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ABA exec: Regulators will drive reform of mortgage rules

In the first year of the Trump administration, regulatory reform has taken a back seat to health care and tax issues. Bob Davis, executive vice president at the American Bankers Association, discussed why he remains optimistic that meaningful reforms to the rules that affect mortgage originators will take place over the next few years. He said the regulators, and not Congress, will likely take the lead, however.

Have we seen any meaningful regulatory reform that affects mortgages since the beginning of the year?

bobdavisWe have begun to see it. What we have seen is a positive sign of what is likely to come. We have gotten far enough past the initial rule-making under [the Dodd-Frank Wall Street Reform and Consumer Protection Act], in particular, but also some of the [Basel III international regulatory framework] implementation, that the regulators — even the CFPB [Consumer Financial Protection Bureau] —are beginning to look at some consequences that were unintended, and they are beginning to make some changes. I think the pace of that is going to accelerate, particularly as we eventually get to new agency heads. We are facing a series of turnovers there that will bring some new blood into the approaches. But already the agencies are making some changes.

There was much speculation after the election that Dodd-Frank would be overhauled. Do you still see that happening?

We expect a lot of Dodd-Frank to be preserved. There will be targeted legislative reform in several areas. Our objective is to attack those pieces of the regulatory structure that impede the ability to serve customers, and those are myriad. There is still going to be an onion, but the onion needs to be unpeeled in certain ways to remove impediments that really impeded the ability of the private market to serve consumers, rather than protect them. That is where the focus is going to be. There is still going to be consumer protection. There is still going to be residential mortgage lending with a focus on the ability to repay. And there is still going to be a focus on having capital that is appropriate to risk, things like that. But in the rush to solve problems, in some instances, we have multiple solutions for one problem.

Who is going to do the regulatory reform? The regulators or Congress?

The regulators are already starting to do it, and we expect that to accelerate. There are some areas where it would be effective to make certain legislative changes that might provide more direct relief and clarity than what the regulators do. To the extent that the law itself creates uncertainty about liability, regulators can’t do much to fix that. They can change the rules, but if there is an unknown, untested list of potential liabilities that a business may face, that is going to impede what happens no matter what the regulators do --- because, the courts will intervene, and in the end, render judgments. So, legislation needs to clarify some things, but there are many areas that can be addressed by regulation. Where this is a situation of wanting to unpeel parts of the onion and to bring the pendulum back to a middle position, that frequently can be calibrated through a rule-making process more easily than legislation, which can sometimes be sort of a blunt instrument, and not surgically tuned.

So, then, you are not optimistic that the House’s comprehensive Dodd-Frank overhaul, the Financial Choice Act, is going to fly?

We have a ways to go to get legislation through both houses. Even with the good intent from Congress, I think some determined regulators are going to have more success at removing unintended consequences through the rule-making process than we will achieve through the legislative process. That is just a statement on the capacity of the current Congress to act as often as we would like to see on a bipartisan basis.

Some relief bills did get passed out of the Financial Services Committee recently, at least one with support from Democrats. Are there bills that can get passed legislatively?

We are optimistic that there will be a regulatory reform bill at some point. It will most likely not be broadly sweeping change. We support many of the provisions and intentions of the Dodd-Frank Act. There is bipartisan support that loans that banks hold in their mortgage portfolios and bear 100 percent of the risk should be qualified mortgages. As you know, there are a variety of disincentives to making non-QM loans. They are made, but that is one area of the credit box has been tightened because of the law and the regulations under it. Just making any loan held in portfolio a QM loan will be something that expands the credit box and flexibility.

Other areas of legislation that can have an impact are those [proposals] that call for tailoring regulation to the risk and business models of institutions. That seems like a common sense approach. It is not the way things have always been. Many parts of the Dodd-Frank Act really don’t provide latitude to tailor regulations. Most of the banking institutions in testimony now  say they think that is [not] appropriate. They say they should be able to tailor their exam procedures and the consequences of supervision with an eye toward the risk and complexity of the institutions they regulate. That reduces unnecessary regulatory burden and cost, where risks are lower or easier to discern or regulate. So, those are two areas that are likely to see some change.

Are these regulatory reforms achievable before the next election cycle next year?

Some will be able to, some maybe not, because you have to go through a rule-making process. In the areas of consumer law that are in the jurisdiction of the CFPB, [the rule-making changes won’t] start until after there is a new director and staff in place. Who knows when that will occur. I am not going to predict that. There will have to be a process of looking at the rules, deciding on proposed changes, making the proposals and providing adequate comment periods for all the different interests, and that will all be sorted out, and a final rule will be put forward. The Dodd-Frank rules were years in the making. The unwinding of some of this, and the peeling back of some of the layers of the onion, are going to be years in process as well.    


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