On June 16, President Barack Obama released a plan to overhaul the government financial regulatory system in the 88-paged plan titled, “Financial Regulatory Reform, A New Foundation: Rebuilding Financial Supervision and Regulation.” While the document’s introduction explains the obvious, that both the safety net of government oversight and industry standards failed, moving us toward the precipice of a depression; the introduction also signals hope showing that the new administration truly understands the problems.
The plan features the formation of a new agency, the Consumer Financial Protection Agency (CFPA), whose mission will be to provide added government reform in a single entity and to close the gaps of the current system so we can “restore confidence and integrity of our financial system.” The proposed plan blames these gaps in federal agency jurisdiction and government oversight for allowing the crisis to occur.
The gap is clearly visible in credit reporting and the relaxed standards in that industry. The credit report is one of the single most important documents in the mortgage file, as it is the primary factor in deciding to lend or not, and if to lend at what terms. It is currently governed by a fractured group of federal agencies and this proposed plan would provide a remedy.
The introduction of the automated underwriting systems at Fannie Mae and Freddie Mac drastically eroded the quality of the mortgage credit report and the requirements of underwriting standards in the mortgage industry. Members of the credit reporting industry spoke to a variety of federal agencies about potential problems these changes would create and found a fractured group of agencies with jurisdiction in this area; however, none of the agencies had the ability or desire to address these issues.
Primary oversight of the Fair Credit Reporting Act (FCRA) is covered by the Federal Trade Commission (FTC) for the credit reporting agencies and the mortgage brokers and others, not under the Federal Reserve as they have oversight on federally-chartered banks. For credit reporting practices at the government-sponsored enterprises (GSEs), it gets more fractured as either the U.S. Department of Housing and Urban Development (HUD) or its agency the former Office of Federal Housing Enterprise Oversight (OFHEO)—now known as the Federal Housing Finance Agency (FHFA)—would have dealt with issues pertaining to Fannie Mae or Freddie Mac.
Within some of these agencies there are also problems of “limited tools and resources” adding to the gaps in jurisdiction. Consider some of the companies that blur lines through state charters; is it clear who is in control yet? While there is always the federal court system if someone believes those agencies are not stepping up as needed (which happened in an FCRA case Donald Weidman vs. Freddie Mac); however, that road is almost always the least desired path for anyone to travel.
Since no single agency had authority, the ability for them to claim FCRA’s issues on complicated matters that often crossed jurisdictional lines was greatly diminished. This lack of oversight allowed the slippery slope of poor lending practices to pick up speed. The proposal claims: “No regulator saw its job as protecting the economy and financial system as a whole.” Add to that scenario “years without a serious economic recession bred complacency among financial intermediaries and investors.” Not to mention the problem of “rising asset prices, particularly in housing, to hide weak underwriting standards and masked the growing leverage throughout the system.” The mortgage industry was a financial version of the Hollywood hit “The Perfect Storm” and now we are all paying the price.
We truly hope that the proposed new CFPA, which would consolidate most of the FCRA regulatory authority and that of many other consumer protection laws into a single agency, will correct these problems. Congress and the Obama Administration will determine the ultimate route this reform will take in the coming months. Since the credit report is a key element in the identification of risk in the mortgage industry, and if not properly addresses, the new foundation for financial soundness is headed for more problems.
Terry W. Clemans is the executive director of the National Credit Reporting Association Inc. (NCRA). He may be reached at (630) 539-1525.