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Republicans can't enact regulatory reforms alone

President Donald Trump has said he plans to dismantle the Dodd-Frank Wall Street Reform and Consumer Protection Act in a move to scale back Obama-era regulations. Michael Stegman, a fellow at the Bipartisan Policy Center, spoke with Scotsman Guide News about what reforms likely can be achieved and why Republicans will need some Democratic support. Stegman is a former senior policy advisor on housing issues to the National Economic Council and served for more than three years as a senior policy advisor in the Obama White House, guiding policy on housing issues and finance reform.

Most people assume that Dodd-Frank will be rolled back in some ways. To what degree do think that regulations on mortgage lenders and banks will be scaled back?

StegmanpicIf there is going to be an effort, I think that mortgage rules will be part of it. One thing to be aware of — because we know it is going to happen and it doesn’t require legislation —  and that is, under existing Dodd-Frank, the qualified mortgage ability-to-pay rule, which embodies an awful lot of the mortgage-related requirements dealing with safe harbors, dealing with ability-to-repay, products, features and a variety of consumer protections, that rule, by law, has to be reviewed by the Consumer Financial Protection Bureau ([CFPB] within five years of its enactment. It must be refined, repealed or reaffirmed by the end of the first five years of it being implemented, and that is in 2019. CFPB is already beginning to try to gather evidence on the effect of that rule on access to credit, and so on. So we do know there is going to be major attention to a very significant part of the mortgage regulations that were put in place for Dodd-Frank.

What are the most likely changes that affect housing finance?

One of the important changes could be to the GSE [government-sponsored enterprise] patch. The GSE patch allows any loan [that is approved by] either Fannie Mae or Freddie Mac’s underwriting engines, to automatically get [the status of] a qualified mortgage with safe harbor against litigation in the event of default. That patch is time limited, and so the bureau is going to have to figure out what to do about that. Fifteen to 20 percent of the loans that have been made over the last year have been made because of the patch, and that patch disappears. So, that is a big deal.

There is also concern about small-balance loans. The qualified mortgage rule puts a [3 percent] cap on points and fees that can be charged on a mortgage loan. For small-balance loans, the hard-fixed costs are often higher than 3 percent, and it is really a problem for the small-balance loans. There is a lot of pressure to increase the exemption from that 3 percent cap to a higher level.

There are a number of other elements of the qualified mortgage rule that are likely to be reviewed as well. There is an exemption under the current rule for very small banks that hold loans in portfolio. As long as they hold that loan in portfolio, it is granted the qualified mortgage status and the legal protections that come with it. There is some interest among Republicans and some others to raise the asset level at which those exemptions would hold.

The biggest piece of unfinished business is certainly the future of Fannie Mae and Freddie Mac, and GSE reform. [Treasury Secretary-designate Steven] Mnuchin talked about wanting to seek bipartisan approach with Democrats and Republicans on a legislative GSE reform measure. I thought that was very positive, but that will take longer. There are significant differences within the Republican caucus on the future of Fannie and Freddie, and housing finance reform and the need for a continuing [government guarantee backing the secondary mortgage market]. That has to be addressed within the Republican caucus before you get any legislation.

Because of the thin Senate majority, I don’t think [regulatory reforms] can be done just with Republicans. In the Senate, there is only a  two-vote margin  there. You are going to have to see some Democratic support. There are centrist Democrats really interested in the community bank issue, so that there will be a possibility of bipartisan consensus, but none of the extreme measures are likely going to succeed.  

Because of the thin Senate majority, Republican can’t necessarily do what they want, then?

They certainly will not be able to do whatever they want. Personally, I would say some of the elements of the [Financial Choice Act proposed by Rep. Jeb Hensarling, R-Texas, chairman of the House Financial Services committee] are quite extreme and will not garner Democratic support.

And you don’t get a sense that the Republicans are completely unified on every point of regulatory reform?

No, I don’t think so, but the new Congress hasn’t really engaged. There is no legislation. From the last Congress, we have legislation. A lot of it got out of committee on a  pure Republican vote. So, I think it is too early to say whether they are all on the same page or not. When you get into the Senate, you get a different mix. Even if [Republicans] are on the same page with the chairman [of the House Financial Services Committee], it is unclear if that will translate to a solid block in the Senate.

What do you feel the future holds for the Consumer Financial Protection Bureau?

Obviously, the trades and others have said that the president has been interviewing potential directors. What are they going to do about [CFPB Director Richard] Cordray? I certainly don’t know. Two areas where there is likely to be legislation are the appropriations element, making the bureau subject to appropriations rather than being funded through the Federal Reserve. The other is [restructuring the bureau] under a commission versus the director. With Cordray, they could wait. If they act on Cordray, it could result in litigation and a long drawn-out process. If they wait to put in their own director at the end of Cordray’s term, a new director could do an awful lot on the CFPB regulations without any legislative changes. The Democrats in the Senate certainly are dug in on both of those issues, both the appropriations and the commission. 


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