Tag Archives: Dodd Frank

Gimme More Mortgage Data!

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People are always talking about the value of data about web browsing habits. They don’t talk nearly enough about the value of data about mortgage shopping habits. Regulators and researchers do not know nearly enough about how borrowers and lenders interact in the mortgage business — and the stakes are high, given that a home is often the biggest investment that a household ever makes. The Consumer Financial Protection Bureau is seeking to make some modest improvements to the federal government’s existing data collection pursuant to the Home Mortgage Disclosure Act (HMDA) through a proposed rule.

Under this proposed rule,

financial institutions generally would be required to report all closed-end loans, open-end lines of credit, and reverse mortgages secured by dwellings. Unsecured home improvement loans would no longer be reported. Thus, financial institutions would no longer be required to ascertain an applicant’s intended purpose for a dwelling-secured loan to determine if the loan is required to be reported under Regulation C, though they would still itemize dwelling-secured loans by different purpose when reporting. Certain types of loans would continue to be excluded from Regulation C requirements, including loans on unimproved land and temporary financing. Reverse mortgages and open-end lines of credit would be identified as such to allow for differentiation from other loan types. Further, many of the data points would be modified to take account of the characteristics of, and to clarify reporting requirements for,different types of loans. The Bureau believes these proposals will yield more consistent and useful data and better align Regulation C with the current housing finance market. (79 F.R. 51733)
This seems like a reasonable proposal. It increases the amount of information that is to be collected about important consumer products such as reverse mortgages.  At the same time, it releases lenders from having to determine borrowers’ intentions about how they will use their loan proceeds, something that can be hard to do and to document well.
There is more to the proposed rule than this, so take a look at it and consider commenting on it. Comments are due by October 29, 2014.

Reiss on The Future of the Private Label Securities Market

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I have posted The Future of the Private Label Securities Market to SSRN (as well as to BePress). I wrote this in response to the Department of Treasury’s request for input on this topic. The abstract reads,

The PLS market, like all markets, cycles from greed to fear, from boom to bust. The mortgage market is still in the fear part of the cycle and recent government interventions in it have, undoubtedly, added to that fear. In recent days, there has been a lot of industry pushback against the government’s approach, including threats to pull out of various sectors. But the government should not chart its course based on today’s news reports. Rather, it should identify fundamentals and stick to them. In particular, its regulatory approach should reflect an attempt to align incentives of market actors with government policies regarding appropriate underwriting and sustainable access to credit. The market will adapt to these constraints. These constraints should then help the market remain healthy throughout the entire business cycle.

Good Data Makes Good Mortgages

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The CFPB issued a proposed rule about increasing the quality of information that lenders report about mortgage applications. The press release regarding the proposed rule states that these changes will ease the reporting burden on lenders, and that may very well be true. But the contested part of these rules relate to the type of information to be collected:

  • Improving market information: In the Dodd-Frank Act, Congress directed the Bureau to update HMDA regulations by having lenders report specific new information that could help identify potential discriminatory lending practices and other issues in the marketplace. This new information includes, for example: the property value; term of the loan; total points and fees; the duration of any teaser or introductory interest rates; and the applicant’s or borrower’s age and credit score.
  • Monitoring access to credit: The Bureau is proposing that financial institutions provide more information about underwriting and pricing, such as an applicant’s debt-to-income ratio, the interest rate of the loan, and the total discount points charged for the loan. This information would help regulators determine how the Ability-to-Repay rule is impacting the market, and would also help the Bureau monitor developments in specific markets such as multi-family housing, affordable housing, and manufactured housing. The proposed rule would also require that covered lenders report, with some exceptions, all loans related to dwellings, including reverse mortgages and open-end lines of credit.

Lenders are not going to like this, because this new information may be used against them in a variety of ways — in Fair Housing lawsuits, by the CFPB in enforcement actions, by members of Congress seeking to increase credit access to various constituencies.

I like this because regulators and academic researchers have been hamstrung by limited and stale data on the fast-moving mortgage market. The mortgage market is often driven by the short-term profit-seeking of private actors and by special interests pushing their agendas with the Executive and Legislative Branches.  Good data can inform good decision-making that can ensure that the housing finance system is vibrant and provides sustainable credit for households over the long term.

Comments on the proposed rule are due by October 22, 2014.

 

Reiss on State Enforcement of Dodd Frank

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Auto Finance News quoted me in The Mess at Condor Capital Signals Stiffer State Oversight. It opens,

Legal action brought by New York State last month against Condor Capital Corp., a Long Island subprime lender accused of bilking customers out of millions of dollars, could signal an increase in state prosecution under Dodd-Frank federal laws.

Legal experts say the case, even though it involves wildly egregious practices by Condor, could be the first of many by states against auto lenders, even if the lender’s nefarious actions are more modest than Condor’s.

In April, New York’s Department of Financial Services (www.dfs.ny.gov) obtained a temporary restraining order in federal court against Hauppauge, N.Y.-based subprime auto lender Condor Capital Corp. (www.condorcap.com) and owner Stephen Baron. The case is being handled in U.S. District Court for the Southern District of New York.

The state’s complaint paints a picture of a company run with disregard for compliance. However, a former senior Condor employee told Auto Finance News that Condor’s practices might have been even worse than what was described in the state’s complaint. The former manager of Condor’s collection department told Auto Finance News that management thumbed its nose at the very notion of compliance.

Plain and simple, the federal law provides state regulators with a new tool according to Law Professor David Reiss from Brooklyn Law School.

“States have historically identified new forms of unfair, deceptive, or abusive acts and practices before they get on the radar of national regulators, so states are likely to be quicker to take action than their federal counterparts,” Reiss said. “In all likelihood, the New York case, as well as a case from the attorney general in Illinois, are just the tip of a burgeoning enforcement iceberg.”

Reiss on Frannie Reform

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Law360.com quoted me in Capital Rules To Spread Beyond Banks Under Housing Bill (behind a paywall). The story reads in part,

Mortgage servicers, aggregators and other actors in the U.S. housing finance market would for the first time be subject to the same capital requirements that apply to banks under a new bipartisan bill aimed at replacing Fannie Mae and Freddie Mac, potentially eliminating an advantage nonbank firms currently enjoy.

The elimination of Fannie Mae and Freddie Mac is the centerpiece of S. 1217, the Housing Finance Reform and Taxpayer Protection Act of 2014, introduced by Senate Banking Committee Chairman Tim Johnson, D-S.D., and the committee’s ranking Republican, Sen. Mike Crapo, R-Wyo. The government-sponsored entities would be replaced by a proposed Federal Mortgage Insurance Corp. that would backstop the housing finance market in a manner similar to the Federal Deposit Insurance Corp.’s backing of the banking system.

Among the details in the 442-page bill released Sunday are provisions that would allow the FMIC to impose capital standards and other “safety and soundness” rules to mortgage servicers, firms that package mortgages into securities and guarantors that provide the private capital backing to mortgage-backed securities. Compliance with these standards would be required for access to a government guarantee.

Previously those types of institutions have not been subject to safety and soundness rules, unless they were part of a bank. If the Johnson-Crapo bill moves forward as currently written, those firms could be in for a big change, said David Reiss, a professor at Brooklyn Law School.

“Historically, nonbanks have had a lot less regulation than banks. So, by giving them a safety and soundness regulator you are taking away a regulatory advantage – that is, less regulation – that they have had as financial institutions,” he said.

*     *      *

“What it effectively does is create safety and soundness standards for guarantors, aggregators and servicers, as if they were banks. There’s been this long debate about what you do about the nondepository institutions, and this would empower FMIC to supervise private-party participants like banks,” said Laurence Platt, a partner with K&L Gates LLP.

Specifically, the potential rules would apply to aggregators, which serve to collect mortgages and pack them into securities, and guarantors, or firms that provide the private capital to back those securities. Mortgage servicers that process payments and provide other services to mortgages inside those securities would also be included under the FMIC’s regulatory umbrella, according to the bill.

The FMIC would also have the power to force the largest guarantors and aggregators to maintain higher capital standards than their smaller competitors as a way to mitigate the risk of any such market player becoming too big to fail, and will be able to limit such firms’ market share if they get too big, according to the bill.

Underwriting standards for mortgages that would be backed by the FMIC would match, as much as possible, the Consumer Financial Protection Bureau’s qualified mortgage standards, which went into effect in January, according to the legislation.

Moreover, the FMIC would be able to write regulations for force-placed insurance that is applied to mortgages where borrowers do not purchase their own private mortgage insurance under the legislation. The CFPB and other regulators have tackled perceived problems in the force-placed insurance market in recent months.

Extending those capital and other safety and soundness requirements to nonbank firms would be akin to extending supervision authority of nonbank mortgage servicers and other firms to the CFPB, a power granted by the Dodd-Frank Act, Reiss said.

“It can be described as part of the effort since the passage of Dodd-Frank to regulate the breadth of the financial services industry instead of one part of it, the banking sector,” he said.

Reiss on Mortgage Availability

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The Consumer Eagle quoted me in Will Mortgages be Harder to Get in 2014? It reads in part,

David Reiss, Professor of Law at Brooklyn Law School, also sees some benefit in more conservative guidelines. “The QM rules and ability-to-repay rules legislate commonsense things like making sure people can repay loans that they take out, which was something that was given up not only in the last boom but in the boom that preceded it. So from the consumer perspective, you now know that when you get a mortgage you’re probably going to be able to pay it back,” Reiss says. “Some consumers and some people in the industry would say let people make their own decisions with minimal consumer protection regulation, but we had a phase of that and it ended poorly for all of us.”

Borrowers who are self-employed or have irregular income may have a harder time qualifying for a loan under the new rules. Reiss notes that those who are ineligible for a QM may still be able to get a non-qualified mortgage. “What we haven’t seen is what this non-QM market is going to look like in 2014 and beyond,” Reiss says. “It’s a new market.”

Members of the banking industry have expressed concerns about the changes. In recent testimony before the House Committee on Financial Services, William Emerson, CEO of Quicken Loans and vice chair of the Mortgage Bankers Association, said the rules “are likely to unduly tighten mortgage credit for a significant number of creditworthy families who seek to buy or refinance a home” and “may impair credit access for many of the very consumers they are designed to protect.”

Reiss notes that consumer protections are always a compromise. “Regulators want to be conservative to protect consumers, but they also don’t want to keep people who would pay back their loans from getting credit,” he says. “There’s always a dance.”

Federalizing Monoline Mortgage Insurance

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The Federal Insurance Office of the Department of Treasury issued a report required pursuant to Dodd-Frank, How To Modernize And Improve The System Of Insurance Regulation In The United States, which addresses among other things the state of the monoline mortgage insurance industry:

Recommendation: Federal standards and oversight for mortgage insurers should be developed and implemented.

Like financial guarantors, private mortgage insurers are monoline companies that experienced devastating losses during the financial crisis. A business predominantly focused on providing credit enhancement to mortgages guaranteed by the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, mortgage insurers migrated from the core business of insuring conventional, well-underwritten mortgage loans to providing insurance on pools of Alt-A and subprime mortgages in the years leading up to the financial crisis. The dramatic decline in housing prices and the impact of the change in underwriting practices required mortgage insurers to draw down capital and reserves to pay claims resulting in the failure of three out of the eight mortgage insurers in the United States. Historically high levels of claim denials, including policy rescissions, helped put taxpayers at risk.

Regulatory oversight of mortgage insurance varies state by state. Though mortgage insurance coverage is provided nationally, only 16 states impose specific requirements on private mortgage insurers. Of these requirements, two govern the solvency regime and, therefore, are of particular significance: (1) a limit on total liability, net of reinsurance, for all policies of 25 times the sum of capital, surplus, and contingency reserves, (known as a 25:1 risk-to-capital ratio); and (2) a requirement of annual contributions to a contingency reserve equal to 50 percent of the mortgage insurer’s earned premium. In addition to the states, the GSEs (and through conservatorship, the Federal Housing Finance Agency) establish uniform standards and eligibility requirements that in some cases are more stringent than those required by state regulators. As the financial crisis unfolded, mortgage insurers no longer met state or contractual capital requirements. State regulators granted waivers in order to allow mortgage insurers to continue to write new business while the GSEs loosened other standards that were applicable to mortgage insurers.

The private mortgage insurance sector is interconnected with other aspects of the federal housing finance system and, therefore, is an issue of significant national interest. As the United States continues to recover from the financial crisis and works to reform aspects of the housing finance system, private mortgage insurance may be an important component of any reform package as an alternative way to place private capital in front of any government or taxpayer risk. Robust national solvency and business practice standards, with uniform implementation, for mortgage insurers would help foster greater confidence in the solvency and performance of housing finance. To achieve this objective, it is necessary to establish federal oversight of federally developed standards applicable to mortgage insurance. (31-32)

This critique of the monoline insurance industry seems accurate to me. The industry has a tendency to fail when it is needed most — during major financial crises. Having multiple states regulate monoline insurers allows this nationally (and globally) significant industry to engage in regulatory arbitrage — that is, finding the most pliable regulatory environment in which to operate. National regulation would solve that problem. As always, a single federal regulator is more prone to capture by the industry it regulates than a bunch of state regulators. We have, however, tried the alternative and it has not worked so well. I think a federal approach is worth a try.