Consumer Protection Agency Gets Started on Shadow Lenders. Step One: Mortgage Originators

The biggest reason the Consumer Financial Protection Bureau needed a director - that was being blocked by Senate Republicans as a way to weaken consumer protection - was that without a director, it could not start to regulate non-bank actors in our financial sector. But the President decided that Americans can no longer wait for the whim of the minority, and appointed Richard Cordray through the use of his Constitutional recess appointment powers as the Director.

With a director now in place, America's first ever agency to solely have as its purpose the protection of consumers sprung into action. Their first non-bank target: the mortgage industry. Today, they released an examination procedure to subject non-bank entities associated with a mortgage process - brokers, non-bank lenders (ahem Countrywide before being bought by BofA ahem) and servicers - to the same level of scrutiny the agency has already been providing for bank lenders, ending the area of the mortgage market where the sun don't shine.
Until now, a significant part of the mortgage market — which includes independent lenders, brokers, servicers, and others unaffiliated with banks and depository institutions — has not been subject to federal supervision. This “nonbank” mortgage sector included many of the largest subprime lenders during the housing bubble. The Dodd-Frank Wall Street Reform and Consumer Protection Act significantly reformed the gaps in federal supervision of the mortgage market by providing the CFPB with authority to supervise a range of mortgage participants.

These product-specific procedures are an extension of the CFPB’s general Supervisory and Examination Manual. The Mortgage Origination Examination Procedures outline the CFPB’s supervisory approach to ensure mortgage originators — lenders and brokers — comply with federal consumer financial laws.
What a concept, huh? Mortgage brokers, lenders - bank and non bank, and servicers should all play by the same set of rules and be subject to consumer protection laws. Who woulda thunk? Seriously, though, the CFPB could not have done this without a Director.

Here's a short (and therefore, incomplete) list of the regulations that all mortgage (bank and non-bank) originating entities will now be facing:
  • Brokers and lenders now have clear disclosure requirement for the applicant/buyer, including closing cost estimates to be provided within three days of application, and information about whether the servicer is likely to sell the loan.
  • Non-bank lenders will now be subject to the Truth in Lending Act, requiring them to disclose and re-disclose (periodically) loan terms, providing consumers with recession rights in certain circumstances, and prohibiting predatory practices in 'higher priced' loans.
  • Lenders will be prohibited from discriminating on credit decisions based on a person's race, gender, religion, etc., or on the basis that some or all of an applicant's income may be derived from a public assistance program, or because the applicant exercised (usually against a creditor) their rights under the Fair Credit Reporting Act.
  • Non-bank mortgage lenders and independent brokers will now be required to be federally licensed and to maintain their license.
  • Mortgage advertisers who are not lenders or brokers will be prohibited from false or misleading advertising as defined by the Credit Card Accountability Responsibility and Disclosure Act of 2009.
In summary, the CFPB is stepping in and telling everyone associated with selling a mortgage that they better clean up their act. The CFPB is telling them that they are done preying on the vulnerability of innocent consumers without the proper information. The free lunch for the mortgage loan sharks is ending. I will bet you anything that payday lenders are next!

President Obama can be described in many different ways, depending on the issues important to you. But if there is one overarching legacy of the President's first term in office (and there is going to be a second term) in my opinion, it is consumer protection. Whether we're talking about the Affordable Care Act outlawing the health insurance company exploitation of patients, the President's credit card reform bill taking on the predatory credit card industry and requiring they play by fair rules, or Wall Street reform representing the most significant regulatory reform of the financial sector since the 1930s, President Obama's passion to protect ordinary consumers from the abuses of financial predators has come to define his legacy in the last three years. Aptly, this president, who grew up without great means and worked as a community organizer, knows that in a market economy, consumer protection must be paramount, and that without it, markets cannot properly function.

When we hear about abuse of the market, it is - almost without exception - a case or a collection of cases of those with inside knowledge of the system exploiting consumers who are left in the dark and often without legal recourse. Consumers deserve full information, fair rules of the road, and we deserve to have financial institutions we do business with abide by those rules. In the words of Gov. Howard Dean, MD, unregulated capitalism is like a hockey game without a referee. And to paraphrase President Obama, a free market is not a license for the market to run wild.