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Richard Cordray, Director of the Consumer Financial Protection Bureau, Discusses Mortgage Rules at Consumer Federation of America Meeting
Just like it took exposure of the filth in the meatpacking industry to usher in the Food and Drug Administration; just like it took the discovery that safety was taking a backseat to comfort with the auto industry to establish the National Highway Traffic Safety Administration; so too it took the collapse of the mortgage market and the ensuing financial crisis to bring to life the Consumer Financial Protection Bureau.
As Frank Lloyd Wright once said, “There is nothing more uncommon than common sense.” That quotation epitomizes the heady years preceding the financial crisis of 2008. Reason and sound judgment were absent when many banks and other mortgage businesses lent to consumers without even considering whether they could pay back the money. The supposedly rational market had become wildly irrational.
If you want to buy a home, you need to assess your choices carefully before signing up for a 30-year debt. But you should not have to worry about getting lured into something that will ruin your future. The proposed terms of the deal should be clear and understandable. If you do your homework and follow plain logic, you should be positioned to make a responsible decision that you can live with over time. And if you do run into trouble down the road, you ought to be able to talk with someone who will be responsive in helping you work through the options available to you.
For many years now, the American people have wanted to have someone stand on their side and help make sure they are not getting tricked into a bad mortgage deal. So at the Consumer Bureau, we started right off by focusing on this market – the single largest consumer finance market in the world, valued somewhere between nine and ten trillion dollars. We have taken action to make it work better for American families. As I stand before you here, we are now only five weeks away from returning to a “back to basics” approach to mortgage lending practices. No debt traps. No surprises. No runarounds. These are bedrock concepts backed by our new common-sense rules.
Let me start with our first back-to-basics approach: no debt traps.
For most people, buying a home means taking on a mortgage. That mortgage may well be the largest financial obligation of their lifetimes. But it can be difficult to figure out how much house – and how much mortgage – is the right amount. Consumers can easily be confused by the intricacies of escrows, interest rates, private mortgage insurance, taxes, various fees, and changing monthly payments. So most people rely on mortgage professionals to tell them how it all works. And they assume that the lender will not lend them money unless the lender is confident it can be repaid.
But if your lender does not check out the important facts, like your income, savings, and debt load, it is impossible for the lender to know how much you can spend each month on a mortgage. Or if your lender only looks at whether you can afford monthly payments under an introductory teaser rate, you may not be able to pay the mortgage after that cheaper rate expires. The result can be that you end up getting in over your head and risk losing your new home.
In the lead-up to the crisis, we saw this happen over and over again. Some mortgage businesses stopped their inquiries well short of the kind of due diligence needed to lend money responsibly. Some joined their customers to engage in wishful thinking. Some tricked people into believing they could afford loans they could not. Some actually falsified the numbers to make them look like they would work. Certainly some of these consumers should have known better and made very bad choices. But too many consumers did not even recognize the risks they had taken on until it was too late.
So our new Ability-to-Repay rule changes all that. It says that lenders must make a reasonable, good-faith determination that you can afford the mortgage before you take on the debt. Now obviously mortgage lenders do not have a crystal ball: they cannot predict if you will lose your job or have an unexpected financial emergency. But they must look at your income or your assets, must look at your debt, and must weigh those against your monthly payments over the long term – not just a teaser rate period. Lenders then can offer you any kind of mortgage they believe you can afford to pay back. This is a very basic concept. In fact, it is certainly the very foundation of responsible lending. But we had sunk into the financial crisis because some irresponsible lenders had chosen a different path, and many others followed suit by trying to compete with those irresponsible lenders.
Of course, certain types of mortgages are more likely to become a trap for the borrower. So our rule lays out some basic guidelines. Loans that meet these guidelines are known as “Qualified Mortgages.” These mortgages must have relatively low points and fees, and they must follow some general underwriting guidelines. They also cannot have certain risky features, such as paying interest only and not principal, or even paying less than the full amount of interest so that each month you owe more than you did before.
If lenders choose not to follow these guidelines, they still can make a loan to you based on their reasonable, good-faith determination that you are able to repay it. To do so, they must verify and document the numbers and must consider certain factors. Either way, mortgage lenders cannot seek to trap you in a loan when they should recognize that you cannot afford it. Once again, the whole point is that they cannot lend to you without determining that you are able to repay.
Let me just take a moment to dispel some myths about what our Ability-to-Repay rule does and does not do, because many rumors have been going around. The rule does not change anything about your current mortgage; it only applies to new mortgages that you apply for on or afterJanuary 10, 2014. And it does not stop lenders from lending to any borrower with a debt-to-income ratio above 43 percent; this particular claim is wrong in three ways. First, lenders can also rely on the standards for loans backed by the GSEs or federal housing agencies. Second, smaller local creditors can make the same kinds of solid loans they have always made if they choose to keep those loans in their own portfolio, as they often have done in the past. Third, lenders can simply use their own judgment when looking at your ability to repay, just as they always have done. Another myth is that this rule restricts down payments; in fact, it says nothing about how much of a down payment you have to make on the house, but leaves that entirely up to you and your lender.
In the end, our Ability-to-Repay rule is straightforward. It puts behind us the irresponsible lending that disrupted the housing market and so badly damaged our economy. And it provides strong new consumer protections while preserving needed access to mortgage credit.
Our second back-to-basics approach affects the mortgage servicing market that performed so poorly in recent years. The central principles are no surprises and no runarounds. Simply put, you should not be hit with surprises by those responsible for collecting your payments. If you bought a home and are paying back your mortgage, our rules require mortgage servicers to keep you informed about your loan. Our rules require the servicer to answer your questions about your loan and to investigate and fix errors. You should be able to see how your payments are credited. You should not be caught off-guard when interest rates adjust. And you should not be slammed with fees that seem to come out of nowhere.
Our new rules will help every borrower, whether or not they struggle to make their payments, by bringing greater transparency to the market. This means you will always know what is going on with your mortgage. You will not have to guess how much money you owe or when you owe it, because mortgage servicers are now required to send monthly statements that show how they credited your mortgage payment. The statement puts all the important information in one place, showing you the interest rate, loan balance, escrow account balance, and where the payments are going. And you will get ample notice when your interest rate adjusts. This is valuable, practical information to guide your choices and actions. That is exactly what we are requiring.
To clean up the servicing market, we also are taking square aim at practices that have constantly given consumers the runaround. Our rules require mortgage servicers to treat you fairly – when things are going well and also when you get into trouble. It is time to put the service back into mortgage servicing. Mortgage servicers have made too many mistakes, lost too many records, and misprocessed payments too often. These problems have been endemic to the industry. So starting on January 10, our new rules require some very basic things. For example, servicers generally will have to credit mortgage payments as of the day they receive them. If you report errors on your bill or account, the servicer must investigate and fix any mistakes.
For consumers who are in trouble, getting the runaround is not just frustrating, but can mean the loss of their homes. They need good information and actual help. Our rules require that mortgage servicers must provide accurate information about available options to save a home or to work out a problem. The goal is to avoid needless foreclosures, which is in the best interest of the borrower, the lender, and our entire economy. So let me run through how our rules address servicer runarounds in key respects.
First, we restrict “dual tracking” by barring servicers from starting foreclosure proceedings until the borrower has missed payments for at least 120 days. This allows them time to understand their options and apply for help, which the industry calls “loss mitigation.” Once a completed application for loss mitigation is submitted, the servicer cannot commence or complete the foreclosure process until the servicer has addressed the application and the consumer has had an opportunity to respond.
Once borrowers become delinquent, servicers must inform them about the options available and instructions for how to obtain more information. They also must have policies and procedures in place to provide direct and ongoing access – the term of art is “continuity of contact” – to personnel who are responsible for helping struggling borrowers. No more endless phone trees or dealing with people who lack access to or awareness of the relevant files.
Once the borrower submits a timely application for loss mitigation, no foreclosure sale can occur until all other available options have been considered. These options can range from deferring payments to modifying loans or even a short sale, among other things. And the servicers can no longer serve themselves by steering you to those options that are most favorable to them. In addition, servicers cannot foreclose on a property once a loss mitigation agreement has been reached, unless the borrower fails to perform under that agreement.
These measures can often determine whether people save or lose their homes. That is not just an economic matter. For many, their home is the only safe place in their lives, the fundamental constant in their family relationships, and a key symbol of their progress in climbing the ladder to success in life. Those deep emotional attachments show just how much is at stake here.
Our servicing rule has also spawned an erroneous myth: that these new measures are overly burdensome and will bog people down in red tape. On the contrary, these measures are not new at all. They are exactly what good community banks and credit unions have been doing for many, many years. They amount to little more than taking the time to work directly with your customers to address their circumstances. In short, our rule means simply that mortgage servicers must now do their jobs. It may seem silly that we need rules to tell servicers to answer the phone; not to lose people’s paperwork; to tell borrowers how much they owe. It might also seem silly that we need a rule telling lenders they must pay attention to whether borrowers will be able to repay the money lent to them. But we have lived through the financial crisis. We have seen with our own eyes the grave dysfunctions in the mortgage market. There was an embarrassingly long list of things that should have happened but never seemed to happen. Our new rules are aimed at setting things right again.
All of the protections just described will help end a failed process in which too many struggling homeowners have been kept in the dark about where they stand. Too many Americans have been forced to roll this rock up the hill only to see it roll down again, repeatedly. People deserve better; they are entitled to be treated with respect, dignity, and fairness.
Importantly, these new mortgage rules will have to be followed across the entire marketplace. It no longer matters whether a loan is made by a bank or by some other kind of financial firm. It no longer matters what kind of company is playing the role of your mortgage servicer: the same basic rules apply. And our mortgage rules are backed by the full supervisory and enforcement authority that Congress has vested in the Consumer Bureau. We will be vigilant about overseeing and enforcing these rules.
As we saw in the lead-up to the financial crisis, common sense turned out to be not so common. By bringing back these basic building blocks of responsible lending and servicing the customer, we will improve conditions for consumers seeking to enter the market and for all those who are still struggling to pay down their existing loans. By making the mortgage market work better, we will build consumer confidence and strengthen this essential foundation of our economy.
It means a great deal to our new Consumer Bureau to know that our allies at the Consumer Federation of America have members with boots on the ground in communities both small and large all across the United States. We urge you to help us spread the word about how consumers can make the most of this new agency. Make sure they know that they can file consumer complaints to tell us about the problems they see. Work with us to help educate them about the specific ways they can look forward to a new and better marketplace. Send them our way towww.consumerfinance.gov/mortgage, where they can find out more about all of these matters. Common sense, after all, serves the common good. You know this very well. You worked hard to help put this new agency in place. You have supported us in bringing about these new rules, and we have much more progress yet to come. Let me say very plainly that we are grateful for all you have done, and we look forward to a long future of working together to achieve our common goals. Thank you.
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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.