How to Stymie Mortgage Lending, One Regulation at a Time

The recent housing industry news about record low interest rates, rising home prices and the market finally bottoming out has some uncorking champagne bottles. This is welcome news, but it is not time yet to take a victory lap.

There are many obstacles looming which will continue to impede the housing recovery. The main culprit is the regulatory maze currently being created under the pretext of helping the consumer and preventing the next housing bust. The proposed regulations will do neither.

I recently returned from the North Carolina Bankers Association's American Mortgage Conference in Raleigh, N.C. I was invited to speak and the topic I chose was to explain this crisis from a mortgage banker's perspective and how we can shape the ongoing discussion on housing finance regulation.

During the three-day conference I had the opportunity to listen to industry experts such as former Freddie Mac head counsel Robert Bostrom, Edward Pinto of the American Enterprise Institute and former Federal Housing Finance Agency Director James Lockhart III. They methodically laid out the facts on the new regulations coming from Dodd-Frank and the CFPB and the impact that they will have on residential lending. 

For the mortgage bankers in the audience, it was sobering.  For the independent community bankers, they might want to petition to be added to the endangered species list. The community banks are a necessary and integral part of our communities and when competition is reduced the consumer will ultimately suffer by having fewer loan choices and paying higher fees.

If the U.S. is serious about making home financing more accessible we first need to review the current regulations and those being proposed.

Here is a good start. 

0. The banking community needs one regulator. American banks, unlike their counterparts in other developed countries, are regulated by multiple agencies either on the state or federal level depending on their charter. However, even state chartered banks find themselves accountable to the FDIC. As a mortgage lender, I had to be wary of federally chartered bank loan products and having to comply with state lending laws. Today we even have some communities trying to pass legislation to take over underwater home mortgage loans using eminent domain. The current alphabet soup of regulators – CFPB, OTS, OCC, FDIC, et al – and the layers of new and onerous regulations on top of existing ones are causing many to spend more time and resources with compliance than loan origination. Perhaps we can copy the one-banking-regulator model from the United Kingdom. After all, we already poached their language and rule of law. 
0. The workings of the CFPB need to be brought into the open and held accountable by some responsible entity in Congress. Clarity is also needed on agency's ability-to-repay rule, specifically the protection offered to the creditor if a loan meets the criteria for a "qualified mortgage." The CFPB has yet to rule on whether originating QMs will provide a safe harbor from litigation, or whether it will merely give lenders a "rebuttable presumption of compliance" in the event they are sued. The rebuttable presumption could be compared to a fire sprinkler system; it provides minimal protection after your house is already burning. Mortgage bankers need a safe harbor provision and without it they will not have the comfort level to lend to creditworthy borrowers.
0. The Disparate Impact Rule needs to be revoked. This proposed rule from HUD is far different than those which protect against discriminatory treatment. This rule will allow discrimination claims to be brought against a lender because of how a basic underwriting requirement, such as a maximum debt-to-income ratio, affects one group of borrowers compared to another, regardless of intent. It could also lead to quotas and "managed outcomes" – the very conduct already prohibited by the Fair Lending Act.
0. All mortgage loan originators should have the same requirements to operate. The current system of licensed and registered mortgage loan originators is solely dependent on whether you work for a state or federally supervised lender.  Registered loan officers are exempt from pre-license education, testing and continuing education requirements. The mortgage banking industry has drastically changed over the past four years, but this exemption does little in providing confidence to consumers. If you are dispensing mortgage advice or reviewing mortgage loan documentation which will be used for a financial determination, you should have a license, no matter who you work for.  

The U.S. has a housing finance system unlike anywhere else in the world. However, it is in danger of being radically changed if we do not begin to reign in the regulatory web.
Richard Booth is a Certified Mortgage Banker and a mortgage industry consultant with America's First Funding Group LLC in Neptune, N.J.