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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