Wednesday, September 29, 2010

Elizabeth Warren Gets to Work as Head of the CFPB

The ink was barely dry on the press announcements naming Elizabeth Warren as the new head of the new Consumer Financial Protection Bureau when she and Tim Geithner held their first forum--a self proclaimed event bringing together "stakeholders to discuss the path forward to simplify mortgage disclosure forms, [and] empower consumers with better, easier to understand information."  The Mortgage Disclosure Forum, which took place September 21, 2010, was meant to be a meeting among industry stakeholders to redesign the good faith estimate and truth in lending forms as mandated by the Dodd Frank Act.  According to the U.S. Treasury press release, invited participants include "consumer advocacy groups, housing counselors, financial literacy experts, mortgage companies, and other stakeholders."

Although the Dodd Frank act mandates that the Consumer Financial Protection Bureau creates a new form which combines both the good faith estimate and the truth in lending into one new disclosure, the bill gives the new agency until June of 2012 to complete the form.  But Warren and her new agency are eager to get the process rolling.  Says Warren in the press announcement, "Simplifying these forms is a prime example of where we can and will accelerate our efforts to deliver real benefits to consumers as soon as possible.  Fine print obscures the cost of credit and makes it impossible for families to compare products. Too often, families come to understand the legalese only when they get bitten by it.  Streamlined disclosure can level the playing field and give families better tools to make better choices.  This is particularly true in the mortgage market, where borrowers receive stacks of incomprehensible paperwork when they're looking for a loan."

My question to the Treasury Department and to Warren herself would be, "What's the rush?"  If you recall, Warren was named interim director of the massive new agency on September 17, 2010.  The White House did not believe that she would survive confirmation hearings, and so they chose the safe route of appointing Warren to the post pending an eventual confirmation of a permanent nominee.  Four days into the job which involves setting up a multi billion dollar agency with unprecedented regulatory authority over financial service providers ranging from tiny mortgage broker shops to mega banks, should redesigning the good faith estimate and truth in lending into a new combined form really be a priority?

Another issue I have with this is the whole anti business, pro-consumer advocacy bent of the announcement, which I assume will also be the tone of this process.  The press release lists the invited participants, "consumer advocacy groups, housing counselors, financial literacy experts, mortgage companies, and other stakeholders."  The "mortgage company" participants are the fourth group listed, as if their contribution to the form restructuring is negligible at best.  And when Warren complains about consumers receiving "stacks of incomprehensible paperwork" she is ignoring the fact that both the good faith estimate and the truth in lending have been revised in the last eighteen months.  The good faith estimate that we have been using since January is the result of a 6 year study by HUD.  While I, personally, think the new three page form is ridiculous, the entire industry was forced to implement it January 1, 2010 at considerable cost.  In July of 2009, the Federal Reserve changed the Truth in Lending Disclosure to require that if the APR goes up more than 1/8% between application and closing, the new APR must be redisclosed to the borrower on a new form and the borrower must wait three business days before closing.  The new Truth in Lending also contains a statement in prominent letters reminding the borrower that he or she is not obligated to complete the application merely because he or she has received the form.  So we now have a three page good faith estimate which is a binding contract on the part of the originator and a truth in lending which has to be redisclosed if any of the fees increase.  Yet, Warren complains that "fine print obscures the cost of lending." 

Maybe one way to consolidate the two forms would be a one page large print disclosure that would read something like this,  "Buying a home is really expensive.  You will probably pay up to three times the sales price in interest over the life of a thirty year mortgage.  And five years into the mortgage you will probably be tired of both the house and the payments and ready to move, but if the market is bad, or you have lost your job or not taken care of your credit, you may not be able to sell the house or qualify to buy a new one. Consider carefully and complete this transaction at your own risk."

The real question, though, is why, four days into the job of creating and leading a new Bureau as comprehensive as the CFPB, Warren is spending her time rewriting forms at all? According to one bio I read, Warren has been twice named one of Time Magazine's 100 most influential people in the world.  With her appointment as CFPB czar, she surely catapulted into at least the top 10. Shouldn't the head of one of the most powerful new agencies have other priorities than mortgage disclosures?

The answer, I think, is that mortgage disclosures are great targets for all consumer advocacy groups, who seem to believe that if the disclosures are worded properly, even more potential home buyers can be discouraged from completing loan applications to buy or refinance housing.  With sales stagnant and even refinance applications dropping off now in spite of low interest rates and housing prices, Warren and her new CFPB just have to find the right wording on the disclosures to completely kill off the housing industry.

It will be interesting to see what this new combined form actually looks like and how it compares to all the revisions we have already seen.  Since the Treasury press release assures us that "the CFPB implementation team is committed to getting the CFPB ready to propose a consolidated form well ahead of the Dodd-Frank Act's July 2012 statutory deadline," we should not have long to wait.


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