The American Bankers Association has issued a white paper, Mortgage Lending Rules: Sensible Reforms for Banks and Consumers. The white paper contains a lot of common sense suggestions but its lack of sensitivity to consumer concerns greatly undercuts its value. It opens,
The Core Principles for Regulating the United States Financial System, enumerated in Executive Order 13772, include the following that are particularly relevant to an evaluation of current U.S. rules and regulatory practices affecting residential mortgage finance:
(a) empower Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth;
(c) foster economic growth and vibrant financial markets through more rigorous regulatory impact analysis that addresses systemic risk and market failures, such as moral hazard and information asymmetry; and
(f) make regulation efficient, effective, and appropriately tailored.
The American Bankers Association offers these views to the Secretary of the Treasury in relation to the Directive that he has received under Section 2 of the Executive Order.
Recent regulatory activity in mortgage lending has severely affected real estate finance. The existing regulatory regime is voluminous, extremely technical, and needlessly prescriptive. The current regulatory regimen is restricting choice, eliminating financial options, and forcing a standardization of products such that community banks are no longer able to meet their communities’ needs.
ABA recommends a broad review of mortgage rules to refine and simplify their application. This white paper advances a series of specific areas that require immediate modifications to incentivize an expansion of safe lending activities: (i) streamline and clarify disclosure timing and methodologies, (ii) add flexibility to underwriting mandates, and (iii) fix the servicing rules.
ABA advises that focused attention be devoted to clarifying the liability provisions in mortgage regulations to eliminate uncertainties that endanger participation and innovation in the real estate finance sector. (1, footnote omitted)
Its useful suggestions include streamlining regulations to reduce unnecessary regulatory burdens; clarifying legal liabilities that lenders face so that they can act more freely without triggering outsized criminal and civil liability in the ordinary course of business; and creating more safe harbors for products that are not prone to abuse.
But the white paper is written as if the subprime boom and bust of the early 2000s never happened. It pays not much more than lip service to consumer protection regulation, but it seeks to roll it back significantly:
ABA is fully supportive of well-regulated markets where well-crafted rules are effective in protecting consumers against abuse. Banks support clear disclosures and processes to assure that consumers receive clear and comprehensive information that enables them to understand the transaction and make the best decision for their families. ABA does not, therefore, advocate for a wholesale deconstruction of existing consumer protection regulations . . . (4)
If we learned anything from the subprime crisis it is that disclosure is not enough. That is why the rules. Could these rules be tweaked? Sure. Should they be dramatically weakened? No. Until the ABA grapples with the real harm done to consumers during the subprime era, their position on mortgage market reform should be taken as a special interest position paper, not a white paper in the public interest.