Upcoming mortgage Regulatory and Legislative Changes?

The title to this article is punctuated with a question mark, because the current regulatory environment is filled with uncertainty. Certain rules and regulations already promulgated and implemented by other federal agencies, are now part of the CFPB (Consumer Financial Protection Bureau). The new consumer protection bureau has the authority to change or eliminate any of these rules or regulations, including those already embedded within the Dodd-Frank Act. An example would be the controversial 2010 GFE (Good Faith Estimate), implemented during RESPA reform. The CFPB recognized the unintended consequences associated with the existing form and is close to completion of a new, simplified GFE, which includes a TIL disclosure. Without a “confirmed” Director, the CFPB has limited authority over non-depositories. To be clear, this doesn’t mean you can ignore existing regulations. It means the CFPB can’t enforce them. Conversely, your state banking department still has the authority. Although, the CFPB will be consumed with writing, or re-writing numerous rules and regulations over the next eighteen months, none will be more closely watched than Loan Originator Compensation and Appraiser Independence. On August 16, 2010, the Federal Reserve Board (FRB) finalized a rule concerning loan originator compensation, citing yield spread premiums to be unfair and deceptive. Regardless of the fact their study failed to substantiate their actions, the FRB still moved forward with the rule. The end result was massive job loss in the small business mortgage sector, elimination of consumer loan options and higher costs for borrowers. The FRB chose to ignore two credible studies. The first was conducted by Georgetown University’s Professor Gregory Elliehausen, titled “The Pricing of Subprime Mortgages by Mortgage Brokers and Lenders.” This study included the examination of over one million subprime loans. The study concluded that consumers using a mortgage broker for home financing would save an average of 1.13% on their annual percent rate (APR). The study also dispelled the myth that mortgage brokers overcharged or took advantage of minorities. According to the findings of the study, minorities saved up to a full 2% on their APR. Ironically, Professor Elliehausen is now employed as an economist by the Federal Reserve Board. The second study was performed by Harvard University, titled “Understanding the Boom and Bust in Nonprime Mortgage Lending.” This study examined what actually caused the housing crisis. The study found several contributing factors, including “relaxed underwriting” and “regulatory and market failures.” It also specifically stated it was not caused by mortgage brokers and/or mortgage bankers. During one of our 5 meetings with the CFPB, we inquired about this harmful rule and the intentions of the CFPB, after they assumed jurisdiction. We were told, “We’ll be looking at it with a fresh set of eyes.” Our meetings produced an exchange of ideas and solutions, rarely witnessed at other federal agencies. The evil twin of this rule is contained in section 1403 of the Dodd-Frank Act and is tied to a borrower’s ability to repay a loan. We have provided the CFPB with substantial documentation clearly showing there is no correlation between a borrower’s ability to repay and originator compensation. Based on our meetings with the CFPB, we expect changes to be made. In addition, NAIHP has submitted an amendment to Congress clarifying the definition of a high cost mortgage, as compared to a traditional mortgage. This amendment is gaining support and may also play a part in changing the current compensation rule, to exclude traditional mortgages. The Home Valuation Code of Conduct (HVCC), was born from an investigation of a federally chartered bank and an unregulated appraisal management company. The investigation revealed conflicts of interest and the influencing of appraisers by banks to fraudulently inflate the value of real estate. This agreement, between then N.Y. Attorney General Andrew Cuomo, Fannie Mae, Freddie Mac and their regulator FHFA, was nothing short of a backdoor plea agreement to keep Cuomo from investigating the GSE’s. HVCC was sold to Congress and the public, as “consumer protection.” Maybe I’m missing something, but since implementation of Cuomo’s code, valuation fraud has INCREASED over 50%, consumer costs have INCREASED by approximately $700.00 per transaction, appraiser business failures have INCREASED by thousands, while real estate values have decreased to levels not seen since the great depression. So if HVCC was so bad for consumers and industry, why was it adopted by Congress into the Dodd-Frank Act? The answer is Chris Dodd. That’s right, this “friend of Angelo” single handedly killed a bipartisan House amendment by Travis Childers and Gary Miller to remove the prohibition of brokers and originators from ordering residential appraisals. The Dodd-Frank Act directed the Federal Reserve Board to issue “interim rules,” on appraiser independence, before the CFPB got up and running. It’s interesting that HVCC’s new name is “appraiser independence,” because it actually destroys an appraiser’s independence. The rule calls for customary and reasonable fees for appraisers, but we all know that will never happen. Appraisal Management Companies have already found a workaround. Sadly, all of the same problems that existed with HVCC, have carried over to the new rule. NAIHP has been meeting with the CFPB on this issue and recently submitted an alternative to the rule. It doesn’t revoke the rule, but it does remove the needless prohibition against brokers and originators from ordering appraisals and communicating with appraisers. If NAIHP’s plan is incorporated, consumer costs will immediately decrease, appraisers will again be allowed to compete in the marketplace for business and fair compensation and real estate values should start to inch up. On July 13, 2011, I represented NAIHP while testifying before a Congressional subcommittee. The hearing focused on the affect of regulations with respect to homeowners and small business. The committee heard the message from industry loud and clear. Although, the financial services industry has experienced an onslaught of new rules and regulations, particularly with mortgage brokers, originators and appraisers, I believe changes for the better are in the works. Both rules affecting loan originator compensation and appraisals have produced harmful consequences for consumers. Therefore, the CFPB has the benefit of those experiences when determining the fate of these rules moving forward.   Marc is the President of the National Association of Independent Housing Professionals. Previously, he served as the 2008-2009 President of the National Association of Mortgage Brokers.  He also held the positions of NAMB’s President-elect, Vice President, Director, Chairman and Founder of the Consumer Protection Committee and was awarded NAMB’s highest honor, Broker of the Year.