As bureaucracy becomes a larger slice of America’s fabric, a host of new government agencies emerges in the rankings of institutions most likely to slow progress. At the top of this new list is the Consumer Financial Protections Bureau (CFPB). CFPB is set to regulate bank accounts, credit cards, debit cards (banks themselves), mortgages, and virtually any financial institution or products that can touch the hands of consumers. While the bureau’s mission statement (to make markets for consumer financial products and services work for Americans) seems noble enough, its purpose will border on the mundane, particularly in the mortgage system.
The CFPB is charged with providing more transparency and accountability in the mortgage servicing system. As it stands, the servicing industry was found guilty of “systematic sloppy recordkeeping” in its “robo-signing” debacle of 2011. Mortgage servicers were also found guilty of being lax in how they deal with borrowers facing a pending default. Accordingly, the Dodd-Frank law of 2010 made way for the CFPB to step in and navigate the process of enforcing more regulations on servicers. Originally, servicers were set up to simply collect, process, and apply a borrower’s payments to their loan balances and work with them in the event of default. Now, the CFPB is charged with ensuring that borrowers have “clear monthly statements” with definitions and how payments are applied, dates for the next payment, recent activity, fees, and warnings for late fees.
Other changes include warnings for interest adjustments, good faith estimates of the new payment and alternatives if the payment is unaffordable and contact information for housing counselors. Servicers will now be required to contact a borrower if they have missed a mortgage payment. Servicers will have to call a borrower if their insurance is about to lapse and in cases where insurance is forced onto a borrower. Finally, servicers are required to institute “common-sense rules and procedures” for handling consumer accounts and establishing reasonable management procedures to minimize errors. As I read this, I immediately thought to myself that this new bureau will be a bureaucratic nightmare.
By and large, tin many states, the majority of mortgage holders pay their mortgages on time. They also pay their property taxes early (if they don’t impound them). Moreover, they shop insurance like they look around for cars, stereos, and TVs. These responsible citizens look for the highest coverage, the lowest deductible, and the best rate. Therefore, the idea of having “forced insurance” coverage is foreign to them. These borrowers review of their disclosures when they start the mortgage process to understand the product offering along with all of the costs associated with borrowing. They also read their loan documents before they sign them, particularly the note and adjustable payment riders. As such, the people for whom these rules are being written for are the borrowers on the fringes who probably should not have purchased a property in the first place.
Ideally, the new role of the CFPB could change a mortgage statement from a one-page document to a ten-page dissertation. Credit card and bank statements that were once short in length may now become thesis projects that no one reads, with three of the pages filled with balances and account activity, while another 4-6 pages are filled with privacy statements, blank pages, and disclosures that waste paper and time. Accordingly, the increased bureaucracy meant to protect all will serve a few, but affect all concerned in the form of increased account fees, higher rates, and new “costs of doing business” to cover the increased general, service, and administration charges levied by institutions to cover the added costs for additional information. Therefore, in the end, to do justice for a few will hurt many.
In summary, the Consumer Financial Protection Bureau is here, and it appears that it is here to stay. Whether consumers are applying for a mortgage, choosing among credit cards, or using any number of other consumer financial products, their goal is to make markets for financial products and services “work for Americans.” My only concern is whether we are all going to have to work harder to pay for extra bank fees.
Preston Howard is a mortgage broker and Principal of Rose City Realty, Inc. in Pasadena, CA. Specializing in various facets of real estate finance, he can be reached at firstname.lastname@example.org.