Three Consumer Financial Reform Amendments

Good News

First off, let’s have some good news. An amendment to ban mortgage steering payments, introduced by Senators Merkley and Klobuchar, has passed:

Today, an amendment put forth by Oregon Senator Jeff Merkley and Minnesota Senator Amy Klobuchar to the Wall Street reform bill passed the Senate by a vote of 63-36. The amendment will protect homeowners by prohibiting mortgage lenders and loan originators from receiving hidden payments when they steer homeowners into high-cost loans and will create strong underwriting standards to ensure borrowers have the ability to repay their loans…

Senators Merkley and Klobuchar’s amendment will ban mortgage lenders and loan originators from accepting payments based on the interest rate or other terms of the loans. In addition, it will require lenders to document income and other underwriting standards to ensure that borrowers’ can repay their loans. This will end the damaging and deceptive practice of “no doc” and “liar loans.”

When you lay out how terrible the incentive structure was for people who were originating subprime and other complicated, high-fee high-churn loans the housing crisis makes more sense. If you pay someone for, all things being equal, giving a person a high interest rate on their loan, they’ll do it. And if the person should be neutral or representing the best interest of the deal, suddenly they are getting paid from going rogue on the quality of the loan. So let’s take that off the table.

Potential Bad News

Now for bad news. There’s a sudden centrist move for state preemption (h/t wonkbook):

Centrist Democrats want the federal consumer regulator to be able to preempt state regulators, reports Silla Brush: Four centrist Senate Democrats are leading an effort to modify the Wall Street overhaul bill to give the federal government greater power than states on consumer regulations. Democratic Sens. Tom Carper (Del.), Mark Warner (Va.), Tim Johnson (S.D.) and Evan Bayh (Ind.) are supporting an amendment that would give federal regulators more power to pre-empt state consumer financial regulations. They are joined by Republican Sens. Bob Corker (Tenn.) and John Ensign (Nev.) on an amendment filed this week

The centrist Democrats’ amendment seeks to limit state attorneys general and state regulators from enforcing consumer regulations on national banks and their subsidiaries. Those are banks or subsidiaries regulated by the Office of the Comptroller of the Currency (OCC), a federal bank regulator. The amendment also removes a requirement in the Dodd bill that the OCC, before pre-empting state rules, must conclude in writing that there is a “substantive standard” in federal law that already applies to the type of regulation under debate.

The balance of state and federal powers is a major issue at the heart of efforts to bolster consumer financial protections. The White House, most congressional Democrats, state attorneys general and consumer advocates during the last year have pushed to allow state officials to pursue tougher regulations than those set at the federal level. The Conference of State Bank Supervisors also supports giving states the ability to push stronger standards.

I wrote more about the reasons to fight preemption here , and the terrible experience it had when it was used via a teamup of the OCC and the ratings agencies on Georgia.

This is still in play.

More on the Whitehouse Amendment

One thing I didn’t catch about the Whitehouse Interstate Lending Amendment is that the bill, as it stands, reiterates support for the 1978 Marquette decision. From The Dodd Bill (large pdf, page 1320):

‘‘(g) PRESERVATION OF POWERS RELATED TO CHARGING INTEREST.—No provision of this title shall be construed as altering or otherwise affecting the authority conferred by section 5197 of the Revised Statutes of the United States (12 U.S.C. 85) for the charging of interest by a national bank at the rate allowed by the laws of the State, territory, or district where the bank is located, including with respect to the meaning of ‘interest’ under such provision.

That means we are all subject to the regulations of the South Dakota, regardless of where we live. And South Dakota is locked into the most permissive and favorable regulation, because if they took any sensible moves to strengthen the regime everyone would just move to North Dakota.

Don’t be mistaken – this language is a giveaway to the national banks, giving them a huge regulatory arbitrage, and a power grab by the OCC.

The Whitehouse amendment, god bless it, says to cross out that paragraph above and replace it with (amendment text):

Suddenly the state where the consumer resides, not the state where the lender resides, is what determines relevant regulation.

The more I think about it, the more this is a huge gamechanger: Think about anti-poverty, religious, consumer advocacy groups and community organizers partnering up to get usury caps and fight predatory lending. These groups are far more effective at the state level than at the federal regulator level and would overnight become an far more effective check against the power and regulatory capture of national lenders.

This is still in play, and could be voted on today or tomorrow.

So two amendments, both with major consequences for consumers and the credit culture. It’ll be interesting which way it goes.

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2 Responses to Three Consumer Financial Reform Amendments

  1. Indignant in Texas says:

    “Think about anti-poverty, religious, consumer advocacy groups and community organizers partnering up to get usury caps and fight predatory lending. These groups are far more effective at the state level than at the federal regulator level and would overnight become an far more effective check against the power and regulatory capture of national lenders.”

    That is a very naive view Try it in Texas (a very big place with a big population). Texas has a usury law but companies engaged as part of their normal course of business in making consumer loans are exempted. So credit card firms, for example, and payday lenders are deliberately not covered. A classic example of the need for federal regulation. It is precisely because of the lack of protections in some states that federal oversight is needed, states rights be damned.

  2. Jim Wikey says:

    The Merkley/Klobuchar amendment reflects a complete lack of understanding about the current mortgage market place. Does any one understand that YSP’s are what allow us to make no-point, and no-cost loans for borrowers? The banks have exactly the same type of income for ‘above par rate loans’, called SRP’s (service release premiums), which somehow are overlooked by consumer groups and Congress. By eliminating the YSP’s in a mortgage broker transaction you’ve effectively put us all out of business–in favor of, guess who, the Big 4 Banks–B of A, Wells Fargo, CITI, and Chase. We won’t be able to offer, say, a 4.625% loan with 1/2 point,because the other 1/2 point that we’d receive (for a total one point loan), which now comes indirectly through the YSP from the lender, would be illegal for us. But the banks–who’ve already received preferential treatment with their huge, tax-payer funded bailouts will still be able to make 1/2 point, or 1/4 point or no-point loans. That’s right, let the banks who essentially fueled the meltdown get a complete monopoly on the mortgage marketplace.
    Also, and very importantly, the new Good Faith Estimate of closing costs, that we issue to all qualified mortgage applicants, clearly shows the lender/broker fees for a loan, and these cannot change at all. In fact, this more than an estimate–it’s a UNILATERAL CONTRACT that we make to the borrower. And, the lender paid rebate (YSP), is now a BORROWER CREDIT, NOT PAID TO THE BROKER.
    Somehow Congress and most consumer groups don’t know this very important development in mortgage transparency, which protects the consumer to a degree that I have not seen in any other business.
    Give the new Good Faith Estimate a chance. And don’t give the mortgage business completely to the Big Banks. The Big Banks want all of the mortgage business for themselves, and the consumer will pay rates that are too high–because we won’t be around to compete with them.

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