How the CFPB Improved Mortgage Lending
by Larry Kirsch and Gregory D. Squires
“It is impossible to buy a toaster that has a one-in-five chance of bursting into flames and burning down your house. But it is possible to refinance an existing home with a mortgage that has the same one-in-five chance of putting the family out on the street—and the mortgage won’t even carry a disclosure of that fact to the homeowner,” wrote Elizabeth Warren in a 2007 Democracy article calling for the creation of a consumer protection agency for financial products. The Dodd-Frank Wall Street Reform and Consumer Protection Act brought this agency from concept to reality as the Consumer Financial Protection Bureau (CFPB). With Dodd-Frank repeal efforts under way, research on the CFPB’s first five years can show why policymakers must avoid a return to the precrisis world of weak consumer financial protections.
“Maria Cruz” represents a typical first-time homebuyer with subprime mortgages. Her story emerged from our research for the book Meltdown: The Financial Crisis, Consumer Protection, and the Road Forward. Maria is a divorced, single parent of two who earns $4,400 in monthly salary from her full-time job and around $600 more each month through overtime, bonuses, or side work. She had always rented, but decided to buy a home in a neighborhood where her kids would go to a middle school with a good reputation in science and technology. Maria’s budget was tight, but she was willing to sacrifice to ensure her children attended a good school.
A mortgage broker told Maria that a modest home was within reach. Low interest rates would make it affordable, and her home’s value would improve, making the finances work out. With a credit score of 630, Maria got a subprime adjustable-rate mortgage. The first payment was $1,701, and she paid it on time every month until the interest rate adjusted and the monthly payment rose to $1,939. She missed two payments and sought help from a housing counselor. While negotiating a loan modification, her interest rate reset again, adding $233 to her monthly mortgage payment. The modification was not going to be sufficient to make the home affordable. Four years after she bought the home, she decided to give it up through a short sale.
How the CFPB Changed the Mortgage Landscape
The CFPB was established to protect consumers shopping for mortgages, auto loans, and other financial services. In the years since, the CFPB has added protections to improve the quality of mortgage lending and increase transparency for prospective homebuyers. No longer can a borrower get a loan without a clear disclosure of the monthly payment and its potential to change over the life of the loan. Nor can lenders bypass sound underwriting principles based on borrowers’ documented ability to repay. The bureau also had enforcement powers and has secured almost $12 billion in restitution to more than 27 million borrowers victimized by the most abusive practices.
Through interviews and case studies in Meltdown, we probe some of the factors that led to success and others that presented a challenge. In mortgage lending, for example, the CFPB could enact and enforce rules, secure broad-based compliance with those rules, and transform business practices in ways it could not with auto lending.
The lending sector’s motivation and capacity have been among the key drivers of the bureau’s results. Mortgage lenders were motivated because of the industry’s obvious responsibility for some of the worst aspects of the financial crisis. The industry needed to contain and reverse its reputational damage, so it accepted responsibility, made financial amends to those victimized by unfair practices, and worked with the CFPB to reform its business practices. The industry was also sufficiently sophisticated and resourced to accept CPFB compliance and enforcement requirements. Although implementing ability-to-pay rules was not easy, the rules were put into force and gradually adapted, leading to the most significant postcrisis transformation in industry practice.
Whether buying a home to achieve residential stability, build assets, access a strong school district, or other reasons, obtaining a mortgage should not put a borrower’s housing stability and financial future at risk. The changes enacted by the CFPB have made sure that Maria and others seeking mortgage loans and other financial services can do so without fear of unclear or abusive loan terms. Improvements are still needed, especially in strengthening financial product protections beyond the mortgage market, but prospective homebuyers and financial markets are better off with a strong CFPB than without it.
Larry Kirsch is managing director at IMR Health Economics. Gregory D. Squires is a professor of sociology and public policy and public administration at the George Washington University. They are the authors of Meltdown: The Financial Crisis, Consumer Protection, and the Road Forward. This article draws on the book and their prior writing for the Huffington Post.