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, who had been in charge of the agency since September 2021.
It now throws into question what comes next for the agency, which was born out of the Great Financial Crisis (GFC) in the early 2000s.
One key achievement of the CFPB was the creation of the Ability to Repay/Qualified Mortgage (ATR/QM) Rule.
Among other things, it requires mortgage applicants to qualify using verified financial information, while banning risky loan features like negative amortization.
Why Was the CFPB Created Anyway?
I’ve long said that the difference between the early 2000s housing market and today’s are the rules in place for home loan financing.
Back in the early 2000s, you could take out a mortgage with zero down while providing very little financial documentation.
Often, all it took was a credit report to get approved for a mortgage. And you could even get by with a subprime credit score, below 620.
The amount of layered risk back then was beyond pale. Imagine an investor purchasing a four-unit property with no money down, a 620 FICO score, and zero documentation.
And on top of that, taking out an interest-only adjustable-rate mortgage, or perhaps worse, a negative amortization loan where the monthly payment didn’t even cover the minimum amount of interest due.
All while home appraisers weren’t well regulated, leading to skyrocketing home prices that in hindsight were clearly unsustainable.
This was what led to the collapse of the housing market back then, along with countless banks and lenders going out of business.
It was so bad that it led to major reform, namely the Dodd-Frank Act in 2010. Part of those sweeping changes resulted in the creation of the CFPB.
What’s the Purpose of the CFPB?
In its own words, the CFPB was created to “was to increase accountability in government by consolidating consumer financial protection authorities that had existed across seven different federal agencies into one.”
The independent agency consolidated employees and responsibilities from a number of existing agencies, including the Federal Reserve, FTC, FDIC, NCUA, and HUD.
Driving its creation was the fact that “consumer financial protection had not been the primary focus of any federal agency,” nor did one agency have the tools necessary to oversee the entire market.
“The result was a system without effective rules or consistent enforcement. The results can be seen, both in the 2008 financial crisis and in its aftermath.”
The CFPB accomplished many things since inception, including cracking down on banks and lenders, limiting credit card late fees, reducing mortgage junk fees, and most recently lessening the impact of medical debt on credit reports.
In the mortgage world, the CFPB’s Know Before You Owe initiative resulted in the creation of the Loan Estimate (LE) and Closing Disclosure (CD).
These replaced the longstanding Good Faith Estimate (GFE), Truth in Lending (TIL) disclosure, and the HUD-1 to help consumers better understand their loan terms and the many costs involved with obtaining a mortgage.
They also created and implemented the ATR/QM Rule in early 2014 to ensure we wouldn’t experience another mortgage crisis fueled by toxic lending.
And so far, one could argue that it has worked well, even if there are still some questionable mortgages out there.
What Does New Leadership at the CFPB Mean for the Housing Market?
At this time, it’s unclear what will change at the CFPB. But the staff has been instructed to halt work.
However, one thing remains clear.
We need to ensure the mortgage protections put in place a decade or so ago remain in place moving forward.
The last thing we want is a rollback of any consumer protections or a return to the loose lending seen back then.
As I’ve said, the lack of high-risk mortgages in the marketplace today has kept the housing market buffered from another major crash, despite poor affordability.
If those protections were to be removed, we’d be back in trouble in no time at all. That’s not to say this will happen under new leadership, but it’s something to keep an eye on.
Today, it’s a lot more difficult to overcharge a homeowner, or put them into a type of loan that isn’t beneficial for them.
This includes things like 40-year mortgages, neg-am loans, and prepayment penalties, or simply a loan that the homeowner can’t truly afford.
Hopefully it stays that way moving forward and additional protections are advanced if and when necessary.
The key to a healthy housing market, aside from adequate supply, is safe and sound underwriting. Without it, we could be doomed to repeat history sooner rather than later.
Read on: Will the housing market crash in 2025?
(photo: CoinDesk)
Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My hands-on experience in the early 2000s inspired me to begin writing about mortgages 19 years ago to help prospective (and existing) home buyers better navigate the home loan process. Follow me on Twitter for hot takes.