Lenders Give Dodd-Frank a Second Look

The Dodd-Frank regulations were intended to correct many of the problems witnessed during the build-up to the subprime financial crisis. In recent quarters, market participants and politicians have debated both tweaks to and wholesale replacement of the Dodd-Frank laws. Lenders who participated in the 1^st quarter Survey of Mortgage Originators shared their opinions on what changes should be made to the leadership structure of the CFPB as well as changes to the Qualified Mortgage (QM) rule.

The Dodd-Frank regulations touch housing in several ways. Dodd-Frank created the Ability to Repay (ATR) rule, which redefined which loans can be made and exemptions to it like the qualified mortgage rule (QM). It established a set of rules to govern how mortgages could be bundled and sold as mortgage backed securities (MBS) and it established an agency, the Consumer Financial Protection Bureau (CFPB), to protect consumers and to monitor financial companies. The CFPB has since promulgated other rules that affect housing like the “Know Before You Owe,” or TRID rule, which merged the Truth and Lending Act (TILA) and Real Estate Settlement Procedures Act (RESPA) rules that governed the origination process, disclosures to consumers, and compensation rules for lenders.

The clear majority of lenders in this survey favored changing the CFPB’s leadership structure from a single director to a five-member panel.  Only 11.8 percent of respondents wanted the CFPB eliminated indicating a recognition of the importance of protecting consumer interests. A far smaller share, at 5.9 percent, favored maintaining the status quo. One concern is that a single director could change with each administration whereas a 5-member panel would turnover in staggered terms, creating more stability and certainty for regulated entities. NAR’s board of directors recently voted in favor of such a plan.

When asked about changes to the QM rule that might be most beneficial, the top two choices by respondents were increasing the cap for rebuttable presumption loans from 150 basis points over the average prime offer rate (APOR) to 250 basis points and creating a consistent 43 percent back-end ratio across the industry. Currently, loans that are guaranteed by the FHA or the GSEs can have a back-end debt-to-income ratio greater than 43 percent and retain the QM standard. The QM status makes these loans more valuable to investors and as a result, they have better terms and lower rates. A higher cap on the rate over APOR would allow lenders to charge more for certain loans either for profit or to set aside capital for credit losses or potential litigation. This could help to expand credit, but it could also introduce more risk into the system.

Other noteworthy responses included a higher cap on points and fees that lenders can charge along with changing the small lender rule. Under the ATR, lenders’ fees are limited to no more than 3 percent of the loan, but some loans require more work like the FHA’s 203(k) rehab loans. In addition, many respondents feel that affiliate fees and points should not count towards 3 percent cap on loan fees, because it disadvantages firms with affiliates and reduces consumer choice. Finally, the small creditor portfolio (SCP) rule currently provides for an exemption to the ATR rule if a lender has less than $2 billion in assets, originates less than 2,000 mortgages annually, and holds the loans originated in portfolio for no less than 3 years. These loans are still limited to be fully underwritten, have product restrictions, but there is no cap on rate over APOR or back-end DTI. Since these loans are held in portfolio, a lender who originates a risky loan is incented to underwrite it well and to set aside adequate loss-absorbing capital. Lenders are in favor of expanding the small lender definition.

The Dodd-Frank regulations have a wide-sweeping impact on housing finance. Many of the regulations have benefited consumers, but a few may need refining. Lenders and NAR leadership agree that a change in leadership structure at the CFPB is in order, but lenders in the most recent Survey of Mortgage Originators argue that tweaks to other regulations are also needed. These tweaks could expand access, but that benefit should be balanced with potential risks to the market. However, the fundamental rights and protections of the consumer are clearly supported by lenders and REALTORS® alike.