Last week, the House of Representatives passed, and the President signed, The Economic Growth, Regulatory Relief and Consumer Protection Act (S.2155). The Act rolls back several provisions of The Dodd-Frank Act, the law that was enacted to regulate banks following the financial crisis to help assure that tax payers would not have to bail out banks again. With the economy continuing to strengthen, smaller banks have argued that the tight regulations imposed by Dodd-Frank have made it difficult to compete. Wall Street concurs and argues that loosening restrictions would generate growth in underserved areas allowing community banks and credit unions to free up capital to lend to smaller borrowers who might not otherwise qualify for loans from larger banks.

The Act removes stress test requirements for banks with assets of less than $250 billion. This provision alone should help consumers in rural areas because credit will free up for community banks and credit unions according to Redfin chief economist Nela Richardson. Lawrence Yin, NAR chief economist expects that there will be a rise in regional construction because small, local home builders will be more likely to obtain construction loans from community banks.

The Act is getting praise across the board from the real estate industry. But there is concern that the Act opens the door to the old practices that brought about the crises in 2008. The “Volcker Rule”, which prohibits financial firms from investing proprietary funds, was eliminated for banks with less than $10 billion in assets. This could cause banks to lose federally insured money on risky investments. Fannie Mae and Freddie Mac are now required to consider alternative credit scoring models. This could open the door to loans to borrowers who don’t have the ability to repay loans. Small banks are exempt from certain disclosure requirements. Redfin’s Richardson says that this could lead to racial inequality in lending.

The result of the Act is that only the 10 biggest banks in the country remain subject to full federal oversight. House Minority Leader Nancy Pelosi (D-CA) says “it’s a bad bill under the guise of helping community banks”. Pelosi said that the Act will take us back to the pre-meltdown days.

The biggest critic of the Act and the biggest advocate of banking reform, Senator Elizabeth Warren (D-MA) said the bill would “bail out big banks again” and would increase the likelihood of taxpayer bailouts. Senator Warren argued that the Act exempts 2 dozen financial firms with assets from $50 billion to $250 billion from the strictest rules imposed by Dodd-Frank. These banks received billions of dollars in bailouts and should not have oversight relaxed says Senator Warren.  Although she supports helping community banks, Senator Warren believes the Act goes way too far.

However, the Congressional Budget Office report says that the relaxation of the regulations creates a “slightly greater risk” of another crash and bailout”. Currently, CBO says, we are at only a “small risk”. Barney Frank, one of the authors of Dodd-Frank says that there is “nothing” in the legislation that damages the regulations intended to curb risk taking by large banks. Those regulations were not weakened for the largest banks. While Frank believes the $50 billion threshold is too low and the $250 billion threshold is too high, the overall risk of harm caused by the new Act is low.

It might be too early to understand the overall effects of the new Act, but it appears that more money will be infused into real estate. If the Act is not the fore runner to further loosening of Dodd-Frank restrictions which allow reckless practices, then the Act could be a good thing. However, if it is used as a crack that Wall Street uses to burst through to fully de-regulate and return banks to the days of the Wild West, we need to be vigilant.

Last week, the House of Representatives passed HR 1153, the Mortgage Choice Act. The Act, sponsored by Representatives Bill Huizenga (R-MI), Steve Stivers (R-OH), Mike Doyle (D-PA) and David Joyce (R-OH), passed with a small amount of bi-partisan support and was strongly supported by the NAR.  The Act amends Dodd-Frank and is intended to encourage competition between smaller mortgage lenders and large financial institutions.  If ultimately passed as is by the Senate and signed by the President, the Mortgage Choice Act will in deed open up new choices for home buyers looking for financing.  However, Congress will have not only stripped away another level of consumer protection, it will have missed an opportunity to strengthen existing consumer protection.

The Act would change definitions applicable to the Qualified Mortgage Rule under Dodd-Frank allowing mortgage brokers and title companies affiliated with real estate brokers to compete with large institutions. Under the Qualified Mortgage Rule, fees and points associated with a loan can not exceed 3% of the loan amount.  Under current law, “Affiliated Businesses” must count more fees toward the cap, including fees paid to affiliated title companies (like title premium) and insurance companies, as well as monies held in escrow.  The Act changes this differing treatment allowing more competition.

The Democratic Whip report prior to the vote last week noted that the exclusion of these fees, if enacted, “could result in mortgages that turn out to be beyond the means of the borrower to repay.” However, the report failed to mention the distinction between Affiliated Businesses which the Act addressed, and larger financial institutions, which are not required to include these fees in calculating the 3% threshold.  Herein lies the missed opportunity.  While the Democrats make a good point, most home buyers are still saddled with these fees and costs, which are generally paid to unaffiliated businesses and therefore, not calculated in determining whether the borrower can afford the loan.

If either side had offered an amendment or alternate legislation to require all 3rd party costs be included in making the 3% determination, small lenders and Affiliated Businesses would be on equal footing with large institutions, which was the basis of NAR’s argument in support of the Act AND consumer protection would increase at no additional cost to the government. But this did not happen.  As a result, the Mortgage Choice Act is a failed opportunity.

Republicans in Congress have long talked about the need to replace the Dodd-Frank Financial Reform Act. President Trump made replacement of the Act one of his campaign promises, notwithstanding  that components of Dodd-Frank were instrumental in helping to jump start the economy following the financial crisis and giving banks and financial institutions an opportunity to recover.  The Consumer Financial Protection Bureau (CFPB) was established by Dodd-Frank to protect consumers in the financial sector.  The CFPB is a prime target of the opponents to Dodd-Frank.

Earlier this month, the House took the first step to scale back Dodd-Frank. The Financial Choice Act passed the House Financial Services Committee on May 5 and will move on to the full House sometime this summer.  The bill, sponsored by House Finance Committee Chairman Jeb Hensarling (R-TX) is designed to gut Dodd-Frank and is Representative Hensarling’s 2nd attempt to do so.  It would take responsibilities away from the Federal Reserve and from the CFPB and lift restrictions on banks’ ability to  invest in certain assets.  The so-called “Volcker Rule” would be repealed which bans banks from making investments using their own capital.  The Act would create a new bankruptcy subchapter for large financial institutions.  This would eliminate the “too big to fail” mentality forcing failing banks into bankruptcy and eliminate TARP like government bailouts.

The bill would also provide banks relief from stress tests. Currently, stress tests are performed annually.  The legislation proposes bi-annual stress tests.  Each of these changes will weaken the public’s confidence in financial institutions’ strength and solvency.  Changes to Dodd-Frank are certainly necessary; even Barney Frank, whose name is on the landmark legislation, calls for reform.  But Representative Maxine Watters (D-CA), the ranking member on the House Finance Committee, calls the Financial Choice Act “one of the worst bills” she has ever seen.

The Act also would change the CFPB to the Consumer Financial Opportunity Agency. Like the CFPB, the new agency would have 1 director.  However, the director would be removable by the president at will – a chief complaint under the current structure.  Additionally, the agency would only have enforcement powers and no regulatory authority.  All regulatory power would be in the hands of Congress.

There has not yet been any real discussion or support for this bill in the Senate and the Administration’s response has been tepid. Yet, given the president’s appetite for victories, it is possible he could get behind this still and make a push.

I have often argued change is always good. But change just for change sake is a waste and is unwise.  If politics could ever be removed from this discussion, there are many changes to Dodd-Frank that both Democrats and Republicans could support and that would benefit consumers and banks.  Unfortunately, we aren’t anywhere near having that discussion.

The Dodd-Frank Act has many critics. Though supporters would argue that it has been successful on many fronts, a hotly debated area is the Consumer Finance Protection Bureau (CFPB).  Led by Director Richard Cordray, the CFPB has a broad role.  It is charged with protecting consumers in the financial sector.  This includes everything from banks to pay day lenders, from credit cards to securities firms.  The CFPB has returned more than $11 Billion to consumers since its creation and helped to unravel the Wells Fargo fraudulent account scam.

However, Republicans have been critical of the CFPB in general and Director Cordray in particular. Senator Ben Sasse (R-NE) and Senator Mike Lee (R-UT) have called on President Trump to fire Director Cordray immediately.  The Trump Transition Team has signaled an intent to do so.  The senators believe that, despite the success of the agency in returning funds to consumers, the Director and the CFPB have not been accountable to the public or to Congress.   Perhaps that is because the Dodd-Frank Act provides that the director reports directly to the president.  He serves a 5-rear term, expiring July, 2018, and can only be removed for cause.

Neither the senators nor President Trump have articulated their justification for calling for the firing of Mr. Cordray. While there is a recent DC Court of Appeals ruling holding that the CFPB’s structure is unconstitutional because the director can’t be terminated, should the president take action prior to an appeal, a battle with Senate Democrats is sure to arise.  Senators Elizabeth Warren (D-MA), Chuck Schumer (D-NY) and Sherrod Brown (D-OH) announced in a joint conference call last week that they will do every thing they can to prevent the president from dismissing Director Cordray.  Senator Schumer says, there is no cause.

Clearly, the first battle of the new administration in consumer finance is shaping up. Dodd-Frank has many flaws that can be fixed.  But firing the director will not solve the problems, nor will be a total dismantling of the law or disregarding the safeguards which were put in to the law to protect against the politicization of consumer protections.  We can’t solve these important issues by posting these at risk in the middle of a political war.

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