The House Committee on Financial Services held a July 15th hearing titled, "Banking Industry Perspectives on the Obama Administration’s Financial Regulatory Reform Proposals." The hearing featured testimony from a number of mortgage industry and financial industry professionals and economic experts, including:
► Denise M. Leonard, vice president, government affairs, National Association of Mortgage Brokers
► Steve Bartlett, president and chief executive officer, The Financial Services Roundtable
► John A. Courson, president and chief executive officer, Mortgage Bankers Association
► Chris Stinebert, president and chief executive officer, American Financial Services Association
► Steven I. Zeisel, vice president and senior counsel, Consumer Bankers Association Professor
► Todd J. Zywicki, George Mason University Foundation Professor of Law and Senior Scholar, Mercatus Center at George Mason University
► Edward L. Yingling, president and chief executive officer, American Bankers Association
► R. Michael S. Menzies Sr., president and chief executive officer, Easton Bank and Trust Company on behalf of Independent Community Bankers of America
On June 17, the Obama Administration released a policy paper through the Department of Treasury entitled “A New Foundation: Rebuilding Financial Supervision and Regulation.” In this paper, the Administration outlines a number of proposals aimed at overhauling the structure of the United States' system of financial regulatory oversight, with a special focus on protecting consumers in the market for financial products and services.
The policy paper specifically cites the failure of thecurrent regulatory framework to adequately protect borrowers in mortgage transactions as a critical underlying cause of our financial crisis. The Administration contends that gaps and conflicts of interest have long-existed between state and federal regulators charged with enforcement of consumer protection statutes. The paper further states that consistency and strength of regulation of consumer financial products and services are primary objectives of the Administration’s Financial Regulatory Reform Plan.
The Administration Plan, as outlined in the Department of Treasury policy paper, focuses on a number of significant issues, inlcuding the establishment of a new independent federal regulatory agency called the Consumer Financial Protection Agency (CFPA), which is reflected in HR 3126. This new agency would become the primary federal regulator focused on consumer protection in the markets for financial products and services. Under the legislation, the CFPA would be granted rule-making authority for consumer protection under existing statutes, and would possess enforcement and supervisory authority over all persons covered by those statutes.
Additionally, the CFPA would be given specific authority to impose greater responsibilities on mortgage lenders, originators and securitizers. These responsibilities would include:
1. Ensuring all communications and disclosures made to consumers are reasonable;
2. Offering consumers a “standard” or “plain vanilla” mortgage product option in addition to any other product options available; and
3. Exercising a duty of care, possibly among other duties, when working with consumers.
"NAMB believes the CFPA, or any other agency for that matter, must act prudently when promulgating and enforcing rules in order to ensure real protections are afforded to consumers, and not merely the illusion of protection that often comes from incomplete or unequal regulation of similar products, services or providers," said Leonard in her testimony.
"Let me say from the outset, the Mortgage Bankers Association supports regulatory modernization and strengthening consumer protections," said John A. Courson, president & CEO of the MBA. "Our country's economic crisis gives us a once-in-a-generation opportunity to improve the regulation of our mortgage markets. These improvements to the financial regulatory structure will have a profound effect on the availability and affordability of mortgage financing. We believe they must be judiciously considered, so reform is done right."
"Mortgage brokers are just one participant in a larger network of loan originating entities, including mortgage bankers, mortgage lenders, credit unions, and depository institutions, all competing to deliver mortgage products to consumers," said Leonard. "In today’s market, there are actually very few substantive differences between these distribution channels when it comes to originating mortgages. The lines that once divided them have become increasingly blurred with the proliferation of the secondary mortgage market, and more often mortgage brokers and mortgage lenders perform essentially the same function--i.e., they present an array of available loan products to the consumer and close the loan."
Todd J. Zywicki, George Mason University Foundation Professor of Law at George Mason University School of Law and Senior Scholar of the Mercatus Center at George Mason, argues that creating stringent regulations aiming to overregulate mortgage brokers out of the industry would strongly harm consumers and their ability to find the best rate. He further argues that, because of competition, it is better for consumers when there is a large number of mortgage brokers practicing the profession.
"New restrictions on mortgage brokers would also likely be counterproductive for consumers. First, it should be noted that the fixation on the 'yield spread premium' for mortgage brokers is obviously misplaced: This is nothing more than the difference between the wholesale and retail cost of funds. Every loan from a depository lender also has an implicit yield-spread premium embedded in it," said Professor Zywicki. "More fundamentally, the White Paper’s apparent hostility to mortgage brokers fundamentally misunderstands the nature of competition and consumer choice in this market. New regulations that might result in a reduction in the number of mortgage brokers, and thus an attenuation of competition, will likely result in harm to consumers. Both economic theory and empirical evidence in this area strongly suggest that greater competition among mortgage brokers results in better loan terms for consumers."
Zwyicki is also co-editor of the Supreme Court Economic Review. From 2003-2004, he served as the Director of the Office of Policy Planning at the Federal Trade Commission. He has also taught at Vanderbilt University Law School, Georgetown University Law Center, Boston College Law School, and Mississippi College School of Law.
"Mortgage brokers are confronted with two distinct incentives," added Professor Zwyicki. "First, mortgage brokers have an incentive to maximize the 'spread' between the rate at which they can acquire funds to lend to consumers (essentially the wholesale rate) and the rate at which they can lend to borrowers (the retail price). But second, mortgage brokers face competition from other brokers trying to get a borrower to borrow from them. The net result of these two factors—one pushing toward higher rates and one pushing toward lower rates—is ambiguous as an a priori matter."
Zwyicki's testimony cited a number of studies conducted that concluded that the elimination of the mortgage broker in the mortgage transaction would be detrimental to consumers.
"Early studies have found various different results, some finding that brokers offer better terms on average than depository lenders and others finding that brokers charge higher prices on at least some elements of the transaction," noted Zwyicki. "The explanation for these differing results appears to result from differences in the number of mortgage brokers competing in a given market. Where mortgage brokers are numerous and thus competition and consumer choice is greater, consumers generally receive lower interest rates from brokers (the competition effect predominates); but where there are a smaller number of brokers and less competition, consumers typically pay higher interest rates (the broker interest effect predominates). Empirical studies indicate that overly-restrictive broker regulations may also lead to a higher number of foreclosures overall. The lesson seems to be clear—regulators should be wary of adopting overly-stringent regulations that will substantially reduce the number of mortgage brokers in a given market. Similar findings characterize many industries where overly-stringent regulations result in higher prices and other welfare losses for consumers."
For a full transcript of Professor Zwyicki's testimony, click here.
Courson responded at the hearing with an outline of MBA's Mortgage Improvement and Regulation Act (MIRA).
"It would provide uniform standards and consistent regulation for all mortgage lending," said Courson. "MIRA would improve the regulatory process to include more rigorous standards for lenders and investors and equally clear protections for consumers. Instead of adding duplicative regulation at the federal level, it would fill gaps in regulation of nondepository lenders and mortgage brokers, streamline regulation and enhance enforcement. MIRA could easily be part of a more comprehensive regulatory modernization effort. Most importantly, it would ensure that consumers are provided mortgage financing and protection from abuse. We hope the committee will consider MIRA as part of its regulatory modernization effort."