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Opinion, commentary and analysis on everything that makes the U.S. housing economy tick -- not to mention the ghosts in the machine, too. Written by HW's team of editors and reporters each business day.
Investments Lending Servicing

The CFPB's enforcement approach is smothering innovation in the mortgage industry

Director Cordray's remarks illustrate the problem

March 11, 2016

I've attended several mortgage industry conferences recently and a common theme is that the tsunami of disruption sweeping every other existing industry is about ready to hit mortgage finance. The mortgage industry is basically at DEFCON 1 and the only way we're going to survive is to MacGuyver our way out of this thing. (If you don't know who MacGuyver is, you are likely driving the tsunami of disruption. Keep reading — we're going to need you.)

It will be challenging, but doable, if we're given the room. I have no doubt that lenders, servicers and investors can engineer new ways to increase responsible homeownership and add fuel to the engine that drives much of our economy.

But will we have the room?

Sessions at these conferences had titles that brimmed with possibilities — Funding the Homes of the Future and Expanding Credit and Reaching the Next Generation of Homeowners. Great!! Let's hear about innovative credit scoring, alternative lending solutions, original operational strategies. But then the regulator(s) on the panel would speak, and it became very clear that the very innovation that could salvage the American Dream for many would-be homebuyers is being smothered by regulation. 

This effect is magnified by the "regulation by enforcement" practices of the Consumer Financial Protection Bureau. Lenders, servicers and investors don't just have to worry about the actual rules, but what the bureau might be trying to say through enforcement actions. 

Remarks by CFPB Director Richard Cordray at a meeting of the Consumers Bankers Association this week illustrate the problem:

Likewise, our public enforcement actions have been marked by orders, whether entered by our agency or by a court, which specify the facts and the resulting legal conclusions. These orders provide detailed guidance for compliance officers across the marketplace about how they should regard similar practices at their own institutions. If the same problems exist in their day-to-day operations, they should look closely at their processes and clean up whatever is not being handled appropriately. Indeed, it would be “compliance malpractice” for executives not to take careful bearings from the contents of these orders about how to comply with the law and treat consumers fairly.

Some have criticized this approach as regulation by enforcement, but I think that criticism is badly misplaced. Certainly any responsible official or agency charged with enforcing the law is bound to recognize that they should develop a thoughtful strategy for how to deploy their limited resources most efficiently to protect the public. That means working toward a pattern of actions that conveys an intelligible direction to the marketplace, so as to create deterrence that can be readily understood and implemented. The alternative is just a random series of actions that takes a few wild swipes at the bad actors without systematically cleaning up the practices that harm consumers across the marketplace.

Others have framed this criticism as a suggestion that law enforcement officials should think through and explicitly articulate rules for every eventuality before taking any enforcement actions at all. But that aspiration would lead to paralysis because it simply sets the bar too high... we strive to present specific enforcement orders that meticulously catalogue the facts we have found in our very thorough investigations and set out the legal conclusions that follow from those facts. These specific orders are also intended as guides to all participants in the marketplace to avoid similar violations and make an immediate effort to correct any such improper practices.

So, there are rules to follow and then there are "patterns of actions" that lenders, servicers and investors must interpret for themselves.

The interpretation so far? We better play it safe.

Because although it might be clear to the regulator that these patterns of actions "convey an intelligible direction to the marketplace," the marketplace isn't so sure. 

The industry has looked at the CFPB's actions and determined that the only reasonable course to follow is a very conservative one. And who could blame them? Just following the explicit rules are hard enough.

Example A would be the TILA-RESPA Integrated Disclosure rule. Even with 1,888 pages to interpret and implement, there are still parts that don't make sense and actually cause the consumer to have a wrong understanding of some of their costs (especially in title). Busy with that implementation, companies are also supposed to somehow have the manpower and brain trust to track and understand a pattern of enforcements that may or may not have anything to do with their operations?

The result of too much regulation is an atmosphere of fear and conservatism that doesn't leave any breathing room for innovation. Some of the most oft-repeated phrases at the conference, unfortunately, were "driving in the lanes," or "staying within the guardrails." People would often put their hands up when they said it, physically demonstrating a narrow path between two barriers.

Yeah, because nothing smacks of innovation like doing the safest thing possible within clearly defined boundaries. I'm sure that's exactly how Steve Jobs, Mark Zuckerberg and whatever whiz kid is now planning the next disruption would approach it.

The mortgage industry desperately needs new ideas and strategies that aren't just variations on a theme but represent whole new categories of themes. And it needs these strategies not just for its own enrichment, but for the good of the very consumers the CFPB is worried about. The ones who will still be renters 10 years from now because we're busy driving in the lanes. 

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