The CFPB Takes On The Mortgage Market

Written by Raj Date
on June 22, 2012 No Comments
Categories : Word On The Street

11844_raj_date The CFPB Takes On The Mortgage Market WORD ON THE STREET: I have now been at the Consumer Financial Protection Bureau (CFPB) for a year and a half. It has been the most challenging and gratifying 18 months of my professional life. In my various roles at the bureau, I've had the chance to talk to a lot of different audiences.

We have done a lot of work since the Dodd-Frank Act was passed two years ago. You can divide that work into two categories. The first is our substantive policy agenda – we want to be able to deliver tangible value to American consumers. We want to be able to help fix these markets. At the same time, though, we know that we need to be building a great institution. We need to make sure that the institutional habits we get into, the people that we attract, the capabilities that we build all allow us to accomplish that mission over time.

Our supervisory function is off to a great start. Steve Antonakes, our assistant director for bank supervision, has always talked about how if we're doing our jobs right with supervision, our supervised entities will say that we're tough-minded but fair. We are not sneaking up on anybody. We try to be transparent about what matters to us and what should matter to the firms that we supervise.

At the same time that we've been building our capabilities, we have been executing against our policy agenda. We've made tangible progress in a number of markets. We've launched an evaluation of overdraft protection and payday lending. We've worked to help students better understand their financial options. And we've started figuring out whether shorter, more transparent credit card agreements can really make a difference to consumers' understanding.

These are critical analytical efforts. Just take one example: overdrafts. The Federal Reserve Board instituted a so-called opt-in regime for checking account overdrafts that took effect in 2010. Other prudential banking regulators followed up with supervisory guidance, which addressed additional overdraft issues.

Unfortunately, today there are slightly different expressed perspectives on the propriety of various overdraft practices across the regulatory agencies. Having slightly different rules – depending on who your regulator is – is not the best possible outcome. We can help change that. And the way that we are going to change that is by taking a single lens to the entire marketplace and by doing foundational analytical work.

We are doing things in a lot of different markets. But, as you might imagine, the place we're spending most of our time is in the mortgage market.

I recently saw a chart that showed nominal interest rates on U.S. mortgages for the last 35 years. It was astonishing. It's a long, almost uninterrupted downhill slope. American consumers have enjoyed steadily lower, more attractive mortgage rates over nearly that entire period. This was a fantastic benefit to the American consumer, to the housing market and to the economy as a whole.

A lot of macro factors enabled that over time. One of the most important factors was the development – and until recently, the maintenance – of a global capital market infrastructure to fund and price residential mortgage risk. But as we have painfully learned, not all was as it seemed. Not all was as it was supposed to be.

The American mortgage business was supposed to be the broadest, deepest, most liquid, most sophisticated consumer finance market in the history of the world. But it failed us. It failed us because it failed to calibrate price, and it failed to calibrate risk. The result was that millions of homeowners ended up in loans that they either couldn't understand or couldn't afford, or both. And we are still slowly, painfully recovering.

So mortgage reform is appropriately front and center on the CFPB's agenda. The mortgage crisis and the financial crisis have impacted every person in this country and, in a professional way, every person in this room. The crisis has had a profound impact. But let me tell you what the crisis has not done: The crisis has not made us, at the CFPB, doubt the value of free and competitive markets.

Quite the contrary – the failures of the mortgage market underscore just what functioning, efficient markets are supposed to look like. They're supposed to be transparent; they're supposed to be fair; they're supposed to create financial incentives for hard work and smart decisions.

I want to share with you how the CFPB is helping to rebuild those elements of a well-functioning mortgage market – how we are helping to restore transparency, fairness and proper financial incentives.

Let me start with transparency. Markets don't work well if both parties to a transaction don't understand what they're getting into. At the CFPB, we are already hard at work on this issue. We are working to integrate and simplify needlessly complicated federal disclosure forms. The idea is for borrowers to have a better chance to actually understand the price and risk profile of their obligations, and that's better for everyone involved.

We're also bringing greater transparency to mortgage servicing. Earlier this year, the bureau previewed a series of commonsense rules that we are considering. They include practical ideas on improving transparency. For instance, 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.

We're just in the early stages of these particular rule-makings, but I'm optimistic that we can find a common-sense path forward. So basic transparency is a priority for the bureau. But so is basic fairness.

Federal consumer financial protection is about fairness with respect to consumers. But fairness among financial services firms matters, too.

Finally, we should all want a mortgage market that is driven by financial incentives that make sense – financial incentives that reward hard work and smart risk-taking.

Let me say a word or two about risk-taking. There is nothing inherently wrong with risk. Risk – liquidity risk, credit risk, counterparty risk, market risk, interest-rate risk – is why financial markets exist. Risk is why bankers get paid. But nobody should get paid for taking risk that they can't understand, they can't rank, they can't quantify or they can't price.

Not to put too fine a point on it, but the secondary mortgage market should work like every other competitive market in the economy. If you are smart and take smart risks, then you should get paid. But if you are taking bad risks, then you shouldn't get paid. For too long, we lived in a mortgage marketplace where people were able to take bad risks and get paid anyway.

You know, I've spent the vast majority of my career in consumer finance. I've been in and around finance companies, commercial banks and investment banks. And through all of that, I have learned one thing above all others. Sure, there are bad mistakes, and there are bad breaks – and, yes, there are some bad people. But fundamentally, when all is said and done, people are generally good, and they generally do what they are paid to do.

So if we want businesses to do the right thing, they shouldn't be paid to do the wrong thing. Bankers shouldn't win when customers lose.

Raj Date is deputy director of the Consumer Financial Protection Bureau. This article was adapted and edited from a June 11 speech delivered before the American Bankers Association Conference in Orlando, Fla. The original text is available online.

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