The director of the Consumer Financial Protection Bureau talks about the January 2013 deadline he faces for a long list of new rulemakings. He says the industry has “a long way to go” in improving the consumer experience in servicing.
Mortgage Banking
September 2012
By Robert Stowe England
Richard Cordray is the first director of the Consumer Financial Protection Bureau (CFPB), a regulatory agency with vast new regulatory powers over the mortgage market. His Jan. 4 recess appointment was made by President Barack Obama in the midst of dispute over whether the Senate was in recess at the time.
Before his appointment as director, he served as the head of enforcement for the CFPB, which was created by Congress in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. As a recess appointment, he cannot serve a full five-year term unless he is formally nominated and confirmed by Congress next year. His term will expire with the current Congress.
Prior to joining the bureau, Cordray, 53, was Ohio’s attorney general (AG) from 2009 to 2011, where he was a vigorous consumer advocate. While AG, he reached a $1 billion settlement with the American International Group (AIG) in a 2007 antitrust case brought on behalf of Ohio’s public-sector employee unions.
Under Cordray, Ohio joined a lawsuit in 2009 against former Chairman and Chief Executive Officer Kenneth Lewis and other top executives at Bank of America, alleging they did not disclose losses at Merrill Lynch ahead of their acquisition of the company at the height of the 2008 financial crisis. Despite rumors of a possible settlement, the case is still moving forward.
The Better Business Bureau serving northwestern Ohio and southwestern Michigan in 2010 presented Cordray with an award for his work to protect consumers.
In November 2010, Cordray was defeated by Republican challenger Mike DeWine for another term as Ohio attorney general.
Cordray earlier served as Ohio’s elected treasurer in from 2007-2009; before that, he was Franklin County’s elected treasurer from 2002 to 2007.
As Ohio treasurer, he resurrected a defunct economic development program that provides low-interest loan assistance to small businesses to create jobs, relaunched the original concept as GrowNOW, which was an Ohio-based partnership between banks in Ohio and the Ohio Treasury. The program allowed small business to obtain a 3 percent bank loan when they link the loan to job retention or growth in Ohio.
The program claims to have prompted hundreds of millions of dollars in loans to small businesses in Ohio. Cordray also set up a Bankers Advisory Council to share ideas about the GrowNOW program with community bankers across Ohio.
Cordray began his political career by winning a seat in the Ohio House of Representatives in 1991 and served until 1993. He was appointed Ohio’s first state solicitor in 1993 to argue cases before the Ohio Supreme Court and the U.S. Supreme Court. He has argued seven cases before the U.S. Supreme Court, including by special appointment of both the Clinton and Bush Justice Departments.
Cordray ran unopposed for the Democratic nomination for Ohio attorney general in 1998 but was defeated by Republican incumbent Betty Montgomery. He ran unsuccessfully for the Democratic nomination for U.S. senator in 2000.
Prior to his career as a state and federal regulator, Cordray was an adjunct professor at the Ohio State University College of Law, Columbus.
He received his bachelor of arts degree in legal and political theory from Michigan State University in East Lansing, Michigan; a master of arts degree from Oxford University in England; and a J.D. from the University of Chicago Law School, where he was editor-in-chief of The University of Chicago Law Review.
Cordray clerked for Judge Robert Bork on the U.S. Court for the District of Columbia, and later clerked for Supreme Court justices Byron White and Anthony Kennedy. In 1987 he became an undefeated five-time Jeopardy! television game show champion. He lives in Grove City, Ohio, with his wife Peggy, a professor of law at Capital University Law School in Columbus, and twins, Danny and Holly.
Cordray is frequently mentioned as a potential 2014 Democratic candidate for governor of Ohio.
Mortgage Banking caught up with Cordray at his office at the CFPB recently to ask about the pace and direction of a raft of new regulations affecting the mortgage market.
Q: What do you consider the most significant mortgage-related rulemaking on the agenda of the CFPB?
A: Actually, there are several--but the one we have been working on the longest is the Know Before You Owe rulemaking, which, as you know, [is] work that is being done at Congress’ explicit direction to combine the two different [disclosure] forms that long bedeviled, confused and burdened both consumers and industry alike around the mortgage transaction. That’s a major job. [For] . . . over 20 years there was a lot of agitation for that to be done--and it did not happen, partly because it is hard. You take something that’s large and complicated, and turned it into something that’s shorter and more streamlined. We’ve been working hard at that.
We have had tremendous input on that rule, both through our own testing and through comments on the proposed forms, which have gone through several refinements. And we have gotten tremendous input through our Small Business Review Panels and will, I assume, receive huge amounts [of input from] the notice and comment process before finalizing the rule.
I would also say that you made me pick one [rulemaking], but the ability-to-repay rule substantively is very significant for the mortgage market, as many people have taken much time to tell us and walk us through their perspective. That’s another one that’s being finalized by the end of the year. In what is currently a difficult and restricted--really fragile--mortgage market, we want to make sure that that rule is consistent with revitalization of the market while at the same time protecting the consumer.
Q: Which CFPB rulemakings do you expect to be finalized by January 2013?
A: There are multiple mortgage rulemakings that have to be finalized by January of 2013. If they are not finalized, there are statutory provisions in Title XIV of Dodd-Frank that will take effect in a self-executing way.
The way to look at these multiple rulemaking processes is we have the opportunity to take what Congress legislated and take input from consumers and providers alike, and contour some of the provisions [in a way] that is operational in the real world. That’s something Congress authorized us to do and, I think, clearly expected us to do.
We understand that we need to meet those deadlines. If we don’t, we will affect this market because statutory provisions will kick in--and after rules are finalized later they will have to adjust additionally, which is not what anybody wants. So, I think it’s in everyone’s interest for us to finalize these rules by the deadline.
Those rules include the ability-to-repay rule; the mortgage servicing rules, that frankly, if you had left me freedom of the road, I would have said there are really three most important sets of rules we are dealing with: the TILA/RESPA [Truth in Lending Act/Real Estate Settlement Procedures Act] integration, the ability-to-repay rule and the mortgage servicing rule. Many of the provisions in our mortgage servicing rule--not all--have to be done by January.
We also have some other rulemakings that have to be done by January. There’s the HOEPA [Home Ownership and Equity Protection Act] rule that has be finalized. There’s a rulemaking affecting appraisers and there’s the mortgage loan origination compensation rule.
We will build on the work that the Fed has done, but we will have more work to do between now and January. As you can see, it’s a big plate of rules around the mortgage markets. It’s a huge focus for us right now.
Q: Does the CFPB take into consideration the effect of its rulemakings on limiting the overall volume of mortgage credit, as a guiding principle?
A: That actually is one of the handful of very specific objectives that Congress laid down as guiding principles for the bureau generally . . . as we consider our actions, we are supposed to take account of the possible effect of our work on the access to credit.
In effect, Section 1021(b) of Dodd-Frank lays out five principle objectives of the bureau, one of which is to ensure that markets for consumer financial products and services, including the discrete mortgage market, operate transparently and efficiently to facilitate access and innovation. I think the thinking there is [that] it’s great for us to write a lot of protections for consumers on consumer credit, but if they can’t get credit, we haven’t accomplished anything and we really haven’t improved life for consumers.
Q: Some small lenders are concerned that the coming plethora of new rules may drive them out of the mortgage business. Given the mounting cost and complexity of compliance, how is CFPB addressing this concern?
A: We are sensitive to that concern. Our statute reflects a recognition that small community banks and credit unions--I speak only, for the moment, of financial service providers--did not themselves really contribute in any meaningful way to the financial crisis, credit crunch and economic meltdown that the country has suffered through.
They are, of course, exempted from our supervisory and enforcement authority if they have assets of less than $10 billion. We are looking at how our rules and our other actions will affect smaller institutions.
We are required by law--uniquely among the banking agencies--to conduct Small Business Review Panels to expressly consider and exclusively consider the effect of our proposals on smaller providers. And [we are required] to do that early in the process, before we have even formulated a regulatory proposal, so that we can have their input and take account of it, lessen the burden, when possible, to consider operationally how rules would affect them, and to get their thoughts and insight into how they think we should consider devising our rules.
It is frankly [a concern] raised to us all the time when we go out around the country, which we do regularly. We have consistently convened roundtables of community banks or of credit unions. We’ve touched the associations of community banks in all 50 states. We also hear from people on the Hill, who hear from the same smaller providers in their constituencies. And their constant refrain for us is to be sensitive to the fact of who caused the crisis, who didn’t, where should the regulatory burden fall, where should it not.
One of the things we’ve said we are willing to consider is initially creating exemptions and thresholds for how our rules apply to smaller providers. And we are, as I said, taking their input, which is substantively affecting the way we’re writing rules--including, for example, TILA/RESPA.
Q: Treasury issued a white paper in February 2011 that called for the private sector to become the dominant provider of mortgage credit in the future. Does the CFPB also see that as the likely best outcome?
A: Much of this is going to turn on how Congress approaches the issue of GSE [government-sponsored enterprise] reform. This is a critical market. It’s the largest single consumer finance market. Exactly what the shape of financing will be in a market where securitization played such a large part for a number of years and now has gone fairly dry, is hard to scope out from the current vantage point.
Q: In the proposed combined RESPA/TILA disclosure rule, some have criticized the inclusion of more fees into the annual percentage rate [APR], which, in turn, might impact the high-loan triggers tied to the APR. Will CFPB consider adjusting the triggers to rebalance the combined effects of the disclosure and the triggers in proposed new HOEPA rules?
A: It’s been important to us to try to make the APR as fully reflective of the true cost of mortgages as possible. We also have found, and I think it’s been no secret, that in our consumer testing, consumers are confused. I think that both the Fed and HUD [the Department of Housing and Urban Development] concluded this 15 years ago.
We see this activity confirmed in our consumer testing about what the APR means and whether that meaningfully guides consumer decision-making. We are aware that the all-in finance change may subject more loans to HOEPA and some of the other rules as well, and we are carefully evaluating the effects of that. And we are taking that into account. We are approaching this set of rules as a set and not [as] rules in isolation. We are still in the proposal stage on that, and it’s something we have sought input on from the public.
Q: Under the proposed HOEPA rule, the APR thresholds are lower. Most observers expect this will have a negative impact on the ability of consumers to access mortgage credit. While the use of alternative APR or the transaction coverage rate [TCR] would mitigate the impact, there is still a concern about requirements that lenders use the maximum interest for an APR or TCR to an adjustable-rate mortgage. Critics says this is a significant expansion of HOEPA and it could lead to significantly less credit availability. How do you respond to those concerns?
A: Again, as with most of your questions at a specific level, we have heard vigorously from people on both sides of that issue. That notion that mortgages should be written with an eye to the maximum interest rate is a reaction to some of the irresponsible excess we all saw in the lead-up to the crisis. It is not unique to the HOEPA rule.
No matter how you draw these criteria and how you tweak them, the HOEPA rule will continue to apply to high-cost mortgages. We can argue about where the threshold should be and what all should be included. And people are arguing about that. We are listening carefully to what they say because, again, this is at a proposal stage. It is not an issue that is escaping our attention or that is going undebated, and we are benefiting from that debate.
Another thing we are doing is that we are making it a point to seek better data about the mortgage market than policymakers perhaps had available to them in the past.
Q: Is that the performance data from the Federal Housing Finance Agency [FHFA]?
A: Most of it. And, although it won’t be in time to affect this round of rulemaking, we have a longer term project to build a mortgage database that is going to be helpful in the future. But, yes, we receive information on a huge number of loans from FHFA.
As you know, we opened the comment process on the ability-to-repay rule because it’s pretty clear that the courts tell you, and it makes good policy sense, that if you are going to potentially be basing some of your decision-making on new data, people need to have an opportunity to comment on that, so if there are any questions, it will not surprise people.
Q: I think there’s no question that there were many mortgages that were very poorly understood by consumers leading up to the crisis.
A: And, frankly, poorly understood by all camps, including those who bought and packaged the securities. Many of them were surprised, at the end, about how poorly underwritten these mortgages were and how much losses were involved.
Q: In the bureau’s April bulletin on fair lending, CFPB asserts that it will use disparate impact doctrine to determine if lenders discriminate. This increases the importance of what is considered “a legitimate business need that cannot reasonably be achieved as well by means that are less disparate in their impact.” How do you think this might be interpreted when evaluating lenders’ reliance on a borrower’s past credit performance, as well as their reliance on credit scores to determine creditworthiness?
A: Well, we’ve heard a lot about that from many quarters. Frankly, our bulletin merely joined us with the standing enforcement policy of the other banking agencies, going back more than 15 years. This is the law of the land, as it currently stands. If there are changes in the law over time, of course we will react and respond to those changes. But, at the moment, we wanted to make it very clear that we stand with our fellow agencies and the Department of Justice in our understanding of the law, and that is what the bulletin was about.
Q: As you indicate, the bureau is currently writing its proposed rulemaking for residential servicing practices. How will this effort align with the interagency project to create broad-based servicing standards modeled after the attorneys general settlement?
A: The two are intertwined. We have been working with the interagency project. As you know, this is a fairly complicated space. The mortgage servicer market is one that very much spans the divide between banks and non-banks. That was a problem previously because part of the market was . . . not regulated or inconsistently regulated. We now have the ability to write rules that will affect the entire market, which is something that none of the other banking agencies can do. The other thing is this element itself complicated this space to some degree because a significant part of the market share is now having part of their portfolio covered by some very specific standards not applicable elsewhere.
So, we have been working with the interagency process throughout. We have given them advance notice that not only are we required to do certain rules in this area, but we were going to cover some other issues that are attempting to broaden provisions that are largely agreed upon, including [by those] in the industry, as improving consumer experience, which has a long way to go way, frankly, in mortgage servicing. So, we’re working with the interagency process. It is being done in collaboration with them, and with state regulators and with state bank supervisors. MB
Robert Stowe England is a freelance writer based in Arlington, Virginia, and author of Black Box Casino: How Wall Street’s Risky Shadow Banking Crashed Global Finance, published by Praeger and available at Amazon.com. He can be reached at
Copyright © 2012 by Mortgage Banking Magazine. Reprinted with permission.
