Changes under financial reform law won't take effect for a while
WASHINGTON — The financial reform bill signed into law by President Barack Obama may look like a giant cornucopia of helpful changes for home buyers and loan applicants — not the least of which will be the creation of a powerful Consumer Financial Protection Bureau.
But how soon will anyone see tangible results of the law? When will the bureau begin writing new rules and cracking down on problems and abuses in everything from home real estate settlements to credit scores to "truth in lending" and equal credit opportunity?
At the moment, it looks like it will be a while, even if the president nominates a director for the consumer protection bureau quickly and the Senate confirms her or him without partisan bloodletting or a filibuster. On the other hand, mortgage industry leaders say some core changes promised by the legislation are either already in effect, such as stricter underwriting and documentation practices, or should be soon.
Here's a quick overview of what to expect and when. The reform law itself contains deadlines for action, but they may not be as immediate as some consumers would prefer. Treasury Secretary Tim Geithner is carrying the ball, and he has had a team at work for weeks drafting the basic structure of the new consumer bureau, which will be housed inside the Federal Reserve.
Under the law, Geithner has until Sept. 19 to designate a "transfer date" when key legal and regulatory authorities shift from the Federal Trade Commission, the Department of Housing and Urban Development, the Fed and other agencies to the new consumer bureau. In effect, that will be the date the bureau, with initial funding projected at $500 million a year, springs to life. By law that transfer date must be no earlier than Jan. 17, 2011, and no later than Jan. 21, 2012.
At a White House briefing, Deputy Treasury Secretary Neal Wolin asked for understanding about the huge task ahead. "This will take some time," he said, "but it's worth it."
Consumer advocates say they get Wolin's point, but they still expect the White House to move the new agency into functional shape fast. Travis Plunkett, legislative director for the Consumer Federation of America, said, "Yes, they need to do this right. But the sooner they can get the doors open, the sooner the public will feel the tangible benefits."
What sort of tangible benefits might we see? One of the earliest — and most widely anticipated changes in the real estate field — will involve appraisals on homes. The law requires the agency to quickly come up with new interim rules on appraisal accuracy and independence, which will replace the controversial "Home Valuation Code of Conduct" rules imposed by Fannie Mae and Freddie Mac in 2009.
That alone should bring relief to buyers, sellers, realty agents and builders who have complained about inept, deal-breaking appraisals fostered by the code. In a companion move, the reform law also sets standards for appraisal management companies that function as third-party vendors for many lenders — and which have been criticized for assigning valuations to inexperienced appraisers who are unfamiliar with local conditions and willing to work for low fees.
Another early tangible benefit is a national hotline system that will allow aggrieved mortgage borrowers and others to lodge complaints and alert the bureau to unfair and deceptive practices.
The new agency will also assume control of a key consumer protection statute known as RESPA (the Real Estate Settlement Procedures Act) that seeks to prevent under-the-table kickbacks and padded fees by lenders, title companies, realty agents and builders. RESPA governs the transaction cost disclosures that millions of borrowers receive at application — the "good faith estimates" — as well as the standard closing form known as the HUD-1.
Among the early projects expected from the new bureau will be a rewrite and streamlining of the existing home purchase disclosures and a tie-in with a revised truth-in-lending disclosure, possibly all wrapped up in a single plain-language package.
Also high on the to-do list: rules that require all loan officers to make good faith verifications that mortgage applicants can repay the loans they're seeking. This may sound basic, but it was an alien concept inside some mortgage companies during the heydays of the boom.
They didn't worry about who could afford what — and no one was monitoring their behavior. Now, someone will be.
Ken Harney can be reached at email@example.com.