WORD ON THE STREET: The economic marketplace can be quite hostile to those in poverty or those whom society marginalizes for any reason. In today's economy, almost two-thirds of our households of color are ‘liquid asset poor,’ meaning they have little or no savings to fall back on if they have to face a financial emergency.
While nearly all Americans saw drops in their household wealth during the financial crisis, African-Americans and Hispanics experienced the steepest drops. When this inequity is compounded by unequal access to credit, including small business lending, it is no wonder that communities of color are struggling to rebound in the wake of the financial crisis.
This nation was founded on the principle that if you work hard and conduct yourself responsibly, you can get ahead in life. But when you cannot access credit, it can be nearly impossible to move forward – you cannot find ways to qualify for the basic means of self-improvement.
Leading up to the financial crisis, the consumer financial marketplace was characterized by many irresponsible lending practices. Too many borrowers were set up to fail with mortgages they could not afford to pay back. The ensuing collapse of the housing market had broad consequences, devastating businesses and causing jobs to disappear across every economic sector and in communities all across the country. This country has a tremendous need to restore confidence and reliability to the mortgage market, which as you know is the single largest market for consumer finance.
So, Congress directed us to take action, and we have delivered – on time and under budget, as they might say of the occasional construction project. In January, we released our Ability-to-Repay rule, also known as the qualified mortgage rule. The concept of this common-sense regulation is simple enough: Lenders must take care to make sure that borrowers will be able to pay back their loans.
Put differently, consumers should only be offered mortgages they can actually afford. It is a strange world indeed in which such a rule would be necessary, but we all know from harsh lessons learned that the mortgage market prior to the financial crisis failed this minimal measure of basic responsible lending.
Gone are the no-doc loans, gone are the so-called ‘Ninja’ loans, gone are loans deceptively underwritten only over the introductory teaser rate and much more. For the most part, those loans are not being made in the current market because the easy money from securitization has dried up. Some might say that is the genius of the market at work, and more regulation is not necessary.
But the kind of extreme disequilibrium that resulted from inadequate oversight in a market that was only partially regulated is nothing to brag about, and it hurt millions of innocent people caught up in a disaster they could not understand or control, which should have been avoided. So, we want to be certain that when the mortgage market recovers, as it surely will, we will never see these shoddy practices ever again.
Another task that Congress placed before us was to write new mortgage servicing rules to protect consumers from deficient practices that have plagued the industry for some time. These practices have resulted in profound consumer harm and brought us countless foreclosures that could have been avoided. Although Congress only required the bureau to write certain specified rules in this area, we undertook to do more because many of us have seen first-hand the kind of misery that has been visited upon our communities. We saw wrong, and we wanted to right it, as much as we could do so.
We also wrote new rules addressing loan originator compensation and high-cost loans. Our changes to the Home Ownership and Equity Protection Act rules, in particular, included expanding the legal protections for high-cost loans to purchase-money loans and home equity lines of credit. On appraisals and other valuations, we provided greater transparency by making it much easier for a consumer to understand the value of the home being purchased. Copies of this important information must be provided free of charge to the consumer before closing.
With all of these new rules, the bureau is intent upon helping to bring more clarity and stability to the mortgage market. Consumers need strong protections to regain confidence and trust in that market.
And lenders need to move beyond the uncertainty and fear that has led to a severe tightening of credit. The pendulum had swung too far. We believe our mortgage rules will help to improve access to credit for all borrowers while creating a more secure market.
In our quest to fulfill our mission of fair and transparent markets, we are working to expand access to credit not only in the mortgage market, but across other consumer financial markets as well. Last year, I announced that the bureau was giving fair notice on fair lending and that we would continue to apply the disparate impact doctrine. We cannot afford to tolerate practices, intentional or not, that unlawfully price out or exclude whole segments of the population from the credit markets.
Dr. Martin Luther King Jr. once said, ‘The time is always right to do what is right.’ At the bureau, we are working to promote economic justice, and we seek to uphold the fundamental dignity and self-respect of every consumer.
Richard Cordray is the director of the Consumer Financial Protection Bureau. This article is adapted and edited from a speech delivered on March 22 before the National Community Reinvestment Coalition Annual Conference in Washington, D.C. The original text is online.