Prepared remarks by CFPB Director Rohit Chopra at the Mortgage Collaborative National Conference

Fifteen years ago, in mid-September, Lehman Brothers collapsed and the financial system crashed. The problems in the US mortgage market spread across the globe, with American families and businesses losing trillions of dollars and suffering incalculable pain. The subprime mortgage crisis represents one of the worst regulatory failures in modern history.

In my remarks today, I’d like to first address a defunct mortgage giant that you may know but is less well known to the public: IndyMac. I would then like to share a few details about the post-crisis reforms, including the creation of the Consumer Financial Protection Bureau and the mortgage rules required by Congress. Finally, I would like to address some of the mortgage industry’s concerns about the legality of these rules.

Lessons from IndyMac

While there have been other subprime mortgage giants that have collapsed, it’s easy to learn many lessons from the confusingly named company IndyMac. Unlike Freddie Mac and Farmer Mac and the like, IndyMac was not a government-sponsored company.

IndyMac was like other banks. It accepted deposits and made loans. However, unlike other lenders, no real underwriting was carried out. IndyMac’s mortgage business relied on Alt-A loans. These mortgages relied on risky features such as: B. stated or missing proof of income, interest-free or negative repayment and no down payment requirement. Even though the borrowers had good credit scores, reasonable credit was not part of the equation. Like others, IndyMac was able to jump on the securitization bandwagon and provide raw materials for high-demand mortgage-backed securities.

IndyMac also had another strategic advantage: a regulator that was completely in its pocket. The Office of Thrift Supervision’s leadership has twisted itself into a pretzel to allow IndyMac to avoid its obligations, including by backdating key financial metrics.

In July 2008, IndyMac failed. At $32 billion, it was one of the largest bank failures ever managed by the FDIC. Because IndyMac relied on many “uninsured” deposits, these depositors were not rehabilitated.

There are many lessons here, but three are particularly relevant today.

First, market forces may not be able to control complex financial products, so you need some ground rules. Homeowners naturally thought that if a lender was willing to offer the mortgage, that meant the lender believed they could pay it back. That was wrong. Investors in mortgage-backed securities considered these Alt-A loans safe. That was wrong.

Second, a handful of large players can create a race to the bottom across the market while others try to remain competitive. We are fortunate in the United States to have a competitive mortgage industry, particularly because we have so many independent players. But this can sometimes be detrimental to consumers, especially when there is no consistent enforcement of the rules.

Finally, the regulator must be a watchdog and not a lapdog. The Office of Thrift Supervision relied on fees paid by its largest institutions. Its leadership essentially marketed its charter to potential institutions as a weak regulator. Protecting the public, particularly consumers, was simply not on their agenda.

Reform of the mortgage market and creation of the Consumer Financial Protection Bureau

So let’s turn to Congressional action in response to the crisis. Here are some of the highlights.

Congress responded to a fundamental market failure by essentially banning mortgages for which the lender did not assess the ability to repay. It also permitted future rules that created a new category of loans that would be deemed to meet its standards. Regulators have also been tasked with cleaning up mortgage disclosures under the Truth in Lending Act and the Real Estate Settlement Procedures Act.

Congress also wanted to ensure that lenders had more power by requiring them to retain some credit risk on the loans they securitized, except for loans that met high standards. There were also other requirements for mortgage data, mortgage servicing and mortgagor compensation.

Perhaps most importantly, Congress has left federal financial regulators in disarray. The Office of Thrift Supervision has been closed. It prohibited the Office of the Comptroller of the Currency from engaging in abusive preventive measures that undermined common sense consumer protections at the state level. It stripped power from the Federal Reserve Board of Governors, the Office of the Comptroller of the Currency, and other regulatory agencies that had also failed in the run-up to the crisis. These powers were given to a new agency within the Federal Reserve System, the Consumer Financial Protection Bureau.

Instead of allowing regulators to pass the buck or point fingers at each other, the CFPB would now be responsible for auditing banks and non-banks across the mortgage industry and implementing and enforcing rules. And instead of being funded by fees charged by regulated companies, the CFPB would be funded by the Federal Reserve Banks, just like the Federal Reserve Board of Governors.

The CFPB and the Mortgage Market

After the law was passed, the Secretary of the Treasury assembled a team to open the agency, and in July 2011, the CFPB joined the Federal Reserve System and opened its doors.

A lot of the mortgage industry really wanted us to get started. While Congress sets the broad outlines of new protections and standards, the details would be implemented through CFPB rulemaking. Without rules, many of the sensitive questions mentioned in the law would have to be resolved in court. Responsible players in the mortgage industry have been eager to put the past behind them.

The CFPB did it. The new standards were implemented to ensure that borrowers have the opportunity to repay their loans under the qualified mortgage rule. If lenders meet certain conditions, they can even gain legal immunity. Other regulators responsible for the skin-in-the-game standards for mortgage securitizations have largely adopted the CFPB rule’s standards.

The CFPB also implemented other mortgage rules mandated by Congress. And whether you agree with the details or not, the details of these rules are now integrated into the entire structure of our nation’s mortgage system, including marketing, origination, securitization and servicing.

As well as providing clarity, the rules have helped restore confidence in the mortgage system. Products with non-traditional features, such as those with customizable tariffs, are much safer than their pre-crisis predecessors. When bad actors emerge, the CFPB takes action to prevent the spread of systemic abuse. Mortgage servicers can’t send borrowers on a wild goose chase when they ask for help.

There is plenty of data to support these results. According to CFPB research, in the first three years they were in effect, the rules saved at least 26,000 families from foreclosure and allowed at least 127,000 additional borrowers to recover from default and resume payments. If these rules had been in place during the 2008 crisis, I believe families could have remained in their homes and the subsequent Great Recession would have had a different outcome.

Challenges to the stability of the mortgage regulatory framework

Mortgage lenders across the country are facing new challenges, particularly the interest rate environment, housing shortages and resuming student loan payments. This requires many independent mortgage lenders to make adjustments so they can continue to help homeowners.

As many of you know, the CFPB rules are facing a number of legal challenges that challenge their validity. The payday loan lobby has argued that the Federal Reserve System’s funding of the CFPB is unconstitutional because Congress provided funding for the CFPB through legislation other than annual appropriations. We and the United States Attorney General disagree, and the Supreme Court will consider this matter in the coming weeks.

As a new agency, the CFPB is no stranger to these challenges and has continued its important work with them. Nevertheless, the CFPB case has significant implications for the entire housing finance and financial regulatory system. The CFPB is just one part of this structure, and we are not the only agency funded this way. Any doubt about the CFPB’s legitimacy could be destabilizing.

The Mortgage Bankers Association recently filed a brief with the Supreme Court warning that challenging the CFPB rules could have “potentially catastrophic consequences for the mortgage and real estate markets.” Their letter also states that “virtually all residential real estate financial transactions in the United States depend on compliance with the CFPB rules and consumers rely on the rights and protections provided by these rules.” And that “lenders, servicers and consumers have followed the CFPB’s guidance for more than a decade and without these rules there would be significant uncertainty about how mortgage transactions should be conducted in compliance with federal law.”

Similarly, the United States Attorney General’s Office noted in its brief that the CFPB “has issued more than 200 final rules.” [that] govern important aspects of countless transactions involving both regulated companies and individual consumers every day, and influence the way homes are mortgaged, cars purchased, credit cards managed, loans granted, debts collected, and banks run.”

A return to a system without these regulations would create uncertainty for the mortgage industry and the economy. And even leaving aside the questions about existing rules, the transition to a world in which the future of housing finance oversight is uncertain and unknown, including the number of years we would live under such secrecy, should be with the raise serious shared concerns among market participants, the financial markets, and consumers alike.

Questions about these rules and the system’s ability to adapt to immediate and future challenges would raise significant concerns about the stability of the real estate market and the financial system in general.

Thank you very much.