Mortgage Regulations Tough Challenge for CFPB

Kelly Cochran says the challenge is creating mortgage rules that protect consumers while preserving access to responsible credit.

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 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?
: 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 midstream 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 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.