Consumer activists warn that dangerous loans and scams reminiscent of the subprime mortgage crisis may resurface as a result of President Donald Trump’s administration’s significant cuts to the federal agency that regulates financial goods like mortgages and student loans.
The Consumer Financial Protection Bureau, the country’s leading consumer watchdog established in the wake of the 2008 financial crisis, has seen job losses and a reduction in essential operations under the Trump administration. In addition to initiating enforcement action against businesses that violate the law, the agency is entrusted with safeguarding customers against fraud and dubious lending practices.
Although the administration’s attempts to completely abolish the CFPB have been thwarted by court decisions in recent weeks, analysts claim the organization is now only a shadow of what it once was. Additionally, supporters told MarketWatch that closing the agency’s operations and its capacity to monitor lenders might allow for the emergence of new frauds in addition to the specters of the subprime disaster.
Even influential figures in the mortgage and real estate sectors find it impossible to envision a world without the CFPB’s regulations. An atmosphere like this could “set off a wave of challenges and the housing market could descend into chaos, to the detriment of all mortgage borrowers,” according to a 2023 amicus brief submitted to the Supreme Court by the Mortgage Bankers Association, the National Association of Home Builders, and the National Association of Realtors. The case contested the constitutionality of the CFPB’s funding structure.
Alys Cohen, a senior lawyer at the National Consumer Law Center, told MarketWatch that there are many different kinds of scams that might hurt the typical homeowner or home buyer.
A range of situations were cited by consumer advocates: Homebuyers may be turned down for a mortgage because of their appearance or place of residence. Purchasers may wind up with mortgages that they will never be able to pay back. In order to avoid a foreclosure, struggling homeowners may pay a con artist, only to lose their house in the end.
According to Cohen, consumers are left vulnerable when there is no specialized organization monitoring such practices. “The problem is that fraud is like whack-a-mole,” she stated. “It requires vigorous, consistent oversight.”
Consumer organizations believe the timing of the CFPB’s dismantling could not have been worse. Many experts and economists are forecasting a recession as a result of the Trump administration’s trade war, which means that more people will likely lose their jobs and be unable to make their mortgage payments.
According to Eric Halperin, the former chief of enforcement at the CFPB, in that case, the agency might not be able to ensure that servicers are abiding by the law and treating customers fairly.
Requests for response from the White House and the CFPB were not answered.
More and more households are already experiencing financial difficulty. According to a survey from property-data company Attom, foreclosure filings in the U.S. increased 11% from the previous month alone and 9% from the same month a year earlier in March. The uptick “suggests that some homeowners may be starting to feel the pressure of ongoing economic challenges,” according to a statement from Attom CEO Rich Barber, even though levels are still below historical standards.
Sen. Elizabeth Warren, a Democrat from Massachusetts who first came up with the concept for the CFPB, warned MarketWatch recently that “scammers will have a field day” with the agency sidelined. Scammers, now is your opportunity, says a large advertisement that has just gone up. Let’s start the games.
According to experts, these three mortgage-industry and scammer strategies may become more prevalent in the absence of strict CFPB regulation.
Mortgages that people are unable to repay
The National Consumer Law Center’s Cohen expressed her worry that homebuyers are taking out mortgages they will never be able to repay.
Lenders forcing purchasers into expensive loans during the subprime mortgage crisis is the source of the concern. By making false claims about loan terms, payment hikes, and borrowers’ ability to repay the loans, lenders misled consumers who were applying for house loans.
For allegedly engaging in similar activities, Countrywide, a well-known lender at the time that was eventually purchased by Bank of America, consented to pay fines totaling billions of dollars. “Steering borrowers with good credit into higher-cost’subprime’ loans; gouging minority borrowers with discriminatory rates and fees; working in collusion with mortgage brokers who use bait-and-switch tactics to land borrowers into loans they can’t afford; targeting elderly and non-English speaking borrowers for abusive loans; and packing loans with inflated and unauthorized fees,” it was charged by regulators and borrowers in a 2008 paper published by the Center for Responsible Lending.
A Bank of America representative told the New York Times that the company had “discontinued Countrywide products and practices that were not in keeping with our commitment and will continue to resolve and put behind us the remaining Countrywide issues” following a $335 million settlement in 2011 over claims that the company had pushed Black and Latino borrowers toward subprime mortgages and charged them higher fees and rates.
That kind of strategy might be resurfacing. Then-President Joe Biden’s CFPB filed a lawsuit against Vanderbilt Mortgage & Finance in early January, alleging that the company ignored “clear and obvious flags” that applicants seeking funding to buy a manufactured house “could not afford the loans.”
Using “artificially low estimates of living expenses that made no adjustment for higher expenses in different geographic areas,” the agency said Vanderbilt utilized. According to the agency, Vanderbilt “left one family of five with only $57.78 in net income after Vanderbilt applied its estimate of living expenses,” for example. “That family first missed a payment only a year after signing the mortgage.”
Under Trump, the CFPB rejected the case.
According to Vanderbilt’s statement to MarketWatch, the company’s underwriting procedures “exceed the legal requirements” for ensuring that borrowers can repay their mortgage. They also go one step further by considering the higher of the borrower’s actual reported expenses or an estimated family living expense prior to loan approval.
In a subsequent email, the business stated that mortgage financing is still governed by state and federal agencies, such as the Federal Trade Commission and the Department of Housing and Urban Development. “In the past two years, in addition to federal oversight, state agencies have examined Vanderbilt more than 50 times, resulting in no fines or penalties,” Vanderbilt stated.
Indeed, regulations are in place to stop excessive borrowing. The CFPB was created by the 2010 Dodd-Frank Act, which mandates that before granting a loan, lenders determine a borrower’s ability to repay. However, consumer groups questioned whether mortgage lenders would adhere to the regulations without the CFPB’s supervision.
if “bad actors want to fudge those numbers or make misrepresentations to people about what’s affordable and make loans that people can’t afford by discounting information, it will be harder to have those problems addressed if you don’t have the bureau,” Cohen stated.
The dismissal of the CFPB case against Vanderbilt by Trump officials “demonstrates that they’re not concerned about [consumers’] ability to repay,” Cohen continued.
Discrimination based on race in mortgage lending
According to Cohen, she is also concerned about businesses going back to redlining.
The practice of refusing borrowers credit or financial services on the basis of their race or ethnicity is known as redlining. The racial discrimination started in the 1930s when the Federal Housing Administration, which supports residential mortgages, decided that no loan was “economically sound” if the property was situated in a community with a high concentration of Black residents. According to the Federal Reserve, the FHA asserted that property prices might decrease during the mortgage’s term.
Archival material (February 2024): One historian explains how private developers and real estate brokers drew out the redlining model.
Consumer advocates said that even though redlining was outlawed by the Fair Housing Act of 1968, some lenders continue to use it unlawfully today. The Biden-era CFPB recently fined Townstone Financial and Fairway Independent Mortgage Corp. for allegedly engaging in unlawful discrimination and redlining.
Since then, the Trump administration has dismissed those cases. Additionally, the CFPB has returned the $105,000 it fined the company in the Townstone case, where the agency accused the company of discouraging potential mortgage applicants based on their race or the racial makeup of the area where they lived or sought to live, based on lending data.
Barry Sturner, the CEO of Townstone, resisted worries that lenders might continue to discriminate in the future and told MarketWatch that redlining would hurt the company’s bottom line. “If we don’t close loans, then we don’t get paid,” Sturner stated. “There must be a reason for redlining, something to benefit from, right? However, what benefits do loan officers receive?
He continued: “Most consumers who file complaints because their loans don’t get approved blame the loan officer when the facts are the consumer didn’t meet the guidelines set forth by Fannie Mae and Freddie Mac.”
