CFPB Proposes New Mortgage Rules

We at the Monthly have been paying close attention to the new Consumer Financial Protection Bureau. Our former editor John Gravois wrote a big piece in our current issue on how the new agency is rolling out:

Polls show that, though few Americans are yet aware of the CFPB, an overwhelming majority support it once they learn about its mission of protecting consumers from big financial institutions.

Nevertheless, the now-bailed-out financial sector claims that if a strong regulator scrutinizes the safety of its products—as the federal government does with toys, cars, appliances, airlines, food, drugs, and most everything else that’s for sale in our capitalist economy—it will tank the industry. And so it has gone to war…

We might as well just say it: saving the CFPB is essential to fixing the fundamentals of our economy and even restoring the American Dream. Americans need a strong financial sector, but not, as we now know from painful experience, one that profits by methodically stripping its customers of their assets. Predatory lending has become endemic to the business model of American finance, and until that changes, it’s hard to see how the economy can once again provide broad prosperity. Not even the financial services industry itself will prosper in the long run unless it adopts a business model that helps build, rather than erode, the wealth of average Americans. The question is whether the bureau can survive the Republican onslaught, and, if so, whether this “twenty-first-century agency” will be powerful enough to change the way our consumer finance market behaves.

I’d say the piece is cautiously optimistic. If the CFPB hangs tough, they could do some very good things. The latest news comes via the WSJ, as the agency rolls out its new mortgage standards:

Under the Consumer Financial Protection Bureau’s proposal, loan servicers would be required to evaluate homeowners’ applications for loan-assistance within 30 days of receiving an application and would be barred from going ahead with a foreclosure until a final decision has been reached on a borrower’s application for help.

Yves Smith, notorious critic of Wall Street and their government allies, says actually this represents a “tough minded” move. One might wonder why. Seems fairly straightforward, right? Surely 30 days is long enough to process some simple paperwork.

The reason is, as John explained above, that the mortgage servicing industry (along with the rest of Wall Street) is largely corrupt. They are not in the business of evaluating creditworthiness and giving out loans to the most deserving. They are in the business of lying, cheating, and stealing. Therefore even the simplest and most clearly defensible rules will annihilate their business model, and they will fight hammer and tong. Smith has some more details:

The article indicates that the big servicers won’t like this because they will “make less money” and will fob the work on to special servicers. This would be written more accurately as “servicers will lose more money.” Servicing portfolios with high levels of delinquencies is wildly unprofitable; that’s why servicers cheat so much these days. Of course, lousy servicer economics will be used to argue for seriously watering down this proposal. I hope the CFPB is not moved…

I hope the CFPB has budget for a robust compliance and enforcement effort for this initiative. They’ll need it. The industry isn’t even remotely set up to comply, and violations will be commonplace. But this will save some borrowers, and even the ones who still get chewed up despite the new rules will presumably have a clearer path to restitution.

This is looking to be the CFPB’s first big test. If they can stay strong and fight off the attack from the grifter class, they could be in fine position for the future. We’ll stay on the beat.

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Ryan Cooper

Ryan Cooper, a contributing editor of the Washington Monthly, is currently the Washington correspondent for The Week.