Yesterday, the CFPB released the second of the three (so far) rewrites to the 4,102 pages of rules it released earlier this year on mortgage underwriting, servicing, RESPA and loan-officer compensation. That’s a lot of pages, so it’s unsurprising there were some goofs. But, there’s a more fundamental problem here – if even the issuing agency can’t understand rules as it issues them, maybe it shouldn’t put them out. Congressional deadlines and detailed dictates are a reasonable excuse for the CFPB, but a more fundamental problem still plagues it: junior lawyers trained to look for every comma and every footnote hold the pen, not policy-makers who understand how a line of business is conducted, how to spot when it goes off the rails and determine which penalties are appropriate for whom when it does. Nothing makes clearer the need for a new consumer-regulatory framework than this increasingly-incoherent set of mortgage rules from an ever-more stressed CFPB. Is the U.K.’s simple – but very tough – approach the right way through our American morass?
Although it’s just barely up and running, the U.K.’s new Financial Conduct Authority has a very different take on governing activities that it believes take advantage of vulnerable consumers (and, for that matter, investors – it has broad sweep, in contrast to U.S.-style silo regulation). Based on its own surveys and data-mining exercises (think big data akin to that the CFPB is also gathering to considerable Congressional concern), the FCA has spotted products it thinks pose so many risks as to warrant either a flat-out ban – it gets to do this – for targeted populations or some very specific restrictions.
The most recent of the latter – tough restrictions – was announced earlier this week for interest-only (I/O) mortgages. Looking at three decades of these loans, the FCA found that they were increasingly offered to more and more vulnerable borrowers – that is, lower-income people less likely to understand that they would still owe the full principal on their loan when it came due. In short, industry practice had slipped so that more and more borrowers lacked the ability to repay these somewhat complex loans based all too often on over-optimistic projections of house-price appreciation and long-term employment.
In the U.S., we had a bout of similarly speculative I/O lending, leading Congress in the qualified-mortgage (QM) rule to bar them from QM protection, but otherwise allow them to be made wherever and however. Lenders have suggested that they might make only QM loans, but we think over time this caution will lapse and, then, I/Os will be back among us. For some borrowers, they make sense – I liked the one I had a few years ago and paid it back, thank you very much. For others, as the FCA says and large U.S. losses showed, I/Os are a no-no. The QM rule doesn’t parse who can and should get an I/O; instead it’s a crude in-or-out-of the QM box determination that provides little forward-looking consumer protection or, perhaps even more important right now, borrower relief for those who unfortunately took out I/Os at the height of the housing bubble.
The FCA approach is particularly striking with regard to current borrowers. Based on its data exercise, it identified classes of borrowers by loan vintage and, then, by who is at most risk. These borrowers will get a letter from the FCA – not something from a lender likely to go in the bin – advising the borrower about his or her risk when the I/O comes due and – here’s a first – what to do about it. Specifically, the FCA tells targeted borrowers how to refinance the loan, what it will cost and where to go to get this done.
In short, the borrower gets an explanation on how to avoid a hard fall. It’s not a rule, let alone a commentary to a rule, or guidance related to a rule or pages of disclosures to be provided to the borrower once a rule is – at least sort of – finalized. Sure, it’s prescriptive and yes, it puts the FCA directly in touch with borrowers. But, it also gets the job done faster, better and in a fashion that holds everyone more accountable – FCA included.