CFPB's Balancing Act: Protecting Consumers While Preserving Credit Access

The Consumer Financial Protection Bureau is expected to release its final mortgage rules in the next few weeks, and soon lenders will have to underwrite loans to fit the so-called "qualified mortgage" and ability-to-repay rules, among other requirements.

While lenders will be scrambling to meet the deadlines, the CFPB faces its own challenges in implementing rules throughout this year.

Few understand the challenges as well as the bureau's assistant director for regulations, Kelly Cochran, who has helped craft the mortgage rules that address everything from servicing, disclosures, loan originator compensation, high-cost mortgages and appraisals.

"For us, just building the agency as we were writing the rules made it extra challenging," says Cochran, who joined the CFPB in its early stage after advising the Treasury Department on consumer protection issues. "But we've gone through that now and we can begin to think about where we are, what we have done, and how to refine our processes going forward."

One of those future processes is consolidating the mortgage disclosures for the Truth-in-Lending Act and the Real Estate in Settlement Procedures Act expected to come out later this year. American Banker recently sat down with Cochran to discuss efforts in crafting the mortgage rules, the impending mortgage disclosures and the potential burdens on small lenders. Below are excerpts from the interview:

What were the key goals for the CFPB when putting together the ability-to-repay and qualified mortgage rules?
COCHRAN: Our focus was on crafting a rule that best protects consumers while preserving access to responsible credit. In implementing the Dodd-Frank Act requirements, we were creating guardrails to ensure that pre-crisis practices such as "no-doc loans" and underwriting only based on initial teaser interest rates would not return to the market. Yet at the same time, we knew that there was anxiety about the statutory requirements and we want to preserve access to credit in today's already very tight credit market.

Balancing all of these considerations was particularly challenging because there were so many pieces of the Dodd Frank Act that were on the table at one time, so we needed to think about how those interacted with each other as well as implementing each one in their own right.

It was also an unusual process because the ability-to-repay rule transferred to the Bureau mid-stream from the Federal Reserve Board. We did additional research, we did a great deal of additional outreach, we reopened the comment period, and worked through all of the issues. We wanted to be really thoughtful about the way we approached that rule and its implications.

There were a number of proposals that were built into the final rule when it was released in January. What were the key issues that drove those added proposals?
There were three pieces. First, we invited comment on certain potential exemptions for nonprofit creditors, certain housing finance agencies and community development and homeownership stabilization programs. Second, we sought comment on some provisions concerning small creditors, in particular a provision to give qualified-mortgage status to certain loans by small creditors, including most community banks and credit unions, when those loans are held in their own portfolios. Both of these pieces were prompted by concerns that implementation burdens on particular types of creditors might have negative impacts on access to credit for consumers.

The third issue concerned how loan originator compensation counts toward the points-and-fees cap for qualified mortgages under the Dodd-Frank Act.

There are a lot of very technical issues there in terms of how you track money as it flows from party to party in the transaction, for instance potentially from the consumer, to the creditor and on to individual employees or onto a broker. I think it's one of the most technically challenging parts of the rule.

Now that the Bureau has gotten past the brunt of rules it was required to release in January, what's the next step?
First, we're going to be working with all stakeholders in the next year to make sure that mortgage rule implementation goes well. It's a huge relief, of course, to have met the deadlines. But we feel like it's very much still a living and breathing process. We want to help lenders implement the rule smoothly and minimize unnecessary burdens because we know consumers will benefit from efficient implementation.

Also, the rulemaking to implement provisions of the Dodd-Frank Act requiring us to integrate various mortgage disclosures under the Truth-in-Lending Act and the Real Estate in Settlement Procedures Act wasn't on the same timeline under the statute as the other mortgage rules, so we're digging back into that rulemaking and expect to issue the final rules later this year.

In addition to issuing the mortgage rules, the bureau has been seeking out good data and information in other key consumer financial services markets to get a clearer sense of the challenges and risks facing consumers. We are continuing to digest and analyze the information we have gathered through these processes to think about prioritization. We know rulemaking is not the right tool for every problem, and we have to think very carefully about how we use our resources at the bureau to structure our work going forward.

Where is the Bureau at in meeting the TILA/RESPA consolidation?
We're preparing to perform quantitative testing of the forms, as well as sifting through the comments to resolve various issues in the rulemaking. Before we proposed the rule, we tested the forms with small groups of consumers, creditors, and brokers. But before we finalize the proposal, we wanted to test it with a larger group of consumers to make sure that we've got the forms right. That's really important and it's obviously critical to the mortgage market.

We would like to finish the rulemaking as quickly as we can. At the same time, we know people are very focused on implementing the other Dodd-Frank Act mortgage rules right now.

Who are these group participants on this TILA/RESPA quantitative analysis?
We will be testing the forms with a diverse group of about 850 consumers in several different regions of the country. The participants will be screened from a broader pool of potential respondents to identify people who have purchased or refinanced a home in the past or expect to participate in purchasing a home within the next several years.

One of the complaints we hear when any rule is released is all the extensive and complex language to rules. Is there a way to try to avoid another 200-page booklet?
It's a funny thing. We want to make the rules and the compliance guides as plain-English as we can. At the same time, we get a lot of questions with people wanting to know detailed answers to detailed operational questions. There's a balancing act because it's hard to make things short and also detailed enough to be useful to people. Our goal is to make the guides as practical and plain-language as we can while still being accurate and useful to people who have to operationalize this.

Now that the comment period on the ability-to-repay rule has ended, do you expect to be releasing the final rule soon?
We are moving as quickly and carefully as possible and we expect to issue the final rule this spring.

Do you feel that those exemptions for smaller institutions and rural counties really address the concerns from the community banks?
We received extensive comment throughout the rulemaking process about potential negative impacts of the ability-to-repay rule on small creditors, and believed that the issues raised were important enough to merit further exploration.

There are some very concrete reasons and data indicating that small lenders who are holding mortgages in their portfolio have a way of doing business that is often very beneficial to consumers. Based on this information, we believed it was appropriate to propose creating a separate category of qualified mortgages for certain small creditor portfolio loans. We also sought comment on whether to raise the rate threshold that differentiates qualified mortgages that receive a safe harbor under the rule from those that receive a rebuttable presumption of compliance for small creditors that make certain types of qualified mortgages. We know that small creditors may have higher costs of funds than their larger competitors, so we thought it was important to seek feedback on whether to adjust the threshold.

We received extensive comment on both of these issues, as well as other concerns from small creditors for instance with regard to the way the Dodd-Frank Act treats balloon loans. We are taking the concerns raised about impacts on small creditors and access to credit very seriously as we work to finalize the rule.

How do you respond when bankers say they can't afford to comply with all the rules or don't have efficiencies and scale to do this?
First, we are required by law to consider the potential benefits and costs of each rule we promulgate, including the rule's impacts impact on smaller creditors and rural areas. So, we take that seriously and thought carefully about that as we went through the rulemaking. We made a number of adjustments to the original proposals to address implementation concerns, including expanding the definition of "rural or underserved" counties for purposes of the rules on escrow accounts and balloon payment qualified mortgages, adjusting the requirement that certain loans be held in portfolio to make it easier for small creditors to comply and maintain qualified mortgage status, the fact that we proposed an additional category of qualified mortgages for certain portfolio loans by small creditors, and that we expanded a proposed exemption for small servicers under certain parts of the servicing rules.

All of those things were instances where we tried to be very careful and thoughtful in the way that we calibrated the need for regulation, the benefits to consumers, and the potential impacts and burdens on industry stakeholders. One of the reasons we think that the implementation support initiative is so important is because we know that smaller institutions do not have huge compliance and legal staff to help with the implementation process. We're sensitive to that.

The CFPB has been gathering a lot data on mortgages from financial companies. Are you satisfied with the information you're receiving from them?
The CFPB has made being a data-driven agency a top goal that is incorporated into everything we do. So, we've appreciated all the information that we've received through the mortgage rulemakings. At the same time, there is still more data that we wish we had. For instance, understanding impacts on mortgage lending in rural areas is a challenge given limitations on how data is reported under the Home Mortgage Disclosure Act.

As we have more time going forward, we will continue to build our data resources through cooperation with other agencies and other mechanisms. For instance, we've partnered with the FHFA to create a national mortgage database to assist in our efforts to monitor the market going forward. The need for better data is also one of the reasons, for instance, that the Bureau has been publishing requests for information to build our research knowledge about other consumer financial services markets over time.

What is the agency doing to make sure that the rules it issues are properly translated down to the thousands of underwriters at large financial companies?
We're trying to think of a variety of different mechanisms and ways that we can be helpful. For example, publicly posting our exam procedures so that people will know what we're looking for; and publishing additional guidance so that they have answers to interpretive questions as they arise.

Obviously, people have to make business decisions, they have to think about how their systems are going to have to be modified, and they're going to have to train their people. We'll learn as we go along as to how best we can support these various efforts and where there may be a need for us to provide additional materials. We view it as an evolutionary process so as we go along and get more feedback, we'll see where we can be more supportive.