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'Consumer Mortgage Choice Act' Takes Away Consumers' Choices

It has been only three years since the passage of the Dodd-Frank Act and five years since the 2008 financial crisis, but memories in Washington can be short. 

Even though we are still emerging from a foreclosure crisis that has affected tens of millions of American families, some in Congress are already pushing to weaken new rules designed to protect taxpayers and keep consumers safe from the faulty mortgage products that wrecked the economy.

The latest danger is H.R. 1077 and its companion bill, S. 949. Deceptively entitled the "Consumer Mortgage Choice Act," the bills seek to undermine Dodd-Frank’s ability-to repay provision. This provision, one of the most direct and important responses to the mortgage crisis, requires lenders to determine whether a borrower can afford a mortgage before they extend a loan. The rule was adopted to prohibit loans that were "designed to fail," a practice that was central to the origination model that brought on the financial crisis. Under the new rule, if lenders offer loans that meet the qualified mortgagestandards provided by the Consumer Financial Protection Bureau , they are presumed to have proven the borrower’s ability to repay and are therefore protected from litigation.

One of these standards is a cap on points and fees, the up-front cost of getting a loan, at 3% of the loan amount.  H.R. 1077 and S. 949 would create significant exceptions to this, allowing many more high-cost loans to qualify as QM loans.

Specifically, these bills recreate incentives for lenders to steer families into high-risk, high-fee loans they do not understand and cannot afford.  In recent investigations, the U.S Department of Justice discovered that, in the lead up to the financial crisis, tens of thousands of borrowers, especially minorities, were sold unsustainable subprime loans even when they qualified for more affordable loans. The mark-up in the cost of those loans led to increased profits for the lenders and also became an indirect form of compensation and dangerous incentive for mortgage brokers.  The ability-to-repay rule regulates this indirect compensation by counting it toward the points and fees cap. The new bill, however, would remove indirect compensation from the cap and encourage the same predatory loan companies that dominated the subprime market back into our neighborhoods.

In addition, H.R.1077 and S. 949 would allow additional loans that Fannie Mae and Freddie Mac deem as risky to be counted as QM, and it would remove the cap on fees charged by title companies that are owned by the lender making the loan.  The conflict of interest that exists when a title company is owned by the loan issuer can prevent consumers from getting the best prices on title insurance.

It is also very troubling to us that H.R. 1077 and S. 949 undermine the rulemaking authority of the CFPB.  The consumer agency has received very positive reviews from industry and consumer groups alike in its work putting in place rules for QM –  rules that it has modified several times to address reasonable industry concerns. The CFPB can monitor markets and make changes as conditions warrant, but putting these changes into statute ties the agency’s hands and makes it more difficult to protect consumers. The Senate has finally confirmed Director Richard Cordray, and the CFPB ought to be free to do its work.

Supporters of H.R. 1077 and S.949 claim that these changes will make sure that more safe mortgages pass the QM test and guarantee access to credit for low income Americans. We heard these same arguments in the early 2000s as the industry lobbied against consumer protection, and the result was that needed reforms were not made until after a financial crisis that nearly brought down the economy. The 2008 crisis cost millions of people their jobs, their pensions or their homes, and we should learn from what went wrong and avoid making the same mistakes moving forward.

Rep. Maxine Waters, (D-Calif.), is the ranking member of the House Financial Services Committee and Sen. Elizabeth Warren (D-Mass.) is a member of the Senate Banking Committee.


(3) Comments



Comments (3)
What Maxine Waters and Elizabeth Warren don't seem to recognize is that failure to pass this legislation would do further damage to the very people that you both seek to protect. The bill itself does not seek to allow indiscriminate fees to be added to mortgage origination charges, but to allow lower loan amounts to be profitable for banks and lenders to make. You see, it costs almost the same for a lender to process and fund a loan for $100,000 as it does to process and fund a loan for $400,000. However, when you restrict fees to a percentage of the loan amount you make it impossible for banks and lenders to profit on small mortgage loan amounts.

For example, let's say that, as is the current guidelines, you cap what a bank can charge for a loan at 3%. Doing a mortgage for $80,000.00 would mean that the maximum that a bank could charge/make would be $2400.00. The (conservative) costs involved in making that loan would be $400.00 to $600.00 for the originator, $500.00 for processing and underwriting, $500.00 to $700.00 for the closing attorney, $200.00 for Title Insurance, $100 to $200.00 for recording fees, $350 to $500 for inspections and $450.00 for the appraisal, making the banks cost for doing the mortgage $2,400 to $2,700. While doing a mortgage for $400,000 would net the bank $12,000.00 in allowable fees while only costing $3,200 to $3,500 (All fees remaining the same except for the commission paid to the originator.)

Now which loans do you think the banks and lenders are going to make and which ones do you think that they are going to pass on? Which portion of the population is going to be passed on when it comes to the opportunity, and who will not be able to sell their homes to move up because the banks have chosen not to lend to their potential buyers?

You need to do the research and make an informed opinion when it comes to the protection of the rights and liberties of the people affected by legislation and not react based upon emotion. I am very much for the right of all Americans to own a home and have worked with borrowers and first time buyers across the spectrum of race, gender, religion, and national origin. But this is not a question of race, it is a question of economics. Everyone of us works in the hope of realizing a profit, if only enough to make ends meet, and none of us can operate in a deficit and hope to survive.
The days of the sub-prime mortgage are over and they are not coming back. HB 1077 is not about allowing exorbitant fees and racking in huge profits, it is about allowing banks to do small mortgages for families without having to take a loss. Banks will survive without HB 1077, but they will do so at the expense of the very lower to middle class consumers that you claim to be championing by opposing this legislation. They simply will not be able to do small mortgage loans and this fact will be true across the board without respect to race, gender, religious preference, or nationality.
Posted by raldenjones | Thursday, August 08 2013 at 11:58AM ET
I agree 100% with comment by rshulman. Dodd-Frank was written more to help big banks take market share away from mortgage brokers than to actually help consumers. Bill 1077 was written to help level the playing field so that consumers will have greater choices for mortgage financing. But in denouncing 1077, Waters and Warren, who say they are all about the consumer and minorities, are actually hurting consumers and minorities who will be left with fewer and fewer choices if the big banks are able to eliminate their competition.

Please see this video for mmore information:
Posted by dsanborn | Thursday, July 25 2013 at 12:36PM ET
The article is misleading. Dodd Frank rules caps the fees on a loan to 3%. The problem is with how these 3% are calculated. The biggest issue is that the 3% cap is calculated differently for different provider groups - bankers and brokers. For a broker, it includes the payment the funding lender makes to the broker for the work done (lender-paid compensation). For the banker, it does not include the equivalent (payment made by the bank to the originator). There are other things included in 3% calculation which are actually not charges paid by consumer, but including compensation paid by lender to broker while not including the equivalent for a banker is the most problematic. The result is that a loan obtained from a broker at lower cost may not pass the qualifying mortgage standard, while a loan obtained from a bank at higher cost will. This by itself steers the consumer to a higher cost loan. The H.R. 1077 fixes this problem by ensuring both banker and broker channels are treated more equally to ensure consumer has the choice and can find the lowest cost loan regardless of the channel.
Posted by rshulman | Thursday, July 25 2013 at 8:14AM ET
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