Want to Protect Mortgage Consumers? License Them
Doctors need a license to practice medicine. Motorists need a license to drive. Borrowers should need a license to secure a mortgage.
Getting a mortgage today isn’t easy — and it shouldn’t be. A $250,000 loan is a big responsibility. But under the new regulations of the Consumer Financial Protection Bureau (CFPB), securing credit is too difficult for too many people. Even Ben Bernanke, former chairman of the Federal Reserve, couldn’t refinance his home loan once he left the Fed.
To protect consumers from themselves and predatory lenders, the CFPB added new disclosures and documents for borrowers to wade through before obtaining a home loan. Indeed, we should have measures to protect borrowers, lenders, and the market at large.
Does that mean the application process needs to be an exhaustive exercise in bureaucratic acrobatics? Of course not.
The CFPB is simply going about it the wrong way. These new restrictions made in the name of consumer protection have stifled credit, confused consumers, and disproportionately burdened small banks.
The CFPB was founded on noble intentions and high-minded goals. But its implementation with respect to mortgage applications has fallen short of its aim. Rather than informing and protecting consumers, the piles of paperwork required to secure a mortgage only confuse them. Like a lengthy terms and conditions agreement on your computer’s software upgrade, the more fine print shoved in front of consumers to sign, the less they’re actually going to read.
The overwrought application process isn’t just a disservice to consumers: it also places an enormous burden on lenders, felt most severely by small community banks without the resources to compile, triple-check, and ensure complete compliance. If even one document needed is missing or unsigned, the bank can face steep penalties under the CFPB’s new rules.
I recently met with the CEO of a community bank who said his mortgage compliance officer resigned after returning from an OCC mortgage training session. Why? The officer stated that she “didn’t sign up for the risk of being personally fined if each piece of paperwork isn’t processed flawlessly.”
In a study of seven banks by the CFPB itself, compliance costs were significantly higher for the two smaller banks with under $1 billion in assets — 4–6% compared to less than 2% for the five larger banks. That’s billions of dollars of additional expenses for the 6,000 community banks in the U.S. Add in the large banks and government administration costs, and that number skyrockets to tens of billions wasted each year.
So fewer small banks lend, less credit is available, and consumers and our economy suffer for it. Preventing consumer mortgage abuse by making sure banks don’t lend to consumers isn’t a real solution.
There’s a simpler solution: license consumers. Require all would-be borrowers to pass a 30-minute in person test and have the CFPB provide free online education, available in every language. By educating and qualifying consumers, we can drastically cut down the paperwork and protect borrowers from predatory loans.
You can’t simply place free information online and hope consumers get the message. Neither can you drop a pile of paperwork at the finish line and assume they’ll take the time to carefully read and reflect on every word. A consumer mortgage license spreads the burden between banks and consumers, ensuring accountability for borrowers and allowing flexibility for lenders.
When our eager sons and daughters turn 16, the DMV doesn’t require them to sign two-dozen documents attesting that they understand the rules of the road — it makes them prove it. Neither are auto dealers liable for verifying that every car buyer is a responsible driver; the government licenses them as safe to drive.
Can you imagine if auto dealers had to verify that every customer was a safe, responsible driver and understand all the risks of driving? What if they could be held financially and civilly liable by the government if the dealer gets it wrong? That’s the situation small community banks are facing.
Licenses are how we as a society assure that those entrusted with significant responsibilities are up to the task. Why should it be any different for a taking on a quarter of a million dollar liability that can devastate families and endanger the economy at large?
Mortgages can be dangerous — for the borrower, the bank, and the government. That’s precisely why customers should have to prove that they’re capable of managing them responsibly. An educated consumer is a safer consumer.
Teaching folks how mortgages work, how to calculate monthly payments and interest, what amortization schedules look like, and what the risks of variable-rate loans are, will create educated consumers less likely to be taken for a ride. The CFPB has emphasized education as recently as January 28, but education without accreditation is not enough.
In one fell swoop, mortgage licenses will empower consumers, reduce paperwork, streamline the mortgage process, and enable thousands of community banks to extend home loans, keeping local deposits in local markets. Banks will save on expenses currently used for mortgage administration and compliance, lowering the costs of loans and raising deposit rates.
Shared responsibility between consumers, regulators, and banks is a pragmatic solution to this growing problem. Why have the majority of borrowers and banks suffer through the laborious process? Train the consumer to reduce the risk of abuse. Fewer loans will end in early default as truly educated consumers practice their proven new skills. And more capital will circulate more freely through our local economies, fueling greater growth and prosperity.
Consumer mortgage licenses aren’t a radical idea. If we take a step back and examine the problem with new eyes, it seems like common sense. When facing the Gordian knot of red tape plaguing the mortgage industry, the answer isn’t to create more complications. You cut through it by empowering consumers with education and, for the first time, holding them to it.