Has the Consumer Financial Protection Bureau (CFPB) gone overboard with mortgage regulations?
I have been helping families get great home loans throughout Texas for over 23 years. While the process my clients have to go through to get a home loan has never been easy, I have noticed that it has gotten increasingly difficult for them and me over the past 7 years or so.
Even during the years of easier credit and more flexible underwriting prior to 2007 and 2008, I always made sure my clients could afford their mortgages and that they knew all the terms and details of the home loan package they were getting. When the national housing and mortgage crisis hit and the industry changed, I agreed (and still do) that the national lending environment had gotten too loose, and needed reigning in with some reforms and more conservative guidelines.
However, the resulting federal agency that was created out of the Dodd Frank reform, the Consumer Financial Protection Agency (CFPB), turned out to swing the pendulum way too far in the other direction in my opinion. Over the next 7 years, this agency has grown in size, power and authority, answering to nobody, not Congress, not even the President. The agency’s top executive , Richard Cordray, has been described as the “2nd most powerful man in the government”, behind only the President himself. Banks and lenders have been sued and fined by the CFPB for various violations and missteps over $5 Billion so far. Despite many pleas by the industry for clear rules and direction from the federal agency on how lenders should operate, the CFPB largely guided the industry via “regulation through enforcement”, levying fines and penalties against banks and lenders to send a message to everyone else.
The message has been heard loud and clear, but it may not be the message that consumers want to hear. Easy as it is to point the finger of blame for the nation’s recession on big banks and Wall Street and cheer as punching bags like Wells Fargo get hit time and time again with fines over hundreds of millions of dollars, the net result has been a severe tightening of consumer credit in the marketplace. Banks and lenders have drastically pulled back in making loans, fearing the risk of making any mistakes that might result in having to buy back loans or pay penalties or fines they deem arbitrary.
Many lenders have chosen to get completely out of the mortgage lending industry, and those that are still lending are much stricter on consumers’ credit and financial qualifications. The cost to originate a mortgage loan has skyrocketed, due primarily to the high cost of regulatory compliance. Recent studies show the average cost to produce a mortgage today is approximately $8,000, with a large percentage of that for regulatory compliance. These rising costs cause the consumer to pay more for a mortgage. The national average time it takes to close a mortgage loan is 52 days, and the average conventional borrower FICO score is 726. This has left many deserving and qualified potential homeowners left out of the credit market.
While I agree that the lending industry must be regulated and lenders must operate within the boundaries of prudence and good sense, the pendulum needs to swing back toward the middle a bit. Home ownership is at a 50 year low right now, with only 62% of Americans owning their home. Millennials are the largest demographic of our population, and many of them fear that owning a home will be out of their reach. The current administration has talked of reducing regulation and restructuring the CFPB in a way to make it more accountable to the government, both of which could be good news for consumers.
President Trump, Congress and new Treasury pick Steve Mnuchin are all looking at easing the government regulatory burden on the lending industry, and I believe this would be a good thing for consumers and homebuyers. The executive order signed last Friday by President Trump to roll back the Dodd Frank Act will bring this issue to the forefront. We will be watching the developments on this and putting out updates in the future.