Are You Prepared to Run the CFPB Gauntlet?

Democracy is such a predictable condition. That predictability is now poised to create a potential nightmare in the American real estate marketplace. This article will spend a lot of time on the background of this situation. It is stuff you need to know.

The process is familiar. Start with a forlorn stretch of road on which no accident nor event nor law enforcement presence has been experienced in years. Add an accident and what do you get? As sure as the sun will come up the next morning, for the next two weeks there will be an overzealous police presence at the same location.

In 2006, the American real estate market had an accident (some have called it a disaster, but what are a few words among friends). Years of careless mortgage lending and borrowing practices stretching back to the beginning of that decade finally culminated in what was known as the “sub-prime crisis.” This crisis ultimately grew into the foreclosure epidemic, and some believe ultimately was to blame for the great recession of 2008.
Democracy’s response to this situation was terribly predictable. First of all, the politicians spent a year exchanging allegations of blame (Blame is a high profile game with a limited shelf life so it must be first in line).
Democracy then spent two more years investing millions of dollars into a cure (forget that the situation that led to the crisis had long since disappeared). Surely enough, in 2010, Congress passed and President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection act. This act constituted democracy’s response to the great recession.

While the new statute attempts to accomplish a number of remedies from a consumer perspective, its most glaring provision will probably be the Consumer Financial Protection Bureau (CFPB). The Dodd-Frank act established the Bureau as an independent federal agency (real very powerful with low accountability) and charged it with a somewhat undefined but wonderfully broad mandate with regards to financial products and services.

While Congress had hoped for a natural birth, congressional Republican’s quickly turned it into a “C-Section” by attempting to ambush the directorship appointment process. The nice professor lady from Harvard who put her heart and soul into creating the agency was apparently found to be way too passionate on the subject. Mr. Obama subsequently withdrew her nomination and ultimately defaulted to a politician from Ohio, Richard Cordray, who was, with a bit of trickery, ultimately confirmed in mid-2013. This process was further muddied by a lawsuit that sought to challenge the CFPB’s constitutional legitimacy, but went nowhere.

The CFPB is tasked with the responsibility to “promote fairness and transparency in processes dealing with mortgages, credit cards and other consumer financial products and services.” CFPB’s current staff was collected from a wide variety of government agencies and includes eager young folks anxious to make their “bones” in regulatory enforcement and not so young folks looking forward to their retirement. In the world of the democracy it is the perfect mix. CFPB’s initial efforts have been in the areas of student loans, credit cards and, most importantly for the purposes of this column, mortgages. It would appear that much of the CGPB’s first 18 months was spent in a meticulous investigation of the facts and circumstances that led to the “sub-prime” mortgage crisis and subsequent crash of the housing market.

This is where the story gets interesting. Based upon its investigation, the CFPB has now prepared some 900 new regulatory provisions, all apparently designed to protect the American consumer from both the mortgage industry and, upon close examination, themselves. Even more stimulating is the fact that a great portion of these provisions will take effect on or about January 1, 2014. Despite valiant efforts by a number of third parties, the CFPB has resisted any attempts to delay the effective date.

The home loan industry will soon have to adapt to new mortgage rules that will offer borrowers much needed protection against lender abuses and reckless lending standards. Unfortunately, the new rules will not please all borrowers, especially those who fail to qualify. These folks can be depended upon the end up bad mouthing their real estate agents, many of whom recommended the mortgage company they used.

Some of the new rules will influence qualification requirements and the types of mortgages that borrowers get. The new standards go into effect next month.

Under the new rules, lenders will be required to ensure that borrowers have the ability to repay their mortgages according to their terms.
The new rules introduce products called “safe” or “qualified mortgages.” According to real estate data provider Core Logic, only about 13% of mortgages issued in 2012 would have failed under the new rules.

All REALTORS® must immediately access training and information regarding both CFPB and its new rules. Agents and brokers should consider formal notifications to their buyers regarding the new rules and the fact that their full impact is still not certain. This is not about agents and brokers yet. Other than the safe practice of ensuring that clients know about the new rules, agents will hopefully not encounter any other problems.

Stay on the safe side here.

Jeremy Conaway

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