With the highly anticipated Dodd-Frank Wall Street Reform and Consumer Protection Act signed into law by President Obama, it has to contain powerful rules within those 2,300 pages to help loan applicants and homebuyers in an industry gone amok – right? It all depends on your point of view. The legislation does create a powerful new independent authority – the Consumer Financial Protection Bureau. Something which many consumer advocates have lobbied for since the financial meltdown two years ago. The “bureau” has the control to write and enforce rules covering consumer-lending requirements for mortgages, credit cards, and other financial products.
Many of the necessary consumer protection statutes have been on the books for decades, but lacked proper enforcement. The new bureau will have sole accountability for all consumer protection laws and administration. Many of the effects of the new regulations will take years to materialize. The bureau needs to write new rules and begin oversight to clamp down on known problems and abuses in many areas, including credit scores, appraisal valuations, real estate settlement transparency, and equal credit opportunity.
Significant Deadlines September
The new regulations establish deadlines for implementation of certain actions. A team, under the supervision of Treasury Secretary Timothy Geithner, has the responsibility of drafting the framework for the Consumer Financial Protection Bureau. The agency will take up offices in the Federal Reserve. The Secretary has a September 19, 2010 deadline to come up with a “transfer date.” This time line signifies the shift of significant legal and regulatory responsibilities under the control of the Federal Reserve, the Federal Trade Commission, and the Department of Housing and Urban Development, to the bureau.
The September cut-off-date initiates a new era in consumer regulatory history. By law, somewhere between January 17 and Jan 21, 2011, the new agency, armed with a full staff, an estimated annual budget of $500 million and sweeping authority, becomes the new consumer protection “sheriff in town.”
Tighter Real Estate and Mortgage Requirements
The key provisions of the legislation place overdue requirements on the mortgage lending and servicing banks and financial institutions. The Act addresses the following areas:
- Require mortgage originators to act in the “best interest” of consumers. Lenders must verify consumers have the income and credit history to repay mortgage. [ Title XIV]
- Lenders must make additional disclosures about their mortgage products. [Title XIV]
- Companies that “securitize” or bundle mortgages to sell in the investment market must retain five percent on their books. This rule encourages lenders to make less risky real estate loans. [Title IX]
Some other changes include annual credit scores and restrictions on penalties for mortgage prepayment.
One of the most obvious fix many in the real estate industry look forward to have to do with home appraisals. The bureau must create interim guidelines on appraisal objectivity and accuracy to replace the contentious “Home Valuation Code of Conduct. Enacted by Freddie Mac and Fannie Mae in 2009, builders, agents, homebuyers, and sellers unanimously agree, the ill-conceived code caused breakdowns in countless numbers of real estate deals.
The regulations also put forth new conditions for appraisal management firms operating as third party merchants for many banks and mortgage companies. One primary criticism involved the practice of allowing inexperience and low-paid appraisers, who had little knowledge about the local real estate market, to handle appraisals.
The Real Estate Settlement Procedures Act (RESPA), which outlines the procedures concerning the disclosure of real estate transactions costs when consumers apply for a mortgage, comes under the authority of the bureau. Congress intended for RESPA to prevent illegal kickbacks and abusive fees by lenders, builders, title firms, and real estate agents. The agency will move immediate to revise and streamline the current real estate disclosure requirements.
Observers expect to see a modified real estate settlement form and truth-in-lending- disclosure in simpler language and in on e package. Loan officers now must make“good faith verifications” that loan applicants have the financial capacity to afford the loans they request. The Act establishes a national hotline system that provides a place for concerned consumers and others to file complaints and sound the alarm when they believe lenders engage in unfair and deceptive practices.
What the Analysts Are Saying
Many analysts feel the Act simply creates another layer of bureaucracy and doesn’t go far enough to address the role the federal government played in the financial meltdown. In addition, the regulations fail to mandate the break up of banks and financial firms that fit the “too big to fail” mode. Some say the Act constitutes a good start, and that the regulation reduces the possibility of similar repercussions from a financial meltdown.
Mark Calabria, director of the of financial regulation studies the nonprofit Cato Institute in Washington D.C., writes that “Rather than fix the endless bailout that Fannie and Freddie have become, Congress believes it is more important to expand federal regulation and litigation to lenders that had nothing to do with the crisis.” The new regulations do not touch Fannie Mae and Freddie Mac, the two quasi-public entities that received $145 billion of the public dollars for bad real estate investments.
Many bankers say consumers will trade protection for fewer options and products more expensive products. Clinton Administration housing official and consultant Howard Glaser states fewer loan applicants will qualify for mortgages. Lenders will have to invest more time determining which loan products meet regulatory guidelines and the criteria for “safe and simple” products.
Consumers and watchdog groups should not expect tangible results anytime soon. President Obama still needs to choose a nominee for director of the bureau. Expect partisan haggling before the Senate actually confirms him or her to the position.