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Brought to you by the Real Law Editorial Team
In the 1970s, the expression “future shock” made its way into common use. It started, of course, with Alvin Toffler’s hugely successful book with that phrase as its title. Like others, Toffler had observed the overwhelming effects on post-industrial societies that were experiencing “too much change in too short a period of time,” leaving individuals stressed and disoriented as a result.
Other expressions borrowed from popular culture have proven to be more durable. Still, one is left to wonder if we abandoned Toffler’s titular catchphrase too quickly. From agriculture, manufacturing and utilities to intellectual property rights, finance and health care, dramatic changes are under way and affecting virtually every segment of the U.S. economy. Coping with the rapid pace of change is not easy.
The pressure is not about to let up, either. In fact, for some in the banking industry in particular, matters could soon get a whole lot worse.
A set of sweeping new rules stemming from the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), which was passed by Congress in 2010 in the wake of the Great Recession, are expected to fundamentally alter how the U.S. mortgage industry functions.
Dodd-Frank mandated the creation of the federal Consumer Finance Protection Bureau (CFPB), giving it rule-making authority along with supervision and enforcement responsibilities, and in January 2013 that agency issued seven rules concerning mortgage markets in the United States.
In June, September and October, after additional industry consultation and input, the CFPB finalized a set of amendments and clarifications to help ensure compliance and to better protect consumers. Some of the rules are in effect already, while the bulk are set to take effect in January 2014.
That’s not much time to prepare. Yet according to one expert, the industry should still be grateful for the coming changes. “If they hadn’t been adopted by January 2013, the lawsuits now would be horrible—just horrible,” says James H. Pannabecker, adjunct professor of law at Washington and Lee University School of Law and the author of numerous treatises and industry guides, including the comprehensive Compliance Guide to the 2013 Mortgage Lending Rules.
“Dodd-Frank contained an entire chapter (Title XIV) that largely would have taken effect in its own right if the CFPB had not adopted its own rules by then,” he adds. “Bankers would have been living under a whole different set of new provisions with even less time to prepare, with little or no guidance and subject to whatever interpretations the courts might arrive at through litigation. So the CFPB did everyone a favor, in my view.”
At the same time, Pannabecker is blunt with his advice to those in the industry who, at this late stage, are still not fully aware of or ready for the January 2014 deadline. “You’ve got to drop everything else you’re doing and get ready—now,” he says.
From a high level, the new rules implement various Dodd-Frank sections and amend several existing regulations, including Regulations Z, X and B, which implement the Truth in Lending Act, Real Estate Settlement Procedures Act and Equal Credit Opportunity Act, respectively.
The Ability-to-Repay (ATR) and Qualified Mortgage (QM) Standards rule has received the most attention. It is intended to protect consumers from irresponsible mortgage lending by requiring that lenders follow strict procedures for determining that prospective borrowers can actually repay their loans.
In addition, a new mortgage servicing rule is intended to establish stronger protections for homeowners facing foreclosure, while new loan originator compensation rules address practices that promote steering borrowers into risky or high-cost loans.
The CFPB also finalized rules to strengthen consumer protection for high-cost mortgages and instituted a requirement that escrow accounts be established for a minimum of five years for certain higher-priced mortgage loans, among the other provisions.
While acknowledging that the coming rules affect a mortgage market that is “sprawling and complex”—indeed, it is valued at more than $10 trillion, making it the largest single consumer financial market in the world—CFPB Director Richard Cordray has also served notice that the agency is committed to the January effective date for its sweeping new regulatory framework.
“We believe it is critical to move forward so these rules can deliver the new protections intended for consumers,” Cordray has remarked repeatedly.
That message is still not sitting well with many in the mortgage industry, despite an appreciation that the CFPB rules bought additional time under Dodd-Frank. The American Bankers Association (ABA) and other national organizations have lobbied hard for an extension of the mandatory compliance deadline. Surveying their members, such organizations have realized that many banks and others affected by the new rules are either not ready or uncertain of their readiness.
The pressures on smaller independent community banks, which support many small business owners, are a particular concern. “Even the most negligible regulatory change can require many months of time to change systems, update policies and procedures, revise underwriting requirements, and train staff,” noted Camden R. Fine, president and CEO of the Independent Community Bankers Association (ICBA), in an open letter sent to the CFPB in early October.
There’s also a concern that many lending institutions might stop offering mortgages out of concern that their lack of readiness creates too great a liability under the new framework.
But Pannabecker isn’t buying that argument as cover for a lack of readiness at this late date. “As usual,” he adds, “the overachievers will reap the benefits of strong compliance planning. The upper crust will get the mortgage business. Their less skillful competitors will miss out as they struggle to understand the regulations they’ve ignored for too much of the past year.”
Nor, in Pannabecker’s view, is the scale of the new framework an excuse for complete noncompliance by January. “When a CEO is faced with staffers who say they can’t complete a task by its due date, he or she asks ‘What is it you can’t do?’ No staffer responds, ‘Everything.’”
For his part, CFPB Director Cordray has offered an olive branch of sorts to the mortgage community. In remarks at the ABA’s annual convention in New Orleans on October 21, 2013, he allowed that oversight of the new mortgage rules in the early months “will be sensitive to the progress made by institutions that have been squarely focused on making good-faith efforts to come into substantial compliance on time.”
That message reinforces Pannabecker’s view that community banks, like their larger counterparts, should be striving to ensure that they are in the top third, and not underachievers “soon to be accused of neglecting creditworthy borrowers.”
He adds: “Having laid a firm groundwork for compliance, now is the time to review checklists and before-and-after comparison charts, and aim for the finish line.”
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