Now that financial reform bills have passed both houses of Congress, industry groups are going to be lining up to influence the final draft of the bill. And with Congress scheduled to reconvene next Monday, conflicts in Washington DC this June will likely be hot.
A primary issue for the mortgage industry will likely be the Merkley/Klobuchar amendment, sponsored by Senators Merkley (D OR) and Klobuchar (D. MN). This amendment was introduced after business hours on a Tuesday evening and approved early the following Wednesday morning before industry groups had a chance to weigh in. Both the National Association of Mortgage Brokers and the Mortgage Bankers Association have expressed concerns about the amendment, although unquestionably, the mortgage broker community has the most to lose in this debate.
The Merkley/Klobuchar amendment is an eleven page document which both mandates that a consumer's ability to repay a loan be taken into consideration in underwriting a loan and at the same time caps originator compensation. The amendment bans the use of Yield Spread Premiums--the spread on interest rates--as compensation for a mortgage loan originator unless the mortgage loan originator is not receiving any other compensation. Yield Spread Premiums are used to reduce the amount of upfront fees that the consumer pays to get his mortgage loan by allowing the originator to be compensated through the rate.
Banks also earn a spread on the interest rates of loans which they sell, but the Merkley amendment expressly does not limit or prohibit these: "No provision in this subsection shall be construed as limiting or affecting the amount of compensation received by a creditor upon the sale of a consummated loan to a subsequent loan purchaser."
The amendment mandates that determination of a consumer's ability to repay the loan must include, "consideration of the consumer's credit history, current income, expected income, current obligations, debt to income ratio, employment status," or financial resources other than the equity in the subject property.
Interestingly the amendment creates a safe harbor for compliance. A loan is presumed to be in compliance with this statute if the creditor has verified the consumer's ability to repay and used the maximum rate permitted under the loan during the first 5 years. However, the presumption of compliance cannot be applied to any loan where the total points and fees exceed 3%, which includes up to 1% of financed mortgage insurance or FHA premiums.
Industry lobbyists are going to argue that such a provision will make it almost impossible to originate loans under $150,000.00. However, they appear to be basically ignoring the blatantly anti-business nature of the amendment. Why does limiting total fees to 3% create a presumption of compliance for any mortgage loan? I once refinanced a loan that had been done with no charges at all by the previous loan originator who had financed the house a couple of years before. The previous loan originator had refinanced a real estate agent's home free of charge in the hopes of building a relationship with her. However, the loan had been done totally incorrectly and was actually illegal under the Texas Home Equity statute. So being free did not make it legal. (Actually, that was one of the factors that made it illegal because under RESPA no loan originator could render a service without charges in expectation of future business.) A low origination charge, or no origination charge, does not mean that the loan itself is affordable or that the consumer is going to make the payments, so to tie compensation to a safe harbor provision is ridiculous, particularly on a purchase loan where the consumer is taking on new debt and not financing his or her closing costs.
Having said that, the reality of the loan origination business is that conventional loans have to be salable to Fannie Mae and Freddie Mac, and they, therefore, have to be underwritten to comply to Fannie Mae and Freddie Mac guidelines. By creating a safe harbor that presumes compliance, Senators Merkley and Klobuchar are setting up a situation in which no loan with origination charges, including financed MI, of more than 3% will be eligible for sale. What this means, essentially, is that wholesale lending and the small mortgage brokers who are left will go out of business.
What is most interesting to me about this whole situation is that the key provisions of the financial reform bill and its amendments as they relate to mortgage lending are coming out of a study that the Center for Responsible Lending completed in April of 2008 regarding mortgage lending and subprime loans. Entitled, "Steered Wrong: Brokers, Borrowers, and Subprime Loans," the study asserted that mortgage brokers steered unsuspecting borrowers into high interest rate subprime loans. The study made three policy recommendations:
1. Ban yield spread premiums and prepayment penalties on subprime loans;
2. Create a system of accountability where lenders and investors share responsibility for brokered loans; and
3. Establish clear broker duties to their clients.
All of these policy recommendations are included in either the two financial reform bills HR 4173, SB 3217 or the amendments. Now, this is the interesting part. The recommendations were made regarding subprime loans. This same study concluded that prime brokered loans were no more expensive than retail loans and that for borrowers with better credit scores, brokered loans were an average of $900 to $1600 per $100,000 loan amount cheaper over the life of the loan as opposed to a retail loan. Today, there really is no subprime market left. However, the Center's anti-broker, anti-small business proposals are being codified into law with regard to all loans even though their own study showed that mortgage brokers were a more competitive choice than retail lenders on prime loans.
NAMB's talking points do assert that the Merkley Amendment "would treat origination channels differently, picking winners and losers in the mortgage industry." And that is really at the heart of this amendment; it is not about protecting the consumer. It is really just about squeezing out the competition.
Showing posts with label SB 3217. Show all posts
Showing posts with label SB 3217. Show all posts
Free to Choose: Consumer Advocates Take on the Consumer
When ACORN's chief organizer, Bertha Lewis, speaking to a group of young people, told them that it takes courage to admit to being a socialist, no one in the mortgage community should have been surprised. We, after all, were used to dealing with ACORN and its constant complaints about the mortgage industry and the broker industry. Now ACORN is basically irrelevant--at least for this moment, but many other consumer advocacy groups have a powerful voice in Washington D.C. and they are setting policy which is affecting small business owners today and will affect all consumers of financial products in the near future after SB 3217 is reconciled with the House bill and then signed into law by the president (which is expected to happen by the fourth of July.)
Today I want to look at a study completed by the Center for Responsible Lending entitled "Steered Wrong: Brokers, Borrower, and Subprime Loans," which was published in April of 2008 and can be found on the Center for Responsible Lending's website at responsiblelending.org. I found this 54 page study and its findings fascinating, and I think in light of everything that is happening around us today, the study is worth sharing.
The study, which is filled with official looking charts and graphs and numerous algebraic equations, puts the blame for the mortgage meltdown squarely on the shoulders of mortgage brokers. The Center for Responsible Lending wants us to know that it is not loose lending practices, or Community Re-Investment Acts, or scant oversight of Fannie Mae and Freddie Mac which caused the problems--it was mortgage brokers by themselves, plus nothing.
The study claims that brokers steered borrowers into subprime mortgages who could have qualified for prime mortgages, and in doing so cost them additional fees and higher interest rates which ultimately caused their homes to go into foreclosure. To support this theory, the report cites a study comparing loans of similar interest rates some of which were originated by brokers and others by retail originators. Now, without actually seeing the data and the files themselves, it would be impossible to make a precise comparison, but I can tell you with all certainty that there are reasons besides greed and heartlessness that borrowers used to go to into subprime loans. For example, two borrowers might both have a 660 credit score. One of the borrowers might have this score because he paid a few accounts thirty days late last year, but he now has 12 months of timely payments for all accounts on his credit report. Assuming that his income qualified him for the loan, he could probably get an automated underwriting approval for a prime loan. However, the other borrower might have a 660 credit score because he had a four year old medical collection for $10,000 which he could not afford to pay. This borrower would not qualify for a prime loan even though his other credit might be fine, because prime loans required that collections be paid at closing. (Even at the height of laxness, Fannie Mae and Freddie Mac never allowed unpaid collections over $5000.00.) So that borrower could either wait three more years for the collection to drop off his credit, or he could take a subprime mortgage at a higher interest rate and plan to refinance later. The study does not appear to consider any factors other than just the credit score, the debt to income ratio, whether the loan was considered full documentation, etc.
Nestled in among the charts and graphs are paragraphs editorializing about the role of the broker: "Brokers react to market incentives predictably; they seek to maximize both the number of loans they originate and their revenue per loan. However, since charging too much per loan could drive away potential customers, brokers must find the optimal balance between these two factors. We posit that brokers shift this balance according to their perception of a customer's credit profile." (page 4). "Homebuyers and homeowners have therefore trusted their brokers as mortgage professionals to help them choose a suitable loan. This misplaced trust has likely been a factor in the current foreclosure crisis." (page 5).
The report acknowledges that all states license mortgage brokers and that licensing requirements include criminal background checks, bonding, and educational experience requirements. But, this is not sufficient, according to the report, because "licensing statutes act primarily as enforcement mechanisms for substantive protections but do not actually establish protections themselves." The report fails to mention that retail originators--with whom it compares the brokers--were not required to be licensed at all until the SAFE ACT was implemented. But it asserts that retail originators are more likely to treat borrowers more fairly because of reputational risk and federal and state auditing requirements.
"Importantly, though their customers routinely rely on them as experts to help select lenders and loan products, mortgage brokers often assert that they are independent contractors and not agents of either borrowers or lenders." (page 6) Mortgage brokers asserted that because states like Texas had a form which borrowers were required to sign that said that we were independent agents and not agents of the borrowers or lenders. This form was mandatory in every file, and it was meant to clarify to the consumer the relationship between the broker and borrower. But a very large part of Center for Responsible Lending's hypothesis is that borrowers cannot and should not be trusted to read and understand forms.
The report states that "rational choice theory...assumes that people faced with choices will choose the best option based on their own set of preferences and constraints." However, the Center does not agree. "A 2007 study by Harvard University researchers finds that borrowers have a limited ability to analyze and compare multiple, complex mortgage products. The study finds that the complexity of mortgage pricing hampers both the borrowers' ability to assess risk and to comparison shop."(page 7)
This is reminiscent of the current Assistant Secretary of the Treasury's writings as quoted by Senator Richard Shelby, "Disclosures are geared towards influencing the intention of the borrower to change his behavior; however, even if the disclosure succeeds in changing the borrower's intentions, we know that there is often a large gap between intentions and actions...Product regulation would also reduce cognitive and emotional pressures related to potentially bad decision making by reducing the number of choices." Translation: Consumers can't be trusted to make the best decisions for themselves, no matter how much disclosure they have, so regulators and consumer advocacy must protect the consumer by limiting their choices. And since mortgage brokers represent a "one-stop shop" which offers many choices to borrowers, they are bad.
Now to the fascinating part. According to this study, borrowers in prime loans get a better deal with a mortgage broker than they do with a retail originator. "Finding Four: Prime borrowers who obtained loans from brokers generally experienced no additional costs compared to retail...Generally stronger credit borrowers with brokered loans that carried lower LTV ratios experienced savings compared to their similarly situated counterparts who received retail loans...Table 9 shows that in general, prime borrowers who obtained loans from brokers experienced no additional costs compared to those who received their loans from a retail lender." (page 25).
It gets better. "In six DTI/LTV combinations associated with borrowers with stronger credit profiles (credit scores greater than 720) retail loans are actually more expensive in the higher FICO scores...In fact the one year results displayed in Table 7 show that brokered loans carry lower interest costs to even more subsets of borrowers." (page 25) "Meanwhile, for a few subsets of prime borrowers, brokers seem to deliver some savings, though the magnitude of these savings is quite modest, ranging from $900-$1600 per $100,000 borrowed over the loan term." (page 31).
Wait a minute! Brokers are cheaper on prime loans? Considering that today in 2010 there is no subprime lending, and only prime loans are available, that makes the broker channel the cheapest option for consumers, or in the worst case at least no more expensive than retail options based on the Center's own study. If we are cheapest, doesn't that also make us the best? Why then is Barney Frank calling for death panels for non-depository lenders? And why are all of the recommendations from this report to be used in connection with subprime loans which no longer exist being implemented today as part of financial reform? Why is the word "mortgage broker" almost an obscenity?
Because we repesent choice and personal responsibility. Brokers offer choices, and in a world where borrowers are not trusted to read and understand disclosures and make their own choices, agents of choice must be done away with. The consumer is no longer free to choose and the business person is no longer free to offer choices, because people with choices will sometimes make the wrong ones. But they also have the opportunity to take risks, and to make choices that will move their lives forward.
The Bureau of Consumer Financial Protection's mandate is to give consumer advocacy groups such as ACORN, the Center for Responsible Lending, and myriad other groups who have signed onto Americans for Financial Reform a seat at the table when creating new rules that govern lending, disclosures and policies as it regulates brokers and banks. And since the Bureau's budget is entirely discretionary, they can fund whatever agencies and organizations they like, which means that we might even see a resurrected, fully funded ACORN back in the spotlight.
Today I want to look at a study completed by the Center for Responsible Lending entitled "Steered Wrong: Brokers, Borrower, and Subprime Loans," which was published in April of 2008 and can be found on the Center for Responsible Lending's website at responsiblelending.org. I found this 54 page study and its findings fascinating, and I think in light of everything that is happening around us today, the study is worth sharing.
The study, which is filled with official looking charts and graphs and numerous algebraic equations, puts the blame for the mortgage meltdown squarely on the shoulders of mortgage brokers. The Center for Responsible Lending wants us to know that it is not loose lending practices, or Community Re-Investment Acts, or scant oversight of Fannie Mae and Freddie Mac which caused the problems--it was mortgage brokers by themselves, plus nothing.
The study claims that brokers steered borrowers into subprime mortgages who could have qualified for prime mortgages, and in doing so cost them additional fees and higher interest rates which ultimately caused their homes to go into foreclosure. To support this theory, the report cites a study comparing loans of similar interest rates some of which were originated by brokers and others by retail originators. Now, without actually seeing the data and the files themselves, it would be impossible to make a precise comparison, but I can tell you with all certainty that there are reasons besides greed and heartlessness that borrowers used to go to into subprime loans. For example, two borrowers might both have a 660 credit score. One of the borrowers might have this score because he paid a few accounts thirty days late last year, but he now has 12 months of timely payments for all accounts on his credit report. Assuming that his income qualified him for the loan, he could probably get an automated underwriting approval for a prime loan. However, the other borrower might have a 660 credit score because he had a four year old medical collection for $10,000 which he could not afford to pay. This borrower would not qualify for a prime loan even though his other credit might be fine, because prime loans required that collections be paid at closing. (Even at the height of laxness, Fannie Mae and Freddie Mac never allowed unpaid collections over $5000.00.) So that borrower could either wait three more years for the collection to drop off his credit, or he could take a subprime mortgage at a higher interest rate and plan to refinance later. The study does not appear to consider any factors other than just the credit score, the debt to income ratio, whether the loan was considered full documentation, etc.
Nestled in among the charts and graphs are paragraphs editorializing about the role of the broker: "Brokers react to market incentives predictably; they seek to maximize both the number of loans they originate and their revenue per loan. However, since charging too much per loan could drive away potential customers, brokers must find the optimal balance between these two factors. We posit that brokers shift this balance according to their perception of a customer's credit profile." (page 4). "Homebuyers and homeowners have therefore trusted their brokers as mortgage professionals to help them choose a suitable loan. This misplaced trust has likely been a factor in the current foreclosure crisis." (page 5).
The report acknowledges that all states license mortgage brokers and that licensing requirements include criminal background checks, bonding, and educational experience requirements. But, this is not sufficient, according to the report, because "licensing statutes act primarily as enforcement mechanisms for substantive protections but do not actually establish protections themselves." The report fails to mention that retail originators--with whom it compares the brokers--were not required to be licensed at all until the SAFE ACT was implemented. But it asserts that retail originators are more likely to treat borrowers more fairly because of reputational risk and federal and state auditing requirements.
"Importantly, though their customers routinely rely on them as experts to help select lenders and loan products, mortgage brokers often assert that they are independent contractors and not agents of either borrowers or lenders." (page 6) Mortgage brokers asserted that because states like Texas had a form which borrowers were required to sign that said that we were independent agents and not agents of the borrowers or lenders. This form was mandatory in every file, and it was meant to clarify to the consumer the relationship between the broker and borrower. But a very large part of Center for Responsible Lending's hypothesis is that borrowers cannot and should not be trusted to read and understand forms.
The report states that "rational choice theory...assumes that people faced with choices will choose the best option based on their own set of preferences and constraints." However, the Center does not agree. "A 2007 study by Harvard University researchers finds that borrowers have a limited ability to analyze and compare multiple, complex mortgage products. The study finds that the complexity of mortgage pricing hampers both the borrowers' ability to assess risk and to comparison shop."(page 7)
This is reminiscent of the current Assistant Secretary of the Treasury's writings as quoted by Senator Richard Shelby, "Disclosures are geared towards influencing the intention of the borrower to change his behavior; however, even if the disclosure succeeds in changing the borrower's intentions, we know that there is often a large gap between intentions and actions...Product regulation would also reduce cognitive and emotional pressures related to potentially bad decision making by reducing the number of choices." Translation: Consumers can't be trusted to make the best decisions for themselves, no matter how much disclosure they have, so regulators and consumer advocacy must protect the consumer by limiting their choices. And since mortgage brokers represent a "one-stop shop" which offers many choices to borrowers, they are bad.
Now to the fascinating part. According to this study, borrowers in prime loans get a better deal with a mortgage broker than they do with a retail originator. "Finding Four: Prime borrowers who obtained loans from brokers generally experienced no additional costs compared to retail...Generally stronger credit borrowers with brokered loans that carried lower LTV ratios experienced savings compared to their similarly situated counterparts who received retail loans...Table 9 shows that in general, prime borrowers who obtained loans from brokers experienced no additional costs compared to those who received their loans from a retail lender." (page 25).
It gets better. "In six DTI/LTV combinations associated with borrowers with stronger credit profiles (credit scores greater than 720) retail loans are actually more expensive in the higher FICO scores...In fact the one year results displayed in Table 7 show that brokered loans carry lower interest costs to even more subsets of borrowers." (page 25) "Meanwhile, for a few subsets of prime borrowers, brokers seem to deliver some savings, though the magnitude of these savings is quite modest, ranging from $900-$1600 per $100,000 borrowed over the loan term." (page 31).
Wait a minute! Brokers are cheaper on prime loans? Considering that today in 2010 there is no subprime lending, and only prime loans are available, that makes the broker channel the cheapest option for consumers, or in the worst case at least no more expensive than retail options based on the Center's own study. If we are cheapest, doesn't that also make us the best? Why then is Barney Frank calling for death panels for non-depository lenders? And why are all of the recommendations from this report to be used in connection with subprime loans which no longer exist being implemented today as part of financial reform? Why is the word "mortgage broker" almost an obscenity?
Because we repesent choice and personal responsibility. Brokers offer choices, and in a world where borrowers are not trusted to read and understand disclosures and make their own choices, agents of choice must be done away with. The consumer is no longer free to choose and the business person is no longer free to offer choices, because people with choices will sometimes make the wrong ones. But they also have the opportunity to take risks, and to make choices that will move their lives forward.
The Bureau of Consumer Financial Protection's mandate is to give consumer advocacy groups such as ACORN, the Center for Responsible Lending, and myriad other groups who have signed onto Americans for Financial Reform a seat at the table when creating new rules that govern lending, disclosures and policies as it regulates brokers and banks. And since the Bureau's budget is entirely discretionary, they can fund whatever agencies and organizations they like, which means that we might even see a resurrected, fully funded ACORN back in the spotlight.
Big Brother is Watching
I love reading government bills. I really do, because as I slog through thousands of pages of gibberish, I get a real sense of where we are headed as a country. For instance, take amendment 3739 to Senate Bill 3217. The amendment--which is presented as a replacement for the bill, offered by Harry Reid (D NV) on April 29, 2010, defines its intentions in the first paragraph, "To promote financial stability of the United States by improving accountability and transparency in the financial system, to end 'too big to fail,' and to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes." It is the "other purposes" that really shine through in this 1566 page piece of bloated legislation.
In its first three hundred pages, SB 3217 (as presented in the amendment) creates at least 4 new regulatory authorities. We have the Office of National Insurance which will work with state regulators to oversee all lines of insurance in the United States except health insurance--which is specifically excluded. This office will "receive and collect data and information on and from the insurance industry and insurers, enter into information sharing agreements, analyze and disseminate data and information, and issue reports regarding all lines of insurance except health insurance."
We have the Financial Stability Oversight Council which will be established effective the date of the enactment of the new financial services bill. The Council will be comprised of the Secretary of the Treasury, who will be the chairperson, the Fed Reserve Chair, the Comptroller of the Currency, the Chairperson of FDIC, the Chairperson of the Commodities Future Trading Commission, the director of the Bureau of Consumer Financial Protection, which the bill also creates, the Chair of the SEC, and one other member appointed by the President. The board members will serve six year terms.
We also have the Office of Financial Research, which will conduct research on insured depository institutions (banks) and insurance companies. Section 155 establishes the financial research fund which is to be a separate fund within the United States Treasury. All monies coming into the Office of Financial Research shall be deposited into the fund. Amounts over the amount that the Director of the Office of Financial Research believes are necessary to run the agency may be invested with the consent of the Secretary of the Treasury. Interestingly, the bill states that "Funds obtained by, transferred to, or credited to the Financial Research Fund shall not be construed to be Government funds or appropriated monies." Where is all of this money going to come from? For the first two years, the Board of Governors of the Federal Reserve is to allocate enough monies to cover the office's expenses, but beginning two years after the law goes into effect, the Treasury Secretary is going to establish a schedule of fees for bank holding companies and non bank financial companies. It is interesting that the government is planning its financial portfolio for an agency that does not yet exist at a time when so many Americans can't even find a job.
Moving on, SB 3217, as amended, creates an Orderly Liquidation Authority Panel. The Orderly Liquidation Authority Panel consists of 3 judges from the United States Bankruptcy Court in Delaware. These are appointed by the Chief Judge of the U.S. Bankruptcy Court in Delaware, who is supposed to take into consideration the financial expertise of each judge in making his appointments.
The Orderly Liquidation Authority Panel is designed to speed up the process of getting rid of lenders who could be a danger to society. Here's how it works: the Secretary of the Treasury determines that a financial company is in default or in danger of default. The Treasury Secretary then petitions the Panel for an order authorizing the Secretary to appoint the FDIC as the receiver. The petition is to be strictly confidential--in fact the penalty for disclosing a petition or pending court proceedings is up to a $250,000 fine or 5 years in prison or both. The company in jeopardy is to be notified, and they have the right to oppose the petition. The Panel is to review the Secretary's petition and supporting evidence, which is supposed to be "substantial", that the financial company is in default or in danger of default. Within 24 hours, the Panel is to make a decision about whether to take the company into receivership. The Panel's decision is final, although it can be appealed through the Court of Appeals and within 30 days of their ruling can be appealed to the Supreme Court of the United States if they choose to hear the case. However, SB 3217 states specifically that the Supreme Court is limited in their ruling as to whether the Secretary's determination that the covered financial company is in default was supported by substantial evidence.
The bill states that no stay or injunction pending appeal is possible. If the Panel's finding is that the financial institution must be turned over to the FDIC, there is no recourse.
If the Panel finds that the Secretary of the Treasury did not provide substantial evidence that the financial institution is in danger of default, within 24 hours they are to provide him with a written statement of each reason that it was not supported and allow him to immediately amend his petition and refile.
Creating an enormous bureaucracy and giving Tim Geithner and whoever his successors may be life and death power over financial institutions may be part of the "other purposes" as defined in the first paragraph of the bill, but it certainly is not part of a system which fosters respect for free enterprise and private ownership of business.
In its first three hundred pages, SB 3217 (as presented in the amendment) creates at least 4 new regulatory authorities. We have the Office of National Insurance which will work with state regulators to oversee all lines of insurance in the United States except health insurance--which is specifically excluded. This office will "receive and collect data and information on and from the insurance industry and insurers, enter into information sharing agreements, analyze and disseminate data and information, and issue reports regarding all lines of insurance except health insurance."
We have the Financial Stability Oversight Council which will be established effective the date of the enactment of the new financial services bill. The Council will be comprised of the Secretary of the Treasury, who will be the chairperson, the Fed Reserve Chair, the Comptroller of the Currency, the Chairperson of FDIC, the Chairperson of the Commodities Future Trading Commission, the director of the Bureau of Consumer Financial Protection, which the bill also creates, the Chair of the SEC, and one other member appointed by the President. The board members will serve six year terms.
We also have the Office of Financial Research, which will conduct research on insured depository institutions (banks) and insurance companies. Section 155 establishes the financial research fund which is to be a separate fund within the United States Treasury. All monies coming into the Office of Financial Research shall be deposited into the fund. Amounts over the amount that the Director of the Office of Financial Research believes are necessary to run the agency may be invested with the consent of the Secretary of the Treasury. Interestingly, the bill states that "Funds obtained by, transferred to, or credited to the Financial Research Fund shall not be construed to be Government funds or appropriated monies." Where is all of this money going to come from? For the first two years, the Board of Governors of the Federal Reserve is to allocate enough monies to cover the office's expenses, but beginning two years after the law goes into effect, the Treasury Secretary is going to establish a schedule of fees for bank holding companies and non bank financial companies. It is interesting that the government is planning its financial portfolio for an agency that does not yet exist at a time when so many Americans can't even find a job.
Moving on, SB 3217, as amended, creates an Orderly Liquidation Authority Panel. The Orderly Liquidation Authority Panel consists of 3 judges from the United States Bankruptcy Court in Delaware. These are appointed by the Chief Judge of the U.S. Bankruptcy Court in Delaware, who is supposed to take into consideration the financial expertise of each judge in making his appointments.
The Orderly Liquidation Authority Panel is designed to speed up the process of getting rid of lenders who could be a danger to society. Here's how it works: the Secretary of the Treasury determines that a financial company is in default or in danger of default. The Treasury Secretary then petitions the Panel for an order authorizing the Secretary to appoint the FDIC as the receiver. The petition is to be strictly confidential--in fact the penalty for disclosing a petition or pending court proceedings is up to a $250,000 fine or 5 years in prison or both. The company in jeopardy is to be notified, and they have the right to oppose the petition. The Panel is to review the Secretary's petition and supporting evidence, which is supposed to be "substantial", that the financial company is in default or in danger of default. Within 24 hours, the Panel is to make a decision about whether to take the company into receivership. The Panel's decision is final, although it can be appealed through the Court of Appeals and within 30 days of their ruling can be appealed to the Supreme Court of the United States if they choose to hear the case. However, SB 3217 states specifically that the Supreme Court is limited in their ruling as to whether the Secretary's determination that the covered financial company is in default was supported by substantial evidence.
The bill states that no stay or injunction pending appeal is possible. If the Panel's finding is that the financial institution must be turned over to the FDIC, there is no recourse.
If the Panel finds that the Secretary of the Treasury did not provide substantial evidence that the financial institution is in danger of default, within 24 hours they are to provide him with a written statement of each reason that it was not supported and allow him to immediately amend his petition and refile.
Creating an enormous bureaucracy and giving Tim Geithner and whoever his successors may be life and death power over financial institutions may be part of the "other purposes" as defined in the first paragraph of the bill, but it certainly is not part of a system which fosters respect for free enterprise and private ownership of business.
Killing Small Business
The past few days have seen the passage of two important amendments to Senate Bill 3217, the Restoring American Financial Security Act, which is currently being debated in the Senate. Both amendments have implications as they relate to small business and the availability of credit for mortgage lending.
The first amendment, the Landrieu (D LA)/Isakson (R GA) amendment, directs financial regulators to create a "qualified" category of mortgage loans which will not be subject to the 5% risk retention requirement of the bill. This is critically important because without the ability to sell mortgage loans into the secondary market, it is not possible to maintain liquidity to originate new mortgages. In simple terms, selling the loans allows the lender to free up cash to make new loans.
The second amendment is not such good news. Jeff Merkley (D OR) sponsored an amendment which was introduced after hours on Tuesday and voted through on Wednesday morning (a maneuver which was obviously intended to stymie industry lobbying efforts.) This amendment effectively caps loan originator compensation at 3% to include all lender fees and up to 1% of the insurance charged by State and Federal Entities (for example the FHA premium to which we devoted our last two posts). This is also significant, because the federal government, rather than competition and free market conditions, are regulating the compensation of individuals who work in lending. No longer will it be legal for loan originators to receive compensation based on the interest rate of the loan, unless the consumer is charged no other fees whatsoever except for third party fees such as appraisal and title insurance.
The loan does allow bonus and incentive payments to loan originators who produce volume loans.
Interestingly the wording of the amendment specifically states that nothing in the bill shall limit the compensation that the lender can make when they sell the closed loan on the secondary market. This compensation is also based on the interest rate. This is one sure and quick way for banks to shore up their reserves. The spread on interest is a function of the market, and for virtually any interest rate there is some cost or some gain. So a law which makes it illegal to share the gain with the originator allows the bank to keep the money which it can apply directly to its bottom line.
This idea of limiting compensation may sound good to many people who have heard horror stories of greedy lenders who devoured helpless victims' equity from their home loans, but in reality it is just another federal intrusion into the market place. As an active originator for the last twelve years, I can speak to the fact that competition is a better tool for getting consumers into good loans than government supervision. A good example is what has been going on this past year and a half. With interest rates at historic lows ranging from 4.5% to 5.25% on thirty year fixed rate loans, borrowers have watched the market carefully. They have looked at the internet and watched the news, so when the rates go down in a day, they hear about it. Before the new RESPA reforms went into effect, we were able to offer no origination fee loans because we got paid on the spread of the money. (We cannot do that under the new rules because all lender fees including any lender compensation through the rate must be included in the origination fee). Competition kept the costs and the interest rates reasonable for most borrowers, because they were able to shop for a lower rate. And competition forced originators to keep the interest rates they offered and the fees they charged in line with the local market. After all, who is going to take a 5.125% interest rate if all of their friends got a 4.75% and they find out they could qualify for a 4.75% as well. And while the government bemoans loan originators who overcharged, the truth is that originators who overcharged too much lost the transaction and didn't get paid at all.
Small businesses are not charitable organizations. They have high overhead, employee expenses etc. With recent rulings determining that all loan originators must be W2'd by their employers and stating that loan originators are legally entitled to overtime pay, it is increasingly difficult for the small business owner to compete. Merkley's newest amendment basically means that an originator will be able to make about 1% on a loan, if he is lucky, after he pays the lender fees and the title escrow fee, the attorney's fees and up to 1% of any federally mandated insurance. By the time he splits his portion with his employer, he will barely have the money to pay his own mortgage. All of which spells fewer people working in the industry, fewer choices for consumers, and ultimately higher prices as a multi-trillion dollar industry becomes concentrated into fewer and fewer hands.
Senate Bill 3217 is expected to pass next week, and then the House bill 4317 and the Senate version will have to be reconciled. The House version does not contain the qualified loan exemption to risk retention, so it is going to be very interesting to see how this shakes out in the end. In the meantime, those of us who heard Barney Frank's warning that he would have death panels for non-depository lenders are getting our blindfolds ready to face the firing squad.
The first amendment, the Landrieu (D LA)/Isakson (R GA) amendment, directs financial regulators to create a "qualified" category of mortgage loans which will not be subject to the 5% risk retention requirement of the bill. This is critically important because without the ability to sell mortgage loans into the secondary market, it is not possible to maintain liquidity to originate new mortgages. In simple terms, selling the loans allows the lender to free up cash to make new loans.
The second amendment is not such good news. Jeff Merkley (D OR) sponsored an amendment which was introduced after hours on Tuesday and voted through on Wednesday morning (a maneuver which was obviously intended to stymie industry lobbying efforts.) This amendment effectively caps loan originator compensation at 3% to include all lender fees and up to 1% of the insurance charged by State and Federal Entities (for example the FHA premium to which we devoted our last two posts). This is also significant, because the federal government, rather than competition and free market conditions, are regulating the compensation of individuals who work in lending. No longer will it be legal for loan originators to receive compensation based on the interest rate of the loan, unless the consumer is charged no other fees whatsoever except for third party fees such as appraisal and title insurance.
The loan does allow bonus and incentive payments to loan originators who produce volume loans.
Interestingly the wording of the amendment specifically states that nothing in the bill shall limit the compensation that the lender can make when they sell the closed loan on the secondary market. This compensation is also based on the interest rate. This is one sure and quick way for banks to shore up their reserves. The spread on interest is a function of the market, and for virtually any interest rate there is some cost or some gain. So a law which makes it illegal to share the gain with the originator allows the bank to keep the money which it can apply directly to its bottom line.
This idea of limiting compensation may sound good to many people who have heard horror stories of greedy lenders who devoured helpless victims' equity from their home loans, but in reality it is just another federal intrusion into the market place. As an active originator for the last twelve years, I can speak to the fact that competition is a better tool for getting consumers into good loans than government supervision. A good example is what has been going on this past year and a half. With interest rates at historic lows ranging from 4.5% to 5.25% on thirty year fixed rate loans, borrowers have watched the market carefully. They have looked at the internet and watched the news, so when the rates go down in a day, they hear about it. Before the new RESPA reforms went into effect, we were able to offer no origination fee loans because we got paid on the spread of the money. (We cannot do that under the new rules because all lender fees including any lender compensation through the rate must be included in the origination fee). Competition kept the costs and the interest rates reasonable for most borrowers, because they were able to shop for a lower rate. And competition forced originators to keep the interest rates they offered and the fees they charged in line with the local market. After all, who is going to take a 5.125% interest rate if all of their friends got a 4.75% and they find out they could qualify for a 4.75% as well. And while the government bemoans loan originators who overcharged, the truth is that originators who overcharged too much lost the transaction and didn't get paid at all.
Small businesses are not charitable organizations. They have high overhead, employee expenses etc. With recent rulings determining that all loan originators must be W2'd by their employers and stating that loan originators are legally entitled to overtime pay, it is increasingly difficult for the small business owner to compete. Merkley's newest amendment basically means that an originator will be able to make about 1% on a loan, if he is lucky, after he pays the lender fees and the title escrow fee, the attorney's fees and up to 1% of any federally mandated insurance. By the time he splits his portion with his employer, he will barely have the money to pay his own mortgage. All of which spells fewer people working in the industry, fewer choices for consumers, and ultimately higher prices as a multi-trillion dollar industry becomes concentrated into fewer and fewer hands.
Senate Bill 3217 is expected to pass next week, and then the House bill 4317 and the Senate version will have to be reconciled. The House version does not contain the qualified loan exemption to risk retention, so it is going to be very interesting to see how this shakes out in the end. In the meantime, those of us who heard Barney Frank's warning that he would have death panels for non-depository lenders are getting our blindfolds ready to face the firing squad.
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