CFPB’s Cordray: Rules, Regulations Have Improved Mortgage Experience

BOSTON–Consumer Financial Protection Bureau Director Richard Cordray said the mortgage industry has gone through “dramatic change” over the past decade and said the work of the Bureau has improved customer protections and insulated the real estate finance industry from a bigger impact of regulatory changes.

Speaking here at the Mortgage Bankers Association’s Annual Convention & Expo, Cordray defended new rules issued by the Bureau since 2014, saying the mortgage industry is in “better shape” as a result.

“The first set of mortgage rules that we adopted took effect in January of 2014,” Cordray said. “That year, home purchase mortgages rose by 4 percent, according to the Home Mortgage Disclosure Act data. In 2015, they picked up steam, rising by almost 14 percent. Preliminary data for this year indicate that the growth trend continues to advance strongly. Even the millennials, many of whom have put off forming households until they were older, now seem to be starting to enter the market. And we are seeing many lenders willing to make sensible jumbo loans. Some of those are non-Qualified Mortgage loans, as more lenders come to recognize that their initial anxieties over the feared legal risks have not materialized.

Cordray said through its work in this area, the CFPB played an important part in these developments. “We know that sometimes you are focused only on one side of the equation, namely the compliance costs you have incurred in implementing the rules we issued,” he said. “That is a fact, but it is an inevitable one. No economic sector that precipitates a global financial meltdown could possibly expect to escape far-reaching reforms, as the Congress so dictated. But the safeguards we have put in place around underwriting, servicing and loan originator compensation have improved industry performance, promoted responsible lending and helped restore consumer trust that was badly shaken by the events of the past decade. These improvements benefit responsible lenders just as much as they benefit consumers.”

By issuing these regulations, Cordray said the CFPB bought the real estate finance industry “crucial time” by avoiding the immediate and self-executing directives that Congress had enacted in Title XIV of the Dodd-Frank Act.

“That could have been a calamity, but it was averted,” Cordray said. “Instead, our rules helped facilitate the implementation of the new law and reduced the burden you otherwise would have experienced. Through the GSE patch in the Qualified Mortgage definition, we avoided disruption to the fragile mortgage market that existed in the wake of the crisis. By adopting a reasonable ‘good faith’ approach to oversight of the Ability-to-Repay rule, we met industry halfway by working with our fellow regulators to assure that our early examinations would be sensitive to the good faith efforts you made to come into compliance and thus would be diagnostic and corrective. And that is exactly what we have done.”

Cordray acknowledged in the wake of the financial crisis, the real estate finance industry has been doing the hard work of extending credit at a time when economic activity was greatly impaired by extreme financial conditions. “You have undergone intense scrutiny, including from within your own ranks, to diagnose what happened,” he said. “So the bottom line is that we have come a long way in a short time. The tasks were immense, and they created real strain, both on your end and on ours. But the mortgage market is now in much better shape because of all our joint efforts. And we remain open-minded, in constant listening mode, about how we can identify further improvements as we move forward together.”

But Cordray also said much work remains to be done. “Even now, eight years later, we have not yet returned to normal conditions,” he said. “The secondary market for mortgage financing remains moribund and interest rates stand at historic lows. Although home foreclosures, mortgage delinquencies and underwater mortgages have all declined steadily, they still affect millions of consumers who continue to feel the effects of the crisis. The pace of recovery has clearly been uneven around the country, particularly in communities of color. And I agree with Federal Housing Finance Agency Director Mel Watt that the market is not yet supporting access to credit for the full spectrum of creditworthy borrowers; average credit scores for home purchase loans are still above the levels historically viewed as normal from past years.”

Nonetheless, Cordray said he sees encouraging signs. “New home sales are up 20 percent year over year, while existing home sales are back up to pre-boom levels,” he said. “Home prices are rising in many areas and positive homeowner equity is now at a record level, pushing $13.5 trillion. By the middle of this year, delinquency rates hit a ten-year low, and foreclosures were the lowest in 16 years. Consumers who had been shut out of the mortgage market for years by prior foreclosures are now returning. And the much-dreaded resetting of troubled home equity lines of credit issued in the years just before the crisis is now being accomplished with minimal disruption.”

Cordray also defended the TILA-RESPA Integrated Disclosure rule, also known as “Know Before You Owe” saying a year after its implementation, the rule has largely achieved its goals.

“At this point last year, many of you were experiencing real and legitimate growing pains around the new rule,” Cordray said. “But we have continued to work closely with the Mortgage Bankers Association and other stakeholders to smooth the implementation process. We have clarified and addressed many issues over the past year, and we have been working with investors, due diligence firms and the rating agencies to help make sure that any minor or technical errors made on the forms do not pose unnecessary obstacles to purchasing the loans.”

While more work is underway, Cordray said, kinks are being worked out and concerns are subsiding. “The number of new mortgages declined in the first month under the rule, but bounced back sharply and was up by 18 percent in the second quarter of this year versus last year,” he said. “Closing times–which had lengthened immediately after the rule took effect–have been shorter for most of this year than they were before the rule. People’s belongings are not sitting out in the street between the sale of one house and the purchase of another, and we have been encouraging exciting new approaches, such as e-closings, to ease the stodgy old paper-heavy process. We are glad to see the mortgage industry finding ways to create more convenience and insight for consumers.”

Cordray reiterated that the CFPB and other regulators remain pledged to be sensitive to the progress made by lenders, squarely focused on making good faith efforts to come into compliance with the rule on time.

“We have also said that our approach would be diagnostic and corrective, not punitive. That is precisely what we are doing,” Cordray said. “What this means is that we will be evaluating a company’s compliance management system and overall efforts to come into compliance, as well as conducting transaction testing–looking at loan files–which is of course necessary to be diagnostic. If violations are identified, we will work with the entity to determine the root cause of the issue and determine what corrective actions are necessary. As a routine part of our review, we will assess whether tolerance violations have occurred, and where found, we will require reimbursement to consumers as a remedial measure. I am happy to report that our initial examinations seem to indicate, just as we expected, that lenders did in fact make good faith efforts to comply with the rules and generally we are finding that consumers are receiving timely and accurate Loan Estimates and Closing Disclosures.”

In addition, Cordray said the Bureau continues to work side by side with industry on implementation of new reporting requirements under the Home Mortgage Disclosure Act. “In general, this rule provides better information on the mortgage market, including the reporting of data elements that will help regulators, industry and the public to understand the effects of the recent reforms,” he said. “We recognize this means yet another implementation process for mortgage lenders, so we set a generous lead time to implement the rule. For most of it, the effective date is January 2018, which means the first submission of new data is not due to the Bureau until March 2019. One change, a higher loan-volume coverage threshold for depository institutions that will exempt institutions doing a small number of loans, takes effect this January.”

Cordray cautioned that the CFPB’s mortgage servicing rules, which took effect in 2014, has resulted in some progress, most notably efforts by certain servicers to adequately staff up effective compliance management programs. But he said many troubling issues persist.

“While we applaud the investments made in compliance by certain servicers, others have not yet made satisfactory progress,” Cordray said. “Outdated and deficient servicing technology continues to put many consumers at risk. This problem is made worse by a lack of training to use their technology effectively. Needless errors impose harm to consumers facing delinquency or engaged in loss mitigation processes. These shortcomings can become chronic when servicers do not implement proper system testing and auditing processes.”

To spur needed improvements in servicer compliance, Cordray said the CFPB, in appropriate circumstances, will insist on specific and credible plans from servicers describing how their information technology systems will be upgraded and improved to resolve these issues effectively. “At the same time, we will be working alongside industry to make sure the updated servicing rules we recently finalized, which generally will take effect in October 2017, are implemented effectively,” he said. “These rules clarify certain issues, allow more flexibility in some areas, strengthen foreclosure protections, and add some important new consumer safeguards for servicing transfers, for successors-in-interest, and for borrowers who are in bankruptcy.”

Cordray touched briefly on a recent court ruling by a panel of the D.C. Circuit Court of Appeals involving PHH Mortgage, in which the court ruled that, among other findings, that the structure of the CFPB was unconstitutional.

“The case is not final at this point; the Bureau has made clear that it respectfully disagrees with the panel’s decision and is considering its options for seeking further review,” Cordray said. “In the meantime, we will continue to consider how best to apply the Real Estate Settlement Procedures Act to specific factual situations just as we always do. In particular, we continue to adhere to our 2015 bulletin identifying the substantial risks posed by marketing services agreements as we have encountered them in our enforcement actions and through our supervisory oversight.”