The deputy director of the Consumer Financial Protection Bureau (CFPB) recently talked about the agency’s effort to craft key mortgage rules ahead of a January deadline imposed by the Dodd-Frank Wall Street Reform and Consumer Protection Act. Raj Date also discussed the agency’s efforts to reform mortgage servicing and ramp up its supervision functions
In a June 11 speech at the American Bankers Association conference in Orlando, Date noted that the bureau hopes to use research, supervision, rulemaking, enforcement and consumer education as it works to protect everyday consumers of financial products and services. Date discussed the steps CFPB has taken to provide more protection for the consumer, including the agency’s supervision efforts.
“There is no more important or central policy tool than supervision,” Date said. “The Bureau can, for the first time, extend federal supervision to non-depositories. This is a critical advantage.
“After all, if you think back to the most problematic vintages of mortgages during the bubble — for example, subprime and Alt A mortgages between 2005 and 2007 — most of those problematic mortgages were originated not by supervised banks, but by mortgage brokers and finance companies who then sold those loans into capital market execution on Wall Street. The results, needless to say, were not great. But that should not have been surprising. As a practical matter, if you don’t have a consistent approach to supervision, then you don’t have an even playing field. And if you don’t have an even playing field, then you shouldn’t expect great results,” Date said.
Date explained that in order for a mortgage market to work it must be driven by financial incentives. In other words, if a lender is going to lend money, he/she should expect to be paid in return. Therefore, the lender must trust that the borrower will pay him/her back. To align lenders’ and borrowers’ financial incentives, CFPB is implementing Dodd-Frank’s ability-to-repay requirement in mortgages.
Date noted that in connection with the ability-to-repay requirement, Congress envisioned “qualified mortgages,” which lay out standards that make it sensible for lenders to expect borrowers to pay them back.
The Federal Reserve proposed its ability-to-repay rule last year and the CFPB recently reopened the public comment period for the qualified mortgage provisions. The notice seeks data focusing on the ability-to-repay provisions and any additional information on potential relevant factors, such as a borrower’s cash reserves.
“In addition, the notice summarizes analysis that the bureau has received about the potential risk of litigation in connection with the new ability-to-repay requirements, and seeks additional data from the public about that issue,” Date said.
Date confirmed that the ability-to-repay rule will be finalized before the January deadline.
The CFPB is also focusing on the payday lending industry, overdraft protection programs and mortgage servicing. Date noted that earlier this year, the bureau previewed a series of “common-sense” mortgage servicing rules the agency is considering.
“They include practical ideas on improving transparency, like: maybe servicers should give borrowers better information about how much they owe every month; or maybe they should give an earlier heads-up that an adjustable rate payment is about to change; or maybe they should warn borrowers that they are going to be force-placed into a potentially expensive insurance policy,” Date said. “We’re just at the early stages of these particular rule-makings, but I’m optimistic that we can find a common-sense path forward.”