, the servicing industry – or at the very least the larger players that dominate the industry – developed a low-cost, high-volume business model. Unfortunately, this system was not designed for and was easily overwhelmed by significant increases in delinquencies and foreclosures.

Accordingly, we have seen far too many instances of servicers failing to provide basic levels of support that borrowers need and deserve. Borrowers’ calls have gone unanswered, documents have been lost, and accounts mishandled. Communication and coordination has been poor.

Considering all this, our new servicing rules seek to achieve two primary objectives. First, they help prevent borrowers from being hit by surprises or getting the runaround. Second, they provide special protections for borrowers who are having trouble making their mortgage payments.

Now, these rules were shaped by vigorous input from the public. That input came from people all around the country who have first-hand experience of the issues we are addressing. It came from consumers, and it came from industry, probably some in this room.

The rules we came up with provide for, among other things, better payment processing, and communication for all borrowers. For example, the rules require that consumers receive mortgage statements each month that are clearly written and easy to understand. Statements must break down payments by principal, interest, fees, and escrow. They must also include the amount and due date of the next payment. We think these common-sense solutions will keep borrowers better informed and better in touch with their servicers.

The rules also include standards to direct the handling of distressed borrowers, including borrowers facing foreclosure. The rules detail procedural protections that begin with early intervention requirements for borrowers who are 36 days late on a payment. The protections also generally require servicers to respond in a timely manner to loss mitigation requests received sufficiently in advance of foreclosure. And they require servicers to make a reasonable effort to obtain the information needed to complete such applications. These protections seek to ensure that struggling homeowners will not be kept in the dark about where they stand in the loan modification or foreclosure process. These are common-sense, easy-to-follow rules that not only protect consumers but responsible servicers as well.

We know that not every servicer’s performance is the same and that there is a wide range in servicer practices. In fact, we found that smaller servicers have quite different incentives and approaches to servicing their customers. As a result, our rules exempt small servicers from many of the provisions.
Any mortgage servicers that choose to be indifferent to the plight of consumers should understand that these rules are backed by the full supervisory and enforcement authority that Congress has conferred upon the Bureau. Importantly, these authorities extend to both bank and nonbank servicers, not just to banks and other chartered institutions. And, we will be vigilant about enforcing these rules.


We recognize that compliance management will be managed differently by large, complex banking organizations at one end of the spectrum and small entities that offer a narrow range of financial products and services at the other end. While the characteristics and implementation will vary from entity to entity, we believe compliance management activities, including implementing new regulatory requirements, must be a priority and should be appropriate for the nature, size, and complexity of the financial entity’s consumer business. It is in the best interests of the consumer for industry to understand and properly implement these rules.

We are, however, also cognizant of the business challenges of absorbing and implementing several complex rulemakings.
To this end, we will be working closely with you over the next year to aid and support the implementation of all of the new mortgage rules. We will publish plain-language summaries of the rules in booklet and video form this spring. We will field questions and offer suggestions to help lenders determine how to implement the rules. And in coordination with our fellow agencies, we will publish materials that help lenders understand supervisory expectations. Accordingly, we will work to create common exam procedures so that the rules are enforced consistently.

In closing, the financial crisis was rooted in the proliferation of high-risk mortgage loans and a complete breakdown in consumer financial protections and controls. The rules the Consumer Financial Protection Bureau has developed – and all the work we are moving forward with – is aimed at strengthening the American consumer, lenders, and the whole of our consumer financial markets in a common-sense way. I thank you for your attention and would be pleased to take your questions.