As we anticipate the financial reform bill being signed into law next week, we will be looking at the final draft of this bill this week. A number of amendments and changes were added at the last minute, so the final bill contains quite a few changes.
The section we are examining is Title XIV--The Mortgage Reform and Anti-Predatory Lending Act. These regulations shall take effect no later than 12 months after the regulations are issued in final form. The findings on page 8 of this section of the final bill are particularly interesting: "The Congress finds that economic stabilization would be enhanced by the protection, limitation, and regulation of the terms of residential mortgage credit and the practices related to such credit, while ensuring that responsible, affordable mortgage credit remains available to consumers." Personally, I don't think that the federal government should be setting lending standards to limit the availability of mortgage credit, but that is exactly what this bill does.
The final draft of the amendments did resolve some glaring problems from the initial legislation. For instance, the final mortgage reform act does leave room for seller financing for up to 3 properties in 12 months to the purchasers of those properties. That would allow investors who want to get rid of their properties to provide seller financing. There are, however, some restrictions--the seller cannot be the builder of the home; the loan must be fully amortizing, the seller must verify that the individual has a "reasonable ability to repay the loan"; and the new loan must have a rate that is fixed for at least 5 years. These restrictions on seller financing--especially the text legislating that the seller must verify the income and ability to repay of the purchaser--are new, but at least they preserve seller financing as an option, which in these days of tightened credit standards is going to be increasingly important.
Stated income loans are outlawed under the new rules. All borrowers must be able to prove their income with at least a W2 and their income must be verified through tax transcripts with the IRS. Currently this is standard practice, but many borrowers have been looking forward to the days when credit guidelines will relax and they will be able to get stated income loans again. Those days are not coming back. This has special implications for people living in border communities like El Paso where we deal with a lot of foreign income. Traditionally, the foreign national borrower could make a large downpayment and state their income. Now, they must be able to prove their income with tax returns, which can create challenges. The new act does provide an exemption for streamline refinances as long as the consumer is not 30 days or more past due on the current mortgage, and the refinance does not increase the principal balance on the current residential mortgage except to the extent of the fees and charges allowed by new rules as written by the new governing agencies.
Finally, the new Act revises the way that mortgage originators are paid. A mortgage originator may no longer receive payments from the lender unless none of the origination fees are paid by the consumer. Further, there is a three percent cap on points and fees for qualified loans. Qualified loans have a presumption of compliance with guidelines regarding income verification, so in practical terms these loans are quickly going to become the only loans that can be originated and sold on the secondary market. As industry professonals have complained that since this cap must include all lender fees it will lead to fewer smaller loans being originated and to less financing being made available for smaller properties, the new Act calls for a study to determine whether financing is actually affected by the new rules. Prohibited practices include: "steering any consumer from a residential mortgage loan for which the consumer is qualifed...to a residential mortgage loan that is not a qualified mortgage...abusive or unfair lending practices that promote disparities among consumers of equal credit worthiness but of different race, ethnicity, gender or age...mischaracterizing the credit history of a consumer or the residential mortgage loans available to a consumer; [and] mischaracterization of the appraised value of the property securing the extension of credit."
Penalties for violating this statute are stiff--the mortgage originator determined to be in violation of this statute can be fined up to 3 times the total amount of direct and indirect compensation plus court costs and the consumer's attorney's fee.
Industry experts predict that since banks are allowed to receive payments on the servicing release premium when the loans are sold, we will see lender administrative fees rolled into higher interest rates which will be sold to the consumers. And that is probably true, because in the end nothing is free. Banks are going to pass their costs on to consumers one way or another.
The new statute ends mandatory arbitration, so consumers with a complaint have the right to go to court. This is an important change because lenders have come to rely on mandatory arbitration clauses to keep costs down in disputes.
Tomorrow we will look at the provisions of the bill as they relate to appraisers and HVCC.
Showing posts with label Financial Reform HR 4173. Show all posts
Showing posts with label Financial Reform HR 4173. Show all posts
A Historic Day
Today is a big day for the real estate and mortgage world. Early this morning, the House and Senate conference committee agreed to the final text of HR 4173, the Restoring American Financial Stability Act. The final conference text will now go to the full House and Senate for a final vote and then the bill will be off to the President's desk for his signature prior to that all important July 4 deadline.
The legislation is being touted as historic--"the greatest financial overhaul since the great Depression." I agree fully, but I would like to remind everyone that historic does not necessarily mean "good." The bombing of Pearl Harbor, 9/11 and Hitler's invasion of Poland were all historic events but none of them turned out well. In fact, since I have a master's degree in history and I taught history for four years on the junior college level, I can say with some degree of certainty that most genuinely historic events are negative. History books do not have their pages filled with happy stories of content, prosperous people anymore than newspapers do.
Next week we will start breaking down what is in and out of the bill. But today is important for more than just financial reform. In the wee hours of the morning, the Senate voted down a jobs bill to extend unemployment benefits. The tax credit deadline extension which was passed by the House of Representatives was attached to this bill. So was re-funding for the National Flood Insurance Program. Since the bill was expected to pass, we were fairly confident that the tax credit would be extended through September. But with the bill killed this morning, the original June 30 deadline remains.
Many last minute borrowers who were trying to take advantage of the first time homebuyer tax credit by signing their contracts on or before April 30 and closing on or before June 30 have experienced delays in underwriting closing and funding due to new underwriting guidelines, delays caused by dropping rates which caused a glut of refinances during the time that the loans were being underwritten, and delays caused by the bank holders of short sales and foreclosures. Often, banks and relocation companies have their own internal delays so that they can review their documents prior to closing, which can delay a closing as much as 72 hours.
To me, a 90 day extension seemed excessive, because a contract that was signed in April probably is pretty close to being ready to close. Perhaps thirty days would adequately cover the delays caused by last minute problems. But perhaps not--it would depend on what each file needed individually in order to be able to close.
The National Association of Realtors is estimating that up to 25% of home buyers will not be able to take advantage of the tax credit if the deadline is not extended--that is about 180,000 borrowers. Of course, these people can still close when their paperwork is ready, but if they know that they are not going to get the tax credit, will they want to? And if they choose not to, what effect will that have on the housing market, since new contracts are now dipping since the tax credit ended.
It would be interesting to know how many of these borrowers who wanted to take advantage of the tax credit have had their closing delayed because their property requires flood insurance. As you recall, the funding for NFIP expired at the end of May, so we are now 25 days with no new flood policies. Congress has estimated that this lack of flood insurance has kept 1300 homes from closing per day. Now on day 25, that would be 32,500 homes and counting.
Here's an idea--rather than tying these two bills to a bill to extend jobless benefits, why didn't somebody just write a small bill for just these two iteme, take it in, vote on it, and then take it over to the Senate and vote on it there. At least we could have an up or down vote on these issues rather than a prolonged fight over bigger issues ending in defeat on these.
I read one commentary that predicts that Harry Reid will just find another bill to attach these items to and pass it before June 30. But I would not count on that--he would need to move awfully fast to have this finished by Wednesday. Rather, I imagine that a lot of closers and loan officers will be working until midnight June 28, 29, and 30.
Finally, today is historic for one other reason. Mortgage rates are the lowest they have ever been in the history of records. The 15 year mortgage rate today is about 3.875%. Of course, individuals have to meet credit and income guidelines and stricter qualification requirements, but still even to have an opportunity to refinance at a fixed rate under 4% is amazing and noteworthy. And that is the type of history we will want to remember.
The legislation is being touted as historic--"the greatest financial overhaul since the great Depression." I agree fully, but I would like to remind everyone that historic does not necessarily mean "good." The bombing of Pearl Harbor, 9/11 and Hitler's invasion of Poland were all historic events but none of them turned out well. In fact, since I have a master's degree in history and I taught history for four years on the junior college level, I can say with some degree of certainty that most genuinely historic events are negative. History books do not have their pages filled with happy stories of content, prosperous people anymore than newspapers do.
Next week we will start breaking down what is in and out of the bill. But today is important for more than just financial reform. In the wee hours of the morning, the Senate voted down a jobs bill to extend unemployment benefits. The tax credit deadline extension which was passed by the House of Representatives was attached to this bill. So was re-funding for the National Flood Insurance Program. Since the bill was expected to pass, we were fairly confident that the tax credit would be extended through September. But with the bill killed this morning, the original June 30 deadline remains.
Many last minute borrowers who were trying to take advantage of the first time homebuyer tax credit by signing their contracts on or before April 30 and closing on or before June 30 have experienced delays in underwriting closing and funding due to new underwriting guidelines, delays caused by dropping rates which caused a glut of refinances during the time that the loans were being underwritten, and delays caused by the bank holders of short sales and foreclosures. Often, banks and relocation companies have their own internal delays so that they can review their documents prior to closing, which can delay a closing as much as 72 hours.
To me, a 90 day extension seemed excessive, because a contract that was signed in April probably is pretty close to being ready to close. Perhaps thirty days would adequately cover the delays caused by last minute problems. But perhaps not--it would depend on what each file needed individually in order to be able to close.
The National Association of Realtors is estimating that up to 25% of home buyers will not be able to take advantage of the tax credit if the deadline is not extended--that is about 180,000 borrowers. Of course, these people can still close when their paperwork is ready, but if they know that they are not going to get the tax credit, will they want to? And if they choose not to, what effect will that have on the housing market, since new contracts are now dipping since the tax credit ended.
It would be interesting to know how many of these borrowers who wanted to take advantage of the tax credit have had their closing delayed because their property requires flood insurance. As you recall, the funding for NFIP expired at the end of May, so we are now 25 days with no new flood policies. Congress has estimated that this lack of flood insurance has kept 1300 homes from closing per day. Now on day 25, that would be 32,500 homes and counting.
Here's an idea--rather than tying these two bills to a bill to extend jobless benefits, why didn't somebody just write a small bill for just these two iteme, take it in, vote on it, and then take it over to the Senate and vote on it there. At least we could have an up or down vote on these issues rather than a prolonged fight over bigger issues ending in defeat on these.
I read one commentary that predicts that Harry Reid will just find another bill to attach these items to and pass it before June 30. But I would not count on that--he would need to move awfully fast to have this finished by Wednesday. Rather, I imagine that a lot of closers and loan officers will be working until midnight June 28, 29, and 30.
Finally, today is historic for one other reason. Mortgage rates are the lowest they have ever been in the history of records. The 15 year mortgage rate today is about 3.875%. Of course, individuals have to meet credit and income guidelines and stricter qualification requirements, but still even to have an opportunity to refinance at a fixed rate under 4% is amazing and noteworthy. And that is the type of history we will want to remember.
Redefining Lending
Today is D-day for the mortgage industry. Today the House and Senate are conferencing the financial reform bill specifically with regard to the issues that affect mortgage lending--the Merkley Amendment (which requires that loan originator compensation be capped at 3% and that a borrower's ability to repay be considered in every case,) and the Landrieu/Isakson amendment (which creates a standard for qualified loans which would be exempt from the 5% risk retention requirements) will forever change the way that mortgage loans are originated in the US.
It is one of the ironies of financial reform that most of the bills hit the working American taxpayer the hardest. For instance, many politicians have called for more help from bankers to allow people to refinance their homes into better terms. And yet, if the Merkley Amendment passes today as it is currently written, the amendment will end FHA and VA streamline refinance loans, which allow borrowers to refinance into more favorable terms without requalifying. Since guidelines are much stricter now than they were three years ago, a borrower wanting to refinance today might not qualify today even if his or her credit is good and all of the mortgage payments have been made on time. That is why a streamline is great. The borrower does not need a new appraisal on a streamline. If streamlines are gone, they will have to pay for the cost of getting the house appraised and hope that the appraisal comes in for value. A good, useful product being used by employed Americans who are meeting their obligations is being eliminated.
This is, of course, just one example of how life will change for consumers and lenders after financial reform becomes law. And industry groups on both sides are lobbying hard at the last minute. For instance, the Americans for Financial Reform, an umbrella group of unions and consumer advocacy groups, has posted on its website its eleventh hour push to make sure that the reform bill gets to the president's desk sooner rather than later. The AFR's efforts include lobbying Senators in states across the U.S. to make sure that they vote for the provisions of the bill and manning a phone bank in coordination with the SEIU to make sure that all elected officials get the AFR's message.
One interesting but little discussed provision that the AFR is pushing for today is passage of the House of Representative's amendment for foreclosure avoidance and affordable housing. On their website, the AFR has posted an open letter with today's date demanding that Congress include as part of financial reform a $3 billion fund to assist homeowners facing foreclosure because of unemployment or medical debt. This $3 billion would come from TARP money. The AFR's letter states that 58% of delinquent homeowners are delinquent on their payments because they are unemployed. "The Obama Administration's foreclosure prevention program, Making Home Affordable, was designed to assist homeowners in costly subprime loans. It has had mixed success dealing with that population. However, the only provision focused on the unemployed guarantees a mere three month's forbearance to those without jobs. This is totally inadequate and offers homeowners little more than is already the practice in the private market."
Actually to say that HAMP has met with mixed results is extremely generous--most people would say that it is has been a mess. A Huffington Post article dated June 21 states that 436,000 of the 1.24 million people who started with the HAMP program have dropped out since the program started in March of 2009. Initially the government pressured banks to bring borrowers into the program without insisting on proof of income, but then when the banks began to demand proof of income, the borrowers could not qualify. Of those who modified, 65-75% will default according to a CNN money story posted June 16. Diane Pendley, a managing director of Fitch, is quoted in the article as saying that the reason for the high defaults is that "on the average HAMP borrowers have 64% of their monthly pre-tax income spent before they can buy a quart of milk."
And since this program which is about thirteen months old has been proven not to work, Congress is going to take a typically governmental approach to the problem by throwing more money at it. Rather than continuing to concentrate on overextended working homeowners who cannot make their payments, why not turn the focus on to borrowers who are not working at all and cannot make their payments?
And that is what the AFR is lobbying for: a Congressional amendment to use $3 billion in TARP money so that HUD can make 24 month bridge loans to unemployed homeowners to give them time to find work. Also, "It is well known that homeowners who have legal representation have a much better chance of successfully navigating the HAMP foreclosure prevention program, which is the main government foreclosure-prevention effort," so the amendment would authorize $35 million for legal aid attorneys to represent homeowners facing foreclosure.
And finally, since foreclosures are devastating for neighborhoods, the amendment authorizes $1 billion for the Neighborhood Stabilization Program to purchase and redevelop foreclosed properties which will be turned into affordable housing.
This is the crux of what I believe is wrong with financial reform--it punishes people who are employed and qualify for mortgages by taking away competition and sound market choices while making it possible for the unemployed to stay in houses they cannot pay for. Don't misunderstand--I really do empathize with people who have lost their jobs over the last three years. I know first-hand how devastating long term unemployment can be to a family. But is a taxpayer subsidy of the family's mortgage payment for up to 2 years really the answer to this problem? I don't think so. Rather, I believe that if Congress really wanted to help the unemployed, they would stop killing small businesses with over regulation so that everyone could go back to work and pay their own mortgages.
Stay tuned; within the next couple of days we are going to know exactly what is in and out of the final bill.
It is one of the ironies of financial reform that most of the bills hit the working American taxpayer the hardest. For instance, many politicians have called for more help from bankers to allow people to refinance their homes into better terms. And yet, if the Merkley Amendment passes today as it is currently written, the amendment will end FHA and VA streamline refinance loans, which allow borrowers to refinance into more favorable terms without requalifying. Since guidelines are much stricter now than they were three years ago, a borrower wanting to refinance today might not qualify today even if his or her credit is good and all of the mortgage payments have been made on time. That is why a streamline is great. The borrower does not need a new appraisal on a streamline. If streamlines are gone, they will have to pay for the cost of getting the house appraised and hope that the appraisal comes in for value. A good, useful product being used by employed Americans who are meeting their obligations is being eliminated.
This is, of course, just one example of how life will change for consumers and lenders after financial reform becomes law. And industry groups on both sides are lobbying hard at the last minute. For instance, the Americans for Financial Reform, an umbrella group of unions and consumer advocacy groups, has posted on its website its eleventh hour push to make sure that the reform bill gets to the president's desk sooner rather than later. The AFR's efforts include lobbying Senators in states across the U.S. to make sure that they vote for the provisions of the bill and manning a phone bank in coordination with the SEIU to make sure that all elected officials get the AFR's message.
One interesting but little discussed provision that the AFR is pushing for today is passage of the House of Representative's amendment for foreclosure avoidance and affordable housing. On their website, the AFR has posted an open letter with today's date demanding that Congress include as part of financial reform a $3 billion fund to assist homeowners facing foreclosure because of unemployment or medical debt. This $3 billion would come from TARP money. The AFR's letter states that 58% of delinquent homeowners are delinquent on their payments because they are unemployed. "The Obama Administration's foreclosure prevention program, Making Home Affordable, was designed to assist homeowners in costly subprime loans. It has had mixed success dealing with that population. However, the only provision focused on the unemployed guarantees a mere three month's forbearance to those without jobs. This is totally inadequate and offers homeowners little more than is already the practice in the private market."
Actually to say that HAMP has met with mixed results is extremely generous--most people would say that it is has been a mess. A Huffington Post article dated June 21 states that 436,000 of the 1.24 million people who started with the HAMP program have dropped out since the program started in March of 2009. Initially the government pressured banks to bring borrowers into the program without insisting on proof of income, but then when the banks began to demand proof of income, the borrowers could not qualify. Of those who modified, 65-75% will default according to a CNN money story posted June 16. Diane Pendley, a managing director of Fitch, is quoted in the article as saying that the reason for the high defaults is that "on the average HAMP borrowers have 64% of their monthly pre-tax income spent before they can buy a quart of milk."
And since this program which is about thirteen months old has been proven not to work, Congress is going to take a typically governmental approach to the problem by throwing more money at it. Rather than continuing to concentrate on overextended working homeowners who cannot make their payments, why not turn the focus on to borrowers who are not working at all and cannot make their payments?
And that is what the AFR is lobbying for: a Congressional amendment to use $3 billion in TARP money so that HUD can make 24 month bridge loans to unemployed homeowners to give them time to find work. Also, "It is well known that homeowners who have legal representation have a much better chance of successfully navigating the HAMP foreclosure prevention program, which is the main government foreclosure-prevention effort," so the amendment would authorize $35 million for legal aid attorneys to represent homeowners facing foreclosure.
And finally, since foreclosures are devastating for neighborhoods, the amendment authorizes $1 billion for the Neighborhood Stabilization Program to purchase and redevelop foreclosed properties which will be turned into affordable housing.
This is the crux of what I believe is wrong with financial reform--it punishes people who are employed and qualify for mortgages by taking away competition and sound market choices while making it possible for the unemployed to stay in houses they cannot pay for. Don't misunderstand--I really do empathize with people who have lost their jobs over the last three years. I know first-hand how devastating long term unemployment can be to a family. But is a taxpayer subsidy of the family's mortgage payment for up to 2 years really the answer to this problem? I don't think so. Rather, I believe that if Congress really wanted to help the unemployed, they would stop killing small businesses with over regulation so that everyone could go back to work and pay their own mortgages.
Stay tuned; within the next couple of days we are going to know exactly what is in and out of the final bill.
The Snowe-Pryor Amendment to HR 4173--Looking out for the Little Guy
I realize that the CEO of BP got into a lot of trouble this week saying that he cares about the "small people," but honestly somebody needs to. With so much emphasis on Wall Street, major banks, corporations which are too big to fail, no one really seems to care about the rest of us at all.
That is probably the reason that a lot of small business advocates are banding together to lobby for inclusion of the Snowe-Pryor Amendment (S Amendment 3883) in the final conference version of financial reform. The list of businesses lobbying for inclusion of this amendment is about as diverse as can be imagined: The Associated Builders and Contractors, the Association of Kentucky Fried Chicken Franchisees, the Taco Bell Franchisees, the Tire Industry Association, the Society of American Florists, Hispanic Leadership Fund, National Federation of Independent Businesses, the U.S. Chamber of Commerce, the U.S. Hispanic Chamber of Commerce and the United States Black Chamber of Commerce are among some of the organizations that sent a letter on June 11 to the members of the conference committee asking that Snowe-Pryor be included in the final bill.
The businesses and organizations named above are hardly the titans of Wall Street, nor are they companies and organizations which sell credit as a commodity. So why are they even interested in financial reform? Because they fear the overreaching powers of the Bureau of Consumer Financial Protection and its ability to regulate finances and limit and perhaps cut off access to credit.
The letter which these agencies sent to the conference committee states that the Snowe-Pryor Amendment, (S Amend. 3883, The Small Business Fairness and Regulatory Transparency Amendment) is necessary in order to require the Consumer Financial Protection Bureau to include recommendations from a small business advocacy review panel with any proposed rules that will have a significant impact on small businesses. And the Consumer Financial Protection Bureau must also inform the public of how its rules affect small business access to credit.
Senator Olympia Snowe (R Maine) and Senator Mark Pryor (D Ark) co-sponsored the amendment. On her website, Senator Snowe explains the need for this amendment as follows: "Plain and simple, onerous regulations are crushing the entrepreneurial spirit of American small businesses and hindering their ability to create new, good-paying jobs. By establishing a transparent rule making process that requires an impact analysis for smaller firms and valuable input from stakeholders, this amendment provides the one-two punch we need to guarantee that the CFPB will issue rules that maximize consumer protection while minimizing economic harm." By making the CFPB a "covered agency" under the rules of Regulatory Flexibility Act, the amendment guarantees that small business advocates can weigh in on its decisions. Federal agencies would have to consider the impact that their rules have on the cost of credit for small businesses and consider specific alternatives to minimize increases to the cost of credit.
Sounds great, doesn't it? After all, isn't the purpose of financial reform partially to protect the U.S. Taxpayer and by extension all of us individually--the small people--from the economic consequences of another financial meltdown. And shouldn't part of that protection include bolstering and protecting small businesses which provide most of the job creation in the U.S. According to the letter signed by the various small business advocates, "Small businesses have created about two out of every three net new jobs in the United States since the 1970's." And according to the SBA, as quoted on Senator Snowe's website, the annual cost of federal regulations totals $1.1 trillion with small firms paying 45% more per employee than their large counterparts.
So who would oppose an amendment to cut some breaks to the small business owner--who is the primary creator of the jobs that are so desperately needed right now? The American for Financial Reform would. This group, you may recall, is an umbrella organization pushing for financial reform comprised of a variety of organizations including the AFL-CIO, AARP, ACORN, the Center for Responsible Lending, and many other unions and consumer advocacy groups. One of their organizations, which calls itself the Main Street Alliance, "a national network of small business coalitions representing small business owners across the country," has written a letter which is posted on the Americans for Financial Reform website opposing passage of the Snowe-Pryor Amendment. The reason? "A strong, independent consumer financial protection arm is critically important to the future health and prosperity of America's small businesses...the Consumer Financial Protection Bureau will protect our customers from the toxic financial products that triggered the financial crisis, destroying millions of jobs, siphoning away disposable income, and decimating our sales and customer base."
But, adds the letter, "The Snowe-Pryor Amendment...will actually harm small business owners' best interests by undermining the consumer protection bureau's ability to operate efficiently. The amendment will add between two and six months to the rules process, possibly much more, by adding a redundant comment window...and by requiring a multi agency panel to draft a joint report on new rules ideas before the rules are even proposed to the public." The Main Street alliance wants passage of the Landrieu-Dodd-Kerry amendment, which it says has the "same commitment to small business input on rules and the same panel review process, but in a streamlined way that allows rulemaking to move forward without cumbersome and unnecessary delays."
Now wait a minute. Small business owners are already shouldering a disproportionately high burden of the 1.1 trillion dollars that are currently the cost of federal regulations, and yet the Americans for Financial Reform are concerned about cumbersome delays to the Consumer Financial Protection Bureau? Personally, I would love to know exactly what businesses the Main Street Alliance actually represents, because if the idea of an autonomous, powerful, intrusive new government agency doesn't scare them witless, I'd like to know why not.
Since the conference committee is slated to finish with the final reform bill which is on track to be on the President's desk by June 25, time is running out. But hopefully, in the end, someone will actually care for the small business owner, who is often the most overlooked, and overburdened species in our modern world.
That is probably the reason that a lot of small business advocates are banding together to lobby for inclusion of the Snowe-Pryor Amendment (S Amendment 3883) in the final conference version of financial reform. The list of businesses lobbying for inclusion of this amendment is about as diverse as can be imagined: The Associated Builders and Contractors, the Association of Kentucky Fried Chicken Franchisees, the Taco Bell Franchisees, the Tire Industry Association, the Society of American Florists, Hispanic Leadership Fund, National Federation of Independent Businesses, the U.S. Chamber of Commerce, the U.S. Hispanic Chamber of Commerce and the United States Black Chamber of Commerce are among some of the organizations that sent a letter on June 11 to the members of the conference committee asking that Snowe-Pryor be included in the final bill.
The businesses and organizations named above are hardly the titans of Wall Street, nor are they companies and organizations which sell credit as a commodity. So why are they even interested in financial reform? Because they fear the overreaching powers of the Bureau of Consumer Financial Protection and its ability to regulate finances and limit and perhaps cut off access to credit.
The letter which these agencies sent to the conference committee states that the Snowe-Pryor Amendment, (S Amend. 3883, The Small Business Fairness and Regulatory Transparency Amendment) is necessary in order to require the Consumer Financial Protection Bureau to include recommendations from a small business advocacy review panel with any proposed rules that will have a significant impact on small businesses. And the Consumer Financial Protection Bureau must also inform the public of how its rules affect small business access to credit.
Senator Olympia Snowe (R Maine) and Senator Mark Pryor (D Ark) co-sponsored the amendment. On her website, Senator Snowe explains the need for this amendment as follows: "Plain and simple, onerous regulations are crushing the entrepreneurial spirit of American small businesses and hindering their ability to create new, good-paying jobs. By establishing a transparent rule making process that requires an impact analysis for smaller firms and valuable input from stakeholders, this amendment provides the one-two punch we need to guarantee that the CFPB will issue rules that maximize consumer protection while minimizing economic harm." By making the CFPB a "covered agency" under the rules of Regulatory Flexibility Act, the amendment guarantees that small business advocates can weigh in on its decisions. Federal agencies would have to consider the impact that their rules have on the cost of credit for small businesses and consider specific alternatives to minimize increases to the cost of credit.
Sounds great, doesn't it? After all, isn't the purpose of financial reform partially to protect the U.S. Taxpayer and by extension all of us individually--the small people--from the economic consequences of another financial meltdown. And shouldn't part of that protection include bolstering and protecting small businesses which provide most of the job creation in the U.S. According to the letter signed by the various small business advocates, "Small businesses have created about two out of every three net new jobs in the United States since the 1970's." And according to the SBA, as quoted on Senator Snowe's website, the annual cost of federal regulations totals $1.1 trillion with small firms paying 45% more per employee than their large counterparts.
So who would oppose an amendment to cut some breaks to the small business owner--who is the primary creator of the jobs that are so desperately needed right now? The American for Financial Reform would. This group, you may recall, is an umbrella organization pushing for financial reform comprised of a variety of organizations including the AFL-CIO, AARP, ACORN, the Center for Responsible Lending, and many other unions and consumer advocacy groups. One of their organizations, which calls itself the Main Street Alliance, "a national network of small business coalitions representing small business owners across the country," has written a letter which is posted on the Americans for Financial Reform website opposing passage of the Snowe-Pryor Amendment. The reason? "A strong, independent consumer financial protection arm is critically important to the future health and prosperity of America's small businesses...the Consumer Financial Protection Bureau will protect our customers from the toxic financial products that triggered the financial crisis, destroying millions of jobs, siphoning away disposable income, and decimating our sales and customer base."
But, adds the letter, "The Snowe-Pryor Amendment...will actually harm small business owners' best interests by undermining the consumer protection bureau's ability to operate efficiently. The amendment will add between two and six months to the rules process, possibly much more, by adding a redundant comment window...and by requiring a multi agency panel to draft a joint report on new rules ideas before the rules are even proposed to the public." The Main Street alliance wants passage of the Landrieu-Dodd-Kerry amendment, which it says has the "same commitment to small business input on rules and the same panel review process, but in a streamlined way that allows rulemaking to move forward without cumbersome and unnecessary delays."
Now wait a minute. Small business owners are already shouldering a disproportionately high burden of the 1.1 trillion dollars that are currently the cost of federal regulations, and yet the Americans for Financial Reform are concerned about cumbersome delays to the Consumer Financial Protection Bureau? Personally, I would love to know exactly what businesses the Main Street Alliance actually represents, because if the idea of an autonomous, powerful, intrusive new government agency doesn't scare them witless, I'd like to know why not.
Since the conference committee is slated to finish with the final reform bill which is on track to be on the President's desk by June 25, time is running out. But hopefully, in the end, someone will actually care for the small business owner, who is often the most overlooked, and overburdened species in our modern world.
The High Cost of Reform to Private Businesses--HR 4173 and the CBO
This week we have been examining the Congressional Budget Office's score card for HR 4173--the Restoring American Financial Stability Act of 2010. Today, we will conclude our series on this by taking a look at the direct cost to private businesses. The CBO estimates that the bill will add $19.7 billion to the deficit between 2010 and 2020, and the first part of the report is aimed at detailing how those monies will be allocated.
However, the final part of the CBO's report is dedicated to the private sector impact of the implementation of this reform bill. The Unfunded Mandates Reform Act sets an annual threshold for private sector mandates which is currently $141 million for 2010. In their summary, the CBO concludes that the fees imposed on private businesses will "significantly exceed" that figure. The last 7 pages of the CBO's analysis are devoted to letting us know how significant these additional costs will be.
For some parts of the bill, the CBO cannot determine a cost because they do not have sufficient information. For example, the CBO is not able to adequately evaluate the impact of the Merkley amendment--which caps loan originator compensation at 3% and prohibits the financing of fees unless the Yield Spread Premium is the only mechanism for compensation, because they do not have enough information about the mortgage industry and how it currently utilizes yield spread premium as a form of compensation to realistically predict the potential impact on business. For the same reason, the CBO does not attempt to address the cost of risk retention or the Landrieu/Isakson amendment.
HR 4173 authorizes the SEC to prohibit predispute mandatory arbitration agreements. These are used by brokers, dealers, municipal financial advisors, investment advisors, mortgage lenders and car dealers as a cost saving mechanism for dealing with conflict without going to court. With mandatory arbitration agreements outlawed, businesses will face potentially much higher litigation costs, which the CBO acknowledges, but to which it does not attempt to assign a dollar figure. The report says simply, "Based on information from industry sources, CBO expects that if the SEC were to impose such mandate, the incremental cost to those entities of using the court system instead of arbitration could be significant."
So what is the CBO able to assign monetary cost to? First, the Orderly Liquidation Fund. The CBO estimates that this fund, which will be part of the Orderly Liquidation Authority, which has the power to seize and dissolve financial institutions which are endangering the economy, will cost the private sector approximately $1 billion in assessments during the first five years of its existence.
Next, the Securities and Exchange Commission fees. Fee increases levied by the SEC are estimated to total at least $650 million during the first five years.
The Financial Stability Oversight Council, which will have the authority to require large bank holding companies to comply with certain requirements and which will be able to issue cease and desist orders for certain activities, will cost the private sector about $75 million a year.
New fees imposed by the Federal Reserve to cover expenses in supervising certain firms will cost the private sector an additional $75 million a year.
New requirements on hedge fund advisers which require advisers managing funds with over $100 million in assets to register with the SEC will cost approximately $30,000 per firm.
Other costs cannot be measured because they involve legislation that has not yet been written. For instance, HR 4173 requires the SEC to establish new rules to address any deficiencies in the regulations of brokers, dealers and advisers, but the CBO cannot score this because the cost depends on whatever new rules are implemented.
And finally, perhaps the oddest note in the CBO's report: HR 4173 contains a section requiring that manufacturers using certain minerals disclose where they obtained the minerals and what measures were "taken to ensure that obtaining the minerals did not benefit any armed groups in the Democratic Republic of the Congo or an adjacent country." Why this is included in financial reform, I cannot even imagine; how much it will cost no one apparently knows. The CBO could not put a price tag on this because they would need to know what data the manufacturers would be required to collect regarding mineral origin.
In summary: The estimated cost of HR 4173 to the U.S. taxpayer: $19.7 billion in deficit spending between 2010 and 2020.
The cost to the private sector in fees and assessements plus additional court costs: well over $1 billion in five years.
Implementing a massive new bureaucracy with unprecedented powers over businesses and the financial lives of Americans: priceless
However, the final part of the CBO's report is dedicated to the private sector impact of the implementation of this reform bill. The Unfunded Mandates Reform Act sets an annual threshold for private sector mandates which is currently $141 million for 2010. In their summary, the CBO concludes that the fees imposed on private businesses will "significantly exceed" that figure. The last 7 pages of the CBO's analysis are devoted to letting us know how significant these additional costs will be.
For some parts of the bill, the CBO cannot determine a cost because they do not have sufficient information. For example, the CBO is not able to adequately evaluate the impact of the Merkley amendment--which caps loan originator compensation at 3% and prohibits the financing of fees unless the Yield Spread Premium is the only mechanism for compensation, because they do not have enough information about the mortgage industry and how it currently utilizes yield spread premium as a form of compensation to realistically predict the potential impact on business. For the same reason, the CBO does not attempt to address the cost of risk retention or the Landrieu/Isakson amendment.
HR 4173 authorizes the SEC to prohibit predispute mandatory arbitration agreements. These are used by brokers, dealers, municipal financial advisors, investment advisors, mortgage lenders and car dealers as a cost saving mechanism for dealing with conflict without going to court. With mandatory arbitration agreements outlawed, businesses will face potentially much higher litigation costs, which the CBO acknowledges, but to which it does not attempt to assign a dollar figure. The report says simply, "Based on information from industry sources, CBO expects that if the SEC were to impose such mandate, the incremental cost to those entities of using the court system instead of arbitration could be significant."
So what is the CBO able to assign monetary cost to? First, the Orderly Liquidation Fund. The CBO estimates that this fund, which will be part of the Orderly Liquidation Authority, which has the power to seize and dissolve financial institutions which are endangering the economy, will cost the private sector approximately $1 billion in assessments during the first five years of its existence.
Next, the Securities and Exchange Commission fees. Fee increases levied by the SEC are estimated to total at least $650 million during the first five years.
The Financial Stability Oversight Council, which will have the authority to require large bank holding companies to comply with certain requirements and which will be able to issue cease and desist orders for certain activities, will cost the private sector about $75 million a year.
New fees imposed by the Federal Reserve to cover expenses in supervising certain firms will cost the private sector an additional $75 million a year.
New requirements on hedge fund advisers which require advisers managing funds with over $100 million in assets to register with the SEC will cost approximately $30,000 per firm.
Other costs cannot be measured because they involve legislation that has not yet been written. For instance, HR 4173 requires the SEC to establish new rules to address any deficiencies in the regulations of brokers, dealers and advisers, but the CBO cannot score this because the cost depends on whatever new rules are implemented.
And finally, perhaps the oddest note in the CBO's report: HR 4173 contains a section requiring that manufacturers using certain minerals disclose where they obtained the minerals and what measures were "taken to ensure that obtaining the minerals did not benefit any armed groups in the Democratic Republic of the Congo or an adjacent country." Why this is included in financial reform, I cannot even imagine; how much it will cost no one apparently knows. The CBO could not put a price tag on this because they would need to know what data the manufacturers would be required to collect regarding mineral origin.
In summary: The estimated cost of HR 4173 to the U.S. taxpayer: $19.7 billion in deficit spending between 2010 and 2020.
The cost to the private sector in fees and assessements plus additional court costs: well over $1 billion in five years.
Implementing a massive new bureaucracy with unprecedented powers over businesses and the financial lives of Americans: priceless
The High Cost of Financial Reform--HR 4173 and the CBO
The title of this blog is "Paying for Protection: The High Cost of Financial Reform." Since the primary focus of reform has been HR 4173 and SB 3217, today we are going to focus on the costs of financial reform as it pertains to budgets, deficits, and the taxpayer.
On June 9, the Congressional Budget office released its cost estimate for HR 4173 (The Restoring Financial Stability Act of 2010) as passed by the Senate on May 20, 2010. A complete copy of the 30 page report is available at www.cbo.gov. The first page summary reiterates briefly the changes that will be implemented as a result of HR 4173, and it makes clear that all costs involved in enacting this legislation are not included in the CBO scoring model. For instance, the summary states that HR 4173 will change the terms and conditions of the FDIC programs guaranteeing financial obligations of bank and bank holding companies when there is a liquidity crisis. The CBO cost estimate includes the cost of repealing the FDIC's current authority but not the costs for creating the new program authorized by HR 4173 since that program would be created by another piece of legislation which would be scored separately.
The CBO is also frank about the fact that passing this legislation is not a guarantee of no future crises. "Under the legislation, as under current law, there is some possibility that, at some point in the future, large financial firms will become insolvent and liquidity crises will arise, and that those financial problems will present significant risks to the nation's broader economy. The cost of addressing those problems under current law is unknown and would depend on how the Administration and the Congress chose to proceed when faced with financial crises in the future; they could, for example, change laws, create new programs, appropriate additional funds, and assess new fees. Depending on the effectiveness of the new regulatory initiatives and new authorities to resolve and support HR 4173, enacting this legislation could change the timing, severity, and federal cost of averting and resolving future financial crises. However, CBO has not determined whether the estimated costs under the act would be smaller or larger than the costs of alternative approaches to addressing future financial crises and the risks they pose to the economy as a whole."
A glowing endorsement indeed--a piece of legislation which will create massive new bureaucracy with unprecedented powers over businesses, "could change the timing, severity and federal cost of averting and resolving future financial crises." So how much is this bill which may or may not solve the problem going to cost?
According to the CBO estimate, HR 4173 will increase revenues by $12.1 billion over the 2011-2015 period and by $33.5 billion over the 2011-2020 period. During the 2010-2014 period, HR 4173 is estimated to increase direct spending by $19.7 billion and net deficits by $10.6 billion. Over the period from 2010-2019 the CBO estimates that enacting HR 4173 will increase direct spending by $46.9 billion and net deficits by $18.3 billion.
In addition, implementation of the bill will impose mandates on the private sector and the states as defined under the Unfunded Mandates Reform Act. For example, states will no longer be able to tax and regulate certain types of insurance. The CBO does not have enough information to calculate the exact cost to the states or to determine whether the costs would exceed the threshold provided for in the Unfunded Mandates Reform Act which was $70 million in 2010. However, where the private sector is concerned, the CBO states that the cost of HR 4173 on private businesses will "significantly exceed" the threshold established by the UMRA for governmental mandates on the private sector, which is $141 million in 2010, because according to the CBO's report, "the amount of fees collected would be more than that amount."
So we have a cost of "significantly" greater than $140 million in fees and costs to private businesses, and deficit spending of $18.3 billion to be covered by the American taxpayer for a new bill which may or may not "change the timing, severity and federal cost of averting and resolving financial crises." Tomorrow we will look at how all of that money is going to be spent.
On June 9, the Congressional Budget office released its cost estimate for HR 4173 (The Restoring Financial Stability Act of 2010) as passed by the Senate on May 20, 2010. A complete copy of the 30 page report is available at www.cbo.gov. The first page summary reiterates briefly the changes that will be implemented as a result of HR 4173, and it makes clear that all costs involved in enacting this legislation are not included in the CBO scoring model. For instance, the summary states that HR 4173 will change the terms and conditions of the FDIC programs guaranteeing financial obligations of bank and bank holding companies when there is a liquidity crisis. The CBO cost estimate includes the cost of repealing the FDIC's current authority but not the costs for creating the new program authorized by HR 4173 since that program would be created by another piece of legislation which would be scored separately.
The CBO is also frank about the fact that passing this legislation is not a guarantee of no future crises. "Under the legislation, as under current law, there is some possibility that, at some point in the future, large financial firms will become insolvent and liquidity crises will arise, and that those financial problems will present significant risks to the nation's broader economy. The cost of addressing those problems under current law is unknown and would depend on how the Administration and the Congress chose to proceed when faced with financial crises in the future; they could, for example, change laws, create new programs, appropriate additional funds, and assess new fees. Depending on the effectiveness of the new regulatory initiatives and new authorities to resolve and support HR 4173, enacting this legislation could change the timing, severity, and federal cost of averting and resolving future financial crises. However, CBO has not determined whether the estimated costs under the act would be smaller or larger than the costs of alternative approaches to addressing future financial crises and the risks they pose to the economy as a whole."
A glowing endorsement indeed--a piece of legislation which will create massive new bureaucracy with unprecedented powers over businesses, "could change the timing, severity and federal cost of averting and resolving future financial crises." So how much is this bill which may or may not solve the problem going to cost?
According to the CBO estimate, HR 4173 will increase revenues by $12.1 billion over the 2011-2015 period and by $33.5 billion over the 2011-2020 period. During the 2010-2014 period, HR 4173 is estimated to increase direct spending by $19.7 billion and net deficits by $10.6 billion. Over the period from 2010-2019 the CBO estimates that enacting HR 4173 will increase direct spending by $46.9 billion and net deficits by $18.3 billion.
In addition, implementation of the bill will impose mandates on the private sector and the states as defined under the Unfunded Mandates Reform Act. For example, states will no longer be able to tax and regulate certain types of insurance. The CBO does not have enough information to calculate the exact cost to the states or to determine whether the costs would exceed the threshold provided for in the Unfunded Mandates Reform Act which was $70 million in 2010. However, where the private sector is concerned, the CBO states that the cost of HR 4173 on private businesses will "significantly exceed" the threshold established by the UMRA for governmental mandates on the private sector, which is $141 million in 2010, because according to the CBO's report, "the amount of fees collected would be more than that amount."
So we have a cost of "significantly" greater than $140 million in fees and costs to private businesses, and deficit spending of $18.3 billion to be covered by the American taxpayer for a new bill which may or may not "change the timing, severity and federal cost of averting and resolving financial crises." Tomorrow we will look at how all of that money is going to be spent.
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