The Consumer Financial Protection Bureau (CFPB) has a new acting director, none other than Treasury Secretary Scott Bessent.
The news was announced today after the firing of former CFPB director Rohit Chopra over the weekend, which had been responsible for the agency since September 2021.
It is now questioning what is coming next to the agency born out of the great financial crisis (GFC) in the early 2000s.
An important performance of CFPB was the creation of the ability to repay/qualified priority loans (ATR/QM) rule.
Among other things, it requires mortgage loan applicants to qualify using verified financial information while prohibiting risky loan properties such as negative amortization.
Why was CFPB created anyway?
I have long said that the difference between the early 2000s housing market and today is the rules for financing home loans.
Back in the early 2000s, you could take down a mortgage loan with zero while delivering very little financial documentation.
Often, all it took was a credit report to be approved for a mortgage loan. And you can even get by with a subprime -credit score, under 620.
The amount of layered risk at that time was beyond pale. Imagine an investor buying a four-unit property without money down, a 620 FICO score and zero documentation.
And on top of it by taking an interest rate-adjustable priority loan, or perhaps worse, a negative amortization loan where the monthly payment did not even cover the least interest.
All with home assessors was not well regulated, which led to skyrocketing housing prices that were clearly unsustainable afterwards.
That was what led to the collapse of the housing market at that time with countless banks and lenders who went out of service.
It was so bad that it led to major reforms, namely the Dodd-Frank Act in 2010. Part of these sweeping changes resulted in the creation of CFPB.
What is the purpose of CFPB?
In its own words, CFPB was set up to “increase the accountability of the government by consolidating consumer financial protection authorities that had existed across seven different federal agencies to one.”
The independent agency consolidated employees and responsibilities from a number of existing agencies, including the Federal Reserve, FTC, FDIC, NCUA and HUD.
Running its creation was the fact that “the consumer’s financial protection had not been the primary focus of any federal agency,” nor did an agency have the necessary tools to oversee the entire market.
“The result was a system without effective rules or consistent enforcement. The results can be seen, both in the financial crisis in 2008 and in its demand. “
CFPB completed many things since its inception, including cracking down on banks and lenders, limiting credit card late fees, reducing mortgage loan fees and most recently reducing the effect of medical debt on credit reports.
In the priority world, the CFPBs resulted before owing the initiative, in the creation of the loan estimate (LE) and closure of detection (CD).
These replaced the long-standing estimate of good faith (GFE), the truth of lending (to) disclosure and skin-1 to help consumers understand their loan terms and the many costs associated with getting a mortgage loan.
They also created and implemented the ATR/QM rule in early 2014 to ensure that we would not experience another priority crisis driven by toxic lending.
And so far, one could argue that it has worked well, although there are still some questionable priority loans out there.
What does new leadership mean at CFPB for the housing market?
At this point, it is unclear what will change at CFPB. But the staff have been asked to stop the work.
One thing, however, remains clear.
We need to ensure that the priority protection introduced a decade ago remains in place that goes on.
The last thing we want is a rollback of any consumer protection or a return to loose loan then.
As I have said, the lack of high risk priority loans in the market today has kept the housing market buffed from another major crash despite poorly affordable price.
If these protections were to be removed, we would be back in trouble in a short time at all. That is not to say that this will happen under new leadership, but it is something to keep an eye on.
Today, it is much more difficult to overcome a homeowner or put them in a type of loan that is not beneficial to them.
This includes things like 40-year priority loans, NEG-AM loans and prepayment sentences, or just a loan that the homeowner can’t really afford.
Hopefully it will remain in that way to move forward and further protection is advanced if and when needed.
The key to a healthy housing market, except for adequate supply, is safe and healthy insurance. Without that, we could be doomed to repeat the story before rather than later.
Read on: Will the housing market go down in 2025?
(Photo: Coindesk)
