The Changes Ahead


With the recent announcement by the new administration that the Dodd-Frank Act would be reviewed, lenders began anticipating the reversal of the numerous regulations put in place after the mortgage crisis of 2008-2009. The creation of the Consumer Financial Protection Bureau (“CFPB”) brought with it a plethora of new requirements and restrictions on all types of consumer lending, not just mortgages. However, mortgage lenders, identified as the drivers of the financial collapse, were without a doubt the hardest hit, and not just with regulations. The CFPB exams, which many times resulted in penalties and fines for lenders, were particularly onerous as were the costly technological revisions that the new regulations required. But before we pop the bottles of champagne, we need to take a minute and consider what exactly is likely to happen and what these changes will actually mean to mortgage lenders.

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Recognizing that any changes in the current regulatory environment must come through Congressional action means that regardless of how urgent we feel that these changes are needed they will take time to accomplish. While the expected timing of the changes varies greatly, we can also expect a tremendous amount of push-back from proponents of the current regulatory environment. In addition, the proposed changes will require significant legal review as the depth and breadth of the current regulations impact much more than mortgage lending. One other thought to keep in mind is the old saying “be careful what you wish for, you just may get it.” So, while there is intense anticipation of the elimination of Dodd-Frank, we need to be prudent and carefully evaluate what is included in each proposal and thoroughly evaluate the potential impacts, both positive and negative. Having said that, let’s look at what is on the table already.

One of the first agenda items is the removal of the current director of the CFPB, Richard Cordray. The current law calls for the agency to be funded through the Federal Reserve and be run by a director appointed by the president with no oversight by Congress. This has been a very sore spot for lenders as they perceive the current director’s actions to be especially punitive, if not downright malicious, toward mortgage lenders. When the results of the litigation involving PHH were made public, the fact that the court felt the current structure was unconstitutional, generated great anticipation that the new administration would immediately fire Cordray and replace him with someone of their choosing. This of course did not happen as it was widely anticipated that Cordray would not simply walk away without a legal battle to retain the position and the existing structure of the bureau. However, the week of January 31st saw the introduction of a Senate bill that would replace the single director with a five-person bipartisan committee.

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The Choice Act

In other action, Representative Jeb Hensarling, Chairman of the House Financial Services Committee, introduced his bill to dismantle the Dodd-Frank Act. In conjunction with statements made by members of the administration, the bill has been widely announced as the “newly improved” Dodd-Frank. This bill does not entirely dismantle what is currently in place but would make changes to some of the lesser known elements of that regulation. For example, this bill, known as the Financial Choice Act would end taxpayer funded bailouts of large financial institutions; relieve banks that choose to be “strongly” capitalized from regulations that are viewed as preventing growth; impose tougher penalties on those that commit fraud and hold federal regulators more accountable for the financial health of the country. This House bill would also replace the director position with a bipartisan committee and changes the name of the organization from CFPB to the Consumer Financial Opportunity Commission (CFOC). An evaluation of this bill by Fitch concluded that this new commission would retain many of the elements of the current CFPB but would put reasonable controls over its authority by mandating congressional oversight and appropriation requirements.   It has also been noted that the bill would in fact widen the mandate of the original agency and provide more protections to consumers.

While all of this sounds favorable to “big banks” there does not seem to be much in it for the independent financial institutions and/or independent mortgage lenders. The expectation from this legislation for non-banks appears to be limited to the lowering of compliance costs and potentially fewer fines. It is possible that this legislation could drive an even bigger wedge between those that benefit and those that get very little relief from its passage.

One thing to keep in mind is that this bill must be vetted through both houses of Congress where numerous changes and addendums are likely to occur. Furthermore, it is important to note that there are less than two years before all members of the House of Representatives and one-third of the Senate will be up for re-election. What we don’t know at this time, is what resistance this bill will receive in both houses of Congress.

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Overall consumers and Consumer Advocacy groups appear to be very pleased with what the CFPB has accomplished. If they see this bill as a weakening of the protections provided under the CFPB will the response be sufficiently derogatory to forestall or significantly change the bill. In addition to consumer groups, realtors are also keeping an eye on the bill. While not impacting them directly, the resurgence of the housing market has been extremely beneficial to them and they are anxious not to change anything that will ultimately dampen home-buyers’ enthusiasm.

Fannie Mae and Freddie Mac Reform

Another topic of discussion within the past week was the introduction by the MBA of its position on what should be done with Fannie Mae and Freddie Mac. While this is only one of the entities expressing its thoughts and recommendations these days, it is clearly one of the most thoroughly vetted positons and is expected to carry a great deal of weight with Congressional leaders.

Based on the document the MBA supports a new approach to the secondary market. One point of emphasis in this proposal is the role of the federal government and the necessity of preventing this new “market” from fluctuations due to political turmoil, favoritism and/or changing administrations.

The introduction document identified four critical elements that the MBA task force concluded must be part of any long-term solution. These include establishing the value of combining competition and regulations; providing equal access for all lenders regardless of size or structure; enhancing their current public mission for promoting affordable housing and finally, to maintain the level of liquidity for both single and multi-family housing.

In a shift, away from the exclusivity present in the current market, the MBA recommended that the new Fannie Mae and Freddie Mac be organized as private utilities with a regulated rate of return and a public purpose of providing credit to the conventional mortgage market. They also indicated that these entities should not be the only such organizations available for aggregating and securitizing loans. The document encouraged the development of private utilities that would compete with these agencies thereby allowing for a more competitive secondary market.

MBA’s position also included a series of controls which they labeled “Guardrails” that must be implemented to reinforce this new mandate. Among these are such standards as the maintenance of a “bright line” between the primary and secondary markets; these utility companies must be standalone to prevent any undue influence (such as those from big banks) and the resulting utilities should be regulated as a Systemically Important Financial Institution (SIFI).

Interestingly enough there seems to be a consensus that the FHFA should remain as is since it is reasonably well run under the direction of Mel Watt. However, the Financial Choice Act contains the expansion of accountability to this agency as well. How these differences will be addressed is yet to be seen.

Overall the last week or so seem to be heralding the resurgence of discussions designed to address many of the issues revolving around the mortgage market that for so long have been silent. This is welcome news to the industry. Now it is incumbent on us to support those changes we see as critical to the overall health of the industry. It finally appears that better days are ahead.

About The Author

Rebecca Walzak

rjbWalzak Consulting, Inc. was founded and is led by Rebecca Walzak, a leader in operational risk management programs in all areas of the consumer lending industry. In addition to consulting experience in mortgage banking, student lending and other types of consumer lending, she has hands on practical experience in these organizations as well as having held numerous positions from top to bottom of the consumer lending industry over the past 25 years.