Tag Archives: CFPB

CFPB Issues Rule on Loan Originator Compensation

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Distorted mortgage broker incentives were one of the big problems during the Subprime Boom.  Indeed, many lenders have since stopped outsourcing loan originator to mortgage brokers because a lot of the terrible loans they were stuck with had been originated by them.  Homeowners were also frequently burned by mortgage brokers who placed them in inappropriate products.

The CFPB has just issued new rules (summary here) relating to the compensation of mortgage brokers. One of the key elements of the rule is that broker compensation cannot be based on a term of the transaction such as the interest rate.  This is intended to keep brokers from steering borrowers into more expensive mortgages solely to increase their own compensation.  This is a major consumer protection initiative because a large number of homeowners with subprime loans were eligible for prime loans with lower interest rates.  Because brokers had been financially incentivized to place them in subprime loans, that is what they did.

The new rule seeks to prevent the mortgage industry from doing an end run around the rule by attempting to identify proxies for the terms of the transaction.  Time will tell whether the proxies work as intended.

CFPB Issues New Rules To Protect Homeowners in Foreclosure

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The CFPB issued new rules today that increase protections for homeowners in foreclosure.  The 2013 Real Estate Settlement Procedures Act (Regulation X) and Truth in Lending Act (Regulation Z) Mortgage Servicing Final Rules.  These rules are a first national standard to replace a hodgepodge of practices that had been in place.  The rules come on the footsteps of the $85 billion settlement last week arising from improper foreclosure practices by the ten banks who are parties to the settlement.  The rules address many of the behaviors that infuriated homeowners over the last few years including

1.  non–transparency as to interest rate adjustments, fees, penalties and other costs;
2.  inability to speak with employees at mortgage servicers;
3.  overly complicated forms and procedures;
4.  glacially slow processing of information; and
5.  capricious review standards.

The CFPB has a fact sheet about the rule.

CFPB Releases Ability-To-Repay and Qualified Mortgage Final Rules

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The CFPB has released the final rules relating to ability-to-repay and Qualified Mortgages.  The CFPB’s Summary is currently available.

The big news is that qualified mortgages do NOT have a minimum down payment requirement.  This was a very big bone of contention during the proposed rulemaking process (which I discussed here and here).

It is also very interesting to see that the CFPB has taken the position that a total debt-to-income ratio of 43% is the maximum that is generally sustainable for homeowners.  This was a bone of contention in the FDIC’s workout of the IndyMac mess during the early years of the crisis, which I had addressed a bit here at page 807.  43% is on the high side of earlier estimates of what is sustainable, so it will be interesting to see if future default data confirms the wisdom of this position.

The rules take effect a year from now.

 

 

Republicans Issue Report Critical of CFPB’s Regulation of Mortgage Markets

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The staff of the House’s Committee on Oversight and Government Reform issued a report that argues that the CFPB is “predisposed to limit access to credit;”  “will increase regulatory burdens and reduce credit availability;” and has inadequate mechanisms to “detect access to credit impediments.”  As to mortgage markets in particular, it argues that

Lenders are reportedly requiring the highest credit scores in a decade to approve home mortgages, with an average credit score of 737 for borrowers approved for a home loan in 2011.22. The international capital guidelines outlined in the Basel III capital accords have also made mortgage loans less worthwhile for banks. An April 2012 Federal Reserve survey found that 83 percent of banks were less likely to originate a GSE-eligible 30-year fixed-rate mortgage for a borrower with a credit score of 620 and a 10 percent down payment than they were in 2006. Roughly 70 percent of those banks surveyed blamed regulatory and legislative changes for restricting lending. (3-4, footnotes omitted)

It continues,

youth4media.eu/lists/files/

the CFPB is currently considering a mortgage rule that would require a lender to verify a borrower’s ability to repay a mortgage unless the loan satisfies the definition of a “qualified mortgage.” According to Frank Keating, CEO of the American Bankers Association, the rule could “make borrowing more expensive and credit less available. Some lenders may leave the market altogether.” The rule could also increase the cost of mortgage lending, reduce consumer choice, and make it harder for consumers to compare mortgage options. If the CFPB is not careful, these rules could make it more difficult – if not impossible – for millions of Americans to purchase homes. (11, footnotes omitted)

The analysis in this staff report strikes me as fundamentally unsophisticated as it does not draw a distinction between sustainable credit and unsustainable credit.  The last bubble was driven by credit that was extended to people who could not repay it.  There is no reason we would want to see a return to those practices.

The question should be — what regulations allow for a healthy mortgage market where careful lenders make loans to creditworthy borrowers?

CFPB Issues Fair Lending Report That Highlights Data Collection

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The Fair Lending Report of the Consumer Financial Protection Bureau provides an overview of the Bureau’s actions over the last year.  Some of the most interesting elements of the report relate to future HMDA and TILA rulemaking:

Section 1094 of the Dodd-Frank Act amends HMDA to require the collection and submission of additional data fields related to mortgage loans, including certain applicant, loan, and property characteristics, as well as “such other information as the Bureau may require.” The CFPB is examining what changes it may propose to Regulation C. . . .

Finally, section 1403 of the Dodd-Frank Act requires that the CFPB prescribe regulations under TILA to prohibit “abusive or unfair lending practices that promote disparities among consumers of equal credit worthiness but of different race, ethnicity, gender or age. The CFPB has begun preliminary planning with regard to this rule. (26) (emphasis added)

Data collection about borrower and mortgage characteristics is very fraught.  Lenders have typically fought against efforts to increase such data collection as it could only hurt them if others knew their business so well.  Academics and consumer advocates have complained that data about the mortgage market is very hard to come by unless one had massive financial resources to pay private providers for it.

This was especially true, given the rapid rate of change in that market.  Working with data that is twelve months old was the same as working with outdated information during the Boom years of the early 2000s.  If the CFPB collects and analyzes data in something approximating real-time, it will be far more nimble than previous regulators.  If it shares its data with outside researchers, it is likely to become even more sophisticated in its approach to the dynamic housing finance sector.

Primary Architect of Mortgage Initiatives at CFPB To Leave

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Raj Date, the number two official at the CFPB, is leaving as the Bureau completes its mortgage regulations.  Story here.