The Consumer Finance Protection Bureau (CFPB) will soon implement new rules to better inform borrowers about their mortgage loans and give them more accurate estimates of closing costs.
In testimony before Congress on May 14, I argued that while these changes are ultimately an important step forward for consumers, we must proceed with caution and give lenders more time to adjust to the new rules. The new rules, however, are a small technical issue dwarfed by a more fundamental problem in today’s housing finance system: the unfinished business of reforming Fannie Mae and Freddie Mac that has left us with a fragile and unsustainable system.
The existing mortgage settlement process is ripe for improvement
For years, the real estate settlement process has been cumbersome and unnecessarily complex. At closing, the borrower receives two sets of disclosure documents (as required under the Truth in Lending and Real Estate Settlement Procedures Acts), generally understands neither, and faces closing costs that are much higher than expected.
In 2010, Congress transferred authority for both sets of rules to the CFPB and asked the agency to combine the two sets of disclosures into one consumer-friendly form. After nearly five years of reconciling inconsistencies between the two forms and completing numerous rounds of consumer testing, the CFPB finalized the new rules in January, and scheduled implementation for August.
While the CFPB’s efforts will greatly improve the closing experience for borrowers, I am concerned that the August 1 implementation is too tight for many lenders. I encourage the CFPB to provide a reasonable “hold-harmless” or grace period through the end of the year. According to an April survey, 41 percent of mortgage lenders say they are not ready for the August 2015 deadline and just 12 percent are “very prepared.”
Between updating complex data systems, training staff, and integrating a host of different parties (brokers, attorneys, inspectors, and others) into the new rule regime, most lenders have not had adequate time to test their systems. If a hold-harmless period is not provided, closings will be delayed.
In short, even though lenders have had a long time to implement this rule, the operational issues are overwhelming, and many are not set up to handle them. A hold-harmless period will allow the CFPB and lenders to work through all these issues together, as well as provide a few important clarifications, for a more seamless transition.
The path forward
Resolving the changes to the real estate settlement process is a minor operational issue in comparison to the much broader question of the future state of the housing finance market. And this is an issue that ultimately cannot move without Congressional action. Federal regulators have been leading Fannie Mae and Freddie Mac down the path of administrative reform, working toward many of the goals that housing finance reform was meant to accomplish:
- increasing access to credit,
- transferring the bulk of the credit risk to the private markets,
- and building a common securitization platform and setting a framework for a single security.
But there are a number of changes that administrative reform cannot accomplish. Administrative reform cannot take the GSEs out of conservatorship and recapitalize them or replace them or allow for more competitors. For that, we need Congressional action.
We should applaud the CFPB’s efforts to streamline the process of real estate settlements, which will vastly improve the consumer experience. But we should also proceed with caution, and take this as a reminder of the broader reforms Congress must advance to foster a housing finance system that better serves and protects the taxpayer.