President Barack Obama marked the one-year anniversary of the collapse of Lehman Brothers by renewing his push for an overhaul of the financial regulatory system, which would include the creation of a Consumer Financial Protection Agency with broad power over mortgage lenders.
"This crisis was not just the result of decisions made by the mightiest of financial firms," Obama said. "It was also the result of decisions made by ordinary Americans to open credit cards and take on mortgages."
While many took out loans they knew they couldn’t afford, "millions of Americans" signed contracts they didn’t fully understand that were offered by lenders who didn’t always tell the truth, Obama said.
A Consumer Financial Protection Agency is needed to protect consumers from loan contracts "designed to be unintelligible," and "hidden fees attached to their mortgages." Responsible lenders such as community banks that are "doing the right thing" shouldn’t have to worry about "ruinous competition from unregulated competitors," Obama said.
As proposed by the Obama administration in June, the agency would have the power to set standards protecting consumers and encouraging competition.
It might do that, the administration said, by developing guidelines for simple "plain vanilla" mortgages with predictable payments, requiring a "duty of care" for mortgage brokers, and banning "yield spread premiums," which are rebates paid by lenders when mortgage brokers place borrowers in high-interest-rate loans (see story).
The Consumer Financial Protection Agency would also be tasked with developing a uniform mortgage loan disclosure form and putting it forward for public comment within a year of its formation.
The real estate and lending industries have been pushing for the Department of Housing and Urban Development and the Federal Reserve to draw up a single mortgage loan disclosure form that meets the requirements of both the Real Estate Settlement Procedures Act (RESPA) and the Truth in Lending Act (TILA). Having separate disclosure forms is burdensome and confuses consumers, critics say.
Loan originators on Jan. 1 must begin using new RESPA loan disclosure forms that will require mortgage brokers to disclose yield-spread premiums to borrowers and credit them against their closing costs. The Federal Reserve has proposed banning yield-spread premiums altogether as part of revisions to TILA disclosure forms intended to make them more compatible with HUD’s RESPA forms (see story).
Inman News columnist Jack Guttentag — "The Mortgage Professor" — believes that the creation of a Consumer Financial Protection Agency is "the best and perhaps the only way to make mortgage disclosures useful to borrowers."
In a recent column, Guttentag also worried that the agency, if granted the wide-ranging powers proposed by the administration, might eliminate options that can benefit consumers if they are understood, such as prepayment penalties. …CONTINUED
Guttentag, a proponent of "up front" lending and consumer choice, said that as proposed, the agency would not be required to "impose a rigorous burden of proof" that less intrusive measures would not accomplish its goals of protecting consumers while promoting competition.
"I believe that creating accountability for consumer protection is essential, but I would have preferred to see the initial powers granted to (the agency) limited to mandatory disclosures," Guttentag said. Once any limitations in disclosure became clear, "the agency could request the additional powers needed to deal with the problems that remained."
The American Financial Services Association (AFSA) is coordinating the lending industry’s opposition to the creation of a Consumer Financial Protection Agency, which the National Association of Realtors has opted not to join (see story).
AFSA has said that the notion of the government "dictating which personal finance products and services can — or cannot — be made available" is "troubling."
Responding to those and other charges that a Consumer Financial Protection Agency would restrict consumer choices, Obama said today, "Nothing could be further from the truth."
In the past, the lack of clear rules created "innovation of the wrong kind," favoring firms that were able to hide the true cost of mortgages and other loans.
"By setting ground rules, we’ll increase the kind of competition that actually provides people better and greater choices, as companies compete to offer the best product, not the one that’s most complex or confusing," Obama said.
The Mortgage Bankers Association has expressed alarm over statements last week by Rep. Barney Frank, D-Mass., that language allowing bankruptcy judges to "cram down" the principal of troubled borrowers could be written into legislation to overhaul the financial regulatory system.
"Allowing judges to retroactively modify borrowers’ mortgage balances will destabilize a mortgage market that desperately needs stability right now," the MBA said in a press release.
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