Several recent reports in American Banker reflect widespread concern among both lenders and consumer advocates that the Qualified Mortgage rules being developed by the Consumer Financial Protection Bureau, while well intentioned, could significantly impact the availability and price of home mortgage credit.
The CFPB may want to consider supplementing the QM rule by promulgating an alternative Dynamic Disclosure process, described below, which could serve as a safety valve to relieve pressures on the market if the QM rule were to prove to be too restrictive.
In its recent rule-making initiatives, the CFPB has developed proposals to simplify disclosures called for under current law and is now in the process of defining the terms of Qualified Mortgages that would be deemed safe for consumers, imposing increased economic risk for lenders and holders of loans that do not conform to the QM standard. This latter approach represents a significant departure from our historic reliance on markets to set transaction terms.
In the 1970's, I was present at the creation of the original consumer financial protection laws, serving as Republican Staff Director of the Senate Banking Committee for Senator Ed Brooke (R.-Mass) when the Committee Chairman, Senator William Proxmire (D.-Wis.), took the lead in passing the Truth in Lending Act, the Real Estate Settlement Procedures Act, the Fair Credit Reporting Act, the Equal Credit Opportunity Act and other statutes. I have since spent most of my professional career in private law practice dealing with these laws.
Having known Sen. Proxmire quite well, I expect that if he were in the Senate today, he and Sen. Brooke would be searching for ways to protect consumers from abuse while not unduly restricting availability of credit to those seeking to climb the economic ladder.
To its credit, the CFPB is engaged in a serious effort to recast some required consumer disclosures, in the process providing more understandable, user-friendly formats. However, using the power of advanced financial technology that is available now, it is possible to supplement standard static disclosures with dynamically presented empirical data and calculations based on a consumer's personal financial profile. If consumers could access such information, their understanding of the risks and rewards associated with their borrowing decisions would be greatly enhanced.
Predictive models now form the basis on which lenders design, market, underwrite, price and service consumer credit products, including mortgages, credit cards and installment loans. What I am proposing is use of these data to educate consumers themselves. Let me offer an illustration.
When applying for a mortgage, the consumer would be provided access to a secure website developed by the CFPB in which she would enter the information provided on the loan application. The CFPB would then provide the consumer with the type of information that a lender receives through its underwriting engine, but organized in a way that is easily understood to the layperson. Among the data the consumer would receive would be a projection of the likelihood that the consumer will default on the type of loan applied for, based upon the history of defaults among consumers with similar credit profiles choosing the same type of mortgage. In this process, the CFPB would also share with the consumer information on how her credit profile and projected payment behavior will likely influence the price the consumer will pay for the loan. At the same time, the CFPB website would let the consumer know what changes in behavior would likely improve the terms on which the consumer could obtain credit.
