The Consumer Financial Protection Bureau grew out of the housing market crash of 2008 and subsequent Dodd-Frank legislation. As a watchdog with teeth, the CFPB's job is to protect homebuyers from the predatory mortgages that helped sink the economy nine years ago. And it worked.
Problem is, for some would-be homeowners, the CFBP is an inconvenient middle-man, adding more red tape to an already impossible situation. In short, it isn't perfect. But with the Trump administration threatening to tear the whole damn thing down, you've got to wonder, is the CFPB really doing more harm to the housing market than good?
How we got here
Pre-housing market crash, the mortgage lending world was a vastly different, Wild West sort of landscape. Dodd-Frank and the CFPB entered the scene, in part, for lending oversight in that uncontrolled housing market. For example, once not-uncommon 'liar loans,' which were largely based on the borrower's word and not much else-for instance, someone saying they made $100,000 a year to qualify for a huge home even though they made $30,000-are now illegal thanks to Dodd-Frank and the CFPB. Mortgage companies cashing in at the expensive of uneducated buyers happened, and it happened a lot.
"Just about everybody I talked to prior to 2008 thought the lending climate was out of control," says Chandler Crouch, broker and owner of Chandler Crouch Realtors in Dallas-Fort Worth. "People were saying it couldn't last. It just didn't make sense. Lending requirements were too loose. Everybody, from Wall Street to the banks to the loan officers to the consumers, was being rewarded for making bad decisions. Lending needed to tighten."
The brokers and the banks
But not everyone thinks the CFPB's current oversight is necessarily the answer. Critics who wish Dodd-Frank would be repealed or loosened point to stringent qualification rules that can leave would-be homebuyers as life-long renters. New regulations have also given headaches to mortgage professionals.
Casey Fleming, a mortgage advisor in the Bay Area of California and author of The Loan Guide: How to Get the Best Possible Mortgage notes that "many of the regulations were either written by someone who didn't understand how the wholesale channel [brokers] work, or were written specifically to undermine brokers in favor of banks."
Under the broker's compensation rule, brokers must disclose exactly how much they'll earn on a deal and not alter it. Which sounds good in theory. But Fleming says it can also equate to fewer deals for consumers. "Basically, no more 'friends and family' price, no more discounts for returning customers, and we can't charge more for a difficult loan-which means we don't tend to be enthusiastic when one comes in."
Meanwhile, the banks aren't as hamstrung in this sense. "Banks aren't restricted in the same manner, and can raise their margin halfway through the deal if they want... The banks were exempted presumably because they don't know their exact margin in advance, but they do," says Fleming.
For homeowners, the CFPB has instituted regulations requiring more stringent credit checks.
Before Dodd-Frank, credit requirements were...well, unrequired from some lenders. Which often meant people who couldn't afford a home bought one anyway. Now homebuyers are put through the ringer with the ability to repay rule which requires lenders to strenuously vet borrower's ability to repay the loan. This means showing a stability of employment and about two years' worth of income through heavy documentation, both of which are headaches for freelancers and commission-based employees. Making sure your credit is pristine and not opening up any new loans or lines of credit up to a year before buying a house is also burdensome for everyone.
"The CFPB has been criticized for restricting mortgage credit too much with its Qualified Mortgage and ability to repay rules," says David Reiss, a law professor at Brooklyn Law School who has practiced real estate law since 1998.
This was all done to ensure buyers could afford their home and not end up in foreclosure or short sale (and also avoid another economic collapse). These rules also bar lenders from predatory loans like massive balloon loans and shady adjustable rate mortgages.
"Lenders are less comfortable and less likely to conduct bad business," says Crouch.
The CFPB has also broadened foreclosure rules to protect homebuyers. Recently, the bureau made it so mortgage inheritors have the same kind of protection as the original homeowner. There's also a mandatory three-day waiting period from getting your closing cost sheets to actual closing day. This was done so lenders couldn't change the amount owed on their estimated costs and spring it to the buyer at the table, which pressured them into a deal more expensive than they originally agreed to. Prior to the CFPB, that "happened all the time," says Fleming.
While the oversights have largely been designed to help home buyers, the kinks in the system can be an emotional-and financial-drain. For example, the waiting period can cause problems for lenders and buyers who need to close quickly.
"It can cause issues for people that have unique time constraints," says Crouch. "In transactions that have a short closing deadline, we are forced to order the appraisal, survey, and home owners association resale certificate earlier in the process so we can meet the closing deadline." The effect sometimes costs buyers more money if the sale doesn't go through. "In the past, we would wait to order each service or report after we received the last, so if there were an issue with one, we would find out about it before too much of our client's money was spent in case the transaction didn't close," Crouch adds.
Other times, regulation just seems unnecessary (and annoying) for everyone.
"The CFPB definitely needs to be altered. There are things that could be a little bit more thought out or eliminated," says Chastin Miles, a Realtor with Rogers Healy and Associates in Dallas. "For example, when an individual has to fax something to the lender, if it's being faxed from a third party-Kinkos, Office Depot, wherever-there needs to be an actual letter attached to the fax from the consumer saying they went to Office Depot, used their fax machine and sent the paperwork in."
The policy level
At the policy level, the topic is a hot button for some Republicans: House Financial Services Committee Chairman Rep. Jeb Hensarling recently claimed the bureau is literally a tyranny. On the other side, Democrats applaud its watchdog behavior.
"It just doesn't have to be all or nothing," says Crouch. "Regulation is here, so that's good, but did it really have to go this far? If my three-year-old went nuts eating peanut butter and jelly, then my solution is to never buy peanut butter and jelly: Are we better off? Why not just move it to a higher shelf in the pantry?"
Reiss offers another perspective, saying the new closing paperwork "although criticized by the mortgage industry, provides homeowners with clearer disclosures...Qualified Mortgages and ability to repay rules have ensured that homeowners have a fighting chance to pay back the mortgage loans they take out."
So, while these restrictions can be annoying for homeowners, the CFPB is armed with the ability to punish lenders who have abused the system-more of a big picture kind of deal. Recently, the CFPB levied fines totaling $29 million to CitiFinancial Servicing and CitiMortgage. Some 41,000 borrowers are said to receive a compensation totaling $17 million.
But Crouch believes there's a correlation between the CFPB's fines and the rise of credit score requirements, noting requirements loosened slowly since right after the CFPB's inception and when rules were at its tightest.
"Outside of FHA, 5% down was the lowest you could find, and near perfect credit was required," Crouch says. "A few years ago, I found a lender that would go down to a 550 credit scores, and conventional loans with 3% were available. [But] as I began to read headlines of the CFPB levying high fines, credit score requirements rose-now about 640 and portfolio mortgage products vanished."
Will no CFPB = housing hellscape?
Let's say the Republicans get their way and the CFPB goes poof. What happens?
"You'd see an expansion of the credit box-more people would be approved for credit," says Reiss. "To the extent that credit is offered on good terms, that would be a good development. I think you would see more potential homebuyers being approved for mortgages which would drive up home prices in the short term as there would be more competition."
But then there's the opportunity for those really bad loans to come swinging back, which harm homeowners would have in the past and also trigger fears of another housing collapse.
"Liar loans would definitely have a comeback if the CFPB and Dodd-Frank were dismantled," says Reiss. "The Qualified Mortgage and ability to repay rules were implemented as part of the broader Dodd-Frank rulemaking agenda; without those rules, credit would quickly return to its extreme boom and bust cycle, with liar loans a product that would pick up steam just as the boom reaches its heights...We would bemoan them once again as soon as the bust hits its depths."
Crouch is less worried. "The housing collapse also involved a correction in the market due to a housing bubble-over inflated house prices," he says. "Ease of access to financing may have contributed to the bubble, but it wasn't the sole cause. I guess the short answer is that I don't think we're in a bubble right now so I don't think we would see a housing collapse anytime soon if it disappeared."
Homeowners would have to wait and see-but that's not very comforting, is it? Especially if they have PTSD from 2008.