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From Banking and Finance Law Daily, April 17, 2015

Rollback Dodd-Frank reforms? Senate hears from industry players

By Colleen M. Svelnis, J.D.

The Senate heard testimony from witnesses working in all aspects of the mortgage and home buying industry, who testified about the state of housing markets across the country, including which lending laws and regulations are working and which can be improved. The purpose of the hearing, “Regulatory Burdens to Obtaining Mortgage Credit,” was to evaluate the regulatory landscape with regard to mortgages and the home buying process and to identify existing laws and regulations that create unnecessary barriers to economic growth, restrict the availability of consumer credit, or increase its cost.

Time to re-examine effectiveness. The opening statement by Richard Shelby (R-Ala), Chairman of the United States Senate Committee on Banking, Housing, and Urban Affairs, stated: “Five years after a sweeping new regulatory framework altered the mortgage market in unprecedented ways, it is time to re-examine its effectiveness and consequences. Dodd-Frank’s stated intent is to protect consumers, but some of the regulations promulgated in response to the law have gone so far that they may actually prevent qualified consumers from owning a home. And, borrowers who are able to qualify for mortgages today may face an increased cost of credit due to these rules.”

Don’t turn back the clock. Ranking member Sherrod Brown (D-Ohio) said that the Dodd-Frank Act “provided a common-sense fix to the bad practices in mortgage lending that had been staring us in the face for years.” Brown said the Dodd-Frank Act established a common-sense rule that requires mortgage lenders to ensure that borrowers have the ability to repay their home loans. “This means that lenders can no longer make a loan based on the home’s value instead of the borrower’s ability to pay back the loan.” And now, five years later, “some are suggesting we weaken some of those standards and head back to where we started.”

Brown went on to say, “Reviewing regulations for their impact on the market and possible duplication is important, but if we don't address the other challenges that restrict credit, eliminating important homebuyer protections under the cloak of access turns the clock back to 2008.”

Restricted availability of mortgage credit. Tom Woods, on behalf of the National Association of Home Builders (NAHB), shared his organization’s views on the regulatory burdens to obtaining mortgage credit. According to Woods, the “collective force” of the banking regulatory actions in response to the financial crisis, “along with the lingering doubts and uncertainty of market participants, has resulted in an undue restriction on the availability of mortgage credit to many creditworthy borrowers.” Today’s tight lending conditions are keeping more buyers on the sidelines even as the housing market strengthens, said Woods. According to Woods, uncertainty about the eventual impact of the new regulations mandated by Dodd-Frank and the cost of compliance are key factors in tightened access to mortgage credit. Woods said the NAHB continues to advocate for comprehensive mortgage finance system reform.

According to Woods, the NAHB supports the following bills as methods to ease the components of the Ability to Repay rule with the most potential to restrict mortgage credit.

  1. H.R. 685, the Mortgage Choice Act, introduced in February, and passed by the House on April, 14, 2015, would amend the Truth-in-Lending regulation to clarify the final QM rule’s definition of points and fees.

  2. H.R. 1210, the Portfolio Lending and Mortgage Access Act. The legislation is intended to ease the ATR requirements for community lenders who may be fearful to originate non-QM loans and, therefore, may limit access to credit for home buyers in their communities they believe to be creditworthy

Proposed rollbacks overly broad. Julia Gordon, the Senior Director of Housing and Consumer Finance of the Center for American Progress, said that undoing the regulatory reforms, “would open them to the same pernicious, predatory practices that brought the economy to its knees less than seven years ago.” She added that “removing these reforms would undermine the most critical component of recovery, which is to restore public trust in the system.”

Gordon addressed the issue of small financial institutions, saying “Nowhere has Dodd-Frank and CFPB provided more accommodation than to smaller financial institutions.” She said they “already benefit from special treatment across a wide range of rules.” Gordon said, “while it’s inarguable that compliance costs can be more of a burden for a small institution than a large one, all banks operate under myriad rules, with Dodd-Frank being only one part of that picture, and rolling back consumer protections is not a solution to challenges posed by capacity problems.”

In the fourth quarter of 2014, profits at community banks increased 27 percent compared to the previous year, according to Gordon, “despite the fact that they had to comply with the new CFPB mortgage rules.”

Gordon also discussed the following bills pending in the Senate, examining what impact each would have on consumer protection, mortgage sustainability, and access to credit.

  • the CLEAR Relief Act would undermine core lending rules for more than half of all mortgage originations and restore incentives to make “exploding” adjustable rate mortgages;

  • the Mortgage Choice Act would make mortgages more expensive by re-opening the door to upselling practices driven by kickbacks and commissions;

  • the Preserving Access to Manufactured Housing Act would sanction offering a largely lower-wealth and rural population more expensive mortgages with fewer consumer protections than are available to households purchasing site-built homes.

She concluded by saying that the proposed rollbacks of Dodd-Frank are both overly broad and insufficiently targeted to the real problems, and therefore will increase risk without necessarily increasing access to appropriate products. Increasing access to safe and sustainable credit is a critically important goal. But it is equally critical to ensure that any expansion of access not lead to the same predatory and abusive market practices that led to the crisis.

Industry focued on compliance. J. David Motley, testifying for the Mortgage Bankers Association (MBA), stated that the regulatory demands under the Dodd-Frank Act and other statutes have made the market safer; however, he noted that the industry is more focused on regulatory compliance than ever before.

According to Motley, many aspects of the Dodd-Frank rules have an “unnecessarily detrimental effect on the availability and affordability of mortgage credit for too many creditworthy families.”

He said that MBA data show that mortgage credit availability remains far below the levels seen prior to the mortgage crisis. Motley said that “the pendulum has swung too far, and credit standards could safely be changed to enable loans to additional qualified borrowers.”

Motley spoke about changes the MBA recommends for Qualified Mortgages (QM):

  • expand the QM safe harbor;

  • increase the small loan definition;

  • broaden the right to cure for DTI and other technical errors;

  • revise the “points and fees” definition;

  • QM for Portfolio Loans; and

  • long-term—replace the patch and the default QM.

Additionally, Motley suggested improvements in the CFPB consumer education initiatives, including improving the “rate checker” tool, and narrowing CFPB consumer complaint postings to include only those narratives where the accuracy of the complaint has been verified.

He also said that the Secure and Fair Enforcement for Mortgage Licensing (SAFE) Act should be updated. According to Motely, in its current form, the SAFE Act “does not provide consumers the necessary assurance that all Mortgage Loan Officers (MLOs) have met minimum standards of competency through an objective test.

Falling homeownership levels. Chris Polychron, the 2015 President of the National Association of Realtors, testified on behalf of his organization. Polychron said that homeownership has fallen and the number of homes purchased annually remains less than 70 percent of what was purchased prior to the financial crisis. “NAR has long supported strong underwriting standards that require all mortgage originators to verify the borrower’s ability to repay the loan based on all its terms, including taxes and insurance,” Polychron said. But, he said, regulatory burdens are “preventing qualified, credit-worthy borrowers from obtaining the American dream of homeownership.”

Polychron grouped these concerns into the following areas:

  • Consumer Financial Protection Bureau Issues including the 3 percent cap on points and fees, enforcement of RESPA/TILA reform, and encouraging community bank lending;

  • Specialty Markets Challenges including rural communities, and manufactured housing loans;

  • Short Sales and Foreclosure Matters; and

  • Lending Policies, including condo restrictions, high guarantee fees (G-fees).

Companies: Center for American Progress; Mortgage Bankers Association; National Association of Home Builders; National Association of Realtors

MainStory: TopStory BankingOperations DoddFrankAct FinancialStability Loans Mortgages PrudentialRegulation

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