If you’ve seen the movie “The Big Short,” you may recall the scene where two brash real estate agents boast about homes with subprime mortgages they sold to low-income borrowers with atrocious credit and no means to pay off their debt.
Jerks like that are why the CFPB exists.
Formed after the 2008 financial crisis, the CFPB, or Consumer Financial Protection Bureau, is a federal agency aiming to safeguard consumers against abusive financial practices.
That means they put mortgage lenders (like us) under a microscope to ensure borrowers (like you) aren’t burdened with unaffordable loans or misleading practices.
Doesn’t that make you feel good? Want to know more? We thought so:
Why did we need them?
To understand the rationale behind the CFPB, you first need to understand what led to the housing crisis that helped plunge the economy into a great recession. And since actress Margot Robbie was unavailable to assist (another “Big Short” reference, FYI), we’ll have to give you our own abbreviated version:
For years, the U.S. financial industry went poorly regulated as banks and lenders sold complex or misleading loans to borrowers who really didn’t understand or qualify for them. Those loans included subprime mortgages, which carried low initial interest rates that reset at higher values after a few months.
Before long, subprime borrowers found themselves stuck with mortgages they couldn’t afford. These homeowners defaulted on their loans, engendering a spate of foreclosure activity that helped cripple the U.S. economy.
In 2010, as the nation crawled to recovery, Congress passed the Dodd-Frank Act, a bundle of financial regulations to prevent another economic collapse. Out of this law, the CFPB was born.
What does the CFPB do?
They’re like referees watching the game unfold and intervening when necessary.
More precisely, the CFPB holds financial institutions accountable, ensuring they follow federal laws that protect consumers who use credit cards, entrust their money to banks or use loans to buy homes and pay for college
The bureau also investigates consumer complaints, writes rules and regulations, issues warning letters to companies involved in questionable practices, audits financial firms, educates consumers about their money and clarifies paperwork so borrowers aren’t bamboozled by confusing terms or hidden fees.
Its oversight extends to the country’s largest banks and to independent and privately owned “non-bank” institutions, such as mortgage lenders, according to information on the White House’s website.
What did they do about mortgage lenders?
A few things. Here are some from the CFPB’s website:
- They required all lenders to assess a borrower’s ability to repay a loan by evaluating that person’s income, debts, assets and credit history.
- They defined a new class of home loans called “qualified mortgages,” which contain features and requirements that ensure borrowers can afford them.
- They cut down on financial incentives given to lenders that steer borrowers to pricier mortgages.
- They mandated that lenders first receive a notice of intent from borrowers before proceeding with the loan process and requesting verification documents, such as W-2s and pay stubs.
Can the CFPB help me with my mortgage?
At the very least, they can help you understand it.
One of the CFPB’s most significant contributions to the mortgage industry was the development of TRID — yes, another acronym — which stands for a set of rules intending to make the loan process easier to understand.
Before TRID, borrowers received four different disclosure forms that broke down the estimated costs of their mortgage payments. Sounds helpful, right?
Well, not so much. These documents were loaded with confusing terms and industry jargon that made them complex and contradictory.
The CFPB decided to streamline the forms by rewriting them into plain English and merging four documents into two. Their efforts spawned the Loan Estimate (LE), which borrowers get at the beginning of the loan process, and the Closing Disclosure (CD), which they get right before closing.
TRID also includes mandatory waiting periods so borrowers have enough time to read over all their forms and really think about what they’re getting into.
Why would I want their help?
Along with assessing grievances against predatory lenders, dealers and bankers, the CFPB offers a host of webinars, toolkits and other financial educational materials that help you budget and make quality spending decisions.
They also offer resources and money tips for children, parents and caregivers, trustees or fiduciaries managing money or property for a loved one. You can also get your hands on CFPB policies and reports, and sift through tons of data tables and spreadsheets that you can filter and manipulate (if you’re into that sort of thing).
You can call the CFPB at (855) 411-2372 or find them online at consumerfinance.gov. A heads up: They don’t help consumers buy houses or avoid foreclosure so don’t call for that.