House vote gives push to change in oversight of mortgage markets
WASHINGTON — When mistakes are made, there are lessons to be learned. The federal government is studying the housing boom and bust that put millions of homeowners into foreclosure — and is taking steps to prevent a repeat.
On Dec. 11, the House passed the massive Wall Street Reform and Consumer Protection Act, the first step toward creating a national watchdog for homebuyers and mortgage borrowers.
The 1,279-page bill covers a vast amount of financial territory, but for ordinary consumers looking to apply for a home loan, the important part is this: Next time around, you'll be far less likely to encounter an environment in which unregulated pitchmen and con artists can sell you loans requiring no money upfront, no documentation, hyped-up appraisals and payment plans that drag you deeper into debt.
Nor will Wall Street investment banks be allowed to chop and churn poisonous mortgages into destructive investments for the capital markets — even if the bonds are rated triple A by companies that see no evil and report no evil.
For buyers, the core of the legislation is its creation of a new Consumer Financial Protection Agency, with broad powers to oversee and evaluate the consumer-safety features of mortgages and equity credit lines offered by banks, mortgage companies, brokers and others nationwide. Though no specific types of loans are prohibited in the legislation itself, the CFPA almost certainly would limit or closely regulate mortgages that come with extra layers of risk — teaser rates, adjustable payments, negative amortization, and options for borrowers to pay as little as they want per month.
The agency would also play a pivotal role in spotting discriminatory patterns in mortgage pricing, underwriting and marketing, from the steering of minorities and seniors into higher-cost loans to unfair denials of credit on racial or other prohibited grounds. The CFPA would essentially take over federal responsibility for the Equal Credit Opportunity Act and fair lending programs and function as the go-to agency on unfair and deceptive trade practices in the financial arena.
It would also monitor home real estate settlement practices such as under-the-table payoff schemes among realty agents, lenders, title companies, lawyers and others in exchange for business referrals. It would also have prime responsibility for making disclosures of loan terms to consumers meaningful and understandable, including a first-ever combined truth-in-lending and good-faith estimates disclosure for all mortgage transactions.
The CFPA would have general oversight on home real estate appraisals and would be required to adopt rules and standards to guarantee "appraiser independence" from pressures by lenders, realty agents and others.
Once the revised appraisal rules go into effect, the Home Valuation Code of Conduct mandated earlier this year by Fannie Mae and Freddie Mac would be terminated. That code has been widely criticized for leading to low-ball appraisals and valuations by inexperienced appraisers operating far beyond their areas of geographic competence.
The legislation requires mortgage lenders to "compensate appraisers at a rate that is customary and reasonable for appraisal services" in their market. This is a direct response to sharply reduced fees now being paid to many appraisers by "appraisal management companies" that have mushroomed under the Fannie-Freddie code.
If it becomes law, the CFPA would be born with a full set of teeth: strong powers to subpoena, mount joint investigations with federal and state agencies, file lawsuits and seek damages, civil penalties and restitution. Penalties could range from $5,000 a day per infraction to $1 million a day.
Ken Harney can be reached at email@example.com.