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ATTORNEY BLOG: Consumer financial protection bureau: Essential nuts and bolts for the residential mortgage markets

By: Lyle D. Washowich, Esq.

While the history of its origin has been well-documented, the Consumer Financial Protection Bureau (“CFPB”) is finally here. Approximately sixty (60) days into its existence, the residential mortgage markets are now — more than ever — anxious to learn how the CFPB will affect them.

Moving down the road toward that understanding, the CFPB’s Assistant Director for Mortgage Markets, Patricia A. McCoy, spoke this week in Washington, D.C. at the Mortgage Bankers Association Regulatory Compliance Conference. Candid and sincere in her remarks, Ms. McCoy made clear that we can debate what caused the mortgage upheaval “until the cows come home.” However, regardless of the cause, the CFPB wants to be forward thinking by implementing a system to avoid such upheaval in the future.

To achieve this, most generally, Ms. McCoy explained that the residential mortgage markets through the CFPB will be handled with three broad principles in mind: (1) research; (2) products/markets; and (3) regulation. Specifically, with regard to the rules of the residential mortgage road, Ms. McCoy stated that the CFPB has envisioned (and is working to further) five major elements: (a) transparency; (b) management of default risk; (c) “saleability”; (d) access to credit; and (e) flexibility.

In contrast to recent practices, the CFPB seeks transparency so that consumers can get complete information and better understand the risks they may incur through their mortgage terms. In kind, the CFPB would like the industry to better grasp its default risk – to mange that risk responsibly and with a sense of realistic expectations. Moreover, to enable capital to be available for these loans, it is critical that lenders have an ability to sell loans on the secondary market. Indeed, the CFPB would like to encourage a system whereby suppliers of capital can accurately rate their investments. Further, without access to credit, these markets cannot function. And, to effectuate that credit availability, the industry must be allowed a certain degree of flexibility in determining when, how and why to make certain residential loans.

Inevitably, as was pointed out, inherent conflicts will undoubtedly arise among these elements. For example, determining access to credit will almost surely contradict certain features of management of default risk, particularly the ability of a borrower to repay a loan. Nevertheless, in the face of these conflicts, the CFPB seeks to balance these elements to encourage a vibrant and fair mortgage market.

Of more general interest, the CFPB is on track to have 1,000 employees by the end of 2011. In addition, the CFPB invites the industry, consumers, or any member of the general public to comment on all proposed mortgage disclosures at www.consumerfinance.gov. Also, information may be received from the CFPB by writing to consumerfinance.gov.

If you have a question for Lyle please email him at [email protected].