The Hubris of Dodd-Frank
What Originators Need to Know About the Regulation of Their Industry
"Virtue is more to be feared than vice, because its excesses are not subject to the regulation of conscience."
-- Adam Smith, author of The Wealth of Nations
Adam Smith's point, in the quotation above, was that people who consider themselves to be virtuous, when granted power over the rest of us, are more dangerous than those of us who know we're fallible sinners, because the "sinners" at least have the occasional attack of conscience that moderates their vice. The virtuous, believing unquestioningly in their own virtue, have no such qualms.
For example, in 2008 we had a financial crisis, brought on by virtuous politicians, bureaucrats, and special interest groups who were dedicated to the proposition that home ownership should be made "affordable". These virtuous and well-meaning activists argued that Fannie & Freddie's underwriting guidelines were so strict that they were preventing low and moderate-income families from being able to buy homes. In 1992, Congress directed the GSEs to meet a quota: 30% of the loans they bought had to be for low and middle-income borrowers. These goals were raised over the years until, by 2008, 56% of all mortgage loans in the U.S. were subprime or of otherwise low quality from an underwriting standpoint. The flow of "easy" money for buying homes naturally spiked demand, which (also naturally) caused home prices to rise precipitously -- a classic bubble, created by government activism in the markets.
When the bubble predictably burst, the virtuous politicians and special interest groups immediately blamed it all on Wall Street greed, the banks and the money lenders.
The very same people whose legislation and regulation caused the bubble in the first place, now told us the problem was that the financial services sector was not sufficiently regulated, and that we needed to "reform" it. The result was the Dodd-Frank Act. As I hope to show, this series of events is a perfect illustration of Adam Smith's point. People who sincerely believe themselves to be virtuous, and acting with the best of intentions, brought one-sixth of the economy to its knees. Still believing themselves to be virtuous, there was no way it would have occurred to them that their actions had been the catalyst for the crash. So they made the lending industry the scapegoat and called for more regulation.
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A client of mine attended a conference in 2013 where David Stevens, then president of the Mortgage Bankers Association, was the keynote speaker.
The gist of Mr. Stevens' comments was that he expected 2014 to be a difficult year for the mortgage industry – the result of a stagnant economy, chronically high unemployment, and the consequences of massive new regulation that will continue to make it more difficult -- and dangerous -- for lenders to lend, while raising the cost consumers must pay to obtain mortgage financing.
The good news, Mr. Stevens said, is that there would likely be a reaction to these consequences that would begin to push the pendulum in the opposite direction. In other words, the government will be forced to undo some of its regulatory excess in order to make it easier (and less expensive) for people to finance their home purchases.
I hope he's right, and there are encouraging signs as a result of the appointment of Mick Mulvaney as acting head of the CFPB. But even if Stevens is right, the regulatory infrastructure is pretty deeply entrenched, and is being run by people with less understanding of mortgage lending than you might think, and far less appreciation for the unintended consequences of their actions than you might like. It's likely (and appropriate) that 90% of your professional attention is on originating loans. But federal regulatory oversight has already significantly altered the mortgage marketplace, and you would ignore its potential to threaten your livelihood at your own peril.
For example, in 2008 we had a financial crisis, brought on by virtuous politicians, bureaucrats, and special interest groups who were dedicated to the proposition that home ownership should be made "affordable". These virtuous and well-meaning activists argued that Fannie & Freddie's underwriting guidelines were so strict that they were preventing low and moderate-income families from being able to buy homes. In 1992, Congress directed the GSEs to meet a quota: 30% of the loans they bought had to be for low and middle-income borrowers. These goals were raised over the years until, by 2008, 56% of all mortgage loans in the U.S. were subprime or of otherwise low quality from an underwriting standpoint. The flow of "easy" money for buying homes naturally spiked demand, which (also naturally) caused home prices to rise precipitously -- a classic bubble, created by government activism in the markets.
When the bubble predictably burst, the virtuous politicians and special interest groups immediately blamed it all on Wall Street greed, the banks and the money lenders.
The very same people whose legislation and regulation caused the bubble in the first place, now told us the problem was that the financial services sector was not sufficiently regulated, and that we needed to "reform" it. The result was the Dodd-Frank Act. As I hope to show, this series of events is a perfect illustration of Adam Smith's point. People who sincerely believe themselves to be virtuous, and acting with the best of intentions, brought one-sixth of the economy to its knees. Still believing themselves to be virtuous, there was no way it would have occurred to them that their actions had been the catalyst for the crash. So they made the lending industry the scapegoat and called for more regulation.
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A client of mine attended a conference in 2013 where David Stevens, then president of the Mortgage Bankers Association, was the keynote speaker.
The gist of Mr. Stevens' comments was that he expected 2014 to be a difficult year for the mortgage industry – the result of a stagnant economy, chronically high unemployment, and the consequences of massive new regulation that will continue to make it more difficult -- and dangerous -- for lenders to lend, while raising the cost consumers must pay to obtain mortgage financing.
The good news, Mr. Stevens said, is that there would likely be a reaction to these consequences that would begin to push the pendulum in the opposite direction. In other words, the government will be forced to undo some of its regulatory excess in order to make it easier (and less expensive) for people to finance their home purchases.
I hope he's right, and there are encouraging signs as a result of the appointment of Mick Mulvaney as acting head of the CFPB. But even if Stevens is right, the regulatory infrastructure is pretty deeply entrenched, and is being run by people with less understanding of mortgage lending than you might think, and far less appreciation for the unintended consequences of their actions than you might like. It's likely (and appropriate) that 90% of your professional attention is on originating loans. But federal regulatory oversight has already significantly altered the mortgage marketplace, and you would ignore its potential to threaten your livelihood at your own peril.
"You Ain't Seen Nothin' Yet!"
President Barack Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law on July 21, 2010.
While the law itself was "only" 3200 pages long, it established or expanded the roles of an alphabet soup of regulatory agencies who were charged with, and given the authority to change at will, some 400 new sets of industry rules.
More than 3 years later, these regulators have only published about 39% of these rules (according to CNBC). In other words, they're just getting started.
Extrapolating from the size of the rules that have been published so far, by the time all of the regulations authorized by the Dodd Frank Act have been completed*, the Dodd Frank Act and all its regulations will weigh in at something like 51.6 million words. The average adult reading speed is about 300 words per minute. At this rate, it would take you more than 2,867 hours. If you spent 8 uninterrupted hours every day reading it, it would take you 359 days to finish. I can't speak for how much of it you would have retained by the time you were done. We are talking about fairly dense legal bureaucratese here, not a Tom Clancy thriller. (*"Completed" isn't quite the right word to use, since the regulatory agencies now are self-perpetuating and have the authority to continue to revise and expand on all these rules.)
Let's put that in perspective:
President Barack Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law on July 21, 2010.
While the law itself was "only" 3200 pages long, it established or expanded the roles of an alphabet soup of regulatory agencies who were charged with, and given the authority to change at will, some 400 new sets of industry rules.
More than 3 years later, these regulators have only published about 39% of these rules (according to CNBC). In other words, they're just getting started.
Extrapolating from the size of the rules that have been published so far, by the time all of the regulations authorized by the Dodd Frank Act have been completed*, the Dodd Frank Act and all its regulations will weigh in at something like 51.6 million words. The average adult reading speed is about 300 words per minute. At this rate, it would take you more than 2,867 hours. If you spent 8 uninterrupted hours every day reading it, it would take you 359 days to finish. I can't speak for how much of it you would have retained by the time you were done. We are talking about fairly dense legal bureaucratese here, not a Tom Clancy thriller. (*"Completed" isn't quite the right word to use, since the regulatory agencies now are self-perpetuating and have the authority to continue to revise and expand on all these rules.)
Let's put that in perspective:
- There are 4,543 words in the U.S. Constitution
- There are 774, 746 words in the Bible.
- There are 381,517 words in the Affordable Care Act (ObamaCare), but bureaucracies in the Obama Administration have thus far published an additional 11,588,500 words of final regulations.
Now, to be fair, no one really knows how many more rules and regulations will be included in the ObamaCare law (delightfully named The Affordable Care and Patient Protection Act). It is entirely possible that ObamaCare will end up dwarfing the size of the Dodd Frank Act.
Somehow, that doesn't reassure me.
From the People Who Brought You the $435 Hammer and the $640 Toilet Seat
For some reason, many Americans seem to think that when a problem is big enough, we need to turn it over to the government and let them solve it. One example of how this tends to work out is the "Big Dig" – a taxpayer-funded tunnel project in Boston Massachusetts. The project was originally scheduled to be completed in 1998 at an estimated cost of $2.8 billion. Instead, the project was "completed" 9 years late in 2007, at a cost of over $14.6 billion – a cost overrun of about 190%, adjusted for inflation -- again because the project was completed 9 years late. The Boston Globe estimated that the project will ultimately cost $22 billion, including interest, and that it will not be paid off until 2038.
Oh, and by the way, the darned thing leaks and occasionally drops ceiling tiles on cars driving through the tunnel.
We're getting a similar level of efficiency from the CFPB and the rest of the Dodd Frank agencies.
As of the beginning of June 2013, 175 of 279 Dodd-Frank deadlines had been missed, while only 104 deadlines had been met with finalized rules. Of the 398 total Dodd-Frank rulemaking requirements, regulators have missed 70.1% of rulemaking deadlines, and missed 99.6% of 280 rules with specified deadlines. Regulators have yet to release proposals for 64 of the 175 missed rules, according to Bank Credit News.
Somehow, that doesn't reassure me.
From the People Who Brought You the $435 Hammer and the $640 Toilet Seat
For some reason, many Americans seem to think that when a problem is big enough, we need to turn it over to the government and let them solve it. One example of how this tends to work out is the "Big Dig" – a taxpayer-funded tunnel project in Boston Massachusetts. The project was originally scheduled to be completed in 1998 at an estimated cost of $2.8 billion. Instead, the project was "completed" 9 years late in 2007, at a cost of over $14.6 billion – a cost overrun of about 190%, adjusted for inflation -- again because the project was completed 9 years late. The Boston Globe estimated that the project will ultimately cost $22 billion, including interest, and that it will not be paid off until 2038.
Oh, and by the way, the darned thing leaks and occasionally drops ceiling tiles on cars driving through the tunnel.
We're getting a similar level of efficiency from the CFPB and the rest of the Dodd Frank agencies.
As of the beginning of June 2013, 175 of 279 Dodd-Frank deadlines had been missed, while only 104 deadlines had been met with finalized rules. Of the 398 total Dodd-Frank rulemaking requirements, regulators have missed 70.1% of rulemaking deadlines, and missed 99.6% of 280 rules with specified deadlines. Regulators have yet to release proposals for 64 of the 175 missed rules, according to Bank Credit News.
We're from the Government, and We're Here to Help You
The CFPB's new “qualified mortgage” standards will take effect at the beginning of 2014. The CFPB's new RESPA-TIL mortgage disclosure rules take effect in January 2014, but lenders have been given a 20 month phase-in period to implement them. The industry will need all of that time, as these new regulations will require extensive and expensive retooling of LOS software and compliance systems.
In an Oct. 22 news article, The Wall St. Journal reported on a speech that CFPB Director Richard Cordray delivered to bankers, in which he said the government is trying to help the industry comply with the new lending rules:
The CFPB's new “qualified mortgage” standards will take effect at the beginning of 2014. The CFPB's new RESPA-TIL mortgage disclosure rules take effect in January 2014, but lenders have been given a 20 month phase-in period to implement them. The industry will need all of that time, as these new regulations will require extensive and expensive retooling of LOS software and compliance systems.
In an Oct. 22 news article, The Wall St. Journal reported on a speech that CFPB Director Richard Cordray delivered to bankers, in which he said the government is trying to help the industry comply with the new lending rules:
“Many of you and your colleagues have told us that you need certainty in order to plan and in order to execute. In no single market is certainty more important than in the recovering mortgage market.”
But the Department of Housing and Urban Development didn’t sign on to the statement, leading MBA chief executive David Stevens to remark, “This is exactly why we’ve continued to call for better policy coordination in these rule makings among all the regulators. The absence of HUD is noticeable.”
According the the WSJ, part of the mortgage industry's concern is that complying with the CFPB's "qualified mortgage" rules will put lenders at odds with HUD, which is charged with enforcing the Fair Housing Act (enacted in 1968). In February, HUD issued a regulation endorsing the use of "statistical analysis" as a way of demonstrating whether lender practices have a disproportionate impact on minorities. (The assumption is that if a higher percentage of minoritiy applicants are turned down for financing -- regardless of their DTI ratio or their credit history -- the reason for it must be discrimination.) The Obama administration has used the “disparate-impact” legal principle to extract huge settlements from banks for allegedly discriminating against mortgage borrowers.
But HUD, which has been around for a long time, is hardly the biggest threat to the industry. Consider the following facts about the CFPB:
The Dodd Frank Act (which created the CFPB) became law in July 2010. By the end of 2012, the CFPB had an annual budget of a half-billion dollars and some 1,300 employees. What has it done with these resources? According to the U.S. House of Representatives Committee on Oversight and Government Reform, the CFPB in its first year, through its regulatory powers, “has increased the cost of consumer credit by a total of $17 billion and depressed job creation by about 150,000 jobs.” (The increased cost to consumers represents about $2,000 per loan, based on 2012 origination figures.)
Although the Congress and president created it, the CFPB operates beyond their oversight. The Bureau gets its money from the Federal Reserve and from fines it imposes on financial institutions. The president can only remove the director for “good cause,” such as gross negligence or criminality, but not policy disputes. The Federal Reserve can't remove the director for any reason. Although the agency’s budget comes from the Fed, the Fed chairman has limited control over it. In fact, the Fed has no control over any employee of the CFPB or over any rule that the CFPB implements. The CFPB is essentially a sovereign entity.
Here's the kicker: while one arm of the CFPB regulates the mortgage industry to prevent it from making unsafe loans, another arm of the Bureau actively solicits complaints from consumers who have been turned down for loans or who feel they have otherwise been mistreated by lenders.
Inside Mortgage Finance reported that CFPB Director Richard Cordray told attendees at the annual convention of the American Bankers Association:
According the the WSJ, part of the mortgage industry's concern is that complying with the CFPB's "qualified mortgage" rules will put lenders at odds with HUD, which is charged with enforcing the Fair Housing Act (enacted in 1968). In February, HUD issued a regulation endorsing the use of "statistical analysis" as a way of demonstrating whether lender practices have a disproportionate impact on minorities. (The assumption is that if a higher percentage of minoritiy applicants are turned down for financing -- regardless of their DTI ratio or their credit history -- the reason for it must be discrimination.) The Obama administration has used the “disparate-impact” legal principle to extract huge settlements from banks for allegedly discriminating against mortgage borrowers.
But HUD, which has been around for a long time, is hardly the biggest threat to the industry. Consider the following facts about the CFPB:
The Dodd Frank Act (which created the CFPB) became law in July 2010. By the end of 2012, the CFPB had an annual budget of a half-billion dollars and some 1,300 employees. What has it done with these resources? According to the U.S. House of Representatives Committee on Oversight and Government Reform, the CFPB in its first year, through its regulatory powers, “has increased the cost of consumer credit by a total of $17 billion and depressed job creation by about 150,000 jobs.” (The increased cost to consumers represents about $2,000 per loan, based on 2012 origination figures.)
Although the Congress and president created it, the CFPB operates beyond their oversight. The Bureau gets its money from the Federal Reserve and from fines it imposes on financial institutions. The president can only remove the director for “good cause,” such as gross negligence or criminality, but not policy disputes. The Federal Reserve can't remove the director for any reason. Although the agency’s budget comes from the Fed, the Fed chairman has limited control over it. In fact, the Fed has no control over any employee of the CFPB or over any rule that the CFPB implements. The CFPB is essentially a sovereign entity.
Here's the kicker: while one arm of the CFPB regulates the mortgage industry to prevent it from making unsafe loans, another arm of the Bureau actively solicits complaints from consumers who have been turned down for loans or who feel they have otherwise been mistreated by lenders.
Inside Mortgage Finance reported that CFPB Director Richard Cordray told attendees at the annual convention of the American Bankers Association:
“Institutions also know, or should know, that our supervision and enforcement teams are keeping a watchful eye on the consumer complaints we receive. The patterns reflected in those complaints can prompt investigations or be the basis for prioritizing supervisory attention through the risk scoping of examinations.”
In September, Inside Mortgage Finance reported that the Consumer Financial Protection Bureau has “accepted” 200,000 consumer complaints, a majority of which are tied to mortgage banking practices. The figure was disclosed in a speech by Bureau chief Cordray at a conference sponsored by SourceMedia.
The CFPB can issue cease-and-desist orders that go into effect immediately against businesses. According to author Jay Richards*, "Such actions are already happening, though you’ll have a hard time finding news stories about them. I have spoken to employees of firms who describe the experience of being ordered by the CFPB to cease and desist as a sort of SWAT raid— except that the officers wear suits and carry briefcases and don’t bring search warrants." (They don't bring search warrants because they don't need them.)
Dodd-Frank (in Sec. 1031, entitled “Prohibiting Unfair, Deceptive, or Abusive Acts or Practices.”) gives the CFPB the power to unilaterally “declare” that a company has engaged in “unfair, deceptive, or abusive acts or practices.” Companies targeted by the Consumer Bureau are guilty— and effectively shut down— until they can prove themselves innocent.
John Adams, our second president, famously said that we are "a nation of laws, not of men." In a nation of laws, no one, no matter how powerful, is above the law. The U.S. Constitution carefully crafted a system of checks and balances so that no branch of the government -- executive, legislative, or judicial -- could exceed its authority -- or evade its responsibility. But the Dodd Frank Act is the latest, and one of the most egregious cases in modern history in which the Congress has abdicated its own oversight responsibilities by passing a law -- essentially a 3200-page empty shell -- that creates unaccountable regulatory agencies like the CFPB, and gives them the authority to make rules that have the full force of law -- all without oversight by Congress.
In 2009, Harvey Silverglate, a noted civil liberties attorney, wrote Three Felonies a Day -- "the story of how citizens from all walks of life—doctors, accountants, businessmen, political activists, and others—have found themselves the targets of federal prosecutions, despite sensibly believing that they did nothing wrong, broke no laws, and harmed not a single person." According to Silverglate, "even the most intelligent and informed citizen cannot predict with any reasonable assurance whether a wide range of seemingly ordinary activities might be regarded by federal prosecutors as felonies."
The CFPB can issue cease-and-desist orders that go into effect immediately against businesses. According to author Jay Richards*, "Such actions are already happening, though you’ll have a hard time finding news stories about them. I have spoken to employees of firms who describe the experience of being ordered by the CFPB to cease and desist as a sort of SWAT raid— except that the officers wear suits and carry briefcases and don’t bring search warrants." (They don't bring search warrants because they don't need them.)
Dodd-Frank (in Sec. 1031, entitled “Prohibiting Unfair, Deceptive, or Abusive Acts or Practices.”) gives the CFPB the power to unilaterally “declare” that a company has engaged in “unfair, deceptive, or abusive acts or practices.” Companies targeted by the Consumer Bureau are guilty— and effectively shut down— until they can prove themselves innocent.
John Adams, our second president, famously said that we are "a nation of laws, not of men." In a nation of laws, no one, no matter how powerful, is above the law. The U.S. Constitution carefully crafted a system of checks and balances so that no branch of the government -- executive, legislative, or judicial -- could exceed its authority -- or evade its responsibility. But the Dodd Frank Act is the latest, and one of the most egregious cases in modern history in which the Congress has abdicated its own oversight responsibilities by passing a law -- essentially a 3200-page empty shell -- that creates unaccountable regulatory agencies like the CFPB, and gives them the authority to make rules that have the full force of law -- all without oversight by Congress.
In 2009, Harvey Silverglate, a noted civil liberties attorney, wrote Three Felonies a Day -- "the story of how citizens from all walks of life—doctors, accountants, businessmen, political activists, and others—have found themselves the targets of federal prosecutions, despite sensibly believing that they did nothing wrong, broke no laws, and harmed not a single person." According to Silverglate, "even the most intelligent and informed citizen cannot predict with any reasonable assurance whether a wide range of seemingly ordinary activities might be regarded by federal prosecutors as felonies."
"I, for One, Welcome Our New Insect Overlords"
In an episode of The Simpsons, Homer becomes an astronaut, and on a spaceflight, he breaks a container of ants (part of a biology experiment). The ants are soon floating all over the cabin, and as they get close to the lens of the camera sending video feed back to Earth, they appear huge. This prompts a panic on the part of newsman Kent Brockman, who, fearing a takeover of earth by these giant ants, says, "I, for one, welcome our new insect overlords. I'd like to remind them, that as a trusted TV personality, I can be helpful in rounding up others to toil in their underground sugar caves."
Despite the Dodd Frank Act's stated purpose of protecting the average consumer, portions of the legislation were influenced or written by Wells Fargo, B of A, J.P. Morgan Chase, and other major banking industry players. And their influence continues. CNBC reported that since July 2010, the six biggest U.S. financial institutions have met with federal agencies over Dodd-Frank more than 1,000 times, according to research by the Sunlight Foundation.
Of course, the role of the nation's biggest financial institutions in shaping the regulatory climate that rules the mortgage industry does not necessarily mean that these laws, rules, and regulations are anti-consumer, or designed to stifle competition from smaller lenders.
Nevertheless, the sheer complexity of the mortgage regulatory climate, and the severe consequences for companies that deliberately or inadvertently run afoul of these regulations, has been a matter of great concern for non-bank lenders, small banks, mortgage brokers, and credit unions. And it is undeniably true that it is easier for the megabanks to create or sustain the infrastructure needed to both comply, as well as to defend themselves in the courts against actions taken against them. You may have noted the news that, in the last quarter, J.P. Morgan Chase spent $9 billion on lawyers to deal with claims arising arising from the financial crisis of 2008. An expense like that would probably have bankrupted 80% or more of bank and nonbank mortgage lenders, but as Forbes reported on Oct. 10th, "Despite an expected dip in profit, analysts are generally optimistic about JP Morgan Chase as it prepares to report its third quarter earnings."
It is small wonder then, that the megabanks have "welcomed our new overlords." The higher the regulatory risks and costs of being in the business of making mortgage loans, the fewer competitors for the "too big to fail" banks to worry about.
You and I -- and our clients, and business partners, like Realtors -- may not feel quite the same way.
In an episode of The Simpsons, Homer becomes an astronaut, and on a spaceflight, he breaks a container of ants (part of a biology experiment). The ants are soon floating all over the cabin, and as they get close to the lens of the camera sending video feed back to Earth, they appear huge. This prompts a panic on the part of newsman Kent Brockman, who, fearing a takeover of earth by these giant ants, says, "I, for one, welcome our new insect overlords. I'd like to remind them, that as a trusted TV personality, I can be helpful in rounding up others to toil in their underground sugar caves."
Despite the Dodd Frank Act's stated purpose of protecting the average consumer, portions of the legislation were influenced or written by Wells Fargo, B of A, J.P. Morgan Chase, and other major banking industry players. And their influence continues. CNBC reported that since July 2010, the six biggest U.S. financial institutions have met with federal agencies over Dodd-Frank more than 1,000 times, according to research by the Sunlight Foundation.
Of course, the role of the nation's biggest financial institutions in shaping the regulatory climate that rules the mortgage industry does not necessarily mean that these laws, rules, and regulations are anti-consumer, or designed to stifle competition from smaller lenders.
Nevertheless, the sheer complexity of the mortgage regulatory climate, and the severe consequences for companies that deliberately or inadvertently run afoul of these regulations, has been a matter of great concern for non-bank lenders, small banks, mortgage brokers, and credit unions. And it is undeniably true that it is easier for the megabanks to create or sustain the infrastructure needed to both comply, as well as to defend themselves in the courts against actions taken against them. You may have noted the news that, in the last quarter, J.P. Morgan Chase spent $9 billion on lawyers to deal with claims arising arising from the financial crisis of 2008. An expense like that would probably have bankrupted 80% or more of bank and nonbank mortgage lenders, but as Forbes reported on Oct. 10th, "Despite an expected dip in profit, analysts are generally optimistic about JP Morgan Chase as it prepares to report its third quarter earnings."
It is small wonder then, that the megabanks have "welcomed our new overlords." The higher the regulatory risks and costs of being in the business of making mortgage loans, the fewer competitors for the "too big to fail" banks to worry about.
You and I -- and our clients, and business partners, like Realtors -- may not feel quite the same way.
What Can You Do About It?
You're probably familiar with the Serenity Prayer:
"God grant me the serenity to accept the things I cannot change,
the courage to change the things I can,
and the wisdom to know the difference."
Very often in the field of human endeavor, the most difficult part is having the wisdom to know the difference between the things we can change, and the things we cannot change.
With that in mind, I offer the following suggestions for surviving the perils of our current regulatory climate.
You're probably familiar with the Serenity Prayer:
"God grant me the serenity to accept the things I cannot change,
the courage to change the things I can,
and the wisdom to know the difference."
Very often in the field of human endeavor, the most difficult part is having the wisdom to know the difference between the things we can change, and the things we cannot change.
With that in mind, I offer the following suggestions for surviving the perils of our current regulatory climate.
- Stay informed. Multiple government agencies independently regulate mortgage lending. As I've tried to show in this article, these regulations are complex, extensive, constantly changing, and sometimes even contradictory. With a relatively small investment of your time, you can stay abreast of major trends in regulation by following publications that cover our industry. I like the Wall Street Journal and Inside Mortgage Finance, but there are a number of other publications that cover these matters. I would also recommend that you consider a subscription to Mortgage Currentcy; in addition to providing news and information about industry regulations and changes in underwriting guidelines, Mortgage Currentcy also provides its members with a help desk you can call for answers to your specific questions.
- Educate your clients (and Realtors). 5 years after the crash and more than 3 years after the enactment of Dodd Frank, too many loan originators still aren't adequately preparing their clients for the loan processing and approval experience. Here's an example of the kinds of things you should be saying to your clients and Realtors:
"Every mortgage loan made in the US today gets a lot more scrutiny than it would have gotten before 2008. It's not that we don't want to give you a loan – the opposite is true, this is how we earn our living – but we now have to follow rules that are set by half a dozen or more Federal and state agencies. There are millions of pages of these rules, and we have to make sure we dot every "i" and cross every "t".
"This means that you will probably have to provide more documentation than you would have had to provide in the past. There will be more paperwork. There will be a larger stack of documents for you to sign when you apply, and when you close your loan. You may very well be asked to provide information that you think is completely irrelevant to your loan application, or to the question of whether you have good credit and the ability to repay your loan. In many cases, you will be right about that, and I will be in agreement with you about it, but it won't change the fact that the information will have to be provided if we are going to get your loan approved. Underwriters at every bank and mortgage company in the nation have become extremely conservative, because in the aftermath of the banking and housing crisis, lenders were forced by the government to buy back billions of dollars in mortgage loans that had been sold to government agencies like Fannie Mae and Freddie Mac. So mortgage lenders now feel they must do everything in their power to prove that they have thoroughly underwritten every loan they make. I apologize in advance for the inconvenience this will cause you, but I can tell you you would run into the same problem anywhere else – if not worse.
"The good news is that I am very knowledgeable and highly experienced in dealing with all of the frustrations of the loan process, and I will be in your corner fighting for you every step of the way. I will do everything I possibly can to make this process as easy as possible for you, but I wouldn't be being fair or honest with you if I didn't tell you that it's harder than it was a few years ago."
Some originators might think this is overkill -- might even be afraid that speaking with this kind of candor to loan prospects will scare them away. But I get reports from the field almost every day -- from loan officers who go above and beyond what's required of them in order to get their clients' loans closed, and still get blamed for the hassle and delay – all because they didn't properly prepare people ahead of time.
From a sales perspective, I would also add that if you let your clients and Realtors know about all of the things you are doing to make sure that their transaction gets closed, they are much more likely to be appreciative of your efforts. This is no time for false modesty. You're the only reason this transaction didn't die from starvation and neglect. Make sure your clients and Realtors know it.
From a sales perspective, I would also add that if you let your clients and Realtors know about all of the things you are doing to make sure that their transaction gets closed, they are much more likely to be appreciative of your efforts. This is no time for false modesty. You're the only reason this transaction didn't die from starvation and neglect. Make sure your clients and Realtors know it.
- Take good care of your clients. One of the best defenses against getting caught in the regulatory net is to have happy, loyal clients. Sometimes, it can even help you get a good loan closed when your underwriting or closing Department is giving you fits about approving or closing a loan that meets guidelines. For example, one of my coaching clients (who works for a national non-bank lender), after getting the loan through underwriting, found that her funding department was balking at closing the loan because the closer misunderstood the guidelines. After unsuccessfully trying to educate the closer on the applicable guideline, my client (with the full support of her borrowers) contacted her company's legal department, explained the situation, and let it be known that if the loan did not fund on time, her clients were threatening to file a complaint with the CFPB. The loan was funded the next day. (This is a rare instance in which one aspect of the regulatory climate actually helped my client get her clients' loan closed! It also demonstrates how truly frightened of the CFPB and other regulatory agencies your company is)
- Rely on (and follow) the rules as set by your company's compliance department. If they tell you to do things a certain way, do them that way – even if you think it's silly or unnecessary. This obviously includes things like disclosures and adverse action notifications, but it also extends to rules about advertising and marketing. In particular, I think you will find that one way to stay out of trouble is to avoid saying anything about rates or pricing in your advertising. Focusing on pricing in your marketing is a fool's errand anyway – your survival in today's market is far better insured by focusing on providing a higher level of service to clients and Realtors – thinking "outside the box" in order to provide value and service that your competitors don't provide. It is almost impossible for a consumer to get a truly accurate, real-time comparison between the bottom-line pricing of two lenders because rates can change daily and don't mean anything until they're locked. Mortgage loans are a commodity. Mortgage loan officers don't have to be commodities; they can be much more.
- Get involved. Educate yourself on the roles of your elected representatives in passing (or opposing) the Dodd-Frank Act, and vote accordingly. If you're so inclined, you can take a more active role -- for example, by actively supporting candidates who are committed to the repeal of Dodd-Frank. (House vote on the Dodd-Frank Act: https://www.govtrack.us/congress/votes/111-2009/h968; Senate vote on the Dodd-Frank Act: http://www.senate.gov/legislative/LIS/roll_call_lists/roll_call_vote_cfm.cfm?congress=111&session=2&vote=00208)