Man on the Hill: Protections with Consequences by Marc Savitt

by 24 Jan 2011
During the past three years, housing industry professionals, especially mortgage brokers, loan originators and appraisers, have experienced an onslaught of new rules, regulations and legislation. These so-called safeguards were designed to protect consumers.   This article will take a closer look at some of these “protections,” to determine the true consequences for consumers and the housing industry. In addition, we’ll examine what the outcome of the November elections means to the housing industry.   On May 1, 2009, the Home Valuation Code of Conduct (HVCC) went into effect. Born from an agreement between former New York Attorney General Andrew Cuomo, the GSE’s and their regulator (FHFA), this new set of appraisal guidelines was established to eliminate conflicts of interest and prevent appraisers from being influenced to over value properties.   Almost immediately, the unintended consequences we all warned about began to materialize. Consumer costs skyrocketed by almost 2.8 Billion dollars a year. Thousands of appraisers were forced out of their profession by the loss of established business relationships with mortgage professionals and the redistribution of their fees to unregulated appraisal management companies. The valuation system in our country was now being controlled by the very organizations, who were the subject of Cuomo’s widespread investigation into appraisal fraud and subsequent litigation. Respected firms like Mortgage Asset Research Institute (MARI) and Interthinx revealed that valuation fraud increased significantly since May of 2009, despite the implementation of HVCC. Moreover, appraisal quality decreased significantly. Conclusion, HVCC was a complete failure.   On October 18, 2010, the Federal Reserve Board released their interim rule on appraiser independence, as required under Dodd-Frank. Although brokers and loan originators were specifically eliminated from the appraisal ordering process in HVCC, the interim rule has no such prohibition. I personally confirmed this with two different sources at the Fed. The current problem is still the GSE’s, who have renewed their HVCC guidelines and refuse to acknowledge the harm created by the code.   NAIHP is determined to restore appraiser independence, where licensed independent professionals control the valuation system and receive “custom and reasonable” fees for their services. This restoration will also reduce costs for consumers.   On August 16, 2010, the Federal Reserve Board announced “final rules to protect mortgage borrowers from unfair, abusive, or deceptive lending practices that can arise from loan originator compensation practices.” The new rules, which restrict originator compensation, were intended to include “mortgage brokers and the companies that employ them, as well as mortgage loan officers employed by depository institutions and other lenders.” The Fed is trying to create an illusion that banks are included in this rule. While bank loan originators are included, the banks themselves are exempt, because they’re considered “creditors.” Although mortgage brokers are considered creditors in all other areas of TILA, this rule, which amends TILA, limits that title to those providing funding at the closing table.   The FRB cites “unfair, abusive, or deceptive lending practices,” was the basis for proposing this rule in August of 2009. However, no such practices were ever substantiated. In fact, during one of my meetings with them over this issue, I asked a specific question to their legal staff, “Do you consider broker, or originator compensation to be unfair and/or deceptive?” They all responded, “NO.”   The Fed attempts to justify this rule, because they conducted consumer testing. Ok, here comes the part where you’re allowed to scream in frustration. The consumer testing associated with this rule involved disclosures, not compensation. In addition, a total of only 35 people were tested in 4 cities. How does this justify a rule on restricting compensation?   The main question is does the FRB have the authority to restrict originator compensation? Our research clearly indicates, NO.   This rule must be stopped at all costs. NAIHP has hired legal counsel and will do whatever it takes to prevent this rule from being implemented, including legal action.   On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law. While originally intended to regulate certain practices on Wall Street, mortgage brokers and loan originators were once again a target. Specifically, an amendment offered by Senator Jeff Merkley of Oregon and now part of the Act, restricted originator compensation and strangely tied it to a borrower’s ability to repay a loan. Although referred to as a safe harbor, originators may not exceed 3 percent in compensation, unless they can document a borrower’s ability to repay. According to the “Act,” third party fees are excluded. However, lender charges would not be considered third party fees. Moreover, I seriously doubt lenders will exceed the 3 percent safe harbor, even if ability to repay is proven. Lenders are going to avoid liability issues and stay within the safe harbor.   Although, this section of Dodd-Frank is not seen as bad as the FRB’s compensation rule, NAIHP is currently working with Congress to make changes.   At the current time, I consider the above three issues the most important to the housing industry. Several others issues exist, but time precludes me from discussing them in this article.   On November 2, 2010, we witnessed sweeping changes to the make up of Congress. For the last four years, both the House and Senate were controlled by one party. In January of 2011, Republicans will gain control of the House, while the Senate, with a smaller majority, will remain under Democratic leadership.   Current Senate Banking Chair, Senator Chris Dodd of Connecticut, will be retiring at the end of this session. I think it is fair to say, Senator Dodd was not a friend to our industry.  Dodd’s likely replacement will be Senator Tim Johnson of South Dakota. Our experience with Senator Johnson has been positive, both on the state and federal levels.   On the House side, Rep. Barney Frank will lose his Chairmanship of the powerful House Financial Services Committee, when the new Congress is sworn in. The new Chairman of the HFSC, will likely be Congressman Spencer Baucus of Alabama. Since Election Day rumors have been flying that Rep. Frank will retire shortly after the new Congress is sworn in. I guess we will know in early January.   Since most of the onerous legislation our industry has faced in recent years originated from these two committees, the changes in leadership are viewed as positive. The new majority in the House has indicated they intend to either repeal Dodd-Frank, or make substantial changes to it. Moreover, they intend to introduce long overdue GSE reform.   Mortgage brokers and originators have endured 4 years as the scapegoat for the housing crisis. We have suffered economic hardships, additional costly licensing regulations and unjustified rules and regulations promulgated in the name of consumer protection, but designed to eliminate competition. Legislatively, we will be in a better position with the new Congress, because they appear to understand small business housing professionals are vital to the recovery of the housing industry. Until the marketplace is returned to Main Street, the housing industry will remain weak and unable to make a full recovery.  Marc is the President of the National Association of Independent Housing Professionals. Previously, he served as the 2008-2009 President of the National Association of Mortgage Brokers.  He also held the positions of NAMB's President-elect, Vice President, Director, Chairman and Founder of the Consumer Protection Committee and was awarded NAMB's highest honor, Broker of the Year.

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